Roth Conversion in Retirement

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brak
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Roth Conversion in Retirement

Post by brak »

I am retired, in a high tax bracket, partly due to my RMD's. I did Roth conversions in the years leading up to my retirement. Would there be any reason to continue doing Roth conversions in my present situation? Thanks.
Alan S.
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Re: Roth Conversion in Retirement

Post by Alan S. »

brak wrote: Fri Oct 22, 2021 9:40 am I am retired, in a high tax bracket, partly due to my RMD's. I did Roth conversions in the years leading up to my retirement. Would there be any reason to continue doing Roth conversions in my present situation? Thanks.
Probably not. You are already receiving RMD income and probably SS benefits, and perhaps even a pension. That means more conversions could well increase your marginal rate or make you subject to IRMAA surcharges. But the real answer depends on the actual numbers including the amount of your actual distributions and other taxable income. The bottom line is that more conversions should not be done if they will increase your tax rate above the rate you would expect in the future if you did not convert.

Other factors include whether you want to consider your beneficiary's tax rates into your decision, who would inherit more or less TIRA or more or less Roth IRA. Also, if married, how much longer the least healthy spouse might live, since filing single for the remaining spouse represents an increase in tax rate. Pretty much your entire financial situation includes variables to consider in making the decision to convert and more importantly HOW MUCH you should convert each year, if any.
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Re: Roth Conversion in Retirement

Post by willthrill81 »

I agree with Alan S. that once SS benefits begin, it usually doesn't make sense to do Roth conversions apart from some unusual circumstances (e.g., your heirs are likely to be in a very high tax bracket at your passing).
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FiveK
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Re: Roth Conversion in Retirement

Post by FiveK »

One possible reason: conversions at your current marginal rate will prevent future RMDs at a higher marginal rate.
Activesloth
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Re: Roth Conversion in Retirement

Post by Activesloth »

One reason would be if you have beneficiaries. It would lighten their tax burden. Also, RMDs increase as the denominator drops, so you really have to crunch some numbers. I think this might be one situation where it might be helpful to consult a professional who specializes in RMDs, maybe a one time assessment at a specified fee.
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Re: Roth Conversion in Retirement

Post by MrJedi »

Current tax cuts (TJCA) are scheduled to end after 2025. So there are 4 tax returns left at these lower rates. If an RMD is forcing you into a high rate now, it might make sense to do some Roth conversions now in order to drop your future RMD and tax bracket when the rates go up. You will also need to balance this with the IRMAA brackets.
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Re: Roth Conversion in Retirement

Post by Fat Tails »

It’s hard to say with the limited information you provided. What is a “high” tax bracket? What is your TIRA balance? What is your age? Roth conversions are best done as early in your life as possible in order to transfer the compounding growth from the TIRA into the Roth IRA.
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tibbitts
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Re: Roth Conversion in Retirement

Post by tibbitts »

Fat Tails wrote: Sat Oct 23, 2021 2:44 am It’s hard to say with the limited information you provided. What is a “high” tax bracket? What is your TIRA balance? What is your age? Roth conversions are best done as early in your life as possible in order to transfer the compounding growth from the TIRA into the Roth IRA.
I agree, not enough information. Although with so many future unknowns I don't have enough information about my own situation to know if my conversions are optimal either. However while at first glance and intuitively it seems that conversions done as soon as possible would be beneficial, if all else is equal (which of course it never is) the math doesn't necessarily support that.
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Re: Roth Conversion in Retirement

Post by Nowizard »

AlanS reflected our circumstance that made conversions unattractive, though it does mean adopting the adage that you don't pay higher taxes unless you have some income. Basically, it is likely to be a choice of whether you would prefer to increase taxation, perhaps substantially, for a year (or few years) or pay some more annually. In other words, not likely to be a financial advantage but could be a psychological one.

Tim
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Re: Roth Conversion in Retirement

Post by tibbitts »

Nowizard wrote: Sat Oct 23, 2021 8:49 am AlanS reflected our circumstance that made conversions unattractive, though it does mean adopting the adage that you don't pay higher taxes unless you have some income. Basically, it is likely to be a choice of whether you would prefer to increase taxation, perhaps substantially, for a year (or few years) or pay some more annually. In other words, not likely to be a financial advantage but could be a psychological one.

Tim
For some it can also be the aspect of how many years to take an IRMAA/NIIT/ACA hit vs. tax rates, so it's not just income tax that figures in to the calculation.
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Re: Roth Conversion in Retirement

Post by VanGar+Goyle »

Activesloth wrote: Fri Oct 22, 2021 9:19 pm One reason would be if you have beneficiaries. It would lighten their tax burden.
It might lighten their tax burden if they are already in a high tax bracket.
If beneficiaries are in a lower tax bracket, they might want to pay their lower taxes.
And if the beneficiary is a charity, their tax bracket is real low, and your Roth conversions are not as useful.
Also if you will move to a higher state income tax state ( Florida to NY? ), Roth conversions now may make sense.
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celia
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Re: Roth Conversion in Retirement

Post by celia »

Your future RMDs will keep increasing as long as the amount withdrawn is less than the yearly growth in the account. These often even out in your late 80s.

If future Roth conversions will keep your future RMDs from jumping into a higher tax bracket, keep doing Roth conversions (after you take the RMD each year). Note that tax brackets are also scheduled to revert to 2017 brackets in 2026, unless Congress intervenes before then.

If you are married, after one of you dies, the survivor will still need to take RMDs, yet file as Single (instead of MFJ). The space in each tax bracket is half as much for Singles compared to MFJ. So it would be easy for the survivor to jump into a higher tax bracket.


I encourage you to do some estimates with and without future conversions to see what your taxes will be over the next 5 to 10 years.
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celia
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Re: Roth Conversion in Retirement

Post by celia »

tibbitts wrote: Sat Oct 23, 2021 8:16 am I agree, not enough information. Although with so many future unknowns I don't have enough information about my own situation to know if my conversions are optimal either.
Other than not knowing what the stock markets will do to your tax-deferred accounts in the future, what other information do you need?

