Conversions

[Kathleen Reynolds]

#3678

Please see below image for details on section inputs.

 

Single Year Conversion

• Optimization Option: The application allows for optimization based on a Taxable Bracket or IRMAA Part B premium amounts. See note below for IRMAA information. If ‘None’ is selected for optimization, then the application will allow you to enter a one-year value to convert.
• Conversion Format: This input only appears if ‘None’ is selected for optimization. This input allows you to select either a percentage or dollar format to be used for the conversion.
• Marginal Tax Bracket Threshold This input will appear if the optimization option selected is ‘Marginal Tax’. This input will allow you to select amongst the current tax brackets. When you select a bracket, it will calculate the maximum amount available that will result in the marginal tax rate to remain in the tax bracket. Several factors are considered: a) Income streams that were entered for the year, including taxable portions of Social Security which are calculated by the application b) Required Minimum Distributions that have occurred for both, if applicable, spouses c) Conversion amounts for the year that may have already occurred (in the case of the second person’s conversion) d) Prorata rule regarding non-deductible portions of the IRA to be converted e) Inflation rate from the main screen will be used to adjust future tax bracket ceiling values. If both spouses have conversions in the same year, the taxable threshold will be applied to both. The First-to-Die’s IRA will be converted first. After the conversion, if there are still available funds to convert, that allows the clients to remain in the marginal tax threshold selected, then the Second-to-Die’s IRA will be converted up to that amount. It’s possible that a selection results in no conversion. If the entered income streams, plus RMDs, exceed the taxable threshold selected, then the conversion will essentially ‘skip’.
• IRMAA Premium Threshold This input will appear if the optimization option selected is ‘IRMAA’. This input will allow you to select amongst the current IRMAA brackets. The ‘25% Standard’ selection will result in the standard premium, with $0 IRMAA added to the premium. Additional IRMAA brackets are listed and reflect the premiums released by the government. IRMAAs are tied to an individual, so both spouse’s (if applicable) will be required to pay the premium. The IRMAA calculation requires a 2 year look behind – it calculates the premium based on the AGI of the clients from two years prior. So, if you are optimizing IRMAA, the end result will not be realized till 2 years after the conversion! Several factors are considered: a) Income streams that were entered for the year, including taxable portions of Social Security which are calculated by the application b) Required Minimum Distributions that have occurred for both, if applicable, spouses c) Conversion amounts for the year that may have already occurred (in the case of the second person’s conversion) d) Prorata rule regarding non-deductible portions of the IRA to be converted. If both spouses have conversions in the same year, the IRMAA threshold will be applied to both. The First-to-Die’s IRA will be converted first. After the conversion, if there is still available funds to convert, that allows the clients to remain within the IRMAA threshold selected, then the Second-to-Die’s IRA will be converted up to that amount. Its possible that a selection results in no conversion. If the entered income streams, plus RMDs, exceed the taxable threshold selected, then the conversion will essentially ‘skip’.
• Include Conversion This input allows you to select if which spouse’s IRA should be converted. The application will allow you to select ‘Yes’ or ‘No’ for both spouses.
• Conversion Year You can select to convert the spouse’s IRA accounts independently of each other. The conversion year must be at least equal to the Analysis Start year, and no greater than the death year of the owner of the IRA.
• Amount to Convert If you select ‘None’, this input will appear if you selected the ‘Dollar’ format. This will convert the dollar amount entered. If you enter an amount that exceeds the available balance of the IRA, the conversion will only convert up to the amount available.
• Conversion Percentage If you select ‘None’, this input will appear if you selected the ‘Percentage’ format. This will convert the percentage you entered in the year entered.

NOTE – Required Minimum Distributions must be done before conversion can take place. So, that portion of the IRA will not be converted, but rather treated as RMD and placed into the Taxable Asset after tax (if that option is selected) or spent.

