My assumption that retirement tax rate would be lower than while working was completely wrong. We are retired and in early RMD stage (MFJ) and in the 24% federal tax bracket. These threads discuss Roth conversion in the 24% bracket or higher but not when taking RMD and don’t show marginal tax rates going from MFJ to single or come to a conclusion
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viewtopic.php?t=409612
viewtopic.php?t=401099
viewtopic.php?t=419760
viewtopic.php?f=1&t=435316
I like to get a critique on why it makes sense to convert for those with high IRA balances, taking RMD, married and living in Massachusetts (or other states with income tax). RMD conversion seems to be cut and dry. I want to check out my conclusions in this forum. Our MGI = AGI.
F-74, M-74
IRA 2.5M funded with pretax
Roth 700K
Taxable 3M
Including RMD with QCD, our expect AGI is $300K. This puts us in the 24% federal tax bracket. 2024 MGI is used for 2026 IRMAA but for this discussion assume the current IRMAA points for 2026. Since future tax rate is unknown, assume future tax rate remain the same for this discussion. Cash is available to pay the conversion taxes without selling securities.
The 24% tax bracket (AGI between $201K to $386K) spans four IRMAA tiers with breakpoints at $206K, 258K, 322K and 386K. Since my AGI is between $258 and $322K, any ROTH conversion will have a marginal tax of 32.8%
24% federal
3.8% NIIT
5.0% MA state.
If next year or any time in the future, with the death of one spouse, the only change in income is losing one SS payment and AGI drops from $300K to $280K. The federal tax rate increases from 24% (MFJ) to 35% (Single). In this case marginal tax increases to 43.8%. Roth conversion is a net positive – have I missed anything?
It may make sense to go pass the next IRMAA point ($322K). Doing so will allow an additional $64K ($386-322K) of Roth Conversion. This will increase Medicare part B and D by $104.80 and $20.50 respectively. For the two of us, this is an additional $3007 cost. Amortized over $64K results in another 4.7% “IRMAA” marginal tax. Total marginal tax for converting another $64K is 32.8% + 4.7% = 37.5%.
In summary, if Roth conversion does not cross a IRMAA breakpoint, marginal tax rate is 32.8%. Increasing Roth conversion one tier past $322K results in a marginal tax of 35.5%. Upon the passing of one spouse, going from MFJ to Single assuming current tax rate results in a 43.8% marginal tax. Roth conversion is a net positive.
With this modest level of Roth conversion, IRA balance may continue to grow. (RMD as a percent of IRA balance remains under 6% until age 85.)
Other beneifts: Roth conversion will reduce the amount subject to potential MA estate taxes by the taxes paid. Heirs get to spend 100% of a Roth but must pay income tax on a tIRA.
If we both live to 100, Roth conversion would not be needed.
viewtopic.php?t=422563
viewtopic.php?t=409612
viewtopic.php?t=401099
viewtopic.php?t=419760
viewtopic.php?f=1&t=435316
I like to get a critique on why it makes sense to convert for those with high IRA balances, taking RMD, married and living in Massachusetts (or other states with income tax). RMD conversion seems to be cut and dry. I want to check out my conclusions in this forum. Our MGI = AGI.
F-74, M-74
IRA 2.5M funded with pretax
Roth 700K
Taxable 3M
Including RMD with QCD, our expect AGI is $300K. This puts us in the 24% federal tax bracket. 2024 MGI is used for 2026 IRMAA but for this discussion assume the current IRMAA points for 2026. Since future tax rate is unknown, assume future tax rate remain the same for this discussion. Cash is available to pay the conversion taxes without selling securities.
The 24% tax bracket (AGI between $201K to $386K) spans four IRMAA tiers with breakpoints at $206K, 258K, 322K and 386K. Since my AGI is between $258 and $322K, any ROTH conversion will have a marginal tax of 32.8%
24% federal
3.8% NIIT
5.0% MA state.
If next year or any time in the future, with the death of one spouse, the only change in income is losing one SS payment and AGI drops from $300K to $280K. The federal tax rate increases from 24% (MFJ) to 35% (Single). In this case marginal tax increases to 43.8%. Roth conversion is a net positive – have I missed anything?
It may make sense to go pass the next IRMAA point ($322K). Doing so will allow an additional $64K ($386-322K) of Roth Conversion. This will increase Medicare part B and D by $104.80 and $20.50 respectively. For the two of us, this is an additional $3007 cost. Amortized over $64K results in another 4.7% “IRMAA” marginal tax. Total marginal tax for converting another $64K is 32.8% + 4.7% = 37.5%.
In summary, if Roth conversion does not cross a IRMAA breakpoint, marginal tax rate is 32.8%. Increasing Roth conversion one tier past $322K results in a marginal tax of 35.5%. Upon the passing of one spouse, going from MFJ to Single assuming current tax rate results in a 43.8% marginal tax. Roth conversion is a net positive.
With this modest level of Roth conversion, IRA balance may continue to grow. (RMD as a percent of IRA balance remains under 6% until age 85.)
Other beneifts: Roth conversion will reduce the amount subject to potential MA estate taxes by the taxes paid. Heirs get to spend 100% of a Roth but must pay income tax on a tIRA.
If we both live to 100, Roth conversion would not be needed.
Statistics: Posted by ee_guy — Thu Jul 11, 2024 10:16 am — Replies 0 — Views 6