Roth Conversions in Pictures

This thread has been very helpful. Thanks to those who were involved in the discussion but in particular, I appreciated the graphs that Midpack provided. I've decided to do some converting. I'm not sure how aggressive I'll be as time goes on, but this year I'm going to convert about 15% of DW's IRA. She's older and will hit RMD's before me so we figured we'd start there. I'll be in the 22% bracket but it will cost more than that because the full 85% of our SS will be taxed. We also have state tax. For this year we'll pay the taxes out of our cash so we don't have to convert any extra to pay the taxes. This is going to hurt, but I understand it's a pay now or pay more later and more later may be a lot more. Again, thank you.
 
I had a realization yesterday. I have been planning to go to the top of the 22%, but struggling with the idea of going to the top of the 24%. I realize it won't make a huge difference either way, but there I was, dithering over the pros/cons/probabilities seemingly endlessly.

Then I took a calculator and typed in: ($383,900 - $201,050)*2% = $3,657. I.e., the difference between whether that slug comes out at 24% or 22% is far lower than I would have guessed. There are MANY small decisions (like exact AA, etc.) that could affect my stash much more than that.

I decided to err on the side of converting more now and next year.

These threads with the feedback of others here convinced me to try to get ahead of the growth of the tIRAs. I pulled the trigger the other day to go to the top of the 24% bracket. I am now down to 53% in deferred, and 46% in Roth. I am pleased with the progress. I will probably be able to do another big chunk in 2025 (but there are some unknowns which will keep me waiting until next December to do so).

Thanks all.
 
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 exactly what my wife and I are doing. Small Roth conversions until we turn 65 to keep us around $38K MAGI so that we get a large ACA subsidy. Once we hit 65, then we'll bump up the Roth conversion to the top of the 12/15% bracket until we're 70. At that point with SS kicking in, we'll be in the 22/25% bracket.

One note to mention is that I'm actively trying to switch many of my Rollover IRA index funds into lower interest T-bills, CDs, and bonds during this timeframe, so that my higher performance funds are in my Roth account, and my Rollover account has more income style investments. (Looking back, I shouldn't have bought so many NVDA shares in my Rollover IRA, and should have bought them in my Roth - so now every Roth conversion is slowly moving those NVDA shares over.)
 
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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 :blush:), 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.
Very similar plan over here. Converted smaller amounts up to and barley into the 22% bracket
almost every year / the past 7-8 years starting at 54 or 55.
Went big in 2023 (Big for me) thinking the Trump tax cuts would end in 2025, and would take SS in 2024.
So did 100k into the 22% bracket in 2023.
This year smaller conv, than 2023 / same as the prev 7 yrs. more or less
as now am guessing the Trump tax plan will get re-newed.
And with the possibility of no fed tax on SS might be able to increase my conversions in the near future.
If those 2 things occur, will be able to easily convert the remaining IRA
in the 12% bracket over the next 8-10 yrs. Thought my 401k would be a big part of my ret. But as it turns out, have not touched it in 11 years. Just converting it to roth. Might never even need it. .
Our taxable income now (with SS) is 115k. IRA & Roth grows at 4% puts us at $155k yr.
But the 115k is taxable income.
(Was too young at 51 for the pension plan with 30 yrs of service
, but did get medical at 51 that turns into medicare in a year at 65.)
So far my home made ret. plan has worked out better than expected.
Spent years trying to make as much $$ as possible. The past 11, trying to make as little as possible.
 
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First - I have a CPA do my taxes and I now have an FA for my IRAs. So I'm a real novice when it comes to knowledge of taxes.

I've done a Roth conversions a couple of time. Thinking about doing one this year. We are 69 and 70 yo, so RMD's will be coming soon.

We are now in the 12% bracket and I thought about converting to the top of the 22. But I'm not sure what advantage that would give me going forward. We'll be in the 22% bracket when RMDs kick in regardless of conversions going forward. At least I think so.

So why convert now to 22 when we'll not be able to get below 22% years from now with conversions?
 