Multi Year Conversion

• Optimization Option: The application allows for optimization based on a Taxable Bracket or IRMAA Part B premium amounts. See note below for IRMAA information. If ‘None’ is selected for optimization, then the application will allow you to enter a one year value to convert.
• Conversion Format: This input only appears if ‘None’ is selected for optimization. This input allows you to select either a percentage or dollar format to be used for the conversion.
• Marginal Tax Bracket Threshold: This input will appear if the optimization option selected is ‘Marginal Tax’. This input will allow you to select amongst the current tax brackets. When you select a bracket, it will calculate the maximum amount available that will result in the marginal tax rate to remain in the tax bracket. Several factors are considered: a) Income streams that were entered for the year, including taxable portions of Social Security which are calculated by the application b) Required Minimum Distributions that have occurred for both, if applicable, spouses c) Conversion amounts for the year that may have already occurred (in the case of the second person’s conversion) d) Prorata rule regarding non-deductible portions of the IRA to be converted e) Inflation rate from the main screen will be used to adjust future tax bracket ceiling values. If both spouses have conversions in the same year, the taxable threshold will be applied to both. The First-to-Die’s IRA will be converted first. After the conversion, if there is still available funds to convert, that allows the clients to remain in the marginal tax threshold selected, then the Second-to-Die’s IRA will be converted up to that amount. Its possible that a selection results in no conversion. If the entered income streams, plus RMDs, exceed the taxable threshold selected, then the conversion will essentially ‘skip’.
• IRMAA Premium Threshold This input will appear if the optimization option selected is ‘IRMAA’. This input will allow you to select amongst the current IRMAA brackets. The ‘25% Standard’ selection will result in the standard premium, with $0 IRMAA added to the premium. Additional IRMAA brackets are listed and reflect the premiums released by the government. IRMAAs are tied to an individual, so both spouse’s (if applicable) will be required to pay the premium. The IRMAA calculation requires a 2 year look behind – it calculates the premium based on the AGI of the clients from two years prior. So, if you are optimizing IRMAA, the end result will not be realized till 2 years after the conversion! Several factors are considered: a) Income streams that were entered for the year, including taxable portions of Social Security which are calculated by the application b) Required Minimum Distributions that have occurred for both, if applicable, spouses c) Conversion amounts for the year that may have already occurred (in the case of the second person’s conversion) d) Prorata rule regarding non-deductible portions of the IRA to be converted. If both spouses have conversions in the same year, the IRMAA threshold will be applied to both. The First-to-Die’s IRA will be converted first. After the conversion, if there is still available funds to convert, that allows the clients to remain within the IRMAA threshold selected, then the Second-to-Die’s IRA will be converted up to that amount. Its possible that a selection results in no conversion. If the entered income streams, plus RMDs, exceed the taxable threshold selected, then the conversion will essentially ‘skip’.
• Include Conversion This input allows you to select if which spouse’s IRA should be converted. The application will allow you to select ‘Yes’ or ‘No’ for both spouses.
• Conversion Year to Start This will be the first year of the partial conversion.
• Number of Years Enter the number of years that the conversion will last. You could enter 1 year, and essentially have a single year conversion (and not partial, if you enter 100%). This input will extend the conversion from the start year for x amount of years.
• Conversion Year 1-10 Depending on the number of years you entered, inputs will appear that will allow you to enter yearly conversion amounts. For dollar amounts, the conversion will only convert up to the available assets – any excess entered will be ignored. For percentages, the conversion routine will convert the balance of the year based on the percentage you enter.
• Fully Convert in last year: If it’s desired to fully convert the remaining IRA balance in the last year (or any year prior to that), enter 100% if you are using the Percentage format, and enter an out-of-range number like $999,999,999 (or some number beyond what the IRA is reasonable of) for the Dollar format.

NOTE – Required Minimum Distributions must be done before conversion can take place. So, that portion of the IRA will not be converted, but rather treated as RMD and placed into the Taxable Asset after tax (if that option is selected) or spent.

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