For a Retired Couple With an $850,000 IRA, the Biggest Roth Conversion That Still Fits the 12% Bracket Is $73,000

This year’s required minimum distribution and any Roth conversion intended for next year both need to be completed by Dec. 31. For a 75-year-old couple with an $850,000 IRA, the RMD comes to $34,553, and the largest amount they can convert while staying within the 12% bracket is $73,000.

The IRS has released the next year’s tax brackets, leaving retirees time to handle two year-end moves: the required minimum distribution for the current year and any Roth conversion that will count for the following year.

Take a married couple, both 75 and retired. His traditional IRA had $850,000 on Dec. 31. Together they receive $3,900 a month from Social Security, or $46,800 a year, and they have no pension, wages or other income. They plan to pay any conversion tax from savings outside the IRA. Their question is simple: after the RMD, how much can they move to a Roth before the tax bill rises too far?

The answer is to take the $34,553 RMD first, then convert $73,000. That is the largest conversion that keeps taxable income in the 12% bracket and preserves the full senior deduction. It adds $10,993 to their federal tax bill, which works out to 15.1% of the amount converted.

The first deadline: the $34,553 RMD

Under IRS rules, each year’s RMD is calculated by dividing the prior Dec. 31 IRA balance by the Uniform Lifetime Table factor, which is 24.6 at age 75. That means $850,000 divided by 24.6 equals $34,553, or about 4.1% of the account. The RMD must be taken before any conversion, and those dollars cannot be rolled into the Roth.

If the RMD is missed, the excise tax is 25% of the shortfall, or $8,638 here, although that can be reduced to 10%, or $3,455, if the error is corrected within two years. Either way, the income tax still applies.

With only the RMD, the couple’s $34,553 of IRA income makes $17,860 of their Social Security taxable, bringing adjusted gross income to $52,413. The standard deduction for a married couple with both spouses age 65 or older is $35,500, and the senior deduction adds another $6,000 per person, or $12,000 total. That leaves taxable income of $4,913 and federal tax of $491.

The bracket chart shows room for $95,887, but the real ceiling is $73,000

The joint 12% bracket reaches up to $100,800 of taxable income. Subtract the $4,913 the couple already has, and it may look as though they have $95,887 of room for a conversion.

But Social Security complicates the picture. Under IRS Publication 915, the taxable portion of benefits depends on provisional income, which is other income plus half of Social Security. Each extra dollar converted to Roth raises provisional income and can pull more benefits into taxation, until as much as 85% becomes taxable. In this case, a conversion increases taxable Social Security from $17,860 to $39,780, adding $21,920 of taxable income without any cash ever being touched.

After running the full calculation, the biggest conversion that still stays within the 12% bracket is $73,967. Rounded down to $73,000 for simplicity, that leaves a small cushion. At that level, AGI is $147,333, taxable income is $99,833, and total federal tax comes to $11,484. The conversion itself adds $10,993 in tax, or 15.1% of the $73,000 converted. In other words, the couple remains in the 12% bracket, but the Social Security effect pushes the real cost to about 15 cents on each converted dollar.

Where the next dollars get more expensive

Three thresholds sit just above $73,000.

The 22% bracket. Converting $83,000 instead of $73,000 raises total tax to $13,781. The extra $10,000 costs $2,297, or about 23 cents per dollar, compared with 15 cents on the dollars below that level.

The $150,000 senior-deduction threshold. Each spouse’s $6,000 senior deduction begins to phase out by 6% of modified AGI above $150,000 on a joint return. At $73,000, the couple’s modified AGI is $147,333, leaving $2,667 of room. At $83,000, they would lose $880 of the deduction, which helps explain why the next $10,000 becomes more expensive.

IRMAA. Medicare’s income-related surcharge uses income from two years earlier, so income in one year affects premiums two years later. The first joint tier starts above $218,000 of modified AGI, and at $147,333 this couple still has $70,667 of breathing room.

Using the full $95,887 of apparent room from the bracket table would push them past the first two thresholds. Total tax would climb to $16,956, the conversion would add $16,465 in tax, and the senior deduction would shrink to $9,574.

How the newer brackets change the picture

The next year’s brackets widen the 12% bracket to $104,050 of taxable income, which is $3,250 higher than the current level. The standard deduction for a couple with both age-based add-ons also rises to $36,600, up $1,100 from the prior amount.

A conversion also reduces the future required distribution. After taking the RMD and converting $73,000, the IRA would hold $742,447 before growth. Dividing that by the age-76 factor of 23.7 gives a projected next-year RMD of about $31,327. Without the conversion, the account would be $815,447 and the RMD would be about $34,407. That means $3,080 less forced income later.

How to run the calculation on your own account

1. Calculate the RMD by dividing the prior Dec. 31 balance by your table factor. In this example: $850,000 divided by 24.6 equals $34,553.
2. Add half of Social Security to the RMD to determine provisional income, then use the Publication 915 worksheet to find taxable benefits. Here, that amount is $17,860.
3. Subtract the standard deduction and senior deduction from AGI. Here: $52,413 minus $35,500 minus $12,000 equals $4,913.
4. For each conversion amount you test, repeat the Social Security calculation with the conversion added to other income. Once provisional income exceeds $44,000, the most difficult formula is: taxable benefits equal the lesser of 85% of benefits or 0.85 times provisional income minus $44,000, plus $6,000.
5. Stop at the largest conversion that keeps taxable income at or below $100,800 and AGI under $150,000. In this example, that is $73,000.

Where the strategy is weaker

Conversions made after 2017 cannot be reversed. The $10,993 comes out of savings now, and the benefit is a future tax savings that cannot be pinned down today because it depends on tax rates, investment growth and how long each spouse lives. The smaller RMD next year saves only about $370 to $464 in tax at rates between 12% and 15.1%, so much of the payoff depends on later years, a surviving spouse and heirs.

State income taxes are not included in this calculation. If the couple lives in a state that taxes conversions, the effective rate is higher than 15.1%.

Converting less, or nothing, may make more sense if they expect to remain in the 12% bracket or lower for life, if they need the IRA for spending soon, or if paying roughly $11,000 from savings would leave them short on cash. Any additional income, even a modest pension, changes the ceiling and requires a fresh calculation.

Two factors still argue in favor of converting. If one spouse dies, the survivor files as single, and the 12% bracket is much narrower while the IRA remains the same size. In addition, the $6,000 senior deductions are temporary, lasting only through 2028, so the room they create will not last forever.

The bottom line

This couple should take the $34,553 RMD, then convert $73,000 before year-end and pay roughly $11,000 from savings. The key figure is 15.1%, the true cost per dollar once Social Security is included. That cost makes sense if a surviving spouse, or their heirs, would later pay more than that on the same money. If both spouses, and eventually their heirs, are expected to remain in the 12% bracket or below, the conversion offers little benefit. With wider brackets in the next year, this remains an annual decision with a new ceiling each December.