Most likely you just need to do some projections and calculations, based on your own data. And your bonds funds should be in tax-deferred to slow down the growth there.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Roth Conversion in Retirement

Post by tibbitts »

celia wrote: Sun Oct 24, 2021 4:36 am
tibbitts wrote: Sat Oct 23, 2021 8:16 am I agree, not enough information. Although with so many future unknowns I don't have enough information about my own situation to know if my conversions are optimal either.
Other than not knowing what the stock markets will do to your tax-deferred accounts in the future, what other information do you need?

Most likely you just need to do some projections and calculations, based on your own data. And your bonds funds should be in tax-deferred to slow down the growth there.
Exactly: all I need is to know the future of what markets will do, how long I'll live, what if any cuts will happen to my projected social security...

Just sticking with the bond vs. equity conversion issue, doing only equities has worked out okay for me so far. However I'm getting down to about 50/50 equity/bond in my tIRA. That tIRA is the last deferred account I'm going to convert; my TIAA Traditional, about twice the value of my remaining tIRA, is in a 403b and although I could, I don't see converting that, ever. At this point I'm not sure about converting only equities, because while the odds don't favor it, I'm going to kick myself if we get an equity pullback and I can't convert "on sale." It would be just incredibly frustrating to have finished converting almost all the equity funds in my tIRA in the post-March-2020 timeframe and then revisit those lows again. So I guess I'm playing the odds with about 75% of my conversions and fighting them with the other 25%. So admittedly I'm kind of attempting market timing, at least in the form of DCA (which I'm also doing by doing lots of conversions vs. making my entire annual conversion at once.)
Last edited by tibbitts on Sun Oct 24, 2021 10:56 am, edited 1 time in total.
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Re: Roth Conversion in Retirement

Post by earlyout »

Keep in mind large medical expenses such as paying for the LTC of a dependent can provide an excellent opportunity to do Roth conversions since the medical expense deduction can offset the taxable income created my the Roth conversion. Another thing you may want to consider is using QCDs in place of your RMDs. This lowers your total income thus lowering your exposure to IRMAA and depending on your particular situation may even lower the amount of Social Security that is taxed.
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Re: Roth Conversion in Retirement

Post by celia »

tibbitts wrote: Sun Oct 24, 2021 10:43 am Exactly: all I need is to know the future of what markets will do, how long I'll live, what if any cuts will happen to my projected social security...
What Markets Will Do
What I’ve done is look at my past 3 to 5 years. Subtract an earlier January 1 balance from the current balance. Add back in all the withdrawals/conversions during that time. Subtract new contributions during that time. Then divide that growth (caused by the stock market) by the number of years in the analysis. This gives an estimated annual growth for those years, had you not withdrawn.

If you’re not withdrawing/converting that much a year, your account balance (and future RMDs) are still growing. If you don’t want to pay more in taxes now, you (or spouse or heirs) will pay them later.

Life Expectancy
I assume age 100. But I also assume my care will cost a lot more those last few years due to cognitive decline. So I plan for 110 and the last 10 years of expenses can be used for expensive care while I am living.

You can withdraw/convert more than needed for your living expenses. Just don’t spend more than your calculated budget based on your income and portfolio (so you don’t run out). Your heirs will appreciate anything they don’t have to pay taxes on.

Cuts to Social Security
Once you start it, it is unlikely to change, except for cost-of-living adjustments. Seniors are a large voting block, when needed. Congress has several ways they can ‘fix it’ which could involve a combination of: higher premiums for those working, raising the starting age, and changing the way the benefit is calculated for new people. Maybe they would have other ideas too, but it will have to be addressed eventually.

. . . I'm going to kick myself if we get an equity pullback and I can't convert "on sale." It would be just incredibly frustrating to have finished converting almost all the equity funds in my tIRA in the post-March-2020 timeframe and then revisit those lows again.
I hear you and that would made me fume too. But what if I told you the markets will drop 50% the year after you finished converting everything?
You would then plan without having that option, so plan away. Then, if you are fortunate to have your portfolio drop that much while still converting, then jump in and take advantage of it. You can always leave some of your tax-deferred unconverted for that purpose.
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Re: Roth Conversion in Retirement

Post by tibbitts »

celia wrote: Sun Oct 24, 2021 5:19 pm
tibbitts wrote: Sun Oct 24, 2021 10:43 am Exactly: all I need is to know the future of what markets will do, how long I'll live, what if any cuts will happen to my projected social security...
What Markets Will Do
What I’ve done is look at my past 3 to 5 years. Subtract an earlier January 1 balance from the current balance. Add back in all the withdrawals/conversions during that time. Subtract new contributions during that time. Then divide that growth (caused by the stock market) by the number of years in the analysis. This gives an estimated annual growth for those years, had you not withdrawn.

If you’re not withdrawing/converting that much a year, your account balance (and future RMDs) are still growing. If you don’t want to pay more in taxes now, you (or spouse or heirs) will pay them later.

Life Expectancy
I assume age 100. But I also assume my care will cost a lot more those last few years due to cognitive decline. So I plan for 110 and the last 10 years of expenses can be used for expensive care while I am living.

You can withdraw/convert more than needed for your living expenses. Just don’t spend more than your calculated budget based on your income and portfolio (so you don’t run out). Your heirs will appreciate anything they don’t have to pay taxes on.

Cuts to Social Security
Once you start it, it is unlikely to change, except for cost-of-living adjustments. Seniors are a large voting block, when needed. Congress has several ways they can ‘fix it’ which could involve a combination of: higher premiums for those working, raising the starting age, and changing the way the benefit is calculated for new people. Maybe they would have other ideas too, but it will have to be addressed eventually.

. . . I'm going to kick myself if we get an equity pullback and I can't convert "on sale." It would be just incredibly frustrating to have finished converting almost all the equity funds in my tIRA in the post-March-2020 timeframe and then revisit those lows again.
I hear you and that would made me fume too. But what if I told you the markets will drop 50% the year after you finished converting everything?
You would then plan without having that option, so plan away. Then, if you are fortunate to have your portfolio drop that much while still converting, then jump in and take advantage of it. You can always leave some of your tax-deferred unconverted for that purpose.
Since I did a very large conversion last year, my last full pre-IRMAA year, my deferred balance is now low enough and includes few enough equities that I'm out of "danger" of the balance growing despite annual conversions up to a reasonable tax bracket and IRMAA level going forward. I might not significantly increase the dollar amount of conversions if an unusually severe pullback happens, but the number of shares converted at the same dollar amount would naturally increase. So I'm good with that.

