Huge conversion in 2025?

[Sunset]

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...

I'm guessing:
They didn't read about RMD's on this site, and how doing Roth conversions are what some people do a little at a time over the years.

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.

Good points.

Personally, I read between the lines that OP has heard and panicked about tax rates increasing, I bet there are rumors the rates are going up more than simply resetting to what they were most recently.

 

[RunningBum]

I'm a conversion advocate, but only where is makes sense. OP says they have run this with spreadsheets but I'd have to see them to believe doing all at once is a wise move. I would love to have my tIRA fully converted but I've been patiently whittling it down with small conversions to a target level each year. My target right now the top of 0% QDivs and LTCGs. ACA subsidies keep me from taking it any higher.

 

[marko]

There's a bunch of Roth conversion calculators out there. They can tell you how much of a good or bad idea it is. Schwab has a good one.

 

[aja8888]

I am 81 (widower since 2022) and still have about 7 figures in my IRA and have been pulling RMDs for 11 years. I plan to continue to do this as I can stay in the 22% bracket (just barely) and someday will use the funds for LTC. Some ROTH conversions were done several years ago when it was advantageous to do so, but it's not a significant amount.

If I drop before LTC, my daughter will have 10 years to draw down the inherited IRA. I have no pension and just SS, which is 1/2 what I need to live on. No debts either.

 

[PatrickA5]

Even "no-brainer" conversions up to the top of the 12% bracket might not make sense. Next year, only 20% of our combined SS will be taxed if we didn't do any conversions. Every dollar of conversion causes more of our SS to be taxed. It would take $45K of conversions to get us to the top of the 12% bracket, but that extra $45K would be taxed at 23% due to another 65% of our SS being taxed.

After RMDs are taxed in 6 years, we'll still easily be in the 12% bracket, so it doesn't make sense to do any more conversions now that we'll both be on SS starting next year.

Obviously, most people here are probably starting out at 85% of SS being taxed, so it's a non-factor for most.

 

[SecondCor521]

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?

[Emphasis added.]

To pile on to what everyone else has said, it's a horrible idea. Your idea will probably cost you in excess of $100,000 in unnecessary taxes. Put another way, that's like you voluntarily giving six years of your SS benefits back to the federal government.

I think it would help if you could explain more about the sentence I bolded in your post above. What do you see as the pitfalls? What can RMDs do? How does your convert-all-at-once strategy address these things?

I think it is very likely that you and your husband have some sort of fundamental misunderstanding or miscalculation regarding taxes which is leading you astray. If we can figure out what that is we might be able to clarify or correct it and you'll probably end up choosing a different and better approach.

 

[jazz4cash]

[Emphasis added.]

I think it is very likely that you and your husband have some sort of fundamental misunderstanding or miscalculation regarding taxes which is leading you astray. If we can figure out what that is we might be able to clarify or correct it and you'll probably end up choosing a different and better approach.

This is exactly what I was thinking.

 

[SevenUp]

Even "no-brainer" conversions up to the top of the 12% bracket might not make sense. Next year, only 20% of our combined SS will be taxed if we didn't do any conversions. Every dollar of conversion causes more of our SS to be taxed. It would take $45K of conversions to get us to the top of the 12% bracket, but that extra $45K would be taxed at 23% due to another 65% of our SS being taxed.

After RMDs are taxed in 6 years, we'll still easily be in the 12% bracket, so it doesn't make sense to do any more conversions now that we'll both be on SS starting next year.

Obviously, most people here are probably starting out at 85% of SS being taxed, so it's a non-factor for most.

That's why it's the marginal tax rate that applies, not the bracket rate.

 

[jazz4cash]

^The marginal tax rate is the same as the bracket rate.

 

[CardsFan]

^The marginal tax rate is the same as the bracket rate.

No.

In Patrick's example, he would still be in the 12% bracket, but the additional SS taxation makes the effective (marginal) rate 23%.

 

[SevenUp]

That's why it's the marginal tax rate that applies, not the bracket rate.

^The marginal tax rate is the same as the bracket rate.

No, and it's important to understand why they aren't (necessarily) the same. See that linked article and others such as Taxation of Social Security benefits - Bogleheads to see why.

 

[pb4uski]

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?

Sounds like an outstandingly bad idea.

