bookkeeper
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Post by bookkeeper on Apr 6, 2021 21:20:03 GMT -5
DH and I have been considering converting some of his Traditional IRA to a Roth IRA. There are a lot of moving pieces to this puzzle and I could use some ideas from the Your Money experts.
The facts are:
DH: 62, ME: 57 been retired since 2015, total debt $50,000
Traditional IRA Balance: $1,330,000
Roth IRA Balance: $150,000
401k Balance: $930,000
Net worth: $2,900,000
2018 AGI: $155,000
2019 AGI: $124,000
2020 AGI: $129,000
Cash on hand: enough to live for a year or better.
Other considerations include the American Rescue Plan Act and the health insurance cap at 8.5% of income. We currently pay $1900/month for health insurance with a $6800 deductible each person.
I have purposely been keeping our income in the $120,000 to $150,000 and our effective tax rate in the 11% to 14% range for the last 5 years.
The advantages to converting this money to a Roth account are:
Tax free income from investments for the remainder of DH’s and my life. Tax free income for our sons for 10 years after our deaths.
Taking advantage of the current 22% and 24% tax brackets. We pay income tax once on this money and it becomes tax free going forward.
Our income will increase after my 84 year old mother goes to heaven (her words). My siblings and I will inherit rental property and the corresponding yearly income. DH gets SS this year at $2000 per month, so more income.
I think we can easily afford to convert $20,000 to $30,000 each year and pay the tax associated which I estimate to be $4,000 to $5,000. Converting money now while we file MFJ gives much more space to accomplish the task at hand of moving money to a Roth rather than if one is a single tax payer.
I am 5 years younger than my DH and I will probably be the one filing single as life progresses. DH’s father lived to 74 and none of the men in his family live to 80.
I plan to meet with a health insurance sales person this week. My state only offers two options for health insurance on the exchange and the policy/coverage would be identical to what I already have purchased as an individual on the open market. By keeping our income low, we could save serious $$$ on health insurance for two years. By increasing our income with a Roth IRA conversion, we could avoid paying tax on an income generating asset going forward for a lifetime and 10 years after we die. Where is the sweet spot? Should we decrease our income and go for cheap health insurance or increase our income to benefit our future selves, or a combination of the two?
I would really appreciate any advice or viewpoints of someone who has done a Roth conversion. I feel like our tax advantaged accounts have done a great job of creating growth to pay the taxes due, and I am trying to figure out if all this strategy is worth the headache to maybe save some tax dollars for my future self. And I would like fries with that! Thanks for any input, this is a confusing topic.
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tallguy
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Post by tallguy on Apr 6, 2021 21:42:30 GMT -5
DH and I have been considering converting some of his Traditional IRA to a Roth IRA. There are a lot of moving pieces to this puzzle and I could use some ideas from the Your Money experts. ------------------------------------------------------------------------------- I would really appreciate any advice or viewpoints of someone who has done a Roth conversion. I feel like our tax advantaged accounts have done a great job of creating growth to pay the taxes due, and I am trying to figure out if all this strategy is worth the headache to maybe save some tax dollars for my future self. And I would like fries with that! Thanks for any input, this is a confusing topic. I would definitely be doing Roth conversions. You have right now a total of $2.26 million in accounts subject to RMDs, although it is not clear how much is in each of your names. By the time you have to start taking them it could be what, double that or more depending on what you are invested in? RMDs alone will be six figures each year, and increasing. It is a given that your SS will be taxable at 85% but you will likely have IRMAA surcharges as well. Individual income tax rates are also scheduled to revise back upward in a few years. (Unless you plan on doing extremely high charitable contributions every year, of course.) I do not have anywhere near that amount subject to RMDs, but I still regret not starting to do Roth conversions even earlier than I did (2017). I spent several years minimizing current taxes rather than really examining my longer-term picture. Admittedly, part of that was changed by circumstance rather than merely being overlooked as a possibility, but that may argue even more in favor of doing conversions now. We do not know what the future will be, and if one of you were no longer around the survivor would be paying a marginal tax rate far higher than 24%.
