Beating 2026 tax increase

[COcheesehead]

So you make assumptions, which are not guesses, as the cheesehead said. That seems better than being afraid to take action because you aren't 100% certain.

A conversion is 100% certainty - you will pay a tax. The question is do you need to and should you. It will vary for everyone. Fear isn’t part of the equation. Looking at the progression of retirement oriented tax laws is however highly relevant.

 

[target2019]

What’s your favorite rmd estimating tool? Do you just figure everything in today’s dollars? Or estimate Ira return vs tax bracket indexing increases?

I was playing with this on the weekend. It lets you calculate for a future year, and adjust the groth rate.

https://www.aarp.org/work/retirement-planning/required-minimum-distribution-calculator.html

 

[target2019]

There are averages (like 12.5 years additional longevity) that can be applied to situations. In our situation it will likely be 20 years, as this happened in two previous generations.

IMO a superior analysis defines your personal situation, then applies rules and personal goals. The rules are not always simple to understand.

As a married individual I have variables that are of no concern to singles. So I need to filter some views and opinions here.

 

[RunningBum]

A conversion is 100% certainty - you will pay a tax. The question is do you need to and should you. It will vary for everyone. Fear isn’t part of the equation. Looking at the progression of retirement oriented tax laws is however highly relevant.

Such as?

I'm aware of social security income becoming taxed in 1984, and IRMAA enacted in 2003. That's a progression towards more taxes for some/many seniors.

 

[COcheesehead]

Such as?

I'm aware of social security income becoming taxed in 1984, and IRMAA enacted in 2003. That's a progression towards more taxes for some/many seniors.

The SECURE act 2.0, especially pushing out RMDs to 75 for me and others.
Here is a summary

https://www.fidelity.com/learning-center/personal-finance/secure-act-2

 

[Phroig]

A tax on tax-deferred money is 100% certainty, unless you give it all to charity. You pay it filing MFJ, or your surviving spouse pays it filing single, or your kids pay it when they inherit. An informed decision to not convert involves just as much guesswork and speculation about future returns and tax rates as a decision to do a conversion.

 

[dknighd]

That’s certainly one point of view. I, OTOH, want to optimize taxes for me and my son.

So you want to predict taxes for two generations? Good luck with that.

 

[Phroig]

So you want to predict taxes for two generations? Good luck with that.

I predict tax rates won’t be lower.

 

[dknighd]

I predict tax rates won’t be lower.

I think you are probably right. But I'd like to be wrong.

 

[COcheesehead]

A tax on tax-deferred money is 100% certainty, unless you give it all to charity. You pay it filing MFJ, or your surviving spouse pays it filing single, or your kids pay it when they inherit. An informed decision to not convert involves just as much guesswork and speculation about future returns and tax rates as a decision to do a conversion.

If I do a conversion today, the tax rate is known. That’s a given. If you don’t do it, the tax rate is unknown, but I also still have the money I would use to pay the tax sitting in my brokerage account working for me and I won’t have to pay tax on it for 15-20 years. I think that’s a pretty good deal. I don’t have kids, so a charity will get all the money we don’t spend anyway.
Should I prepay a tax just because I know exactly what it is, as opposed to what it might be in 20 years?
I know I am pushing against one of the “must do’s” in the financial world, but I know a number of people feel the way I do as well. My numbers also seem to back up not doing any conversions when I take into account the total picture and what increasing my income at the present would do to us.

 

[Phroig]

If I do a conversion today, the tax rate is known. That’s a given. If you don’t do it, the tax rate is unknown, but I also still have the money I would use to pay the tax sitting in my brokerage account working for me and I won’t have to pay tax on it for 15-20 years. I think that’s a pretty good deal. I don’t have kids, so a charity will get all the money we don’t spend anyway.
Should I prepay a tax just because I know exactly what it is, as opposed to what it might be in 20 years?
I know I am pushing against one of the “must do’s” in the financial world, but I know a number of people feel the way I do as well. My numbers also seem to back up not doing any conversions when I take into account the total picture and what increasing my income at the present would do to us.

In your circumstances, not converting makes perfect sense. A classic case of “YMMV.”

 

[SevenUp]

If I do a conversion today, the tax rate is known.
...
I don’t have kids, so a charity will get all the money we don’t spend anyway.

In your circumstances, not converting makes perfect sense. A classic case of “YMMV.”

Probably, because under current tax law the tax rate on charitable heirs' future traditional withdrawals will be 0%, so paying any tax on conversions now wouldn't be wise.

That's an easy call for a single filer in that situation. It's less clear for MFJ if a surviving spouse would be paying higher rates on RMDs for many years.

