Help me with Roth conversion!

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Offshore
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Help me with Roth conversion!

Post by Offshore »

I need your help!
This year will be my first Roth conversion and I know what I want to do, but am not confident on the math to get there.

I know I want to convert to the top of the 22% tax bracket ($172,750.).
I know my total earnings for this year will be, roughly, $135,000.
I know I have $20,000. in short term capital gains (no LTCG) this year.
I know over 3 quarters of 2021 I have about $45,000. in dividends from taxable accounts (about $15k per quarter).
I know I don't itemize. Rather, I use the standard deduction for married filing jointly.
I know the std. deduction amount this year is $25,100.

What's the math look like for a rough number to convert?
Also, I have carry over losses to use against the STCG. Do those losses factor into the equation?
InNameOnly
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Re: Help me with Roth conversion!

Post by InNameOnly »

TaxCaster is a handy app to get you in the the right ballpark.
The realist sees the glass as completely full, 50% water and 50% air.
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retiredjg
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Re: Help me with Roth conversion!

Post by retiredjg »

Offshore wrote: Mon Nov 29, 2021 12:09 pm I need your help!
This year will be my first Roth conversion and I know what I want to do, but am not confident on the math to get there.

I know I want to convert to the top of the 22% tax bracket ($172,750.).
I know my total earnings for this year will be, roughly, $135,000.
I know I have $20,000. in short term capital gains (no LTCG) this year.
I know over 3 quarters of 2021 I have about $45,000. in dividends from taxable accounts (about $15k per quarter).
I know I don't itemize. Rather, I use the standard deduction for married filing jointly.
I know the std. deduction amount this year is $25,100.

What's the math look like for a rough number to convert?
Also, I have carry over losses to use against the STCG. Do those losses factor into the equation?
Will the carry over losses offset all of the STCG?

About those dividends...maybe $60k....what kind of dividends are these? Qualified dividends or non-qualified dividends?

Your qualified dividends will not be added into the number you need to stay under. Non-qualified dividends will be added. (Note that all dividends from bonds are not-qualified. Some dividends from stock funds are qualified and some are not.)
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Offshore
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Re: Help me with Roth conversion!

Post by Offshore »

retiredjg,

Yes, the losses are enough to cover the STCG.

Re: breakdown of dividends between ordinary and qualified... who knows until end of year when that information is sent out! I phoned Vanguard today asking just this question and was told the breakdown is sent at year end. Don't I need to Roth convert for 2021 before 12/31/2021?

All bond holdings are in rollover IRA's so I don't think those dividends are relevant. I think. : (
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retiredjg
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Re: Help me with Roth conversion!

Post by retiredjg »

You cannot do this calculation without some idea of how much of that $60kish will be counted as ordinary income (non-qualified) and how much will be counted as qualified dividends.

Did you have similar holdings in taxable last year? Can you tell us what the numbers were last year?
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Mullins
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Re: Help me with Roth conversion!

Post by Mullins »

Go here and input your numbers. https://www.mortgagecalculator.org/calc ... ulator.php

Yes, your ST carryover losses offset your ST cap gains dollar for dollar. But if there's more loss left, $3000 of it goes to offset your ordinary income.
After you've inputted all your numbers, play with the "taxable IRA withdrawal" seeing what takes you to the top of your bracket (at the bottom of the calculator it'll note the specifics of marginal %, effective %, and bracket).
"The Quality of the Answer Depends on the Quality of Your Question."
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retiredjg
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Re: Help me with Roth conversion!

Post by retiredjg »

After you offset the STCG, will you have at least $3k in carryover losses left?

How much of your total earnings went into a 401k (or similar), employer sponsored health plan, and/or HSA?

Please add this information to the original post.
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Mullins
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Re: Help me with Roth conversion!

Post by Mullins »

Offshore wrote: Mon Nov 29, 2021 12:31 pm retiredjg,

Yes, the losses are enough to cover the STCG.

Re: breakdown of dividends between ordinary and qualified... who knows until end of year when that information is sent out! I phoned Vanguard today asking just this question and was told the breakdown is sent at year end. Don't I need to Roth convert for 2021 before 12/31/2021?

All bond holdings are in rollover IRA's so I don't think those dividends are relevant. I think. : (
Yes, it has to be done by 12/31 this year.

