My First Roth conversions to be this year! Top of 24% or 32%?
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My First Roth conversions to be this year! Top of 24% or 32%?
Having retired last year, I expect I am a good candidate now for Roth conversions between now and my 70s, and this would be the first year I would be making Roth conversions.
I could use some feedback on planning magnitude and timing of conversions. My main question is what level of Roth conversion should I do this year (2022)? Information on our current situation is below.
My draft plan is to do conversions up to the top of the 24 or 32% bracket this year. I did do some runs using i-ORP that seem to support at least top of 24%. I could proceed towards top of 24% (i.e., start conversions and estimated tax by April 15) and put off decision about 32% until end of 2022 (and reassess in 2023 for 2023…). I have considered IRMAA for the both of us (MFJ). I expect that as I proceed with conversions my overall asset allocation would stay about the same (50/50) but my allocation in pre-tax would trend more towards bonds as the amount of equity funds in Roths increases.
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Age: me 64, spouse 60 (MFJ)
Children: two both 22 years old (finishing college by May with employment line up starting in summer)
Annual Expenses: 200 (all numbers in k$)
Current asset allocation: 50/50
State: NJ
House: 550 (no mortgage)
Social security PIA: 3105 $/m me, 1839 spouse
Income: RSU of about 50/year for next 6 years; current dividends/CG/interest from aftertax of 50/yr; no pension
IRAs: 2900 me (primarily from pension lump sum, current allocation 65/35), 700 spouse
401k: 3177 me (includes 87 aftertax with remaining pretax of which about 500 is company stock and remainder in a stable-value-like fund with 3% return; expect to roll over in several years to IRA, Roth and NUA stock)
Aftertax account: 2500 (mostly stock funds with some diversity in capital gains including about 500 in bonds with minimal capital gains, overall capital gains ~50%)
Roth: 200
Goals: sustain or increase expenses, support extended family as needed (MIL, siblings, …), inheritance for sons.
I could use some feedback on planning magnitude and timing of conversions. My main question is what level of Roth conversion should I do this year (2022)? Information on our current situation is below.
My draft plan is to do conversions up to the top of the 24 or 32% bracket this year. I did do some runs using i-ORP that seem to support at least top of 24%. I could proceed towards top of 24% (i.e., start conversions and estimated tax by April 15) and put off decision about 32% until end of 2022 (and reassess in 2023 for 2023…). I have considered IRMAA for the both of us (MFJ). I expect that as I proceed with conversions my overall asset allocation would stay about the same (50/50) but my allocation in pre-tax would trend more towards bonds as the amount of equity funds in Roths increases.
_______
Age: me 64, spouse 60 (MFJ)
Children: two both 22 years old (finishing college by May with employment line up starting in summer)
Annual Expenses: 200 (all numbers in k$)
Current asset allocation: 50/50
State: NJ
House: 550 (no mortgage)
Social security PIA: 3105 $/m me, 1839 spouse
Income: RSU of about 50/year for next 6 years; current dividends/CG/interest from aftertax of 50/yr; no pension
IRAs: 2900 me (primarily from pension lump sum, current allocation 65/35), 700 spouse
401k: 3177 me (includes 87 aftertax with remaining pretax of which about 500 is company stock and remainder in a stable-value-like fund with 3% return; expect to roll over in several years to IRA, Roth and NUA stock)
Aftertax account: 2500 (mostly stock funds with some diversity in capital gains including about 500 in bonds with minimal capital gains, overall capital gains ~50%)
Roth: 200
Goals: sustain or increase expenses, support extended family as needed (MIL, siblings, …), inheritance for sons.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
You are in great shape. I like your plan to convert to the top of 24% and reconsider more later. Hey the market could take a significant tumble and you could opportunistically convert more. Realistically you never will be in a low bracket given the RMDs you will be facing. Don't forget that your potential beneficiaries may be in lower brackets. Also consider that once you are 70.5 you can do QCDs and that by that time the tax brackets are scheduled to revert to their previously higher levels.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
Models in I-orp require the same stock/bond allocation in all accounts. Otherwise the program is just searching out the fastest way to get money from the low stock % accounts to the high stock % accounts. While you have so much in tax deferred that the results you are quoting may be reasonable, the model isn't up to the task.
You can use RPM available from this site's wiki or Pralana Gold (using the new version that will be out shortly) to model Roth Conversions when you preferentially put bonds\fixed income in tax deferred.
You can use RPM available from this site's wiki or Pralana Gold (using the new version that will be out shortly) to model Roth Conversions when you preferentially put bonds\fixed income in tax deferred.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
You might consider looking at Pralana retirement calculator, I think it is more flexible than I-ORP and the 2022 edition plans to have more depth around Roth Conversions. I found it helpful in putting together my Roth Conversion strategy.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I've been trying to use i-orp.org but continually run into an error message -- "Error 502"/"Bad gateway". The message also says that there is a "Host Error." I've tried accessing the site via both Chrome and Microsoft Edge and both lead to the same message.
Are others running into this problem? Any advice?
Are others running into this problem? Any advice?
Re: My First Roth conversions to be this year! Top of 24% or 32%?
