[Boilerman]

Originally Posted by CoachKandSportsguy

Yes, there are many good reasons to convert to a ROTH, but fear of IRMAA should not be one of them, especially if you are paying lots more in taxes to avoid the penalty than you have to pay in IRMAA, unless you have an IRA say $4M or more when the penalty starts early and continues for the rest of your life. And yes, being single in this case transitioning from a married couple, is a valid point to consider moving some money out of an IRA, but that is the same model with a different scenario, which I haven't finished as the workbook is almost perfected.

Paying $50,000 in additional taxes prior to paying IRMAA at $14,000 per year for two years in the future makes no financial sense whatsoever. One can't grow wealth with a tax / penalty avoidance approach. Taxes are a by-product of success, not the same as tax minimization strategy, which a ROTH conversion is a potential option.

However as on my other post, there is a little advantage to a ROTH versus a TAXABLE account, other than tax free for annual gains which some people might expect are guaranteed, especially in FL with no state tax , but gains are in fact not guaranteed. And if you convert to a ROTH and don't have gains or lose money, unfortunately poor timing, there is not offset, its permanently gone.

The difficulty is that there are a lot of unknowns for sure, the future is always uncertain. The calculations are with the current knowns and relationships, which is the best one can do. . as well as be genetically lucky and live a healthy and long life, same with your spouse. Remember, you might not live long enough but you might. . .

There are many factors in play that makes everyone’s situation different. Trying to give generic advice like this doesn’t work. Unless your Roth conversions push you into a higher tax bracket, you’re not “paying lots more in taxes”, you’re just pre-paying them. If you think tax rates are likely to be lower in the coming years then keep your money in the traditional IRA. Or maybe you’re certain that both you and your spouse sill die in the same tax year.

For me, the worst case scenario is that my Roth conversions will be a wash. The best case scenario is that we save thousands of dollars. But as I said, that wont apply to everyone.

[rsmurano]

I decided decades ago that it will never buy me 1 penny in benefits to go the Roth way compared to the regular 401k way for a few reasons, but 1 main reason:
When I was working, I was in a high tax bracket and I knew for a fact when I stopped working, it didn’t matter at what age, my tax bracket would drop greatly and it has. For example, if I was in a 30% tax bracket when working, I would have to pay 30% taxes on my income before putting any money into a Roth whereas in a 401k, I didn’t pay any income tax and contributed the full amount. So hypothetically, if I wanted to put away $20,000 a year in a Roth using after tax money, I would need $26,000 of income before taking taxes out. But while I was in a high tax bracket, I got to put $20,000 into my 401k and now, I’m in a much much lower tax bracket so my taxes withdrawals are taxed much less than the tax I would have to pay years earlier. This has been true thus far in retirement, with even better benefits.

My work would not do a company match on a Roth whereas I got a lot of company matching that is free money.

The other benefit is that I got a much better return on my money using tax free money than what I would have got taking taxes out earlier. For example: say I had $10,000 to invest in either a Roth or 401k. The full $10,000 would be invested in a 401k because it would be before tax $$$. Now if I wanted to put the same $10,000 into a Roth, I would have had to pay taxes on that money, say I’m in a 20% tax bracket in my working years, I would only have $8,000 to put in the Roth. Over decades, my 401k would make more money because I would have more to compound interest on. This is a fact. Most of the scare tactic financial planners try to scare you by using the same tax bracket in retirement as you were in will you worked. Even if you used the same tax bracket in retirement 20%, you would pay the same taxes on your 401k withdrawals as you would have paid when paying taxes before putting the money in a Roth. Do the math.
But the reality is, you will be in a lower if not a much lower tax bracket in retirement so you will be paying much less taxes on 401k/ira withdrawals than if you paid after tax money in a high tax bracket. Do the math.
We don’t know what things will be like next year or 5 or 10 years down the road. The scare tactic people will say your taxes will be much higher down the road but on the other side of the coin, we just rmd’s pushed down the road by a few years which means less taxes to be paid before larger distributions are warranted, so that gives you more time to cash in on your 401k/ira at a low tax bracket (if not paying 0 tax dollars) so your rmd’s are at a smaller amount in the future.

[BrianL99]

Originally Posted by spinner1001

This thread deviated quickly from the OP’s financial modeling post.

The model was nonsensical.

[BrianL99]

Originally Posted by Haggar

in a higher bracket the investment amount could be reduced by 20-30% which will affect the yield and growth.

Someone mentions that the sale of a house (particularly a non-residence) could cause an increase in IRMMA (which will calculated for 2024 based on your 2022 return). Yes it could but there a form you can file which requests medicare to reduce the premium based upon non-recurring events or life changing situations. Their response to filing this form is very quick.

A decision not to sell any property, in contrast to what you did a year or 2 ago, is not a "life changing event" per Medicare Regulations and it won't change an IRMAA determination.

[Stu from NYC]

Originally Posted by BrianL99

The model was nonsensical.