Why? Sounds like you would be much better off just taking RMDs when they come and paying whatever tax is due rather than writing a big check to the IRS now.

 

[jazz4cash]

No, and it's important to understand why they aren't (necessarily) the same. See that linked article and others such as Taxation of Social Security benefits - Bogleheads to see why.

Ok, thanks. Need to check this out.

 

[charais]

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...

OK. I can fill in the blanks. I should call it blissful unawareness. Yes you're right, that's when we should have done it but honestly had not really looked at it. We just worked hard and tried to save money, and Roth accounts weren't really on the radar. Getting the match and piling up cash in an IRA was all we thought about. I think at some point I was told not to bother with a Roth because there wasn't much time to fund it at our age so just keep doing the IRA. So Yes retired, sold the house and had a great couple of years traveling and looked for a home in Florida. Son in law had 2 strokes in 2021 and we had to move back to help with his care. Hubs went back to work to have something to do while I did the care (driving to therapy appointments, cooking, etc) and then I was diagnosed with cancer. Now he has mostly recovered and I am mostly recovered so life can go forward. Purchasing a home in Florida (cash) and should be moving in November. My husband is debating when to retire again (he says April, I'm guessing January) We have a CFP and a separate tax person suggest converting to IRMAA thresholds, so I'm deciding how much I should fight over this. Interesting so many of you say RDM's are no big deal. We thought we'd pay little to no tax as we age and the RMD's made it look like we'd be paying a lot! Well this is why I posed the question here because I didn't think it was a good idea and y'all seem to know your way around money in ways we don't. So I thank you for your insights and sincerely appreciate sharing your opinions. I'll certainly let you know what happens.

 

[charais]

I'm guessing:
They didn't read about RMD's on this site, and how doing Roth conversions are what some people do a little at a time over the years.

Good points.

Personally, I read between the lines that OP has heard and panicked about tax rates increasing, I bet there are rumors the rates are going up more than simply resetting to what they were most recently.

Absolutely. My husband is in the panic about rates increasing.

 

[charais]

[Emphasis added.]

To pile on to what everyone else has said, it's a horrible idea. Your idea will probably cost you in excess of $100,000 in unnecessary taxes. Put another way, that's like you voluntarily giving six years of your SS benefits back to the federal government.

I think it would help if you could explain more about the sentence I bolded in your post above. What do you see as the pitfalls? What can RMDs do? How does your convert-all-at-once strategy address these things?

I think it is very likely that you and your husband have some sort of fundamental misunderstanding or miscalculation regarding taxes which is leading you astray. If we can figure out what that is we might be able to clarify or correct it and you'll probably end up choosing a different and better approach.

I think he is hoping we pay it all at once and never pay taxes again because we won't have income to report. RMD's trigger tax and he wants to control that. Some of this panic comes from when we got hit unexpectedly with IRMAA the last time he retired. Sold a bunch of crypto and pushed medicare into the $900+ quarterly range and he had just signed up for medicare. Had no idea who IRMAA was and why she wanted so much money! We learn the hard way! But I'd like to be smarter about it this time.

 

[SevenUp]

We thought we'd pay little to no tax as we age and the RMD's made it look like we'd be paying a lot!

That could be true, but if so it's probably true that converting it all in one or two years means you would be paying a lot more. You should check that, or pay your CFP or tax person to do the comparison for you.

If you do or pay to check the numbers, what do you get?

 

[charais]

That could be true, but if so it's probably true that converting it all in one or two years means you would be paying a lot more. You should check that, or pay your CFP or tax person to do the comparison for you.

If you do or pay to check the numbers, what do you get?

Still working on the spreadsheet. Number Crunch Nerds has a good one but quite the learning curve.

 

[SecondCor521]

I think he is hoping we pay it all at once and never pay taxes again because we won't have income to report. RMD's trigger tax and he wants to control that. Some of this panic comes from when we got hit unexpectedly with IRMAA the last time he retired. Sold a bunch of crypto and pushed medicare into the $900+ quarterly range and he had just signed up for medicare. Had no idea who IRMAA was and why she wanted so much money! We learn the hard way! But I'd like to be smarter about it this time.

Hope is wonderful, but as far as taxes go it's not as great as making a good rational plan.

