ROTH conversion from RMD'd Trad IRA

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steve51
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ROTH conversion from RMD'd Trad IRA

Post by steve51 »

Hello,
My basic question is there any time limit on when you can do a Roth conversion.
My situation - now 70, taking Soc Sec and have 600K in Trad/SEP accounts.
Currently my marginal tax rate is 24% and even taking conversion over 3 years, I don't think I can avoid bumping up to 35% tax rate.
I want to avoid dealing with annual RMD distributions.
I'm familiar with Pro Rata rule and it will apply to this conversion. As I don't need these funds immediately, the five year rule will not affect me.
With the 'Cares Act(?)', I can delay taking RMD until the year after I turn 72.
This gives me two years to do a conversion but the tax bite is too large.
Can I still do a Roth conversion after my RMD has started?

Thanks for your comments and help. :happy
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retiredjg
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Re: ROTH conversion from RMD'd Trad IRA

Post by retiredjg »

Welcome to the forum. :happy

Yes, you can continue to do Roth conversions after your RMDs have started. You must take your RMD first. If you have multiple accounts, there is a little more to it about the timing.

Bumping from 24% to 35% is pretty drastic. Your tax-deferred accounts would need to be really big for that but you only report $600k. So something doesn't seem right to me. Maybe there is more to the story.

If that's the case, you might benefit from the ability to do qualified charitable donations (QCDs) from your IRA starting at age 70.5. You can donate up to $100k (per person) directly to charity and pay no taxes on that money.

I suggest you take your first RMD in the year you turn 72. If not, you must take two RMDs in the year you are 73.

Be sure you actually need to do Roth conversions. I can't see how $600k in tax-deferred accounts would even be a problem that requires Roth conversions.
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GerryL
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Re: ROTH conversion from RMD'd Trad IRA

Post by GerryL »

You can do a Roth conversion AFTER you have taken your RMD for the year. So, RMD+conversion = big tax hit.

I use QCDs to lower my taxes and try to avoid going over the IRMAA threshold and getting hit with higher Medicare premiums. This is useful for people who are inclined to do charitable giving since it doesn't put any money in YOUR pocket.
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FiveK
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Re: ROTH conversion from RMD'd Trad IRA

Post by FiveK »

steve51 wrote: Thu May 26, 2022 6:55 pm I want to avoid dealing with annual RMD distributions.
Why? You would be paying a very high tax price to avoid something that is very simple to do once a year.
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Flobes
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Re: ROTH conversion from RMD'd Trad IRA

Post by Flobes »

steve51 wrote: Thu May 26, 2022 6:55 pm My situation - now 70, taking Soc Sec and have 600K in Trad/SEP accounts...
GerryL wrote: Thu May 26, 2022 7:29 pm I use QCDs... This is useful for people who are inclined to do charitable giving since it doesn't put any money in YOUR pocket.
QCDs can begin the day after you turn 70 and a half. Depending on when in the year your birthday happens, you can get one or two extra years of moving money out of your IRA, with no tax consequences, as checks go directly to charity. This lowers your IRA balance before RMDs must start at 72.
Exchme
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Re: ROTH conversion from RMD'd Trad IRA

Post by Exchme »

RMDs are easy to automate. At Vanguard for instance, you just pick a date each year and and a fund to pull from and the right amount will move each year.

