Roth Conversion not for us?

[TheWizard]

Another potential drawback of Roth conversion is that it pushes up your income level that some of your capital gain income could be pushed out zero capital gain tax range. So you could end up with paying some capital gain tax which could be zero originally. You will have to play with the number to see how much Roth conversion can be done without triggering capital gain tax.

Wealthy retirees are already paying 15% CG tax.
It's a non issue for many of us...

 

[skyking1]

It will make sense for us, WRT survivor tax burden. We won't convert it all, just to the top of the 12/15% bracket as @pb4uski has suggested.
We would end up about half Roth at the end of the process.

 

[SevenUp]

If you are planning QCDs and bequeathing your estate to charities, then not doing any Roth conversions is probably the best plan for you.

Perhaps.
At age 75, I'm doing both QCDs and small Roth conversions, not maxing out either.
It all depends on your goal...

Yes, it depends....

Paying anything above 0% on money going to charity deprives the charity of the full benefit of the contribution.

 

[Exchme]

The way to navigate a progressive tax code is to avoid high tax rates. That means avoiding low tax rates as well. In other words, knock off the mountain tops and fill in the valleys. OP having $1.4M in tax deferred but not paying any income tax this year is a red flag that they are not doing that, so could presumably benefit from at least some modest conversions.

To do the analysis, OP really needs to make a lifetime model. While all models have limits, the one I like best is Pralana (Pralanaretirementcalculator.com). It is more number-centric and less visually appealing than competitors, but their strong suit is to do better at getting the tax code modeled right and having lots of flexibility and power. For instance, if OP has put bonds preferentially in the IRA (as you would expect in order to be tax efficient), that requires a lot of modeling power that other products lack.

Not everyone is enough of a number nerd to want to learn a program and check their inputs to make sure the program is doing what they expect. For those folks, a more practical alternative is to hire a planner on a by the hour basis to make a model, a good planner may also turn up other issues that could be optimized.

 

[USGrant1962]

The way to navigate a progressive tax code is to avoid high tax rates. That means avoiding low tax rates as well. In other words, knock off the mountain tops and fill in the valleys. OP having $1.4M in tax deferred but not paying any income tax this year is a red flag that they are not doing that, so could presumably benefit from at least some modest conversions.

+1 on a succinct analysis. Many people don't seem to understand our deeply progressive tax regime outside of whatever bracket they are currently in.

 

[USGrant1962]

State taxes is where we made out like a bandit. Saved ~6% state income tax when the income was deferred. Now live in no state income tax state so 0% state income tax on tIRA withdrawals or Roth conversions.

Yea, much of my early and mid-career tax-deferred contributions (and all of DWs) were in low/no-tax states. So we didn't avoid much state tax on those, and are exposed to high state tax now. Kind of messes up the Roth conversion math.

 

[ncbill]

We don't have children. And not that concerned with our beneficiaries.

That's the big thing.

My view is that our Roth accounts are for our kids.

I will finish converting the modest amount we had in traditional IRAs to Roth before age 60.

Based on the longevity of the males in my family I've got 15 - 20 years left.

But I expect 'mother' could live twice that with no need to access any Roth funds.

Then under current law the kids could let those feds grow tax-free for another decade.

 

[old medic]

We will draw down the tIRA for income. And keep the taxable market funds for growth-hopefully (45%). That's why I started this thread. These responses are food for thought.

If your drawing from the tIRA your paying the tax anyway, If not needed to spend, reinvest it to Roth.
I'm a simple math guy.... 1.4M tIRA @12% $168K Grows to 2M and you go to 22% bracket now owing $440K...

 

[Surewhitey]

My bird in the hand is ACA monies. The 6 years age gap is likely going to cost us if we don't delay SS too.

If DW delays to 70, I'll still be 64 so at least 1 year of ACA loss. That's with no rollovers. If we do rollovers, we will likely lose $20k (or more) annually there.

Then there is a small pension & interest income to expect with post tax funds.

We are not set yet on which way to go, but I'm leaning towards ACA way. We have 45% in post tax bucks for the early days. RMD's will be on the 55% pre tax at 75 & if we want, do rollovers from 65-75 for me & 71-75 for DW.