Guess you disagreed but decided not to do so politely

[Boilerman]

Originally Posted by rsmurano

I decided decades ago that it will never buy me 1 penny in benefits to go the Roth way compared to the regular 401k way for a few reasons, but 1 main reason:
When I was working, I was in a high tax bracket and I knew for a fact when I stopped working, it didn’t matter at what age, my tax bracket would drop greatly and it has. For example, if I was in a 30% tax bracket when working, I would have to pay 30% taxes on my income before putting any money into a Roth whereas in a 401k, I didn’t pay any income tax and contributed the full amount. So hypothetically, if I wanted to put away $20,000 a year in a Roth using after tax money, I would need $26,000 of income before taking taxes out. But while I was in a high tax bracket, I got to put $20,000 into my 401k and now, I’m in a much much lower tax bracket so my taxes withdrawals are taxed much less than the tax I would have to pay years earlier. This has been true thus far in retirement, with even better benefits.

My work would not do a company match on a Roth whereas I got a lot of company matching that is free money.

The other benefit is that I got a much better return on my money using tax free money than what I would have got taking taxes out earlier. For example: say I had $10,000 to invest in either a Roth or 401k. The full $10,000 would be invested in a 401k because it would be before tax $$$. Now if I wanted to put the same $10,000 into a Roth, I would have had to pay taxes on that money, say I’m in a 20% tax bracket in my working years, I would only have $8,000 to put in the Roth. Over decades, my 401k would make more money because I would have more to compound interest on. This is a fact. Most of the scare tactic financial planners try to scare you by using the same tax bracket in retirement as you were in will you worked. Even if you used the same tax bracket in retirement 20%, you would pay the same taxes on your 401k withdrawals as you would have paid when paying taxes before putting the money in a Roth. Do the math.
But the reality is, you will be in a lower if not a much lower tax bracket in retirement so you will be paying much less taxes on 401k/ira withdrawals than if you paid after tax money in a high tax bracket. Do the math.
We don’t know what things will be like next year or 5 or 10 years down the road. The scare tactic people will say your taxes will be much higher down the road but on the other side of the coin, we just rmd’s pushed down the road by a few years which means less taxes to be paid before larger distributions are warranted, so that gives you more time to cash in on your 401k/ira at a low tax bracket (if not paying 0 tax dollars) so your rmd’s are at a smaller amount in the future.

Which is why Roth conversions after retirement makes sense. Paying lower taxes than you would have while working.

[rsmurano]

Why do you think it’s a good time to make the conversion when you retire? Just for grins, say you have $5M in 401k/ira and you are 65 years old. Plus, say right now you are in the $0 tax bracket. Now, you want to say you want to convert $1M a year to a Roth for the next 5 years, do you know what tax bracket you will be in each year? You would be in the max tax bracket, your Medicare payments will jump by 5x or more every year you do this plus 1 year, your social security will be taxed at 85%, on and on. So you sell $1M of your 401k/ira and you get to take a little over $550,000 and invest it. Do this for 5 years, you will end up with $2.5M-$3M.

Now I keep what I have and it compounds by 8-10% each year on average, my $5M will grow to $7.5M-$8M in 5 years (3x more than what you would have with the conversion), let them tax the hell out of me in 5 years each year, but I guarantee you, I will not be anywhere near the top tax bracket and the more money I have in my 401k/ira accounts, the more it will grow, and my growth per year will pay any taxes that will be levied to me.

[dewilson58]

"IRMAA not worth getting excited over "

Crap, I woke up this morning and was looking forward to getting excited over.

[Boilerman]

Originally Posted by rsmurano

Why do you think it’s a good time to make the conversion when you retire? Just for grins, say you have $5M in 401k/ira and you are 65 years old. Plus, say right now you are in the $0 tax bracket. Now, you want to say you want to convert $1M a year to a Roth for the next 5 years, do you know what tax bracket you will be in each year? You would be in the max tax bracket, your Medicare payments will jump by 5x or more every year you do this plus 1 year, your social security will be taxed at 85%, on and on. So you sell $1M of your 401k/ira and you get to take a little over $550,000 and invest it. Do this for 5 years, you will end up with $2.5M-$3M.

Now I keep what I have and it compounds by 8-10% each year on average, my $5M will grow to $7.5M-$8M in 5 years (3x more than what you would have with the conversion), let them tax the hell out of me in 5 years each year, but I guarantee you, I will not be anywhere near the top tax bracket and the more money I have in my 401k/ira accounts, the more it will grow, and my growth per year will pay any taxes that will be levied to me.

You wouldn’t make that large a conversion in any one year for the reasons you stated. But a $8M IRA balance at age 70 would result in an RMD at age 73 of over $300K. Depending of your other income you could permanently be in at least the 32% tax bracket and paying around $500 a month for Medicare forever (times 2 if you’re married). Ideally, you be starting conversions at an earlier age with smaller amounts each year. $8M might be hard to convert. Good problem to have.