Roth Conversions may be worth it up to the top of your current IRMAA tier/tax bracket, whichever is lower, but going to the next bracket or even IRMAA tier is probably not wise. Jumping two tax brackets is just burning money.
RetiredCSProf
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Re: ROTH conversion from RMD'd Trad IRA

Post by RetiredCSProf »

You may want to look at my thread on Roth conversions in RMD years: viewtopic.php?t=377093

I think most of the responses you are getting assume that you are filing MFJ, in which case $600K is not an unreasonable amount for you to hold in tax-deferred. If you are filing single status, that's a different story.
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GerryL
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Re: ROTH conversion from RMD'd Trad IRA

Post by GerryL »

RetiredCSProf wrote: Thu May 26, 2022 9:31 pm You may want to look at my thread on Roth conversions in RMD years: viewtopic.php?t=377093

I think most of the responses you are getting assume that you are filing MFJ, in which case $600K is not an unreasonable amount for you to hold in tax-deferred. If you are filing single status, that's a different story.
How different a story? I'm filing single and have a lot more than $600k in tax-deferred?
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retired@50
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Re: ROTH conversion from RMD'd Trad IRA

Post by retired@50 »

GerryL wrote: Thu May 26, 2022 10:12 pm
RetiredCSProf wrote: Thu May 26, 2022 9:31 pm You may want to look at my thread on Roth conversions in RMD years: viewtopic.php?t=377093

I think most of the responses you are getting assume that you are filing MFJ, in which case $600K is not an unreasonable amount for you to hold in tax-deferred. If you are filing single status, that's a different story.
How different a story? I'm filing single and have a lot more than $600k in tax-deferred?
GerryL,
Have you started RMDs yet?

If you look at the IRS table that helps you compute your RMD you'll be able to run some numbers and see how much the RMD grows over the years. I think the percentage starts under 4% in the first year, then slowly grows larger. In your 90s it can be over 8% I think.

If you then take your RMD projections and add them to the remainder of your income from other sources, you'll start to get a sense of just how much your total income could be down the road. If this starts bumping you into higher tax brackets, and IRMAA cliffs, etc. then you may want to do some Roth conversions to control your income.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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GerryL
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Re: ROTH conversion from RMD'd Trad IRA

Post by GerryL »

retired@50 wrote: Thu May 26, 2022 11:15 pm
GerryL wrote: Thu May 26, 2022 10:12 pm
RetiredCSProf wrote: Thu May 26, 2022 9:31 pm You may want to look at my thread on Roth conversions in RMD years: viewtopic.php?t=377093

I think most of the responses you are getting assume that you are filing MFJ, in which case $600K is not an unreasonable amount for you to hold in tax-deferred. If you are filing single status, that's a different story.
How different a story? I'm filing single and have a lot more than $600k in tax-deferred?
GerryL,
Have you started RMDs yet?

If you look at the IRS table that helps you compute your RMD you'll be able to run some numbers and see how much the RMD grows over the years. I think the percentage starts under 4% in the first year, then slowly grows larger. In your 90s it can be over 8% I think.

If you then take your RMD projections and add them to the remainder of your income from other sources, you'll start to get a sense of just how much your total income could be down the road. If this starts bumping you into higher tax brackets, and IRMAA cliffs, etc. then you may want to do some Roth conversions to control your income.

Regards,
Yes. Several years into RMDs. And I have looked forward at the chart. Assuming the market doesn't come crashing down and remain there, I am looking at eventually going into perpetual IRMAA territory. Will use QCDs to lessen the pain and stay in first bracket as long as possible. I started to do Roth conversions before SS at 70 but then realized that most of my money would be going to charity in my will, so it made no sense to pay taxes on it just to move it into a different type of account.
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Eagle33
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Re: ROTH conversion from RMD'd Trad IRA

Post by Eagle33 »

GerryL wrote: Fri May 27, 2022 1:32 am Yes. Several years into RMDs. And I have looked forward at the chart. Assuming the market doesn't come crashing down and remain there, I am looking at eventually going into perpetual IRMAA territory. Will use QCDs to lessen the pain and stay in first bracket as long as possible. I started to do Roth conversions before SS at 70 but then realized that most of my money would be going to charity in my will, so it made no sense to pay taxes on it just to move it into a different type of account.
Have you factored in the annual IRMAA adjustments? Maybe not make it into the increasing IRMAA tier as you think. Check out this IRMAA article that is updated by the author periodical as new info is available. He has been updating the last couple of years (as long as I have been following it).
Charon
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Re: ROTH conversion from RMD'd Trad IRA

