Another poke at the ROTH Conversion question

[BTDretire]

I put down details as I know them, 2018 income for us is unknowable, making it difficult.
I hope it doesn't read to convoluted.

Regarding doing Roth conversions.
 We own our home and have a fairly frugal expenses  ~ $45k. (today)
I expect a good inheritance for my two kids and starting to set it up that way.
My wife and I each have about $380k in tIRA or SEP/IRA accounts.
We also have about $1M in taxable accounts.
We will reach 70-1/2 in 7 and 11 years, 2025 and 2029.
Assuming 7% growth rate over the next 7 years and 11 years, 
 The tIRA and SEP/IRA  accounts will have $610,000 and $800,000 respectively.
The taxable money account may have $1,600,000.
At 70, I will get $29k SS and my wife will get $23k.
First year RMDs would be $22k + $29k SS + $32,000 Dividends--That assumes 2% on $1.6M
That would put my income at $73,000, in 2025.
Four years later when my wife has RMDs and SS.
 $29k (my RMD) + $23k (Wife RMD) + $58k SS + $40k Dividends = $150,000  in 2029.
I think that presents the case for Roth conversions. Plus, I think I can stay in the 12%
tax bracket while converting some money.
BUT, I'll lose both kid deductions in 2018, and Sep/IRA deductions, If I start Roth Conversions.
I'll gain the pass through deduction in our business. Expect about $65k net business income.
I'll have about $65k a year graduate college expenses for the next 4 years, and I have NOT yet figured out if they are deductible or creditable.
 I have been paying an extremely low Effective tax rate (low single digits) by
putting money in two SEPs, HSAs and two kids and college Credits. Marginal 15% rate.
My current thinking is that the 2018-12% tax rate is going away by the time I reach 70yrs old, and if it doesn't, my income will push me to a higher bracket than now, making a Roth Conversion a wise choice, because my tax bracket will be higher.

Am I in a no brainer, do ROTH conversion situation, or do I need to do more calculations?
 

[secondcor521]

I didn't put your stuff into a spreadsheet, but I'd suggest you set one up to look at this question.

A couple of general comments:

1.  There's always the gamble of paying taxes now to avoid paying more taxes later risking a situation where the rules change and the paying taxes now was a mistake in retrospect.  So that's a caveat.

2.  Remember in your spreadsheet that the tax brackets increase with inflation.  There is also the fact that the new rates and brackets expire in 2026(?) so that is an additional thing to think about.

3.  Assuming you're the older one in your marriage, your 2029 RMD will likely be higher by some amount because you have to reduce your RMD divisor by one every year.  You'll start your RMDs in ~2026 with ~$800K and an RMD divisor of ~27.4.  Four years later your divisor will be ~23.4, so if your balance stays the same your RMD will be more like ~$34K.

4.  If you're basing your SS numbers on your SS estimates from the government, remember that those are in current dollars.  So you might need to inflate those for the next 7 and 11 years.  If you stop earning income before that, though, the SS estimates will be on the higher side.

5.  In 2029 if brackets stay the same, I figure the top of the 22% bracket will be ~$103K and the top of the 24% bracket will be ~$196K.  From your $150K in 2029 income you'll want to subtract your $24K (increased for inflation), so you'll have ~$125K in taxable income so will be in the middle of the 24% bracket.

I'm still figuring this out myself, but I think what you want to do is probably figure out about how much overall you need to convert to stay in the 22% bracket over the next several years, then make a plan for when you want to convert that money.  Personally I have about 21 years to address this problem, and I'm going to kick the can down the road two years at least because I think it is more valuable for me to try to get a better financial aid deal for my kids starting college.

You might find you only need to convert, say, about $100K to get yourself below the top of the 22% bracket in 2029.  You could just divide that into $50K for you and $50K for your wife, and then move $50K/7 and $50K/11 each year.  Then you'll have to weigh if that additional income and what you're giving up for it over the next 7 and 11 years is worth it.  For me I am not willing to give up trying for better financial aid, but I will probably be willing to give up my ACA credits in a few years.

Finally, as far as college goes, that's a broad topic.  Basically there are several deductions and credits available, plus the financial aid game if you choose to learn about that.  The AOTC seems to be the most valuable, but there is also the Lifetime Learning Credit if they go longer than four years, and the tuition and fees deduction.

Good luck!

[BTDretire]

I didn't put your stuff into a spreadsheet, but I'd suggest you set one up to look at this question.

A couple of general comments:

1.  There's always the gamble of paying taxes now to avoid paying more taxes later risking a situation where the rules change and the paying taxes now was a mistake in retrospect.  So that's a caveat.

2.  Remember in your spreadsheet that the tax brackets increase with inflation.  There is also the fact that the new rates and brackets expire in 2026(?) so that is an additional thing to think about.

  Let me thank you for thinking deep enough to see many pitfalls in the analysis!
I wasn't thinking about bracket inflation, but I am thinking
about the 2026 expiration. I don't believe rates will drop, but...

3.  Assuming you're the older one in your marriage, your 2029 RMD will likely be higher by some amount because you have to reduce your RMD divisor by one every year.  You'll start your RMDs in ~2026 with ~$800K and an RMD divisor of ~27.4.  Four years later your divisor will be ~23.4, so if your balance stays the same your RMD will be more like ~$34K.

I added 7% per year and also removed the RMD each year so in
2029 the amount is correct. As well as I can predict.

4.  If you're basing your SS numbers on your SS estimates from the government, remember that those are in current dollars.  So you might need to inflate those for the next 7 and 11 years.  If you stop earning income before that, though, the SS estimates will be on the higher side.

Actually mine will me $610k in 2025 hers $800k in 2029.
Yes, we will stop work before 70 and I did drop the amount some for that but it was just a guess. Yep lots of details.

5.  In 2029 if brackets stay the same, I figure the top of the 22% bracket will be ~$103K and the top of the 24% bracket will be ~$196K.  From your $150K in 2029 income you'll want to subtract your $24K (increased for inflation), so you'll have ~$125K in taxable income so will be in the middle of the 24% bracket.

I'm still figuring this out myself, but I think what you want to do is probably figure out about how much overall you need to convert to stay in the 22% bracket over the next several years, then make a plan for when you want to convert that money.  Personally I have about 21 years to address this problem, and I'm going to kick the can down the road two years at least because I think it is more valuable for me to try to get a better financial aid deal for my kids starting college.

You might find you only need to convert, say, about $100K to get yourself below the top of the 22% bracket in 2029.  You could just divide that into $50K for you and $50K for your wife, and then move $50K/7 and $50K/11 each year.  Then you'll have to weigh if that additional income and what you're giving up for it over the next 7 and 11 years is worth it.  For me I am not willing to give up trying for better financial aid, but I will probably be willing to give up my ACA credits in a few years.

Finally, as far as college goes, that's a broad topic.  Basically there are several deductions and credits available, plus the financial aid game if you choose to learn about that.  The AOTC seems to be the most valuable, but there is also the Lifetime Learning Credit if they go longer than four years, and the tuition and fees deduction.

Good luck!

  Thanks for the input. I also think there is some advantage to my heirs (kids) if they inherit Roths with no tax do.
This does assume they will be in higher tax brackets. My wife is 59, possible to have 30 more years of growth if/when the
kids get it.