 

[Montecfo]

A tax on tax-deferred money is 100% certainty, unless you give it all to charity. You pay it filing MFJ, or your surviving spouse pays it filing single, or your kids pay it when they inherit. An informed decision to not convert involves just as much guesswork and speculation about future returns and tax rates as a decision to do a conversion.

How about an informed decision to convert some? A bet hedging strategy.
I am not against conversions. I just understand the limits of planning using multiple variables over long time horizons.

I will say the longer the period of time before those taxes otherwise would be due the less sense it makes.

Same reason most people do not find investments that take 10, 20 or 30+ years to pay off very attractive.

 

[RunningBum]

Who has said that Roth conversion is a "must-do"?

 

[COcheesehead]

How about an informed decision to convert some? A bet hedging strategy.
.

That’s the way I look at it, but instead of a conversions, I am doing by it by contributions.I have earned income from a PT job so I can contribute all my earnings up to the max to a Roth and we have two HSAs that we max out as well. So the tax free bucket grows without paying anything.

 

[Koolau]

Who has said that Roth conversion is a "must-do"?

Heh, heh, at one time or another - probably me.

Of course, I was wrong. Again. BECAUSE YMMV.

 

[Bigdawg]

That’s the way I look at it, but instead of a conversions, I am doing by it by contributions.I have earned income from a PT job so I can contribute all my earnings up to the max to a Roth and we have two HSAs that we max out as well. So the tax free bucket grows without paying anything.

You are paying whatever your current income tax rate is. Unless you are below the standard deduction. But, I do like your strategy. I would love to contribute to a HSA but can't. Retired military medical. Actually a much better deal so not complaining.

 

[COcheesehead]

You are paying whatever your current income tax rate is. Unless you are below the standard deduction. But, I do like your strategy. I would love to contribute to a HSA but can't. Retired military medical. Actually a much better deal so not complaining.

I make less than $15,000 so I don’t pay anything.

 

[swabby01]

Think bottom line is that I am screwed (whining but issue is really a blessing). My "lifetime" pension drives me to the max IRMAA so no matter when I take IRAs/401Ks out no IRMAA impact. looking at just paying the taxes and incrementally moving out of retirement accounts and into my Roth starting this year.

 

[TheWizard]

Think bottom line is that I am screwed (whining but issue is really a blessing). My "lifetime" pension drives me to the max IRMAA so no matter when I take IRAs/401Ks out no IRMAA impact. looking at just paying the taxes and incrementally moving out of retirement accounts and into my Roth starting this year.

That's like $500,000 annual income, filing single!
Neato!
Lucky you!!!

 

[audreyh1]

Seriously? The max IRMAA level each year from a pension?

 

[JOBO]

Roth conversion

Should I prepay a tax just because I know exactly what it is, as opposed to what it might be in 20 years?

Being retired, pre-SS and taking RMD's at 75 I concur, mainly but not only, because tax rates can and do go down.

This has happened in 15 out of the 22 years between 2003 and 2025 or almost 70% of the time.

This 2021 study also calls into question other assumptions such as:
Future tax rates must be higher for a conversion to pay off.
Paying the tax from outside funds matters a lot.
Roth conversions are especially beneficial for top bracket taxpayers.

 

[RetireBy90]

Being retired, pre-SS and taking RMD's at 75 I concur, mainly but not only, because tax rates can and do go down.

This has happened in 15 out of the 22 years between 2003 and 2025 or almost 70% of the time.

This 2021 study also calls into question other assumptions such as:
Future tax rates must be higher for a conversion to pay off.
Paying the tax from outside funds matters a lot.
Roth conversions are especially beneficial for top bracket taxpayers.

Thanks for the post. I downloaded for later reading.

 

[Chuckanut]

Think bottom line is that I am screwed (whining but issue is really a blessing). My "lifetime" pension drives me to the max IRMAA so no matter when I take IRAs/401Ks out no IRMAA impact. looking at just paying the taxes and incrementally moving out of retirement accounts and into my Roth starting this year.

Think of it as a “success tax”. We should all have such problems.

I suspect many people, including some here, will be subjected to the next level of IRMAA thanks to the rapid increase in short term interest rates. This assumes the Cd and bond investments are done outside of tax advantaged accounts. They might want to check out the payment estimates on their broker’s website.

 

[Koolau]

Think of it as a “success tax”. We should all have such problems.

I suspect many people, including some here, will be subjected to the next level of IRMAA thanks to the rapid increase in short term interest rates. This assumes the Cd and bond investments are done outside of tax advantaged accounts. They might want to check out the payment estimates on their broker’s website.

If one were to "accidentally" break through a given level of IRMAA, it might be a good time to Roth convert or take tIRA or 401(k) money out up to the next threshold for IRMAA. Of course, YMMV.