Planning for this year's Roth conversion, hit a wall, stumped!

[RunningBum]

Quote:

Originally Posted by cat4ever Sorry, that falls under the category of complication, as well as assuming whatever I-orp is, it knows what actual future rates may be, and assumes i can trust whatever math lines behind it, without having to take the time and effort to understand it.

OK. It's your money, you can do with it what you want. I tend to forget that not everyone enjoys developing spreadsheets like I do.

You seem to have at least a vague notion that taxes will be higher later, so converting something is probably going to be the right move. And if it's not obvious what to do, there's probably not a big difference how much you convert, as long as it's not a total conversion and a huge tax bill in one year.

Another option is to hire a tax expert to run the numbers for you, but you may consider the work of getting your information and working out your assumptions on growth and tax rate with them too complicated, and they might not save you any more money than they'll charge.

It's also possible you'll notice something when doing your taxes (or having them done) that signals you should change your conversion amount for future years.

So, no, not crazy at all. Probably not optimal, but also possible you'll do better than people like me who try to get it perfect, only to find reality doesn't match assumptions.

[TheWizard]

Not crazy, no, just ordinary, perhaps.

Lots of regular folks just take it as it comes, rolling with the punches. These folks often pay someone to do their taxes, not because they're incredibly complicated, but due to lack of interest and learning.

So, yeah...

[Trooper]

Quote:

Originally Posted by pb4uski If you have made $300 of charitable contributions in 2020 you can do another $300 of Roth conversion and offset it with an additional $300 chartiable contribution deduction and pay an additional $0 in tax on the added $300 Roth contribution.

Good point on the one-time ability to deduct cash contributions, even for those that itemize.

Another way to increase Roth conversion ability is through an HSA contribution. This is only available to folks insured in an HSA-eligible plan (normally high-deductible plans). The OP said his DW was still working, so perhaps her plan is eligible.

[FREE866]

Quote:

Originally Posted by pb4uski If you have made $300 of charitable contributions in 2020 you can do another $300 of Roth conversion and offset it with an additional $300 chartiable contribution deduction and pay an additional $0 in tax on the added $300 Roth contribution. \

I have...and thank you for reminder!!!

[MarieIG]

Thinking of converting approx. 50k per year between 2021-2025 and letting the chips fall where they may . . .

[pb4uski]

Will $50k a year result in IRMAA Part B and Part D premium surcharges?

[MarieIG]

Quote:

Originally Posted by pb4uski Will $50k a year result in IRMAA Part B and Part D premium surcharges?

Thank you Pb4uski. We will be IRMMA'd not withstanding but I will check the (IRMMA) brackets - Gumby's list - we will be not be filing for Part D. (DH's union had a meeting with instructions as to how to file, A&B only they will cover us in lieu of D.)

We will pay on the coversions. It is an attempt to smooth out the taxes. DH will file for SS at age 70; and has a good earnings history.

[cat4ever]

Quote:

Originally Posted by RunningBum OK. It's your money, you can do with it what you want. I tend to forget that not everyone enjoys developing spreadsheets like I do.

Ha, no, it's not at the top of my list anyway, and in retirement I'm trying to put the emphasis on enjoying myself. But I could see myself at some point being enticed to go down this rabbit trail, perhaps after I've done a year or two of post retirement taxes and I'm a little more well versed in the ins, outs and gotchas.

[Happyras]

I made a conversion early this year and it is not reversible. We are in the top IRMAA bracket now and will be for some time. The conversion pushed us up in bracket well beyond my original plan, like 32%. However, the conversion to Roth is part of our estate planning and here is why;
In WA state we get to pay estate taxes on estates >2M. Some can be avoided by conserving exemptions with A/B type trust structures but not all. So it then comes down to quickly gifting prior to death to avoid estate taxes on the balance, or doing so over time. The Roth allows you to spread out the conversions at a lower tax rate than making a one time pull from a TIRA to gift in one year. If you had say 2M excess of exemption to avoid estate tax on, then pulling it from a Roth at that time has no additional tax. If you pull it from your TIRA at that time to gift, the income tax would certainly be over 39.6%, and likely higher once tax law is changed within the next 5 to 10 years. Can anyone agree with this point? It sort of justifies the conversions at higher current tax rates. If left in the TIRA to pass through estate taxes it would incur both Federal income and State estate taxes on withdrawal by heirs.

