Marginal tax rate of Roth conversions
- billthecat
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Marginal tax rate of Roth conversions
Suppose a person is retired, most of his assets are taxable, and his income consists of regular dividends taxed at ordinary income tax rates, and qualified dividends taxed at long term capital gains tax rates. And his income is supplemented by liquidating investments, some of which would be subject to long term capital gains taxes. And suppose he is considering how much of Roth conversions to do in his traditional 401K.
If the income subject to long term capital gains tax rates starts in the 0% bracket and ends in the 15% bracket, then is the marginal tax rate on Roth conversions a combination of the marginal ordinary income tax rates and marginal long term capital gains tax rates? It seems so, because each additional dollar of ordinary income would shift up the LTCG stack. And that would mean in the diagram below his marginal tax on Roth conversions would not be 10% but 25% 12% but 27%. Even worse if his marginal ordinary income tax rate is 12%.
The approach of filling an ordinary income tax bracket with Roth conversions, like filling the 10%, 12%, or even 22% tax bracket, is a little misleading, in this situation. What would you do in this scenario?
If the income subject to long term capital gains tax rates starts in the 0% bracket and ends in the 15% bracket, then is the marginal tax rate on Roth conversions a combination of the marginal ordinary income tax rates and marginal long term capital gains tax rates? It seems so, because each additional dollar of ordinary income would shift up the LTCG stack. And that would mean in the diagram below his marginal tax on Roth conversions would not be 10% but 25% 12% but 27%. Even worse if his marginal ordinary income tax rate is 12%.
The approach of filling an ordinary income tax bracket with Roth conversions, like filling the 10%, 12%, or even 22% tax bracket, is a little misleading, in this situation. What would you do in this scenario?
Last edited by billthecat on Sun Jun 20, 2021 9:40 pm, edited 9 times in total.
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Re: Marginal tax rate of Roth conversions
I would use FiveK's advice and free calculator as I showed in this thread where I went from 12% to 37% marginal with an additional $200 in Roth conversion:
viewtopic.php?p=4919005#p4919005
Here is the chart from that thread:
viewtopic.php?p=4919005#p4919005
Here is the chart from that thread:
- firebirdparts
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Re: Marginal tax rate of Roth conversions
IRA conversion would always be taxed as ordinary income. Ordinary income effects the tax rate on capital gains, so that’s not simple, but you can easily calculate what you are paying, which is what the calculator is for. Based on that you should be able to make a good decision.
This time is the same
Re: Marginal tax rate of Roth conversions
I agree.
If you have unavoidable (necessary to fund your lifestyle) capital gains and/or qualified dividends, and a dollar more of income would increase the tax rate on those LTCG, then you need to add the increase to the marginal rate.
So in this case, if you have any LTCG taxed at 0% any extra dollar of discretionary regular income (Roth conversions) would have a 27% marginal rate. Up to the point where you have no 0% LTCG left. Then the marginal rate drops to 12%
I also think that if you have to sell taxable assets to cover the tax or lack of income, I think any capital gains tax there would also be added to marginal rate. I think.
If you have unavoidable (necessary to fund your lifestyle) capital gains and/or qualified dividends, and a dollar more of income would increase the tax rate on those LTCG, then you need to add the increase to the marginal rate.
So in this case, if you have any LTCG taxed at 0% any extra dollar of discretionary regular income (Roth conversions) would have a 27% marginal rate. Up to the point where you have no 0% LTCG left. Then the marginal rate drops to 12%
I also think that if you have to sell taxable assets to cover the tax or lack of income, I think any capital gains tax there would also be added to marginal rate. I think.
Re: Marginal tax rate of Roth conversions
... also add in loss of tax credits.
