Why I must convert to Roth

[livingalmostlarge]

I can answer for my mom. when i helped them I converted up to the top of the 22% until my dad died. But they had a lot less since they literally didn't invest their money. Now I'm investing their money aggressively and yes she could convert but i'm hoping my kids will be a lower income bracket when they inherit.

As for us, I'm hoping that by retiring early we did all pretax so that we can convert for 20 years from 55-75 up to the 22% bracket. We've been in a marginally high bracket for a long time so converting will work for us.

 

[SevenUp]

Fred and Wilma have just one child who is the 32% bracket.

To Koolau's point, let's assume that Fred and Wilma are in the 22% marginal tax bracket.

Fred & Wilma converting at 22% or 24% will be very favorable for that child.

Converting at 22% (and perhaps at 24%) will also be favorable for Fred & Wilma if they pay the conversion tax from cash flow, based on how "Traditional plus taxable" vs. Roth works, even if they stay at a 22% marginal rate.

 

[Koolau]

Fred & Wilma converting at 22% or 24% will be very favorable for that child.

Converting at 22% (and perhaps at 24%) will also be favorable for Fred & Wilma if they pay the conversion tax from cash flow, based on how "Traditional plus taxable" vs. Roth works, even if they stay at a 22% marginal rate.

Indeed, paying the conversion tax from cash flow is a powerful but somewhat subtle way to get the most from Roth conversions.

 

[Time2]

Thankfully, I had a 74 yr old breakfast buddy when I was 60, that complained a lot about his RMDs pushing him into a higher tax bracket. The spurred me to start Roth Conversions as soon as we retired. I think I now have them down below the level where they could grow faster than I can get the money out.

 

[ERhoosier]

Late to this thread but recently attended a FA seminar about the whole Roth conversion issue. Two big points raised were:
1- Regular Roth conversions (below top tax rates) are critical for couples with widely disparate life expectancies. Tax rate for conversion while married filing jointly is typically much lower than single rate (for widow or widower). Most conversion calculators assume both spouses live (almost) forever.
2- Tax laws can be VERY unpredictable over many years. Today's 'untouchable' Roth (especially very large Roth) may well be subject to de facto taxation later (e.g. wealth tax, Roth wealth cutting other deductions or Federal benefits, etc.). Never underestimate the Government's power to change tax law in their favor

 

[RetiredHappy]

We just met with our Fidelity FA today and I brought up the topic of Roth conversion and she recommended that we convert to the top of 24%, and suck it up for higher IRMAA bracket (and NIIT). I think we will do that this year and for a few years until we can get my husband's IRA down quite a bit.

 

[junkanoo]

You’re right—I forgot that once a spouse passes, the kids can start withdrawing their share.
BTW, taxes will be higher in 10-20 years. That's a guarantee.

More calculation and converting $250K looks good too.

Ah huh. Tell that to the woman exec from 3M who posted broadly in the Morningstar Forum back in the day (when we were both there). She was converting waaaaay into the the 33% marginal tax because she was absolutely convinced that her taxes would only go up. Add on 8-ish percent for Minnesota state taxes back then and she was Roth Converting at roughly 41%. 10+ years later (and more before any possible tax increase) and where are we?

*If* you went through with your plan of Roth Converting $300K last year (when you could have done nothing at a lower top tax bracket), plus that $12K Senior Deduction went bye-bye plus you now went past the Georgia $130k deduction on retirement income. So, hopefully you didn't do that as a good portion of that Roth Conversion would appear to be at the 22-24% (Fed tax brackets) + 6% (Senior Deduction) + 5% (State). Highest amount at the 35% level. To save what for your widow?

But, then again, we have your guarantee that taxes are only going higher.

 

[Time2]

We just met with our Fidelity FA today and I brought up the topic of Roth conversion and she recommended that we convert to the top of 24%, and suck it up for higher IRMAA bracket (and NIIT). I think we will do that this year and for a few years until we can get my husband's IRA down quite a bit.

