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- Manlobbi
Personal Finance Topics / Retirement Investing
No. of Recommendations: 0
I did my first Roth conversion today.
Am I right in thinking that the first items to convert would be stocks that you expect to have the largest gains? This year my income was pretty low, and for the next 4 years it will be on the low side so I'm going to try and do a reasonable amount of Roth conversions. I also have to take RMDs from an inherited account so I have to factor that in my tax considerations.
Thanks.
No. of Recommendations: 7
This year my income was pretty low, and for the next 4 years it will be on the low side so I'm going to try and do a reasonable amount of Roth conversions. I also have to take RMDs from an inherited account so I have to factor that in my tax considerations.
Thanks. - richinmd
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You don't mention your age but if you are with ten years or so of going onto Medicare, then bone up on IRMAA. IRMAA is basically an escalating surcharge on your medicare premiums if your income exceeds the various thresholds. Since a Roth conversion will kick up your AGI, be wary of going even one dollar into the next higher IRMAA tier. I learned this too late in my Roth Conversion journey and am now paying several hundred extra each month for Medicare that could have been avoided.
No. of Recommendations: 1
That is a concern. We have a bit of Roth, but mostly regular IRAs. Plus an inherited IRA from 1poormom (she died this year). That latter one has RMDs already. In 10 years, the others will start having RMDs. That will increase income, obviously. And SS is going to start within 10 years.
Seems there really no way to avoid it. It's gonna get taxed. I'm thinking I should start drawing those down BEFORE I reach 65, so they won't factor into IRMAA, at least. Minimize the eventual RMDs. We retired over a year ago, so I can either get money from my retirement accounts, or from my brokerage. The cap gains from the brokerage aren't taxed as long as we keep our ordinary income below about $94K (married, filing joint).
No. of Recommendations: 1
I'm thinking I should start drawing those down BEFORE I reach 65, so they won't factor into IRMAA, at least. - 1pg
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Then you would be well advised to get started.
The 24% bracket for MFJ in 2023 starts at $89,450 and goes all the way to $190,750. With $94K or income already, you could do a $100K Roth Conversion on top and still pay only 24% on the amount converted.
This helps with IRMAA but even if it didn't, it gets money out of your IRA at 24%, a rate that is scheduled to go to 26% in 2026 when Trump Tax cuts expire, so you have three years (including 2023) to exploit the 2% tax savings on Roth Conversions.
No. of Recommendations: 0
Hmmm...thanks for the advice.
So your thinking is to take advantage of ROTH tax-free growth, and continue living off the taxable brokerage. As long as we stay under $94K of income, cap gains are not taxed. I can see that strategy.
Our ordinary income this year isn't going to even be $50K, much less $94K! Though if we do conversions, we would have to be aware of brackets. We were doing back-door conversions while we were working. Maybe we should do some front door now.
I sold a little stock this year, and never reinvested the proceeds. So that's mostly what we've been living on.
No. of Recommendations: 5
We have just spend several days building an ugly spreadsheet to model whether the IRA->Roth conversion makes sense. The issue is that those dollars grow untaxed in the IRA vs growing after-tax in the Roth. What we are seeing is that our net worth 10 years from now is significantly higher if we just wait and be forced to take the higher RMD having not done the conversion. This includes the IRMAA tax penalty due to higher RMDs. I haven't modeled the 24%->26% jump in 2025 but I doubt it would make a significant difference in our case.
I don't want to dissuade anyone from doing the conversion, but I do recommmend spending some time building a model that you can then stress-test. I went in to the process pretty sure that the conversion would be favored and came away surprised.
Rgds,
HH/Sean
No. of Recommendations: 4
The issue is that those dollars grow untaxed in the IRA vs growing after-tax in the Roth. What we are seeing is that our net worth 10 years from now is significantly higher if we just wait and be forced to take the higher RMD having not done the conversion.
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If the tax rates do not change, math says the after tax value of either strategy would be the same.
If you pay the taxes now and the rates decline then conversion resulted in more taxes that if you waited.
If you let it ride and pay the taxes later, and the tax rate has risen by that time, then you would pay more taxes than if you paid up front in the conversion.