[Happyras]

Quote:

Originally Posted by pb4uski You can play with https://www.dinkytown.net/java/1040-tax-calculator.html to see the impact. Open two windows and put MFJ and in one window input $55,050 of pension income and $50,000 of taxable IRA distributions and in the other window input $55,050 of pension income and $100,000 of taxable IRA distributions.

Great link for comparative review, but totally falls short in preparing a proper estimate. For me I found it was missing the QBI deduction for rental property self managed, had no way to show capital gains income not subject to NIIT (business sale not subject to NIIT due to participation rule), and missing a big $6500 tax credit for electric vehicle. So, while this is good for the majority of folks, it had me owing about 25K more in taxes than my TurboTax shows.

If I used it solely for comparison, I would not done the Roth conversion, so it is useful to most.

[SecondCor521]

Quote:

Originally Posted by Happyras I made a conversion early this year and it is not reversible. We are in the top IRMAA bracket now and will be for some time. The conversion pushed us up in bracket well beyond my original plan, like 32%. However, the conversion to Roth is part of our estate planning and here is why; In WA state we get to pay estate taxes on estates >2M. Some can be avoided by conserving exemptions with A/B type trust structures but not all. So it then comes down to quickly gifting prior to death to avoid estate taxes on the balance, or doing so over time. The Roth allows you to spread out the conversions at a lower tax rate than making a one time pull from a TIRA to gift in one year. If you had say 2M excess of exemption to avoid estate tax on, then pulling it from a Roth at that time has no additional tax. If you pull it from your TIRA at that time to gift, the income tax would certainly be over 39.6%, and likely higher once tax law is changed within the next 5 to 10 years. Can anyone agree with this point? It sort of justifies the conversions at higher current tax rates. If left in the TIRA to pass through estate taxes it would incur both Federal income and State estate taxes on withdrawal by heirs.

Generally speaking, TIRA beneficiaries either have their lifetime (spouses) or 10 or 11 tax years (children / grandchildren) to draw down the TIRA after it is received. For your 39.6% analysis and justification to be correct, I think that would require the TIRA to be large enough where the spouse's RMD or each younger beneficiary's share divided by 10 would be enough, on top of any other income, to push them into 39.6% territory. Possible, but that's a really large TIRA.

Regarding your last sentence: I though any state estate taxes would be due and payable by the estate within a year or so of the person's death, as federal estate taxes are. Beneficiaries might owe *inheritance* taxes based on the state they live in, and those I think are also due at the time of the inheritance. Beneficiaries would also, of course, be taxed on TIRA withdrawals as ordinary income at the time of those withdrawals.

If you start looking, there are a decent number of simple ways to reduce moderately large estates quickly to avoid estate taxes. Traditional IRAs seem to be the most challenging in this regard. There are also probably methods involving trusts, but IMHO those are costly in terms of legal bills and trust taxes and are beyond my pay grade. I started a thread about this topic a while ago and got some good suggestions:

https://www.early-retirement.org/for...es-106348.html

[Happyras]

Quote:

Originally Posted by SecondCor521 Generally speaking, TIRA beneficiaries either have their lifetime (spouses) or 10 or 11 tax years (children / grandchildren) to draw down the TIRA after it is received.

Well, it gets complicated quickly. Our Estate Plan calls for an IRA Beneficiary Trust to receive the IRA's for the heirs, the IRA's are not in the Living Trust. The IRA trust has its own issues with tax filing at that time. The complication starts with how the bypass trust is created upon the first spouses death to preserve the state exemption (not involving the IRA's). Since other assets are used in the exclusion for each spouse (such as rental properties, home, and other investments), the IRA's remain fully subject to the remaining estate tax liability. As you point out, the estate taxes must be paid on the value of the assets upon death. What is not clear is how a 2M+ tIRA is valued. Is it $2M+ or the after tax value of say 1.2M if disbursed in one year under current law. I suspect it is valued at $2M and estate taxes (since the exclusion is in other assets) would be a minimum of 20% on top of any Fed income tax paid by heirs upon distribution. It goes up from there...