Re: Marginal tax rate of Roth conversions
The marginal rate for adding more ordinary income (Roth conversion) would be 25% or 27% depending on where in the "stack" the LTCG and qualified dividends reside. And as you add more dollars, the marginal 27% "shadow rate" continues as long as any of the LTCG and QDs straddle the division line ($40,400 taxable income for singles, $80,800 for couples).billthecat wrote: ↑Sat Jun 19, 2021 12:57 pm If the income subject to long term capital gains tax rates starts in the 0% bracket and ends in the 15% bracket, then is the marginal tax rate on Roth conversions a combination of the marginal ordinary income tax rates and marginal long term capital gains tax rates? It seems so, because each additional dollar of ordinary income would shift up the LTCG stack. And that would mean in the diagram below his marginal tax on Roth conversions would not be 10% but 25%. Even worse if his marginal ordinary income tax rate is 12%.
That's how I understand it, anyway.
Hard to say. If the tax-deferred account is large enough to be a problem later on, I might go ahead and do some fairly large conversions for a few years....to make busting through that "hump" worthwhile.The approach of filling an ordinary income tax bracket with Roth conversions, like filling the 10%, 12%, or even 22% tax bracket, is a little misleading, in this situation. What would you do in this scenario?
Note that the number of dollars subject to those higher rates may not be large. For example, who should care if $1,000 (made up number) is subject to higher rates....if you can accomplish something you want?
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Re: Marginal tax rate of Roth conversions
Depends on the situation. I think you are assuming that we are realizing the same amount of gains in either scenario, but if we are able to control the amount of our realized gains, then the marginal rate is only the marginal rate of the conversion. I would need more info about the individual's portfolio and spending to be able to figure out the optimal approach. Personally I am planning to avoid any gains in the 15% bracket in retirement and do conversions up to the top of the 10% bracket, perhaps going into the 12% bracket at times. l
- billthecat
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Re: Marginal tax rate of Roth conversions
Correct, I'm assuming a certain level of LTCGs. It's possible that it could be managed, by choosing the lots to sell, and anyway it wouldn't be 100% stock but would include some bonds too (depending on what rebalancing called for). But given the level of dividends, there's not a lot of room to play with.aristotelian wrote: ↑Sat Jun 19, 2021 5:13 pm Depends on the situation. I think you are assuming that we are realizing the same amount of gains in either scenario, but if we are able to control the amount of our realized gains, then the marginal rate is only the marginal rate of the conversion. I would need more info about the individual's portfolio and spending to be able to figure out the optimal approach. Personally I am planning to avoid any gains in the 15% bracket in retirement and do conversions up to the top of the 10% bracket, perhaps going into the 12% bracket at times. l
Also - though this may be rationalizing - it may not be right to obsess over the marginal rate. The average rate is still fairly low and livesoft's chart shows it only gradually increases.
I think it would drop to 22%, because at the point where you have no 0% LTCG left your ordinary income would have to be at the 22% bracket (other than the $125 difference between the 22% ordinary income bracket and the 15% LTCGs bracket).
So it seems the marginal rate for a Roth conversion (or really any supplemental income, such as from a job) would be:
At the 10% ord. inc. bracket: 25%
At the 12% ord. inc. bracket: 27%
At the 22% ord. inc. bracket: 37% but only for $125. Then it would drop to 22% because you would have depleted all your 0% LTCG space. I think. If I have this right.
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Re: Marginal tax rate of Roth conversions
At the baseline, you can consider the standard deduction (approx $26K mfj) as your "free" space, to be filled with Roth conversion or interest/non-qual dividends without impacting taxability of your LTCG. If you have an HSA-eligible health plan, you might add another $9K to that, but you'd have to be able to actually contribute that much to the HSA to get that space in your tax return. Beyond that free space, you would then have approximately $80K of room for qualified dividends and LTCG with zero tax.
Fitting in the above space is the sweet spot, going beyond hits those significantly higher marginal rates you mentioned. If you were getting SS, it could be even worse with the phase-in of taxation on your SS benefit. Remember, though, that you don't need to be uniform in your tax scenario year by year. You might gain by flipping back and forth between Roth conversion years (where you sell bonds for minimal gains) and stock sale years.
Edited to add: sorry, I wasn't paying attention to the fact that you are dealing with single brackets. That makes using the low rate space more difficult.