I use a homebrewed spreadsheet which incorporates the Excel optimizer into the mix. Once I get results from that, I can then use that as guidance to my withdrawal calculator to make it practical. In other words, I think the Roth optimizer is great to help develop a plan but I wouldn't want to use it as both the Roth planner and the withdrawal calculator. Such a plan should be revisited from time to time.

As has been mentioned before, there are a lot of reasons to do Roth conversions. In my case, so far, what I've been optimizing on is a (remaining) lifetime increase in after-tax spending. Then I check the results for other scenarios such as one of us departing before the other and moving into single-filing category with a lower overall SS benefit, and a portion of what we will leave as an inheritance being tax free. And always, I compare against my default-no conversion plan.

One thing I've noticed, at least for our case, is that there are a lot of constraints I can place on the optimization that give nearly the same results. For example, as many have noted in this thread, constraining to the top of a bracket, constraining to below the first IRMAA level, max overall amount allowed to be converted in any given year, or completely unconstrained. Limited only by your imagination and the ability of the optimizer to actually find a solution. The main thing I see for the unconstrained case vs. any constraints I place on the process is the magnitude of the conversions themselves and how many years it takes to complete the conversion process. The unconstrained case, though, always gives the (slightly) highest overall after-tax spending capacity. And it does so in some surprising ways such as going into the first IRMAA bracket for a year or two at the beginning and even touching into a higher bracket than most rules-of-thumbs might have you do.

This year will be my first true conversion with me at age 63 and DW at 64. I underestimated my MAGI for 2024 for ACA, so for this first conversion, I'm merely converting up to the MAGI I originally estimated. It'll be plenty big enough I think no matter what other constraints I place for 2025 onwards. In 2025, we will still have a premium tax credits for the first few months of the year, but that will disappear when my DW starts SS in Q2. That will be mostly noise if I end up having to pay back the tax credits at the following tax season.

Finally, MaxiFI Planner has recently added a Roth Optimizer as an option to their tool. A good friend of mine has been a user of this tool for a number of years. After having watched one of their videos and actually sitting down with my friend as he ran the optimizer, I noticed something I hadn't considered. Today, even without any Roth conversions, we have a spending capacity that, so far, is quite a bit larger than we've been using. In the MaxiFI Planner examples, they break the spending into two parts: nondiscretionary and discretionary and allow Roth conversions to only increase the amount of discretionary spending. In 2025 as I consider the forward-going plan, I might consider a similar idea - it would require at least mentally breaking the portfolio into two parts: One part that provides nondiscretionary and one part that provides for discretionary spending and, hence is, subject to Roth conversions.

There are many ways to crack this nut. And based on what I've seen, Nth level optimization won't buy you much vs. having a plan of some sort in the first place.

Cheers.
 
So why convert now to 22 when we'll not be able to get below 22% years from now with conversions?

1. To stay below the 24% or 32% brackets, especially for the one of you who survives the other and has nearly the same income but will be taxed as Single instead of MFJ.

2. To avoid IRMAA mini-cliffs. (I'm single, but I think some of the IRMAA breakpoints for MFJ fall in the 22% bracket.)

It's possible (but unlikely) that neither of the above applies to you. If so, then the other reasons are:

1. To reduce tax drag. Money in taxable grows taxed. Money in Roths grows tax free.

2. You believe tax rates in general will rise in the future, and you want to avoid those.

3. You think the beneficiaries of your traditional IRA will be taxed at higher than 22%, or you just feel like prepaying the taxes for them for whatever reason.
 
1. To stay below the 24% or 32% brackets, especially for the one of you who survives the other and has nearly the same income but will be taxed as Single instead of MFJ.
That was my main reason as I thought this through.
 
I use a homebrewed spreadsheet which incorporates the Excel optimizer into the mix. Once I get results from that, I can then use that as guidance to my withdrawal calculator to make it practical. In other words, I think the Roth optimizer is great to help develop a plan but I wouldn't want to use it as both the Roth planner and the withdrawal calculator. Such a plan should be revisited from time to time.

