28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

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Topic Author
godhammer
Posts: 16
Joined: Fri Oct 22, 2021 5:28 pm

28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

Hello everyone, excited to be here :happy

I already have an overall idea of what should I do but I'd discuss with someone else to make sure I'm not doing anything dumb.

This year I quit my job in the first quarter and haven't worked since then, I don't plan to find another job until next year, so I think this year it'd be a great chance to pull the first Backdoor Roth in my life.

My situation for 2011:

* I'm 28 years old and single.
* I have $160,000 in Traditional IRA (rolled over from 401ks from my previous employers).
* I already have a Roth IRA account and have a little money in it.
* The gross wage for this year is $16,500.
* The federal Taxable Wage is $15,000. My state doesn't have a state income tax.
* Plenty of Cash reserve.
* Plan to work for another 5-10 years of high-income job (likely 35% bracket) and then retire (at 35-40 yo). Meaning plenty of chance of converting down the road if the tax code didn't change.

401k Contributions I made This year before I quit:
* $2,600 Pre-Tax
* $1,700 After-Tax
* $300 company match

My current plan:
* Since the federal standard deductible of $12,550 will be completely eaten by the taxable wage I earned, I'll need to pay tax on any IRA to Roth conversion. I plan to reach the 12% tax bracket by converting approximately $40,125 - ($15,000 taxable wage - $12,550 standard deductible) = $37 675 from IRA to Roth IRA.
* On top of that, I will put an additional $6000 into my Roth IRA from my cash reserve. (Nothing more I can contribute, correct?)

Thanks for reading so far. Does this sound like a good plan? Shall I use this opportunity to convert more while kicking myself up a tax bracket because this money in Roth will grow tax-free for the next 30+ years? Shall I convert less because even 12% is too much tax given I'm retiring 5-10 years from now? Any tips and tricks?
Last edited by godhammer on Fri Oct 22, 2021 6:25 pm, edited 4 times in total.
A Random Fellow
Posts: 88
Joined: Mon Mar 01, 2021 2:44 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by A Random Fellow »

I think you're thinking about this the right way. The only thing is say is that you might want to consider your future employment prospects before moving forward. If it's likely going to be hard to save much for retirement in the future, you might not want to pay the tax now and instead allow for longer compounding.

On the flip side, it sounds like you have money available - which tells me you are likely to be able to continue saving. If that's the case and you can pay the conversion tax with outside, non-retirement funds, I say go full steam ahead with your plan....particularly since you live in an income tax free state (which may not always be the case).
MrJedi
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by MrJedi »

I think you understand the basic strategy of the Roth conversion and marginal tax rates, but FYI what you are describing is not the Backdoor Roth at all. This is just a Roth conversion. I do think the top of the 12% bracket makes sense for a young person with a lot of unknowns still. 22% may make sense depending on your expected income during your career and when you plan to retire, but those are huge unknowns and kind of a crapshoot.
Topic Author
godhammer
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Joined: Fri Oct 22, 2021 5:28 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

joe_the_buckeye wrote: Fri Oct 22, 2021 5:57 pm I think you're thinking about this the right way. The only thing is say is that you might want to consider your future employment prospects before moving forward. If it's likely going to be hard to save much for retirement in the future, you might not want to pay the tax now and instead allow for longer compounding.

On the flip side, it sounds like you have money available - which tells me you are likely to be able to continue saving. If that's the case and you can pay the conversion tax with outside, non-retirement funds, I say go full steam ahead with your plan....particularly since you live in an income tax free state (which may not always be the case).
Hey thanks for pointing out, I realized I should have specified my FIRE plan down the road so I went back to make this edit:

* Plan to work for another 5-10 years of high-income job (likely 35% bracket) and then retire (at 35-40 yo). Meaning plenty of chance of converting down the road if the tax code didn't change.

It shouldn't change the calculation much, right? Or should I wait until I retired to convert?
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David Jay
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by David Jay »

MrJedi wrote: Fri Oct 22, 2021 6:05 pmI do think the top of the 12% bracket makes sense for a young person with a lot of unknowns still.
Definitely fill the 12% bracket. Remember, the 12% tax bracket is scheduled to "go away" in 2026 (becomes 15%) so take advantage of it while it still exists.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
godhammer
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

David Jay wrote: Fri Oct 22, 2021 6:25 pm
MrJedi wrote: Fri Oct 22, 2021 6:05 pmI do think the top of the 12% bracket makes sense for a young person with a lot of unknowns still.
Definitely fill the 12% bracket. Remember, the 12% tax bracket is scheduled to "go away" in 2026 (becomes 15%) so take advantage of it while it still exists.
Oh wow thanks for letting me know!
financialheadache
Posts: 24
Joined: Mon Mar 22, 2021 9:32 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by financialheadache »

I am in a similar situation as you and did exactly what you are proposing to do (Roth conversion) up to the top of the 12% bracket last year. I plan to do the same thing this year.

A couple of thoughts and discoveries I've had during this process:
1) Darn I wish I had converted in march in 2020 at the lows, or at the beginning of this year at lower levels. I converted 50k or so last year during market highs and my IRA is still worth more than it was pre-conversion due to 2021 gains.
2) I wish someone told me that I could have done this years ago. I didn't even realize that I had some post-tax money in a 401k that should have been converted to a Roth much sooner. Fidelity was very helpful in assisting with my first conversion.
3) I have trouble figuring out my overall income due to unexpected distributions at year end so I have to be a little conservative with the conversion amount to stay within 12% bracket / 0% LTG. Even my CPA gave me wrong info on this at one point...I try to use online calculators.
4) Don't stay unemployed for too long at too young of an age regardless of net worth/savings because the motivation to go back to work gets more and more difficult.
5) Make sure you pay estimated taxes in the same quarter that you do the conversion. At this point you have until Jan 15 I believe.
6) Every so often I think about going up to an even higher tax bracket with conversions to hedge against future changes, but I haven't pulled the trigger.
Activesloth
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Joined: Wed Oct 20, 2021 7:03 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by Activesloth »

Your standard deduction is $12,550. This plus your 401k deferral should pretty much cancel out your earnings for the year. You could convert close to 40k and pay around 4K in taxes.
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FiveK
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by FiveK »

godhammer wrote: Fri Oct 22, 2021 5:31 pm...great chance to pull the first Backdoor Roth in my life.

