How much Roth Converting?

[blue_green_sparks]

I have been working on a long-term, big picture spreadsheet. For you folks older than 59.5 with a Roth account older than 5 years but not yet receiving Social Security/Pensions, how do you decide how much converting to do each year? With my non-qualified accounts, I can even keep my income just below my first tax dollar or ACA dollar, but is this really the best thing to do?

I guess the answer is based each person's future expected income levels and will require some assumptions and calculations. Or is there a rule of thumb. Right know it is just a nagging question, but I read many forum posts from folks who seem to be converting now, trying to empty out their trad IRA ASAP.

[terran]

The first step would be making some guesses about what your RMDs might be if you do nothing and what Federal + state tax bracket that will put you in. That's your target: if you can convert and pay less Federal + State tax + Lost ACA subsidies expressed as a marginal rate then you should convert. Your best conversion years will be the time between when Medicare starts and when RMDs start since that removes the ACA consideration. You will want to familiarize yourself with IRMAA since that can increase your Medicare premiums.

[blue_green_sparks]

The first step would be making some guesses about what your RMDs might be if you do nothing and what Federal + state tax bracket that will put you in. That's your target: if you can convert and pay less Federal + State tax + Lost ACA subsidies expressed as a marginal rate then you should convert. Your best conversion years will be the time between when Medicare starts and when RMDs start since that removes the ACA consideration. You will want to familiarize yourself with IRMAA since that can increase your Medicare premiums.

Thanks, @terran. This helps a lot. I will add the RMDs and Medicare expenses to my sheet as we transition away from the ACA marketplace and try different Roth conversion scenarios and SS start dates. Fortunately, no state income tax here but I do think the Federal bracket tax rates may be going up next year so I will use those.

[lhamo]

In case you haven't seen it yet, the Bogleheads Retiree Portfolio Model is one of the most robust tools I have found to date for seeing the tax implications of various approaches to Roth conversions.

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

It is a very complex sheet that can be kind of intimidating when you first start using it -- just persist in plugging in all your data/assumptions as you go along and eventually the number of red flag/warning messages should decrease.

[blue_green_sparks]

In case you haven't seen it yet, the Bogleheads Retiree Portfolio Model is one of the most robust tools I have found to date for seeing the tax implications of various approaches to Roth conversions.

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

It is a very complex sheet that can be kind of intimidating when you first start using it -- just persist in plugging in all your data/assumptions as you go along and eventually the number of red flag/warning messages should decrease.

Oh this is great, thanks. I just downloaded it and looks like there is good support for using it !

[mistymoney]

In case you haven't seen it yet, the Bogleheads Retiree Portfolio Model is one of the most robust tools I have found to date for seeing the tax implications of various approaches to Roth conversions.

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

It is a very complex sheet that can be kind of intimidating when you first start using it -- just persist in plugging in all your data/assumptions as you go along and eventually the number of red flag/warning messages should decrease.

thanks for this!

todays reading secured :)

[terran]

I do think the Federal bracket tax rates may be going up next year so I will use those.

The 2018 Tax Cuts and Jobs Act tax bracket changes are set to expire AFTER 2025, so starting with the 2026 tax year.

My estimates for what the 2017 tax brackets would be for Married Filing Jointly if still in effect in 2024 are below. These will go up with inflation by 2026, but as long as you're using inflation adjusted return assumptions in your spreadsheet you should be using current tax brackets anyway. The way I've calculated this is by scaling the brackets with the Personal Exemption ($4050 in 2017) which was the same as the Qualified Disability Trust exemption that's still published ($5000 in 2024).

$0 - $23,000 10.00%
$23,000 - $93,700 15.00%
$93,700 - $189,000 25.00%
$189,000 - $288,050 28.00%
$288,050 - $514,400 33.00%
$514,400 - $581,100 35.00%
over $581,100 39.60%

Standard deduction  $15,650
Personal exemption  $5,000
Personal exemption phaseout $387,400

The personal exemption phaseout subtracted 2% of the personal exemption for every $2500 you were over the phaseout amount. The $2500 didn't increase with inflation, so I don't know if it would be any higher in 2026.

[blue_green_sparks]

I do think the Federal bracket tax rates may be going up next year so I will use those.

The 2018 Tax Cuts and Jobs Act tax bracket changes are set to expire AFTER 2025, so starting with the 2026 tax year.

My estimates for what the 2017 tax brackets would be for Married Filing Jointly if still in effect in 2024 are below. These will go up with inflation by 2026, but as long as you're using inflation adjusted return assumptions in your spreadsheet you should be using current tax brackets anyway. The way I've calculated this is by scaling the brackets with the Personal Exemption ($4050 in 2017) which was the same as the Qualified Disability Trust exemption that's still published ($5000 in 2024).

$0 - $23,000 10.00%
$23,000 - $93,700 15.00%
$93,700 - $189,000 25.00%
$189,000 - $288,050 28.00%
$288,050 - $514,400 33.00%
$514,400 - $581,100 35.00%
over $581,100 39.60%

Standard deduction  $15,650
Personal exemption  $5,000
Personal exemption phaseout $387,400

The personal exemption phaseout subtracted 2% of the personal exemption for every $2500 you were over the phaseout amount. The $2500 didn't increase with inflation, so I don't know if it would be any higher in 2026.

