Huge conversion in 2025?

[charais]

My husband and I are thinking of doing a huge Roth conversion in 2025. Planning to be just under IRMMA limit for 2024 conversion, but 2025 converting all the tIRA to Roth. It’s a little over $1M so taxes galore, IRMMA pain for 2 years and having all the other taxes for high income BUT it will be done and no RMDs. We’ve run calculations and yes it’s breathtaking but we do have cash to pay the taxes (I assume we’ll convert quarterly and pay quarterly). Never ever have done anything like this. We were unaware of the taxable IRA pitfalls and didn’t really understand what RMDs can do until recently. We’re usually in the 12% bracket so yes we lost years of opportunity to do this a less tax costly way. But hubs is 67, retiring in early 2025 and hasn’t started SS so he’s feeling like why not. I’m retired, 66 and on SS but my monthly benefit is small just $1400. Is this crazy? Is there maybe something else to consider before doing this?

 

[walkinwood]

iORP would have been a help, but it is defunct. There are other software packages that can analyze & compare lifetime tax costs of various strategies and also optimize it. Or you can try to spreadsheet it.

 

[charais]

iORP would have been a help, but it is defunct. There are other software packages that can analyze & compare lifetime tax costs of various strategies and also optimize it. Or you can try to spreadsheet it.

Yes we have 2 spreadsheets that spell out all the fees and taxes but I still want to make sure we are aware of any other details.

 

[Surewhitey]

If you can be more specific to how much this year & next it may get you more responses. If I interpret it correctly, you are converting ~$200k this year and $800k next year.

If this is close, I'd really consider doing RMD's vs paying 35% or more next year.

Or you can share more of your findings to help others too.

 

[SevenUp]

Yes we have 2 spreadsheets that spell out all the fees and taxes but I still want to make sure we are aware of any other details.

Just because you can afford the taxes doesn't mean it will be best for you. You mention spreadsheets so have you looked at the tax rates you will pay as you go from $0 to $1 million in conversion amount? Roth Conversion with Social Security and Medicare IRMAA describes one way to do this.

 

[Doribe]

I took a big bite before DH started SS and before I had to worry about IRMAA. Mine was not as large as yours. I dd run out a projection on a spreadsheet and it was six of one, half dozen of the other. Of course, I made certain assumptions.

I still have tIRA which I am picking at, staying within the TIER 1 IRMAA and under the 24% tax bracket. I think this is where I will end up whether I convert or not.

There may be some benefit to having some money in tIRA. I might want to do Charitable Distribution or I may be able to get into a long term care expense that gives me a medical deduction. I'm still figuring this part out.

 

[charais]

If you can be more specific to how much this year & next it may get you more responses. If I interpret it correctly, you are converting ~$200k this year and $800k next year.

If this is close, I'd really consider doing RMD's vs paying 35% or more next year.

Or you can share more of your findings to help others too.

Converting $38,000 in 2024 and $1m in 2025. We’re just at the IRMAA limit in 2024 and my husband is still w*rking.

 

[Exchme]

No! This is a terrible idea. You will end up paying the top rate, plus the maximum state taxes, plus putting your capital gains into the 26% or 28% bracket. That will unnecessarily cost you hundreds of thousands of dollars.

My guess: Your husband should defer claiming SS until age 70, use your cash to finance living until then. Roth convert up to the top of the base IRMAA tier next year and the year after. Then no more conversions.

Hire a one-time-fee financial planner (avoid the Assets Under Management types like you would avoid a rattlesnake) and have them look at the math for you, I guarantee the answer will not include an enormous Roth Conversion.

 

[Koolau]

Generally, it would be better to spread things out, but there are a lot of variables involved. I don't know how you would model all of this. Maybe hire a by-the-hour Financial Planner - but tell her/him up front what you want and ask if s/he can help you.

I will tell you from experience that RMDs, while a bit painful, are NOT excruciating and I would never have considered what you are planning. I'm still doing what I can to lower my 401(k) balance in hope of keeping ahead of RMD increases as I age out (and divisors get "worse".)

It sounds to me that you are attempting to "get IRMAA out of the way once and for all." If that is your goal, I suppose this plan would w*rk. BUT it's gonna cost you a LOT of taxes and have you considered NIIT?

I can't tell you it's a good or bad plan, but it "seems" like over-kill to me.

Best luck and I hope whatever you do meets your expectations.

 

[Al18]

Doesn’t sound wise to me. What’s wrong with RMD’s? All the presentations I’ve viewed over the past few years say to spread your taxes evenly for the lowest overall amount of taxes. $1M is a large amount, but there are some on this forum who have 10X and are not converting all at once. Talk to a professional before spending hundred of thousands in taxes in 1 year.

 

[Exchme]

It's even possible that the best answer is to only convert up to the start of the long term capital gain tax phase-in, you have to have a good model, make some assumptions about the future and check.

Over on bogleheads.org (a great resource in its own right), I've seen folks being referred to adviceonlynetwork.com and the Garrett Planning Network. Again, stay away from folks that charge a percentage of assets, that is waaay more expensive than just paying for the service. You don't have a long time to be updating the plan, so I think just a one-time-plan for a one-time-fee is all you will need.