Personally, I think rates are more likely to increase than decrease over the long term. So there is little downside to converting now resulting in higher total taxes.
The other thing that motivates me is leaving a sizable Roth Account to my children, one they owe zero taxes on when they take a withdrawal. Versus leaving them with an IRA, withdrawals from which will be pushing their taxable income even higher.
No. of Recommendations: 3
“We have just spend several days building an ugly spreadsheet to model whether the IRA->Roth conversion makes sense. The issue is that those dollars grow untaxed in the IRA vs growing after-tax in the Roth. What we are seeing is that our net worth 10 years from now is significantly higher if we just wait and be forced to take the higher RMD having not done the conversion.”
Sure, your pre-tax net worth would be higher at year 10.
You still have to pay the tax at some point.
No. of Recommendations: 7
Sure, your pre-tax net worth would be higher at year 10.
This is why I post here.
You are right, I was combining pre-tax and post-tax funds. When I take a more sophisticated approach to the sum it does look like a wash (assuming the same marginal tax rate). If marginal tax rates go up or the RMD forces me into a higher marginal tax bracket then the conversion really makes sense. And the IRMAA penalty just compounds the problem.
Thank you BHM and AC for correcting my thinking.
Rgds,
HH/Sean
No. of Recommendations: 3
Thanks. My income is very controllable right now and will be at its lowest for 3 years starting in December 2024. Then we have a couple of small pensions, my wife's social security and finally my social security at 70.
The IRMAA is unlikely to hit me but I'm running some calculations. The one thing I'm trying to figure out and might hit us down the road is a possible inheritance from a relative and that coupled with our own RMDs in a decade or so could get us into the IRMAA (one too many "A"s? too tired to look it up). I don't want to count on the inheritance as a certainty since the person could end up needing the money or do something stupid with the money as they get older but I was told by him that two of us would split his IRA 50/50 and just based on his comments it sounded like a decent size so I need to at least consider it partly in my tax planning and not in my spending.
I'm trying to take the inherited money from my father's IRA over the next 3 years and delay his Roth until it has to be removed.
And of course, depending on any tax changes, all this planning could have to be redone.
No. of Recommendations: 1
Retired recently and I met with my CPA and he advised to convert 1/6 of my total intended conversions (age 57) from my traditional/rollover to my Roth and repeat over the next 6 years to stay under IRMA penalty. My plan is to trim equities in brokerage acct until such time I am forced into RMD of a small residual rollover IRA and then tap into SS @70 and the Roth in my 70s and beyond, but I’ll noodle over it more as that time nears. Sound reasonable?
No. of Recommendations: 2
Retired recently and I met with my CPA and he advised to convert 1/6 of my total intended conversions (age 57) from my traditional/rollover to my Roth and repeat over the next 6 years to stay under IRMA penalty. My plan is to trim equities in brokerage acct until such time I am forced into RMD of a small residual rollover IRA and then tap into SS @70 and the Roth in my 70s and beyond, but I’ll noodle over it more as that time nears. Sound reasonable? - WEB
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Good Plan. The only thing I can add.....
If you have the resources to pay the tax on the Roth conversion with money outside the TIRA, then 100% of the amount converted makes its way into the tax free promised land of the Roth. The first few years I did Roth conversions I made the mistake of letting Vanguard withhold 20% to go to uncle sugar.
No. of Recommendations: 1
As an FYI, it's IRMAA (Income-Related Monthly Adjustment Amount).
Brian
No. of Recommendations: 1
“If you have the resources to pay the tax on the Roth conversion with money outside the TIRA, then 100% of the amount converted makes its way into the tax free promised land of the Roth.”
Thanks bighairymike. Yes, that is the plan and pay the taxes from MM in the brok. acct. We have a “free”Fidelity Wealth Mgt advisor who I met with a year ago. Might meet with him again for an hour/ year just for a bit peace of mind and to better manage tax/estate planning which may change. He gave us a good view of things from 30,000 feet even though I honestly did not learn much new. Some cool tools on their website but I’m not too OCD wrt these. Many thanks!
