Roth Conversion calculator and Tax impact

sma3

I have been struggling to determine the tax impact of converting my IRA to my Roth IRA

There are lots of calculators that calculate RMDs but this is the only one I found that will calculate what the extra taxes AND Medicare IRMAA will be. I checked a couple of the levels and I think it is quite accurate. You can set the tax bracket you want to stay in also.

https://www.newretirement.com/retirement/roth-conversion-calculator/

msf

A few other things to keep in mind:

1. ACA - for those "younger" (pre-65) folk, subsidies get phased out based on income. KFF.org seems to have a decent calculator for these subsidies. I haven't checked it out extensively, but IMHO KFF is one of the most complete and accurate sources of information on health care.
https://www.kff.org/interactive/subsidy-calculator/

2. State help with Medicare drug coverage. This depends on state and income level. For example, NYS has its Elderly Pharmaceutical Insurance Coverage (EPIC) program that may help with co-pays for individuals with income up to $75K (individual) or $100K (married).

3. Cap gain/ qualified divs - this can get messy for an obvious reason and one that's more complicated:

a) Cap gains are "outside" of ordinary taxes. They have their own rates and brackets. The conversion calculator assumes all AGI is ordinary income. Whether cap gains or ordinary income, all income affects IRMAA the same way. But how much to convert to fill an ordinary income tax bracket depends on how much of your income is taxed as ordinary income and how much is taxed as cap gains.

You can fake out the calculator by just giving it the ordinary income part of your AGI to fill your bracket. Then recalculate with this amount plus your cap gains income (no extra conversions) to see the IRMAA impact.

b) If your income is at the level where some cap gains are taxed at 0% and some at 15%, then every extra dollar you earn (convert) is taxed at 15% plus your ordinary tax rate. Kitces calls this region of income the "bump zone". A simple rule of thumb is "go long (convert until you're well past the bump zone) or go home". Kitces provides a more thorough analysis for Roth conversions and bump zones.


https://www.kitces.com/blog/long-term-capital-gains-bump-zone-higher-marginal-tax-rate-phase-in-0-rate/

FInally, a petty observation. The conversion calculator doesn't seem to include Part D IRMAA (around 1/5 of Part B IRMAA). "It is not commonly known, but the more you earn, the more you pay for Medicare Part B."

Apparently even less well known is that Part D also has IRMAA charges.
https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/monthly-premium-for-drug-plans

davidrmoran

partly helpful ?

https://www.kitces.com/blog/roth-conversion-analysis-value-calculate-timing-true-marginal-tax-rate-equivalency-principle/

msf

Nice piece as usual from Kitces. If nothing else, it goes far in conveying a sense of why one doesn't find calculators for this. A couple of the comments are also worth a mention:

- the first comment suggests including ACA subsidies (tax credits) in the calculations (as I also suggested, above);

- Kitces added a comment about how paying the taxes on a Roth conversion from a taxable account changes things (there's a tax drag on the taxable investments that is reduced by converting).

- That was his response to another comment citing this 2021 (2022 update) paper (haven't read it yet);
When and for Whom are Roth Conversions Most Beneficial? A New Set of Guidelines, Cautions and Caveats
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3860359