Fitting in the above space is the sweet spot, going beyond hits those significantly higher marginal rates you mentioned. If you were getting SS, it could be even worse with the phase-in of taxation on your SS benefit. Remember, though, that you don't need to be uniform in your tax scenario year by year. You might gain by flipping back and forth between Roth conversion years (where you sell bonds for minimal gains) and stock sale years.
Edited to add: sorry, I wasn't paying attention to the fact that you are dealing with single brackets. That makes using the low rate space more difficult.
Re: Marginal tax rate of Roth conversions
It's probably easier to think of it as the marginal rate on the ltcg as going up.
Re: Marginal tax rate of Roth conversions
The wiki article on "Roth Conversions" has one of FiveK's/personal financial toolbox's marginal rate landscape graphs showing this 27% "shadow rate". (Scroll down below the spreadsheet image to get to the graph).
The odd marginal rate stuff on the left of the graph is the social security tax hump. The 27% is more over towards the right of the graph. Then you see it do a brief "v" down to 12% (as opposed to up to up to 37%) for that darn $250 bracket mismatch introduced in the 2018 tax law.
Michael Kitces has an article that discusses the marginal rate "bump zones" created by the interaction of ordinary income tax rates and QD/LTCG tax rates: "Navigating The Capital Gains Bump Zone: When Ordinary Income Crowds Out Favorable Capital Gains Rates"
If the initial wall of words in that article makes anyone's eyes glaze over, make sure to scroll down to the examples/graphics. The examples build on one another, with example 3 introducing the 27% "bump zone".
The odd marginal rate stuff on the left of the graph is the social security tax hump. The 27% is more over towards the right of the graph. Then you see it do a brief "v" down to 12% (as opposed to up to up to 37%) for that darn $250 bracket mismatch introduced in the 2018 tax law.
Michael Kitces has an article that discusses the marginal rate "bump zones" created by the interaction of ordinary income tax rates and QD/LTCG tax rates: "Navigating The Capital Gains Bump Zone: When Ordinary Income Crowds Out Favorable Capital Gains Rates"
If the initial wall of words in that article makes anyone's eyes glaze over, make sure to scroll down to the examples/graphics. The examples build on one another, with example 3 introducing the 27% "bump zone".
- billthecat
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Re: Marginal tax rate of Roth conversions
Thanks, that's great info.cas wrote: ↑Sat Jun 19, 2021 6:20 pm The wiki article on "Roth Conversions" has one of FiveK's/personal financial toolbox's marginal rate landscape graphs showing this 27% "shadow rate". (Scroll down below the spreadsheet image to get to the graph).
The odd marginal rate stuff on the left of the graph is the social security tax hump. The 27% is more over towards the right of the graph. Then you see it do a brief "v" down to 12% (as opposed to up to up to 37%) for that darn $250 bracket mismatch introduced in the 2018 tax law.
Michael Kitces has an article that discusses the marginal rate "bump zones" created by the interaction of ordinary income tax rates and QD/LTCG tax rates: "Navigating The Capital Gains Bump Zone: When Ordinary Income Crowds Out Favorable Capital Gains Rates"
If the initial wall of words in that article makes anyone's eyes glaze over, make sure to scroll down to the examples/graphics. The examples build on one another, with example 3 introducing the 27% "bump zone".
We cannot direct the winds but we can adjust our sails • It's later than you think • Ack! Thbbft!
Re: Marginal tax rate of Roth conversions
Yeah. I think you are right. I wasn’t thinking about the 12% / 22% relation with the 0% / 15% LTCG bracket correctly.billthecat wrote: ↑Sat Jun 19, 2021 5:35 pm So it seems the marginal rate for a Roth conversion (or really any supplemental income, such as from a job) would be:
At the 10% ord. inc. bracket: 25%
At the 12% ord. inc. bracket: 27%
At the 22% ord. inc. bracket: 37% but only for $125. Then it would drop to 22% because you would have depleted all your 0% LTCG space. I think. If I have this right.
