Up to what bracket should I do Roth Conversions

[Samsung4321]

Actually, unless the net tax rate changes, pay-now and pay-later produce exactly the same result. Here is the gedanken experiment that finally made my understanding of Roth conversions "click:"

Assume a tIRA of $100K, current net tax rate of 30%, future net tax rate of 30%, and portfolio growth of 8%. (The numbers don't really matter but make the experiment clearer IMO.)

So, of the $100K tIRA, consider/mental accounting that a $30K pot belongs to the government and a $70K pot is mine.

Case 1, Pay-Now: I give the government its $30K, keep my pot and let it grow in the account at 8%.

Case 2, Pay-Later: I invest my $70K and the government's $30K at the 8% rate. Both pots, of course, grow at the same rate and the government's pot is always 30% of the account value. Finally, I give the government its pot. What's left is my pot, having grown at 8%. Exactly the same amount as the Pay-Now option balance.
​

So the question is only this: Will the government's future take be 30% or will it be some other number. If it is smaller, I win, and I get to keep some of the money that I thought was the government's. If it is bigger, I lose and I should have taken the Pay-Now option.

Before I figured this out, I had some kind of vague notion that by paying later I was earning money by investing the government's money. But as you can see, that is not the case.

Simplifying, same return rate, same time, same tax rate = same result.

Pay Now:
= FV(0%, 1, 0, (1 - 30%) * -1)
= $0.70

Pay Later
= FV(0%, 1, 0, -1) * (1 - 30%)
= $0.70

 

[MarieIG]

Thanks, what I mean to say is whether I can rollover from the 401k custodian over to a Roth IRA account in another institution and do that for a few years.

I would imagine the custodian of my former employer would not let me open or host a new Roth IRA account there.

I guess I will have to ask them.

The megacorp which holds DH's 401k does allow conversions from a regular 401k to a Roth 401k. Moreover their fund costs are low.

My former employer did not allow conversions of the regular 401k to the Roth, even though they had a Roth 401k, they had a relatively limited choice of funds most of which were expensive; and they had excessive management fees which were passed onto the employees. So - I rolled on out of Dodge . . .

 

[MarieIG]

The lion's share of my conversion today was cash, but I converted a few shares in kind of VTSAX. (I'm nibbling on reducing that holding in my traditional IRA.) I cannot "time the market" and I do think the shares will drop next quarter. I'll covert more next year.

 

[Trooper]

Looks like next year we’ll be converting about $225K into our Roths. Less than this year to drop us into a lower IRMAA bracket. If the markets have a big drop as some pundits are calling for, we will take the hit with IRMAA and convert more shares at lower prices.

Aren't you worried about NIIT? Or don't Roth conversions count toward the $250K (MFJ) limit?

 

[MarieIG]

Aren't you worried about NIIT? Or don't Roth conversions count toward the $250K (MFJ) limit?

They count.

 

[audreyh1]

They count towards the limit, but Roth conversions or any IRA/401K withdrawal is not itself subject to NIIT as it’s not considered invest income.

 

[COcheesehead]

Of course. Expecting higher net marginal tax rates is the reason for doing conversions earlier. Almost the only reason.

But the math is the math and Roth conversions are simply a tax rate arbitrage play with future taxes somewhat unknown. No change in net marginal rates, no reason to convert.

And RMDs are set to be pushed further out.

 

[MarieIG]

Converted more cash this morning. That will be it for the day, unless one of my funds has a noticeable drop. I anticipate that this year will be my largest conversion . . .

 

[MarieIG]

Well converted a few shares in kind. I'm coming to the end of the line.

 

[Dash man]

Aren't you worried about NIIT? Or don't Roth conversions count toward the $250K (MFJ) limit?

No, not worried at all. I am paying some NIIT on capital gains, dividends, and interest. But the amount of NIIT isn’t that much in the big picture of lowering future tax obligations based on projected RMD. I’m paying IRMAA and NIIT for a few years in order to never pay it again after 2025.

 

[TheWizard]

No, not worried at all. I am paying some NIIT on capital gains, dividends, and interest. But the amount of NIIT isn’t that much in the big picture of lowering future tax obligations based on projected RMD. I’m paying IRMAA and NIIT for a few years in order to never pay it again after 2025.

I don't pay this NIIT thing, but I'll be paying IRMAA until the end of time...

 

[explanade]

Just checked an RMD calculator.

Seems to come to about 6.5-6.6% of the balance.

So if you start taking your RMDs at age 72, you'd be withdrawing for about 16-17 years, to age 88-89?

Of course you can withdraw more but I guess people would want to minimize taxes by only withdrawing the RMD?

Yet your 401k or IRA balance may outlive if you only withdraw the RMD.

What if instead of converting before RMDs start, you spend some or all of it instead? You may be able to do more with it in your 60s than in your 70s or 80s?

Of course it depends on how much you are relying on the 401k or IRA to fund your living expenses.

I would think most here who FIRE'd have significant non-retirement or taxable assets so they're not as reliant on 401K or IRA savings?

Since 401k and IRA have annual contribution limits and people who are able to FIRE probably saved way more than these contribution limits each year?

 

[Montecfo]

Converted some today. No time like the present.