We have a similar portfolio size. Top of 24% is what we are doing. Especially while tax rates are lower than normal. If the market has a big correction, I would consider a larger Roth conversion. We have two in college as well. We are matching their salary if they invest half and prepare their own taxes for us to review. They have learned a lot about taxes and investing. We want them to work have, save for the future and enjoy life along the way.
Last edited by Wiggums on Sun Jan 16, 2022 1:33 pm, edited 2 times in total.
"I started with nothing and I still have most of it left."
Re: My First Roth conversions to be this year! Top of 24% or 32%?
Judging by the oddly huge dividend payments this year, and other assorted unexpected things that can happen between Jan and the last week of Dec, I definitely would advise thinking about waiting until the last week of Dec to do your Roth Conversions
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I think the flexible retirement planner was one of the best programs for looking at various roth conversion options. It helped me make up my mind. Has to be done manually, but you can decide on what years you do and how much, instead of i-orp making a lot of assumptions that may or may not fit your situation. I-orp is great, just understand it has limitations. Take a look at the results and make sure it is doing what you would be doing. I am an early retirement with a pension and a 457, and there are not a lot of calculators out there that don’t try to factor in early withdrawal penalties. And if they do work ok, the other problem is that my wife’s money cannot be converted until later, (but i-orp wants to convert it ASAP.). Many of the more simplified programs just cannot model this at all, so doing it manually made it far closer to our particular situation.
I jumped up a bracket myself for my roth conversion-22% to 24%. Not sure that going 24-32% would pencil out nearly as easily, but then again I am not trying to convert nearly as much either...
I jumped up a bracket myself for my roth conversion-22% to 24%. Not sure that going 24-32% would pencil out nearly as easily, but then again I am not trying to convert nearly as much either...
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Given the magnitude of your tax deferred accounts, I would bite the bullet and go up to the top of the 32% bracket. We know that current law has us snapping back to higher tax rates in a few years, and RMDs very well could put you into a higher than 32% bracket when RMDs start. Some people would suggest cutting back on conversions in the year that your wife turns 63, to avoid two max IRMAAs.
Ralph
Ralph
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
These are random comments based on my own experience and not on the best financial advice (which you'll be getting from other commenters):
1) If you've never done Roth conversions and paid estimated tax, you might want to start out slowly. I ran i-ORP on my own situation and it recommended an aggressive Roth conversion strategy. I got sticker shock from the estimated tax payments the first year I converted to the top of the 24% bracket. Now I'm taking a less aggressive approach.
2) I don't know what your expenses are, but that $2.5M after tax account must be churning out some significant income, maybe enough to live on for the rest of your life.
3) Seems to me you may be leaving a substantial inheritance to your children, perhaps as much as the current value of your IRAs/401ks, so why not let them pay the taxes on all that instead of you. After all, you'll be paying plenty of taxes on the taxable account.
That's all from this rookie investor. Good luck.
1) If you've never done Roth conversions and paid estimated tax, you might want to start out slowly. I ran i-ORP on my own situation and it recommended an aggressive Roth conversion strategy. I got sticker shock from the estimated tax payments the first year I converted to the top of the 24% bracket. Now I'm taking a less aggressive approach.
2) I don't know what your expenses are, but that $2.5M after tax account must be churning out some significant income, maybe enough to live on for the rest of your life.
3) Seems to me you may be leaving a substantial inheritance to your children, perhaps as much as the current value of your IRAs/401ks, so why not let them pay the taxes on all that instead of you. After all, you'll be paying plenty of taxes on the taxable account.
That's all from this rookie investor. Good luck.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
This also depends on what you intend to do with the money. If you plan to use your RMDs to make large qualified charitable distributions, the RMDs may not push you into a high bracket. If you intend to reinvest your RMDs into your taxable account, you will pay tax on them, and then more tax on the money once it is in your taxable account.ralph124cf wrote: ↑Sun Jan 16, 2022 7:33 pm Given the magnitude of your tax deferred accounts, I would bite the bullet and go up to the top of the 32% bracket. We know that current law has us snapping back to higher tax rates in a few years, and RMDs very well could put you into a higher than 32% bracket when RMDs start.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Have you looked into whether or not your 401k plan will allow you to convert these after tax funds into Roth funds? If your 401k plan will not allow that, then you might look into whether the aftertax funds can be rolled out into a Roth (and associated earnings rolled out into a traditional IRA).
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Thanks for the replies and are helping me gain comfort in starting conversions this year. Here are some responses to your comments:
Thanks for the plan confirmation. Signs so far are that my beneficiaries are not on a path to low brackets...maybe the next generation. I think I have til 72 and not 70.5 for RMDs giving me an extra 1.5 years? I have thought about QCD but they are far off right now; last year I was in a high bracket due to retirement lump sum and so I contributed to our DAF to gather deductions in 2021 which could fund then until the QCDs if we use that option.Carl53 wrote: ↑Sun Jan 16, 2022 11:41 am You are in great shape. I like your plan to convert to the top of 24% and reconsider more later. Hey the market could take a significant tumble and you could opportunistically convert more. Realistically you never will be in a low bracket given the RMDs you will be facing. Don't forget that your potential beneficiaries may be in lower brackets. Also consider that once you are 70.5 you can do QCDs and that by that time the tax brackets are scheduled to revert to their previously higher levels.
