Roth Conversions in Pictures

[Midpack]

I am not saying everyone should do Roth conversions, but now 6 years in, I can show where they'll be beneficial for us. I was happily paying well inside the 12% tax bracket for several years (OK, 7 ), until I realized that Soc Sec at 70yo and RMDs were going to force us into the 24% bracket and IRMAA penalties for the rest of our lives. So I started converting aggressively in 2019 (the charts below begin 2022, so several years of large conversions not shown), and it's now clear we'll have some headroom inside the 22% bracket. May look subtle, but tax savings are almost $400K over the next 30 years - even more if tax brackets/rates become more confiscatory. If brackets/rates become generous...not going to happen IMO.

I now have options WRT how much I want at 22% and/or when to stop paying IRMAA penalties.

I know there are others here in the same tax realm. And yes, first world problems.

 

[gwill1010]

Is this a a spreadsheet you created or something on the net?

 

[Jerry1]

I’m just barely in the 22% bracket. RMD’s will be about $50K (first year). I think I’m naturally in equilibrium in the 22% bracket and safely under the IRMAA limits. I think I’d have to believe that the rates will go up in the future, otherwise, it’s pay 22% now or 22% later.

I think the next thing I should do is a similar analysis assuming me or DW passes and one of us is forced into the single tax brackets.

 

[Midpack]

Is this a a spreadsheet you created or something on the net?

Excel spreadsheet I created.

 

[Exchme]

It may be in pictures, but like good abstract art, it's visually stunning, but it takes a while to understand it. The red solid lines are the 1.0 and 1.4 IRMAA tiers, since those are MAGI driven, the entire stacked cash flow is used to compare.

The dotted lines are the 12% and 22% ordinary tax brackets and the top (dark blue) layer of the AGI (qualified dividends) so should be ignored when looking at ordinary income brackets - just compare the dotted lines to the top of the green slice.

The gray zone is the Roth Conversions. The chart title of Tax Equilibrium confused me, maybe it should be "Income and Tax Brackets"?

I would not look at lifetime taxes paid as the metric of success, though. The metric you want to use is the tax-corrected final wealth, meaning your net worth minus taxes that your heirs will pay on the residual tax deferred account balance. Future taxes, like everything else in the calculation, are growing with time (inflation + real returns puff everything up). Because of that ongoing growth, paying taxes early may reduce the lifetime sum of your taxes, but paying at the right rate is what increases your wealth.

Your Picture2 says Fully Convert IRAs - I would not recommend that case, it's not likely right to fully convert. I'm thinking that Picture 3 shows a good plan.

 

[Koolau]

Thanks for the visual representation.

I did a moistened finger in the wind approach and probably paid a bit more in taxes than I should have on the way BUT, the net effect is similar to your abstract art, Midpack. My RMDs are almost under control going forward though the markets could still force me to pay more tax than I want to. My windfall of run-away Megacorp stock in my 401(k) is something I could (almost) never have seen coming. Other than that, I think I did pretty well.

All of this to remind the young'uns among us to be diligent in tax management before you hit RMDs.

 

[Midpack]

It may be in pictures, but like good abstract art, it's visually stunning, but it takes a while to understand it. The red solid lines are the 1.0 and 1.4 IRMAA tiers, since those are MAGI driven, the entire stacked cash flow is used to compare.

The dotted lines are the 12% and 22% ordinary tax brackets and the top (dark blue) layer of the AGI (qualified dividends) so should be ignored when looking at ordinary income brackets - just compare the dotted lines to the top of the green slice.

The gray zone is the Roth Conversions. The chart title of Tax Equilibrium confused me, maybe it should be "Income and Tax Brackets"?

I would not look at lifetime taxes paid as the metric of success, though. The metric you want to use is the tax-corrected final wealth, meaning your net worth minus taxes that your heirs will pay on the residual tax deferred account balance. Future taxes, like everything else in the calculation, are growing with time (inflation + real returns puff everything up). Because of that ongoing growth, paying taxes early may reduce the lifetime sum of your taxes, but paying at the right rate is what increases your wealth.

Your Picture2 says Fully Convert IRAs - I would not recommend that case, it's not likely right to fully convert. I'm thinking that Picture 3 shows a good plan.

+1. All correct (legend below each chart), thanks for your thoughts.

 

[Exchme]

+1. All correct (legend below each chart), thanks for your thoughts.

