Roth Conversion

Submitted by James Demuth on Mon, 2023-11-20 14:38

I am currently a state employee (over 65 years of age) with a defined benefit plan. I have also been making voluntary contributions (both pre-tax and Roth) to my state 457 plan. I would now like to convert at least $50,000 or more in my 457 plan to the Roth 457. I’m trying to keep the conversion amount within my same general tax bracket (24%).
Is it correct that long term capital gains from mutual funds is not considered a factor in my bracket due to being treated at their long term rate. I also sold a single-family residential investment property this year (that I held for about 10-12 years) netting about $30,000.
My state wages, dividends and short term capital gains (from mutual funds), bank interest and money market mutual funds earnings should be about $125,000 for the year 2023.
I am single. So looking at the single tax bracket for 2023, (24% for $95,376 – $182,100) would I be able to convert about $55,000 or so to my Roth?
Also do the standard deductions of $13,850 + $1,850 (over 65 years of age), allow me to convert that much more.
Thank-you so much if anyone is able to guide me through this important decision!



Submitted by Alan - IRA critic on Mon, 2023-11-20 20:40

  • This is actually a general tax question, since an in plan Roth rollover is taxed as ordinary income. It is correct that any LT gains or qualified dividends are taxed at the lower 15% max rate, so if the amount of this 15% income exceeds 182,100 of taxable income, it does not matter. What could present a problem is any depreciation you took on the investment property must be recaptured as ordinary income. Therefore, you will have to determine how much of the reported sale will be subject to the ordinary income rate before you determine how much of a Roth rollover you could do and avoid spilling into the 24% marginal bracket. You must also factor in any state income tax unless you are in a no state income tax state. You are correct that your standard deductions will reduce the amount of your taxable income, providing more space to convert unless depreciation recapture reduces that space.
  • Typically, good conversion years are between early retirement, claiming SS, and RMDs. But depending on your year of birth, your RMD age can vary, and your DB pension will probably start right after you retire. Therefore, you may have very few years between retirement and the start of this other income and therefore may not have the years to convert at low post retirement rate. If you had more of these years, I would suggest that you wait until after retirement before converting incremental amounts.

Submitted by David Mertz on Mon, 2023-11-20 21:37

If you are enrolled in Medicare Part B or Part D, also consider any effect on Medicare IRMAA.  Getting pushed into the next IRMAA bracket could have an effect equivalent to a increase in the federal marginal tax rate of 2% or more.

Submitted by James Demuth on Tue, 2023-11-21 03:27

Appreciate all your your help… gives me a few things I didn’t realize!

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