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Next-year Roth conversion?
Old 02-20-2024, 12:01 PM   #1
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Next-year Roth conversion?

You can make IRA contributions as late as April 15 the next year. However Roth conversions must be reported in the same year.
https://www.hrblock.com/tax-center/i...ira-conversion

That makes no sense to me. In Jan-Apr 2024 I can add to my IRA for 2023, but I'll be paying taxes on Roth conversions in 2025.

So how do you game the tax brackets (converting IRA to Roth to get to the top of your current bracket) if you don't know what your income will be ?? It's almost 2 months into 2024 and I still don't know what my AGI will be. Once I get all my 1099's &etc I could approximate it, but I won't know for sure until my CPA signs off on my return. There's basically no way to do it in 2023 unless you keep inhumanly accurate records.
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Old 02-20-2024, 12:36 PM   #2
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I'll agree that it make no sense that you can make tIRA contributions retroactive through April 15 but Roth conversions can't be retroactive, but it is what it is. We used to be able to fine tune by recharacterizing Roth conversions retroactively but that was cut off a few years ago.

It's not a huge problem for me. Our income of my pension and SS is easily predictable. Taxable account interest and dividends are reasonably estimable. That's all I got. Those alone would put us in the bottom of the 10% tax bracket.

I add Roth conversions to bring us to the top of the 0% bracket for QD/LTCG. In 2023, I overestimated by $936 so it cost us an extra $94 in taxes (22% bracket vs 12% bracket). In 2023 I missed it by $6 the other way. Both are close enough.

I think that you are overestimating the difficulty of doing reasonable projections of your income. One of the benefits of doing your tax return yourself is that you get to learn how all the pieces fit together and which ones are sensitive and which ones are not.
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Old 02-20-2024, 12:54 PM   #3
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I wish we could still re-characterize retroactively, but it's gone.

Do your own tax return, besides saving a few hundred dollars every year, you would understand where all the dollars come from and how they affect taxes.

I generally start with last years numbers. Unless I have done something special it will be close. Then I fine tune that estimate by looking up various numbers near the end of the tax year.

It involves some effort but it's not hard, and in a few hours I gather all the relevant numbers.
Bank accounts tell you the interest paid each month , and have ways to show the current year.
Brokerages allow you to see activity for the current year, so just view the divs, interest, etc.
Add them all up.

It will be close to the final number and I leave a few thousand as a cushion.
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Old 02-20-2024, 01:45 PM   #4
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I usually do an estimate for the year once I've completed my prior year tax return.

My broker (Schwab) can give me projected dividends and interest for the year based on the year to date and my current holdings. I can make a resonable estimate for my online savings account interest. My pension is known as is DW's SS. Based on that, I can estimate my Roth conversions for 2024.

Then, I'll convert 80% or so to eave leeway for changes.

Then in October, I'll update the analysis and update it again in late December and take my final Roth conversion for the year.

If it changes, then the amounts are generally de minimus.

Less than an hour a year all told once you have things set up.
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Old 02-20-2024, 03:09 PM   #5
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We still have a small amount of W-2 income. I made 2023 tIRA contributions in 2024 once I knew our other 2023 income, to keep us in the 0% cap gains bracket. Do you have any earned income, by any chance?
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Old 02-20-2024, 03:37 PM   #6
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I did my first Roth conversion for 2024 right at the beginning of January to get it over to the tax free side of the books. I did about 80% of what I plan to convert. By November I'll have a better idea of how much more I can convert and make another conversion and the last week of December I'll do the final one to the top of my tax bracket. No ACA this year so I'm able to convert more than I've been able to in the past when I was controlling my income for maximum ACA subsidies.
You will need to pay the taxes for your 2024 Roth Conversion by the end of 2024.
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Old 02-20-2024, 03:42 PM   #7
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I wish we could still re-characterize retroactively ...
+1 I had three years in a row where I would convert a bit more than what I needed to, do my tax return and then recharacterize any excess so my filed return was at the top of the 0% QD/LTCG tax bracket exactly and for some of my refund and tax due would be $0. Those were the days.

The horse race folks spoiled it for all of us.
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Old 02-20-2024, 10:27 PM   #8
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I convert about half in January. I then do a pro forma tax return in December, figure out my target AGI, then do another set of Roth conversions in late December to put me over my AGI figure by a few hundred dollars.