You are very talented at graphics! Once I got the hang of it, I like it as a really nice way to see what's going on.

 

[copyright1997reloaded]

I’m just barely in the 22% bracket. RMD’s will be about $50K (first year). I think I’m naturally in equilibrium in the 22% bracket and safely under the IRMAA limits. I think I’d have to believe that the rates will go up in the future, otherwise, it’s pay 22% now or 22% later.

I think the next thing I should do is a similar analysis assuming me or DW passes and one of us is forced into the single tax brackets.

To my thinking, there is little difference between the 22% and 24% bracket (2% extra) vs. the jumps from 12% to 22% (10%) or 24% to 32% (8%). Thus, if it were me I would seriously consider filling up most of the 24% bracket - except to also consider IRMAA. That is, get almost to the 161K level (single) or 322K level (MFJ). The IRMAA hit (if you keep it just below 161k/322k is about 1.5%. So the the total hit for doing part of the 24% bracket is 2% + 1.5% = 3.5% additional tax on the marginal income.

I only mention this because if the 2018 tax cuts don't get extended, the brackets (with different values due to inflation) revert to 10%/15%/25%/28%/33%/35%/39.6% and AMT is back in play. The 28% (old pre 2018) was from about 91K to 191K (single) or 153K-233K (MFJ), so its not hard to imagine being in the 28% bracket vs. the 22% or 24% now.

I'm faced with this delima now. I can't stay in the 22% (100,525 for single) but being in the 24% isn't that much worse (well, except for IRMAA crap being so irritating). But if I drifted over $191,950 then all of a sudden I get a big marginal jump to 32% federal (plus IRMAA plus NIIT considerations). Ugh. So yes I think you should think about "what if single" in terms of the analysis and whether you can at least partially eliminate it at a relative smallish additional cost.

 

[Midpack]

You are very talented at graphics! Once I got the hang of it, I like it as a really nice way to see what's going on.

Thanks, but I lifted the graphic idea straight from Kitces.

Wish I’d done it long ago, I already had an income projections spreadsheet, but seeing it all in graph form makes it easier for me to assess. I’m doing any variation I want in minutes now! I just did another staying inside IRMAA 1 starting next year, so I’d never pay IRMAA 1.4 again starting 2027. Lovely.

 

[Jeffman52]

With tax cuts probable in the near term, conversions are definitely going to be beneficial. Especially considering that in the future, tax increases are probable as well. DW and I will be converting as much as we can (within reason). I figure at 61 years old, we can convert for the next 9 to 10 years and really make a dent, while allowing our converted investments to grow tax free from that point forward.

 

[Koolau]

With tax cuts probable in the near term, conversions are definitely going to be beneficial. Especially considering that in the future, tax increases are probable as well. DW and I will be converting as much as we can (within reason). I figure at 61 years old, we can convert for the next 9 to 10 years and really make a dent, while allowing our converted investments to grow tax free from that point forward.

Yes, it was very good having from 59 to 70 to make our conversions. Very few gotchas due to the extra time factor.

Again, to the young'uns: Start early with your conversions.

 

[Jerry1]

I only mention this because if the 2018 tax cuts don't get extended, the brackets (with different values due to inflation) revert to 10%/15%/25%/28%/33%/35%/39.6% and AMT is back in play. The 28% (old pre 2018) was from about 91K to 191K (single) or 153K-233K (MFJ), so its not hard to imagine being in the 28% bracket vs. the 22% or 24% now.

It's hard for me to think about converting to a Roth now versus taking the hit when RMD's force the withdrawal. Nothing analytical about it, I just feel that putting off taxes as long as possible is my best course of action. Having said that, I think if the brackets were to revert back to the old percentages, we'd have some time to act accordingly. At that point, I'd convert as much as made sense while still in the 22/24 bracket and live with the results. Sitting here today, the truth is that I'm struggling with what to do. As always, this forum and these types of discussions are very helpful.

 

[Midpack]

As always, this forum and these types of discussions are very helpful.

This forum has saved me 10's of thousands, literally. I added up some examples I could think of a while back. Don't wait on your advisory fees though...

 

[Koolau]

It's hard for me to think about converting to a Roth now versus taking the hit when RMD's force the withdrawal. Nothing analytical about it, I just feel that putting off taxes as long as possible is my best course of action. Having said that, I think if the brackets were to revert back to the old percentages, we'd have some time to act accordingly. At that point, I'd convert as much as made sense while still in the 22/24 bracket and live with the results. Sitting here today, the truth is that I'm struggling with what to do. As always, this forum and these types of discussions are very helpful.

