Should I Do A Roth Conversion Tutorial

[FiveDriver]

Thanks Dash Man. I think in 2024, when DW starts her SS, we'll be firmly planted in the next tax bracket. At that point in time it might be worth pulling some money out of the tIRA. Again, we don't need every last dollar, just a round number up to a point.

I'm honestly surprised that there is no website calculator based on the Roth Conversion analysis.

 

[SevenUp]

I'm honestly surprised that there is no website calculator based on the Roth Conversion analysis.

What inputs would be required, and what output should it provide?

 

[Sonoma_steve]

Roth conversion

Lots of great advice but I would advise reviewing your 401k total and estimating what it will be when you’re 72 years of age assuming you do no conversions. Make a rough estimate of 4% in annual RMDs, add your other income and estimate your tax %. That will likely be your tax bracket for the remainder of your life.
I did my numbers and saw a 401k number that would give me 6 figure RMDs a year, and coupled with SS and dividend income would put me in 24% bracket for ever. So I immediately started Roth conversions that put me in the 22% bracket. At 72 I’ll have halved my 401k IRA and the other half will be in a Roth.
There are huge advantages to having a sizable Roth plus I think it important to recognize that IRA RMDs are for life and avoiding the top tax brackets is usually a good plan. So if paying higher taxes for a few years gets you a lower tax bracket for your years after 72 years of age I think it’s worth considering.
And to your original question, yes do the tutorials it will help.

 

[TheWizard]

Lots of great advice but I would advise reviewing your 401k total and estimating what it will be when you’re 72 years of age assuming you do no conversions. Make a rough estimate of 4% in annual RMDs, add your other income and estimate your tax %. That will likely be your tax bracket for the remainder of your life.
I did my numbers and saw a 401k number that would give me 6 figure RMDs a year, and coupled with SS and dividend income would put me in 24% bracket for ever. So I immediately started Roth conversions that put me in the 22% bracket. At 72 I’ll have halved my 401k IRA and the other half will be in a Roth.
There are huge advantages to having a sizable Roth plus I think it important to recognize that IRA RMDs are for life and avoiding the top tax brackets is usually a good plan. So if paying higher taxes for a few years gets you a lower tax bracket for your years after 72 years of age I think it’s worth considering.
And to your original question, yes do the tutorials it will help.

I mostly agree with your approach but would modify it to just aim for the inflation adjusted AGI from start of retirement through mid 70s.
No need to pay excessive taxes in your 60s so that you have lower taxes in your 70s+, if you live that long.

An exception might be in order for some married couples depending on what your numbers show for the survivor...

 

[Koolau]

Informative Video. I think his Standard Deduction amounts for MFJ are slightly out of date. When I look at our 2022 Total Taxable Income, after Std Ded of $27,300 we're just over the 12% threshold. So any Roth Conv will be taxed at 22%.....not ideal. This was always my dilemma, even during Self-Employed years.

Because we're older, have SS and pension, and RMDs, we get to 22% already. With significant assets and income, we'll all probably hit that 22% (or more) at some point. You can wait for a while, but 22% (or whatever in '26) will likely hit you. Might as well start now with Roth conversion if they fit strategically in your overall financial plan. Basically what I guess I'm saying is that the gummint is gonna get its share, so do what is best for you in the long run.

 

[boilerman]

Lots of great advice but I would advise reviewing your 401k total and estimating what it will be when you’re 72 years of age assuming you do no conversions. Make a rough estimate of 4% in annual RMDs, add your other income and estimate your tax %. That will likely be your tax bracket for the remainder of your life.
I did my numbers and saw a 401k number that would give me 6 figure RMDs a year, and coupled with SS and dividend income would put me in 24% bracket for ever. So I immediately started Roth conversions that put me in the 22% bracket. At 72 I’ll have halved my 401k IRA and the other half will be in a Roth.
There are huge advantages to having a sizable Roth plus I think it important to recognize that IRA RMDs are for life and avoiding the top tax brackets is usually a good plan. So if paying higher taxes for a few years gets you a lower tax bracket for your years after 72 years of age I think it’s worth considering.
And to your original question, yes do the tutorials it will help.

Our situation was similar so we are in our third year of aggressive Roth conversions with the goal of converting everything we can before RMDs. I also started wondering if our SS income might be at risk some day if they started doing means testing for SS benefits. If our RMDs at 72 are say $200k a year, added to our pension, might we be considered too rich and undeserving of SS benefits? I think it’s possible.

 

[crashdox]

I only skimmed this topic, but I can tell you that I've played with a couple of commercial programs (I'm a user & not at all involved with either of them); IncomeLab (web based) & Pralana Gold (spreadsheet). IL provides a really good comparison of converting at various levels. Pralana Gold lets you set limits on how the conversion is done (capital gains, IRMAA.) Both programs show that I win doing conversions up to 22% or 24% (both are very close) vs 12%, and get them done before or close to the TCJA reversion. My case, I also don't want my daughter - sole inheritor - to have to be concerned about the tax issues. And like many of you, my RMDs would kill us tax wise. We are planning on using wifes IRA & use RMDS + QCDs, and leave it to charity if anything left. Daughter gets my Roth leftovers.

