Roth Conversions in Pictures

[audreyh1]

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.

I think the IRMAA income levels are much higher than the ACA subsidy income levels, so some folks wait until age 65 to do serious RMD conversions. And they can do so up to the year before they are subject to RMD which is 73 for those born 1951 to 1959. 75 for 1960 and later. Folks usually start drawing SS at some point during this time so that has to be taken into account too.

 

[Al18]

I would consider converting some of your IRA to Roth IRA, so the surviving spouse can spend these funds without any additional tax liability. The tax rates for single are much higher than married. In my family, the grandmothers outlived my grandfathers by almost a decade.

If you have children that you’re leaving your money to - they should be able to pay the taxes, in my opinion.

 

[Winemaker]

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.

Couldn't qualify for ACA. We paid~$18k/year for 10 years for health insurance.

 

[RetireBy90]

I love that we can each consider the many various considerations and map an individual plan. We converted more aggressively for a few years and bumped our income into IRMAA expenses but yesterday I got a letter that my Medicare cost will be just base for 2025. I considered several costs and best guess of the future. About 90% of our stash is in IRA accounts. Today we have about 70% in Roth and 30% traditional. I plan a smaller ($30K) conversion this year and then will be done with them.
A BIG consideration for me was having the taxes paid. Different people will have different considerations and priorities. With the divided populace in our country I'm surprised we can discuss and debate a topic like this and then walk away as friends.

 

[Flieger]

I hate to look back, but am almost positive that I deferred much of this money at lower effective rates.

I just had this conversation with a friend over the weekend. I'm not sure when Roth became available (I could look but why - spilt milk) but I am pretty sure between wife and I we were already high earners and without deferrals would have had huge tax hits if not for deferrals. Now, at (essentially) 62, a 5 year look back, etc I am not sure it make sense to convert. I may try to construct (or find) a similar spreadsheet to the OP and do the math, but this is what my head is telling me right now.

Flieger

 

[Kings over Queens]

I am not sure it make sense to convert.
Flieger

In my case, I can safely assume its going to be a push on tax brackets, unless I convert to the top of the 24% bracket, and with 18 years before I would have been forced to take that money via RMD, the growth at 7% assumed shows a slight gain, so I'm not hurting myself.

This causes me to look at the other things that add to the equation, like avoiding IRMAA and NIIT, as well as the potential of forcing my kids who might inherit large sums into higher tax brackets.

So much to consider.

 

[all4j]

@Midpack Help me clear some brain fog...What is the difference between "ROTH Conv Taxable" & "RMD Taxable" (mainly before age 73)? Also, have you come up with a way to graphically show some of the considerations other than AGI and/or "what if" scenario comparisons?

 

[Flieger]

Taking a quick look, and based on current tax schedule, I could potentially pay up to the 22% max now amounting to an additional $20k in tax per year, or keep my current withdrawal plan which would be slightly in to the 22% bracket and pay an additional $4500 more in taxes going forward. IRMAA is way out of the picture.

I am not in the same situation as some on here, but I am not destitute either. But the additional $15k I would pay in taxes wouldn't really help me a lot, and my kids/heirs, well they will just have to figure outlaw to deal with free money minus taxes.

My earlier plan of leaving them "stupid" wealthy went out the door due to a corp bankruptcy depleting my retirement (all matches and bonuses in stock) and a prior divorce.

Flieger

 

[TheWizard]

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??

This is exactly the idea behind Levelizing your AGI in your 60s before starting SS at 70.
You do Roth conversions ruffly equal to your projected SS benefit plus your RMD, thus avoiding a big increase in AGI and taxes once you're in your 70s...

 

[Midpack]

@Midpack Help me clear some brain fog...What is the difference between "ROTH Conv Taxable" & "RMD Taxable" (mainly before age 73)? Also, have you come up with a way to graphically show some of the considerations other than AGI and/or "what if" scenario comparisons?

I have non deductible contributions in my TIRA, so conversions and RMDs are not 100% taxable. You probably know Roth conversions are distributions from a TIRA>Roth each year, and RMDs are the distributions I have to take starting at age 73. I started Roth conversions at age 65, and every year since.

 

[Jerry1]

This is exactly the idea behind Levelizing your AGI in your 60s before starting SS at 70.
You do Roth conversions ruffly equal to your projected SS benefit plus your RMD, thus avoiding a big increase in AGI and taxes once you're in your 70s...