So many moving parts...

 

[donheff]

I happened to be using an AI to help analyze some information for a nonprofit I am a member of and thought that people are probably using it for things like Roth conversions. I noticed a post in a Reddit on the Boldin financial management tool where a guy talks about his experience with this. You still have to be careful with these systems but they will likely be aces at this stuff soon, if not already. Here is the Reddit thread: Bolden and Generative AI - a Match Made in Heaven

 

[TheWizard]

That's the big thing.

My view is that our Roth accounts are for our kids.

I will finish converting the modest amount we had in traditional IRAs to Roth before age 60....

This may not be the best idea if you have any charitable inclinations. Donating tax-deferred funds avoids paying the tax entirely...

 

[SecondCor521]

My bird in the hand is ACA monies. The 6 years age gap is likely going to cost us if we don't delay SS too.

If DW delays to 70, I'll still be 64 so at least 1 year of ACA loss. That's with no rollovers. If we do rollovers, we will likely lose $20k (or more) annually there.

Then there is a small pension & interest income to expect with post tax funds.

We are not set yet on which way to go, but I'm leaning towards ACA way. We have 45% in post tax bucks for the early days. RMD's will be on the 55% pre tax at 75 & if we want, do rollovers from 65-75 for me & 71-75 for DW.

So many moving parts...

I'm 56, on ACA, and doing Roth conversions.

I essentially look at the loss of ACA subsidies as an additional marginal tax. There are a number of breakpoints in the ACA subsidy calculations, so typically for me Roth conversions make sense up to one of those breakpoints.

I do a pro forma tax return in December and top up to my Roth conversion target at that point. (I actually overshoot a bit and then do an HSA contribution in the spring once the final numbers are in to tweak it down to the exact AGI dollar target.)

Be aware that the way the ACA subsidy calculations work, the additional marginal tax rate is *not* the same as the applicable figure in the Form 8962 instructions; it can be almost twice as high.

I'm also delaying SS, but that's an eternal debate. I base my decision on opensocialsecurity.com's recommendations plus the ability to do more Roth conversions.

 

[pb4uski]

^^^ Smart approach.

 

[Exchme]

Be aware that the way the ACA subsidy calculations work, the additional marginal tax rate is *not* the same as the applicable figure in the Form 8962 instructions; it can be almost twice as high.

Yes, there is a high marginal cost in phase-out of ACA credits. These costs are on top of the ordinary tax rate. My understanding is that the old system without ramps but with a cliff at 4X FPL will come back in the House Bill that's in the Senate.

 

[SecondCor521]

My understanding is that the old system without ramps but with a cliff at 4X FPL will come back in the House Bill that's in the Senate.

The enhanced subsidies and 400% FPL cliff have built in expirations at the end of this year and will go away unless new legislation is passed.

Who knows what the pending legislation will end up being. That's a separate topic, probably for the public policy forum.

 

[Rianne]

Read all comments carefully. We're going to do a Zoom call with Zacc from Retirement Nerds on YouTube. He's the president of Capita Financial Network and they're deep into tax detail during retirement. Down to the minutiae of how much SS exactly is taxed as you WD and/or do Roth conversions. This is as nerdy as it gets. The Zoom is set for next week. I hear you Pb4uski and many other comments.

It's elementary but I like this nerd. Other videos get deep.

 

[imjustawarrior]

Let us know how the Zoom call goes. It should be interesting.

 

[skyking1]

+1 on a succinct analysis. Many people don't seem to understand our deeply progressive tax regime outside of whatever bracket they are currently in.

Many people don't take a moment and look at the single filer rate for the MFJ income they have now. That's the big eye-opener.

 

[pb4uski]

Read all comments carefully. We're going to do a Zoom call with Zacc from Retirement Nerds on YouTube. He's the president of Capita Financial Network and they're deep into tax detail during retirement. Down to the minutiae of how much SS exactly is taxed as you WD and/or do Roth conversions. This is as nerdy as it gets. The Zoom is set for next week. I hear you Pb4uski and many other comments.