As has been mentioned before, there are a lot of reasons to do Roth conversions. In my case, so far, what I've been optimizing on is a (remaining) lifetime increase in after-tax spending. Then I check the results for other scenarios such as one of us departing before the other and moving into single-filing category with a lower overall SS benefit, and a portion of what we will leave as an inheritance being tax free. And always, I compare against my default-no conversion plan.

One thing I've noticed, at least for our case, is that there are a lot of constraints I can place on the optimization that give nearly the same results. For example, as many have noted in this thread, constraining to the top of a bracket, constraining to below the first IRMAA level, max overall amount allowed to be converted in any given year, or completely unconstrained. Limited only by your imagination and the ability of the optimizer to actually find a solution. The main thing I see for the unconstrained case vs. any constraints I place on the process is the magnitude of the conversions themselves and how many years it takes to complete the conversion process. The unconstrained case, though, always gives the (slightly) highest overall after-tax spending capacity. And it does so in some surprising ways such as going into the first IRMAA bracket for a year or two at the beginning and even touching into a higher bracket than most rules-of-thumbs might have you do.

This year will be my first true conversion with me at age 63 and DW at 64. I underestimated my MAGI for 2024 for ACA, so for this first conversion, I'm merely converting up to the MAGI I originally estimated. It'll be plenty big enough I think no matter what other constraints I place for 2025 onwards. In 2025, we will still have a premium tax credits for the first few months of the year, but that will disappear when my DW starts SS in Q2. That will be mostly noise if I end up having to pay back the tax credits at the following tax season.

Finally, MaxiFI Planner has recently added a Roth Optimizer as an option to their tool. A good friend of mine has been a user of this tool for a number of years. After having watched one of their videos and actually sitting down with my friend as he ran the optimizer, I noticed something I hadn't considered. Today, even without any Roth conversions, we have a spending capacity that, so far, is quite a bit larger than we've been using. In the MaxiFI Planner examples, they break the spending into two parts: nondiscretionary and discretionary and allow Roth conversions to only increase the amount of discretionary spending. In 2025 as I consider the forward-going plan, I might consider a similar idea - it would require at least mentally breaking the portfolio into two parts: One part that provides nondiscretionary and one part that provides for discretionary spending and, hence is, subject to Roth conversions.

There are many ways to crack this nut. And based on what I've seen, Nth level optimization won't buy you much vs. having a plan of some sort in the first place.

Cheers.
Be very careful with MaxiFi, my understanding is that you only get accurate answers for Roth Conversions if you hold the same asset allocation in all accounts.

If you try to model the tax efficient method of putting bonds in your t-IRA and stocks in taxable and Roth, it confuses the program. The calculation method ends up switching you from bonds (that were held in the IRA) to stock as you convert to Roth. That effect is so much larger than the benefit of Roth Conversions that it can show that you should make enormous conversions. The only tools I'm aware of that have a fix for that problem are the free bogleheads' Retiree Portfolio Model (at the bogleheads.org wiki) and the paid Pralana (pralanaretirementcalculator.com).

I believe MaxiFi also misses the capital gains taxes you will have to pay when you convert, those are often a significant brake on doing conversions. The Retiree Portfolio Model does not calculate capital gains taxes, though if you estimate them separately, they can be input. Pralana allows you to input your current unrealized gains and then escalates them so it does estimate capital gains taxes.
 
1. To stay below the 24% or 32% brackets, especially for the one of you who survives the other and has nearly the same income but will be taxed as Single instead of MFJ.

2. To avoid IRMAA mini-cliffs. (I'm single, but I think some of the IRMAA breakpoints for MFJ fall in the 22% bracket.)

It's possible (but unlikely) that neither of the above applies to you. If so, then the other reasons are:

1. To reduce tax drag. Money in taxable grows taxed. Money in Roths grows tax free.

2. You believe tax rates in general will rise in the future, and you want to avoid those.

3. You think the beneficiaries of your traditional IRA will be taxed at higher than 22%, or you just feel like prepaying the taxes for them for whatever reason.
Thanks - you bring up some points I hadn't thought of.
 