I have no idea how social security will be resolved so in keeping with Boglehead philosophy have planned based only on the reduction provided for in current law, based on the most recent data.
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Re: Roth Conversion in Retirement

Post by TravelforFun »

Activesloth wrote: Fri Oct 22, 2021 9:19 pm One reason would be if you have beneficiaries. It would lighten their tax burden.
Unless your beneficiaries' marginal tax rates are lower than yours.

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Re: Roth Conversion in Retirement

Post by celia »

tibbitts wrote: Sun Oct 24, 2021 9:17 pm
celia wrote: Sun Oct 24, 2021 5:19 pm
. . . I'm going to kick myself if we get an equity pullback and I can't convert "on sale."
I hear you and that would made me fume too. . .
Since I did a very large conversion last year. . .
WHAT?’?}!&*%

You just did a large conversion during or soon after a big market drop!!! Even if it was late in the year, you already had your ‘sale’ on the Roth conversion taxes. . . And now you want another ‘sale’? Since many people don’t get a chance to participate in one ‘sale’, how can you be expecting another one?
:oops: :D
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Roth Conversion in Retirement

Post by tibbitts »

celia wrote: Mon Oct 25, 2021 12:01 am
tibbitts wrote: Sun Oct 24, 2021 9:17 pm
celia wrote: Sun Oct 24, 2021 5:19 pm
. . . I'm going to kick myself if we get an equity pullback and I can't convert "on sale."
I hear you and that would made me fume too. . .
Since I did a very large conversion last year. . .
WHAT?’?}!&*%

You just did a large conversion during or soon after a big market drop!!! Even if it was late in the year, you already had your ‘sale’ on the Roth conversion taxes. . . And now you want another ‘sale’? Since many people don’t get a chance to participate in one ‘sale’, how can you be expecting another one?
:oops: :D
For inexplicable reasons, I never even looked at RMDs until I was 10 years out (according to age 72... I'm still waiting for those additional three years that I'd thought were an almost-done deal.) So I started gradual daily conversions around the beginning of q4 2020, and accelerated toward the end. I had only done about 5% of what turned out to be anywhere near the lows in q1, the annual amount I'd been doing for a while, only because I didn't understand the RMD situation, so that was entirely my fault. Honestly if I'd looked at RMDs during only the very the worst days of 2020, I wouldn't have done that much more, because at that point my RMDs wouldn't have been nearly as out-of-control as they appeared to be by later in the year. It wasn't just the change in the balances of course, but the change compounded over ten more years that had to be considered. I didn't change my return assumptions before/during/after the downturn, which might not have been the best approach. So in that sense I didn't look at the lows as a "sale", but more the most correct price available, from which hopefully "normal" growth would resume.
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Re: Roth Conversion in Retirement

Post by Kal1981 »

When you do 401k Roth conversion in retirement, do you usually do it in big chunks or can/should you do small amounts? I assume you always want to go as high as possible within the tax bracket? My spouse will still be employed when I retire and I’m trying to figure out how to do the conversion properly.
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Re: Roth Conversion in Retirement

Post by smitcat »

Kal1981 wrote: Mon Mar 27, 2023 10:30 pm When you do 401k Roth conversion in retirement, do you usually do it in big chunks or can/should you do small amounts? I assume you always want to go as high as possible within the tax bracket? My spouse will still be employed when I retire and I’m trying to figure out how to do the conversion properly.
It is a personal situation based on all of your numbers and goals. Generally, you would want to smooth out the taxes owed along a large timeframe but that is not always accurate either.
The best way for you to know your choices is to take the time to run the most likely scenarios you are interested in with one of the more powerful calculators and model their results.
The two I am familiar with are RPM and Pralana and both take a larger amount of time to setup, run, and then review and understand the results.
In our case we have found them to be very valuable in our understanding, planning, and actions.
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Re: Roth Conversion in Retirement

Post by smitcat »

tibbitts wrote: Mon Oct 25, 2021 8:25 am
celia wrote: Mon Oct 25, 2021 12:01 am
tibbitts wrote: Sun Oct 24, 2021 9:17 pm
celia wrote: Sun Oct 24, 2021 5:19 pm
. . . I'm going to kick myself if we get an equity pullback and I can't convert "on sale."
I hear you and that would made me fume too. . .
Since I did a very large conversion last year. . .
WHAT?’?}!&*%

You just did a large conversion during or soon after a big market drop!!! Even if it was late in the year, you already had your ‘sale’ on the Roth conversion taxes. . . And now you want another ‘sale’? Since many people don’t get a chance to participate in one ‘sale’, how can you be expecting another one?
:oops: :D
For inexplicable reasons, I never even looked at RMDs until I was 10 years out (according to age 72... I'm still waiting for those additional three years that I'd thought were an almost-done deal.) So I started gradual daily conversions around the beginning of q4 2020, and accelerated toward the end. I had only done about 5% of what turned out to be anywhere near the lows in q1, the annual amount I'd been doing for a while, only because I didn't understand the RMD situation, so that was entirely my fault. Honestly if I'd looked at RMDs during only the very the worst days of 2020, I wouldn't have done that much more, because at that point my RMDs wouldn't have been nearly as out-of-control as they appeared to be by later in the year. It wasn't just the change in the balances of course, but the change compounded over ten more years that had to be considered. I didn't change my return assumptions before/during/after the downturn, which might not have been the best approach. So in that sense I didn't look at the lows as a "sale", but more the most correct price available, from which hopefully "normal" growth would resume.
"I didn't change my return assumptions before/during/after the downturn, which might not have been the best approach."
We find it better to model a range of future possibilities and review the pros and cons of each.
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Re: Roth Conversion in Retirement

Post by BitTooAggressive »

Alan S. wrote: Fri Oct 22, 2021 9:53 am
brak wrote: Fri Oct 22, 2021 9:40 am I am retired, in a high tax bracket, partly due to my RMD's. I did Roth conversions in the years leading up to my retirement. Would there be any reason to continue doing Roth conversions in my present situation? Thanks.
Probably not. You are already receiving RMD income and probably SS benefits, and perhaps even a pension. That means more conversions could well increase your marginal rate or make you subject to IRMAA surcharges. But the real answer depends on the actual numbers including the amount of your actual distributions and other taxable income. The bottom line is that more conversions should not be done if they will increase your tax rate above the rate you would expect in the future if you did not convert.

