RMDs begin next year. Too late to begin Roth Conversions?

[edferg]

Hello everyone. I'm new here:
Single, age 71, retired age 66, no debts, own home, live in Pacific Northwest
Net Worth: 1.9M
Began Social Security at 66.
Income: Pension $900/mo + Social Security (began 2018) $3,100/mo + home business $900/mo
Social Security + home business covers my expenses. I have not had to withdraw from my portfolio.
Portfolio: Rollover IRA $880,000 Roth IRA $87,000 Cash & CDs $186,000
RMDs begin 2025
Current tax bracket 2024: 10%
Projected tax bracket in 2025 when first RMD is taken: middle of 10%

OK - I blew it on Roth conversions which I should have started at least 6 years ago. I only heard about RMDs three months ago - you can probably tell I don't have a financial advisor.
I turn 72 this September. Is there anything I can do this late regarding Roth conversion? Or is there nothing to be gained at this point?

 

[TheWizard]

I'd have to double check your numbers but, if what you say is accurate, then doesn't look like you would benefit hugely from Roth conversions...

 

[jazz4cash]

Unless you will be in a lower bracket when RMDs start, it’s a wash. There may be some benefit to having a bit more in Roth just for tax diversification/income smoothing in the event of a major expense but you already have a good chunk there. I’d move some over via conversion for this year and move on. You might also consider using the home business income for Roth Contributions but that is very limited.

 

[TheWizard]

I'm guessing most of the OP's SS is not presently included in his AGI.
The age 73 RMD on $1M is around $3145 per month, so that ordinary income will cause more of his SS to be included in his AGI (be subject to taxation).

You'd have to run some worksheet examples to see that actual dollar impact.

OP will be starting RMDs in 2025, so this is the last year for larger Roth conversions. I'd probably do a $35-40k conversion this year to take the edge off...

 

[CardsFan]

I am far from an expert, but using these 2 tools:

Charles Schwab

1040 Tax Calculator

Use this 1040 tax calculator to help estimate your tax bill for the current tax year's rates and rules.

www.dinkytown.net

It looks to me like you will be in the 22% bracket next year, and probably forever, or higher, after that.

That said, your effective tax rate looks to be around 13%.

I would consider a Roth conversion this year close the top of the 22% bracket (look out for IRMAA and stay below that). And I would consider conversions in the future, after RMD's, to the same level.

But all that said, it probably won't move the needle enough to matter.

 

[pb4uski]

Once you start RMDs, you'll be solidly in the 22% tax bracket. I would do either traditional IRA withdrawals or Roth conversions to the top of the 12% tax bracket for each year until you have RMDs. I suspect that would be about $20k a year and would give you some modest savings paying 12% now to avoid paying 22% later.

 

[N02L84ER]

Unless you plan to donate almost all of your RMD as a QCD (qualified charitable donation), I agree with CardsFan, you will be in the 22% bracket next year. Every dollar of RMD will make 50% - 85% of a matching dollar of SS taxable until 85% of all SS dollars are taxed.

 

[SevenUp]

Single, age 71

Income:
Pension $900/mo [= $10,800/yr]
Social Security $3,100/mo [= $37,200 gross]
home business $900/mo [= $10,800/yr. Assuming your Medicare premium is the health insurance you can use for the self-employed health insurance deduction, that's probably a $2096 deduction for 2024.]

Portfolio: Rollover IRA $880,000 [If you withdraw/convert enough so that never changes, at age 78 the RMD will be $40K/yr]
Cash & CDs $186,000 [assuming a 4% interest rate, that's $7440/yr]

Current tax bracket 2024: 10% [Unless I misread/misassumed something above, with that income $13,664 of your SS is taxble, leading to an AGI of $39,845, putting you in the "12% bracket" but paying a marginal tax rate of 22.2% on your ordinary income at this point.]
Projected tax bracket in 2025 when first RMD is taken: middle of 10% [assuming everything else stays the same as assumed above, that RMD will incur a 26% marginal tax rate due to the way Taxation of Social Security benefits works.]

It appears you have enough cash to pay Roth conversion taxes (so the full amount goes from traditional to Roth and you either adjust withholding or pay estimated tax to land in one of the Safe harbors that avoid underpayment penalties).

See Roth Conversion with Social Security and Medicare IRMAA if you'd like to delve deeper. If you do that, what do you decide?

 

[Exchme]

Those CDs and cash seem to be in taxable so should be yielding something (maybe $8K/yr?), so your AGI has to include that. If so, you do not have any significant room in the 10% bracket (maybe $1,000 or $2,000). That first $1,000-$2000 of Roth Conversions would have a marginal tax cost of 15% as each $1 of conversions would expose $0.50 of SS to taxation.

Above the 10% bracket, there is a slight advantage to the next ~$12,000 of Roth Conversions as that will be at a marginal tax cost of 18% since each $ of Roth Conversion also exposes $0.50 more of your SS to taxation. Above that and you will expose $0.85 of SS to taxation for each $ of Roth Conversion, so your marginal tax cost will be 22.2% even though you would be in the 12% bracket.

Once RMDs start, the full 85% of your SS will be taxed and you will be in the 22% bracket if you continue your business. You would be in the, 12% bracket, but the zone where 85% of SS would be taxed if you end your business.

Like many, your window for meaningful Roth Conversions was before you claimed SS.

 

[TheWizard]

Those CDs and cash seem to be in taxable so should be yielding something (maybe $8K/yr?), so your AGI has to include that. If so, you do not have any significant room in the 10% bracket (maybe $1,000 or $2,000). That first $1,000-$2000 of Roth Conversions would have a marginal tax cost of 15% as each $1 of conversions would expose $0.50 of SS to taxation.

Above the 10% bracket, there is a slight advantage to the next ~$12,000 of Roth Conversions as that will be at a marginal tax cost of 18% since each $ of Roth Conversion also exposes $0.50 more of your SS to taxation. Above that and you will expose $0.85 of SS to taxation for each $ of Roth Conversion, so your marginal tax cost will be 22.2% even though you would be in the 12% bracket.

Once RMDs start, the full 85% of your SS will be taxed and you will be in the 22% bracket if you continue your business. You would be in the, 12% bracket, but the zone where 85% of SS would be taxed if you end your business.

Like many, your window for meaningful Roth Conversions was before you claimed SS.

Yes, the best time for doing RMDs, as well as paying some living expenses from tax-deferred withdrawals, are the years prior to claiming SS at age 70 and then RMDs after that...

 

[oldtimer]

You may want to look at the heat map on Taxation on Social Security benefits.
Also, are you adjusting your gross income on Schedule 1 for your Medicare premiums & including medigap plan up to to your self employment net income?

 

[edferg]

Thanks for everyone's reply. There is no simple answer, so I've decided to subscribe to retirement planning software ($120/year) that graphs the effects on Taxes, Social Security, IRMAA for different Roth conversions you define. I have limited time remaining, but I can still take some actions before age 73.

 

[SevenUp]

Thanks for everyone's reply. There is no simple answer, so I've decided to subscribe to retirement planning software ($120/year) that graphs the effects on Taxes, Social Security, IRMAA for different Roth conversions you define. I have limited time remaining, but I can still take some actions before age 73.

If you get a chance to compare those results with the free approach suggested in Roth Conversion with Social Security and Medicare IRMAA, it would be interesting to see that comparison.