It's elementary but I like this nerd. Other videos get deep.

You can easily get a good idea by using IRS & State Tax Calculator | 2005 -- 2025

Put in your numbers with no IRA withdrawals or Roth conversions and note your tax.

Add $10,000 of tIRA withdrawals. Note the increase in tax. Repeat with another $10,000 and not the increase in tax.

 

[Livefree]

You can easily get a good idea by using IRS & State Tax Calculator | 2005 -- 2025

Put in your numbers with no IRA withdrawals or Roth conversions and note your tax.

Add $10,000 of tIRA withdrawals. Note the increase in tax. Repeat with another $10,000 and not the increase in tax.

Yes we use this site, it's helpful. I just want to confirm that I'm figuring out the top of the 12% bracket correctly.

MFJ both over 65= $33,100
Top of Bracket= $96,950
$130,050
If we keep our income under this amount we're inside the 12% bracket?
Trying to figure out how much to convert and stay under this amount.

 

[SevenUp]

Yes we use this site, it's helpful. I just want to confirm that I'm figuring out the top of the 12% bracket correctly.

MFJ both over 65= $33,100
Top of Bracket= $96,950
$130,050
If we keep our income under this amount we're inside the 12% bracket?
Trying to figure out how much to convert and stay under this amount.

2025 std. ded. for MFJ both 65+ = $33,200

If you want a picture of your marginal rates for an entire range of Roth conversions, the case study spreadsheet will do that for you automatically, if you can use Excel.

 

[pb4uski]

Yes, you got it, except $33,200 as SevenUp wrote. I'm not sure why irscalculator only has $33,100

 

[RunningBum]

Kind of a nit because the numbers are so close, Instead of the top of the 12% bracket at 96,950, you should be targeting the top of 0% QDivs/LTCGs at 96,700. The important distinction is that you are looking at all taxable income (including QDivs+), not regular income that makes up the 12% bracket. Once you go over that 96,700 + std deduction, additional income from a Roth conversion is taxed at 27%: the regular income 12% tax rate + an equal amount of QDivs pushed into being taxed at 15%. You can see this by using a tax calculator like the one pb4 links and incremental adding income to model addition Roth conversion.

 

[Scuba]

I wish I would have saved more in my taxable account. Instead of maxing out my 401K, I should have just put in enough to max out the company match and put the rest in an index fund in a taxable account. Hindsight is 20/20.

This is what we did. Now after almost 9 years of retirement, and living off our taxable portfolio without any IRA withdrawals, our taxable portfolio is still almost 70% of our financial assets.

We haven’t done many Roth conversions and may not do any more. The only reason we might do more is to smooth out taxes so a single surviving spouse doesn’t get killed on taxes later in life. However, it is hard for us to get excited about paying a big tax bill now to potentially save decades down the road. Also we now have IRMAA to be concerned about. The jump in cost is huge at higher income levels!

 

[Rianne]

Let us know how the Zoom call goes. It should be interesting.

Had the Zoom call. Very helpful. Rich was the FA, 25 yrs. of experience, 18 years with Fidelity. He had frustration with Fidelity because they could not give tax guidance. We asked specific tax related questions and he answered them in detail with follow up videos that he sent after the call. Did not try to sell us. He told us what they do but understood we are DIY, many people they talk to are, but do not understand how to approach WD and managing taxes. He showed us charts and examples of how taxes are structured. Ordinary income then stacked other income and how it's taxed. I gave him my exact plan for 2025. Our LTCG would be taxed at $0. We could Roth convert, stay in the 12% marginal bracket with dividends, interest, SS, STCG (which we have no control since mutual funds trade) which are taxed at ordinary rates. The standard deduction would cover most of the Roth conversion. Then stack income from there. We're selling stock (not mutual fund stock). So look at lots. It matters if leaving to beneficiaries getting a stepped up. He explained DAF (Donor Advised
Funds) for charitable giving which was interesting and we didn't know about.

No charge for the call and all our questions answered. We were not hurried and he was willing to talk as long as we asked.