[Haggar]

Originally Posted by BrianL99

A decision not to sell any property, in contrast to what you did a year or 2 ago, is not a "life changing event" per Medicare Regulations and it won't change an IRMAA determination.

I agree that the voluntary sales of real estate by itself does not qualify but the sale of real estate along with a change in a zip code or a sale of income producing real estate have been successful reasons for reducing the increase in medicare premiums by my clients.

[Boomer]

There is a well-organized, clearly written article on investopedia.com titled “Capital Gains Tax on Home Sales” dated March 2023, update.

Google or DuckDuckGo, using the article title and the source, will find it, if you want to learn more.

Btw, it was the Taxpayer Relief Act of 1997 that changed the law that used to say profits on a home sale got hit with a capital gains tax unless being reinvested in a more expensive home.

I don’t know about you, but that 1997 Taxpayer Relief Act helped regular people (Mr. Boomer and me) far more than any tax law change since. If you don’t remember who was President then, look it up and you might be surprised that was the actual Taxpayer Relief for helping regular people, not just the tiny percent at the very top.

We have bought 3 primary residences since 1997 and each time we have thanked that 1997 tax law change.

Seems like an awful lot of my fellow-boomers, and beyond, are forgetting which side their bread was buttered on by a tax relief act and remain off by 20 years or are choosing to be amnesiacs. 2017 did very little, if anything, for most of us…..

But the Taxpayer Relief Act of 1997 sure helped a lot of us by letting us keep a chunk of change when selling our primary residence for a good profit.

Boomer (the regular boomer, not a bizillionare)

[manaboutown]

Then IRMAA came into existence in 2003, expanded in 2011 under the ACA and MIDs and SALT deductions were capped in 2017, affecting only "the rich". How about them apples!

"IRMAA was first enacted in 2003 as part of the Medicare Modernization Act.

This new rule applied only to high-income enrollees of Medicare Part B.
In 2011, IRMAA was expanded under the Affordable Care Act. The new rules include high-income enrollees in Medicare Part D."

How Much Does Health Insurance Cost Per Month? - Healthmarkets Agents/Content/Plans.

Mortgage Interest Deduction: Reviewing How TCJA Impacted Deductions

[CoachKandSportsguy]

Originally Posted by Boilerman

You wouldn’t make that large a conversion in any one year for the reasons you stated. But a $8M IRA balance at age 70 would result in an RMD at age 73 of over $300K. Depending of your other income you could permanently be in at least the 32% tax bracket and paying around $500 a month for Medicare forever (times 2 if you’re married). Ideally, you be starting conversions at an earlier age with smaller amounts each year. $8M might be hard to convert. Good problem to have.

There is a certain wealth point above which these issues are non issues, as a different point of view from those which are significantly below the wealth point. Its behavioral economics, and most people assume a sufficing life style, and they hope to maintain it. Especially if you live a relatively frugal life, and even after all the taxes, you still have plenty of money to live your lifestyle, many issues become non issues.

In reality, the older you are, the less active you are, and the less likely you will be living an expensive lifestyle, other than healthcare related expenses.

But remember that many times, you can control events, and at other times, you can't control events, and this is a time where you can't control events. the IRMAA tax is transitionary for those with windfalls or other wealth point issues, but beyond your control due to events, foreseen or unforeseen. So yes, you are being taxed differently, but you are probably viewing the added tax through the lack of control issue view, which you live the rest of your life. At this point, the tax is what it is, and I admire those who have this issue that they did better than I, and those who saved and worked well enough to have these issues.

But I do love this bbs and the responses here, gives me great insights into different views of behavioral finance for sure.

[Boilerman]

Originally Posted by CoachKandSportsguy

But remember that many times, you can control events, and at other times, you can't control events, and this is a time where you can't control events. the IRMAA tax is transitionary for those with windfalls or other wealth point issues.

I don’t think people with lots of money have any less aversion to paying taxes as those who don’t. IRMAA can be permanent, not just transitory in some situations. But Roth conversions can, done properly, give you control over future RMDs and taxable income so one can avoid IRMAA and other consequences of having higher taxable income.

[Boomer]

Originally Posted by Boilerman

I don’t think people with lots of money have any less aversion to paying taxes as those who don’t. IRMAA can be permanent, not just transitory in some situations. But Roth conversions can, done properly, give you control over future RMDs and taxable income so one can avoid IRMAA and other consequences of having higher taxable income.

The guy who wrote the post I am quoting here gets my vote.

Btw, I have said it before and I will say it again……

I don’t care how many commas you have in your total IRA amount, it could be well worth taking the time to look into converting to Roth…….

especially when you are in what can be a very sweet spot after retiring, when your earned income goes down, but before RMD age.

Generic financial advice cannot apply in this one.

And — another thing — speaking of generic advice — that thing about waiting to take SS until full SS age is also generic advice. There are many different scenarios where that tedious mantra should not apply because taking the money and running at 62 could make a lot more sense in a variety of circumstances — including being able to stay out of tax-deferred accounts longer.

Why in the heck do people think financial advice should be one-size-fits-all.

Boomer