Huge conversion in 2025?

[SecondCor521]

Got it.

Thanks.

It's good to clarify, though. You get it, and I get it, but the back and forth might help OP and others learn more. So I appreciate the exchange.

 

[TickTock]

OP - DW and I think in terms of 'how to minimize lifetime taxes' vs. paying low or no taxes for several years. While you can't know all of the future variables (changes in tax laws, when you pass on) it does provide a useful frame for making decisions.

 

[MarieIG]

You mentioned that you are usually in the 12% bracket. So, why don't you spread out your conversions starting this year? Your DH can postpone SS to 70 and use that space for additional conversions. You can look into suspending your SS when you reach full retirement age to age 70, and then restart it (with an increase) again using that extra space for conversions. It does not have to be all or nothing.

In your circumstance, I would probably bite the bullet on a modeling software with good reviews. Some people have recommended Pralana (Gold) although I am not familiar with it. I expect that you may have to pay some IRMMA, but be careful of being "penny wise." The end goal is to have more money for you and your DH to spend.

Good luck.

 

[Route246]

This is a multivariate problem. One thing ignored by almost everyone doing calculations is early demise, not a popular topic and quite uncomfortable to think about but I always think this way. I always chart benefit as a function of time with that time being uncertain of termination. Paying a whole bunch of taxes up front (not in this case necessarily) and then dying a short time later can provide a considerable windfall to state and federal taxing coffers.

Look, Roth IRAs were created in order to pry free some of the deferred taxes now on the books of people with retirement accounts and get those taxes now and worry about the consequences later. It is a bet that the government made that you will die soon, they will get their money now and you ended up losing on this bet. If you live to a ripe old age then it is a break even for the feds and you have the satisfaction of withdrawing retirement funds tax free.

I've always viewed paying taxes as a privilege. We pay a ton of taxes and I would rather have it that way then not paying much tax at all as it can be directly proportional to out quality of life vs those who pay very little in taxes.

 

[RunningBum]

This is a multivariate problem. One thing ignored by almost everyone doing calculations is early demise, not a popular topic and quite uncomfortable to think about but I always think this way. I always chart benefit as a function of time with that time being uncertain of termination. Paying a whole bunch of taxes up front (not in this case necessarily) and then dying a short time later can provide a considerable windfall to state and federal taxing coffers.

Look, Roth IRAs were created in order to pry free some of the deferred taxes now on the books of people with retirement accounts and get those taxes now and worry about the consequences later. It is a bet that the government made that you will die soon, they will get their money now and you ended up losing on this bet. If you live to a ripe old age then it is a break even for the feds and you have the satisfaction of withdrawing retirement funds tax free.

I've always viewed paying taxes as a privilege. We pay a ton of taxes and I would rather have it that way then not paying much tax at all as it can be directly proportional to out quality of life vs those who pay very little in taxes.

An IRA account doesn't die with the original owner. With that in mind, I can't make much sense out of your post.

 

[RetiredHappy]

This is a multivariate problem. One thing ignored by almost everyone doing calculations is early demise, not a popular topic and quite uncomfortable to think about but I always think this way. I always chart benefit as a function of time with that time being uncertain of termination. Paying a whole bunch of taxes up front (not in this case necessarily) and then dying a short time later can provide a considerable windfall to state and federal taxing coffers.

Look, Roth IRAs were created in order to pry free some of the deferred taxes now on the books of people with retirement accounts and get those taxes now and worry about the consequences later. It is a bet that the government made that you will die soon, they will get their money now and you ended up losing on this bet. If you live to a ripe old age then it is a break even for the feds and you have the satisfaction of withdrawing retirement funds tax free.

I've always viewed paying taxes as a privilege. We pay a ton of taxes and I would rather have it that way then not paying much tax at all as it can be directly proportional to out quality of life vs those who pay very little in taxes.

Your argument is no longer valid since the Secure Act as inherited IRAs have to be liquidated and taxed within 10 years, which usually means paying higher taxes to the government.

Yeah, overall, I can't make much sense out of your post as well.

 

[Exchme]

This is a multivariate problem. One thing ignored by almost everyone doing calculations is early demise, not a popular topic and quite uncomfortable to think about but I always think this way. I always chart benefit as a function of time with that time being uncertain of termination. Paying a whole bunch of taxes up front (not in this case necessarily) and then dying a short time later can provide a considerable windfall to state and federal taxing coffers.

Look, Roth IRAs were created in order to pry free some of the deferred taxes now on the books of people with retirement accounts and get those taxes now and worry about the consequences later. It is a bet that the government made that you will die soon, they will get their money now and you ended up losing on this bet. If you live to a ripe old age then it is a break even for the feds and you have the satisfaction of withdrawing retirement funds tax free.

I've always viewed paying taxes as a privilege. We pay a ton of taxes and I would rather have it that way then not paying much tax at all as it can be directly proportional to out quality of life vs those who pay very little in taxes.