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justme
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Post by justme on Apr 6, 2021 23:46:36 GMT -5
I'm in about that tax rate and considering moving more to roth. My work only added roth last year (though my previously job had it) I'm at a 12/4 percent break with another 3 from work into traditional and I've put another 1-2% in roth ira the last two years. I'm also now expanding into taxable but considering upping roth. I'm going to be paying more taxes with the taxable anyways.
So considering I'm in about your tax bracket considering adding more into roth I'd say yes. I need to do the math but pretty sure I need to up my roth. Plus ya know 22% prob will be my lowest top rate for a long ass time.
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CCL
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Post by CCL on Apr 7, 2021 2:44:22 GMT -5
What about taxable accounts? I've been doing Roth conversions for the last 5 years. What I'm finding now is my taxable account is paying out much more dividends and capital gains than it used to. Once all that is added in, I end up paying higher rates.
Taxes always seem to be a moving target, but I think now is the time to do the conversions before tax rates go back up again.
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bookkeeper
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Post by bookkeeper on Apr 7, 2021 8:09:34 GMT -5
We don't have a taxable brokerage account. I do have shares of a tax free municipal bond fund. The bond funds I own are currently throwing a dividend of around $450/month which I have been reinvesting. I also receive some rental income from my late father's trust.
We plowed money into DH's 401k during his working years to lower our taxable income. During the 2008-2012 time period, we doubled down and invested even more in the retirement accounts. That move has served us very well. The funds in DH's Traditional IRA are his retirement payout as he took a lump sum rather than an annuity.
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Post by The Walk of the Penguin Mich on Apr 7, 2021 13:49:49 GMT -5
TBH......you really need to sit down with a financial advisor. There are really so many moving parts here that even though what you provided is quite a lot, it is not a complete picture and could have some huge effects later.
After converting what we have, we still have about about the same amount as you in taxable accounts....and are about the same age. TD has has calculated that in RMDs, we will need to be pulling out around $90k. When this is added to our SS, Canadian income, dividend income and capital gains, this all adds up to the place where IRMAA kicks in. Him retiring early gives us a chance to draw down the IRAs and converting to Roth so we can get to a point where the requirement that both of us don’t get hit with IRMAA (or at least too badly) when he starts to collect Medicare.
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bookkeeper
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Post by bookkeeper on Apr 8, 2021 7:21:27 GMT -5
We have been working with our financial advisor that handles the IRA portion of the pile. He is the one who has proposed starting the conversion.
If we do nothing, I estimate DH's RMD to be around $100,000/year. In 10 years when RMD's would begin, that $100,000 will not go as far as it does today.
We have a meeting with an insurance broker today. It looks to me that we can save $10,000 per year by enrolling at healthcare.gov. That would go a long way toward paying the income tax on an IRA conversion.
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bookkeeper
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Post by bookkeeper on Apr 8, 2021 13:24:03 GMT -5
We enrolled on healthcare.gov today and our new premium is $503. We saved over $1300/month.
The American Rescue Act is pretty popular at our house!
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CCL
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Post by CCL on Apr 8, 2021 21:15:19 GMT -5
Whoa! That's a big savings. Good for you!
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plugginaway22
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Post by plugginaway22 on Apr 9, 2021 6:16:53 GMT -5
Would love to hear more about how you got that rate? Is it subsidized? We are getting close to needing this option.
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bookkeeper
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Post by bookkeeper on Apr 9, 2021 12:02:04 GMT -5
We bought a marketplace plan that was identical to the healthcare plan we had purchased off the exchange. I estimated our income at $150,000 for 2021 to give myself room to start converting DH's Traditional IRA.
The American Rescue Act has eliminated the income limit for Marketplace health plans for a period of time. I am no expert, but the short version is for 2021 and 2022, you will not pay more than 8.5% of your adjusted gross income for health insurance.
The $1300 savings is the federal government picking up the rest of the premium. You do have to be registered with healthcare.gov to get the subsidy or alternately, if you are paying the full premium - get the subsidy amount back as a credit on your federal income tax. You have to true up your income and premium subsidy with each year's tax filing. Best not to underestimate your income and face a large tax bill the following spring.
