Interesting Financial planning exercise for Roth Conversions
 

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. .

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.

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

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.

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

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.

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.

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.

Here's an excellent video I found for Roth IRS Conversions
 

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

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

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.

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

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?

Good plan!

I like it, low expectations .

How do you make your golf drive look great?
start out by assuming its a lost ball. .
and then when its in the fairway,
joyousness abounds :MOJE_whot: :pepper2: !

In a similar "calculator" mode for a Roth conversion right now. I have ZERO W2 income and am married. Neither of us on social security. Here are my thoughts for a 100% tax-free IRA -> Roth conversion:

Max out HSA with single contribution: $9550 (family w/$1000 catch-up)
Take standard deduction for my spouse and myself: $30,000

So, I can "safely" move $39,550 at ZERO tax, right?

That leaves me with:

* 10% tax bracket on next $23,850 of rollover ($2385 tax)
* 12% tax bracket on next $73,100 of rollover ($8772 tax)

Combined, you get an $11,157 tax on $96,950 -- overall, an 11.5% tax rate to convert all those IRA funds for tax-free income of the funds, which are all positioned in income-producing positions.

So, if you add in the $39,500 tax-free conversion, we're going to convert a total of $136,450 IRA to Roth with only $11,157 in taxes. If my calculations are correct, that's, ultimately, a 8.18% tax on the total conversion. Right?

Please chime in if I have something wrong here. I've run this past my tax guy, but my confidence in him has waned in recent years, as he's further down the aging path than I at this point.

Go!!

Financials for singles please!
 

Can you run scenarios for singles on SS. Especially IRMMA.

Thanks.

Looks basically good, and any error in too much IRA conversion wouldn't be tax catastrophic. .
Not totally clear, you are saying that you have zero income for 2025? no 1099, no interest and dividend income, no capital gains income and you can live in the villages paying 50K a year in living and food expenses?

What source of funds are you using to pay expenses that is not taxable? and you must have some funds earning taxable income?

I have liquidity to pay my bills even without consulting. My consulting income is via my corporation where I contributed to keep it afloat for a couple of decades while working full-time. So, I can now earn against those contributions, taking them as distributions. The money was already taxed, so it's a tax-neutral transaction. I'm continuing to consult (10-15 hours a week), so I don't need to have any sort of earnings, otherwise. My dividends are reinvesting so the monthly income continues to rise when I finally pull that trigger. My wife is eligible for social security, but we're waiting to let the monthly amount grow since her mother lived to 90. My dad is 89 and still kickin' (poor mom), so I'm also going to hold off on starting social security for a couple of extra years -- though I don't really have to.

I hope that explains things. Or I'm going to jail. LOL!!

Nice, well done, carry on, you don't need my advice, as some anon finance tax planning poser. . :duck:

Cash
 

The other thing to consider is holding a higher cash position as a senior to preserve your capital. Some have talked about making huge investment returns in a IRA but that differs when you are older. Depending on your need to pass inheritance to others, avoiding a 2 yr lag on Irma for Medicare etc, you don’t want high RMD at higher tax rates. That may force you into a charitable trust etc.

At a certain age and financial position you want to enjoy the fruits of your labor and reduce the stress of events you can’t control like stock market fluctuation, political changes, and wars or pandemics.

The above calculations are very simple and don’t include any dividends and short term and long term gains that most people receive at our age. Plus, when you have a high income, your Medicare payments can go up to $800 a month for 2 years, and if you are young, your medical insurance subsidies go away.

So in the above calculations, add $50k in dividends to your calculations, check out what you will be paying in current taxes and future medicare/subsidies. Then some people make 6 digits in dividends, what will that do to your calculations. I look at doing an Roth conversion every year and that’s why I won’t be converting anything to a Roth except in a deep recession or if the income tax rates go away or go way low.

The assumptions were stated,
the warning was stated as a simple exercise for thoughts about changes in the future tas status of Social Security, nothing more.
The post was not targeted to High net worth individuals, looking at the assumptions and parameters, which people want to constantly inject from their individual situations.

A subsequent post included the effect of dividends when tax free Social Security is implemented.

The entire discussion was discussing the effect of tax free SS income on the ability to increase Roth conversions prior to RMDs for the non net worth individuals simply explained.

Nothing the post recommended any action today as the Social Security tax status has not changed.

Okay, Anon Tax Planner. But do not forget that it was your original calculations that inspired me to restate and clarify my own plans. You are a far cry from, yet, another complaint about snow-birders, round-abouts, and golf cart LED lights. :)

A breath of fresh air, indeed!