Exchme wrote: ↑Sun Jan 16, 2022 12:22 pm Models in I-orp require the same stock/bond allocation in all accounts. Otherwise the program is just searching out the fastest way to get money from the low stock % accounts to the high stock % accounts. While you have so much in tax deferred that the results you are quoting may be reasonable, the model isn't up to the task.
You can use RPM available from this site's wiki or Pralana Gold (using the new version that will be out shortly) to model Roth Conversions when you preferentially put bonds\fixed income in tax deferred.
I had noticed that problem with I-ORP and did use common yields to get reasonable answers, but unfortunately not well representing the consequences of differing yields while keeping AA fixed. I am working on getting RPM working for me (on the learning curve), and may well opt for Pralana Gold; I think the Pralana Gold 2022 version is out?JimSmiley1850 wrote: ↑Sun Jan 16, 2022 1:11 pm You might consider looking at Pralana retirement calculator, I think it is more flexible than I-ORP and the 2022 edition plans to have more depth around Roth Conversions. I found it helpful in putting together my Roth Conversion strategy.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Wiggums,Wiggums wrote: ↑Sun Jan 16, 2022 1:31 pm We have a similar portfolio size. Top of 24% is what we are doing. Especially while tax rates are lower than normal. If the market has a big correction, I would consider a larger Roth conversion. We have two in college as well. We are matching their salary if they invest half and prepare their own taxes for us to review. They have learned a lot about taxes and investing. We want them to work have, save for the future and enjoy life along the way.
Thanks for the confirmation by your example. We have been matching our two's summer income the last couple years by funding their Roths; it looks like they will be "independent" this year according to the IRS at least.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Looks like our last year was higher (went from 50 to 80k). If we aimed for a specific IRMAA threshold then we would need to be very careful not to surpass, but if we aim for the tax bracket boundary, I do not expect we would need to be as accurate (I might not even know which bracket ends up being better).
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Ralph,ralph124cf wrote: ↑Sun Jan 16, 2022 7:33 pm Given the magnitude of your tax deferred accounts, I would bite the bullet and go up to the top of the 32% bracket. We know that current law has us snapping back to higher tax rates in a few years, and RMDs very well could put you into a higher than 32% bracket when RMDs start. Some people would suggest cutting back on conversions in the year that your wife turns 63, to avoid two max IRMAAs.
Ralph
This is exactly what I have been thinking!
I was thinking of going to the top of 32 until my wife turns 63 and then perhaps dropping lower (I have been able to get I-OGP to roughly simulate this with some tweaking). I am still trying to further understand the implications for the future scheduled change in tax brackets. By this thread I am searching for evidence that this is a good plan. And, of course, I can adapt the plan in the future. From what I hear so far there is a strong case for at least 24%, paying tax to top of 32% would be a bitter pill but as you say may be good to bite the bullet.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I'd consider whether or not you will ever recoup the lost investment income on the tax paid upfront, within your lifetime. Once your are in the range of age 65 and in the higher tax brackets and subject to IRMAA, it gets difficult to ever recoup that lost investment income. If Conversions start at younger ages there is time, but at 65+ you'd have to live a long time. And if you need the money for medical bills at some point, e.g. long term care, you will have paid tax on the Conversion when you could have used the IRA/401K money and taken a medical deduction and potentially paid zero tax on that same money. Likewise with QCDs.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Jonny,JonnyBeRetired wrote: ↑Sun Jan 16, 2022 9:48 pmHave you looked into whether or not your 401k plan will allow you to convert these after tax funds into Roth funds? If your 401k plan will not allow that, then you might look into whether the aftertax funds can be rolled out into a Roth (and associated earnings rolled out into a traditional IRA).
Yes, my 401k has those features. There are 3 features that I would like to use: 1) conversion of aftertax contributions out of plan to Roth; 2) NUA of company stock; and 3) heavy use of stable-value-like fund that pays 3% which I find attractive (it is apparently a fund run by my old employer that is made up of old i- and EE-bonds, loans, and other fixed income investment). I expect that I will put off closing the 401k for a few years, getting NUA stock and rolling over aftertax contributions to Roth and the rest to IRA but losing access to the stable-value-like fund (will bond yields have improved by then?).
Re: My First Roth conversions to be this year! Top of 24% or 32%?
Yes, I just checked the website and Pralana Gold 2022 is out. The improvements I found most useful were:ClassOf2021 wrote: ↑Mon Jan 17, 2022 6:44 am I had noticed that problem with I-ORP and did use common yields to get reasonable answers, but unfortunately not well representing the consequences of differing yields while keeping AA fixed. I am working on getting RPM working for me (on the learning curve), and may well opt for Pralana Gold; I think the Pralana Gold 2022 version is out?