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teen persuasion
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Post by teen persuasion on Apr 9, 2021 15:16:37 GMT -5
Have you tried running your numbers thru i-ORP? i-ORP
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bean29
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Post by bean29 on Apr 9, 2021 15:37:34 GMT -5
I have 30% of my pay going to conventional 401K and 10% to Roth. When I am reading about you guys doing conversions, I feel like I should put all my current 401K investments in the Roth side. We are not eligible for Roth if I don't do it via the 401K.
Do I have to wait to do a conversion until our income is lower?
Did you just change to Marketplace Bookkeeper? I thought we could change DS's plan, but when I went in to look, is said he would have needed to change by March 18 (If I remember correctly).
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bookkeeper
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Post by bookkeeper on Apr 10, 2021 7:57:16 GMT -5
The upside to contributing to your 401k is the instant tax savings you get in the year you contribute. That investment then grows tax free until you are retirement age to draw. In our case, DH began contributing to his 401k in the 1980's so that money has had lots of time to grow and generate the income to pay federal income tax.
How much federal income tax you and your heirs want to pay is the heart of the IRA conversion conversation. We did just switch to Marketplace health insurance. I believe Marketplace enrollment is now open. From the healthcare.gov website:
"You can enroll in or change plans due to the COVID-19 emergency through August 15,
or see if you qualify for Medicaid or CHIP."
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tskeeter
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Post by tskeeter on Apr 13, 2021 16:11:58 GMT -5
I have 30% of my pay going to conventional 401K and 10% to Roth. When I am reading about you guys doing conversions, I feel like I should put all my current 401K investments in the Roth side. We are not eligible for Roth if I don't do it via the 401K. Do I have to wait to do a conversion until our income is lower? Did you just change to Marketplace Bookkeeper? I thought we could change DS's plan, but when I went in to look, is said he would have needed to change by March 18 (If I remember correctly). Bean, if you plan to maintain the lifestyle you currently enjoy after you retire, there is a pretty good chance that your tax bracket in retirement will be higher than it is today. Given the level of deficit spending at the federal level over the past many years and the platform of the current presidential administration, it’s hard to imagine a scenario where taxes will not increase and where tax deductions and exemptions will not decrease. For many new retirees, it’s likely that a lot of their tax deductions, credits or exemptions will go away. Education credits, retirement contribution credits, dependent deductions, mortgage interest deductions, and more. I’d expect that in the future, most YMAMer’s will be in higher tax brackets than they are today. Delaying Roth conversions until your income is lower may not actually result in lower taxes.
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ripvanwinkle
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All that is necessary for evil to succeed is that good men do nothing - Edmund Burke 1729 -1797
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Post by ripvanwinkle on Apr 27, 2021 20:06:30 GMT -5
I'm also looking at converting my traditional IRA to my Roth IRA. I just turned 70. Is there a calculator online to show me what it will cost to convert it to my Roth?
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CCL
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Post by CCL on Apr 27, 2021 20:09:55 GMT -5
The taxes you pay will be based on your income, assuming you already deducted the contribution.
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teen persuasion
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Post by teen persuasion on Apr 27, 2021 20:52:39 GMT -5
I'm also looking at converting my traditional IRA to my Roth IRA. I just turned 70. Is there a calculator online to show me what it will cost to convert it to my Roth? Whatever amount you convert increases your ordinary income by that amount. But if you are receiving SS, that increase may increase the proportion of your SS that is taxable (unless your SS is already 85% taxable). You could also hit IRMAA bands, pushing up the cost of your Medicare for a bit of time 2 years in the future. You could also bump up into a higher LTCG bracket. So it depends on how much other income you have (and types, like pension vs investment income), how much you convert, where you are in a tax bracket (more room to stay in same bracket, vs push you into a higher bracket), if you are below/in/past the SS tax hump, where you are in IRMAA bands...
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teen persuasion
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Post by teen persuasion on Apr 29, 2021 11:20:36 GMT -5
I'm also looking at converting my traditional IRA to my Roth IRA. I just turned 70. Is there a calculator online to show me what it will cost to convert it to my Roth? Just saw this thread on Bogleheads about the same question; lots of good links in there. link
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