Moving to new state for December - Roth conversion?

[bb11]

I'm living and working in New York City, but moving to New Jersey (while continuing to work in NYC) this weekend (December 1st). My understanding is that since I work in New York I will continue to pay NY state taxes, so this seems to potentially be an opportunity to do Roth conversions. Is it a good idea?

I project to have $80k in taxable income for the year (after adjustments for 401k contributions, HSA, and standard deduction. $12k of that will be made in December, but my understanding is it will still be NY taxable income. So it seems that the 1 month I'm an NJ resident my taxable income will be $0. I understand I only get 1/12 of the standard deduction in NJ, but they still only tax the first $20k in income at 1.4%, and the next $15k in income at 1.75%.

The federal 22% rate ends at $82.5k. Then I would be converting at the 24% federal rate. basically I'm thinking I could convert up to $35k from Trad IRA to Roth IRA at a ~23.5% federal and ~1.5% state rate, meaning pay 25% in taxes on it total.

Should I do this, or is a 25% rate still too high? I have about $60k in my Traditional IRA, and my salary is ~$150k so expect to be in the 24% federal, 6.5% state bracket for the foreseeable future.

[MDM]

Should I do this, or is a 25% rate still too high? I have about $60k in my Traditional IRA, and my salary is ~$150k so expect to be in the 24% federal, 6.5% state bracket for the foreseeable future.

The primary question to answer is "what marginal tax rate do you expect to pay after retirement?" and compare that to your current rate.  See Traditional versus Roth - Bogleheads for more details.

[bb11]

Should I do this, or is a 25% rate still too high? I have about $60k in my Traditional IRA, and my salary is ~$150k so expect to be in the 24% federal, 6.5% state bracket for the foreseeable future.

The primary question to answer is "what marginal tax rate do you expect to pay after retirement?" and compare that to your current rate.  See Traditional versus Roth - Bogleheads for more details.

Right. The difficulty with that is I don't know how much money I will end up with or when I will retire.

I do plan to retire early, so there will be some years with nice Roth conversion opportunities. But I won't retire with less than $1.5-2M (or at least that is my thought process as of right now, and I'm potentially open to ending up with more if I keep enjoying work). If my Trad IRA balance were to swell to $400k-500k+, which it may as I'm putting in the max every year and expect to work at least 10 more years (plus contracting opportunities after I "retire"), it would obviously take awhile to convert at low rates.

Is it worthwhile to convert now for 25% fed + state rate? I'm leaning towards no, I can probably convert later for lower rates, but I'm not sure, which is why I'm asking for advice.

[MDM]

If my Trad IRA balance were to swell to $400k-500k+, which it may as I'm putting in the max every year and expect to work at least 10 more years (plus contracting opportunities after I "retire"), it would obviously take awhile to convert at low rates.

1) Is that $500K in today's dollars (i.e., did you assume a real - not nominal - return)?  E.g., if you believe you will have a 7% growth but 3% will be due to inflation, use 4% in your Future Value calculation).

2) Would withdrawals from that balance be your only income?

3) Whatever the answer to question #2, what marginal rate will you pay on 4%/yr withdrawals from the traditional account, assuming today's tax brackets & rates?

[bb11]

If my Trad IRA balance were to swell to $400k-500k+, which it may as I'm putting in the max every year and expect to work at least 10 more years (plus contracting opportunities after I "retire"), it would obviously take awhile to convert at low rates.

1) Is that $500K in today's dollars (i.e., did you assume a real - not nominal - return)?  E.g., if you believe you will have a 7% growth but 3% will be due to inflation, use 4% in your Future Value calculation).

2) Would withdrawals from that balance be your only income?

3) Whatever the answer to question #2, what marginal rate will you pay on 4%/yr withdrawals from the traditional account, assuming today's tax brackets & rates?

I appreciate your direction with the calculation, but I'm not having troubles with that part. The issue is the error bars are so large that a hard calculation like that is meaningless. I might end up with $1M, or I might end up with $5M - 10M. I might have 10 good Roth conversion years, or I might have 30. I may even have none! My potential career outcomes are too broad and my retirement window too uncertain, to do an NPV analysis.

I'm more interested in a qualitative approach. I can convert money now at a ~25% effective rate. Is it worth doing for someone with expected final assets in the $1M to $5M range, with an interest in early retirement but absolutely no plans for it in the next decade at least? Or should I just keep it in the Trad IRA? If I stop work early (say at age 40) the tax rate will almost certainly be lower I think, but if I keep working it'd probably be higher (especially given IMO tax rates are more likely to go up than down in the future).

My thought is keep it in the Traditional. While it's possible I pay higher than 25% in the future, that mostly can only occur if I end up with large amounts of money/income, in which case the difference between converting now/later will be fairly unimportant. I'm open to other people's thoughts though.

[MDM]

The issue is the error bars are so large....

Yes, they are now.

Next year, when you repeat the estimate, they will be smaller.  And smaller the year after that, etc.

Or you could flip a coin....

[bb11]

Anyone else have any thoughts?