You can only make an educated guess. Look up when the distribution is paid for the funds you hold. Also look up the *estimated* QD percentage. Vanguard had PDFs available for that.

The distribution should be near year's end but in enough time for you to fine tune the conversion amount and pull the trigger then.

Even if you dip into the next bracket, it shouldn't be by much. Alternatively, you can always underestimate the conversion amount.
"The Quality of the Answer Depends on the Quality of Your Question."
cas
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Re: Help me with Roth conversion!

Post by cas »

In addition to what retiredjg said...

You cited the MFJ 22% bracket threshold, so I assume you are filing MFJ?

Are both you and spouse less than age 63?
Are either you or spouse getting health insurance via the ACA exchanges?

Are the "total earnings" from a W-2 job?
I'll assume those are gross earnings?
If so, do you have any pre-tax deductions, such as
-contributions to pre-tax 401(k) or similar
-employee contributions to health, dental, vision premiums
-contributions to FSA or HSA

On the taxable account...

On your most recent post, you indicate this is probably held at Vanguard.
You'll want to
1. Log in, pull down the "My Accounts" menu at the top of the page, and select "Dividends and Capital Gains"
Then on the "Dividends and Capital Gains" page, use the pull down menu to select "2021 Year to Date"
That will give you actual dividends received (for each fund and total) for the first 3 quarters.

Preliminarily, you can look up the dividend distribution/share for each of your funds for the 4th quarter last year to estimate what the 4th quarter will be this year. (Dividends tend not to come in evenly for the 4 quarters, and the 4th quarter tends to be more than 25% of the total.)

*Common Gotcha if you have significant investment in international funds: you'll need to add in the foreign taxes paid to the dividend number for your international funds. As an estimate, look at your 1099-DIV from last year and use the foreign taxes paid number from it.)

2. Then you want to type "Vanguard Tax Center" into google, and select the "Tax Center | Vanguard Advisors" link
Then select link "Qualified dividend income - 2021 year-to-date estimates"
Enter the tickers of your Vanguard funds at the top of the page, and multiply the "2021 Year-to-date QDI estimates" x the dividend estimate for each fund that you got in Step 1.

That will give you an estimate for you qualified/non-qualified dividend split.

3. Back on the Tax Center page, select "Preliminary year-end Vanguard fund distribution estimates"
Select the pdf link on the resulting page, then look through it to make sure none of your funds have capital gain distributions this year. (There are some surprises.)

4. On 12/9/2021 you want to go back to the Tax Center page and click on the *updated* 2021 year end distributions link ... it will give you the estimated dividend per share for the 4th quarter of each of your funds.
You can use this number to update your 2021 estimated dividends (and qualified/non-qualified dividend numbers), if you want more precision.
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Offshore
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Re: Help me with Roth conversion!

Post by Offshore »

Mullins, retiredjg, cas,

Thanks folks. I know this isn't rocket science and I am shooting for a rough conversion number and going high is not a fatal error, just a bit more in taxes. Having said that, here's answers to your questions.

Mullins: cool website. I put in my numbers and am still playing with the output.

retiredjg: Yes, there will still be $3,000. left in carryover to help offset wages. I have no 401(k) anymore but I do plan on contributing to a Roth IRA. I buy our health insurance from my old employer in taxable dollars. I don't itemize, even if that expense could be deducted. I no longer contribute to an HSA.

cas: Wow! You really researched the instructions. Thanks for that. Yes, we are filing MFJ, and we are in the 22% bracket. We are under 63 and do not use ACA insurance. We have no contributions to health, dental or vision.


I'll continue to research the process. Thanks to those who replied.
retire2022
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Re: Help me with Roth conversion!

Post by retire2022 »

Op

I use the online app for your state

https://www.taxformcalculator.com/state-tax.html

also AARP has one for feds if Taxform is too much of a challenge

https://www.aarp.org/money/taxes/1040_t ... lator.html
cas
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Re: Help me with Roth conversion!

Post by cas »

Offshore wrote: Mon Nov 29, 2021 1:22 pm Yes, we are filing MFJ, and we are in the 22% bracket
The reason for a lot of the questions is that the significant distributions from the taxable account are a complicating factor: you now have *two* "tax rates" you need to keep track of, not just one.

