Taking into account the American Rescue Plan and the temporary elimination of the ACA cliff in 2022 (we did a Roth conversion of $300K early in the year in 2021 so the ARP in 2021 does not benefit us), given these facts, should we hold off on our planned Roth conversion in 2022?
FACTS
Married filing jointly. Semi-retired, currently 61, and spouse retired, currently 60. My prior significant Roth conversions as follows: 300K in 2021, 340K in 2020, 240K in 2019, and 25K in 2018. We planned on converting an additional $300K-$340K in 2022 (depending on other income). Current Roth balance (solely in stock index funds) is $1.5 million. Current tIRA balance (solely in a bond fund) is $1.7 million. In 2020 our stock index funds in brokerage accounts generated $70K in dividends. We also received $80K in tax exempt interest income. We assume the numbers will be similar in 2022. Thus, our Modified Adjusted Gross Income in 2022 will likely be $150K. For purposes of ACA, 8.5% of MAGI is $12,750. The SLCSP for Illinois in 2022 will likely be around $17,750 giving us a tax credit of around $5K. Additionally, our QDI/CG total for 2022 should be under $80K so we would not have to pay federal taxes on any of that income--normally $70K of QDI/CG would generate $10.5K in federal taxes at the 15% rate for us. Skipping our planned Roth conversion in 2022 saves us around $15K, but we lose a year of Roth conversion.
We have been planning on aggressive Roth conversions to the top of the 24% bracket given the size of the tIRA and the likely bequeth to my spouse in the next few years of $1 million in a tIRA. None of the taxes have been paid, or will be paid, from the Roth conversion. We have been converting aggressively to get my tIRA balance down. Once Medicare kicks in (we are aware of the 2 year look back period), we will try to manage IRMAA but expect to be in the first or second bend no matter what and thus expect to pay that additional "tax" of $1800-$2900/year.
So.....does getting a projected tax credit of $5K and the ability to avoid CG tax of QDI in 2022 outweigh losing a year of Roth conversion in 2022 under these circumstances? Comments/analysis appreciated.
Should I pause my Roth Conversion in 2022?
Re: Should I pause my Roth Conversion in 2022?
You might look at the Roth Conversion and Capital Gains On ACA Health Insurance article from The Finance Buff (member tfb here), and use the tool mentioned there to analyze your situation.
The Roth IRA conversion game is all about marginal tax rates. The chart in that wiki article is from the same tool described in tfb's article.
The Roth IRA conversion game is all about marginal tax rates. The chart in that wiki article is from the same tool described in tfb's article.
Re: Should I pause my Roth Conversion in 2022?
Thanks for the site to the TFB article. I can understand spreadsheets, but I am fairly incompetent when it comes to generating an excel spreadsheet, but I will try that for future conversion modeling. For 2022, I think my tax analysis is accurate. Any thoughts on that issue? And, any thoughts on the real question in my post: does the benefits we will obtain for our 2022 plan outweigh the costs in future years given our ages, need to aggressively convert the tIRA, and the IRMAA issues we will face?FiveK wrote: ↑Sat Jul 31, 2021 12:30 am You might look at the Roth Conversion and Capital Gains On ACA Health Insurance article from The Finance Buff (member tfb here), and use the tool mentioned there to analyze your situation.
The Roth IRA conversion game is all about marginal tax rates. The chart in that wiki article is from the same tool described in tfb's article.
Re: Should I pause my Roth Conversion in 2022?
The marginal rate on the conversion is taxes paid on the converted amount divided by converted amount. The marginal rate on the conversion is going to be pushed up by the loss of the 5,000 credit, but the larger the chunk, the lower the percentage.
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Re: Should I pause my Roth Conversion in 2022?
For purposes of comparison, I'd just add the $15K of QDI tax and foregone ACA subsidy to the tax "cost" of the Roth conversion. It bumps up the marginal rate 5% or so. Are there state taxes as well?
You've got a nice chunk in Roth already, and the growth in your tIRA is limited by the investments held there. Depending on the nature of the holdings, bond income may be down this year as older higher interest bonds get retired or called and replaced by new lower yielding ones.
I don't think there is any absolute answer. From a simple numbers perspective, it's probably better to pause for a year, but it depends on how much you rely on the status quo holding in Washington. I've been limiting my Roth conversions (similar age, but less income from taxable accounts) to collect ACA subsidies the last few years. I'm not fully convinced that was the best choice, but $20K in ACA subsidy (our case) is hard to pass up.
You've got a nice chunk in Roth already, and the growth in your tIRA is limited by the investments held there. Depending on the nature of the holdings, bond income may be down this year as older higher interest bonds get retired or called and replaced by new lower yielding ones.