Then in February, I sit down and do my tax return for real, figure out the excess, and then make an HSA contribution for the previous year for ($excess + $1).

Doing it this way gets me right on the number I want. It does require doing the HDHP + HSA thing and it requires leaving enough contribution headroom in the HSA to make the additional contribution to dial in the AGI. I like both of those things anyway, so it works well for me.

Also, as a general strategy, I keep track of all of my income tax stuff throughout the year, so in December I know what my sources of income are, what my deductions will be, etc. And I can get access online to all the YTD tax information since I know my sources of income. The only thing I sort of have to pay attention to is the December mutual fund distributions in my taxable account, but there are only a couple of those, and they're all Vanguard funds so I can get that info pretty easily. Most years the distributions are done by 12/22 or so; sometimes as late as 12/28 or so. But they publish estimates so I can get those pretty close and account for them.
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Old 02-21-2024, 07:27 AM   #9
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Quote:
There's basically no way to do it in 2023 unless you keep inhumanly accurate records.
That's what I do. I have a spreadsheet that calculates federal and state taxes as I enter each month's data. I then size my Roth conversion (if any) in December to stay in the desired tax bracket. The spreadsheet isn't perfect but usually differs from the TurboTax result by around $100. I was off by $170 this year though.
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Old 02-21-2024, 07:54 AM   #10
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I use a spreadsheet to project taxable dividends and interest along with SS and pension payments. I add in my Roth conversions and deduct any charitable, medical and property tax deductions I get. It’s usually close enough as long as I don’t input wrong data.
I did input an incorrect amount for a Roth conversion in 2023 resulting in a larger refund this year. I’m usually more accurate than that.
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Old 02-21-2024, 08:56 AM   #11
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Originally Posted by pb4uski View Post
I'll agree that it make no sense that you can make tIRA contributions retroactive through April 15 but Roth conversions can't be retroactive, but it is what it is. We used to be able to fine tune by recharacterizing Roth conversions retroactively but that was cut off a few years ago.

It's not a huge problem for me. Our income of my pension and SS is easily predictable. Taxable account interest and dividends are reasonably estimable. That's all I got. Those alone would put us in the bottom of the 10% tax bracket.

I add Roth conversions to bring us to the top of the 0% bracket for QD/LTCG. In 2023, I overestimated by $936 so it cost us an extra $94 in taxes (22% bracket vs 12% bracket). In 2023 I missed it by $6 the other way. Both are close enough.

I think that you are overestimating the difficulty of doing reasonable projections of your income. One of the benefits of doing your tax return yourself is that you get to learn how all the pieces fit together and which ones are sensitive and which ones are not.
+1
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Old 02-21-2024, 09:26 AM   #12
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I'm 60 and getting ready to make another Roth IRA contributon for 2023. I'm doing it because most of my retirement funds are in after-tax accounts, and I need to move some of those annual earnings to tax protected accounts, like a Rothm to reduce current taxes. Is there any reason to not make any more Roth IRA contributions? I can't really see any downside, but wondering if I'm missing something.
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Old 02-21-2024, 09:35 AM   #13
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I'm 60 and getting ready to make another Roth IRA contributon for 2023. I'm doing it because most of my retirement funds are in after-tax accounts, and I need to move some of those annual earnings to tax protected accounts, like a Rothm to reduce current taxes. Is there any reason to not make any more Roth IRA contributions? I can't really see any downside, but wondering if I'm missing something.
You have to be working (earned income) to make Roth contributions. You can make Roth Conversions at any time without needing to have worked.

We are doing Roth conversions to move some IRA $$$ to Roth as we have a lot in IRA and not much in Roth accounts.

We could simply take $$ out of IRA's and have it sit in a taxable account, but there is no extra cost to Convert it to Roth where it can grow tax free. We can always take it out of a Roth if it's needed later.
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Old 02-21-2024, 09:59 AM   #14
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I think that you are overestimating the difficulty of doing reasonable projections of your income.
Maybe. But I suspect my taxes are a bit more complex than some folks here. I have a separate LLC, 1099 income (not much any more but it's still there), rental properties, etc in addition to the typical SS / dividends / cap gains income.