Is converting in the 24% tax bracket going to keep you out of the 32% tax bracket in retirement?

 

[RetiredHappy]

Is converting in the 24% tax bracket going to keep you out of the 32% tax bracket in retirement?

We have been retired for 10 years. Last year was the first year that we did Roth conversion and we were converting into the 24% bracket, NIIT and IRMAA (for 2027 Medicare). The point is that if one of us passes first, the other is definitely stuck in 32% tax bracket. So as much as we can convert in the 24% tax bracket, we will still come out ahead. We used to pay max Fed tax rate while we were working, so we are not complaining, even when we end up with 32% tax bracket.

 

[Time2]

We have been retired for 10 years. Last year was the first year that we did Roth conversion and we were converting into the 24% bracket, NIIT and IRMAA (for 2027 Medicare). The point is that if one of us passes first, the other is definitely stuck in 32% tax bracket. So as much as we can convert in the 24% tax bracket, we will still come out ahead. We used to pay max Fed tax rate while we were working, so we are not complaining, even when we end up with 32% tax bracket.

Yep, that why I am Roth Converting, although to the top of the 12% bracket so she doesn't get pushed into the 22% bracket.

 

[Diogenes]

Admittedly I have nothing to add here, beyond the following two observations:

1. If you're an 8-figure guy or gal, count on having a large eventual tax bill, even if your habits have been fastidious and your withdrawal rate has been minimal. That holds whether you have a Roth-heavy portfolio, traditional IRA-heavy, or plain old taxable. The tax man will get his due!

2. Singles are really going to suffer tax-wise, compared to married people... again, especially if you're a single member of the 8-figure team.

That's all that I have....

 

[Rocky mtn high]

CPA recommends top 24%

 

[TheWizard]

Admittedly I have nothing to add here, beyond the following two observations:

1. If you're an 8-figure guy or gal, count on having a large eventual tax bill, even if your habits have been fastidious and your withdrawal rate has been minimal. That holds whether you have a Roth-heavy portfolio, traditional IRA-heavy, or plain old taxable. The tax man will get his due!

2. Singles are really going to suffer tax-wise, compared to married people... again, especially if you're a single member of the 8-figure team.

That's all that I have....

8 figures of investable assets is $10 Million to $99 Million.
I've been single for a few decades now and hope to get to $10 M before too long.
I'm not worried about income taxes if I get to that level.
I'll be just fine...

 

[Koolau]

8 figures of investable assets is $10 Million to $99 Million.
I've been single for a few decades now and hope to get to $10 M before too long.
I'm not worried about income taxes if I get to that level.
I'll be just fine...

And since you are single, you'll leave no spouse behind to pay higher taxes.

 

[RetiredHappy]

8 figures of investable assets is $10 Million to $99 Million.
I've been single for a few decades now and hope to get to $10 M before too long.
I'm not worried about income taxes if I get to that level.
I'll be just fine...

My "issue" is that my idea of "wealth" is different from my spouse's. He thinks we are affluent and happy to be where we are at and believes that we can spend on whatever we want. I am thankful for what we have, but I also don't like to spend money and would like to see our stash grow some more.

 

[old medic]

Yep, that why I am Roth Converting, although to the top of the 12% bracket so she doesn't get pushed into the 22% bracket.

Exactly the same for us. And the grandkids will get the leftovers tax free.

 

[Winemaker]

We're concerting up to the 2nd IRMAA tier of 1.4x. DW's tIRA is about $150k now, 7 figure Roth. My 4 tIRAs and 401k are same as OP's, $2.1M. If I croak before her, 3 of the accounts go to kiddos/grandkids, thus removing them from the RMD equation. DW's fixed income will be reduced only by her SS because she will pick up my benefit equivalent in 2 years. She won't miss out on any lobster, but her wine cellar may deplete.

 

[Chuckanut]

And since you are single, you'll leave no spouse behind to pay higher taxes.