Other factors include whether you want to consider your beneficiary's tax rates into your decision, who would inherit more or less TIRA or more or less Roth IRA. Also, if married, how much longer the least healthy spouse might live, since filing single for the remaining spouse represents an increase in tax rate. Pretty much your entire financial situation includes variables to consider in making the decision to convert and more importantly HOW MUCH you should convert each year, if any.
Excellent answer.
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Re: Roth Conversion in Retirement

Post by Navillus1968 »

brak wrote: Fri Oct 22, 2021 9:40 am I am retired, in a high tax bracket, partly due to my RMD's. I did Roth conversions in the years leading up to my retirement. Would there be any reason to continue doing Roth conversions in my present situation? Thanks.
The Devil is in the details- where is your MAGI in relation to the next IRMAA cliff & where is your taxable income in relation to your current bracket top?

As others have noted "high tax bracket" is a relative term- need more info.

If further Roth conversions make any sense, they are likely to be small- basically filling in headroom before you hit either an IRMAA MAGI tier or an OI tax rate change.

If you do decide to make additional Roth conversions, make sure to take your annual RMD before converting any money or the IRS gets very grumpy.
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Re: Roth Conversion in Retirement

Post by tibbitts »

Kal1981 wrote: Mon Mar 27, 2023 10:30 pm When you do 401k Roth conversion in retirement, do you usually do it in big chunks or can/should you do small amounts? I assume you always want to go as high as possible within the tax bracket? My spouse will still be employed when I retire and I’m trying to figure out how to do the conversion properly.
I'm not sure why you resurrected this old thread, but it's interesting to see it again with the knowledge of everything that's transpired since 2021. Anyway personally I do many small transactions, but I'm not sure what the process is for your 401k->Roth, so I'm not sure how trivial those transactions are to perform.
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Re: Roth Conversion in Retirement

Post by tibbitts »

Navillus1968 wrote: Tue Mar 28, 2023 9:05 am
brak wrote: Fri Oct 22, 2021 9:40 am I am retired, in a high tax bracket, partly due to my RMD's. I did Roth conversions in the years leading up to my retirement. Would there be any reason to continue doing Roth conversions in my present situation? Thanks.
The Devil is in the details- where is your MAGI in relation to the next IRMAA cliff & where is your taxable income in relation to your current bracket top?

As others have noted "high tax bracket" is a relative term- need more info.

If further Roth conversions make any sense, they are likely to be small- basically filling in headroom before you hit either an IRMAA MAGI tier or an OI tax rate change.

If you do decide to make additional Roth conversions, make sure to take your annual RMD before converting any money or the IRS gets very grumpy.
This is the a practical answer. The OP would really just be topping up to a bracket or IRMAA limit at most, and realistically it probably wouldn't matter much. The OP could probably make it make sense or not by changing future assumptions, but much more information would be needed.
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Re: Roth Conversion in Retirement

Post by Wiggums »

brak wrote: Fri Oct 22, 2021 9:40 am I am retired, in a high tax bracket, partly due to my RMD's. I did Roth conversions in the years leading up to my retirement. Would there be any reason to continue doing Roth conversions in my present situation? Thanks.
I don’t know if this will help you decide, but there was a relevant presentation at the 2022 Boglehead conference

Breakout Session - Pre-Retirees and Retirees (Mike Piper on Social Security and Tax Planning)

https://boglecenter.net/2022conference/
"I started with nothing and I still have most of it left."
986racer
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Re: Roth Conversion in Retirement

Post by 986racer »

smitcat wrote: Tue Mar 28, 2023 8:44 am
Kal1981 wrote: Mon Mar 27, 2023 10:30 pm When you do 401k Roth conversion in retirement, do you usually do it in big chunks or can/should you do small amounts? I assume you always want to go as high as possible within the tax bracket? My spouse will still be employed when I retire and I’m trying to figure out how to do the conversion properly.
It is a personal situation based on all of your numbers and goals. Generally, you would want to smooth out the taxes owed along a large timeframe but that is not always accurate either.
The best way for you to know your choices is to take the time to run the most likely scenarios you are interested in with one of the more powerful calculators and model their results.
The two I am familiar with are RPM and Pralana and both take a larger amount of time to setup, run, and then review and understand the results.
In our case we have found them to be very valuable in our understanding, planning, and actions.
Agreed with it being personal and you will need something like RPM or Pralana to run through scenarios. There is definitely not a "one size fits all" answer.

I was having the same discussion with my parents and have been pushing them to do more Roth conversions before the TCJA expires at the end of 2025. Using simplified assumptions (steady growth rates, no deaths, etc) I could show that it was clearly better to do the Roth conversions using a 20-year timeframe. By clearly better, I mean that it showed that their overall net worth would be the same between doing the conversions and not doing them but the large balance of their money would be in Roth (so no tax liability) vs T-IRA.

Things were going well for a couple of years and then they stopped because they didn't like the IRMAA surcharges (I already accounted for them in the analysis though).

I'm not sure it would make as much sense doing after the TCJA sunset though. I didn't run that analysis but I figured intuitively that the main advantage of doing it now is that tax rates are currently at a low so trying to do the same analysis with a higher tax rate seemed pointless.
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Re: Roth Conversion in Retirement

Post by tibbitts »

986racer wrote: Tue Mar 28, 2023 1:47 pm
smitcat wrote: Tue Mar 28, 2023 8:44 am
Kal1981 wrote: Mon Mar 27, 2023 10:30 pm When you do 401k Roth conversion in retirement, do you usually do it in big chunks or can/should you do small amounts? I assume you always want to go as high as possible within the tax bracket? My spouse will still be employed when I retire and I’m trying to figure out how to do the conversion properly.
It is a personal situation based on all of your numbers and goals. Generally, you would want to smooth out the taxes owed along a large timeframe but that is not always accurate either.
The best way for you to know your choices is to take the time to run the most likely scenarios you are interested in with one of the more powerful calculators and model their results.
The two I am familiar with are RPM and Pralana and both take a larger amount of time to setup, run, and then review and understand the results.
In our case we have found them to be very valuable in our understanding, planning, and actions.
Agreed with it being personal and you will need something like RPM or Pralana to run through scenarios. There is definitely not a "one size fits all" answer.