- billthecat
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Re: Marginal tax rate of Roth conversions
What do you think, would it be better to delay Roth conversions until I start collecting social security, so they're taxed at a 22% marginal rate, instead of a 27% marginal rate during early retirement (pre-social security)?
milktoast wrote: ↑Sun Jun 20, 2021 1:09 amYeah. I think you are right. I wasn’t thinking about the 12% / 22% relation with the 0% / 15% LTCG bracket correctly.billthecat wrote: ↑Sat Jun 19, 2021 5:35 pm So it seems the marginal rate for a Roth conversion (or really any supplemental income, such as from a job) would be:
At the 10% ord. inc. bracket: 25%
At the 12% ord. inc. bracket: 27%
At the 22% ord. inc. bracket: 37% but only for $125. Then it would drop to 22% because you would have depleted all your 0% LTCG space. I think. If I have this right.
cas wrote: ↑Sat Jun 19, 2021 6:20 pm The wiki article on "Roth Conversions" has one of FiveK's/personal financial toolbox's marginal rate landscape graphs showing this 27% "shadow rate". (Scroll down below the spreadsheet image to get to the graph).
The odd marginal rate stuff on the left of the graph is the social security tax hump. The 27% is more over towards the right of the graph. Then you see it do a brief "v" down to 12% (as opposed to up to up to 37%) for that darn $250 bracket mismatch introduced in the 2018 tax law.
Michael Kitces has an article that discusses the marginal rate "bump zones" created by the interaction of ordinary income tax rates and QD/LTCG tax rates: "Navigating The Capital Gains Bump Zone: When Ordinary Income Crowds Out Favorable Capital Gains Rates"
If the initial wall of words in that article makes anyone's eyes glaze over, make sure to scroll down to the examples/graphics. The examples build on one another, with example 3 introducing the 27% "bump zone".
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Re: Marginal tax rate of Roth conversions
You could also consider borrowing to fund your life in the year you do Roth conversions. Then realize your capital gains in the following year when you don't do any conversions to pay back the loan.
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Re: Marginal tax rate of Roth conversions
I think the language of "convert to 10%/12%" doesn't give enough information,
especially if one wants to stay at 0% LTCG
With no dividends or cap gains (or any income) EXCEPT Roth conversion,
one can fill all the way to 10% or 12% (or whatever)
But, taxes are still due ... and expenses must be paid.
So I'm never sure if "converting to x% bracket" means:
a) the full dollar amount goes from Tax Deferred to Roth (and basically live off cash, pay taxes from cash)
OR
b) income to live on + conversion fills up the x% bracket.
If the lifestyle puts you above the 0% LTCG I wonder if alternating has some merit:
one year sell off from taxable such that still at 0% LTCG but income = (gains + basis)
next year do conversion / draw down tax deferred, thus avoiding the 27% = 15 + 12 illustrated above
especially if one wants to stay at 0% LTCG
With no dividends or cap gains (or any income) EXCEPT Roth conversion,
one can fill all the way to 10% or 12% (or whatever)
But, taxes are still due ... and expenses must be paid.
So I'm never sure if "converting to x% bracket" means:
a) the full dollar amount goes from Tax Deferred to Roth (and basically live off cash, pay taxes from cash)
OR
b) income to live on + conversion fills up the x% bracket.
