Please Review my Roth Conversion Estimate

[JLTinVA]

2019 is the first year I'll be doing a Roth Conversion, and I want to make sure I'm doing it right. Would greatly appreciate a review of the numbers I put together to see if I'm thinking about it correctly. I'll attach the spreadsheet as well.  Since these are estimates, I'll probably convert about $5000, just to make sure I don't trigger any taxes.

#		Item		Comment	Amount
1		0% Capital Gains Income Limit		Married Filing Jointly		78750
2		Standard Deduction		2019 Amount		24400
3		Estimated Total Dividends		From recent statement		28524.79
4		Estimated Total Qualified Dividends		#3 * 95% (Based on prior year amounts)		27098.55
5		Estimated Total Non Qual Dividends		#3 - #4		1426.24
6		Estimated Total Foreign Tax Paid		Based on Prior Year Amounts		500
7		Estimated Short Term Capital Gains		From recent statement		0
8		Estimated Long Term Capital Gains		From recent statement minus $3000 carry over capital loss		4434.07
9		Estimated Earned Income		No wages/salaries/tips		0
10		Estimated Interest Income		Based on latest statements		1000
11		Total ACA Income		#3 + #7 + #8 + #9 + #10		33958.86
12		Determine Max Roth Conversion		#2 - (#9 + #10 + #5 + #7)		21973.76
13		Determine Max Long Term Capital Gains Harvest Amount		#1 - (#4 + #8 + #9)		47217.38
14		ACA Income Declared at Beginning of Year				40000
15		Max Roth Conversion OR Capital Gains Harvest Amount Taking Into Account ACA		#14 - #11		6041.14

[gocurrycracker]

Your math is all fine.

But: A recent statement might just be backwards looking - be sure to estimate dividend and capital gain distributions for Q4'19


There isn't any special reason to stay below $40k income ("just to make sure I don't trigger any taxes"), even though that is what you estimated for ACA purposes.  For the following, I'm assuming you are a household of size 2 for ACA purposes:

If you did no Roth conversion this year, and income came in at ~$34k (206% FPL for household size = 2) you would get a refund of premiums already paid of ~$950.

In other words, doing a $6k Roth conversion to get income to exactly $40k (243% FPL) costs you $950 over doing nothing, or a tax rate of 15% or so.


On the other extreme, let's say you did a Roth conversion of ~$27k, pushing income to $61k (370% FPL.)

This would generate $500 in income tax, which could be offset with the Foreign Tax Credit for the $500 foreign tax paid - net result is $0 income tax.

However, it would also mean you needed to pay back $2,600 of ACA premiums (the limit for repayback, even though technically you would owe up to $2772.) https://www.gocurrycracker.com/obamacare-advanced-premium-tax-credit-repayment-limitation/

That $2600 on $21k of income (over the 40k mark) is a 12.4% tax rate.


Summary:
do nothing and get a refund
convert a little bit and pay 15% tax
convert a lot, recover the foreign taxes paid, and pay back aca premium credits at a 12.x% rate

[JLTinVA]

Our subsidy actually covered our entire premium in 2019: we're young-ish and in relatively good health, so we chose a bronze plan. That said, I don't think I did enough analysis like you did above to determine what is our best approach over the long-term. I don't think we'll need to touch the converted money, and our tax rate later is likely to be higher than it is now. Maybe it's better to convert more now and pay some taxes to avoid much higher taxes in the future. I'll have to run through some scenarios and see how it plays out.

Thank you so much for looking and responding!

[gocurrycracker]

Is the $40k MAGI where the subsidy from the second lowest cost silver plan makes the bronze premium exactly $0? Or can you go a little higher?


This is how I think about the pay some taxes now to avoid paying more taxes later trade-off
(It depends on how big your Traditional accounts are)
https://www.gocurrycracker.com/is-your-401k-too-big-part-2/
point

When going with a Bronze policy, ideally you will have an HSA.
You don't need earned income to contribute, and you can contribute up to $7k for a family in 2019
https://www.gocurrycracker.com/hsa-contribution-limits/

Then you use the $7k deduction to offset the income from a $7k Roth conversion.



The foreign tax credit can be carried forward for up to 10 years, so it isn't immediately use it or lose it. But it does get more challenging to use all if it when it exceeds $600, as you then have to fill out form 1116. Some planning is in order.


Since you are young-ish and healthy, consider doing a year abroad so you are outside the ACA. You can then do some massive Roth conversions and cap gain harvesting at zero tax, which will set you up nicely for the years to come back in the US.https://www.gocurrycracker.com/kickstart-your-retirement/

[JLTinVA]

We upped our MAGI and are paying a bit this year for our ACA plan. We are in an under-served rural community, so have very limited options on our coverage.

My husband's 401(k)/IRA is large (closing in on $1M). Definitely have to convert more now!

We have too much tying us to the US at this time...but something to consider for sure.

Thanks again! Happy New Year!