I was having the same discussion with my parents and have been pushing them to do more Roth conversions before the TCJA expires at the end of 2025. Using simplified assumptions (steady growth rates, no deaths, etc) I could show that it was clearly better to do the Roth conversions using a 20-year timeframe. By clearly better, I mean that it showed that their overall net worth would be the same between doing the conversions and not doing them but the large balance of their money would be in Roth (so no tax liability) vs T-IRA.

Things were going well for a couple of years and then they stopped because they didn't like the IRMAA surcharges (I already accounted for them in the analysis though).

I'm not sure it would make as much sense doing after the TCJA sunset though. I didn't run that analysis but I figured intuitively that the main advantage of doing it now is that tax rates are currently at a low so trying to do the same analysis with a higher tax rate seemed pointless.
Are they not agreeing with your conclusion, or are they simply opposed to paying higher IRMAA on principle? If they don't do conversions now, will they pay higher IRMAA (not to mention income taxes, perhaps) later?
smitcat
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Re: Roth Conversion in Retirement

Post by smitcat »

986racer wrote: Tue Mar 28, 2023 1:47 pm
smitcat wrote: Tue Mar 28, 2023 8:44 am
Kal1981 wrote: Mon Mar 27, 2023 10:30 pm When you do 401k Roth conversion in retirement, do you usually do it in big chunks or can/should you do small amounts? I assume you always want to go as high as possible within the tax bracket? My spouse will still be employed when I retire and I’m trying to figure out how to do the conversion properly.
It is a personal situation based on all of your numbers and goals. Generally, you would want to smooth out the taxes owed along a large timeframe but that is not always accurate either.
The best way for you to know your choices is to take the time to run the most likely scenarios you are interested in with one of the more powerful calculators and model their results.
The two I am familiar with are RPM and Pralana and both take a larger amount of time to setup, run, and then review and understand the results.
In our case we have found them to be very valuable in our understanding, planning, and actions.
Agreed with it being personal and you will need something like RPM or Pralana to run through scenarios. There is definitely not a "one size fits all" answer.

I was having the same discussion with my parents and have been pushing them to do more Roth conversions before the TCJA expires at the end of 2025. Using simplified assumptions (steady growth rates, no deaths, etc) I could show that it was clearly better to do the Roth conversions using a 20-year timeframe. By clearly better, I mean that it showed that their overall net worth would be the same between doing the conversions and not doing them but the large balance of their money would be in Roth (so no tax liability) vs T-IRA.

Things were going well for a couple of years and then they stopped because they didn't like the IRMAA surcharges (I already accounted for them in the analysis though).

I'm not sure it would make as much sense doing after the TCJA sunset though. I didn't run that analysis but I figured intuitively that the main advantage of doing it now is that tax rates are currently at a low so trying to do the same analysis with a higher tax rate seemed pointless.
"By clearly better, I mean that it showed that their overall net worth would be the same between doing the conversions and not doing them but the large balance of their money would be in Roth (so no tax liability) vs T-IRA."
A great observation.
We do a number of runs and lay out the key summary result metrics on a chart.
- one run with 'poor' market returns
- one run with 'much less than average' returns
- one run with 'a bit less than average' returns
If we get a positive move in total spendable dollars (after tax) and a larger Roth account with the 'much less' returns it is a winner. Any time the returns are better than that the conversion case will pay out better.

"I didn't run that analysis but I figured intuitively that the main advantage of doing it now is that tax rates are currently at a low so trying to do the same analysis with a higher tax rate seemed pointless."
One of the key drivers is the draw rate - if they are not going to spend the funds even with low returns the conversions almost always pay.
They would not pay in a few instances like if they were making large charitable contributions, or if their heir(s) had a low income tax rate, or they have huge uncovered medical bills.
On the higher end always be aware of the potential of estate and/or inheritance taxes (some states). If they will be subjected to any of that in the future it is typically best to convert as well.
But as always - you need to run your own numbers with your own goals.
Exchme
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Re: Roth Conversion in Retirement

Post by Exchme »

Since OP is in a "high tax bracket", I take it to mean that, as a minimum, the maximum 85% of OP's SS benefit is taxed. So it probably wouldn't hurt to do Roth Conversions up to the next marginal tax rate change - such as an IRMAA tier, ordinary income tax bracket, phase-in LTCG taxes or the start of NIIT, whichever is less. Beyond that, as others have noted, it requires modeling with a thorough tool like RPM or Pralana Gold to gain any insight.
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Re: Roth Conversion in Retirement

Post by Kal1981 »

I found the website for Pralana Retirement Calculator but wouldn't find RPM. Is it short for something?
tibbitts
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Re: Roth Conversion in Retirement

Post by tibbitts »

Kal1981 wrote: Tue Mar 28, 2023 5:11 pm I found the website for Pralana Retirement Calculator but wouldn't find RPM. Is it short for something?
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
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Re: Roth Conversion in Retirement

Post by Kal1981 »

tibbitts wrote: Tue Mar 28, 2023 5:21 pm
Kal1981 wrote: Tue Mar 28, 2023 5:11 pm I found the website for Pralana Retirement Calculator but wouldn't find RPM. Is it short for something?
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Thanks! Greatly appreciate it.
tibbitts
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Re: Roth Conversion in Retirement

Post by tibbitts »

Kal1981 wrote: Tue Mar 28, 2023 5:39 pm
tibbitts wrote: Tue Mar 28, 2023 5:21 pm
Kal1981 wrote: Tue Mar 28, 2023 5:11 pm I found the website for Pralana Retirement Calculator but wouldn't find RPM. Is it short for something?
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Thanks! Greatly appreciate it.
It would be interesting to know if you find much difference in results between your initial analysis and the ones from any other tool you use, given of course similar assumptions.
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FiveK
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Re: Roth Conversion in Retirement

Post by FiveK »

Kal1981 wrote: Mon Mar 27, 2023 10:30 pm When you do 401k Roth conversion in retirement, do you usually do it in big chunks or can/should you do small amounts? I assume you always want to go as high as possible within the tax bracket? My spouse will still be employed when I retire and I’m trying to figure out how to do the conversion properly.
Using marginal tax rate instead of "tax bracket" is more likely to give you what you want.