Post by Charon »

steve51 wrote: Thu May 26, 2022 6:55 pm Currently my marginal tax rate is 24% and even taking conversion over 3 years, I don't think I can avoid bumping up to 35% tax rate.
This is difficult to make sense of, unless you have a very large income from something other than SS (e.g., a pension). You need about $222k/year of income to hit 35%, even if filing single. Your tax-deferred savings are negligible compared to this limit.
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FiveK
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Re: ROTH conversion from RMD'd Trad IRA

Post by FiveK »

Charon wrote: Fri May 27, 2022 7:59 pm
steve51 wrote: Thu May 26, 2022 6:55 pm Currently my marginal tax rate is 24% and even taking conversion over 3 years, I don't think I can avoid bumping up to 35% tax rate.
This is difficult to make sense of, unless you have a very large income from something other than SS (e.g., a pension). You need about $222k/year of income to hit 35%, even if filing single. Your tax-deferred savings are negligible compared to this limit.
OP's situation is "now 70, taking Soc Sec and have 600K in Trad/SEP accounts." $600K/3yr is pretty close to that $222K/yr. Of course, that prompts the question of "why insist on converting it all in 3 years?"
tibbitts
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Re: ROTH conversion from RMD'd Trad IRA

Post by tibbitts »

retiredjg wrote: Thu May 26, 2022 7:29 pm Be sure you actually need to do Roth conversions. I can't see how $600k in tax-deferred accounts would even be a problem that requires Roth conversions.
Probably this isn't a case of "need", it's more trying to (over?) optimize based on a guess at the future, maybe future changes in filing status or tax brackets or medical expenses that might or might not materialize, whatever. Certainly there are obvious cases where conversions either make sense or don't but this doesn't seem to be a case where they're likely to matter much either way.
Topic Author
steve51
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Re: ROTH conversion from RMD'd Trad IRA

Post by steve51 »

Hello and thanks for the comments ....
Some additional info may be helpful. I live a frugal lifestyle by choice. I filing ‘single’. 2021 MAGI was $96K from other investments all at Vanguard) putting me into 24% marginal tax rate. My Trad/SEP account is earmarked for some of my beneficiaries and I was trying (wrongly it seems) to keep those funds lumped together in my portfolio. Converting to a Roth leaves beneficiaries with less tax issues.
“Bumping my tax rate from 24 to 35%” was based on doing the total $600K in 3 years. A bad idea I see now.
Comments received have made me realize that I can do Roth conversion over several years keeping better control on my marginal rate while receiving RMDs. Yes I agree in retrospect that taking RMDs is not a ‘big lift’.


Thanks to retiredjg, GerryL, FiveK, Flobes, Exchme, informative thread by RetiredCSProf, Eagle33 for IRMA considerations which I found out when my tax free muni fund receipts counted towards my IRMA totals, Charon – see 2021 MAGI.

You've all given me food for thought and a clearer road ahead... :)
Thanks
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FiveK
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Re: ROTH conversion from RMD'd Trad IRA

Post by FiveK »

steve51 wrote: Fri May 27, 2022 9:39 pm Comments received have made me realize that I can do Roth conversion over several years keeping better control on my marginal rate....
Good plan!

See Roth IRA conversion - Bogleheads for more on visualizing your marginal rates.
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retiredjg
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Re: ROTH conversion from RMD'd Trad IRA

Post by retiredjg »

steve51 wrote: Fri May 27, 2022 9:39 pm Hello and thanks for the comments ....
Some additional info may be helpful. I live a frugal lifestyle by choice. I filing ‘single’. 2021 MAGI was $96K from other investments all at Vanguard) putting me into 24% marginal tax rate.
How familiar are you with taxes? If a good portion of your income is from investments, you may not be in the 24% marginal tax bracket at all.