So you aren't in just "the 22% bracket." You have one tax rate if you add any more income taxed at ordinary tax rates (i.e. Roth conversions) and a different tax rate if you add any income taxed at Qualified Dividend/LTCG rates. And those two rates interact. And the rate on the Roth conversion might or might not be 22%.

So people are trying to figure out the breakdown between your income taxed at ordinary tax rates and your income taxed at QD/LTCG rates. And also trying to do a check on whether there will be any unpleasant tax surprises causes by interactions between those two types of income.

(It occurred to me after I wrote the previous post:

I initially interpreted your statement that "I know my total earnings for this year will be, roughly, $135,000" to mean $135K in earned income. And then the investment income was on top of that.

Is that what you meant?

Or did you mean that your total income, including the investment income, was $135K? )
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Offshore
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Re: Help me with Roth conversion!

Post by Offshore »

cas,

My wages will be $135,000. this year. Not total income. That statement was misleading. Sorry.
Investment income is on top of that.
Looking at last year's tax return I see my QD's were $48,000. and ordinary dividends were $60,000.
Now I am wondering if I will even be in the 22% bracket this year. Consider this: $135,000. + $60,000.= 195,000. minus the std. deduction of $25,100.= 169,900.
Toss in a smidge of interest from various bank accounts and taxable income is close to the the top of the 22% bracket ($172,750.). Even considering the $3,000. from carryover losses and foreign tax paid, if my math is correct it is not worth the effort to Roth convert in 2021.


My income was very, very low in 2020 due to covid. That would have been a better year to convert. May need to sit this one out. Thoughts?
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retiredjg
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Re: Help me with Roth conversion!

Post by retiredjg »

Not so fast.

A common stumbling point is dividends. Ordinary dividends = qualified dividends + dividends that are not qualified.

So rather than add on $60k in dividends to the income, you should only add $12k in dividends. The $48k in qualified dividends will be taxed, but not as ordinary income. And it is the ordinary income that you need to keep under the top of the 22% bracket.

If you feel you need to do Roth conversions, it seems you can do at least a $48k Roth conversion just based on the numbers in your last post. And since you are not up against an IRMAA cliff or something, it won't matter if you slop over a little bit into the 24% bracket.
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Mullins
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Re: Help me with Roth conversion!

Post by Mullins »

Offshore wrote: Mon Nov 29, 2021 2:24 pm cas,

My wages will be $135,000. this year. Not total income. That statement was misleading. Sorry.
Investment income is on top of that.
Looking at last year's tax return I see my QD's were $48,000. and ordinary dividends were $60,000.
Now I am wondering if I will even be in the 22% bracket this year. Consider this: $135,000. + $60,000.= 195,000. minus the std. deduction of $25,100.= 169,900.
Toss in a smidge of interest from various bank accounts and taxable income is close to the the top of the 22% bracket ($172,750.). Even considering the $3,000. from carryover losses and foreign tax paid, if my math is correct it is not worth the effort to Roth convert in 2021.


My income was very, very low in 2020 due to covid. That would have been a better year to convert. May need to sit this one out. Thoughts?
Hang on. QDs make up a part of your Ordinary Dividend $60,000 amount, you know. So, your taxable income should estimate south of $169,900.

Also, using last year's figures isn't as accurate as doing what cas suggested:
1. Log in, pull down the "My Accounts" menu at the top of the page, and select "Dividends and Capital Gains"
Then on the "Dividends and Capital Gains" page, use the pull down menu to select "2021 Year to Date"
That will give you actual dividends received (for each fund and total) for the first 3 quarters.

Preliminarily, you can look up the dividend distribution/share for each of your funds for the 4th quarter last year to estimate what the 4th quarter will be this year. (Dividends tend not to come in evenly for the 4 quarters, and the 4th quarter tends to be more than 25% of the total.)

*Common Gotcha if you have significant investment in international funds: you'll need to add in the foreign taxes paid to the dividend number for your international funds. As an estimate, look at your 1099-DIV from last year and use the foreign taxes paid number from it.)

2. Then you want to type "Vanguard Tax Center" into google, and select the "Tax Center | Vanguard Advisors" link
Then select link "Qualified dividend income - 2021 year-to-date estimates"
Enter the tickers of your Vanguard funds at the top of the page, and multiply the "2021 Year-to-date QDI estimates" x the dividend estimate for each fund that you got in Step 1.

