How to Take Advantage of a Low Income Year During Accumulation

[RePatriot]

[Scrubbing personal info]

[getmoneyeatpizza]

Looks like you can convert than entire $46k of Traditional to a Roth and stay in the 12% bracket. I would do that for sure.

I wish I had known to do a roth conversion in grad school at the time.

[Shuchong]

I did a traditional to Roth conversion while I was in law school and paid nothing in taxes on it, because my income was so low and because I had a lifetime learning credit that otherwise would have gone to waste.  So be sure to factor any education credits you're eligible for into your planning.  You may be able to do both the conversion and the brokerage to Roth contribution with very little tax consequence. 

(Also, kudos to you for thinking about this now!  I'm a senior associate at this point, having some health issues and questioning whether I should stay in biglaw, and having saved crazy amounts over the past few years is one of the best gifts I have ever given myself.  It takes a lot of the pressure off, and pressure is something there is no shortage of in biglaw...)

[MustacheAndaHalf]

The cheapest tool is last year's tax software.  You can plug in what you expect to happen, see the tax owed, then edit and see how it changes.  Historically 12% is a great tax rate.  The next dollar above that bracket is taxed at 22%.

The 12% income bracket is $40k for single filers, but you have a $14k standard deduction.  You need to add up income, dividends from investments, income from CDs, bonds and bank accounts.  The gap between all that and ($40k + $14k =) $54k is how much you can put into a Roth Conversion while staying within 12% taxation.

[MDM]

Any recommendations for tools to run scenarios for tax purposes?

The "best" tool will be a matter of taste, but if you don't mind entering a few numbers in Excel, the case study spreadsheet will show your 2021 marginal rate breakpoints for whatever income range you'd like to consider.

[getmoneyeatpizza]

He's MFJ and claims his income this year will be 44k.

So he can take his income 44k, his trad ira 46.5 = 90.5k

In order to stay in 12% you have the 25k standard deduction and up to 80k in income. 105k.

Since 90.5 is less than 105k you can do it, and the marginal rate for your conversion is 12%. And since you'll be a well paid lawyer that's worth it.

Roth is also helpful because you can avoid big RMDs later in life and you can stay in a lower tax bracket even when you have "lumpy" expenses. i.e. you are trying to stay under 65k for ACA reasons and you need your roof replaced, just take it from the Roth. Also nicer for heirs to inherit a roth than a Trad.

1) The roth conversion is a no brainer
2) Selling taxable for roth, less so, especially if you want to access money for retirement before 59.5. BUT - Are you going to be making 180k plus after school? If so, I'd lean towards selling the taxable for roth too since you'll have plenty of money to fill up a taxable bucket later anyway. You will probably pay zero percent gains in 2022 and maybe other years too. The gap gains rate is 0% until 80k

https://taxfoundation.org/2021-tax-brackets/

[Kayad]

Agree with all, convert trad to Roth while you can do it at 12% or less.  Smart move.  Break it up into a few years if cash flowing the tax payment is going to hurt.

Next, for the taxable, even if you don’t sell for Roth contribution, you could/should capital gains harvest up to that 0% cap gains rate.

Two other thoughts
1.  Don’t forget to factor in state taxes, depending on where you live, it may alter the cost benefit calculus to some degree.
2.  If you are going to want to buy a house post law school, that 27k will be a helpful start toward that, a potential good reason not to tie it up in retirement accounts.