An odd one even by Boglehead standards, but here goes...
The recently passed tax reform has prompted a re-think of my existing Roth conversion plan. I am a US non-resident alien with a 401k from work in the US, and had intended to convert around $4k/year until age 60 and then $40k/year until the 401k is fully converted to a Roth, to mitigate high tax rates on RMDs. I am in an unusually asymmetrical tax situation -- I pay tax on Roth conversions at normal US graduated rates but without any standard or other deductions (and now, no personal exemption either), and at my full local marginal rate on 401k withdrawals (typically 40% but can go up to 60%).
My original plan used the exemption and then the 10/15% brackets to the full, stopping there. But I have now run some projections that suggest that due to fund growth, and exacerbated by the loss of personal exemption, I will not be able to avoid moving solidly into the 22% bracket before the conversion is completed. So it appears that I should be bolder.
I have 13 years before RMDs, and my tax asymmetry seems to strongly suggest converting the entire 401k before then. For more motivation, between ages 70 and 75 I will also be facing my own local country pension 'tax torpedo'.
My revised plan converts 1/N of my 401k each year starting this year, so that it is fully converted by age 70. Assuming 3% inflation and 4% real growth, this will just nudge over the top of 12% tax bracket in the first year, and by the 13th I estimate being around 1/2 way through the 22% bracket. Effective tax rates on the conversions range from 11.5% at the start to perhaps 15.5% in the final year. Not bad, and much better than my estimated 40% on withdrawals. I will have to front up the tax from other savings, at least until I can make penalty-free Roth withdrawals at age 59.5, but this is just a forex and timing nuisance rather than a cashflow problem.
So, questions. I assume nobody else has ever been in a similar position, although if you have then feedback would be great!
1. Is a rolling 1/N conversion a reasonable profile to use? I could either front-load or back-load it a little without changing the final outcome, but skewing too much results in either early under-use of the 12% bracket or a later push beyond 22% and a worse outcome. This might boil down to: which of growth and inflation is the most likely or not to manifest? And who knows?
2. I have assumed AMT is not a threat, but is this right? I cannot claim any deductions for state or other tax, nor any standard deduction, so on my recollection I should never encounter it, but it may have some wrinkle I'm not aware of.
3. I cannot claim medicare or other benefits of this type, so no income effects there. I might at some point receive US social security, but under the US/UK treaty this is taxable only to the UK, so should not affect my Roth conversion tax rates. Might there however be some other externality that would affect my US tax rates?
4. There is an odd effect at the latter part of the 13 years of conversion where stretching out conversion into RMD years can be better than full conversion before RMDs, meaning that extending to 14 or more could be a benefit. For example, with £76k in a 401k it would be better to convert in two lots of $38k even with two RMDs -- the RMDs would be around $4.5k total and taxed at 40%, but this is more than compensated by being able to convert using two 10/12% brackets for the remainder as opposed to a single conversion that extends well into the 22% tax bracket. I have no real idea how to realistically model this to find its breakeven point, but as it is probably more than a decade away I have ignored it for now. But if anyone does have a bright idea on how to project this, I am all ears. (I-ORP certainly cannot handle it!)
5. The potential expiry of the tax cuts in 2025 actually has little to no effect on this plan as far as I can see. If they do expire, the tax I would pay on conversions increases a little, but to nowhere near 40% so the basic principle still holds. Sound right?
6. Anything else I might not have thought of? Obvious dangers include tax treaty issues and 401k provider no longer cooperating. Lesser hassles involve timing estimated taxes and the general difficulties of dealing with the IRS from another country. But other than these?
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