And he can spend every penny right up to his demise with a clear conscious.

 

[junkanoo]

We have been retired for 10 years. Last year was the first year that we did Roth conversion and we were converting into the 24% bracket, NIIT and IRMAA (for 2027 Medicare). The point is that if one of us passes first, the other is definitely stuck in 32% tax bracket. So as much as we can convert in the 24% tax bracket, we will still come out ahead. We used to pay max Fed tax rate while we were working, so we are not complaining, even when we end up with 32% tax bracket.

As you both have been retired for 10 years, "max" Federal tax rate was 39.6% presumably during your peak earning years. Even if you didn't mean that and it was really 35%, converting now even with NIIT and IRMAA is probably a win. However, you recently posted that you are withdrawing between $150k and 200k per year. Even at its most efficient (taxable, LTG or qualified dividend) the true cost of *those* dollars after taxes is significant.

 

[RetiredHappy]

As you both have been retired for 10 years, "max" Federal tax rate was 39.6% presumably during your peak earning years. Even if you didn't mean that and it was really 35%, converting now even with NIIT and IRMAA is probably a win. However, you recently posted that you are withdrawing between $150k and 200k per year. Even at its most efficient (taxable, LTG or qualified dividend) the true cost of *those* dollars after taxes is significant.

Yep, we still pay alot of taxes each year. We do save on not paying California taxes. But the converse of not paying alot of taxes now is not as nice...

 

[jerryo]

Quick question: I'm retired in my mid-70s and my spouse and I have already been in the top tax bracket for the past 10 years based on our pension incomes. Under the circumstances, I've presumed there was no advantage to us making Roth conversions. Is that correct?

 

[RunningBum]

Quick question: I'm retired in my mid-70s and my spouse and I have already been in the top tax bracket for the past 10 years based on our pension incomes. Under the circumstances, I've presumed there was no advantage to us making Roth conversions. Is that correct?

Probably correct, but nothing is a given. There are a few possibilities for a small advantage:

1) Maybe you could avoid a top IRMAA tier or NIIT.
2) If the person with the smaller pension dies first, the survivor, filing single, likely more quickly moves into that top tax bracket.
3) If tax rates increase in the future, it would've been beneficial to convert at the lower rate. As it turned out, the opposite happened as the top rate went a little lower, but there is still some future ahead of you. Similarly if you had moved from a state with lower or no income tax to one with higher, it would've helped to convert.

So, most likely little or nothing lost by not converting, and it could've even gone the other way. You're good.

 

[jerryo]

Thanks. We both have private health insurance through our past employers, rather than Medicare (except part A), so I don't think IRMAA applies. Also, already pay NIIT. Our pensions are pretty equal, so I think we're still in the top bracket as singles, if one pre-deceases. So, sounds like we're good!

 

[Out-to-Lunch]

Quick question: I'm retired in my mid-70s and my spouse and I have already been in the top tax bracket for the past 10 years based on our pension incomes. Under the circumstances, I've presumed there was no advantage to us making Roth conversions. Is that correct?

I agree with RunninngBum, but I have to ask something. "The top bracket" starts at ~$768k for MFJ. You have pensions of ~$800,000? I am impressed.

 

[junkanoo]

Quick question: I'm retired in my mid-70s and my spouse and I have already been in the top tax bracket for the past 10 years based on our pension incomes. Under the circumstances, I've presumed there was no advantage to us making Roth conversions. Is that correct?

It would depend on the specifics of your detailed situation and goals. If you want to start your own thread, I'm sure plenty of folks here would comment on it.

That said, it is a bit eye-opening that your pensions get you into the top tax bracket. If combined with spouse, you had pension income of $200K (> than 99% of couples) and you had an additonal $100K of SS income, that would still only put you in the 24% tax bracket (MFJ). If, instead, you have another $100k of pension income ($300K/$400k with SS), that would still put you in the 24% bracket. A loooong way from the top bracket of 37%. So, a pension that large would put you in some rarified air.