RMD's result in income. Whether that results in taxes, and how much those taxes are, depends on the rest of your tax return. And as I mentioned before and as most everyone else has said, the amount of money you'll lose to taxes because of RMDs is less than what you'll lose with your plan in the OP.

Getting hit unexpectedly isn't fun and it isn't good. But you're about to get hit again if you go through with your plan. How unexpected that hit sort of depends on whether you believe what you're reading on this thread and if your husband is reading here as well.

If he doesn't like $900 a quarter for IRMAA, how is he going to like paying an extra $100,000+ in unnecessary income taxes?

I'm glad you want to be smarter about it this time. The plan in the OP, though, is not smart. The people on this board are pretty savvy folks, and it seems like the feedback you're getting is pretty consistent.

Even if you pay a CPA or a tax preparer $250-$500 for an hour or two of their time to go over the numbers with you, you're still way way way better off than if you go through with the idea in the OP. (And I bet you dollars to donuts they'll confirm the $100,000 number I've estimated.)

 

[RetiredHappy]

It is way worse than $100K. Take a look at this chart. You are looking at about $300K in taxes on $1M IRA to ROTH conversion.

 

[Exchme]

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.

I'm sorry to say that your math is not right. Hopefully you haven't already gone through with this mega-conversion. Converting $600K all at once out of less than $1M is going to cost you six figures more than you will ever save. I think you didn't include the return you would have earned on the taxes you have to pay to do the conversion. For a single person, that's ~$190K (depending on other income). That chunk of money would also have been earning returns for you if you didn't hand it over to the government right now.

If we were to neglect tax drag in taxable, then conversions/no conversions would come down to balancing the marginal tax rate of doing the conversion vs. waiting for RMDs. Doing a $600K conversion would put you in the top rate and unless you have a serious source of other income, you would never see rates like that if you waited and took it as RMDs, so it's a not a good strategy. Plus, if you end up needing long term care, you could have gotten the money out with almost no taxes on it.

Before making big financial moves, I urge people to use a high fidelity model like the free bogleheads.org Retiree Portfolio Model spreadsheet or the even more powerful Pralana Online (pralanaretirementcalculator.com). If you're not number oriented, hire a CFP on an hourly basis to make you plan. As a minimum, do like OP and come here first and let us warn you if your plan seems way out of the norm.

 

[marko]

Everyone on this forum knows how severely math challenged I am. Without even running numbers (which would likely come out wrong anyway) I can tell this is a bad idea.

There are several conversion calculators out there that will confirm my astute assessment.

 

[pb4uski]

There is a much easier way to think about it. If you do nothing... no conversions... how much do you estimate that the tax on your RMD will be in relation to your RMD?

Similarly, if you do a conversion what is the tax in relation to the conversion?

Lower number wins. If it's close, then don't sweat it.

 

[SecondCor521]

It is way worse than $100K. Take a look at this chart. You are looking at about $300K in taxes on $1M IRA to ROTH conversion.

The $100K is the unnecessary increase in taxes compared to a better plan - it's the difference between what they would pay in taxes in a single year conversion compared to spreading it out over the rest of their lifetimes.

The total amount of taxes paid in the current year is a different, and much larger figure - $300K sounds like a reasonable estimate.

OP, basically to get the $100K number, I took the $1M you're talking about converting, and estimated you'd be paying in the low 30%-range in taxes, and that you could probably, with a decent plan, pay in the low 20%-rage in taxes. That's a 10% difference on $1M, which is $100K. There are other secondary effects, like the income you'd earn on the money you'd use to pay the tax bill, taxation of SS, etc. that make it very likely over $100K.

 

[RetiredHappy]

The $100K is the unnecessary increase in taxes compared to a better plan - it's the difference between what they would pay in taxes in a single year conversion compared to spreading it out over the rest of their lifetimes.

The total amount of taxes paid in the current year is a different, and much larger figure - $300K sounds like a reasonable estimate.

OP, basically to get the $100K number, I took the $1M you're talking about converting, and estimated you'd be paying in the low 30%-range in taxes, and that you could probably, with a decent plan, pay in the low 20%-rage in taxes. That's a 10% difference on $1M, which is $100K. There are other secondary effects, like the income you'd earn on the money you'd use to pay the tax bill, taxation of SS, etc. that make it very likely over $100K.

Got it.