* The gross wage for this year is $16,500.
* The federal Taxable Wage is $15,000. My state doesn't have a state income tax.
* Plenty of Cash reserve.
* Plan to work for another 5-10 years of high-income job (likely 35% bracket) and then retire (at 35-40 yo). Meaning plenty of chance of converting down the road if the tax code didn't change.

401k Contributions I made This year before I quit:
* $2,600 Pre-Tax
A couple of what may be minor points:
- You won't be using the Backdoor Roth process, but instead you will be doing a straightforward Roth IRA conversion. See the latter article for suggestions on how to evaluate your conversion amount.
- Gross wage of $16.5K minus $2.6K 401k = $13.9K W-2 box 1, not $15K.

Having cash on hand to pay conversion tax is good, because if you withhold money from the conversion amount you would be hit with a 10% penalty on the withheld amount (because you are under age 59.5).
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FiveK
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by FiveK »

godhammer wrote: Fri Oct 22, 2021 5:31 pm * Plan to work for another 5-10 years of high-income job (likely 35% bracket) and then retire (at 35-40 yo). Meaning plenty of chance of converting down the road if the tax code didn't change.
One other oh-by-the-way: you might want to run your numbers through a 2021 tax estimation program (e.g., the Personal finance toolbox) that will show the marginal tax rate you'll incur by giving up credits such as the Earned Income and Retirement Saver's as your conversion amount increases.

Might still be worth doing the conversion now, but good for you to understand the actual cost.
aristotelian
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by aristotelian »

godhammer wrote: Fri Oct 22, 2021 5:31 pm Hello everyone, excited to be here :happy

I already have an overall idea of what should I do but I'd discuss with someone else to make sure I'm not doing anything dumb.

This year I quit my job in the first quarter and haven't worked since then, I don't plan to find another job until next year, so I think this year it'd be a great chance to pull the first Backdoor Roth in my life.

My situation for 2011:

* I'm 28 years old and single.
* I have $160,000 in Traditional IRA (rolled over from 401ks from my previous employers).
* I already have a Roth IRA account and have a little money in it.
* The gross wage for this year is $16,500.
* The federal Taxable Wage is $15,000. My state doesn't have a state income tax.
* Plenty of Cash reserve.
* Plan to work for another 5-10 years of high-income job (likely 35% bracket) and then retire (at 35-40 yo). Meaning plenty of chance of converting down the road if the tax code didn't change.

401k Contributions I made This year before I quit:
* $2,600 Pre-Tax
* $1,700 After-Tax
* $300 company match

My current plan:
* Since the federal standard deductible of $12,550 will be completely eaten by the taxable wage I earned, I'll need to pay tax on any IRA to Roth conversion. I plan to reach the 12% tax bracket by converting approximately $40,125 - ($15,000 taxable wage - $12,550 standard deductible) = $37 675 from IRA to Roth IRA.
* On top of that, I will put an additional $6000 into my Roth IRA from my cash reserve. (Nothing more I can contribute, correct?)

Thanks for reading so far. Does this sound like a good plan? Shall I use this opportunity to convert more while kicking myself up a tax bracket because this money in Roth will grow tax-free for the next 30+ years? Shall I convert less because even 12% is too much tax given I'm retiring 5-10 years from now? Any tips and tricks?
Hm, I think I am in the minority here but I think I would do only the top of the 10% bracket or maybe none at all. I think some of the people advising Roth conversions may be missing that you are looking at a very unique situation. You will have perhaps 25 to 30 years in the 0% tax bracket. If you get married at some point you will double your standard deduction and tax brackets. I see more downside than upside if you go higher than 10% now.

By the way, being high income, you should roll the Traditional IRA into your 401k if possible at the earliest opportunity. That will allow you to do backdoor Roth. Otherwise your Traditional IRA will be subject to the pro rata rule.
Topic Author
godhammer
Posts: 16
Joined: Fri Oct 22, 2021 5:28 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

financialheadache wrote: Fri Oct 22, 2021 8:16 pm I am in a similar situation as you and did exactly what you are proposing to do (Roth conversion) up to the top of the 12% bracket last year. I plan to do the same thing this year.

A couple of thoughts and discoveries I've had during this process:
1) Darn I wish I had converted in march in 2020 at the lows, or at the beginning of this year at lower levels. I converted 50k or so last year during market highs and my IRA is still worth more than it was pre-conversion due to 2021 gains.
2) I wish someone told me that I could have done this years ago. I didn't even realize that I had some post-tax money in a 401k that should have been converted to a Roth much sooner. Fidelity was very helpful in assisting with my first conversion.
3) I have trouble figuring out my overall income due to unexpected distributions at year end so I have to be a little conservative with the conversion amount to stay within 12% bracket / 0% LTG. Even my CPA gave me wrong info on this at one point...I try to use online calculators.
4) Don't stay unemployed for too long at too young of an age regardless of net worth/savings because the motivation to go back to work gets more and more difficult.
5) Make sure you pay estimated taxes in the same quarter that you do the conversion. At this point you have until Jan 15 I believe.
6) Every so often I think about going up to an even higher tax bracket with conversions to hedge against future changes, but I haven't pulled the trigger.
Hey thanks!

What do you mean by point 5? Do you mean I should send IRA about $4000 tax when I do the conversion (out of pocket for sure)? Would they penalize me if I don't pay right away and wait til April 2022?
ivgrivchuck
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by ivgrivchuck »

godhammer wrote: Fri Oct 22, 2021 5:31 pm Thanks for reading so far. Does this sound like a good plan? Shall I use this opportunity to convert more while kicking myself up a tax bracket because this money in Roth will grow tax-free for the next 30+ years? Shall I convert less because even 12% is too much tax given I'm retiring 5-10 years from now? Any tips and tricks?
Being able to convert at 12% rate is a very good deal in my opinion. So even though it may not end up being mathematically optimal if you retire early, I would probably still lock up that rate (future is uncertain, plans change, and so on...)
25% VTI | 25% VXUS | 12.5% AVUV | 10% AVDV | 2.5% VWO | 25% BND/SCHR/SCHP
thor111
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by thor111 »