Munis are not included in taxable income for federal taxes, long term capital gains and qualified dividends from stocks are not included in the ordinary income. You might be in a lower tax bracket than you think.
Charon
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Re: ROTH conversion from RMD'd Trad IRA

Post by Charon »

FiveK wrote: Fri May 27, 2022 8:23 pm
Charon wrote: Fri May 27, 2022 7:59 pm
steve51 wrote: Thu May 26, 2022 6:55 pm Currently my marginal tax rate is 24% and even taking conversion over 3 years, I don't think I can avoid bumping up to 35% tax rate.
This is difficult to make sense of, unless you have a very large income from something other than SS (e.g., a pension). You need about $222k/year of income to hit 35%, even if filing single. Your tax-deferred savings are negligible compared to this limit.
OP's situation is "now 70, taking Soc Sec and have 600K in Trad/SEP accounts." $600K/3yr is pretty close to that $222K/yr. Of course, that prompts the question of "why insist on converting it all in 3 years?"
Yes, thanks - I read the situation too quickly and missed that the OP was trying to avoid all RMDs by Roth converting everything. (I thought the OP was worried that RMDs would push them into the 35% bracket.)

Pay a lot more taxes for a few years rather than pay less taxes and take RMDs? Does not seem like a good idea, as the OP has now realized.
Charon
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Re: ROTH conversion from RMD'd Trad IRA

Post by Charon »

steve51 wrote: Fri May 27, 2022 9:39 pm 2021 MAGI was $96K from other investments all at Vanguard) putting me into 24% marginal tax rate.
Beyond the fact that much investment income isn't taxable as ordinary income, I'm being slow today and not understanding why $96k MAGI would put you in the 24% bracket. The personal deduction in 2021 was $12,550, so your taxable income would be less than $84k, and the 24% bracket began at $86,376.

?
Topic Author
steve51
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Re: ROTH conversion from RMD'd Trad IRA

Post by steve51 »

Thank you for being persistent on the 24% tax rate issue....Charon, retiredjg.
I guess I've grown complacent using TurboTax. Wondered why the tax on 1040 line 16 didn't match tax tables but googling indicated dividends, gains were taxed at different rates to income which I knew but never found/looked for the relevant tables. Digging into that with spreadsheet, I'm a bit confused on how my adjusted standard deduction line 14 $14,715 affects the tax calculation. Are the taxes calculated then the deduction applied? Still working on that understanding.

So Inc rate (Income+Ord Divs(less Qual divs)+Sht Trm Captl Gains) is @ 12 or 22% and (Qual Divs + Lg Trm Gains) is 15%.

So you're correct not 24%.

Cheers :oops:
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FiveK
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Re: ROTH conversion from RMD'd Trad IRA

Post by FiveK »

steve51 wrote: Sat May 28, 2022 2:22 pmDigging into that with spreadsheet....
Given that predilection, you might look at the personal finance toolbox spreadsheet. Not that it, or most any spreadsheet, is immediately comprehensible, but all the formulas are visible there.

The Qualified Dividends and Capital Gain Tax Worksheet (starts on Calculations!K3) is where the QD & LTCG get broken out and taxed at their rate, while the ordinary income is taxed at its rate, and the two results added at the end.
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steve51
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Re: ROTH conversion from RMD'd Trad IRA

Post by steve51 »

.... Coming up with 1040 line 16 tax amount - whew! What a convoluted thing the 'Qualified Dividends and Capital Gain Tax Worksheet' is. I knew there was a reason I didn't like some of the IRS worksheets, there's very little reason for what's going on. I guess that's why tax accountants have a job ;-).

Thanks FiveK for the thread to the Boglehead toolbox page.
I've downloaded the tax spreadsheet for further study.