That will give you an estimate for you qualified/non-qualified dividend split.
And besides, especially given that current tax rates are set to expire by 2026, conversions make sense. Run the numbers out to see what otherwise would be your RMDs, how they'll impact your future tax, how much more your assets would grow in a Roth (paying tax from taxable account).
"The Quality of the Answer Depends on the Quality of Your Question."
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retiredjg
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Re: Help me with Roth conversion!

Post by retiredjg »

Is there money available to pay the extra taxes?
cas
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Re: Help me with Roth conversion!

Post by cas »

Offshore wrote: Mon Nov 29, 2021 2:24 pm cas,

My wages will be $135,000. this year. Not total income. That statement was misleading. Sorry.
Investment income is on top of that.
Looking at last year's tax return I see my QD's were $48,000. and ordinary dividends were $60,000.
Now I am wondering if I will even be in the 22% bracket this year. Consider this: $135,000. + $60,000.= 195,000. minus the std. deduction of $25,100.= 169,900.
Toss in a smidge of interest from various bank accounts and taxable income is close to the the top of the 22% bracket ($172,750.). Even considering the $3,000. from carryover losses and foreign tax paid, if my math is correct it is not worth the effort to Roth convert in 2021.
Warning: I didn't check my math on any of the comments below.

Since you have a substantial amount of QD/LTCG, the Taxable Income figure on your tax return will mislead you about your "tax bracket."

There is another step, where the Taxable Income gets processed through the "Qualified Dividends and Capital Gain Tax Worksheet."

That worksheet separates out the QD/LTCG income from all the other income, then figures tax on the two types of income separately, using two different tax bracket schemes.

In your example above, the income taxed at ordinary tax bracket rates is

$135K + (60K - 48K) + smidge - 3K - 25.1K = 119K income taxed in the tax brackets for ordinary income.

48K is taxed in the 15% special-brackets-for-QD/LTCG.

Many people find this tax visualizer useful for understanding this concept: https://engaging-data.com/tax-brackets/ ... 0&cg=48000

(I put in your approx income already. The "generate URL" link has a bug where it reverted to 2020, though, so the std deduction is wrong for 2021. But the concept is still the same.)

So your income taxed at ordinary rates is low in the 22% nominal bracket and you still have quite a bit of room to add Roth conversion income lots of room before hitting the top of the 22% nominal bracket. (approx 173K - 119K = 54K)

https://engaging-data.com/tax-brackets/ ... 0&cg=48000

***BUT*** ... before adding any Roth conversion income, your AGI is 192K.
If you really did add $54K in Roth conversion, your AGI would be $246K.
And $246K *AGI* is getting close to the $250K limit where Net Investment Income Tax kicks in.
If your AGI/Taxable Income estimates start moving around a little, you will want to keep a sharp eye on that $250K *AGI* threshold for NIIT.

(Unfortunately, the tax visualizer tool does not show NIIT.)

So ... you are in a range where you have to make sure you don't bang your head on 2 different thresholds ... the top of the 22% bracket for ordinary income + the 250K AGI threshold for NIIT.

These concepts are pictured in graphical form in this Kitces article: https://www.kitces.com/blog/long-term-c ... in-0-rate/

(If Kitces makes your eyes glaze over, make sure to scroll down to the examples, where the graphics are, and work through those. Make sure to make it all the way through example 3, where he talks about the 27% "bump zone." That particular "bump zone" doesn't apply to your Roth conversions this year, but you are dealing with the next "bump zone" up ... which is where NIIT kicks in.

Also, he says "capital gains bump zone" but it applies to qualified dividends, too, since QD and LTCG are taxed the same way.)
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Offshore
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Re: Help me with Roth conversion!

Post by Offshore »

cas, retiredjg,

Thankfully, the tax on the conversion will be paid by other monies and not from the conversion.
I'll need to read more, including both your posts again and visit the websites you reference. I usually can figure things out, eventually.
Understanding the ins and outs of Roth conversion is proving to be more challenging than I had anticipated.
Maybe, if more questions arise I can ask you to chime in again.

Offshore
Parkinglotracer
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Re: Help me with Roth conversion!

Post by Parkinglotracer »

if you keep your income below 150K MFJ this year you will qualify for 2021 economic recovery $ as a credit on 2021 tax returns. There is a previous BH thread on this.
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