Beating 2026 tax increase

[lawman]

My plan is to start converting this year in hopes of keeping my future RMD's low enough to keep me on tier 1 and avoid higher IRMAA penalties..Anything to consider or any reason not to do that? I am 67 years old..I plan to convert as much as I can in 2023 in order to keep us below $206,000.00 MAGI since 2025 medicare costs will be based on 2023 tax return..That is the limit for tier 1 for married filing jointly.

 

[Koolau]

I wonder how much money in traditional IRA is too much?
It looks like I will never reach $400K tax even if I convert the entire $500K balance in one year. Should I worry about Roth conversions at all?

I suppose too much is when RMDs roll around and take your ability to titrate your tax rate from your control.

And don't worry, but consider the advantages and disadvantages of Roth conversions.

One advantage that can increase the value of your Roth is paying the taxes from cash you have laying around - not from the tIRA. When you do that, the Roth is actually worth considerably more by the amount of taxes you paid with cash on hand. Though the values are nominally the same, the Roth will grow tax free and so will the amount you DIDN'T lose by paying taxes FROM the tIRA. You could argue that the money you used to pay taxes could have been invested - but probably not tax free. YMMV

 

[dknighd]

I've given up on being able to predict future tax rates. Frankly, I'm surprised they are as "low" now as they are. 2026 is still 3 years away, and the projected change is pretty small. Rates could go up, or down, or stay the same. And, it could happen in 2026, or before, or after. Who knows?
So for now I do Roth conversions based on the tax rates and brackets in effect this year. I expect tax rates will probably increase, but I could be wrong, again.
We live pretty comfortably with withdrawals and spending in our current tax bracket. I top up our current tax bracket with Roth conversions every year. My current projection is RMD will leave us in the same tax bracket.
But tax brackets, and tax rates, can change at any time, and I have no control.

I do Roth conversions to try to smooth things out. I'm paying extra tax this year in an attempt to keep things smooth in the future. But I do those conversions based on current laws and balances. I do not project the future.


Edit: honestly if we, or I, or my spouse, or our kids, end up in a higher tax bracket, that is probably a good thing. It likely means we have more than enough.

 

[Koolau]

I've given up on being able to predict future tax rates. Frankly, I'm surprised they are as "low" now as they are. 2026 is still 3 years away, and the projected change is pretty small. Rates could go up, or down, or stay the same. And, it could happen in 2026, or before, or after. Who knows?
So for now I do Roth conversions based on the tax rates and brackets in effect this year. I expect tax rates will probably increase, but I could be wrong, again.
We live pretty comfortably with withdrawals and spending in our current tax bracket. I top up our current tax bracket with Roth conversions every year. My current projection is RMD will leave us in the same tax bracket.
But tax brackets, and tax rates, can change at any time, and I have no control.

I do Roth conversions to try to smooth things out. I'm paying extra tax this year in an attempt to keep things smooth in the future. But I do those conversions based on current laws and balances. I do not project the future.


Edit: honestly if we, or I, or my spouse, or our kids, end up in a higher tax bracket, that is probably a good thing. It likely means we have more than enough.

Just one more First World problem, I suppose.

So glad to live in a world where we can worry about taxes and not where our next meal will come from. YMMV

 

[RetireBy90]

So as I have read on other Roth conversion threads, there are many reasons and gotchas for doing conversions besides trying to project where taxes will be in the future.
- RMDs May cause you to take more money from your TIRA than you want, causing a higher tax bill or bracket and perhaps higher IRMAA.
- if you have a spouse,one of you will likely die before the other causing your filing status to be single rather than MFJ, which has significantly higher tax brackets than MFJ.
- If your spending of tax deferred accounts (TIRA) is lump, your tax bracket can adjust higher in lumpy years. So I want to buy a new vehicle this year. If I take the $50K from my TIRA, I’ll be in 24% bracket where if I had done conversions at 22% bracket I would save the higher bracket. A Roth can be raided in one year without tax implications.
- all of the above can also have an impact on IRMAA.

 

[dknighd]

Just one more First World problem, I suppose.

So glad to live in a world where we can worry about taxes and not where our next meal will come from. YMMV

I agree. I feel lucky to be able to talk about retirement on the internet.

 

[COcheesehead]

A conversion is a guess. As much as people like to think they have it dialed in- it’s still a guess on what the future holds. Last I checked, folks aren’t so good on predicting the future. So do you want to prepay a tax - in todays dollars, to avoid a unknown tax in tomorrow’s dollars - that for some, like me, won’t occur for likely 15+ years down the road?

 

[RunningBum]

A conversion is a guess. As much as people like to think they have it dialed in- it’s still a guess on what the future holds. Last I checked, folks aren’t so good on predicting the future. So do you want to prepay a tax - in todays dollars, to avoid a unknown tax in tomorrow’s dollars - that for some, like me, won’t occur for likely 15+ years down the road?

Bird in the hand. And that tax in tomorrow's dollars is on income in tomorrow's dollars as well so that's a fairly meaningless point.

 

[Sunset]

There is the Backdoor Roth process to overcome that, if you don't have a significant pre-tax balance in any traditional IRA.