Cheers :D
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steve51
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Re: ROTH conversion from RMD'd Trad IRA

Post by steve51 »

Sorry this has gotten away from my original topic so will end here.
Thanks all.
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retiredjg
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Re: ROTH conversion from RMD'd Trad IRA

Post by retiredjg »

steve51 wrote: Sat May 28, 2022 3:32 pm Sorry this has gotten away from my original topic so will end here.
Thanks all.
Well, it is your thread. :happy You can take it anywhere you want!

The fact that your tax bracket is lower than you thought is important to your decision.

Suggestion: do some conversions, if for no other reason than you don't want the tax-deferred account to grow. You'll want to watch the IRMAA brackets (which determine what you pay for Medicare) so you don't go too far into IRMAA territory.
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celia
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Re: ROTH conversion from RMD'd Trad IRA

Post by celia »

steve51 wrote: Thu May 26, 2022 6:55 pm I'm familiar with Pro Rata rule and it will apply to this conversion.
How much of that $600K is basis? (See line 14 of the most recent Form 8606 you filed.)

Each RMD and Roth conversion will contain some of the basis. So some of your RMDs and conversion amounts won’t be taxed.

I can see why you want to convert all of this, as the pro rata rule will continue until the tax-deferred IRAs are emptied out. Note that when you take QCDs, you are giving away only tax-deferred money, not any of the basis.

retiredjg wrote: Thu May 26, 2022 7:29 pm I suggest you take your first RMD in the year you turn 72. If not, you must take two RMDs in the year you are 73.
It would be a terrible idea to delay the first RMD until the year you turn 73, as then you couldn’t do any Roth conversions in the year you are 72. This is because you must take out your RMD before you convert each year.
RetiredCSProf
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Re: ROTH conversion from RMD'd Trad IRA

Post by RetiredCSProf »

steve51 wrote: Sat May 28, 2022 2:22 pm I'm a bit confused on how my adjusted standard deduction line 14 $14,715 affects the tax calculation. Are the taxes calculated then the deduction applied? Still working on that understanding.
The following items are deducted from MAGI to calculate taxable income (assuming std deduction, not itemized):
a) age deduction = $1750 in 2022 (if 65 or older)
b) standard deduction = $12,950 in 2022 (if filing single)
c) above-the-line charitable donation = $300 (maximum amount allowed if single)
c) Qualified business income deduction = $0 (assuming OP has no deduction here)

Assuming the above $15,000 $14,700 in deductions, if MAGI < $185,050 $184,750, then taxable income < $170,050 (top of the 24% marginal tax rate for single filers in 2022)

In 2022, MAGI < $185K (but > $150K) is likely to fall within IRMAA Tier #3 for Medicare surcharges in 2024, even if inflation < 1% between now and Aug 2023
-----
Edited to correct for expiration of above-the-line charitable donation; also, the IRMAA Tier brackets are a guesstimate
Last edited by RetiredCSProf on Sun May 29, 2022 9:56 am, edited 1 time in total.
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FiveK
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Re: ROTH conversion from RMD'd Trad IRA

Post by FiveK »

RetiredCSProf wrote: Sat May 28, 2022 8:53 pm c) above-the-line charitable donation = $300 (maximum amount allowed if single)
Minor detail, but that doesn't apply for 2022.
tibbitts
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Re: ROTH conversion from RMD'd Trad IRA

Post by tibbitts »

retiredjg wrote: Sat May 28, 2022 4:23 pm Suggestion: do some conversions, if for no other reason than you don't want the tax-deferred account to grow. You'll want to watch the IRMAA brackets (which determine what you pay for Medicare) so you don't go too far into IRMAA territory.
The point about getting the balance down to where it's not growing was the most important one and for me was a reason for considering converting in a higher-than-otherwise-desirable bracket. I did that the year before IRMAA would become a factor, although elevated IRMAA, as long as it's only for a year or two, isn't a huge consideration. I just didn't want deferred accounts to have such a large balance that RMDs would leave me in a high-ish bracket with elevated IRMAA forever.
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