Roth Conversion

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Scruff

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Mar 11, 2008
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I get keeping income under limits to keep eligibility for other things, but why worry about staying under the next tax bracket?
Efficiency saves money long term. If you're in the 24% tax bracket, its common to do a roth conversion to the extent of that bracket. Save converting the remained until the following year/years. Why pay an extra 8% when you can wait a year and save those tax dollars?
 
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dmclone

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OK, so it sounds like for my situation, immediately filing a 1040es and paying the taxes from my non retirement money makes the most sense. What about the state piece? Anything I have to immediately pay for Iowa?
 

cyphoon

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What about the state piece? Anything I have to immediately pay for Iowa?

Take the amount you are converting x your marginal Iowa tax rate (probably 8.53%) That is the state tax hit from your conversion. You can make an estimated tax payment online. Iowa has the same 2 exceptions for avoiding tax penalties that the feds have, which might allow you to skip paying an estimated tax if you want to defer to next April. Something to consider if you usually get a big Iowa refund.

Note that if you plan on moving out of Iowa next year to a lower tax state, then you might want to wait on the conversion.

H
 

Cyclones_R_GR8

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If either of you have a W-2 job, consider adjusting your witholdings to take out extra money each paycheck. Tax payments are fungible, so it doesn't really matter who pays them.
I have extra held out of my paycheck to help cover the taxes I incur from dividends and capital gains that are reinvested in a non qualified investment account
 

cyphoon

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why worry about staying under the next tax bracket?

Because you could just convert the amount that spills into the higher bracket next year and pay the lower marginal rate on it.

Paying 30-40% tax rate on a big chunk of the conversion might make doing a conversion a bad idea, especially for couples that will be in a lower tax bracket when they retire. I think the original poster said they have 7 years to retire. That means the conversion money will earn about 75% from market returns. Those earnings will be free of taxation forever, but if the conversion is heavily taxed, they may have been better off not converting.

People tend to forget that first $26k they withdraw from a traditional IRA will be free of taxes due to the standard deduction, and the next $10k will be taxed at 10%. That first $26k was essentially never taxed at all (akin to HSA money). Converted Roth money needs to earn enough to overcome this advantage for the traditional, and it is hard for that math to work out if the conversion money was heavily taxed.

H
 
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dmclone

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Because you could just convert the amount that spills into the higher bracket next year and pay the lower marginal rate on it.

Paying 30-40% tax rate on a big chunk of the conversion might make doing a conversion a bad idea, especially for couples that will be in a lower tax bracket when they retire. I think the original poster said they have 7 years to retire. That means the conversion money will earn about 75% from market returns. Those earnings will be free of taxation forever, but if the conversion is heavily taxed, they may have been better off not converting.

People tend to forget that first $26k they withdraw in retirement will be free of taxes due to the standard deduction, and the next $10k will be taxed at 10%. If that first $26k came from a traditional IRA, then the money was never taxed at all (akin to HSA money). Converted Roth money needs to earn enough to overcome this advantage for the traditional, and it is hard for that math to work out if the conversion money was heavily taxed.

H

So many things to think about.

Death
Long Term Care strategies
Bridging the gap before Medicare
Who/when to take social security
RMD's (75 now)
How to be invested in retirement
Annuity options
Inheritance
Which state to live in and everything that goes with that (Income taxes, housing, other costs, climate change ramifications, family, etc)
Buy vs. rent
Condo vs. Single Family
55+
Government debt and impact on taxes
Social Security shortfalls
and about 1000 other things
 
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dmclone

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Something to note for Iowans: it may pay to wait on Roth conversions until the upcoming state income tax bracket changes are fully phased in.
Yeah, trying to factor that in as well. Although they will only go down 2.1% and federal taxes may go up about the same time those hit their bottom, which I believe is 3.9%
 

BCClone

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Not exactly sure.
One thing to remember if you are close to retiring, qualified dividends are taxed at 20%. So does it make sense to pay 24 to 32% federally and up to 8% state to convert if you can pay 20% federal and nothing on state (retirement money is going to be tax free soon)?
 

Bestaluckcy

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Because you could just convert the amount that spills into the higher bracket next year and pay the lower marginal rate on it.

Paying 30-40% tax rate on a big chunk of the conversion might make doing a conversion a bad idea, especially for couples that will be in a lower tax bracket when they retire. I think the original poster said they have 7 years to retire. That means the conversion money will earn about 75% from market returns. Those earnings will be free of taxation forever, but if the conversion is heavily taxed, they may have been better off not converting.

People tend to forget that first $26k they withdraw from a traditional IRA will be free of taxes due to the standard deduction, and the next $10k will be taxed at 10%. That first $26k was essentially never taxed at all (akin to HSA money). Converted Roth money needs to earn enough to overcome this advantage for the traditional, and it is hard for that math to work out if the conversion money was heavily taxed.

H

Do IRA withdrawals receive an offset for qualifying medical expenses (like long term care expense)? I know that regular income such as rents or farm income can be offset when certain thresholds are met.
 

cyphoon

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Do IRA withdrawals receive an offset for qualifying medical expenses (like long term care expense)? I know that regular income such as rents or farm income can be offset when certain thresholds are met.

Better ask someone smarter than me, but my hunch is that the withdrawal is treated as ordinary income, and then it boils down to whether the expenses are deductible.

H
 
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brokenloginagain

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So many things to think about.

Death
Long Term Care strategies
Bridging the gap before Medicare
Who/when to take social security
RMD's (75 now)
How to be invested in retirement
Annuity options
Inheritance
Which state to live in and everything that goes with that (Income taxes, housing, other costs, climate change ramifications, family, etc)
Buy vs. rent
Condo vs. Single Family
55+
Government debt and impact on taxes
Social Security shortfalls
and about 1000 other things
Also known as "things DINKs spend their time thinking about" - haha
 

BCClone

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Not exactly sure.
Do IRA withdrawals receive an offset for qualifying medical expenses (like long term care expense)? I know that regular income such as rents or farm income can be offset when certain thresholds are met.
Just for state level (which is the smaller amount)

 

FallOf81

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Breakeven time period to do this critical. It's one thing when you are 50, another 60 plus. Also, if you intend to pass along to the kids that makes more sense to convert.
 

BCClone

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Not exactly sure.
Breakeven time period to do this critical. It's one thing when you are 50, another 60 plus. Also, if you intend to pass along to the kids that makes more sense to convert.
That last part is a big deal. I don't plan for us to touch our Roth IRA's. If we do, it will probably be for an investment of something that the kids can have also. A lot comes down to if any of the kids take over the business or not. If they do, better chance to dip into the IRAs. If not, then I'm 99% positive we won't.
 

dmclone

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I'm so happy that my 88 year older mother didn't worry about leaving money to her kids. We are all 50 plus and I've told her forever to just worry about herself. We have family members pissed that an aunt didn't leave them money and I find it amusing since they told me how this exact situation would play out. Make your own way.
 

BCClone

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Not exactly sure.
I'm so happy that my 88 year older mother didn't worry about leaving money to her kids. We are all 50 plus and I've told her forever to just worry about herself. We have family members pissed that an aunt didn't leave them money and I find it amusing since they told me how this exact situation would play out. Make your own way.
We were not expecting anything and all had jobs and were sitting well on our own. She was just always concerned about money incase she went into a care center and incase the depression hit again. By the time she did enter the care center, she had enough income to take care of the costs and didn’t do the BS thing of hiding all her assets and go on Medicaid.