That's gonna sting a bit. Does sunsetting of the 2018 Tax Cuts and Jobs Act directly impact ACA thresholds as well?

[terran]

No, the TCJA doesn't have anything to do with ACA subsidies. However, the subsidies were improved during covid (including removing the cap for income above 400% of the federal poverty level) and those changes also expire after 2025, so subsidies will drop starting in 2026 unless the changes are extended. All we can really do now is assume that the changes will take effect in 2026 as scheduled, but it wouldn't surprise me if we see some action taken next year, depending on the outcome of this fall's election.

Here's a good link for ACA subsidy info, although it only shows through 2025 as of now: https://thefinancebuff.com/federal-poverty-levels-for-obamacare.html

Looking for the subsidies from 2020 would give you a pretty good idea of what you should expect at various multiples of the federal poverty level in 2026 if no changes are made.

[secondcor521]

No, the TCJA doesn't have anything to do with ACA subsidies. However, the subsidies were improved during covid (including removing the cap for income above 400% of the federal poverty level) and those changes also expire after 2025, so subsidies will drop starting in 2026 unless the changes are extended. All we can really do now is assume that the changes will take effect in 2026 as scheduled, but it wouldn't surprise me if we see some action taken next year, depending on the outcome of this fall's election.

Here's a good link for ACA subsidy info, although it only shows through 2025 as of now: https://thefinancebuff.com/federal-poverty-levels-for-obamacare.html

Looking for the subsidies from 2020 would give you a pretty good idea of what you should expect at various multiples of the federal poverty level in 2026 if no changes are made.

I thought that the only change to ACA subsidies was to change from the 400% FPL cliff to an 8.5% of AGI slope, which I recall as being part of the IRA and sunsetting 1/1/26.  Did the subsidies between 100% and 400% actually get more generous?  I don't recall that happening and I can't find any mention of it in the legislative history at Wikipedia.

[terran]

I thought that the only change to ACA subsidies was to change from the 400% FPL cliff to an 8.5% of AGI slope, which I recall as being part of the IRA and sunsetting 1/1/26.  Did the subsidies between 100% and 400% actually get more generous?  I don't recall that happening and I can't find any mention of it in the legislative history at Wikipedia.

What you're looking for are the Applicable Percentage Tables for a particular year. You can actually see what they were going to be in 2021 (page 2) and what they became in 2021 (page 5) after the American Rescue Plan was passed. This was supposed to only be for 2021 and 2022 until it was extended through 2025 by the Inflation Reduction Act. I think the pre-ARP 2021 percentages are a good estimate to use for 2026 until/unless congress does something.

[Louise]

This is a great question. I have no idea. We have high state tax rates which kind of muddy up the waters. My spouse is over 59.5, but I am not (early 50s). We have a large age gap, so I am thinking of slowing converting most of my IRA to Roth over the next 10 years or so. I will have to mindful of income for both ACA and FAFSA.

We are in the current 12% bracket, so I suppose it would be wise to at least convert up to that limit. It's hard to swallow when the state tax is almost 7% on top of that though. Then I wonder if I'm being penny wise, pound foolish by not converting. Most conversion calculators only show a slight advantage to converting, but the flexibility would be nice.

We will also be in a low tax bracket upon retirement. I have to be mindful of the possibility of filing as a single individual in the future too, although my husband has more longevity in his family than mine, so who knows?

[secondcor521]

I thought that the only change to ACA subsidies was to change from the 400% FPL cliff to an 8.5% of AGI slope, which I recall as being part of the IRA and sunsetting 1/1/26.  Did the subsidies between 100% and 400% actually get more generous?  I don't recall that happening and I can't find any mention of it in the legislative history at Wikipedia.

What you're looking for are the Applicable Percentage Tables for a particular year. You can actually see what they were going to be in 2021 (page 2) and what they became in 2021 (page 5) after the American Rescue Plan was passed. This was supposed to only be for 2021 and 2022 until it was extended through 2025 by the Inflation Reduction Act. I think the pre-ARP 2021 percentages are a good estimate to use for 2026 until/unless congress does something.

Ah, gotcha.  Thank you for the reminder and the references!

[MDM]

I have been working on a long-term, big picture spreadsheet. For you folks older than 59.5 with a Roth account older than 5 years but not yet receiving Social Security/Pensions, how do you decide how much converting to do each year? With my non-qualified accounts, I can even keep my income just below my first tax dollar or ACA dollar, but is this really the best thing to do?

I guess the answer is based each person's future expected income levels and will require some assumptions and calculations. Or is there a rule of thumb. Right know it is just a nagging question, but I read many forum posts from folks who seem to be converting now, trying to empty out their trad IRA ASAP.

"Emptying" the traditional accounts ASAP may or may not be a good idea - it depends on the tax price you have to pay for that.

A couple of articles that may be helpful: Roth Conversion and Capital Gains On ACA Health Insurance and Roth Conversion with Social Security and Medicare IRMAA.

The Roth conversion - Bogleheads wiki article may also be worth reading.