+User selectable allocation (where you can put bonds in tax deferred and stocks in Roth/taxable),
+Flexible Roth Conversion module where you can select whose account to convert, the tax bracket, IRMAA tier or FPL factor limit for each of 20 years
+Allows dividends to be put into the cash account instead of reinvested automatically (cash maximums allow the user to reinvest if the dividends are not needed)
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Thanks for your comment.water2357 wrote: ↑Mon Jan 17, 2022 7:09 am I'd consider whether or not you will ever recoup the lost investment income on the tax paid upfront, within your lifetime. Once your are in the range of age 65 and in the higher tax brackets and subject to IRMAA, it gets difficult to ever recoup that lost investment income. If Conversions start at younger ages there is time, but at 65+ you'd have to live a long time. And if you need the money for medical bills at some point, e.g. long term care, you will have paid tax on the Conversion when you could have used the IRA/401K money and taken a medical deduction and potentially paid zero tax on that same money. Likewise with QCDs.
Whether or not "we come out ahead" is of course an important question that I am trying to better understand so that we can be comfortable with our conversion decision.
Two factors are that 1)we are both in good health, and 2) my spouse is 60, and so an addition to a Roth this year would probably have over 20 years to compound. Given that our expenses are so much larger than our investments I expect that financial risks are very low.
On the other hand, if we were to die today, our kids would have inherited IRAs from us large enough to put them in the 35% bracket (even without other income) for the 10 years over which they would need to withdraw those IRAs (a higher bracket than those that I am considering here).
So, I guess this means that resolving our question of how much to convert would mean better defining what it means to "come out ahead" (related to our stated goal, which is more qualitative than quantitative).
Thanks again for the comment. Being a new retiree, these types of questions are helping us better understand both conversions and our goals.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
The only reason to convert to 32% is if you know with certainty that you’ll probably be in the 37%.
The jump from 24 to 32 is one of the larger jumps in our tax brackets right now.
Converting into the expected tax bracket never makes sense because it’s a net zero with a locked in cost.
Conversions are a game of tax arbitrage. You’re trading taxes today for no taxes tomorrow. Tomorrow’s taxes could be lower. They could be higher too.
The jump from 24 to 32 is one of the larger jumps in our tax brackets right now.
Converting into the expected tax bracket never makes sense because it’s a net zero with a locked in cost.
Conversions are a game of tax arbitrage. You’re trading taxes today for no taxes tomorrow. Tomorrow’s taxes could be lower. They could be higher too.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
OP,
You might find this thread helpful in developing a Roth Conversion Strategy…
viewtopic.php?t=354318
First steps:
- Develop a set of goals for doing Roth Conversions
- Identify how much (if any) you want to leave in an IRA for Long Term Care, Charitable Giving, Inheritance
- Decide who you are optimizing for: You and your spouse (2), Widow/Widower (1), Heirs (0)
- Understand the full tax picture: Fed, State, Medicare
Do not expect to breakeven on Taxes until your 80’s.
QCDs (if that is part of your plan), can be an excellent knob to adjust your taxable income once you turn 70 1/2.
WoodSpinner
You might find this thread helpful in developing a Roth Conversion Strategy…
viewtopic.php?t=354318
First steps:
- Develop a set of goals for doing Roth Conversions
- Identify how much (if any) you want to leave in an IRA for Long Term Care, Charitable Giving, Inheritance
- Decide who you are optimizing for: You and your spouse (2), Widow/Widower (1), Heirs (0)
- Understand the full tax picture: Fed, State, Medicare
Do not expect to breakeven on Taxes until your 80’s.
QCDs (if that is part of your plan), can be an excellent knob to adjust your taxable income once you turn 70 1/2.
WoodSpinner
WoodSpinner
Re: My First Roth conversions to be this year! Top of 24% or 32%?
It looks like you have over 6M in tax-deferred accounts. If it grows to 10M by the time you turn 72 the first year RMD amount would be around 365K, plus you will have SS benefits and dividends/CG/interest as taxable income.ClassOf2021 wrote: ↑Sun Jan 16, 2022 11:00 am ...
Age: me 64, spouse 60 (MFJ)
...
Social security PIA: 3105 $/m me, 1839 spouse
Income: RSU of about 50/year for next 6 years; current dividends/CG/interest from aftertax of 50/yr; no pension
...
IRAs: 2900 me (primarily from pension lump sum, current allocation 65/35), 700 spouse
401k: 3177 me (includes 87 aftertax with remaining pretax of which about 500 is company stock and remainder in a stable-value-like fund with 3% return; expect to roll over in several years to IRA, Roth and NUA stock)
Aftertax account: 2500 (mostly stock funds with some diversity in capital gains including about 500 in bonds with minimal capital gains, overall capital gains ~50%)
Roth: 200
...
I think that converting to the top of 24% is good tax arbitrage. I would look at using RPM/Pralana Gold to study the jump to 32%, including the potential capital gain tax if you need to sell from Aftertax account to pay for conversion taxes.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
I totally agree with your comment regarding your kids. I am in a similar situation, albeit with a much lower "pot of gold" and I am aggressively converting up to the limits of IRMAA because whether I pay the taxes or my children is a moot point. My goal is to lessen the tax bite TO THE ESTATE. I think I can reasonably expect that when my kids inherit the IRA, it will push them into the highest bracket because of the 10 year requirement established in the SECURE ACT. That is my motivation.ClassOf2021 wrote: ↑Mon Jan 17, 2022 9:32 amThanks for your comment.water2357 wrote: ↑Mon Jan 17, 2022 7:09 am I'd consider whether or not you will ever recoup the lost investment income on the tax paid upfront, within your lifetime. Once your are in the range of age 65 and in the higher tax brackets and subject to IRMAA, it gets difficult to ever recoup that lost investment income. If Conversions start at younger ages there is time, but at 65+ you'd have to live a long time. And if you need the money for medical bills at some point, e.g. long term care, you will have paid tax on the Conversion when you could have used the IRA/401K money and taken a medical deduction and potentially paid zero tax on that same money. Likewise with QCDs.