If the lifestyle puts you above the 0% LTCG I wonder if alternating has some merit:
one year sell off from taxable such that still at 0% LTCG but income = (gains + basis)
next year do conversion / draw down tax deferred, thus avoiding the 27% = 15 + 12 illustrated above
- billthecat
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Re: Marginal tax rate of Roth conversions
I like how you're both thinking but unfortunately a significant portion of the income at LTCG rates is qualified dividends, in my case. The vast majority of my holdings are in taxable (generating qualified and non-qualified dividends). By alternating years with capital gains (with borrowing on the off year or double gains on the gain years), it would leave a little room in the off years, but not much. Still, a little is better than none, so it is an interesting approach.bradpevans wrote: ↑Tue Aug 03, 2021 9:02 am If the lifestyle puts you above the 0% LTCG I wonder if alternating has some merit:
one year sell off from taxable such that still at 0% LTCG but income = (gains + basis)
next year do conversion / draw down tax deferred, thus avoiding the 27% = 15 + 12 illustrated above
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Re: Marginal tax rate of Roth conversions
Another twist on things would be, probably early in early retirement, convert to a bracket higher thanbillthecat wrote: ↑Tue Aug 03, 2021 10:02 amI like how you're both thinking but unfortunately a significant portion of the income at LTCG rates is qualified dividends, in my case. The vast majority of my holdings are in taxable (generating qualified and non-qualified dividends). By alternating years with capital gains (with borrowing on the off year or double gains on the gain years), it would leave a little room in the off years, but not much. Still, a little is better than none, so it is an interesting approach.bradpevans wrote: ↑Tue Aug 03, 2021 9:02 am If the lifestyle puts you above the 0% LTCG I wonder if alternating has some merit:
one year sell off from taxable such that still at 0% LTCG but income = (gains + basis)
next year do conversion / draw down tax deferred, thus avoiding the 27% = 15 + 12 illustrated above
you need to live on, and convert a chunk, save a chunk, live on the rest.
While this means paying a higher marginal rate to get your money out of tax deferred,
it gives you more flexibility in subsequent years. Essentially you stockpile some cash
to better allow the combination of:
Low tax brackets / 0% LTCG / conversions AND enough money to live on
Re: Marginal tax rate of Roth conversions
Since the LTCG comes in the form of dividends which you don't have any control over, yes. The tax rate on doing a conversion is close to 30/40 percent. You can convert up to the bend point (where the cap gains goes from 0% to 15%), but going further is costly.billthecat wrote: ↑Mon Aug 02, 2021 4:20 pm What do you think, would it be better to delay Roth conversions until I start collecting social security, so they're taxed at a 22% marginal rate, instead of a 27% marginal rate during early retirement (pre-social security)?
Once your guaranteed income or necessary income exceeds the cap gains bend point, you can convert up to the next bend point (which appears to be an IRMAA cliff). Or not convert at all depending on your complete situation.
- billthecat
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Re: Marginal tax rate of Roth conversions
It's all fluid, of course (tax rates/brackets could change, and social security could change) but based on what I know now it could end up looking like this once social security starts (before Roth conversions):Lee_WSP wrote: ↑Tue Aug 03, 2021 11:37 amSince the LTCG comes in the form of dividends which you don't have any control over, yes. The tax rate on doing a conversion is close to 30/40 percent. You can convert up to the bend point (where the cap gains goes from 0% to 15%), but going further is costly.billthecat wrote: ↑Mon Aug 02, 2021 4:20 pm What do you think, would it be better to delay Roth conversions until I start collecting social security, so they're taxed at a 22% marginal rate, instead of a 27% marginal rate during early retirement (pre-social security)?
Once your guaranteed income or necessary income exceeds the cap gains bend point, you can convert up to the next bend point (which appears to be an IRMAA cliff). Or not convert at all depending on your complete situation.
It's a gamble - I could delay, only for tax rates to increase beyond 27% in the (current) 22% bracket. I wonder why I-Orp calls for me to do conversions (i did normalilze the asset allocation - same across all accounts and at retirement and plan end).
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Re: Marginal tax rate of Roth conversions
You're delaying social until 72 right? If so, does that graph take into account estimated RMD's?billthecat wrote: ↑Tue Aug 03, 2021 12:45 pmIt's all fluid, of course (tax rates/brackets could change, and social security could change) but based on what I know now it could end up looking like this once social security starts (before Roth conversions):Lee_WSP wrote: ↑Tue Aug 03, 2021 11:37 amSince the LTCG comes in the form of dividends which you don't have any control over, yes. The tax rate on doing a conversion is close to 30/40 percent. You can convert up to the bend point (where the cap gains goes from 0% to 15%), but going further is costly.billthecat wrote: ↑Mon Aug 02, 2021 4:20 pm What do you think, would it be better to delay Roth conversions until I start collecting social security, so they're taxed at a 22% marginal rate, instead of a 27% marginal rate during early retirement (pre-social security)?