 

[Dash man]

I don't pay this NIIT thing, but I'll be paying IRMAA until the end of time...

NIIT is paid on just investment income (cap gains, dividends, interest) and only if your total income is over $250,000 filing jointly. I think if over $200,000 single. So you don’t pay it on Roth conversions, but you’ll pay it on any investment income if the conversions put you over the $250,000 mark.

 

[Winemaker]

NIIT is paid on just investment income (cap gains, dividends, interest) and only if your total income is over $250,000 filing jointly. I think if over $200,000 single. So you don’t pay it on Roth conversions, but you’ll pay it on any investment income if the conversions put you over the $250,000 mark.

And rental income.......

 

[MarieIG]

Trued up my conversion today (cash only everything was, at least temporarily, up) to a round number after I got the final tally from yesterday.

 

[MarieIG]

I have not done an accurate tax assessment, but have enough Roth conversion this year to come close to the top of the 22% bracket.

Mucho tax payment this year, compared to last year. I should not fear penalty for underpayment of taxes, as I have withheld plenty for taxes to satisfy the safe harbor requirement.

Currently, I have only 8% of investable assets in Roth. Still a long way to go.

Now go forth and earn some income in that Roth!

 

[NW-Bound]

Now go forth and earn some income in that Roth!

I have been doin' it the best I can. However, with the Roth account balance still so puny in the low 6 figures compared to my larger accounts, there's not enough capital there for me to work with.

I need a lot of stocks to write OTM covered calls on. And lots of cash to write OTM covered puts on. I need capital, because I don't do leveraged bets, meaning naked options.

 

[MarieIG]

I have been doin' it the best I can. However, with the Roth account balance still so puny in the low 6 figures compared to my larger accounts, there's not enough capital there for me to work with.

I need a lot of stocks to write OTM covered calls on. And lots of cash to write OTM covered puts on. I need capital, because I don't do leveraged bets, meaning naked options.

IIRC - and I may not, I saw that you built up your account from something like $10,000? But - I am glad that you are decently, ahem, covered. I wouldn't want you to risk making your Roth disappear. (Personally, I am terrorized even by the thought of naked options.)

 

[TheWizard]

NIIT is paid on just investment income (cap gains, dividends, interest) and only if your total income is over $250,000 filing jointly. I think if over $200,000 single. So you don’t pay it on Roth conversions, but you’ll pay it on any investment income if the conversions put you over the $250,000 mark.

I'm single and should be able to stay below $200k in retirement without too much difficulty.
Why isn't it $400k for MFJ?

 

[Gumby]

You would have to ask Congress.

 

[NW-Bound]

IIRC - and I may not, I saw that you built up your account from something like $10,000? But - I am glad that you are decently, ahem, covered. I wouldn't want you to risk making your Roth disappear. (Personally, I am terrorized even by the thought of naked options.)

No, I spent a few years in semiretirement and working part-time, and my income was low enough to be allowed to put some money into Roth. And I have been doing Roth conversions in dribs and drabs, but this is the first year that I do a conversion in 6 figures.

So, I have a few 100Ks there, but it is still small.

When I want to write calls and puts on stocks like ASML which is $550/share, a single contract is for 100 shares and involves $55K. A few 100Ks don't go very far. ASML was as high as $833/share, so a contract involves $83K of capital.

PS. By the way, option trading in Roth and IRA are limited to the "safer" type. No naked option trading allowed there, although you can drive anything to zero simply by buying the wrong stocks. You don't even need to trade options.

PPS. It's hard to do options on even benign stocks like Humana and United Healthcare. They are all above $500/share. Costco is $456. Need mucho capital.

 

[MarieIG]

No, I spent a few years in semiretirement and working part-time, and my income was low enough to be allowed to put some money into Roth. And I have been doing Roth conversions in dribs and drabs, but this is the first year that I do a conversion in 6 figures.

So, I have a few 100Ks there, but it is still small.

When I want to write calls and puts on stocks like ASML which is $550/share, a single contract is for 100 shares and involves $55K. A few 100Ks don't go very far. ASML was as high as $833/share.

PS. By the way, option trading in Roth and IRA are limited to the "safer" type. No naked option trading allowed there, although you can drive anything to zero simply by buying the wrong stocks.

Ahhh, I did not know that.

Yes, I know how to buy the wrong stocks! (Novavax anyone?) although if I am stepping out of the box, I prefer to do it with very small amounts, and keep the IRAs mostly to funds.

 

[NW-Bound]

I have bought stocks that went bankrupt in the past. We have had a few threads on this a while back.

And about funds, you can lose plenty of money with funds, and I have done that too. Nowaways, people do it with ARK funds.

Compared to meme stocks and hot-shot funds, option trading on something like Walmart, Costco, Pfizer is so tame. The reward is modest, and the risk is correspondingly small.

People are just prejudiced when they hear the term "option", and don't know the in/out of it.

 

[explanade]

NIIT is paid on just investment income (cap gains, dividends, interest) and only if your total income is over $250,000 filing jointly. I think if over $200,000 single. So you don’t pay it on Roth conversions, but you’ll pay it on any investment income if the conversions put you over the $250,000 mark.

Are those figures gross income or taxable income?