Should I Do A Roth Conversion Tutorial

[SevenUp]

I do appreciate your response and don't want to be one of those "get off my post " kind of guys.

I understand what you are saying if tax rates are the same as they are later and I agree. That isn't the case unless congress surprises us and extends them. At the simplest case, I see conversions at 22 and 24%(this year) better than 25% -28% withdrawals later. I also see having minimal taxes when one of us switches to single rates as a big benefit relative to marginal rates although no way to quantify without knowing when that happens. Since my pension goes when I do, her SS taxable would also change to 50% vs 85% which wouldn't happen if she is pulling $$$ out of a tIRA to fully cover expenses.

Finally, the market being down gave me the opportunity to transfer more qty of stock within the same tax bracket this year is the benefit I see. That makes it less to convert later and reduces the time to complete full conversion

No argument with any of that!

 

[RetireBy90]

While the SevenUp point is correct, as far as the example, I find it hard to believe someone can convert $290K and not affect your bracket, and real hard to believe $400K not pushing you into a new marginal bracket.
But, having said this, I finally understand that 22% of that money I have in my TIRA isnt mine, im just managing it for the IRS. Pay me now or later or both. My plan is for more than the ending dollars, it includes simplicity for DW, what I believe will be higher tax rates overall, and certainly higher rates for the survivor.
However back to the SevenUp example, I can’t make any plan if I don’t know the rules of the game and you need a clear objective. Is it for simplicity, lower overall taxes paid, or biggest pile when it is over. Thanks for the hard truth.

 

[Romer]

Deleted and replaced with next post

 

[Koolau]

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.

That sounds like an excellent idea. Getting the padding right would be the only issue. If no long term care, it's one number but IF LTC, it's quite another number. Oh, well. Nothing in life is really simple, is it?

 

[Romer]

I do appreciate the push back and I have to ask for forgiveness as I transposed two numbers in my head. My actual conversion was $209K, not $290K. I apologize for not double checking before I posted.

I converted 2500 shares in 2023 and had converted 500 shares in 2022 and jumbled those together as well

again, my apologies

The rationale was still the same.
1) Maximize to 24% Bracket in 2023 as IRRMA level (Turn 63) is more restrictive in 2024
2) Maximize long term conversion before 2026 tax increase
3) Long term plan to fully convert tIRA in 10 years
4) Minimize survivor tax burden when switching to single rates
5) Simplify tax preparation for my wife if I pass first

 

[Koolau]

I do appreciate the push back and I have to ask for forgiveness as I transposed two numbers in my head. My actual conversion was $209K, not $290K. I apologize for not double checking before I posted.

I converted 2500 shares in 2023 and had converted 500 shares in 2022 and jumbled those together as well

again, my apologies

The rationale was still the same.
1) Maximize to 24% Bracket in 2023 as IRRMA level (Turn 63) is more restrictive in 2024
2) Maximize long term conversion before 2026 tax increase
3) Long term plan to fully convert tIRA in 10 years
4) Minimize survivor tax burden when switching to single rates
5) Simplify tax preparation for my wife if I pass first

The rationale seems right on to me. I just wish I could have done even more Roth conversion back when I was "young."

 

[tenant13]

Great tutorial. As others have already noticed there are a few variables that may affect this calculation.

The one that I have in mind are state taxes. If I move to a state without income tax - or leave US (I'm not from US so it's easy) - before RMDs kick in, then I should take into account all the taxes I would be paying to the state of NJ now, that I could be avoiding later. It's not insignificant.

But mostly what I kept thinking about while watching this video was: the numbers make sense but this doesn't address the quality of life and decumulation of assets aka having fun with what I have saved. I have no interest in leaving anything behind (no heirs or spouse) and the idea that I'm living my life around creating the perfect spreadsheet is not appealing. So I look at this video as an incentive to blow as much of my dough as I can before RMDs and not let that 401k grow too much - I think I'll have more fun spending money at 60 than I will at 75.

 

[d.davis]

As I stated earlier in this thread I will convert 100% of the tIRA to Roth. That way when I pass, my wife will have zero state tax and miniscule (if any) fed tax. She won't have to worry about RMDs or tIRA withdrawals and how to pay taxes. Will that approach cost me more money . . . Debatable (I say no others say yes), but the piece of mind setting my wife up for a simplistic approach is well worth it to me. And if she passes first, then I will have it easier

^^^^^^^ This

Consider it surviving spouse insurance.

