I have about 700k in a tax deferred account (IRA). I am considering moving some of it to my Roth IRA. My wife has no retirement accounts. My wife and I will file taxes "married filing jointly". If the Roth conversion is not done we will be near the high end of the 22% tax bracket (for this discussion, lets say we're at the top of it, at around $168,000).
My question is, if I want to convert some of my taxed deferred IRA to Roth and stay out of the 32% bracket and only get moved up to the 24% bracket, is the $321,000 cutoff for married filing jointly the number I should consider? In other words, if we made 168k and I converted 321-168 = $153,000, would I stay in the 24% tax bracket? (For simplicity lets say I convert slightly less e.g. 150k or so to avoid being near the cutoff).
Your analysis is basically correct.
Keep in mind you will still pay the same tax on you wage income as before (progressive tax rates).
You will pay 24% on the amount you convert to Roth.
This is probably a good move if you expect your Roth to grow.
You didn't say how old you are.
You'll also want to consider possible side effects due to the increase in AGI. It might make you subject to Net Investment Income Tax. It might reduce your itemized deduction for medical expenses. There are a number of other possibilities, so you'll want to prepare simulated tax returns with and without various amounts of Roth conversion to calculate the actual marginal tax rate. The increase in AGI could also cause increased Medicare Part B and D payments (if you participate) of about $4,800 for the year two years after the year of the conversion.
Don't forget to consider state income taxes.
fanfare, my reply is below. dmertz, I will read yours and reply seperately.
I am about to turn 60. My wife is 40. She is pregnant with what will (probably) be our only child, so I will keep working as long as possible. (yes I'm going to get tired on many days, and yes I might be a knucklehead). In addition to the 700k in tax deferred Vanguard funds I have about 240k in savings stashed in a non-retirement Vanguard account. 80% of all my money is in Moneymarket funds at the moment. I'm carefully watching and reading many books about investments and Social Security and all that. Learning it enough to actually know some stuff and not just be dangerous is hard, especially when I'm still working a hard job. But one thing that seems to be getting more clear is this idea of taking advantage of low tax rates and biting the bullet and paying some of the taxes by a Roth Conversion. I was thinking about maybe doing it two or three times the way I asked you about in the first post.
Thank you for the reply. With respect to your warning about becoming subject to Net Investment tax (as well as some other things you said), I have some questions:
1. If I don't retire for five or ten years is that Medicare issue you brought up moot?
2. Aside from that Medicare issue, is staying in the 24% bracket my primary benchmark/metric? Or maybe in simpler terms, if I accomplish the goal of a Roth conversion while staying in the 24% bracket, is there any other thing I need to worry about or take care of?
3. Can I use Turbotax to prepare the simulated tax returns you mentioned, and does that just mean almost finishing a return, writing down the results, then going back and changing stuff and almost finishing it again?
Use turbotax CD/Download to prepare trial tax returns. you can do any number of tax returns.
my 2019 and 2020 trial tax returns are now done and ready using the 2018 software; it's accurate enough for my purposes.
1. I mentioned Medicare Part B and D premiums as an example of something that can be affected by AGI, but in your case it seems that it is not a concern. The IRMAA adjustment for a particular year is determined by the AGI two years before.
2. Because of possible side effects, your concern should be marginal tax rate, not just tax bracket. If there are no side effects, marginal tax rate will be your tax-bracket rate, but the only way to know for sure that there are no side effects is to prepare simulated tax returns.
3. Yes, to determine the average marginal tax rate for a particular Roth conversion you would prepare the tax return without the Roth conversion, record the tax liability, add the Roth conversion, subtract the recorded tax liability from the new tax liability and divide by the amount of the Roth conversion added. The CD/download version of TurboTax has a What-If Worksheet in forms mode that can be used to show these results side by side and it can be set to use the next year's tax rate tables.