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URL:  https://boards.fool.com/top-of-12-bracket-81050-top-of-22-bracket-34989262.aspx

Subject:  Re: Roth Conversion Alternative Date:  11/29/2021  6:23 AM
Author:  CuriousQ Number:  105379 of 107571

Top of 12% bracket: $81,050
Top of 22% bracket: $$172,750

Total ordinary income at 22%: $172,750 - $81,050 = $91,700. Add this to the Roth conversion amount at 12% of $75,150 = $166,850, pushing the $5,000 QD+LTCG up but still taxed at 15%. That's a lot of Roth conversion for most, but it certainly can make sense if your employer plan rollover is well up into the 6 or even 7 digits and/or you expect a large jump in household income in the next few years.

A couple of other comments.
Social Security and Medicare taxes (FICA) are taxed on earned income, not un-earned income such as the ordinary income from a TIRA to RIRA conversion.



If I understand correctly, one question you have is "Why do [I] feel [I'm] automatically in the 22% marginal bracket rather than the 12% bracket?" Part of that is that I still have some "working life" hangover. That is, When I retired in 2020, I was still paying taxes on earned income, plus Social Security and Medicare taxes, plus I had a kid in college and another at home finishing off her college loans. So, there were a lot of expenses I didn't have in 2021 but I was still in a working/parent mentality. Also, in 2021, I had my health insurance go up *A LOT* because it went from paying a portion as employee to it being all on me. (And note--as an employee, the part I paid came out before taxes; once I paid 4x that on my own, it came from after-tax money.) I'll revisit my numbers once I complete my 2021 taxes next year.

On the topic of income subject to Social Security and Medicare taxes, I understand that the unearned income from IRA withdrawals or Roth conversions aren't subject to that. I was talking about how one's taxable income can cause his/her Social Security to be taxed at 0%, 50% or 85%. It looks like I will be in the situation where I will be at a mix of 50% and 85% if I get some of my income needs from a taxable IRA withdrawal, but all 50% if I get most of my income needs from a Roth IRA. So, the trade-off is: Pay 22% tax on a Roth conversion now and pay little taxes on SS later, or pay no tax on a Roth conversion now by not doing one, and pay 22% tax on an IRA withdrawal later along with 85% taxes on SS. The Medicare surcharge I mentioned was the one that you get hit with if your taxable income is >$182K.

I read Financial Dave's article on conversions, and there wasn't anything new there for me. Actually, your prompt to question my assumption of perpetually being in the 22% bracket was the most useful. We also want to remember that (unless something changes), the 12% tax rate goes to 15% and the 22% tax rate goes to 25% in 2026.
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