Once your guaranteed income or necessary income exceeds the cap gains bend point, you can convert up to the next bend point (which appears to be an IRMAA cliff). Or not convert at all depending on your complete situation.
It's a gamble - I could delay, only for tax rates to increase beyond 27% in the (current) 22% bracket. I wonder why I-Orp calls for me to do conversions (i did normalilze the asset allocation - same across all accounts and at retirement and plan end).
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Re: Marginal tax rate of Roth conversions
I assume you meant 70 but anyway that's a good point - I guess Roth conversions don't count as a distribution.Lee_WSP wrote: ↑Tue Aug 03, 2021 1:34 pmYou're delaying social until 72 right? If so, does that graph take into account estimated RMD's?billthecat wrote: ↑Tue Aug 03, 2021 12:45 pmIt's all fluid, of course (tax rates/brackets could change, and social security could change) but based on what I know now it could end up looking like this once social security starts (before Roth conversions):Lee_WSP wrote: ↑Tue Aug 03, 2021 11:37 amSince the LTCG comes in the form of dividends which you don't have any control over, yes. The tax rate on doing a conversion is close to 30/40 percent. You can convert up to the bend point (where the cap gains goes from 0% to 15%), but going further is costly.billthecat wrote: ↑Mon Aug 02, 2021 4:20 pm What do you think, would it be better to delay Roth conversions until I start collecting social security, so they're taxed at a 22% marginal rate, instead of a 27% marginal rate during early retirement (pre-social security)?
Once your guaranteed income or necessary income exceeds the cap gains bend point, you can convert up to the next bend point (which appears to be an IRMAA cliff). Or not convert at all depending on your complete situation.
It's a gamble - I could delay, only for tax rates to increase beyond 27% in the (current) 22% bracket. I wonder why I-Orp calls for me to do conversions (i did normalilze the asset allocation - same across all accounts and at retirement and plan end).
And I have to rethink delaying because while the marginal tax rate goes go down (27% to 22%), the average tax rate (the effective tax rate) goes up (it depends on how much social security and conversion but it could be from, say, 13% to 16%). It gives me a headache just thinking about it. It's mind bending. I suppose at the end of the day, since the dividends and social security are "unavoidable" then it's the marginal tax on the conversions that matters.
Last edited by billthecat on Wed Aug 04, 2021 5:41 pm, edited 1 time in total.
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Re: Marginal tax rate of Roth conversions
I said 72 because based on my modeling of conversions, 2 years of conversions is not going to reduce RMDs by much.
I haven't done much modeling of conversions on top of RMDs, but it probably makes sense to fill up the bracket one is in.
I haven't done much modeling of conversions on top of RMDs, but it probably makes sense to fill up the bracket one is in.
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Re: Marginal tax rate of Roth conversions
I think when most say they are converting to the top of the 12% bracket, they really mean they are converting to the top of the 0% cap gains tax bracket. The difference is not much, for MFJ it's $80,800 vs. $81,050 in 2021.billthecat wrote: ↑Sat Jun 19, 2021 12:57 pmThe approach of filling an ordinary income tax bracket with Roth conversions, like filling the 10%, 12%, or even 22% tax bracket, is a little misleading, in this situation. What would you do in this scenario?
The size of the taxable account does not really matter, ours is very small but there are still some qualified dividends, so our conversions stop before the 0% bracket ends and our total taxable income will be just under $80,800, rather that being just under $81,050.
Re: Marginal tax rate of Roth conversions
I did a model of something similar to your situation using the personal finance toolbox. Assuming single filer. Federal taxes only.