It looks like you are assuming that all accounting ends at your death. But if you are leaving the money to heirs you care about, then the IRA money will face taxation at the heirs' tax rate as non-spousal heirs have to empty the account in 10 years. That may be at a bad time for your heirs, perhaps messing with college aid for their kids, messing with ACA premium credits, undermining their own Roth Conversions or coinciding with their peak earning years.

For folks with heirs they care about, the place where time matters in the calculation is if taxes on Roth Conversions are paid from taxable, then that reduction in the balance in taxable reduces tax drag. That savings starts very small but keeps on helping year after year. If you live a long time, it adds up to a very respectable percentage of the converted amount.

 

[USGrant1962]

OP - DW and I think in terms of 'how to minimize lifetime taxes' vs. paying low or no taxes for several years. While you can't know all of the future variables (changes in tax laws, when you pass on) it does provide a useful frame for making decisions.

IMHO a better way to look at is "how to maximize after tax income"?

A simple example is tax free muni bonds. Even in low tax brackets you could "minimize lifetime taxes" by buying them instead of taxable bonds, but you probably won't maximize your after tax income by doing so. Conversely, in higher tax brackets munis make a lot of sense as the lower non-taxable interest beats taxable bonds after taxes.

To OP, because we have a progressive income tax system your best bet is to levelize taxes over your lifetime. That takes the most advantage of the zero and low tax brackets.

 

[dmpi]

I've looked into this 10 years ago right after I retired and I couldn't find a tax advantage for doing a huge one-time conversion even taking IRAMMA into account. The way the tax code works very high income simply means very high tax bracket. You'll end up paying a lot more. That said, I did once sell off a large amount of stocks to generate a 950K long-term capital gain. Driving this WA State was going to implement a 7% capital gains tax and I was under 63 so IRAMMA wasn't in the picture yet. Doing this doesn't change your tax bracket. I think I ending up paying 20% capital gain tax + 3.8% NIIT tax. I'm not positive I came out ahead but I wanted to realize my stock gains before I started medicare.

 

[kgtest]

I feel like the people who would net gain on a singular one time 1 million conversion would be a small few and far between. DF has 1MM and he is spreading the pain amongst the next 4 yrs. He is healthy, DM is not COPD on o2 tanks and can't do much...

So for him, doing it sooner than later is a better plan since when she is gone his tax rates climb, and the tax torpedo explodes. But doing it all in a singular year would net a higher tax bill in the long term.


I totally get the once it's done, it's done mentality. BUT, do the math.

YMMV.

 

[athena53]

I watched a video by a planner named Craig Wear (and had to Unsubscribe from the flood of subsequent e-mails). He advocates this tactic and claims to have sophisticated models showing the optimal strategy and the tax benefits. Of course, you have to make guesses about future tax rates, which no one knows. The follow-up e-mail offered me a customized plan- for $10,000.

I've got $1.7 million in traditional IRAs- Roths weren't an option till late in my career. I have a couple more years before I start RMDs. Anything I can do with Roth conversions up to the 22% bracket is a drop in the bucket although I might be able to make up most of my RMDs through QCDs. I just can't stomach the idea of taking $1.7 million into taxable income over a short period.

Good problem to have, I guess.

 

[pb4uski]

It looks like you are assuming that all accounting ends at your death. But if you are leaving the money to heirs you care about, then the IRA money will face taxation at the heirs' tax rate as non-spousal heirs have to empty the account in 10 years. That may be at a bad time for your heirs, perhaps messing with college aid for their kids, messing with ACA premium credits, undermining their own Roth Conversions or coinciding with their peak earning years.

For folks with heirs they care about, the place where time matters in the calculation is if taxes on Roth Conversions are paid from taxable, then that reduction in the balance in taxable reduces tax drag. That savings starts very small but keeps on helping year after year. If you live a long time, it adds up to a very respectable percentage of the converted amount.

It might be that Route246's IRA is going to charities. that is the only way that post makese sense.

My aunt and uncle's IRAs are going to charities with commensurate adjustments made to bequests out of their taxable accounts. So if $x goes to charities from the IRAs then the distributions from their trusts to charities are reduced dollar-for-dollar and bequests to individuals are increased by the same amount. More tax efficient.

 

[sengsational]

IMHO a better way to look at is "how to maximize after tax income"?

Or similarly, "Maximizing Lifetime Spending", where spending includes handing over any leftovers to heirs. This is what I-ORP did. I ran I-ORP for my numbers and dozens of other people's scenarios and never did it suggest a "get it behind you" solution. It was aggressive on conversions because even if it saved one dollar, that was optimal. But I-ORP ignored one thing mentioned above, cashing out early. So you had to get the optimal, then go by feel to decide if the savings are worth paying now and only maybe paying less later. In my case it's a close call, since flipping Roth conversions on and off wasn't that impactful.

 

[Al18]

RothIRA conversion doesn’t have to be an all or nothing deal. I will likely do one more conversion next year to the top of the 12% bracket. This will result in a total of 30% of our IRA being moved into RothIRA’s.

 

[TickTock]

IMHO a better way to look at is "how to maximize after tax income"?

A simple example is tax free muni bonds.

That is a better way to look at it.