I am on the track to convert some traditional to Roth EVERY YEAR. I want to lessen the bad tax effects of RMD from our traditional IRA. This post provides a spreadsheet you can use to judge how much you should convert this year: one for single filer and one for married, joint filers. These are closely related to the spreadsheets I provided in this post.
I’ll get the year-end dividend distributions for our funds and ETFs in our taxable account today and next Friday. I’ll soon have a very precise estimate of our taxable income for the year.
== Why convert? ==
I want to SHIFT after-tax value from traditional to Roth: I wind up with the same basic after-tax value in our retirement accounts, and I retain the same benefit of tax-free growth. But Patti and I will avoid higher taxes that will come from distributions from our traditional IRA: we’re all being pushed toward a higher marginal tax bracket and IRMAA tripwires because RMD increases dramatically over time. The tax effects will be worse when it is just one of us alive. Also, our heirs will keep more from Roth than traditional. See more detail here.
I’m also lowering the time and effort that I spend on detailed tax planning each year – lessening the headache I get every year in November and December.
== How much to convert? ==
The spreadsheet calculates how much you can convert and stay in the 22% bracket and not cross the next IRMAA tripwire. My estimate of the IRMAA tripwires applicable to your 2024 tax return is here. My estimate includes an inflation adjustment for the tripwires finalized in November; those look back at your 2023 return for IRMAA this upcoming calendar year. Lower my estimates to the present table that makes you more comfortable.
== How to convert? ==
I describe the steps in this post. You are SHIFTING after tax value in your traditional IRA to Roth. At the 22% marginal rate, $100 in traditional has the same after-tax value as $78 in Roth. Both grow tax-free in the future. Both net the same amount after taxes when you distribute for your spending:
Your target is to SHIFT $100 from traditional to Roth and to wind up with $78 in Roth. You can do this easily if you are over age 59½; you immediately distribute from your “conversion Roth” for the taxes. You have an added wrinkle if you are younger than age 59½. You “convert” $100 to Roth and distribute $22 from your prior Roth contribution basis for taxes.
Conclusion: I now am routinely converting some traditional to Roth each year. I am converting in the 22% marginal tax bracket, and I make sure I don’t stumble over an IRMAA tripwire. When I convert, I pay the taxes from the amount from my Roth – from the amount I transferred from my traditional IRA. My result is the same after-tax value I had before the shift. This post provides a spreadsheet that calculates how much you can convert and stay in the 22% marginal bracket and not cross the next IRMAA tripwire.
Hi, Tom,
I was so hopeful that Santa would be leaving something for us Single Filers.
Alas, it looks like you are still linking the MFJ spreadsheet instead of a Single Filer one. (Just like on the other post I wrote to you about a few weeks ago.)
Happy Holidays to you and yours!
Vera