If we assume 30k of qualified dividends and a tax bracket starting point of 25k worth of income, then the cumulative tax rate (the average tax rate of the amount looked at (probably not the most precise definition, but it'll have to do)) hits the first marginal rate increase at ~33k; the LTCG cliff at around 55k of total income and then IRMAA at around 88 or so.
So, if you convert right up to the LTCG cliff, it's a marginal rate of ~12 or so. If you convert up to the IRMAA bracket, it's a marginal rate of ~23% on the total amount converted. That is, the conversion amount is taxed at ~23%. So, if 22/23 (can't get a precise number on the graph (I don't know how)) percent is going to be less than your expected RMD bracket, converting up to the first IRMAA cliff makes sense.
If we assume 30k of qualified dividends and a tax bracket starting point of 25k worth of income, then the cumulative tax rate (the average tax rate of the amount looked at (probably not the most precise definition, but it'll have to do)) hits the first marginal rate increase at ~33k; the LTCG cliff at around 55k of total income and then IRMAA at around 88 or so.
So, if you convert right up to the LTCG cliff, it's a marginal rate of ~12 or so. If you convert up to the IRMAA bracket, it's a marginal rate of ~23% on the total amount converted. That is, the conversion amount is taxed at ~23%. So, if 22/23 (can't get a precise number on the graph (I don't know how)) percent is going to be less than your expected RMD bracket, converting up to the first IRMAA cliff makes sense.
Re: Marginal tax rate of Roth conversions
Are you taking the bizarre marginal rates that occur due to the phasing in of the taxation of social security into account? I can't tell from your graph. But it looks like it isn't impossible that you have one of those unpleasant SS tax humps with a 49.95% marginal rate stretch, such as is shown in the graph for the example in the discussion in the wiki on Roth Conversions: Worth pushing through the Social Security hump and/or IRMAA cliffs?billthecat wrote: ↑Tue Aug 03, 2021 2:35 pmAnd I have to rethink delaying because while the marginal tax rate goes go down (27% to 22%), the average tax rate (the effective tax rate) goes up (it depends on how much social security and conversion but it could be from, say, 13% to 16%).billthecat wrote: ↑Mon Aug 02, 2021 4:20 pm What do you think, would it be better to delay Roth conversions until I start collecting social security, so they're taxed at a 22% marginal rate, instead of a 27% marginal rate during early retirement (pre-social security)?
But SS tax humps are *extremely* dependent on the exact details of a person's income profile.
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Re: Marginal tax rate of Roth conversions
OP,
To better visualize your decision, consider modeling out your expected taxes through Retirement and building a Cumulative Taxes Graph to better visualize the taxes you are paying today vs. the taxes paid in the future.
Visually, look to see the Tax Equilibrium between Conversions and RMDs as discussed in their Kitces Blog.
I find this to be a more intuitive way to tackle the problem than focusing on Marginal Rates alone, especially with LTCG and SS humps and the Impact on the cumulative marginal rate.
WoodSpinner
To better visualize your decision, consider modeling out your expected taxes through Retirement and building a Cumulative Taxes Graph to better visualize the taxes you are paying today vs. the taxes paid in the future.
Visually, look to see the Tax Equilibrium between Conversions and RMDs as discussed in their Kitces Blog.
I find this to be a more intuitive way to tackle the problem than focusing on Marginal Rates alone, especially with LTCG and SS humps and the Impact on the cumulative marginal rate.
WoodSpinner
WoodSpinner
Re: Marginal tax rate of Roth conversions
OP,
If you do no Roth conversion now or do not convert enough to offset the growth of your tax-deferred account, your tax-deferred account grew bigger. Then, you may get hit with a bigger tax bomb later.
Balance aka average out the taxes that you are paying over the retirement years might be a good idea.
KlangFool
If you do no Roth conversion now or do not convert enough to offset the growth of your tax-deferred account, your tax-deferred account grew bigger. Then, you may get hit with a bigger tax bomb later.
Balance aka average out the taxes that you are paying over the retirement years might be a good idea.
KlangFool
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