What’s the Break-Even on a Retirement Roth IRA Conversion?

[@Bondbeer]

In the example at the top of the 12% bracket, an important missing fact is the type of income. One issue when converting from the 12% bracket into the 22% is that your qualified dividends and cap gains that were at zero tax will now be taxed at 15%. If you converted $100k and had $40k of cap gains, that would add $6k tax to the $22k tax or 28% total. If you convert more than $100k you will trigger IRMAA surcharges if 63 or older and if you go over $250k you trigger the 3.8% investment income surtax.

[@Bondbeer]

Your example in the 25% tax bracket converting $100k will not be a good decision if they deferred and pay less than 25%, even if they pay more tax dollars they can still come out with a better after tax net worth. Your math was perfect in the example. Where you went off track is assuming you will pay more than 25% later. If you properly plan your other income to minimize income except SS and RMDs, you can take advantage of the inflation adjustments. If you are 60 today The year 1 RMD is 15 years away. The RMD on $2m is only $80k which added to SS will be well under the 25% bracket at that time (subject to any other law changes, which are unknown).

[@Bondbeer]

Good video. I don’t think there is a such thing as a break even on a Roth Conversion since there are so many variables and it’s conceivable the deferred option won’t be fully depleted until 10 years after your death, so you can compare the after tax net worth. Of course there are some no brainer situations such as when your income is very low and you can convert some to Roth using up the standard deduction for zero tax (this would provide an immediate break even). Otherwise you need to do the math taking into consideration your current marginal rate and projected future rates, which will vary depending on the annual inflation adjustments to the standard deduction, tax brackets and IRMAA surcharge limits, as well as your heirs tax brackets (unless you know exactly when you will die so you can time out withdrawals). Don’t forget when you convert you pay all the tax up front in today’s dollars at your highest marginal tax rate vs deferring and paying RMDs slowly over many years with some income potentially taxed at lower rates. For example if you convert in the 22% bracket you pay 22% on the entire amount. If you defer are are in the 28% bracket later, your effective (average) tax rate can be less than 20%.