One small point: I believe you can convert your 401k "After-Tax" to Roth anytime. If you do it often, before the investment has time to grow, there is no tax penalty.
401k Contributions I made This year before I quit:
* $2,600 Pre-Tax
* $1,700 After-Tax
* $300 company match
HeelaMonster
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Joined: Sat Aug 10, 2019 11:46 am

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by HeelaMonster »

godhammer wrote: Sat Oct 23, 2021 4:09 pm What do you mean by point 5? Do you mean I should send IRA about $4000 tax when I do the conversion (out of pocket for sure)? Would they penalize me if I don't pay right away and wait til April 2022?
Correct. I just make it part of the drill every time I do a conversion like this, sending estimated tax as the final step (as above, you actually have the quarter in which to accomplish this, but I do immediately so I don't forget).
ralph124cf
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Joined: Tue Apr 01, 2014 11:41 am

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by ralph124cf »

Are you using the ACA for health insurance, and are you getting a subsidy? If so be careful that you don't have too high an income to qualify for the subsidy.

Convert to the top of the 12% bracket is definitely a good idea, but personally I would convert to the top of the 22% bracket.

Ralph
aristotelian
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Joined: Wed Jan 11, 2017 7:05 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by aristotelian »

ralph124cf wrote: Sun Oct 24, 2021 5:47 pm Are you using the ACA for health insurance, and are you getting a subsidy? If so be careful that you don't have too high an income to qualify for the subsidy.

Convert to the top of the 12% bracket is definitely a good idea, but personally I would convert to the top of the 22% bracket.

Ralph
Why do you think they will be in the 12% bracket or higher in retirement? They may have 20+ years to do Roth conversions before SS and RMDs. With only 5-10 years of savings, I doubt they will have a seven figure 401k.
bloom2708
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Joined: Wed Apr 02, 2014 2:08 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by bloom2708 »

I would not convert any pre-tax at age 28.

Wait 30 years and re-visit then. Don't pay tax that you don't have to. Nobody knows what the tax rules/brackets will look like 30 years from now.
Topic Author
godhammer
Posts: 16
Joined: Fri Oct 22, 2021 5:28 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

ralph124cf wrote: Sun Oct 24, 2021 5:47 pm Are you using the ACA for health insurance, and are you getting a subsidy? If so be careful that you don't have too high an income to qualify for the subsidy.

Convert to the top of the 12% bracket is definitely a good idea, but personally I would convert to the top of the 22% bracket.

Ralph
My state gives free Medicaid for people under 30 I'm grateful.
Topic Author
godhammer
Posts: 16
Joined: Fri Oct 22, 2021 5:28 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

thor111 wrote: Sat Oct 23, 2021 5:34 pm One small point: I believe you can convert your 401k "After-Tax" to Roth anytime. If you do it often, before the investment has time to grow, there is no tax penalty.
401k Contributions I made This year before I quit:
* $2,600 Pre-Tax
* $1,700 After-Tax
* $300 company match
Already did ;)
Topic Author
godhammer
Posts: 16
Joined: Fri Oct 22, 2021 5:28 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

aristotelian wrote: Sat Oct 23, 2021 11:00 am
godhammer wrote: Fri Oct 22, 2021 5:31 pm Hello everyone, excited to be here :happy

I already have an overall idea of what should I do but I'd discuss with someone else to make sure I'm not doing anything dumb.

This year I quit my job in the first quarter and haven't worked since then, I don't plan to find another job until next year, so I think this year it'd be a great chance to pull the first Backdoor Roth in my life.

My situation for 2011:

* I'm 28 years old and single.
* I have $160,000 in Traditional IRA (rolled over from 401ks from my previous employers).
* I already have a Roth IRA account and have a little money in it.
* The gross wage for this year is $16,500.
* The federal Taxable Wage is $15,000. My state doesn't have a state income tax.
* Plenty of Cash reserve.
* Plan to work for another 5-10 years of high-income job (likely 35% bracket) and then retire (at 35-40 yo). Meaning plenty of chance of converting down the road if the tax code didn't change.

401k Contributions I made This year before I quit:
* $2,600 Pre-Tax
* $1,700 After-Tax
* $300 company match

My current plan:
* Since the federal standard deductible of $12,550 will be completely eaten by the taxable wage I earned, I'll need to pay tax on any IRA to Roth conversion. I plan to reach the 12% tax bracket by converting approximately $40,125 - ($15,000 taxable wage - $12,550 standard deductible) = $37 675 from IRA to Roth IRA.
* On top of that, I will put an additional $6000 into my Roth IRA from my cash reserve. (Nothing more I can contribute, correct?)

Thanks for reading so far. Does this sound like a good plan? Shall I use this opportunity to convert more while kicking myself up a tax bracket because this money in Roth will grow tax-free for the next 30+ years? Shall I convert less because even 12% is too much tax given I'm retiring 5-10 years from now? Any tips and tricks?
Hm, I think I am in the minority here but I think I would do only the top of the 10% bracket or maybe none at all. I think some of the people advising Roth conversions may be missing that you are looking at a very unique situation. You will have perhaps 25 to 30 years in the 0% tax bracket. If you get married at some point you will double your standard deduction and tax brackets. I see more downside than upside if you go higher than 10% now.

By the way, being high income, you should roll the Traditional IRA into your 401k if possible at the earliest opportunity. That will allow you to do backdoor Roth. Otherwise your Traditional IRA will be subject to the pro rata rule.
After retirement, I'll draw income from investment at $50k-60k a year. Higher bracket than 12%.
Topic Author
godhammer
Posts: 16
Joined: Fri Oct 22, 2021 5:28 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

bloom2708 wrote: Mon Oct 25, 2021 11:00 am I would not convert any pre-tax at age 28.

Wait 30 years and re-visit then. Don't pay tax that you don't have to. Nobody knows what the tax rules/brackets will look like 30 years from now.
I expect the social programs will likely expand, to the extent more on par with other developed countries, which requires higher tax rates.

Of course, this is pure speculation. I just think expanded social programs are more likely to happen than shrunk.
bloom2708
Posts: 9861
Joined: Wed Apr 02, 2014 2:08 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by bloom2708 »

godhammer wrote: Mon Oct 25, 2021 3:46 pm
bloom2708 wrote: Mon Oct 25, 2021 11:00 am I would not convert any pre-tax at age 28.