Whether or not "we come out ahead" is of course an important question that I am trying to better understand so that we can be comfortable with our conversion decision.
Two factors are that 1)we are both in good health, and 2) my spouse is 60, and so an addition to a Roth this year would probably have over 20 years to compound. Given that our expenses are so much larger than our investments I expect that financial risks are very low.
On the other hand, if we were to die today, our kids would have inherited IRAs from us large enough to put them in the 35% bracket (even without other income) for the 10 years over which they would need to withdraw those IRAs (a higher bracket than those that I am considering here).
So, I guess this means that resolving our question of how much to convert would mean better defining what it means to "come out ahead" (related to our stated goal, which is more qualitative than quantitative).
Thanks again for the comment. Being a new retiree, these types of questions are helping us better understand both conversions and our goals.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Different situation, but I'm 55, widowed, still working 30 hrs/week, and converting to the top of the 24% until the tax brackets revert, and then I probably won't do much more after that. (At 60 I'll start SS survivor benefits, my pension at 65, my SS at 70) I don't have kids, so I'm doing it more to even out my expected taxes in later years and to have a tax-free pool of money to be able to grab from if I need to make a large purchase.
Just passing this along to show solidarity for those who can't follow the "eek! why would you convert anywhere above the 12% bracket?" guidance that is often seen on this subject.
Just passing this along to show solidarity for those who can't follow the "eek! why would you convert anywhere above the 12% bracket?" guidance that is often seen on this subject.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Thanks for the comment.DSBH wrote: ↑Mon Jan 17, 2022 10:44 amIt looks like you have over 6M in tax-deferred accounts. If it grows to 10M by the time you turn 72 the first year RMD amount would be around 365K, plus you will have SS benefits and dividends/CG/interest as taxable income.ClassOf2021 wrote: ↑Sun Jan 16, 2022 11:00 am ...
Age: me 64, spouse 60 (MFJ)
...
Social security PIA: 3105 $/m me, 1839 spouse
Income: RSU of about 50/year for next 6 years; current dividends/CG/interest from aftertax of 50/yr; no pension
...
IRAs: 2900 me (primarily from pension lump sum, current allocation 65/35), 700 spouse
401k: 3177 me (includes 87 aftertax with remaining pretax of which about 500 is company stock and remainder in a stable-value-like fund with 3% return; expect to roll over in several years to IRA, Roth and NUA stock)
Aftertax account: 2500 (mostly stock funds with some diversity in capital gains including about 500 in bonds with minimal capital gains, overall capital gains ~50%)
Roth: 200
...
I think that converting to the top of 24% is good tax arbitrage. I would look at using RPM/Pralana Gold to study the jump to 32%, including the potential capital gain tax if you need to sell from Aftertax account to pay for conversion taxes.
I purchased Pralana Gold and am moving up the learning curve using that tool, which is raising more questions.
A particular question I have is if I convert “up to the top of the 24% bracket”, would that mean I should convert up to that bracket limit PLUS the level of my capital gains and qualified dividends? This would mean I would be in the 32% bracket but would still pay a marginal tax rate of 15% on CG and 24% on common income! Is this true (I have not noticed it being discussed or in tools like Pralana Gold)? If so this could add significant conversion space to top of 24% since I have a fair amount of Unrealized gains.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
No, there is a regular income bracket which includes Roth Conversions, that's what's at 24%. Capital gains are taxed separately, 15% up to $517,200 MFJ AGI, 20% above that. Plus at your level, you will also have NIIT applied for another 3.8%, so either 18.8% or 23.8% for your dividends + long term capital gains. If you go really crazy with conversions and get into AMT territory, the top capital gains rate could go to 26% or 28% + NIIT.ClassOf2021 wrote: ↑Thu Jan 20, 2022 7:12 am A particular question I have is if I convert “up to the top of the 24% bracket”, would that mean I should convert up to that bracket limit PLUS the level of my capital gains and qualified dividends? This would mean I would be in the 32% bracket but would still pay a marginal tax rate of 15% on CG and 24% on common income! Is this true (I have not noticed it being discussed or in tools like Pralana Gold)? If so this could add significant conversion space to top of 24% since I have a fair amount of Unrealized gains.