Yeah, that would have made the decision a lot easier for me. Unfortunately, I ended up on disability which gave me my full retirement amount at 61. Health wise that sucks but financially, it’s been a good thing. I was all set to convert up to the 12% bracket but now I’m in the 22% bracket so conversion is centered around the belief that DW is going to be single and we need to handle that financially as well as possible.

The wild card is health. DW has dementia in her family. If she ends up in memory care, her medical expenses will be deductible and she’s not likely to pay any taxes.

 

[all4j]

I have non deductible contributions in my TIRA, so conversions and RMDs are not 100% taxable. You probably know Roth conversions are distributions from a TIRA>Roth each year, and RMDs are the distributions I have to take starting at age 73. I started Roth conversions at age 65, and every year since.

Guess I wasn't clear on what I wasn't clear about. Looked to me that at age 70 for example you had both 'roth conv taxable' & 'RMD Taxable'. Are you saying the 'RMD taxable' was just a distribution you took that you didn't convert to roth? Maybe I was crossed up by distinction in a distribution & a 'required' distribution (starting at age 73)? Just curious

 

[TheWizard]

Guess I wasn't clear on what I wasn't clear about. Looked to me that at age 70 for example you had both 'roth conv taxable' & 'RMD Taxable'. Are you saying the 'RMD taxable' was just a distribution you took that you didn't convert to roth? Maybe I was crossed up by distinction in a distribution & a 'required' distribution (starting at age 73)? Just curious

It's illegal to convert any of your RMD to Roth; only the excess beyond RMD can be converted...

 

[NgineER]

Taking a quick look, and based on current tax schedule, I could potentially pay up to the 22% max now amounting to an additional $20k in tax per year, or keep my current withdrawal plan which would be slightly in to the 22% bracket and pay an additional $4500 more in taxes going forward. IRMAA is way out of the picture.

I am not in the same situation as some on here, but I am not destitute either. But the additional $15k I would pay in taxes wouldn't really help me a lot, and my kids/heirs, well they will just have to figure outlaw to deal with free money minus taxes.

My earlier plan of leaving them "stupid" wealthy went out the door due to a corp bankruptcy depleting my retirement (all matches and bonuses in stock) and a prior divorce.

Flieger

Another consideration too is that at one point one of you will likely file as single and your tax brackets will jump substantially... Not fun to think about, but most likely very possible.

 

[audreyh1]

Regarding tax considerations for the surviving spouse:

A surviving spouse can disclaim part or all of an inherited IRA in favor of the other beneficiaries. This must be done within 9 months of the spouse’s death and before accepting any of the inherited IRA.

You can also choose to leave part or all of your IRA to other beneficiaries. You may choose to do this if your spouse is already well provided for.

These are just additional ways of handling the increase in taxes due to a surviving spouse becoming a single filer the year after a spouse’s death.

Also the surviving spouse will receive a stepped up basis on at least half of the jointly owned and inherited assets. In many community property states the surviving spouse gets 100% stepped up basis on jointly held accounts. This is an opportunity for rearranging assets for better tax treatment. Also for selling if desired long held assets with a high unrealized capital gain.

 

[CardsFan]

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??

If you have substantial tax deferred money (say over $1.5 million) do not be seduced into doing small conversions to stay in the 12% bracket like I was. If I had it to do over again, before 63 (no IRMAA impact) I would go to the top of the 22% bracket. Then go to just below the first IRMAA bracket (this is what I am doing now at 69)

 

[TheWizard]

Regarding tax considerations for the surviving spouse:

A surviving spouse can disclaim part or all of an inherited IRA in favor of the other beneficiaries. This must be done within 9 months of the spouse’s death and before accepting any of the inherited IRA.

You can also choose to leave part or all of your IRA to other beneficiaries. You may choose to do this if your spouse is already well provided for.

These are just additional ways of handling the increase in taxes due to a surviving spouse becoming a single filer the year after a spouse’s death.

Also the surviving spouse will receive a stepped up basis on at least half of the jointly owned and inherited assets. In many community property states the surviving spouse gets 100% stepped up basis on jointly held accounts. This is an opportunity for rearranging assets for better tax treatment. Also for selling if desired long held assets with a high unrealized capital gain.

I agree with this; a large increase in unneeded income and taxes for surviving spouse isn't carved in stone.