Wait 30 years and re-visit then. Don't pay tax that you don't have to. Nobody knows what the tax rules/brackets will look like 30 years from now.
I expect the social programs will likely expand, to the extent more on par with other developed countries, which requires higher tax rates.

Of course, this is pure speculation. I just think expanded social programs are more likely to happen than shrunk.
Yes. Speculating about next month is tough. 30 years from now. Whew.

Do you have enough cash to pay the tax bill and do you want to use your cash for that porpoise (sic)?

I'd rather have pre-tax 401k + Roth + Taxable/brokerage. Throw the tax money in Total US or Total World. Let that grow for 30 years.

I see a lot of people finding creative ways to pay tax when too young. But, there are probably worse things you can do with the money.
EnjoyIt
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Joined: Sun Dec 29, 2013 7:06 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by EnjoyIt »

godhammer wrote: Mon Oct 25, 2021 3:42 pm
aristotelian wrote: Sat Oct 23, 2021 11:00 am
godhammer wrote: Fri Oct 22, 2021 5:31 pm Hello everyone, excited to be here :happy

I already have an overall idea of what should I do but I'd discuss with someone else to make sure I'm not doing anything dumb.

This year I quit my job in the first quarter and haven't worked since then, I don't plan to find another job until next year, so I think this year it'd be a great chance to pull the first Backdoor Roth in my life.

My situation for 2011:

* I'm 28 years old and single.
* I have $160,000 in Traditional IRA (rolled over from 401ks from my previous employers).
* I already have a Roth IRA account and have a little money in it.
* The gross wage for this year is $16,500.
* The federal Taxable Wage is $15,000. My state doesn't have a state income tax.
* Plenty of Cash reserve.
* Plan to work for another 5-10 years of high-income job (likely 35% bracket) and then retire (at 35-40 yo). Meaning plenty of chance of converting down the road if the tax code didn't change.

401k Contributions I made This year before I quit:
* $2,600 Pre-Tax
* $1,700 After-Tax
* $300 company match

My current plan:
* Since the federal standard deductible of $12,550 will be completely eaten by the taxable wage I earned, I'll need to pay tax on any IRA to Roth conversion. I plan to reach the 12% tax bracket by converting approximately $40,125 - ($15,000 taxable wage - $12,550 standard deductible) = $37 675 from IRA to Roth IRA.
* On top of that, I will put an additional $6000 into my Roth IRA from my cash reserve. (Nothing more I can contribute, correct?)

Thanks for reading so far. Does this sound like a good plan? Shall I use this opportunity to convert more while kicking myself up a tax bracket because this money in Roth will grow tax-free for the next 30+ years? Shall I convert less because even 12% is too much tax given I'm retiring 5-10 years from now? Any tips and tricks?
Hm, I think I am in the minority here but I think I would do only the top of the 10% bracket or maybe none at all. I think some of the people advising Roth conversions may be missing that you are looking at a very unique situation. You will have perhaps 25 to 30 years in the 0% tax bracket. If you get married at some point you will double your standard deduction and tax brackets. I see more downside than upside if you go higher than 10% now.

By the way, being high income, you should roll the Traditional IRA into your 401k if possible at the earliest opportunity. That will allow you to do backdoor Roth. Otherwise your Traditional IRA will be subject to the pro rata rule.
After retirement, I'll draw income from investment at $50k-60k a year. Higher bracket than 12%.
Are you sure? Will all your withdrawals be fully taxable when you are ready to retire? When you are pulling cash out in retirement you will still need to fill up the 0%, 10% and then the 12% tax bracket before even getting to 22%. Will some of your spending come from a Roth or from your cash reserves that you say you have plenty of and therefor not taxed at all?

Just something to think about.
A time to EVALUATE your jitters: | viewtopic.php?p=1139732#p1139732
Topic Author
godhammer
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Joined: Fri Oct 22, 2021 5:28 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

HeelaMonster wrote: Sat Oct 23, 2021 7:53 pm
godhammer wrote: Sat Oct 23, 2021 4:09 pm What do you mean by point 5? Do you mean I should send IRA about $4000 tax when I do the conversion (out of pocket for sure)? Would they penalize me if I don't pay right away and wait til April 2022?
Correct. I just make it part of the drill every time I do a conversion like this, sending estimated tax as the final step (as above, you actually have the quarter in which to accomplish this, but I do immediately so I don't forget).
Hey, do you have a link to a guide somewhere on how I do this? I imagine I need to fill a out some form with a check and send it to IRS? All the guide I found are about how to calculate it but not how to actually pay. Many thanks.
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by aristotelian »

godhammer wrote: Mon Oct 25, 2021 3:42 pm
aristotelian wrote: Sat Oct 23, 2021 11:00 am
godhammer wrote: Fri Oct 22, 2021 5:31 pm Hello everyone, excited to be here :happy

I already have an overall idea of what should I do but I'd discuss with someone else to make sure I'm not doing anything dumb.

This year I quit my job in the first quarter and haven't worked since then, I don't plan to find another job until next year, so I think this year it'd be a great chance to pull the first Backdoor Roth in my life.

My situation for 2011:

* I'm 28 years old and single.
* I have $160,000 in Traditional IRA (rolled over from 401ks from my previous employers).
* I already have a Roth IRA account and have a little money in it.
* The gross wage for this year is $16,500.
* The federal Taxable Wage is $15,000. My state doesn't have a state income tax.
* Plenty of Cash reserve.
* Plan to work for another 5-10 years of high-income job (likely 35% bracket) and then retire (at 35-40 yo). Meaning plenty of chance of converting down the road if the tax code didn't change.

401k Contributions I made This year before I quit:
* $2,600 Pre-Tax
* $1,700 After-Tax
* $300 company match

My current plan:
* Since the federal standard deductible of $12,550 will be completely eaten by the taxable wage I earned, I'll need to pay tax on any IRA to Roth conversion. I plan to reach the 12% tax bracket by converting approximately $40,125 - ($15,000 taxable wage - $12,550 standard deductible) = $37 675 from IRA to Roth IRA.
* On top of that, I will put an additional $6000 into my Roth IRA from my cash reserve. (Nothing more I can contribute, correct?)

