Roth Conversion not for us?

[Dtail]

According to Fidelity’s Retirement planner, my RMDs do not go above my current withdrawal percentage (2% ish) until 2053. Based on average market returns. I likely won’t need the money. I’ll be 90. I could be dead too. Maybe by then I’ll just brag and complain to my McDonald's coffee buddies about how much taxes I pay.
I have options because I don’t need any of the money in deferred accounts. I can QCD it or a chunk of it. I can take withdrawals currently for taxes using the end of the year method to reduce it. I can go into more conservative investments. I can switch off income from taxable and live on the RMD when the time comes. I have options and I can exercise them when more is known vs now when it’s all still pretty much a guess and I would pay to make that guess.

I have mentioned in other threads that if the RMD's are less than or equal to the current spending% based off the TIRA, would one be satisfied with those results and not convert further?
Most folks key in on whether they are potentially moving from the 12 to 22 or the 24 to 32 bracket, which of course makes sense too.

 

[SecondCor521]

I have mentioned in other threads that if the RMD's are less than or equal to the current spending% based off the TIRA, would one be satisfied with those results and not convert further?

The metric I use is whether I think that Roth conversions at my current marginal rate will be lower than the future marginal rate on those dollars. This requires guessing estimating several things about the future.

My situation involves planning across three generations - my Dad's, mine, and my kids'. If the metric shows conversions make sense, even if the benefit is to me instead of my Dad or my kids instead of me, then that is what we do in my family.

Most folks key in on whether they are potentially moving from the 12 to 22 or the 24 to 32 bracket, which of course makes sense too.

I'd really encourage people to look at their actual tax return and actual marginal rates. There are several situations where the actual marginal rate can be quite different than just looking at the basic tax tables - the SS tax torpedo, the phantom 27% bracket, ACA subsidies acting like a parallel tax system, refundable credits like AOTC creating an extended virtual 0% tax bracket, IRMAA, and NIIT, just to name a few.

I really like the Case Study Spreadsheet and use it's functionality to analyze most of the above factors. It doesn't incorporate IRMAA because that's a Medicare surcharge and not an income tax, but I think it handles the rest. (ETA: it does handle IRMAA, see follow up posts below.) I use the CSS every December to plan my "top up" Roth conversions. It means doing my taxes twice, but it's worth it to me for what I see as the tax savings.

 

[SevenUp]

I'd really encourage people to look at their actual tax return and actual marginal rates. There are several situations where the actual marginal rate can be quite different than just looking at the basic tax tables - the SS tax torpedo, the phantom 27% bracket, ACA subsidies acting like a parallel tax system, refundable credits like AOTC creating an extended virtual 0% tax bracket, IRMAA, and NIIT, just to name a few.

+1

I really like the Case Study Spreadsheet and use it's functionality to analyze most of the above factors. It doesn't incorporate IRMAA because that's a Medicare surcharge and not an income tax, but I think it handles the rest. I use the CSS every December to plan my "top up" Roth conversions. It means doing my taxes twice, but it's worth it to me for what I see as the tax savings.

Roth Conversion with Social Security and Medicare IRMAA shows how the CSS does consider IRMAA, along with all the others mentioned.

 

[SevenUp]

Right, if we make $40-$50K conversions over the next 6 years...our RMDs will probably be $60K or so. That's doable.
Per current tax table:
$40K conversion = $0 CG tax
$50K conversion = $0 CG tax
$60K conversion = $1218 CG tax...but still at 12% marginal

12% ordinary + 15% LTCG = a 27% marginal tax rate for as long as it takes to make all the LTCG taxable.

 

[SecondCor521]

+1

Roth Conversion with Social Security and Medicare IRMAA shows how the CSS does consider IRMAA, along with all the others mentioned.

Thanks for the correction - I'll try to edit my earlier post.