And by leaving a portion of the deceased spouse's IRA to offspring or other individuals, the ten year clock of a smaller inherited IRA starts sooner than otherwise. Beneficiaries could have up to 20 years total to empty two inherited IRAs which is usually a good thing tax wise...

 

[Midpack]

Guess I wasn't clear on what I wasn't clear about. Looked to me that at age 70 for example you had both 'roth conv taxable' & 'RMD Taxable'. Are you saying the 'RMD taxable' was just a distribution you took that you didn't convert to roth? Maybe I was crossed up by distinction in a distribution & a 'required' distribution (starting at age 73)? Just curious

No. The RMDs start at age 73, the TIRA distributions > Roth conversions in some example charts continue past age 73 - nothing stopping that. BUT conversions are above and beyond RMDs, you CANNOT convert RMD distributions $ to your Roth.

 

[all4j]

No. The RMDs start at age 73, the TIRA distributions > Roth conversions in some example charts continue past age 73 - nothing stopping that. BUT conversions are above and beyond RMDs, you CANNOT convert RMD distributions $ to your Roth.

Thanks for reply -- you'll probably be happy to know I'm dropping this as I think we mainly have a terminology problem. BEFORE age 73 is what I've been asking about (another poster also missed that) & then there isn't anything 'required' so no minimum so no RM just D. I had noticed you basically broke out by AGI component, but in that case you seemed to break one box of 1040 into 2 parts.

I don't think I missed anything after all (other than how that helps you), so no reply necessary. I think the other questions I brought up that went unanswered as answered by the silence.

 

[pjigar]

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

I also created spreadsheet which I have shared here before. See if you can use it:

RMD Scenarios

docs.google.com

 

[big-papa]

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.

Agree about the title being called Tax equilibrium. Also agree that lifetime taxes paid probably isn't the best metric of success. It's just the tool to achieve the success. But I don't necessarily agree that final wealth, adjusted for taxes is always the best metric for everybody, either. I know plenty who are doing this as a way to increase overall average spending capacity over their retirement and are using that as their metric of success.


Cheers.

 

[Exchme]

Agree about the title being called Tax equilibrium. Also agree that lifetime taxes paid probably isn't the best metric of success. It's just the tool to achieve the success. But I don't necessarily agree that final wealth, adjusted for taxes is always the best metric for everybody, either. I know plenty who are doing this as a way to increase overall average spending capacity over their retirement and are using that as their metric of success.


Cheers.

Good point!

 

[big-papa]

I think the IRMAA income levels are much higher than the ACA subsidy income levels, so some folks wait until age 65 to do serious RMD conversions. And they can do so up to the year before they are subject to RMD which is 73 for those born 1951 to 1959. 75 for 1960 and later. Folks usually start drawing SS at some point during this time so that has to be taken into account too.

That's basically it. I'm doing a modest conversion this year because I overestimated our MAGI for ACA for 2024. My conversion will just be up to the MAGI that I'm estimated. In 2025, my wife goes on medicare so we'll take that into account. Just don't forget that IRMAA uses a 2 year lookback, so even when you turn 65, what you did back at age 63 is what matters. This year's conversion will still be well under the threshold for 2 years from now.

Also, note that depending on what you're trying to accomplish, avoiding IRMAA altogether might not always result in an optimal solution, depending on your goals and, of course, what the reality of the future brings vs. one's assumptions.

Cheers.

 

[cat4ever]

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.

As a 60 YO "young'un", my current approach is to not do conversions in order to get the full healthcare subsidy, which makes my silver plan zero cost (current pension puts me right on the line, almost to the dollar). Once Medicare kicks in I plan to start the conversions per the midpack plan above, until SS kicks in at 69-70. From one "finger in the wind" planner to another, Is there a chance this "finger in the wind" plan might cost me more than I think in the long run. Current amount of IRA money is 3.2M, i have another 1.8M already Roth'd.

Looks like I got my answer from the post just above from big-papa.

 

[Dtail]

No. The RMDs start at age 73, the TIRA distributions > Roth conversions in some example charts continue past age 73 - nothing stopping that. BUT conversions are above and beyond RMDs, you CANNOT convert RMD distributions $ to your Roth.

I did the RMD for my mom for the first time in Fidelity and it appeared to state that the if one does an RMD and a Roth conversion during the year, then the RMD must be done first.
So for example, one can't convert to a Roth in January, then separately perform the RMD in December?