Sent from my moto g power using Early Retirement Forum mobile app

 

[HI Bill]

...we converted all of our after tax mutual funds to ETF's to eliminate capital gains. That will reduce future income by $20-40k per year (and eliminate the variable unknown in planning).

Are you sure? I converted my MFs to ETFs, and still have about $20K annually in dividends.

 

[HI Bill]

...the numbers make sense but this doesn't address the quality of life and decumulation of assets aka having fun with what I have saved. I have no interest in leaving anything behind (no heirs or spouse) and the idea that I'm living my life around creating the perfect spreadsheet is not appealing. So I look at this video as an incentive to blow as much of my dough as I can before RMDs and not let that 401k grow too much - I think I'll have more fun spending money at 60 than I will at 75.

+1! I'm fine paying more taxes in my 70s if I can travel and spend more in my 50s and 60s. I'm trying to maximize my spending in my remaining younger years.

Bernicke's Reality Retirement Plan models a decrease in spending as one ages. So do other calculators which use "Go Go, Slow Go, and No Go" years. I'm fine with linearity of spending, and in paying more taxes when I'm 80 [if I make it that long] and am not travelling, remodeling, or buying new cars as much!

 

[Koolau]

^^^^^^^ This

Consider it surviving spouse insurance.

Sent from my moto g power using Early Retirement Forum mobile app

Yep - we've both "Roth'd" all our tIRAs. The elephant in the room is my 401(k) which is just too large to Roth. At least DW will only have one fund to deal with (RMDs, etc.) I think she can handle it.

 

[Al18]

Tenant13,
If you are 62 or older and total income is less than $150,000, then you get a large break in your NJ Income Tax according to https://www.state.nj.us/treasury/taxation/njit7.shtml

 

[tenant13]

Tenant13,
If you are 62 or older and total income is less than $150,000, then you get a large break in your NJ Income Tax according to https://www.state.nj.us/treasury/taxation/njit7.shtml

I’ll be 60 in September. So no breaks yet.

 

[Humbooster]

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 my plan as well, not sure why more people are not using it. Spouse gets half, kids will get the other half if I go tomorrow. I can adjust it some other day if I remember.

 

[audreyh1]

That sounds like an excellent idea. Getting the padding right would be the only issue. If no long term care, it's one number but IF LTC, it's quite another number. Oh, well. Nothing in life is really simple, is it?

You have to include LTC of course. If LTC is needed then deductible medical expenses will reduce the taxable income of the surviving spouse. If sufficient funds for LTC needs are already available outside the IRA then it doesn’t matter.

 

[CRLLS]

Because our income had been so variable from year to year, I have wrestled with Roth conversions, waiting until the last of the years and keeping it just below entering IRMMA surcharges. Last year I skipped making Roth conversions altogether due to an unplanned windfall $75K of taxable income mid-year. This year it could be even more. Perhaps I should have been/need to be more aggressive in our conversions.

You have to include LTC of course. If LTC is needed then deductible medical expenses will reduce the taxable income of the surviving spouse. If sufficient funds for LTC needs are already available outside the IRA then it doesn’t matter.

The problem that I have is determining just how much LTC we may possibly need, years ahead of when we may/will need it. I have no family history of needing it. DM passed quickly in her late 70's and DF in his mid 80's with only a month or two in LTC. DW's father passed in his mid 80's with 1 day in Hospice. Her mother is still living on her own in her mid 90's. Our financial plan goes out to age 100. My gut tells me we will not need any large expense of LTC at all. We do have HCPOA and know that neither of us want to be kept artificially alive. At some time, we will have DNR's in place. Too early for that right now I think. If we do eventually need LTC, then I guess we will deal with it then. With RMD's, that amount left will be reduced every year. Planning some amount to keep in an IRA now based on tax implications that may or may not occur later, perhaps decades later, seems to be a bit iffy to nail down the right amount to leave in an IRA.

 

[target2019]

One pitfall of crafting turtorials and training, is that you need to define the audience. Is it possible to create a tutorial that fits all in this audience? Probably not. So one needs to define the use cases, and then cleverly create decision tree(s) to fit.

 

[TheWizard]

I think that the issue about the surviving spouse having way higher income taxes is overblown.
While Federal taxes per capita will be at least somewhat higher in most cases, it's best to have an accurate spreadsheet model to get a proper understanding of the eventual situation(s), two of them depending on which spouse goes first.

What really matters is how much income surviving spouse has left over after taxes, since expenses like property taxes and utilities don't depend on how many people live on the property.