Thanks for reading so far. Does this sound like a good plan? Shall I use this opportunity to convert more while kicking myself up a tax bracket because this money in Roth will grow tax-free for the next 30+ years? Shall I convert less because even 12% is too much tax given I'm retiring 5-10 years from now? Any tips and tricks?
Hm, I think I am in the minority here but I think I would do only the top of the 10% bracket or maybe none at all. I think some of the people advising Roth conversions may be missing that you are looking at a very unique situation. You will have perhaps 25 to 30 years in the 0% tax bracket. If you get married at some point you will double your standard deduction and tax brackets. I see more downside than upside if you go higher than 10% now.

By the way, being high income, you should roll the Traditional IRA into your 401k if possible at the earliest opportunity. That will allow you to do backdoor Roth. Otherwise your Traditional IRA will be subject to the pro rata rule.
After retirement, I'll draw income from investment at $50k-60k a year. Higher bracket than 12%.
With the standard deduction you have $52k of room in the 12% bracket. Your effective tax will be around 8%. Assuming you have some Roth and taxable assets to supplement your 401k draw you should have no problem staying in the 12% bracket.
Last edited by aristotelian on Mon Oct 25, 2021 5:32 pm, edited 1 time in total.
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FiveK
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by FiveK »

godhammer wrote: Mon Oct 25, 2021 5:17 pm Hey, do you have a link to a guide somewhere on how I do this? I imagine I need to fill a out some form with a check and send it to IRS? All the guide I found are about how to calculate it but not how to actually pay. Many thanks.
Payments | Internal Revenue Service might help.
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FiveK
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by FiveK »

FiveK wrote: Sat Oct 23, 2021 10:49 am One other oh-by-the-way: you might want to run your numbers through a 2021 tax estimation program (e.g., the Personal finance toolbox) that will show the marginal tax rate you'll incur by giving up credits such as the Earned Income and Retirement Saver's as your conversion amount increases.

Might still be worth doing the conversion now, but good for you to understand the actual cost.
aristotelian wrote: Mon Oct 25, 2021 5:31 pm With the standard deduction you have $52k of room in the 12% bracket. Your effective tax will be around 8%. Assuming you have some Roth and taxable assets to supplement your 401k draw you should have no problem staying in the 12% bracket.
Assuming $17,600 gross, $2,600 401k contribution, no other income or contributions, and no ACA effects, the marginal rates for Roth conversions are shown below. No amount of conversion will have an overall (aka cumulative) marginal rate of less than 15% on the conversion amount. It may or may not still be a good deal.
Image
aristotelian
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by aristotelian »

FiveK wrote: Mon Oct 25, 2021 6:00 pm Assuming $17,600 gross, $2,600 401k contribution, no other income or contributions, and no ACA effects, the marginal rates for Roth conversions are shown below. No amount of conversion will have an overall (aka cumulative) marginal rate of less than 15% on the conversion amount. It may or may not still be a good deal.
Image
Interesting. Very good point. Appears they would be giving up Saver's credit of $300 and Earned Income Credit of $677. From that standpoint I think I would not do any conversions at all.
BabaWawa
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by BabaWawa »

You've done great at your young age. But unless I've read your post wrong, I'm still trying to wrap my head around your retirement plan is as little as 5 years, while currently unemployed and 160k in IRA. By "plenty of cash reserve" are we talking 7 figures or more, or is there an expected large inheritance in 5-10 years? What is the total picture to fund a 50 year retirement including healthcare expenses and taxes?
HeelaMonster
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by HeelaMonster »

FiveK wrote: Mon Oct 25, 2021 5:32 pm
godhammer wrote: Mon Oct 25, 2021 5:17 pm Hey, do you have a link to a guide somewhere on how I do this? I imagine I need to fill a out some form with a check and send it to IRS? All the guide I found are about how to calculate it but not how to actually pay. Many thanks.
Payments | Internal Revenue Service might help.
Correct, and for a bit more guidance, here are some additional links. OP, what you are wanting to do is pay "estimated" or "quarterly" taxes, since (to quote the IRS)... "Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments." In the past, I used the preprinted voucher slips that churned out with my annual tax return, selected the one for current quarter, wrote a check for around 20% of the amount converted (I typically have some random consulting income, from which taxes have not been withheld), and popped in mail. Most recently I used the online payment portal linked above by FiveK, with direct debit from bank account. With either method there isn't much "paperwork" to complete... basically fill in one number that says "here's how much I'm sending you this time" and make sure it gets credited to your account (SSN).

https://www.irs.gov/businesses/small-bu ... ated-taxes

https://www.nerdwallet.com/article/taxe ... erly-taxes
Last edited by HeelaMonster on Tue Oct 26, 2021 8:39 am, edited 1 time in total.
HeelaMonster
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by HeelaMonster »

BabaWawa wrote: Tue Oct 26, 2021 7:38 am You've done great at your young age. But unless I've read your post wrong, I'm still trying to wrap my head around your retirement plan is as little as 5 years, while currently unemployed and 160k in IRA. By "plenty of cash reserve" are we talking 7 figures or more, or is there an expected large inheritance in 5-10 years? What is the total picture to fund a 50 year retirement including healthcare expenses and taxes?
Yes, and a related question.... how much (dollar amount, not percentage) do you project saving from your salary over the next 5-10 years? As Baba implies, you might need 10-15 times the amount you currently have in your IRA, to support the 50 year retirement you have described.
aristotelian
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by aristotelian »