 

[COcheesehead]

I don’t think this has been mentioned yet, but having greater balance in your accounts during your saving years helps with RMDs too. We have just about half our assets in a taxable account and another 10% in a deferred annuity which has no RMDs. That account is our LTC bucket. So one of the reasons I am not super motivated to convert is the RMD torpedo happens much later in life for us in our 90’s when accounts due to QCDs or other withdrawals could be smaller than projected.

 

[Guamaniac]

I did my own (fairly quick) calculation which said I won't enter the next (22%) tax bracket because of RMD's until I'm 96. Ok, by "own calculation" I asked AI/Grok. Of course when one of us dies, that tax bracket changes. And right off the bat it got my starting RMD age wrong. It should be 75, not the 73 it listed. Also, any short term cap gains from my taxable account would push my income higher which I didn't add to the assumptions.

 

[Oakster]

There are other reasons than taxes to make the conversion. If you take money out of a ROTH it will not be income later, so you can avoid increased taxes on social security, impact to Obamacare subsidies etc. If its in a ROTH you can leave it to your heirs if you plan to, without required distributions and without taxes or income for them.

 

[TheWizard]

I did my own (fairly quick) calculation which said I won't enter the next (22%) tax bracket because of RMD's until I'm 96. Ok, by "own calculation" I asked AI/Grok. Of course when one of us dies, that tax bracket changes. And right off the bat it got my starting RMD age wrong. It should be 75, not the 73 it listed. Also, any short term cap gains from my taxable account would push my income higher which I didn't add to the assumptions.

An increased tax bracket for surviving spouse isn't necessarily either guaranteed or a bad thing.
It can be avoided or lessened by willing a portion of first spouse's assets to offspring/relatives/charity.
Alternately, surviving spouse can QCD up to $108,000+ to charity each year.
It depends on where your priorities lie...

 

[Winemaker]

While a skeptic at first, but we are converting up to the NIIT level, no more. It currently puts about $44k into the 24% bracket. This number will decrease as tax brackets adjust, and in a few years it will be 22% If one of us croaks, our income would be decreased by the amount of my DW's SS benefit. That would put the survivor into the current 32% bracket; again this rate will change as brackets are adjusted. If the market continues to make positive returns, projected RMDs will be over $100k. I am converting/spending to prevent that from occurring. PA, currently taxes no pensions, SS or retirement monies. Nor does out local township.

 

[RetiredHappy]

While a skeptic at first, but we are converting up to the NIIT level, no more. It currently puts about $44k into the 24% bracket. This number will decrease as tax brackets adjust, and in a few years it will be 22% If one of us croaks, our income would be decreased by the amount of my DW's SS benefit. That would put the survivor into the current 32% bracket; again this rate will change as brackets are adjusted. If the market continues to make positive returns, projected RMDs will be over $100k. I am converting/spending to prevent that from occurring. PA, currently taxes no pensions, SS or retirement monies. Nor does out local township.

This is totally describing my spouse and me, but we have not been converting. If my spouse croaks, I will be in the 32% tax bracket with RMD. My strategy is to disclaim a portion of the IRA so that it gets passed onto my son directly, reducing my tax liability. He will have to pay Fed and State tax, but will still be lower than mine (Fed only). If I croak first, my brokerage goes to my son, but my spouse gets my annuity income (qualified) and he will also be stucked with higher tax rate.

 

[TheWizard]

This is totally describing my spouse and me, but we have not been converting. If my spouse croaks, I will be in the 32% tax bracket with RMD. My strategy is to disclaim a portion of the IRA so that it gets passed onto my son directly, reducing my tax liability. He will have to pay Fed and State tax, but will still be lower than mine (Fed only).

That is an excellent idea...

 

[Winemaker]

I have told my wife the same thing and it is written in our "Go Cold plan". I have converted most of my wife's 403b and tIRA to $150k. My "hugely" pretax accounts are spread amongst 4 tIRAs and a 401k, so she can pick and choose which to disclaim.