You can calculate marginal tax rates by changing your Roth conversion amount in any Tax estimation tool or commercial software that fits your situation and doing the (change in tax)/(change in income) calculation yourself, or use something like the personal finance toolbox (if you can use Excel) that does so automatically.
Dregob
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Re: Roth Conversion in Retirement

Post by Dregob »

brak wrote: Fri Oct 22, 2021 9:40 am I am retired, in a high tax bracket, partly due to my RMD's. I did Roth conversions in the years leading up to my retirement. Would there be any reason to continue doing Roth conversions in my present situation? Thanks.
Single or married? I'm married and we are doing conversions because when one of us dies the survivor will be in a higher bracket.
I'm keeping conversions in our current retirement 22% tax bracket, and under IRMAA, so if we both stay alive it is break even.
Last edited by Dregob on Tue Mar 28, 2023 10:35 pm, edited 2 times in total.
986racer
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Re: Roth Conversion in Retirement

Post by 986racer »

tibbitts wrote: Tue Mar 28, 2023 3:50 pm Are they not agreeing with your conclusion, or are they simply opposed to paying higher IRMAA on principle? If they don't do conversions now, will they pay higher IRMAA (not to mention income taxes, perhaps) later?
It took a while to convince them that paying taxes now would be better than paying even more taxes later. The IRMAA hit them by surprise (my fault, I should have warned them about it). I think there also was a miscalculation due to extra capital gains from a mutual fund and they crossed an extra IRMAA threshold.

Basically though, yes they are against the pay some now to save even more later.
tibbitts
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Re: Roth Conversion in Retirement

Post by tibbitts »

986racer wrote: Tue Mar 28, 2023 10:11 pm
tibbitts wrote: Tue Mar 28, 2023 3:50 pm Are they not agreeing with your conclusion, or are they simply opposed to paying higher IRMAA on principle? If they don't do conversions now, will they pay higher IRMAA (not to mention income taxes, perhaps) later?
It took a while to convince them that paying taxes now would be better than paying even more taxes later. The IRMAA hit them by surprise (my fault, I should have warned them about it). I think there also was a miscalculation due to extra capital gains from a mutual fund and they crossed an extra IRMAA threshold.

Basically though, yes they are against the pay some now to save even more later.
Interesting; have they considered that eventually one of them is extremely likely to lose MFJ? Are they aware of how much taxes will increase when that happens?
Navillus1968
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Re: Roth Conversion in Retirement

Post by Navillus1968 »

986racer wrote: Tue Mar 28, 2023 10:11 pm
tibbitts wrote: Tue Mar 28, 2023 3:50 pm Are they not agreeing with your conclusion, or are they simply opposed to paying higher IRMAA on principle? If they don't do conversions now, will they pay higher IRMAA (not to mention income taxes, perhaps) later?
It took a while to convince them that paying taxes now would be better than paying even more taxes later. The IRMAA hit them by surprise (my fault, I should have warned them about it). I think there also was a miscalculation due to extra capital gains from a mutual fund and they crossed an extra IRMAA threshold.

Basically though, yes they are against the pay some now to save even more later.
Even if your folks won't listen to reason on the logic of incurring IRMAA pain now to avoid higher taxes (& possibly higher IRMAA, too) in the future when RMDs begin, you should tell them to at least continue Roth conversions up to a MAGI level that is about $10k below IRMAA Tier 1, to account for income surprises late in the year.

Here's a link to an estimate of which level of 2023 income will trigger IRMAA in 2025. The FInance Buff is the go-to IRMAA expert.
https://thefinancebuff.com/medicare-irm ... a-brackets

The FInance Buff zero inflation estimate for Tier 1 cliff for 2023 is MAGI $258k. If your parents converted up to MAGI $240k-$245k in 2023, they would avoid any IRMAA spike in 2025 & also stay under the $250k MAGI threshold for the NIIT tax in 2023, if they have QDI &/or LTCG.

PS- Have you shown your parents what will happen to their tax rate when one of them is widowed, as noted by tibbits? SS income drops, but RMDs don't change if the widowed spouse is the IRA beneficiary, as is usually the case. Filing Single as a widow, you hit IRMAA Tier 1 at only $129k of 2023 income, Tier 2 at $161k.
"Pay me now, or pay me more later!"- the IRS
986racer
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Re: Roth Conversion in Retirement

Post by 986racer »

Navillus1968 wrote: Wed Mar 29, 2023 10:53 am
986racer wrote: Tue Mar 28, 2023 10:11 pm
tibbitts wrote: Tue Mar 28, 2023 3:50 pm Are they not agreeing with your conclusion, or are they simply opposed to paying higher IRMAA on principle? If they don't do conversions now, will they pay higher IRMAA (not to mention income taxes, perhaps) later?
It took a while to convince them that paying taxes now would be better than paying even more taxes later. The IRMAA hit them by surprise (my fault, I should have warned them about it). I think there also was a miscalculation due to extra capital gains from a mutual fund and they crossed an extra IRMAA threshold.

Basically though, yes they are against the pay some now to save even more later.
Even if your folks won't listen to reason on the logic of incurring IRMAA pain now to avoid higher taxes (& possibly higher IRMAA, too) in the future when RMDs begin, you should tell them to at least continue Roth conversions up to a MAGI level that is about $10k below IRMAA Tier 1, to account for income surprises late in the year.
Yes, that’s what they are doing now. I was hoping to get the bulk of their tax deferred accounts converted but it looks like we will now only get the stepfather’s accounts converted before TCJA expires.

I understand and agree with the argument about the extra taxes once one person dies. That was also modeled in the RPM spreadsheet.