HeelaMonster wrote: Tue Oct 26, 2021 8:34 am
BabaWawa wrote: Tue Oct 26, 2021 7:38 am You've done great at your young age. But unless I've read your post wrong, I'm still trying to wrap my head around your retirement plan is as little as 5 years, while currently unemployed and 160k in IRA. By "plenty of cash reserve" are we talking 7 figures or more, or is there an expected large inheritance in 5-10 years? What is the total picture to fund a 50 year retirement including healthcare expenses and taxes?
Yes, and a related question.... how much (dollar amount, not percentage) do you project saving from your salary over the next 5-10 years? As Baba implies, you might need 10-15 times the amount you currently have in your IRA, to support the 50 year retirement you have described.
I am not OP but they claim they will be in the 35% tax bracket and spend about $55k. That puts their retirement goal at about $1.5M. Starting with $300k and contributing $120k per year, their 50th percentile outcome is $1.1M after 5 years, $2.3M after 10 years. Shouldn't be hard if they are correct about their salary prospects.
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by HeelaMonster »

aristotelian wrote: Tue Oct 26, 2021 9:02 am
HeelaMonster wrote: Tue Oct 26, 2021 8:34 am
BabaWawa wrote: Tue Oct 26, 2021 7:38 am You've done great at your young age. But unless I've read your post wrong, I'm still trying to wrap my head around your retirement plan is as little as 5 years, while currently unemployed and 160k in IRA. By "plenty of cash reserve" are we talking 7 figures or more, or is there an expected large inheritance in 5-10 years? What is the total picture to fund a 50 year retirement including healthcare expenses and taxes?
Yes, and a related question.... how much (dollar amount, not percentage) do you project saving from your salary over the next 5-10 years? As Baba implies, you might need 10-15 times the amount you currently have in your IRA, to support the 50 year retirement you have described.
I am not OP but they claim they will be in the 35% tax bracket and spend about $55k. That puts their retirement goal at about $1.5M. Starting with $300k and contributing $120k per year, their 50th percentile outcome is $1.1M after 5 years, $2.3M after 10 years. Shouldn't be hard if they are correct about their salary prospects.
(Recognizing that we're all working with incomplete or imagined data.....).

1. If I understand your projection correctly, that would be a multiple of 27x expenses. My understanding was that the standard 25-30x calculation would support a traditional retirement. Even with some wiggle room, isn't there a need to "wiggle" considerably higher for a retirement that might be twice that long?

2. The $120k per year addition is what I was really wondering about with my question. If OP is able to (a) get another high-paying job and (b) consistently set aside that much, agree they've got a shot.

3. And then there's the question raised in other threads, whether $55k is a realistic living expense inclusive of all costs, including healthcare, taxes, etc. Without any help from SS. In a location where jobs are available at $300k per year.

4. Finally, I recognize all this conjecture by old retired people (like me) is not addressing the OP's question about Roth conversion! I'm a fan of conversions, when taxes are low. :happy
aristotelian
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by aristotelian »

HeelaMonster wrote: Tue Oct 26, 2021 9:38 am

(Recognizing that we're all working with incomplete or imagined data.....).

1. If I understand your projection correctly, that would be a multiple of 27x expenses. My understanding was that the standard 25-30x calculation would support a traditional retirement. Even with some wiggle room, isn't there a need to "wiggle" considerably higher for a retirement that might be twice that long?

2. The $120k per year addition is what I was really wondering about with my question. If OP is able to (a) get another high-paying job and (b) consistently set aside that much, agree they've got a shot.

3. And then there's the question raised in other threads, whether $55k is a realistic living expense inclusive of all costs, including healthcare, taxes, etc. In a location where jobs are available at $300k per year.

4. Finally, I recognize all this conjecture by old retired people (like me) is not addressing the OP's question about Roth conversion! I'm a fan of conversions, when taxes are low. :happy
3.75% withdrawal rate 98% success for 40 years, 94% for 50 years (assuming 75% stocks portfolio). Seems reasonable to me but sure you could argue for marginally higher.

$55k is well above the average US individual income and OP is single. I'd have no problem living on $55k with no dependents. Having no reason to doubt the OP I am assuming their numbers are correct.

I think the overall plan is an important consideration for OP's question because one of the arguments against Roth conversions now is that a) 401k will not have much time to grow relative to most people on this board and b) with very early retirement they will have more years in the 0% tax bracket to do Roth conversions in retirement. It seems most of the advice in favor of more Roth conversion now are not really taking OP's plan seriously.
HeelaMonster
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by HeelaMonster »

aristotelian wrote: Tue Oct 26, 2021 10:11 am 3.75% withdrawal rate 98% success for 40 years, 94% for 50 years (assuming 75% stocks portfolio). Seems reasonable to me but sure you could argue for marginally higher.

$55k is well above the average US individual income and OP is single. I'd have no problem living on $55k with no dependents. Having no reason to doubt the OP I am assuming their numbers are correct.

I think the overall plan is an important consideration for OP's question because one of the arguments against Roth conversions now is that a) 401k will not have much time to grow relative to most people on this board and b) with very early retirement they will have more years in the 0% tax bracket to do Roth conversions in retirement. It seems most of the advice in favor of more Roth conversion now are not really taking OP's plan seriously.
All good points. Thanks for the discussion. :sharebeer
BabaWawa
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by BabaWawa »

aristotelian wrote: Tue Oct 26, 2021 9:02 am
HeelaMonster wrote: Tue Oct 26, 2021 8:34 am
BabaWawa wrote: Tue Oct 26, 2021 7:38 am You've done great at your young age. But unless I've read your post wrong, I'm still trying to wrap my head around your retirement plan is as little as 5 years, while currently unemployed and 160k in IRA. By "plenty of cash reserve" are we talking 7 figures or more, or is there an expected large inheritance in 5-10 years? What is the total picture to fund a 50 year retirement including healthcare expenses and taxes?
Yes, and a related question.... how much (dollar amount, not percentage) do you project saving from your salary over the next 5-10 years? As Baba implies, you might need 10-15 times the amount you currently have in your IRA, to support the 50 year retirement you have described.
I am not OP but they claim they will be in the 35% tax bracket and spend about $55k. That puts their retirement goal at about $1.5M. Starting with $300k and contributing $120k per year, their 50th percentile outcome is $1.1M after 5 years, $2.3M after 10 years. Shouldn't be hard if they are correct about their salary prospects.
I'm having trouble getting a picture of a 28 yo focused on early retirement while sitting out of the job market for a year. Any more info?... Non-compete, burnout?
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godhammer
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

EnjoyIt wrote: Mon Oct 25, 2021 4:06 pm
godhammer wrote: Mon Oct 25, 2021 3:42 pm
aristotelian wrote: Sat Oct 23, 2021 11:00 am
godhammer wrote: Fri Oct 22, 2021 5:31 pm Hello everyone, excited to be here :happy

I already have an overall idea of what should I do but I'd discuss with someone else to make sure I'm not doing anything dumb.

