[CoachKandSportsguy]

Current tax scenario vs potential future scenario, back of the napkin/envelope concepts

2025 Current:
Assume married two person SS receptients, and $3K plus per month each
= $72K gross income less std deduction of $30K = $42K taxable income
IRA to Roth conversions add to SS income and increase tax brackets, making the break even time longer.
Current married income tax bracket is 24K to 97K of 12%

So 97K-42K = 55K of IRA roth conversion at 12% Above 55K of conversion the tax rate jumps to 22%. Let's just convert the max at the minimum tax rate. . .

Possible future scenario
SS income of $72 is tax free,
Assuming no other changes in std deduction / rates for tax purposes,
$97 K of Roth conversion would be available at 12% tax rate, almost double the amount.

So, if you are planning on 2025 IRA Roth conversions, still maintain your current conversion,
and as soon as Social Security income is declared tax free, figure the additional conversion amount at 12% income tax rate, and convert!

just some random thoughts which goes through my finance brain, which operates 24x7, and only shuts off on the golf course.

good luck out there. .
we will need it. .

[Decadeofdave]

I run the numbers every December to decide how much IRA money to convert to Roth.
Good job.

[CoachKandSportsguy]

Originally Posted by Decadeofdave

I run the numbers every December to decide how much IRA money to convert to Roth.
Good job.

Great!

The point of the post is to make people aware that there will be a BIG opportunity with a small change, such that they need to adjust their models to incorporate any NEW INFORMATION in the december model, so that you don't miss any extra conversion due to changes

Can happen with people who just reuse the same workbook. .

You would not believe the number of workbooks I received at work which were over 10 and 15 years old.

[Pugchief]

1. This assumes you have ZERO investment income.
2. You aren't taking IRMMA into account.

[ltcdfancher]

Originally Posted by CoachKandSportsguy

Current tax scenario vs potential future scenario, back of the napkin/envelope concepts
So, if you are planning on 2025 IRA Roth conversions, still maintain your current conversion.

I made what I think was my last conversion in 2024; in hindsight, I probably should NOT have converted last year. Hey ho.

Our situation is slightly different. I draw a pension, which is less and less common. I haven’t quite reached my full retirement age; I’m not drawing SS yet. My wife is collecting. We fell off the first IRMAA cliff and are paying the penalty this year (and likely next year too).

I’ll take distributions from my IRA to pay our Villages mortgage which will total less than my eventual RMD.

[CoachKandSportsguy]

Originally Posted by Pugchief

1. This assumes you have ZERO investment income.
2. You aren't taking IRMMA into account.

1 back of the envelope concepts. . you must not understand that concept
2 back of the envelope concepts. . you must not understand that concept
3 OBVIOUSLY everyone situation is not simple with three numbers
4 Since I just used like three figures, its just a simple concept and A REMINDER is also posted is to inform people that any old model is no long optimized for your own tax situation with this change, and you can be leaving lots of conversion potential in the tax deferred account

I'm sorry you missed that point in bold

[manaboutown]

I converted all of my IRA to a ROTH back in 2002 when I experienced an anomalous very low tax year. It was a no brainer for several solid reasons.

[rsmurano]

I’ll never convert a penny to a Roth unless we get hit with another 2007/2008 recession, or the v shape downturn in 2020 because of Covid. Why would anybody convert when the market is high? You will pay more taxes. If I would have converted when the market was at its lowest point in 2020, when we all knew the market will have a v shape recovery, I would have been able to convert 35% more and pay the same taxes if converted at the markets high point, and knowing when the market recovers, I will have the same amount of money as I had before - taxes paid. If you convert when the market is high, and actually falling, it will be very hard for you to recover your money. At the markets high, you have an equal chance of the market going down more than going up, and if the market goes down after your conversion, it’s going to take you a long time to get back to where you were.

As for calculations, you have to add all your gains, short/long for the year, SS income, dividends, etc. to your calculations, and I a lot of cases, every penny you convert is going to add to your tax base, future Medicare payments, etc..

For me, when I’m fully invested, I make 30% and much more on my investments, so I would rather have all my money making this money instead of a smaller base after a conversion and paying taxes. When I’m 73 or so when I have to take an rmd, I’m making much more money per year to pay the rmd taxes.

For me, you don’t know what the older people will be paying in taxes on their non-taxable income. For example, I hear rumblings the new WH wants to do away with the income tax and make it so the government makes their money by tariffs. If this happens, I’m doing 1 big sell the 1st day in case later on they go back to an income tax. Or, maybe they will extend the age to take rmd’s like they did during COVID. Or, the tax rates will be lower in the future. All these cases are a win/win for me for not doing a conversion. Worst case, I’m making good money on my larger base that paying taxes on my rmd’s are trivial.

