Thanks for your help, all of you. I'll have to think about this a little more and look to see where my spreadsheet is off. It has done a stellar job accurately calculating my taxes every year and handles the flow of expenses, income, inflation, and distributions and I've put a lot of work into it so I thought it was relatively sound. And yes, @reeshau, I was planning the Roth conversion up to the 12% limit and keeping the LTCG taxes from the taxable account at 0% at that time, as well. Or as close as possible. That's what I meant by playing around with numbers and timing. Conversions of different amounts (5k, 30k, 100k), it always came out worse.
@Telecaster I understand that if the tax rate is the same that the math is the same, but I don't fully comprehend (yet) why the timing isn't important. I still don't understand why having the $ now that I would've sent to the government isn't much better than sending it later, in which case I'll have more $ in my Trad IRA and can keep the same tax rate later but on more money.
But I'll read through the links you all kindly provided and try to wrap my head around it more. Thanks again!
I think I finally understand what you are doing with your spreadsheet (running it year by year until you run out of money, comparing when you run out instead of comparing balances).
Regarding the part above that I bolded - making Roth conversions up to the standard deduction, then using taxable assets up to the top of the zero LTCG bracket for expenses
should be zero tax cost, right? So how could small, $5k conversions still end up worse? Maybe look at that scenario to tease out the error.
That is somewhat our plan, though we have no taxable assets to speak of. We intend to Roth convert at least enough to use up the standard deduction each year (MFJ, so larger for us) and withdraw for expenses from previous Roth IRA contributions and past HSA unreimbursed expenses. The question for us is whether we want to convert more, and pay 10% tax on that, or whether we are good at that level annually?
It all depends on how quickly the tIRA grows (replacing the converted portion, or not quite and thus shrinking with time). Part of this equation is what proportion of the tIRA is bonds. We have all our bonds in the tIRA, plus some stocks, and only stocks in the Roth IRAs. So if the tIRA is slowly being drained (while the rIRAs are left to grow), its proportion of bonds grows, reducing its income, shrinking it further with each conversion. Hopefully we will get it to a manageable size by the time SS benefits start, so that much of SS is untaxed, keeping the total income again inside the standard deduction. Hopefully RMDs would then be below the conversions we'd already been doing, and we keep rolling.
It's hard to know how much we need to do annually - too much early, and we've prepaid tax unnecessarily. Not enough early, it's hard to course correct later, and we pay more tax later instead. Find the sweet spot, we might pay zero or close to it, forever, leaving more to spend.