Ty. Buts its all pre tax. Thats why I think it may be best to convert a little at a time. I figure if I take a little each year, I can put it in that way. Just thinking about it now.

What SevenUp is saying is if you don't already have a traditional IRA (or a really tiny one), then you could do a backdoor roth move.

Once you have a bunch or large traditional IRA, it can't be done or is not as nice.

 

[COcheesehead]

Bird in the hand. And that tax in tomorrow's dollars is on income in tomorrow's dollars as well so that's a fairly meaningless point.

There is an opportunity cost for a dollar removed from my taxable account or from my deferred to pay a tax I may or may not ever owe.
Paying it today based on a guess, to me, isn’t the best move, though conversions to some are in essence a given. - a must do, when it’s really a maybe.

I am in the RMD at age 75 group. Based on tools I use, I don’t even get close to a higher bracket until I am in my 80’s. In the 20+ years until I reach that point, a lot can change.

 

[RetireBy90]

There is an opportunity cost for a dollar removed from my taxable account or from my deferred to pay a tax I may or may not ever owe.
Paying it today based on a guess, to me, isn’t the best move, though conversions to some are in essence a given. - a must do, when it’s really a maybe.

I am in the RMD at age 75 group. Based on tools I use, I don’t even get close to a higher bracket until I am in my 80’s. In the 20+ years until I reach that point, a lot can change.

What about surviving spouse paying taxes as single ?

 

[Phroig]

What about surviving spouse paying taxes as single ?

+1
Higher tax rates at significantly lower levels of income. Kids who have to empty the account out in ten years may also be single.

 

[Montecfo]

+1
Higher tax rates at significantly lower levels of income. Kids who have to empty the account out in ten years may also be single.

Hard for me to get too concerned about that. If our son inherits money he will be ok paying taxes on it. It would be "found money".

 

[MichaelB]

What about surviving spouse paying taxes as single ?

+2

A surviving wife lives on average 12.5 years, and her tax rate on traditional IRA withdrawals will be substantially higher over that period.

 

[target2019]

I can estimate the difference for my surviving spouse, pre RMD:

a) In 2023 our joint taxable income is 22%.
or
b) If I croaked previously, her single taxable income will be 24%.

Looking down the road to 2030 (RMDs being taken), we would be in a future 25% bracket. For her as a single it would be 27%. Correction: will be 28%.

 

[Phroig]

Hard for me to get too concerned about that. If our son inherits money he will be ok paying taxes on it. It would be "found money".

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

 

[Romer]

+2

A surviving wife lives on average 12.5 years, and her tax rate on traditional IRA withdrawals will be substantially higher over that period.

+3. One of the main drivers for me

we are at the 22% top bracket now, which for my wife single after 2026 would be 28% and potentially into next 2026 bracket which I think is 32 or 35% with RMDs

By doing Roth Conversions, we not only reduce our married taxable income starting at 70-72 years(when full conversion complete), but ensure her tax rate will be in the 10-15% range after I pass. That will make things much simpler for her

 

[Popeye]

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?

 

[TheWizard]

+2

A surviving wife lives on average 12.5 years, and her tax rate on traditional IRA withdrawals will be substantially higher over that period.

Possibly.
As I've mentioned before, it depends to a degree how the first spouse to pass structured the handling of his/her tax-deferred assets.
Were a good portion of those assets willed to offspring and/or charity? Or were 100% left to surviving spouse?,

Something to think about...

 

[SecondCor521]

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 have my own spreadsheet which is moderately complicated and does differentiate between IRA returns and tax bracket indexing. It also handles some things about my own situation that a generic tool might or might not handle.

I've read some people here like Pralana Gold. I think there are a few other similar tools.

 

[audreyh1]

Possibly.
As I've mentioned before, it depends to a degree how the first spouse to pass structured the handling of his/her tax-deferred assets.
We're a good portion of those assets willed to offspring and/or charity? Or were 100% left to surviving spouse?,

Something to think about...

Yes, our plan too with IRAs.

 

[Montecfo]

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

Well there are really a lot of variables at work as CoCheesehead was saying. Examples:

Your longevity
Your tax bracket
Your marital status
His marital status
Future tax laws
His income and that of any spouse
Market returns/timing of tax payment

I kind of feel these tactics though well intentioned may be a tough needle to thread. What seems obvious in theory may not work in practice.

 

[RunningBum]

Well there are really a lot of variables at work as CoCheesehead was saying. Examples:

Your longevity
Your tax bracket
Your marital status
His marital status
Future tax laws
His income and that of any spouse
Market returns/timing of tax payment

I kind of feel these tactics though well intentioned may be a tough needle to thread. What seems obvious in theory may not work in practice.

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.

 

[Koolau]

What about surviving spouse paying taxes as single ?

Now, that's a cliff worth considering. I'm very open to suggestions. It's almost certainly coming to most of us - well the married ones anyway.

 

[Montecfo]

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.

Fear? Never.

But understanding the limits of forecasting?

Absolutely!

But it is just perspective. I also do Roth conversions. I am lowering my effective tax rate while reducing lifetime cash flow. It should benefit the second of us to die, but even that is hard to say.

But I can't be very certain I can to minimize taxes for my non-spouse heirs for reasons stated.