So why convert now to 22 when we'll not be able to get below 22% years from now with conversions?
To me, the main reason is / Fed. tax rates now are lower than prev years. Also, will be easier on my heirs down the road. If it seems like a wash, those 2 things are worth considering. Like most ret. things, there is no 100% right answer. Just do the best you can in the current situation. :)
 
Be very careful with MaxiFi, my understanding is that you only get accurate answers for Roth Conversions if you hold the same asset allocation in all accounts.

If you try to model the tax efficient method of putting bonds in your t-IRA and stocks in taxable and Roth, it confuses the program. The calculation method ends up switching you from bonds (that were held in the IRA) to stock as you convert to Roth. That effect is so much larger than the benefit of Roth Conversions that it can show that you should make enormous conversions. The only tools I'm aware of that have a fix for that problem are the free bogleheads' Retiree Portfolio Model (at the bogleheads.org wiki) and the paid Pralana (pralanaretirementcalculator.com).

I believe MaxiFi also misses the capital gains taxes you will have to pay when you convert, those are often a significant brake on doing conversions. The Retiree Portfolio Model does not calculate capital gains taxes, though if you estimate them separately, they can be input. Pralana allows you to input your current unrealized gains and then escalates them so it does estimate capital gains taxes.

I'm not using MaxiFI planner - it was just a demo that ultimately gave me an idea for how to manage discretionary vs non discretionary with my own optimization spreadsheet (which does not require the same assets in each account). These are the types of things you can do when create your own tools with your own requirements.

Cheers.
 
Hi Midpack, Would you care to share your spreadsheet (without your numbers of course).
Sorry I can't. Developed over many years, with 12 worksheets - many cells linked across worksheets, so it would be a nightmare to just remove our numbers.

Screenshot 2024-12-25 at 4.00.17 PM.png
 
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Sorry I can't. Developed over 19 years, with 12 worksheets - many cells linked across worksheets, so it would be a nightmare to just remove our numbers.

View attachment 53486
🤣 That looks like my spreadsheet. New tabs anytime I had a new thought our question I needed an answer for.
 
Be very careful with MaxiFi, my understanding is that you only get accurate answers for Roth Conversions if you hold the same asset allocation in all accounts.

If you try to model the tax efficient method of putting bonds in your t-IRA and stocks in taxable and Roth, it confuses the program. The calculation method ends up switching you from bonds (that were held in the IRA) to stock as you convert to Roth. That effect is so much larger than the benefit of Roth Conversions that it can show that you should make enormous conversions. The only tools I'm aware of that have a fix for that problem are the free bogleheads' Retiree Portfolio Model (at the bogleheads.org wiki) and the paid Pralana (pralanaretirementcalculator.com).

I believe MaxiFi also misses the capital gains taxes you will have to pay when you convert, those are often a significant brake on doing conversions. The Retiree Portfolio Model does not calculate capital gains taxes, though if you estimate them separately, they can be input. Pralana allows you to input your current unrealized gains and then escalates them so it does estimate capital gains taxes.
There are no Capital Gains taxes for a Roth conversion.
Conversions are taxed at higher Ordinary Income tax rates...
 
There are no Capital Gains taxes for a Roth conversion.
Conversions are taxed at higher Ordinary Income tax rates...

I think exchme was alluding to the capital gains resulting from selling stock in taxable to pay the ordinary income taxes due on the Roth conversion.

Since I'm under 59 1/2, that's what I do - Roth convert, then sell stock, then use proceeds to pay my tax bill (which is in large part due to the conversion). I don't want to mess with withholding from the conversion, because I'd then have to deal with either the early withdrawal penalty or replacing the withholding via a rollover contribution.
 
First - I have a CPA do my taxes and I now have an FA for my IRAs. So I'm a real novice when it comes to knowledge of taxes.

I've done a Roth conversions a couple of time. Thinking about doing one this year. We are 69 and 70 yo, so RMD's will be coming soon.