Beyond that, if the survivor has way too much excess income after taxes, there are various strategies to use:
1) do a QCD of your entire RMD each year (up to $100k?)
2) get remarried, preferably to a destitute individual
3) learn to accept your status as a high-income individual with increasing wealth.

A note on 2): if you get remarried to someone with comparable income and assets, then both your AGI and income tax will approximately double under current tax law, staying in the same marginal tax bracket...

 

[rayvt]

This is my plan as well, not sure why more people are not using it. Spouse gets half, kids will get the other half if I go tomorrow. I can adjust it some other day if I remember.

Don't do that. One of my ancestors did that and his wife needed the money but the kids didn't. Leave some flexibility.

Set up the spouse as primary beneficiary and the kids as contingent (secondary) beneficiaries.

Spouse can then decide to take or to disclaim all or part of the inheritance. The primary has 9 months to disclaim. Plenty of time to make the decision.

Do that for all the IRA accounts, TIRA(s) and ROTH(s). Spouse can split it with the kids by taking the ROTH(s) and disclaiming the TIRAs. The benefit of having more than one TIRA and ROTH is that the survivor can fine-tune between keeping and passing to the kids.

 

[TheWizard]

...Do that for all the IRA accounts, TIRA(s) and ROTH(s). Spouse can split it with the kids by taking the ROTH(s) and disclaiming the TIRAs. The benefit of having more than one TIRA and ROTH is that the survivor can fine-tune between keeping and passing to the kids.

Are you saying that it's not possible to disclaim 50% of a tIRA?

 

[FiveDriver]

My concern with Roth Conversions was that our Income during the last few w*orking years was widely variable. I had Self-employment Income with it's own set of tax breaks for Home Office and all the other write-offs, which we took full advantage of.

But You had to declare your Conversion Amount by December 31.....and we never knew what our Taxable Income and Bracket were going to be until our CPA finished his magic, sometime in February.

Now that our Income is stabilized around Pension, SS and RMD -- I'd like to take advantage of converting some tIRA money into the Roth Account.

At least for my benefit, any tutorial would have to include a discussion on the 'top of 12% bracket (or the 2024 15%) and the Marginal Tax Rate.

I don't need to convert every dollar up to that top.....but it would be nice to get something out of the conversion process.

 

[Dash man]

My concern with Roth Conversions was that our Income during the last few w*orking years was widely variable. I had Self-employment Income with it's own set of tax breaks for Home Office and all the other write-offs, which we took full advantage of.

But You had to declare your Conversion Amount by December 31.....and we never knew what our Taxable Income and Bracket were going to be until our CPA finished his magic, sometime in February.

Now that our Income is stabilized around Pension, SS and RMD -- I'd like to take advantage of converting some tIRA money into the Roth Account.

At least for my benefit, any tutorial would have to include a discussion on the 'top of 12% bracket (or the 2024 15%) and the Marginal Tax Rate.

I don't need to convert every dollar up to that top.....but it would be nice to get something out of the conversion process.

There are many YouTube videos dealing with Roth conversions. Here’s one:

https://youtu.be/z6AS126WS8A

 

[FiveDriver]

There are many YouTube videos dealing with Roth conversions. Here’s one:

https://youtu.be/z6AS126WS8A

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.

 

[Dash man]

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.

There are many other videos. Just search YouTube for “Roth conversions .”
You should also use a spreadsheet to calculate your expected future income, including RMDs up to your expected life span. Use average inflation numbers to guess what tax bracket you might be in and what your IRAs may grow to. It doesn’t have to be exact, but just to see what tax bracket your RMDs might put you in.
Another way if you don’t mind spending a few bucks is to use New Retirement planning software. It provides suggestions for whether to do Roth conversions.

 

[TheWizard]

...You should also use a spreadsheet to calculate your expected future income, including RMDs up to your expected life span. Use average inflation numbers to guess what tax bracket you might be in and what your IRAs may grow to. It doesn’t have to be exact, but just to see what tax bracket your RMDs might put you in...
.

Quite correct about using a spreadsheet.
My sheet didn't/doesn't worry about projecting tax brackets, only projecting my AGI.

But each December, I tweak up my Roth conversion for the year based on actual tax brackets and projected IRMAA tiers for two years hence.

I started RMDs last year and thought I would stop doing Roth conversions at that point, but I did a small $9000 one anyway to keep away from the next higher IRMAA tier.
My RMD is smaller this year compared to last and with those brackets increasing, I'll be doing a larger conversion this December, still in the 24% Federal bracket...