 

[Koolau]

Our situation was similar so we are in our third year of aggressive Roth conversions with the goal of converting everything we can before RMDs. I also started wondering if our SS income might be at risk some day if they started doing means testing for SS benefits. If our RMDs at 72 are say $200k a year, added to our pension, might we be considered too rich and undeserving of SS benefits? I think it’s possible.

Whoa! $200K RMD. Have you estimated your possible RMD? Wild guess is that an initial RMD of $200K would mean a 401(k) or total tIRA of around $5 Million. My hat is off to you. That's a good problem to have.

 

[RetireBy90]

So this gets very complex. If I’m at $150K and then add $35K SS in 3 years, just to pick some numbers from the air. If I add in RMD starting at $50k, that gives around $235K, should be about 22% bracket. With RMDs increase each year, percentage at least, assuming value goes up, then more each year in 22% bracket. If I do couple years to top of 22%;then I can do RMDs and SS without so much in higher brackets later. Hmmm lots of options there. I’m glad I’ve done most of mine with 2-3 years smaller numbers. I’ll spend some the next 2 years instead

 

[TheWizard]

So this gets very complex. If I’m at $150K and then add $35K SS in 3 years, just to pick some numbers from the air. If I add in RMD starting at $50k, that gives around $235K, should be about 22% bracket. With RMDs increase each year, percentage at least, assuming value goes up, then more each year in 22% bracket. If I do couple years to top of 22%;then I can do RMDs and SS without so much in higher brackets later. Hmmm lots of options there. I’m glad I’ve done most of mine with 2-3 years smaller numbers. I’ll spend some the next 2 years instead

In pretty sure that $235k AGI, filing single, is more likely in the 32% bracket, not 22%...

 

[FiveDriver]

What inputs would be required, and what output should it provide?

Just thinking out loud here -- An input of Estimated Taxable Income after Standard Deduction. Based on prior year's Taxable Income plus estimate of this year's Dividend Income and any Capital Gains/Loss tally. And an educated guess at the amount of Taxable Social Security.

An output of --
a) Resultant Tax Bracket
b) Marginal Tax Bracket
c) Amount of tIRA than can be Converted without going into next Bracket
d) Wild Guess at what the savings might be over tIRA RMD in future.

Simple, right ?

 

[Koolau]

In pretty sure that $235k AGI, filing single, is more likely in the 32% bracket, not 22%...

Yeah, I don't know the numbers but it's well beyond the 22%. And, of course, you also run into IRMAA. Again, a First World problem and good to have - though a pain to deal with.

 

[boilerman]

Whoa! $200K RMD. Have you estimated your possible RMD? Wild guess is that an initial RMD of $200K would mean a 401(k) or total tIRA of around $5 Million. My hat is off to you. That's a good problem to have.

It is. But we FIRED at age 57 with 15 years of growth before age 72 and able to live on our pension. For us Roth conversions are a no-brainer.

 

[SevenUp]

Just thinking out loud here -- An input of Estimated Taxable Income after Standard Deduction. Based on prior year's Taxable Income plus estimate of this year's Dividend Income and any Capital Gains/Loss tally. And an educated guess at the amount of Taxable Social Security.

An output of --
a) Resultant Tax Bracket
b) Marginal Tax Bracket
c) Amount of tIRA than can be Converted without going into next Bracket
d) Wild Guess at what the savings might be over tIRA RMD in future.

Simple, right ?

Yes, it is simple if you can use Excel: the case study spreadsheet will give you exactly a, b, and c. Some quick calculations would give you d (e.g., if the withdrawal rate from the traditional account matches the expected growth rate of the investments, then "no change" to future RMDs would be a good guess).

I think that is the tool used for charts like this; it's called the personal finance toolbox at Bogleheads.

 

[RetireBy90]

In pretty sure that $235k AGI, filing single, is more likely in the 32% bracket, not 22%...

Actually for 2023 brackets are
$22,000-$89,449 12%
$89,450-$190,749 22%
$190,750-$364,199 24%

So 32 doesn't kick in till $364,200 for MFJ. Your correct that for singles 32% kicks in at $182,2000. However we have pensions that won't transfer to survivor and total SS will be reduced to only the higher SS not both.

My point is that paying a higher rate for a couple years may be better if it reduces the rate in the future years.

 

[target2019]

Instead of focusing on a future possible tax bracket, we look at total tax paid. If current rates expire at the end of 2025, that makes for more uncertainty, different calculation, and so on.

It's a good idea to add standard deduction to the tax bracket number you see in rates charts.

I wonder if there's a crafty person floating around congress, cooking up a surprise tax increase for those with Roth accounts.

