How do I determine how much to convert from an IRA to a Roth?

[Kipmc7]

I have a large balance in an IRA and and more in a 401(k) . I have been studying Required Minimum Distributions (RMDs) and they could put me into higher tax brackets when I'm retired than I am in now.

The question becomes how much do I convert to Roth and over how many years ?

There are financial planners who offer this service. Some charge as much as $9300 just for the plan. Please note, this is not for managing the account and making stock picks or mutual funds selections. This is just to tell you how much to convert and when. 

Have any of you found a planner or software that will help with this for a reasonable fee??

Thank you

[dmertz]

The general suggestion is to convert an amount in a particular year that brings your taxable income up to the top of your current tax bracket.  However, be wary of side effects that an increase in your AGI can have that might bring your marginal tax rate above the tax-bracket rate.  (Treat any increase in Medicare Part B and Part D from IRMAA as if it is an additional tax.)  Also consider state taxes and any amounts that your state might exclude from income after you reach a certain age, often age 65.  You'll generally get maximum benefit of a Roth conversion by paying the taxes with other funds.  You certainly don't want to use qualified funds to pay taxes if you are under age 59½ since amounts distributed and not rolled over or converted will be subject to a 10% early-distribution penalty.  Planning much beyond that requires extensive modeling and various assumptions about the future which may or may not turn out to be valid.

You can use tax software like TurboTax to do a projected tax return to get an idea of your marginal tax rate and whether it is influenced by side effects.  The CD/download version of TurboTax, not the online version, is best for this.

[fanfare]

"Treat any increase in Medicare Part B and Part D from IRMAA as if it is an additional tax.)"

Generally, these surtaxes will be avoided, as well tax on Social Security, if you are funding your retirment out of Roth IRA money.

Your future self will  be thanking you, a lot.

paying $9,300 to subtract your AGI from the top of your tax bracket sounds idiotic.

@Kipmc7 

@Kipmc7 

[NCperson]

@Kipmc7 it is a rather simple exercise.

1) decide what tax bracket you can stomach.  

2) decide (if you are on Medicare) what tranche of IRMAA you can stomach.

3) convert enough to get to the top of 1) and 2). 

4) what is your objective? There is a growing thought that folks are moving towards larger Roth conversions since their children (who normally inherit) only have 10 years to liqudate the inherited Trad IRAs and many may have to do that during their high earning years.  Hence parents can convert at a lower tax rate than their children may be able to. 

Good IRMAA explanation: 

https://thefinancebuff.com/medicare-irmaa-income-brackets.html

@fanfare <<Generally, these surtaxes will be avoided, as well tax on Social Security, if you are funding your retirment out of Roth IRA money.>>

can you explain please?  Maybe I misunderstand what you are meaning?

The Roth money is the most valuable financial asset vehicle as there is no tax on exiting from the Roth (it was already paid!), so best to consume all nonqual investments first (only taxed at capital gains rates), then Trad IRA dollars (which there is really no way out of the tax, short of QCD), and leave the Roth dollars to grow tax free and consumed last.  

Better to pay tax I can't get out of than consume assets (roth) where I have already paid the tax but can enjoy tax free returns going forward.

[Kipmc7]

@NCperson It is only a "Simple Excerise"  if you are OK with just "taking a stab at it" and possibly leaving 10's of thousands of dollars on the table for the IRS to collect.  You sugggest that I decide "What I can stomach" as a tax bracket NOW. That is missing the whole point that the tax bracket in the future may be even higher. My plan is to do the hard work to find, if not the perfect solution then at least a very good solution by understanding my options and making an informed decision on how much to pay in taxes now to avoid paying even more later.  Done this way, it is not a simple question at all. It does involve many factors including the IRMAA that you mentioned.

If anyone would like to team up with me to try to find the best solution we can, message me on here. 

[NCperson]

@Kipmc7 - no one knows what the future holds for federal taxes - maybe they will be higher, but maybe not. 

Sarcastically, just cash the entire IRA now (or over a short period of time) and the future risk of even higher taxes is mitigated.  That is why I asked what can you stomach now as the tax rate. 

Are you going to consume the money during your lifetime in any event or are you expecting to leave it for heirs - that is why I asked what your goal is.  It makes a difference in how much you stomach now. 

everyone has an opinion on where taxes are going in the future: 

https://www.wsj.com/politics/tax-cuts-budget-deficits-republicans-democrats-4f2a0d33?mod=Searchresul...

[dmertz]

Perhaps replace "can stomach" with "you think is reasonable given all of the information presently available."  Because of the prospects of tax-free growth in the Roth IRA, you might conclude that a marginal tax rate slightly higher than what your marginal tax rate would be without the additional income is reasonable.