This year I quit my job in the first quarter and haven't worked since then, I don't plan to find another job until next year, so I think this year it'd be a great chance to pull the first Backdoor Roth in my life.

My situation for 2011:

* I'm 28 years old and single.
* I have $160,000 in Traditional IRA (rolled over from 401ks from my previous employers).
* I already have a Roth IRA account and have a little money in it.
* The gross wage for this year is $16,500.
* The federal Taxable Wage is $15,000. My state doesn't have a state income tax.
* Plenty of Cash reserve.
* Plan to work for another 5-10 years of high-income job (likely 35% bracket) and then retire (at 35-40 yo). Meaning plenty of chance of converting down the road if the tax code didn't change.

401k Contributions I made This year before I quit:
* $2,600 Pre-Tax
* $1,700 After-Tax
* $300 company match

My current plan:
* Since the federal standard deductible of $12,550 will be completely eaten by the taxable wage I earned, I'll need to pay tax on any IRA to Roth conversion. I plan to reach the 12% tax bracket by converting approximately $40,125 - ($15,000 taxable wage - $12,550 standard deductible) = $37 675 from IRA to Roth IRA.
* On top of that, I will put an additional $6000 into my Roth IRA from my cash reserve. (Nothing more I can contribute, correct?)

Thanks for reading so far. Does this sound like a good plan? Shall I use this opportunity to convert more while kicking myself up a tax bracket because this money in Roth will grow tax-free for the next 30+ years? Shall I convert less because even 12% is too much tax given I'm retiring 5-10 years from now? Any tips and tricks?
Hm, I think I am in the minority here but I think I would do only the top of the 10% bracket or maybe none at all. I think some of the people advising Roth conversions may be missing that you are looking at a very unique situation. You will have perhaps 25 to 30 years in the 0% tax bracket. If you get married at some point you will double your standard deduction and tax brackets. I see more downside than upside if you go higher than 10% now.

By the way, being high income, you should roll the Traditional IRA into your 401k if possible at the earliest opportunity. That will allow you to do backdoor Roth. Otherwise your Traditional IRA will be subject to the pro rata rule.
After retirement, I'll draw income from investment at $50k-60k a year. Higher bracket than 12%.
Are you sure? Will all your withdrawals be fully taxable when you are ready to retire? When you are pulling cash out in retirement you will still need to fill up the 0%, 10% and then the 12% tax bracket before even getting to 22%. Will some of your spending come from a Roth or from your cash reserves that you say you have plenty of and therefor not taxed at all?

Just something to think about.
Hey, you are right I might be missing something here, I haven't thought it through yet.

So my previous plan is to retire at 35-40 yo, then live on investment income and dividends from taxable accounts, wait til 59 yo, then start to draw from tax-advantage accounts.

Shall I also draw money from Roth since there is no penalty?

Or shall I leave it alone since it's tax free growth?

I should still prioritize drawing money from taxable investment right?

I currently have a large cash reserve because I prepared for this quitting for a long time. Won't be the case after I retire early.
Topic Author
godhammer
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

FiveK wrote: Mon Oct 25, 2021 6:00 pm
FiveK wrote: Sat Oct 23, 2021 10:49 am One other oh-by-the-way: you might want to run your numbers through a 2021 tax estimation program (e.g., the Personal finance toolbox) that will show the marginal tax rate you'll incur by giving up credits such as the Earned Income and Retirement Saver's as your conversion amount increases.

Might still be worth doing the conversion now, but good for you to understand the actual cost.
aristotelian wrote: Mon Oct 25, 2021 5:31 pm With the standard deduction you have $52k of room in the 12% bracket. Your effective tax will be around 8%. Assuming you have some Roth and taxable assets to supplement your 401k draw you should have no problem staying in the 12% bracket.
Assuming $17,600 gross, $2,600 401k contribution, no other income or contributions, and no ACA effects, the marginal rates for Roth conversions are shown below. No amount of conversion will have an overall (aka cumulative) marginal rate of less than 15% on the conversion amount. It may or may not still be a good deal.
Image
Wait wait wait, why? I don't understand this graph at all. The marginal tax rate is 12% from $9,951 to $40,525.

I'm on state Medicaid for being young.
Topic Author
godhammer
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

BabaWawa wrote: Tue Oct 26, 2021 7:38 am You've done great at your young age. But unless I've read your post wrong, I'm still trying to wrap my head around your retirement plan is as little as 5 years, while currently unemployed and 160k in IRA. By "plenty of cash reserve" are we talking 7 figures or more, or is there an expected large inheritance in 5-10 years? What is the total picture to fund a 50 year retirement including healthcare expenses and taxes?
Before I quit my income was in the 200k range. I've been preparing for quitting for a long time so I have a big emergency fund, a few times more than most people. So I have enough cash to cover the tax for this conversion.

I have taxable investment accounts on top of IRAs and the total net worth is approaching 7 figures because I was saving and investing aggressively for a few years and made one good investment decision in the housing market.

Healthcare is a big problem, I'm still planning, maybe moving to a low healthcare cost country, or join the military.
Last edited by godhammer on Wed Oct 27, 2021 6:11 pm, edited 2 times in total.
Topic Author
godhammer
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

HeelaMonster wrote: Tue Oct 26, 2021 8:24 am
FiveK wrote: Mon Oct 25, 2021 5:32 pm
godhammer wrote: Mon Oct 25, 2021 5:17 pm Hey, do you have a link to a guide somewhere on how I do this? I imagine I need to fill a out some form with a check and send it to IRS? All the guide I found are about how to calculate it but not how to actually pay. Many thanks.
Payments | Internal Revenue Service might help.
Correct, and for a bit more guidance, here are some additional links. OP, what you are wanting to do is pay "estimated" or "quarterly" taxes, since (to quote the IRS)... "Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments." In the past, I used the preprinted voucher slips that churned out with my annual tax return, selected the one for current quarter, wrote a check for around 20% of the amount converted (I typically have some random consulting income, from which taxes have not been withheld), and popped in mail. Most recently I used the online payment portal linked above by FiveK, with direct debit from bank account. With either method there isn't much "paperwork" to complete... basically fill in one number that says "here's how much I'm sending you this time" and make sure it gets credited to your account (SSN).

https://www.irs.gov/businesses/small-bu ... ated-taxes

https://www.nerdwallet.com/article/taxe ... erly-taxes
Awsome thanks for the detailed explanation.
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FiveK
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by FiveK »

godhammer wrote: Wed Oct 27, 2021 5:54 pm
FiveK wrote: Mon Oct 25, 2021 6:00 pm
FiveK wrote: Sat Oct 23, 2021 10:49 am One other oh-by-the-way: you might want to run your numbers through a 2021 tax estimation program (e.g., the Personal finance toolbox) that will show the marginal tax rate you'll incur by giving up credits such as the Earned Income and Retirement Saver's as your conversion amount increases.

