Author Topic: How much of my TIra should I convert to Roth right now?  (Read 369 times)

Trudie

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How much of my TIra should I convert to Roth right now?
« on: March 19, 2020, 12:42:44 AM »
Given the market downturn Iím trying to decide if I should convert more of my traditional IRA to Roth in 2020.  I have already converted my expected tax free amount for the yearó the amount of taxable ordinary income I expect to be offset by deductions.  Beyond that, how much further would you go?  I have space left in the 10 and 12% brackets.  Weíre living off stockpiled cash this year, so the stars seem to be aligning.  Also, in 2021 we may purchase health care on the exchange, if itís still around, so may have more to consider with the AGI cliff next year.  (Weíre on COBRA through 2020.)

I also would probably tap cash on hand to pay the taxes and let 100% of the amount go to work right away...  Right now we have enough cash to live on for 5 years, and likely more if we needed to.  I know thatís a lot, but it feels good at the moment given the turmoil in the market and our newly FIred status and it was also part of an inheritance.  We didnít stay out of the market when we were accumulating.

Iím 49 and FIred.

secondcor521

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Re: How much of my TIra should I convert to Roth right now?
« Reply #1 on: March 19, 2020, 01:16:54 AM »
The best answer I've seen after many discussions of this topic on another FIRE forum is to attempt to level your top marginal bracket across your lifetime.

One rough first cut approximation for this is to figure out what your top marginal rate will be when you are 72, given that you will be subject to RMDs, will be collecting Social Security, and will possibly face IRMAA surcharges.  Compare that rate to your current rate, and it may make sense to take more now so that your tax rate from 72 onward isn't as high.

When leveling, it is also thought to be important to consider state income taxes, IRMAA surcharges, FAFSA EFC effects if you have kids who may be in college, and ACA subsidy losses.  All of these things act like parallel tax systems.  It can get complicated quickly.

There are software packages out there that can do the math for you.  I-ORP is well-known, well-regarded, and free, although it can be hard to set up and understand and hard to believe the results.  There are other packages which cost a modest fee that I've seen referenced but am not that familiar with.

Personally I'm converting up to a FAFSA-related limit this year and possibly next, then will convert to the top of the 12% bracket for a number of years, then eventually to top of the 22% bracket.  At least that's the latest answer according to my homegrown spreadsheet and very simple approach.  I'm still trying to get a handle on the whole thing, honestly.

terran

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Re: How much of my TIra should I convert to Roth right now?
« Reply #2 on: March 19, 2020, 09:22:24 AM »
The best answer I've seen after many discussions of this topic on another FIRE forum is to attempt to level your top marginal bracket across your lifetime.

+1

MDM

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Re: How much of my TIra should I convert to Roth right now?
« Reply #3 on: March 19, 2020, 02:31:55 PM »
And see Investment Order if you'd like to see one approach to estimating those marginal tax rates, both now and in retirement.