If I'm adding right, your NW is a bit over $10M, so once TCJA expires after 2025, you are in estate tax territory ($12.06M exemption for married or widowed). That is the 900 lb gorilla that will dominate your calculations, the last thing you want is to have your estate taxed on the embedded taxes due on your tax deferred. Roth Conversions now will avoid a 40% federal estate tax + any NJ estate tax + whatever income tax bracket would apply to your heirs as they withdraw from the inherited IRA. Unless you plan to give the money to charity, you need to be figuring out the most efficient way to whittle down the tax deferred balances so or they will just be taxed away.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I think the total taxable income (including QD/LTCG) after deductions determines the tax rate on ordinary income, so "top of the 24% bracket" to me means "Taxable Income" as in line 15 of the 2021 form 1040 - https://www.irs.gov/pub/irs-pdf/f1040.pdf - (including Roth conversion and QD/LTCG) not exceeding the "top of the 24% bracket" of your filing status.ClassOf2021 wrote: ↑Thu Jan 20, 2022 7:12 am A particular question I have is if I convert “up to the top of the 24% bracket”, would that mean I should convert up to that bracket limit PLUS the level of my capital gains and qualified dividends? This would mean I would be in the 32% bracket but would still pay a marginal tax rate of 15% on CG and 24% on common income! Is this true (I have not noticed it being discussed or in tools like Pralana Gold)? If so this could add significant conversion space to top of 24% since I have a fair amount of Unrealized gains.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
I am using Pralana Gold 2022 and have found it has the same problem described with I-orp by Exchme above. Only solution I have come up with is setting stock/bond allocation the same in Tax-deferred and Roth. Is there a better solution/workaround in Pralana Gold?Exchme wrote: ↑Sun Jan 16, 2022 12:22 pm Models in I-orp require the same stock/bond allocation in all accounts. Otherwise the program is just searching out the fastest way to get money from the low stock % accounts to the high stock % accounts. While you have so much in tax deferred that the results you are quoting may be reasonable, the model isn't up to the task.
You can use RPM available from this site's wiki or Pralana Gold (using the new version that will be out shortly) to model Roth Conversions when you preferentially put bonds\fixed income in tax deferred.
Thanks!
Re: My First Roth conversions to be this year! Top of 24% or 32%?
Pralana has two asset allocation methods. Mode 1 is the traditional like i-ORP, Mode 2 allows to you set the order of which gets stocks vs bonds. To switch to Mode 2, go to Financial Assets - Management and right below the red menu bar is Asset Allocation Mode. Select "User Specifies Overall Asset Allocation and Target Asset Location". Then when you go to Asset Allocation, you will see a menu where you set the order of priority of which accounts get stocks (by clicking on the account and using the blue arrow to move that account left or right, left means higher priority for stocks).buckeye7983 wrote: ↑Fri Jan 21, 2022 8:56 amI am using Pralana Gold 2022 and have found it has the same problem described with I-orp by Exchme above. Only solution I have come up with is setting stock/bond allocation the same in Tax-deferred and Roth. Is there a better solution/workaround in Pralana Gold?Exchme wrote: ↑Sun Jan 16, 2022 12:22 pm Models in I-orp require the same stock/bond allocation in all accounts. Otherwise the program is just searching out the fastest way to get money from the low stock % accounts to the high stock % accounts. While you have so much in tax deferred that the results you are quoting may be reasonable, the model isn't up to the task.
You can use RPM available from this site's wiki or Pralana Gold (using the new version that will be out shortly) to model Roth Conversions when you preferentially put bonds\fixed income in tax deferred.
Thanks!
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I read on another thread something about a comma in a cell causing issues. Look for the thread titled "why I use I-Orp and who shouldn't "AGuy2 wrote: ↑Sun Jan 16, 2022 1:17 pm I've been trying to use i-orp.org but continually run into an error message -- "Error 502"/"Bad gateway". The message also says that there is a "Host Error." I've tried accessing the site via both Chrome and Microsoft Edge and both lead to the same message.
Are others running into this problem? Any advice?
Good luck
I had money, I had none. I had money, I had none. But I never been so broke that I couldn't leave town. (Jim, Ray, Robby, John)
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Thanks, Exchme!Exchme wrote: ↑Fri Jan 21, 2022 3:52 pmPralana has two asset allocation methods. Mode 1 is the traditional like i-ORP, Mode 2 allows to you set the order of which gets stocks vs bonds. To switch to Mode 2, go to Financial Assets - Management and right below the red menu bar is Asset Allocation Mode. Select "User Specifies Overall Asset Allocation and Target Asset Location". Then when you go to Asset Allocation, you will see a menu where you set the order of priority of which accounts get stocks (by clicking on the account and using the blue arrow to move that account left or right, left means higher priority for stocks).buckeye7983 wrote: ↑Fri Jan 21, 2022 8:56 amI am using Pralana Gold 2022 and have found it has the same problem described with I-orp by Exchme above. Only solution I have come up with is setting stock/bond allocation the same in Tax-deferred and Roth. Is there a better solution/workaround in Pralana Gold?Exchme wrote: ↑Sun Jan 16, 2022 12:22 pm Models in I-orp require the same stock/bond allocation in all accounts. Otherwise the program is just searching out the fastest way to get money from the low stock % accounts to the high stock % accounts. While you have so much in tax deferred that the results you are quoting may be reasonable, the model isn't up to the task.
You can use RPM available from this site's wiki or Pralana Gold (using the new version that will be out shortly) to model Roth Conversions when you preferentially put bonds\fixed income in tax deferred.
Thanks!