Maybe just do SOME conversion but not the maximum to completely fill a tax bracket??

Personally, I wish I had done MORE conversions when I had the chance. I was not prepared for my remaining qualified money (in my 401K) to grow as much as it did. Because it grew, I'm STILL struggling with RMDs because 1) I'm getting old and the factors are rapidly going against me and 2) my 401(k) has grown dramatically with the markets. Thus, my RMDs are becoming problematic, tax and "gotcha" wise.

I guess the way I look at it is that BEFORE RMD's you have a lot of control over your taxes. You can convert as much or as little as you wish and, therefore, pay as much or as little tax as you wish. Once RMDs kick in, you have pretty much lost control over how much you will take from your tIRS/401(k) and you WILL PAY the taxes that the RMDs generate. You may also be subject to the "gotchas" of, for instance, IRMAA, etc.

I understand that the old mantra was to delay taxes as long as possible. I think that was before the many options that the gummint gave us for things like tIRAs, 401(k) (and similar) and - especially - Roth IRAs (with ability to convert.) SO the mix of options is large with advantages and disadvantages which must be played off against each other.

Best luck in navigating this part of your financial life during FIRE.

 

[Kings over Queens]

It's hard for me to think about converting to a Roth now versus taking the hit when RMD's force the withdrawal. Nothing analytical about it, I just feel that putting off taxes as long as possible is my best course of action.

My CPA, who is also a friend for 40 years, feels the same way and has pushed back on my suggestion to convert. He's dead set against it with his money and is still deferring at 68.

I too share your struggle, but am coming to the realization that if we do nothing RMD's will push my (our) income to the bottom of today's 24% just by virtue of the compounded growth over the next 18 years. We have room to do $75,000 now in the 22% which is a clear savings or up $250,000 to the top of the 24% bracket which is a push tax wise, but could help with IRMAA and NIIT. It still leaves a lot more, but we won't have to take RMD's until 75, unless that's rolled back.

I hate to look back, but am almost positive that I deferred much of this money at lower effective rates. I've never been a "high earner" but for the better part of 15 years did max deferral for me and my wife who was on my books. Hindsight is 20/20 and I know I wouldn't have saved as much as we did had it not been for the tax deferral but the way it looks now, there is no way we wind up in a 12% bracket, using today's brackets.

 

[Koolau]

My CPA, who is also a friend for 40 years, feels the same way and has pushed back on my suggestion to convert. He's dead set against it with his money and is still deferring at 68.

I too share your struggle, but am coming to the realization that if we do nothing RMD's will push my (our) income to the bottom of today's 24% just by virtue of the compounded growth over the next 18 years. We have room to do $75,000 now in the 22% which is a clear savings or up $250,000 to the top of the 24% bracket which is a push tax wise, but could help with IRMAA and NIIT. It still leaves a lot more, but we won't have to take RMD's until 75, unless that's rolled back.

I hate to look back, but am almost positive that I deferred much of this money at lower effective rates. I've never been a "high earner" but for the better part of 15 years did max deferral for me and my wife who was on my books. Hindsight is 20/20 and I know I wouldn't have saved as much as we did had it not been for the tax deferral but the way it looks now, there is no way we wind up in a 12% bracket, using today's brackets.

While it's good to have a friend as your CPA, his ability to "do" your taxes is one thing. His financial advice may not be suitable for someone other than himself. IMO you gotta do your own spread sheets and make your own assumptions/predictions of the future. Best luck.

 

[Winemaker]

While I finally bit the bullet a few years back and started converting. I am on a never get ahead treadmill. I have reduced my taxable investment income to almost nothing to have an minimal NIIT, and have converted to the estimated cliff for IRMAA Tier 2. We converted $85k of DW's tIRA. Our tIRAs, 401k is up $300k for the year. but

 

[Jerry1]

I hate to look back, but am almost positive that I deferred much of this money at lower effective rates. I've never been a "high earner" but for the better part of 15 years did max deferral for me and my wife who was on my books. Hindsight is 20/20 and I know I wouldn't have saved as much as we did had it not been for the tax deferral but the way it looks now, there is no way we wind up in a 12% bracket, using today's brackets.