However, I’ve come to learn that it is easier said than done and especially so when it is someone else’s money.
tibbitts
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Re: Roth Conversion in Retirement

Post by tibbitts »

986racer wrote: Wed Mar 29, 2023 12:47 pm
Navillus1968 wrote: Wed Mar 29, 2023 10:53 am
986racer wrote: Tue Mar 28, 2023 10:11 pm
tibbitts wrote: Tue Mar 28, 2023 3:50 pm Are they not agreeing with your conclusion, or are they simply opposed to paying higher IRMAA on principle? If they don't do conversions now, will they pay higher IRMAA (not to mention income taxes, perhaps) later?
It took a while to convince them that paying taxes now would be better than paying even more taxes later. The IRMAA hit them by surprise (my fault, I should have warned them about it). I think there also was a miscalculation due to extra capital gains from a mutual fund and they crossed an extra IRMAA threshold.

Basically though, yes they are against the pay some now to save even more later.
Even if your folks won't listen to reason on the logic of incurring IRMAA pain now to avoid higher taxes (& possibly higher IRMAA, too) in the future when RMDs begin, you should tell them to at least continue Roth conversions up to a MAGI level that is about $10k below IRMAA Tier 1, to account for income surprises late in the year.
Yes, that’s what they are doing now. I was hoping to get the bulk of their tax deferred accounts converted but it looks like we will now only get the stepfather’s accounts converted before TCJA expires.

I understand and agree with the argument about the extra taxes once one person dies. That was also modeled in the RPM spreadsheet.

However, I’ve come to learn that it is easier said than done and especially so when it is someone else’s money.
One reason it's difficult is because that no matter how you model, the results are based on assumptions, so it's not like you can tell someone with any confidence that a certain amount of conversions will or won't be beneficial, except maybe for small marginal conversions (up to a cliff breakpoint for example), or in extreme cases (maybe very high or low income/assets for example.) There are simply too many unknowns, to the point that it's somewhat of a futile exercise. There are some Bogleheads who have more confidence in the results of modeling but for example using RPM you can easily change inputs and decide for yourself how confident you are in any one particular recommendation.

Also consider that you probably don't want to convert all of a deferred balance. Even for a single person there's probably some amount of deferred balance that's desirable to maintain. Whether that's $500k or $1M or 1.5M or some other amount... I'm not sure.
smitcat
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Re: Roth Conversion in Retirement

Post by smitcat »

tibbitts wrote: Wed Mar 29, 2023 1:16 pm
986racer wrote: Wed Mar 29, 2023 12:47 pm
Navillus1968 wrote: Wed Mar 29, 2023 10:53 am
986racer wrote: Tue Mar 28, 2023 10:11 pm
tibbitts wrote: Tue Mar 28, 2023 3:50 pm Are they not agreeing with your conclusion, or are they simply opposed to paying higher IRMAA on principle? If they don't do conversions now, will they pay higher IRMAA (not to mention income taxes, perhaps) later?
It took a while to convince them that paying taxes now would be better than paying even more taxes later. The IRMAA hit them by surprise (my fault, I should have warned them about it). I think there also was a miscalculation due to extra capital gains from a mutual fund and they crossed an extra IRMAA threshold.

Basically though, yes they are against the pay some now to save even more later.
Even if your folks won't listen to reason on the logic of incurring IRMAA pain now to avoid higher taxes (& possibly higher IRMAA, too) in the future when RMDs begin, you should tell them to at least continue Roth conversions up to a MAGI level that is about $10k below IRMAA Tier 1, to account for income surprises late in the year.
Yes, that’s what they are doing now. I was hoping to get the bulk of their tax deferred accounts converted but it looks like we will now only get the stepfather’s accounts converted before TCJA expires.

I understand and agree with the argument about the extra taxes once one person dies. That was also modeled in the RPM spreadsheet.

However, I’ve come to learn that it is easier said than done and especially so when it is someone else’s money.
One reason it's difficult is because that no matter how you model, the results are based on assumptions, so it's not like you can tell someone with any confidence that a certain amount of conversions will or won't be beneficial, except maybe for small marginal conversions (up to a cliff breakpoint for example), or in extreme cases (maybe very high or low income/assets for example.) There are simply too many unknowns, to the point that it's somewhat of a futile exercise. There are some Bogleheads who have more confidence in the results of modeling but for example using RPM you can easily change inputs and decide for yourself how confident you are in any one particular recommendation.

Also consider that you probably don't want to convert all of a deferred balance. Even for a single person there's probably some amount of deferred balance that's desirable to maintain. Whether that's $500k or $1M or 1.5M or some other amount... I'm not sure.
"One reason it's difficult is because that no matter how you model, the results are based on assumptions, so it's not like you can tell someone with any confidence that a certain amount of conversions will or won't be beneficial"
You can make multiple runs relatively easy off of a baseline run and record the key differences in a simple 'chart'.
Dependent upon your personal thoughts and goals maybe runs with and without Conversions with something similar to this example:
Portfolio performance
1. below average
2. well below average
3. just below average
4. budgeted draw
5. draw at 1.5X
Etc

"Also consider that you probably don't want to convert all of a deferred balance. Even for a single person there's probably some amount of deferred balance that's desirable to maintain"
Depends upon your personal numbers and goals - the maintained number might be much lower than $500K at RMD start.
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Re: Roth Conversion in Retirement

Post by tibbitts »

smitcat wrote: Wed Mar 29, 2023 4:01 pm "Also consider that you probably don't want to convert all of a deferred balance. Even for a single person there's probably some amount of deferred balance that's desirable to maintain"
Depends upon your personal numbers and goals - the maintained number might be much lower than $500K at RMD start.
The values I chose weren't intended as inclusive, but are likely a common range. Certainly less than $500k or much more than $1.5M could be appropriate for some single filers, although probabilities would trail off at the extremes on both ends. Bogleheads would likely favor higher values, given the popularity here for using QCDs to satisfy RMDs. I don't plan to do that myself, at least in the early years of my RMDs, but if I did then I'd feel more comfortable with $1.5M or more in deferred.
smitcat
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Re: Roth Conversion in Retirement