Say, for for example the total estate after death of surviving spouse is $6M. $4M is exempted using bypass trust preservation leaving the $2M fully taxed by the state. Now if the current value of the IRA's is more than 2M, what will they be worth in 30 years with RMD's paid? We are in a favorable situation where our income exceeds expense and IRA's are really for our grandkids if possible. The RMD's will be rolled into taxable investments under our Living Trust along with other assets, so clearly the estate will see some estate tax if we do not gift away assets. The Roth conversion lets the funds grow tax free until they are gifted. The RMD's could fall into the gifting strategy as well, but still I can foresee the IRA's getting estate taxed unless we do some planning.

Just a point, it is totally unfair that tax laws can change and be retroactive on any plan you make, so you have to have alternate contingent plans. The use of an Intentionally Defective Trust structure is another way to avoid this, which my friends swear is better. In that case, we would give to that trust our income properties for the benefit of the heirs, but it gets really complicated. I am still learning and appreciate feed back always such as yours.

[pb4uski]

Quote:

Originally Posted by Happyras Great link for comparative review, but totally falls short in preparing a proper estimate. For me I found it was missing the QBI deduction for rental property self managed, had no way to show capital gains income not subject to NIIT (business sale not subject to NIIT due to participation rule), and missing a big $6500 tax credit for electric vehicle. So, while this is good for the majority of folks, it had me owing about 25K more in taxes than my TurboTax shows. If I used it solely for comparison, I would not done the Roth conversion, so it is useful to most.

Agreed, but very few taxpayers or even early retirees have the nuances that you describe and the person I responded to didn't. In your more complex situation one would need TT.

[SecondCor521]

Quote:

Originally Posted by Happyras Well, it gets complicated quickly. Our Estate Plan calls for an IRA Beneficiary Trust to receive the IRA's for the heirs, the IRA's are not in the Living Trust. The IRA trust has its own issues with tax filing at that time. The complication starts with how the bypass trust is created upon the first spouses death to preserve the state exemption (not involving the IRA's). Since other assets are used in the exclusion for each spouse (such as rental properties, home, and other investments), the IRA's remain fully subject to the remaining estate tax liability. As you point out, the estate taxes must be paid on the value of the assets upon death. What is not clear is how a 2M+ tIRA is valued. Is it $2M+ or the after tax value of say 1.2M if disbursed in one year under current law. I suspect it is valued at $2M and estate taxes (since the exclusion is in other assets) would be a minimum of 20% on top of any Fed income tax paid by heirs upon distribution. It goes up from there... Say, for for example the total estate after death of surviving spouse is $6M. $4M is exempted using bypass trust preservation leaving the $2M fully taxed by the state. Now if the current value of the IRA's is more than 2M, what will they be worth in 30 years with RMD's paid? We are in a favorable situation where our income exceeds expense and IRA's are really for our grandkids if possible. The RMD's will be rolled into taxable investments under our Living Trust along with other assets, so clearly the estate will see some estate tax if we do not gift away assets. The Roth conversion lets the funds grow tax free until they are gifted. The RMD's could fall into the gifting strategy as well, but still I can foresee the IRA's getting estate taxed unless we do some planning. Just a point, it is totally unfair that tax laws can change and be retroactive on any plan you make, so you have to have alternate contingent plans. The use of an Intentionally Defective Trust structure is another way to avoid this, which my friends swear is better. In that case, we would give to that trust our income properties for the benefit of the heirs, but it gets really complicated. I am still learning and appreciate feed back always such as yours.

Indeed it does.

The $2M IRA would be estate taxed and GST taxed (just started learning about that topic myself) at whatever the value is at date of death (or alternative valuation date, if chosen). It is not reduced by any embedded taxes.

The federal estate tax rate beyond the exemption is a flat 40%, not 20%.

Your estate situation is much more complicated than anything I could help with.

I didn't look to see what state you're in, but it must have an awful estate tax rate and exemption for you to do that much planning to avoid it.