[RoboVil]

Originally Posted by CoachKandSportsguy

Current tax scenario vs potential future scenario, back of the napkin/envelope concepts

2025 Current:
Assume married two person SS receptients, and $3K plus per month each
= $72K gross income less std deduction of $30K = $42K taxable income
IRA to Roth conversions add to SS income and increase tax brackets, making the break even time longer.
Current married income tax bracket is 24K to 97K of 12%

So 97K-42K = 55K of IRA roth conversion at 12% Above 55K of conversion the tax rate jumps to 22%. Let's just convert the max at the minimum tax rate. . .

Possible future scenario
SS income of $72 is tax free,
Assuming no other changes in std deduction / rates for tax purposes,
$97 K of Roth conversion would be available at 12% tax rate, almost double the amount.

So, if you are planning on 2025 IRA Roth conversions, still maintain your current conversion,
and as soon as Social Security income is declared tax free, figure the additional conversion amount at 12% income tax rate, and convert!

just some random thoughts which goes through my finance brain, which operates 24x7, and only shuts off on the golf course.

good luck out there. .
we will need it. .

Another important item to consider is whether the increased income resulting from converting a traditional IRA into a Roth IRA is whether you will trigger an increase in traditional Medicare payments. The income trigger, IRMAA, is calculated a bit different from your taxable income though the change in Medicare fee lags 2 years behind your reported income.

[Shish]

Here's an excellent video I found for Roth IRS Conversions:
https://www.youtube.com/watch?v=xG07OC5LJtQ
(skip the commercial at the beginning)

[Janie123]

Originally Posted by Pugchief

1. This assumes you have ZERO investment income.
2. You aren't taking IRMMA into account.

OP is only going up to the 12% bracket, IRRMA first cliff is a bit over $200k

[CoachKandSportsguy]

Originally Posted by RoboVil

Another important item to consider is whether the increased income resulting from converting a traditional IRA into a Roth IRA is whether you will trigger an increase in traditional Medicare payments. The income trigger, IRMAA, is calculated a bit different from your taxable income though the change in Medicare fee lags 2 years behind your reported income.

Although true, this example was specific with two SS income earners, married, and not the highest, but simple math fairly high for the example of the impact of a potential tax change

So lets run that IRMMA scenario:
back of the napkin/envelope concepts for those that need the reminder

SS Income: $72K
Status: Married
Converted IRA: 97K

Total IRMMA income: $169K

Current IRMMA married Threshold: $210K

IRMMA threat, minimal
EXCEPT
when your spouse passes away in the next 12 months, and in two years you are filing single with a two year loopback at married incomes

So then Pugchief mentioned financial taxable income,

OK, lets conceptualize it:

By including the financial income: In absolute terms, the $97K Roth conversion $ amount will push the filer into the next tax bracket, because it's a back of the envelope concept. In reality, with the financial constraint goal of staying in the lowest tax bracket, as stated in the conceptual example, the maximum IRA ROTH conversion will estimated lower by the amount of the financial income, hitting the maximum income at the top of the lowest tax rate bracket

For both cases, IRMMA penalty risk remains the same/identical.

The point of the example is: don't use old models when tax rates change, and have a strategy with your financial consultant about your specific strategy. .

The other is not to be scared of IRMMA without modeling the impact . . . but also remember that the future is very uncertain, and most plans work until they don't, most times the reason is beyond your control, but that is the reality of future uncertainty. ..

as always, good luck out there. . we all will need it.

[dougjb]

Social Security will become totally tax free....when cows fly!

[Pat2015]

Originally Posted by CoachKandSportsguy

Although true, this example was specific with two SS income earners, married, and not the highest, but simple math fairly high for the example of the impact of a potential tax change

So lets run that IRMMA scenario:
back of the napkin/envelope concepts for those that need the reminder

SS Income: $72K
Status: Married
Converted IRA: 97K

Total IRMMA income: $169K

Current IRMMA married Threshold: $210K

IRMMA threat, minimal
EXCEPT
when your spouse passes away in the next 12 months, and in two years you are filing single with a two year loopback at married incomes

So then Pugchief mentioned financial taxable income,

OK, lets conceptualize it:

By including the financial income: In absolute terms, the $97K Roth conversion $ amount will push the filer into the next tax bracket, because it's a back of the envelope concept. In reality, with the financial constraint goal of staying in the lowest tax bracket, as stated in the conceptual example, the maximum IRA ROTH conversion will estimated lower by the amount of the financial income, hitting the maximum income at the top of the lowest tax rate bracket

For both cases, IRMMA penalty risk remains the same/identical.

The point of the example is: don't use old models when tax rates change, and have a strategy with your financial consultant about your specific strategy. .

The other is not to be scared of IRMMA without modeling the impact . . . but also remember that the future is very uncertain, and most plans work until they don't, most times the reason is beyond your control, but that is the reality of future uncertainty. ..

as always, good luck out there. . we all will need it.

Agree with your scenario. Also, taxes are only going in one direction based on the deficient and they are quite low now. Additionally, if a spouse dies and there is substantial IRA money sitting in the account, the remaining spouse is now taxed as a single. Do you want to pay more taxes and lose more of the amount that you think you have in your IRA?

[Pat2015]

Good plan!