We are now in the 12% bracket and I thought about converting to the top of the 22. But I'm not sure what advantage that would give me going forward. We'll be in the 22% bracket when RMDs kick in regardless of conversions going forward. At least I think so.

So why convert now to 22 when we'll not be able to get below 22% years from now with conversions?
If you can pay the conversion tax from income outside the conversion, "tie goes to the Roth" due to reducing tax drag. "Traditional plus taxable" vs. Roth explains more.

You might check what your actual marginal tax rate would be. Due to the way Taxation of Social Security benefits works, those 12% and 22% bracket rates may not be what it will cost you for conversions now or RMDs in the future.
 
You might check what your actual marginal tax rate would be. Due to the way Taxation of Social Security benefits works, those 12% and 22% bracket rates may not be what it will cost you for conversions now or RMDs in the future.
That's exactly where I'm at and it's an important thing to understand. I'm in the 12% bracket but my marginal rate is in the 22% bracket. Not only do I pay 12% to fill up the bracket, more of my social security gets taxed as I fill up the bracket, making my marginal rate more than 12% and actually above the 22% by a small amount. Then, after 85% of my SS is taxed (the max), my marginal rate comes back to the 22% of the bracket until I hit the 24% bracket - though that's something I do not actually do.
 
I think exchme was alluding to the capital gains resulting from selling stock in taxable to pay the ordinary income taxes due on the Roth conversion.

Since I'm under 59 1/2, that's what I do - Roth convert, then sell stock, then use proceeds to pay my tax bill (which is in large part due to the conversion). I don't want to mess with withholding from the conversion, because I'd then have to deal with either the early withdrawal penalty or replacing the withholding via a rollover contribution.
Exactly. The best way to do Roth conversions is to pay taxes out of taxable. That eats up some assets with low unrealized gains. Then when you need cash, you have to sell assets with higher gains. Overall, that can be a significant drag on Roth conversion math.

Sorry I wasn’t clear.
 
Exactly. The best way to do Roth conversions is to pay taxes out of taxable. That eats up some assets with low unrealized gains. Then when you need cash, you have to sell assets with higher gains. Overall, that can be a significant drag on Roth conversion math.

Sorry I wasn’t clear.

On the flip side, Mike Piper in his Bogleheads talk on Roth conversion points out that there is an effect in the opposite (positive) direction - selling taxable to pay for Roth conversions effectively shifts assets from taxable to Roth, which means that money goes from a tax draggy account to a tax free account.

The effect is probably small in most situations but does compound over time. His argument is that this effect is a reason to Roth convert even when rates are equal.

I think it would depend on the tradeoff between how much in cap gains you have to realize vs. the ongoing improvement in tax drag effect.

Personally the only thing I have left in taxable is Vanguard index funds I bought in October 2016, so my unrealized gain percentage is over 50% now. So it's starting to be something I've noticed. I'm still doing Roth conversions though because the arbitrage and my remaining life expectancy means it still makes sense.
 
I am currently withdrawing all yearly income generated from our Roths about $38k, to supplement our pension, and 401k withdrawals (not RMDs yet). That gives me another $38k to convert up to the $250k NIIT level.

While not complaining in any way, I cannot keep up with the rate of growth/conversions. We converted $95k this year but the tIRAs increased in value over $300k. Uncle Sam is licking his chops!
 
On the flip side, Mike Piper in his Bogleheads talk on Roth conversion points out that there is an effect in the opposite (positive) direction - selling taxable to pay for Roth conversions effectively shifts assets from taxable to Roth, which means that money goes from a tax draggy account to a tax free account.

The effect is probably small in most situations but does compound over time. His argument is that this effect is a reason to Roth convert even when rates are equal...
Yes, what Mike Piper said is effectively a way of making Roth CONTRIBUTIONS when you have no earned income anymore.

I have substantial Ordinary Income from pension/annuities and SS, so I use some of that to pay taxes on smallish Roth conversions nowadays.
It works out just fine.

I am also increasing my taxable investment account most months with new contributions. The older, more appreciated lots will likely never be sold (by me) but will get stepped up basis at some point...
 
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