 

[dknighd]

Nothing new for those who’ve already done the math, but there are always new candidates coming up.

https://youtu.be/BkxYuQ0Vb88

Frankly I find all these "talking head" tutorials a waste of time. They take 20 minutes to talk about something I could read in 5 minutes. I guess they could be useful to some. This one in particular seems to be selling their services. Which is OK. It takes time and effort to make one of these. They should hope to be compensated for that work.



The problem to me is the conclusion always seems to be "it depends."


The previously cited https://www.bogleheads.org/wiki/Roth_IRA is a pretty good source. But it is also long and complicated. Probably because tax laws are long and complicated, and pretty much out of our control! Has anybody made a better tutorial? Does ER have one?



I personally think making a good Roth conversion tutorial is impossible! Too many variables. Too much guessing what the future might hold.


I do think everybody should have a Roth account. Even a small one. Just to start the 5 year clock.


I'm currently in the 12% tax bracket, and expect to stay that way. So for now I'm converting up to the top of that bracket. Worse case I break even, unless income tax rates go down, which seems unlikely, but possible.


Essentially by making Roth conversions you are guessing which way tax rates will go. You are also guessing how much of your "income" will be taxed.


Assuming tax rates, and rules, stay the same, you have nothing to loose by converting at your current tax rate.


My next car, or roof, or other thing, will likely be paid for by my Roth accounts.

 

[dknighd]

I wonder if there's a crafty person floating around congress, cooking up a surprise tax increase for those with Roth accounts.

It could be. My guess is Roth accounts will be left alone and they (the crafty people) will find another way to cover the budget. Or not. But I could be wrong! Most likely I am!


In the end it is a guessing game. My best guess right now is I'll break even by doing Roth conversions. If I'm lucky I'll come out a little ahead. So far I've been lucky. I guess I'm depending on continued good luck!
Which I admit, does seem silly.

 

[fishfactory]

Hi Midpack,

You and I had discussions on this board several years ago on this topic. I have been converting to the top of the 24% bracket for a few years, and have probably been too aggressive in that my effective tax rate will likely be a bit lower in the future. If tax rates go up beyond the expected 2026 increase my aggressiveness will have paid off. But my main reason for being aggressive is to make sure my wife does not face the single tax payer brackets if I pass early (the widow's tax trap).

I have used RightCapital and iORP to run many simulations, but it really is a guessing game, and everyone has to decide what variables are important to them. For me, potentially overpaying a bit up front to avoid the widow tax trap was a major variable.

 

[Koolau]

Hi Midpack,

You and I had discussions on this board several years ago on this topic. I have been converting to the top of the 24% bracket for a few years, and have probably been too aggressive in that my effective tax rate will likely be a bit lower in the future. If tax rates go up beyond the expected 2026 increase my aggressiveness will have paid off. But my main reason for being aggressive is to make sure my wife does not face the single tax payer brackets if I pass early (the widow's tax trap).

I have used RightCapital and iORP to run many simulations, but it really is a guessing game, and everyone has to decide what variables are important to them. For me, potentially overpaying a bit up front to avoid the widow tax trap was a major variable.

I'm thinking when DW inherits my 401(k) I will have depleted it some and she'll only owe taxes on her RMDs. Maybe not too bad.

 

[dknighd]

Hi Midpack,

but it really is a guessing game

True

 

[fishfactory]

Koolau,
Sounds like your variables are a bit different, in that between a small pension and soc sec I will not be depleting the IRAs much. So in your case it does make sense to not be as aggressive as I have been. Every case is different, and nobody knows the future tax rates, which is what makes this exercise so challenging.

 

[dknighd]

I'm guessing my "golden years" of converting to Roth will be between 70 (when I claim SS) and 72 (when I have to take RMD). In those 2 years I can convert more than normal. Since only 85% of SS is taxed.

 

[target2019]

It could be. My guess is Roth accounts will be left alone and they (the crafty people) will find another way to cover the budget. Or not. But I could be wrong! Most likely I am!

In the end it is a guessing game. My best guess right now is I'll break even by doing Roth conversions. If I'm lucky I'll come out a little ahead. So far I've been lucky. I guess I'm depending on continued good luck!
Which I admit, does seem silly.

There's always a surprise in the "package." Reminds me of rope-a-dope.

I don't think this will happen in the near term. It will get bundled in with the save social security tax party.

 

[cb2008]

Great plan!

How to address the surviving spouse tax burden:

Take a good look at what the total amount either surviving spouse will inherit and their lifetime needs (heavily padded of course). Then consider how much of any inherited IRA they really need. Look at having your heirs inherit the rest of it thus reducing the annual RMDs on the surviving spouse. Beneficiaries can be updated online as needed to fine tune things.

This is exactly how we have been planning for the surviving spouse. Well said!

Do you know if the surviving spouse can simply disclaim the tIRA inheritance at time of death versus proactively changing the beneficiaries?