I intend to start doing my taxes "in parallel" with my CPA, so I can check my understanding. I believe many folks use a free / cheap TurboTax or similar to calculate your taxes, but I think my tax situation kicks me out of the free tier. But it's not that much (it's a lot less than my CPA !!), and I think it's free unless you actually file, so that will be a good exercise for me.
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Old 02-21-2024, 10:06 AM   #15
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Maybe. But I suspect my taxes are a bit more complex than some folks here. I have a separate LLC, 1099 income (not much any more but it's still there), rental properties, etc in addition to the typical SS / dividends / cap gains income.

.....
Nope.

I have all those, except the LLC, but have sole proprietorship. Also have investments in a foreign country, so get to fill out the Treasury FiNCEN reports too. As well as do foreign tax return and discuss things with the State gov't tax dept to educate them about the Tax Treaty treatment of my income.

I bet if you looked at what your CPA files, spanning over a couple of years, you would notice it doesn't really vary much, and the CPA just inputs the numbers you give the CPA.
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Old 02-21-2024, 11:52 AM   #16
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You have to be working (earned income) to make Roth contributions. You can make Roth Conversions at any time without needing to have worked.

We are doing Roth conversions to move some IRA $$$ to Roth as we have a lot in IRA and not much in Roth accounts.

We could simply take $$ out of IRA's and have it sit in a taxable account, but there is no extra cost to Convert it to Roth where it can grow tax free. We can always take it out of a Roth if it's needed later.
We do have some earned income. My wife is still working W-2 and we have a consulting business that earns enough to max out a Roth contribution.
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Old 02-21-2024, 12:58 PM   #17
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I'm 60 and getting ready to make another Roth IRA contribution for 2023. I'm doing it because most of my retirement funds are in after-tax accounts, and I need to move some of those annual earnings to tax protected accounts, like a Roth to reduce current taxes. Is there any reason to not make any more Roth IRA contributions? I can't really see any downside, but wondering if I'm missing something.
Putting earned money in a Roth reduces future taxes but not current taxes. Putting earned money in a traditional IRA reduces current taxes. We had 2.3% of our retirement funds in a Roth when we retired. We did over $200K of Roth conversions after we retired (spread out over many years) when our marginal tax bracket significantly reduced. How many more years are you going to need to work?
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Old 02-21-2024, 03:50 PM   #18
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Maybe. But I suspect my taxes are a bit more complex than some folks here. I have a separate LLC, 1099 income (not much any more but it's still there), rental properties, etc in addition to the typical SS / dividends / cap gains income. ...
Probably not. DM had a commercial rental property that I managed for her and I also did her taxes. The rent was very predictable, as were all expenses other than repairs but by the time we got into December, even tat was very reasonably estimable. If you control the LLC then you should be able to do that too... but if you don't control the LLC you would have to get information from the manager of the LLC.
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Old 02-21-2024, 04:27 PM   #19
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Putting earned money in a Roth reduces future taxes but not current taxes. Putting earned money in a traditional IRA reduces current taxes. We had 2.3% of our retirement funds in a Roth when we retired. We did over $200K of Roth conversions after we retired (spread out over many years) when our marginal tax bracket significantly reduced. How many more years are you going to need to work?
This (bolded) brings up an interesting point. If one is still w*rking with the ability to do either tax-deferred or Roth, they can "hedge" by doing the tax-deferred and then Roth convert from the traditional towards the end of the year when they better know income, etc. Of course, your plan must allow a partial rollover or in-plan conversion etc.

Another thing to know about this technique is that each Roth conversion starts a 5 year clock (but just on that conversion). If one had just done the Roth contribution there is no 5 year clock (other than the one associated with the very first Roth contribution).

I just retired (from full time teaching, hurray, at the end of the fall term). I was able to take some of the sick bank money and have it put into a Roth (for 2024, again hurray since 2023 was full...managed to make my retirement not official until early January). I am still teaching as an adjunct (not so much hurray but I did sign up for it), I am now having some of those funds go toward tax-deferred instead of the Roth as I am worried about IRMAA hits, etc. Later in the year I will figure out how close to the 161K I am and Roth convert just shy of that limit. Part of that will depend if I am stupid enough to sign up for a fall class.
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Old 02-21-2024, 05:05 PM   #20
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We do have some earned income. My wife is still working W-2 and we have a consulting business that earns enough to max out a Roth contribution.
Do you have a self 401K ?
They are really fantastic for saving money
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