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I agree with you. Except perhaps with the use of the word "never".Lee_WSP wrote: ↑Mon Jan 17, 2022 10:04 am The only reason to convert to 32% is if you know with certainty that you’ll probably be in the 37%.
The jump from 24 to 32 is one of the larger jumps in our tax brackets right now.
Converting into the expected tax bracket never makes sense because it’s a net zero with a locked in cost.
Conversions are a game of tax arbitrage. You’re trading taxes today for no taxes tomorrow. Tomorrow’s taxes could be lower. They could be higher too.
Converting to the top of your current tax bracket probably always makes sense (unless you think your tax bracket might go down). Converting into your "expected" tax bracket might not make sense. Unless you were darn sure you were going to end up there, and the taxes on that bracket were going up.
Right now I feel we are in a state of flux. Tax rates could go up or down. Investment returns could go up or down. Nobody I know knows. Perhaps nobody knows.
I started Roth conversions a couple of years ago. If I were the OP I'd take it slow in the first year. This gives them time to get used to the process, and more time to think about what they want to do in the future.
I don't mind paying taxes. It is my civic responsibility. But I think I'd rather err on the side of paying less tax now than in the future, rather than paying more tax now and discovering later it was a mistake. My current thinking is if I can cover our expenses, and do Roth conversions in the same tax bracket, that is a good thing. I'm not ready yet to pay more taxes than I need to now, to perhaps reduce future taxes. Roth conversions are "a game of tax arbitrage". Nobody knows how the game will play out, or what the rules will be. Funny thing is I'm not looking to win. I'm just looking for a comfortable fun ride
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I’ll give the opposite viewpoint, but i’m not being critical of anyone. My brother told me Roth conversions are a bad idea without knowing our finances. LOL
People should consider Roth conversions as part of their estate planning. Married couples need to think about the time period as a single filer. RMDs are another factor. Its NOT an all or nothing decision. Future taxes and deductions are unknown.
People have different views on a retirement portfolio size. Only in hindsight can you tell us that we saved too much. My friend told me back in the 90’s to become a contractor to make more money. I stayed with the stable company and advocated for myself to move to higher positions. My friend made different choices and had a very different outcome. In his case, he did not enjoy the same level of financial stability or wealth.
I find it best to introduce as few variables as possible and work with the existing tax rates. We know that the taxes are expected to revert in 2026. Anything can happen…so have a plan and make your assessment yearly. Being flexible in retirement is key.
Cheers…
"I started with nothing and I still have most of it left."
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I could die today, Or in 40 years. Nobody knows.
Retired 2019. So far, so good. I want to wake up every morning. But I want to die in my sleep. Just another conundrum. I think the solution might be afternoon naps ;)
Re: My First Roth conversions to be this year! Top of 24% or 32%?
Thanks for reminding me that medical expenses are ax deductible above 7.5% of AGI (adjusted gross income.) Does that include nursing home or rehab? Does that include out of pocket home health? Does that include dental care?water2357 wrote: ↑Mon Jan 17, 2022 7:09 am I'd consider whether or not you will ever recoup the lost investment income on the tax paid upfront, within your lifetime. Once your are in the range of age 65 and in the higher tax brackets and subject to IRMAA, it gets difficult to ever recoup that lost investment income. If Conversions start at younger ages there is time, but at 65+ you'd have to live a long time. And if you need the money for medical bills at some point, e.g. long term care, you will have paid tax on the Conversion when you could have used the IRA/401K money and taken a medical deduction and potentially paid zero tax on that same money. Likewise with QCDs.
A time to EVALUATE your jitters: |
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
One thing that I would add is opportunistically take advantage of anything eligible to convert that is down the most.
If a stock or ETF is down when you convert then for the same tax dollars you convert a bigger portion of your portfolio.
Our IRA/401k asset allocation is somewhat higher in individual growth stocks than ETF's.
This year the individual growth stocks are way down right now so I have started converting them increasing the conversions the more they drop. I am picking the stocks I believe the most in for future growth.
Last year I also did individual growth stock conversions on 3/11/201 and 3/16/2021 when the stocks were down a lot.
In 2020 I did a conversion on March 12 and a triple that size conversion on March 19. In that case I did ETF's as everything was down a lot.
It is of course easiest to time the market when an asset is down big early in the year as stocks generally go up.
This year I am filling our current tax bracket and the next higher bracket. I can't pass up converting good growth stocks way down.
If a stock or ETF is down when you convert then for the same tax dollars you convert a bigger portion of your portfolio.
Our IRA/401k asset allocation is somewhat higher in individual growth stocks than ETF's.
This year the individual growth stocks are way down right now so I have started converting them increasing the conversions the more they drop. I am picking the stocks I believe the most in for future growth.
Last year I also did individual growth stock conversions on 3/11/201 and 3/16/2021 when the stocks were down a lot.
In 2020 I did a conversion on March 12 and a triple that size conversion on March 19. In that case I did ETF's as everything was down a lot.
It is of course easiest to time the market when an asset is down big early in the year as stocks generally go up.