I was in higher brackets, but I share your hindsight. Had I known then what I know now, I would have only contributed enough to my 401K to max out the company match. Instead, I maxed out based on the IRS limits and even did the extra after I turned 50 (or whatever the age was to defer extra).

 

[PhrugalPhan]

While I finally bit the bullet a few years back and started converting. I am on a never get ahead treadmill. I have reduced my taxable investment income to almost nothing to have an minimal NIIT, and have converted to the estimated cliff for IRMAA Tier 2. We converted $85k of DW's tIRA. Our tIRAs, 401k is up $300k for the year. but

I have to second (third, fourth?) the advice to convert to Roth if practical (and earlier is better). If it looks like a wash, do it anyway. I'm 62 & single, and am trying to get ahead of the avalanche. My 457 plan allowed in plan Roth rollovers starting maybe 6 years ago. I retired last year, and I started this year with a $582k traditional balance. I did a $100k rollover the first week of this year, and as of today my traditional balance is up to $660k. It's like I didn't even do a conversion.

I made smaller conversions the final years I was working and as well did 100% Roth contributions my last four years of working. To date I've converted $212k and it's grown to $400k, yet I wish I had done even more years ago.

I'm converting to the top of the 24% bracket, but I was hoping to only convert to the top of the 22% bracket starting in 2026 (when I need to consider IRMAA in my conversion plans). Now I don't know what I'll end up doing. First world problems I guess.

 

[wannabefire]

I follow this thread and many of the “should we convert” threads closely. As we plan to retire prior to 60 years old and will be in lower brackets for a few years (we are currently in the top marginal bracket.

One thing that does not come up as frequently as IRMMA is the concept of RMDs combined with Social Security putting you into a higher bracket in your 70s. Although I’m not well. Eased in the subject, I feel like this is part of the reason to convert WHEN you are in a lower bracket.

We are actually still contributing to tax deferred savings in an effort to reduce current tax liability.

Thoughts??

 

[MTB4me]

How do y’all do conversions and not impact your ACA health insurance rates, for those under 65 and not on Medicare? If you have even some income (interest or dividends) in taxable accounts, that doesn’t leave much margin to Roth convert up to 4x FPL to then qualify for reduced ACA costs.

 

[SecondCor521]

I follow this thread and many of the “should we convert” threads closely. As we plan to retire prior to 60 years old and will be in lower brackets for a few years (we are currently in the top marginal bracket.

One thing that does not come up as frequently as IRMMA is the concept of RMDs combined with Social Security putting you into a higher bracket in your 70s. Although I’m not well. Eased in the subject, I feel like this is part of the reason to convert WHEN you are in a lower bracket.

We must read different Roth conversion threads. I've seen RMD+SS in your 70s mentioned numerous times on this board, including by me.

We are actually still contributing to tax deferred savings in an effort to reduce current tax liability.

Thoughts??

Depends on what your tax plan is for the rest of your life. I'm FIREd and expecting my FIRE stash to grow faster than inflation such that my RMD+SS in my 70s will be at a moderately high rate (including IRMAA). I Roth convert each year to try to pull some of that forced income earlier and get it taxed at slightly better rates.

 

[SecondCor521]

How do y’all do conversions and not impact your ACA health insurance rates, for those under 65 and not on Medicare? If you have even some income (interest or dividends) in taxable accounts, that doesn’t leave much margin up to 4x FPL to then qualify for reduced ACA costs.

I take ACA subsidy loss into consideration when evaluating Roth conversions. It *does* happen and there isn't any real way to avoid it AFAIK.

I have relatively low spending (paid off house and car, MCOL area, chill lifestyle), so my cash flow needs are moderate. I can meet those cash flow needs partly through selling in taxable with about a 50% cost basis, as well as some non-taxable cash inflows.

I can then Roth convert some beyond that and still get some ACA subsidies.

There are still some subsidies now beyond 400% FPL this year and next due to a law passed a year or two ago. That expires and the cliff returns 1/1/2026.

 

[PhrugalPhan]

How do y’all do conversions and not impact your ACA health insurance rates, for those under 65 and not on Medicare? If you have even some income (interest or dividends) in taxable accounts, that doesn’t leave much margin to Roth convert up to 4x FPL to then qualify for reduced ACA costs.

Thankfully I don't have that issue. I retired with a pension and health insurance through my old employer. Costs $400 / month. And with a COLA'd pension I will never be below marginal of 22% so converting to fill the 24% bracket makes too much sense for me.