Might still be worth doing the conversion now, but good for you to understand the actual cost.
aristotelian wrote: Mon Oct 25, 2021 5:31 pm With the standard deduction you have $52k of room in the 12% bracket. Your effective tax will be around 8%. Assuming you have some Roth and taxable assets to supplement your 401k draw you should have no problem staying in the 12% bracket.
Assuming $17,600 gross, $2,600 401k contribution, no other income or contributions, and no ACA effects, the marginal rates for Roth conversions are shown below. No amount of conversion will have an overall (aka cumulative) marginal rate of less than 15% on the conversion amount. It may or may not still be a good deal.
Image
Wait wait wait, why? I don't understand this graph at all. The marginal tax rate is 12% from $9,951 to $40,525.

I'm on state Medicaid for being young.
The nominal 12% tax bracket may span that range, but that's not the actual marginal tax rate you'll pay.

After you read that wiki article, are things clearer - or muddier?
Topic Author
godhammer
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

BabaWawa wrote: Tue Oct 26, 2021 9:02 pm
aristotelian wrote: Tue Oct 26, 2021 9:02 am
HeelaMonster wrote: Tue Oct 26, 2021 8:34 am
BabaWawa wrote: Tue Oct 26, 2021 7:38 am You've done great at your young age. But unless I've read your post wrong, I'm still trying to wrap my head around your retirement plan is as little as 5 years, while currently unemployed and 160k in IRA. By "plenty of cash reserve" are we talking 7 figures or more, or is there an expected large inheritance in 5-10 years? What is the total picture to fund a 50 year retirement including healthcare expenses and taxes?
Yes, and a related question.... how much (dollar amount, not percentage) do you project saving from your salary over the next 5-10 years? As Baba implies, you might need 10-15 times the amount you currently have in your IRA, to support the 50 year retirement you have described.
I am not OP but they claim they will be in the 35% tax bracket and spend about $55k. That puts their retirement goal at about $1.5M. Starting with $300k and contributing $120k per year, their 50th percentile outcome is $1.1M after 5 years, $2.3M after 10 years. Shouldn't be hard if they are correct about their salary prospects.
I'm having trouble getting a picture of a 28 yo focused on early retirement while sitting out of the job market for a year. Any more info?... Non-compete, burnout?
Burnout and continued education, why do you think employers would pay us 20 something monkeys 200k+ a year if it's not soul-crushing? :')

Yes, I do recognize that it is a very risky move. But I realized as long as you are making good use of your time while being unemployed they don't care that much. A few friends in similar situations have done that and they encouraged me to make the move. Currently, I'm taking advanced classes online and doing volunteer work (to replenish the soul the previous employer sucked out of me). Wish me luck when I return to the job market :)
Topic Author
godhammer
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Joined: Fri Oct 22, 2021 5:28 pm

Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by godhammer »

FiveK wrote: Wed Oct 27, 2021 6:12 pm
godhammer wrote: Wed Oct 27, 2021 5:54 pm
FiveK wrote: Mon Oct 25, 2021 6:00 pm
FiveK wrote: Sat Oct 23, 2021 10:49 am One other oh-by-the-way: you might want to run your numbers through a 2021 tax estimation program (e.g., the Personal finance toolbox) that will show the marginal tax rate you'll incur by giving up credits such as the Earned Income and Retirement Saver's as your conversion amount increases.

Might still be worth doing the conversion now, but good for you to understand the actual cost.
aristotelian wrote: Mon Oct 25, 2021 5:31 pm With the standard deduction you have $52k of room in the 12% bracket. Your effective tax will be around 8%. Assuming you have some Roth and taxable assets to supplement your 401k draw you should have no problem staying in the 12% bracket.
Assuming $17,600 gross, $2,600 401k contribution, no other income or contributions, and no ACA effects, the marginal rates for Roth conversions are shown below. No amount of conversion will have an overall (aka cumulative) marginal rate of less than 15% on the conversion amount. It may or may not still be a good deal.
Image
Wait wait wait, why? I don't understand this graph at all. The marginal tax rate is 12% from $9,951 to $40,525.

I'm on state Medicaid for being young.
The nominal 12% tax bracket may span that range, but that's not the actual marginal tax rate you'll pay.

After you read that wiki article, are things clearer - or muddier?
Muddier.

For simplicity's sake let's say the standard deductible covered all my income, no ACA either. And let's ignore the 2k-ish contribution I made to 401k as well.

For this Roth conversion, I'll pay 10% on $0 to $14,200, then 12% on $14,201 to $54,200, right? How can the overall tax rate exceed 12%?
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FiveK
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Re: 28 years old, $160k in Traditional IRA, $15k taxable wage this year, how much should I convert from IRA to Roth?

Post by FiveK »

godhammer wrote: Wed Oct 27, 2021 6:26 pm Muddier.

For simplicity's sake let's say the standard deductible covered all my income, no ACA either. And let's ignore the 2k-ish contribution I made to 401k as well.

For this Roth conversion, I'll pay 10% on $0 to $14,200, then 12% on $14,201 to $54,200, right? How can the overall tax rate exceed 12%?
Welcome to the federal tax code. ;)

We could ignore the $2K+ 401k contribution and make things appear simpler, but that would not be accurate because by making that contribution you qualify for the Saver's credit - if your income is low enough.

You also qualify for the Earned Income Tax Credit (EITC) - again, if your income is low enough.

The reductions in those credits - stepwise, leading to spikes in the marginal rate chart, for the saver's credit, and gradually, providing the higher "plateaus" in the chart, for the EITC - are what cause your Roth conversion amounts to be taxed at higher than the nominal bracket amount.

Getting clearer, or still opaque?
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