My tool of choice is Pralana and while setting that up is a bit much for someone new to the ideas, there are by-the-hour advisors that use that program and then give you the live model at the end, so you can update it yourself. You can even share the model back and forth. You can see a couple of names of advisors if you go to pralanaretirementcalculator.com and go to the Forum.

One of the reasons for not converting everything is long term care. Odds are that one or both of you will need some one day and it is mostly tax deductible, meaning that you can get the money for the care from your IRA and not owe much in taxes. If you've already converted your IRA to Roth, then that's too bad for you, you're not likely to be able to use the tax deduction.

 

[marko]

Everything Koolau said. The tail is wagging the dog here, IMO

 

[mrfeh]

I would be very surprised if this is the best thing to do mathematically.

 

[Midpack]

Everything Koolau said. The tail is wagging the dog here, IMO

+1. I had a 7 figure TIRA, and started large conversions in 2019 at age 65. I’ve continued every year and expect to have most but not all of it converted before RMDs begin in 2027 for me. I’ve been converting to stay within the 22% bracket or IRMAA Tier 2. I did the math, and there’s no way just converting everything in one year would have been financially beneficial - even though I could afford the taxes.

 

[camfused]

As others have said, you will probably have to pay the NIIT tax (I think 3.5%) too.

I think you are better off converting up to the IRMAA limit each year, for this and the next several years, until the IRAs are depleted. This might means paying RMDs for a few years, but the rates for the first few years are the lowest ones.

BTW, this is my plan, although I will never be able to deplete my IRAs.

Let us know what you decide.

 

[Mark1]

..................We were unaware of the taxable IRA pitfalls and didn’t really understand what RMDs can do until recently........

I wonder if you truly understand the pitfalls and results of RMDs. These effects are very minor compared to the pain you will inflict upon yourself with a million dollar conversion. Remember the excise tax of 50% is for folks that don't take their RMDs and is not the amount that you will pay on your RMDs. Somewhere your calculations have run amok.

 

[Al18]

Don’t forget adding state taxes also. NJ top tax rate is 10.75%

 

[RetiredHappy]

You will pay far more taxes in converting $1M IRA all at once. I doubt it is a wise finnancial move.

While I have turned my IRA into an annuity income stream, my husband has about $2M in his IRA and we are well into his RMD, as in his 6th year. It doesn't break us in paying the taxes. RMD helps with providing income throughout retirement. If I survive him, I figure I will disclaim part of it to keep my single person taxes a little lower.

 

[TimSF]

I retired 11 years ago at 50; my tIRA was at about $1m. I've been doing Roth conversions since turning 59 1/2 and have converted about half the account. I decided to convert a big chunk this year ($600k) and take the maximum tax hit this year because I've calculated that in the long run it will be cheaper because all gains and income in Roth accounts are tax-free, not merely tax-deferred. Assuming a conservative 5% growth rate, in a few short years the tax savings on my current and future gains will exceed the total tax bill for conversion. Before I turn 72, I will have converted all but maybe $100k of the tIRA, which I will use to make charitable donations. Thus, no RMDs. The only income taxes I expect to pay in the future are taxes on social security.

I should add -- and this is an entirely personal thing -- but not having to worry about future US tax policy and future tax rates also gives me peace of mind.

 

[Al18]

Ballpark tax estimate if you lived in NJ would be 50% taxes on $1M

 

[braumeister]

Once I got the TIRA total down to a manageable level I quit doing RMDs. I just take the equivalent amount (usually more) out as QCDs for my favorite charities. It simplifies things.

 

[CardsFan]

Doesn’t sound wise to me. What’s wrong with RMD’s? All the presentations I’ve viewed over the past few years say to spread your taxes evenly for the lowest overall amount of taxes. $1M is a large amount, but there are some on this forum who have 10X and are not converting all at once. Talk to a professional before spending hundred of thousands in taxes in 1 year.

+1

I do not get the obsession some have with converting ALL their tax differed money. RMD's on $1 million start at under $50k/year.

That said, we are in the position of having more than twice that. I have been converting up to the IRMAA limit, which is about the same number I expect our RMD's to be in a few years. I have looked at mega conversions, though not as much as OP, and the math just does not work out.

 

[Sunset]

This is a bad idea !
You will literally be paying taxes that you would never otherwise pay.
You will pay taxes for Fed at the rate of 37% for nearly half the conversion, at a minimum, possibly a few percent more. Plus whatever your State charges.

If you take RMD's instead it will add only ~$40K per year to your income, meaning the tax you pay will at most (including 2 SS) might just 22% maybe 24% (saving you 13% in taxes compared to all at once conversion).

Instead, do Roth conversions up to the IRMAA limit each year and start taking your RMD (probably age 73).

 

[ivinsfan]

In a 2018 post you say that you both retired in early 2018 sold your house and were traveling... what has changed since then. That would have been a time to do the roth switch. You have left it too late to accomplish without a huge tax bill...

 

[Montecfo]

Reading between the lines, it seems like this is for convenience?

I have always been one to urge restraint on Roth conversions and only do it when the case to do so was very compelling, since we do not know the future. Maybe the market melts down and resets at 14x earnings after some of us voluntarily paid tax on Roth conversions at 50% higher values.

Anyway, there are good reasons to have a traditional IRA: couple of examples:

-Use it to fund charitable giving tax free using QCDs
-Use it to fund deductible medical expenses such as LTC.
-Have your estate use it to fund charitable giving post-death

These are good to consider.