But a question: Why are you putting your IRAs into a trust? Is it to prevent against lawsuits/liability? Is it to add conditions onto your beneficiaries use? Other? Just curious. Generally speaking, the trust tax rates and brackets on the IRA distributions will probably be worse than the beneficiary's tax rates and brackets. That can be solved with DNI, but then that mostly circles back to why have a trust in the first place.

As for your last paragraph, I don't think the estate tax laws are generally retroactive. But they can change rather rapidly and in unexpected ways, which does make planning very complicated, expensive, and easy to mess up. So you either have to pay expensive lawyers and expensive CPAs to do it right and keep it right every few years, or give up and take it on the chin. My parents may have done the worst of both worlds by paying medium priced lawyers and CPAs to do it right but then didn't keep up with the tax law changes, so their 1999 documents weren't very good for a 2016 situation, and "fixing" that cost even more $$$. I posted elsewhere my disappointment in that outcome.

[bpgdeg1234]

Quote:

Originally Posted by pb4uski You can play with https://www.dinkytown.net/java/1040-tax-calculator.html to see the impact. Open two windows and put MFJ and in one window input $55,050 of pension income and $50,000 of taxable IRA distributions and in the other window input $55,050 of pension income and $100,000 of taxable IRA distributions.

pb4uski, is this pension income or qualified dividend income you indicate to compare?

[pb4uski]

Compare the taxes.

• $55,050 of pension income and $50,000 taxable IRA distributions (which is how a Roth conversion is taxed) results in $9,241 in tax
  
• $55,050 of pension income and $100,000 taxable IRA distributions (which is how a Roth conversion is taxed) result in $20,235 in tax

The $10,994 difference in tax divided by the $50,000 difference in Roth conversion is the 22% marginal tax rate on the Roth conversion.

You can also use it with combinations of qualified and ordinary income... but the idea is that you input your information before and after any Roth conversion and you can see the tax impact of doing the Roth conversion before you pull the trigger.... works the same for additional Roth conversions where you have already done some Roth conversions.

[bpgdeg1234]

Quote:

Originally Posted by pb4uski Compare the taxes. $55,050 of pension income and $50,000 taxable IRA distributions (which is how a Roth conversion is taxed) results in $9,241 in tax $55,050 of pension income and $100,000 taxable IRA distributions (which is how a Roth conversion is taxed) result in $20,235 in tax The $10,994 difference in tax divided by the $50,000 difference in Roth conversion is the 22% marginal tax rate on the Roth conversion. You can also use it with combinations of qualified and ordinary income... but the idea is that you input your information before and after any Roth conversion and you can see the tax impact of doing the Roth conversion before you pull the trigger.... works the same for additional Roth conversions where you have already done some Roth conversions.

Thanks, I understand with straight income as the additional $50K went into the 22% tax bracket but thought you were depicting the problem with qualified dividends that are taxed at 0% when in the lower 12% bracket but then getting taxed up to a 27% rate once you start converting into the 22% tax bracket. Not exactly sure I have this right but think is a big problem if one has a lot of qualified dividends?

[pb4uski]

Yes, just run the scenario above but change the $55,050 from pension income to LTCG or qualified dividends.... you'll get $2,670 in tax with $50k of Roth conversions and $16,170 in tax with $100k of Roth conversions... so the marginal tax on that second $50,000 of roth conversions is 27%.

[DR1959]

I did a Roth conversion this year. First one. When market took a hit I did it. I have already recovered the tax and gains tax free. I wouldn’t do it now at a high. You can convert certain stocks which is what I did and I picked ones that were beaten down.

I would wait. Market may take a hit next year. Then convert the beaten down stocks. If dividend payers even better. Now it’s a tax free dividend.

I am trying to stay In a certain bracket and being retired and wife deferring income I did it this year. Next year I am taking her income. You have to pay tax eventually but the goal is to smooth out the income to stay in a lower bracket and even if you step a toe into the next one remember it’s just the amount over that is taxed at the higher bracket.

[pb4uski]

No Roth conversion for me for 2020 because I filled up my 0% LTCG bucket with LTCG when I sold equities in the spring and then some at 15%.

However, I do plan to do a Roth conversion for ~80-90% of what I think I can do in 2021 in January... then I'll top it off in December 2021.