Post by smitcat »

tibbitts wrote: Wed Mar 29, 2023 5:48 pm
smitcat wrote: Wed Mar 29, 2023 4:01 pm "Also consider that you probably don't want to convert all of a deferred balance. Even for a single person there's probably some amount of deferred balance that's desirable to maintain"
Depends upon your personal numbers and goals - the maintained number might be much lower than $500K at RMD start.
The values I chose weren't intended as inclusive, but are likely a common range. Certainly less than $500k or much more than $1.5M could be appropriate for some single filers, although probabilities would trail off at the extremes on both ends. Bogleheads would likely favor higher values, given the popularity here for using QCDs to satisfy RMDs. I don't plan to do that myself, at least in the early years of my RMDs, but if I did then I'd feel more comfortable with $1.5M or more in deferred.
"I don't plan to do that myself, at least in the early years of my RMDs, but if I did then I'd feel more comfortable with $1.5M or more in deferred."
I would look closely at that $1.5M in deferred by modeling as well - RMD's can be quite interesting over the years dependent upon what any of the other accounts look like (Taxable and Roth) and the totality of goals.
tibbitts
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Re: Roth Conversion in Retirement

Post by tibbitts »

smitcat wrote: Wed Mar 29, 2023 6:18 pm I would look closely at that $1.5M in deferred by modeling as well - RMD's can be quite interesting over the years dependent upon what any of the other accounts look like (Taxable and Roth) and the totality of goals.
Interestingly an adviser's software (I don't know what he was using) didn't recommend conversions when projecting up to about 2.5M in deferred at RMD start, even filing single. I thought that was interesting. Of course with just slightly different ranges of assumptions it could be beaten into submission and made to say anything, as with all modeling software.
smitcat
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Re: Roth Conversion in Retirement

Post by smitcat »

tibbitts wrote: Wed Mar 29, 2023 10:16 pm
smitcat wrote: Wed Mar 29, 2023 6:18 pm I would look closely at that $1.5M in deferred by modeling as well - RMD's can be quite interesting over the years dependent upon what any of the other accounts look like (Taxable and Roth) and the totality of goals.
Interestingly an adviser's software (I don't know what he was using) didn't recommend conversions when projecting up to about 2.5M in deferred at RMD start, even filing single. I thought that was interesting. Of course with just slightly different ranges of assumptions it could be beaten into submission and made to say anything, as with all modeling software.
I would only make my own changes and see the results. I see no reason to rely on one set of variables if i can review the results of a range of possible outcomes and see the results from lows to highs.
IMHO - it takes a lot more than just slightly different assumptions to change the outcomes.
$2.5 million at retire is enormous for a single based on what we have seen so far (admittedly not too much with singles).
RetiredAL
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Re: Roth Conversion in Retirement

Post by RetiredAL »

986racer wrote: Wed Mar 29, 2023 12:47 pm
Navillus1968 wrote: Wed Mar 29, 2023 10:53 am
986racer wrote: Tue Mar 28, 2023 10:11 pm
tibbitts wrote: Tue Mar 28, 2023 3:50 pm Are they not agreeing with your conclusion, or are they simply opposed to paying higher IRMAA on principle? If they don't do conversions now, will they pay higher IRMAA (not to mention income taxes, perhaps) later?
It took a while to convince them that paying taxes now would be better than paying even more taxes later. The IRMAA hit them by surprise (my fault, I should have warned them about it). I think there also was a miscalculation due to extra capital gains from a mutual fund and they crossed an extra IRMAA threshold.

Basically though, yes they are against the pay some now to save even more later.
Even if your folks won't listen to reason on the logic of incurring IRMAA pain now to avoid higher taxes (& possibly higher IRMAA, too) in the future when RMDs begin, you should tell them to at least continue Roth conversions up to a MAGI level that is about $10k below IRMAA Tier 1, to account for income surprises late in the year.
Yes, that’s what they are doing now. I was hoping to get the bulk of their tax deferred accounts converted but it looks like we will now only get the stepfather’s accounts converted before TCJA expires.

I understand and agree with the argument about the extra taxes once one person dies. That was also modeled in the RPM spreadsheet.

However, I’ve come to learn that it is easier said than done and especially so when it is someone else’s money.
In addition to the IRMAA impacts, do a proforma tax return as single. The total bill for taxes and IRMAA will be an eye opener.
Navillus1968
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Re: Roth Conversion in Retirement

Post by Navillus1968 »

smitcat wrote: Thu Mar 30, 2023 7:46 am
tibbitts wrote: Wed Mar 29, 2023 10:16 pm
smitcat wrote: Wed Mar 29, 2023 6:18 pm I would look closely at that $1.5M in deferred by modeling as well - RMD's can be quite interesting over the years dependent upon what any of the other accounts look like (Taxable and Roth) and the totality of goals.
Interestingly an adviser's software (I don't know what he was using) didn't recommend conversions when projecting up to about 2.5M in deferred at RMD start, even filing single. I thought that was interesting. Of course with just slightly different ranges of assumptions it could be beaten into submission and made to say anything, as with all modeling software.
I would only make my own changes and see the results. I see no reason to rely on one set of variables if i can review the results of a range of possible outcomes and see the results from lows to highs.
IMHO - it takes a lot more than just slightly different assumptions to change the outcomes.
$2.5 million at retire is enormous for a single based on what we have seen so far (admittedly not too much with singles).
I have a relative who took a lump sum payout of his pension with MegaOil Corp into his TIRA back in the 80s. Before 2010, his income was too high to do Roth conversions ($100k limit before 2010), after 2010 he thought his tax bracket was too high due to RMDs & high QDI (MegaOil stock in taxable).
He's now in his early 90s, after a retiring into a long bull market & never owning any bonds- his RMDs are >$350k, QDI >$350k.

To add insult to injury- his high RMDs make all of his QDI subject to the NIIT & about half of QDI is in the 20% LTCG bracket, so he's paying 23.8% on about $150k of QDI. The stock is very low basis (mostly bought in 1960s-1980s), so selling is not an attractive option.
It's the ultimate First World problem, but his income is 5 times his spending! He's basically a cash cow for the IRS.

Because of my relative's painful example, I plan to start RMDs with a TIRA well under 7 figures, but beyond that, it's a SWAG.
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