This year I am filling our current tax bracket and the next higher bracket. I can't pass up converting good growth stocks way down.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I did not intend to imply RMDs were at 70.5 but you are correct that they start in the year you turn 72. DAF are fine prior to 70.5 but QCDs would be preferable after that.ClassOf2021 wrote: ↑Mon Jan 17, 2022 6:44 am Thanks for the replies and are helping me gain comfort in starting conversions this year. Here are some responses to your comments:Thanks for the plan confirmation. Signs so far are that my beneficiaries are not on a path to low brackets...maybe the next generation. I think I have til 72 and not 70.5 for RMDs giving me an extra 1.5 years? I have thought about QCD but they are far off right now; last year I was in a high bracket due to retirement lump sum and so I contributed to our DAF to gather deductions in 2021 which could fund then until the QCDs if we use that option.Carl53 wrote: ↑Sun Jan 16, 2022 11:41 am You are in great shape. I like your plan to convert to the top of 24% and reconsider more later. Hey the market could take a significant tumble and you could opportunistically convert more. Realistically you never will be in a low bracket given the RMDs you will be facing. Don't forget that your potential beneficiaries may be in lower brackets. Also consider that once you are 70.5 you can do QCDs and that by that time the tax brackets are scheduled to revert to their previously higher levels.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
I agree, with those amounts of Tax Deferred savings, the present law of Children needing to withdraw with in 10 yrs, converting to Roth IRA up till top of 24% Tax Bracket makes a lot of sense from many angles.
Re: My First Roth conversions to be this year! Top of 24% or 32%?
Here is a list of Schedule A Deductible and Nondeductible Medical Expenses.EnjoyIt wrote: ↑Sat Jan 22, 2022 2:45 pmThanks for reminding me that medical expenses are ax deductible above 7.5% of AGI (adjusted gross income.) Does that include nursing home or rehab? Does that include out of pocket home health? Does that include dental care?water2357 wrote: ↑Mon Jan 17, 2022 7:09 am I'd consider whether or not you will ever recoup the lost investment income on the tax paid upfront, within your lifetime. Once your are in the range of age 65 and in the higher tax brackets and subject to IRMAA, it gets difficult to ever recoup that lost investment income. If Conversions start at younger ages there is time, but at 65+ you'd have to live a long time. And if you need the money for medical bills at some point, e.g. long term care, you will have paid tax on the Conversion when you could have used the IRA/401K money and taken a medical deduction and potentially paid zero tax on that same money. Likewise with QCDs.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Exchme,Exchme wrote: ↑Thu Jan 20, 2022 8:31 am If I'm adding right, your NW is a bit over $10M, so once TCJA expires after 2025, you are in estate tax territory ($12.06M exemption for married or widowed). That is the 900 lb gorilla that will dominate your calculations, the last thing you want is to have your estate taxed on the embedded taxes due on your tax deferred. Roth Conversions now will avoid a 40% federal estate tax + any NJ estate tax + whatever income tax bracket would apply to your heirs as they withdraw from the inherited IRA. Unless you plan to give the money to charity, you need to be figuring out the most efficient way to whittle down the tax deferred balances so or they will just be taxed away.
Thanks for reminding me of 2026 estate tax. I looked at your previous thread and it looks like you are a little ahead of me in thinking about this. The level of conversions I am considering looks like it will have some effect on exceeding the pre TCJA exemption limit. Using Pralana Gold, I can look at the trajectory of absolute $ in today’s $ compared to the estate tax limit, while maximizing effective $.
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Re: My First Roth conversions to be this year! Top of 24% or 32%?
Update after 1q 2022:
Thanks all for your comments,
I did use PG to run a bunch of scenarios to get a better idea of the amount of Roth conversion to do. Of course the outcome is highly dependent on many assumptions. What I did find was that there were many cases that supported top of 24% bracket for 2022, and a fair fraction of cases where conversions dropped off after 2026. Not many cases supporting higher level then 24%, although I tended to only look at cases where future growth rates were at or below past average. My conclusion is to stick with my default plan for top of 24% for this year then re-evaluate.
So far this year I have converted about half of this year’s allotment (140k so far); while I did not do this at the precise bottom of the dip, I converted at prices lower than now. I will wait til later in the year to convert the remainder, and redo my analysis to see if I should convert to the same extent in 2023.
Thanks again!
Thanks all for your comments,
I did use PG to run a bunch of scenarios to get a better idea of the amount of Roth conversion to do. Of course the outcome is highly dependent on many assumptions. What I did find was that there were many cases that supported top of 24% bracket for 2022, and a fair fraction of cases where conversions dropped off after 2026. Not many cases supporting higher level then 24%, although I tended to only look at cases where future growth rates were at or below past average. My conclusion is to stick with my default plan for top of 24% for this year then re-evaluate.
So far this year I have converted about half of this year’s allotment (140k so far); while I did not do this at the precise bottom of the dip, I converted at prices lower than now. I will wait til later in the year to convert the remainder, and redo my analysis to see if I should convert to the same extent in 2023.
Thanks again!
Re: My First Roth conversions to be this year! Top of 24% or 32%?
Hi! I did not read all the responses, but wanted to be sure you are watching out for IRMAA! Since you are 64, you will, I assume, be starting Medicare soon, and they look back 2 yrs to determine any additional payments.