I don't think there is any absolute answer. From a simple numbers perspective, it's probably better to pause for a year, but it depends on how much you rely on the status quo holding in Washington. I've been limiting my Roth conversions (similar age, but less income from taxable accounts) to collect ACA subsidies the last few years. I'm not fully convinced that was the best choice, but $20K in ACA subsidy (our case) is hard to pass up.
Re: Should I pause my Roth Conversion in 2022?
It probably won't make much difference either way.Chicago60 wrote: ↑Sat Jul 31, 2021 10:59 amThanks for the site to the TFB article. I can understand spreadsheets, but I am fairly incompetent when it comes to generating an excel spreadsheet, but I will try that for future conversion modeling. For 2022, I think my tax analysis is accurate. Any thoughts on that issue? And, any thoughts on the real question in my post: does the benefits we will obtain for our 2022 plan outweigh the costs in future years given our ages, need to aggressively convert the tIRA, and the IRMAA issues we will face?FiveK wrote: ↑Sat Jul 31, 2021 12:30 am You might look at the Roth Conversion and Capital Gains On ACA Health Insurance article from The Finance Buff (member tfb here), and use the tool mentioned there to analyze your situation.
The Roth IRA conversion game is all about marginal tax rates. The chart in that wiki article is from the same tool described in tfb's article.
Using 2021 tax calculations,
- in 2022 the marginal rate on a $300K Roth conversion, including all the hills and valleys along the way, is just over 24%.
- in 2024, when you both become liable for IRMAA, you can't convert any more than about $72K before you'll be paying more than 24% on the conversion - somewhere around 27% as you reach the top of the 24% bracket.
- SS benefits in the $30K-$40K range (just to pick some numbers) will increase the rate on large conversions to ~$28%, but perhaps even higher on smaller conversions/RMDs because you won't have the benefit of a large 24% range.
Entries in cells G2 (filing status), G9&G10 (ages), D24 (tax-exempt interest), D25 (qualified dividends), B38&C38 (SS benefits), H35 ("IL" if state tax calcs desired), and P83 (adjusts the x-axis on the marginal rate chart) are all you should need to reproduce the items above.
If you expect tax law changes that increase your rates, that would favor Roth conversions. If you expect large medical expenses or significant Qualified Charitable Distributions (both of which could lower your tax rate), that would favor not doing Roth conversions.
Polish your crystal ball, and...it appears you'll be fine whatever you do - good luck!
Re: Should I pause my Roth Conversion in 2022?
FiveK - thanks for the tip on this spreadsheet.FiveK wrote: ↑Sat Jul 31, 2021 12:30 am You might look at the Roth Conversion and Capital Gains On ACA Health Insurance article from The Finance Buff (member tfb here), and use the tool mentioned there to analyze your situation.
Re: Should I pause my Roth Conversion in 2022?
Thanks for this analysis. I realize we are talking about reasonably immaterial changes in outcome no matter which way we choose to proceed.FiveK wrote: ↑Sat Jul 31, 2021 2:23 pmIt probably won't make much difference either way.Chicago60 wrote: ↑Sat Jul 31, 2021 10:59 amThanks for the site to the TFB article. I can understand spreadsheets, but I am fairly incompetent when it comes to generating an excel spreadsheet, but I will try that for future conversion modeling. For 2022, I think my tax analysis is accurate. Any thoughts on that issue? And, any thoughts on the real question in my post: does the benefits we will obtain for our 2022 plan outweigh the costs in future years given our ages, need to aggressively convert the tIRA, and the IRMAA issues we will face?FiveK wrote: ↑Sat Jul 31, 2021 12:30 am You might look at the Roth Conversion and Capital Gains On ACA Health Insurance article from The Finance Buff (member tfb here), and use the tool mentioned there to analyze your situation.
The Roth IRA conversion game is all about marginal tax rates. The chart in that wiki article is from the same tool described in tfb's article.
Using 2021 tax calculations,
- in 2022 the marginal rate on a $300K Roth conversion, including all the hills and valleys along the way, is just over 24%.
- in 2024, when you both become liable for IRMAA, you can't convert any more than about $72K before you'll be paying more than 24% on the conversion - somewhere around 27% as you reach the top of the 24% bracket.
- SS benefits in the $30K-$40K range (just to pick some numbers) will increase the rate on large conversions to ~$28%, but perhaps even higher on smaller conversions/RMDs because you won't have the benefit of a large 24% range.
Entries in cells G2 (filing status), G9&G10 (ages), D24 (tax-exempt interest), D25 (qualified dividends), B38&C38 (SS benefits), H35 ("IL" if state tax calcs desired), and P83 (adjusts the x-axis on the marginal rate chart) are all you should need to reproduce the items above.
If you expect tax law changes that increase your rates, that would favor Roth conversions. If you expect large medical expenses or significant Qualified Charitable Distributions (both of which could lower your tax rate), that would favor not doing Roth conversions.
Polish your crystal ball, and...it appears you'll be fine whatever you do - good luck!