Convert to Roth at Top Tax Bracket?

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Goodman60
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Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Sat Apr 25, 2020 8:52 am

Should I convert my $800,000 IRA to a Roth?

I'm 60. About 10 years ago, when Roth conversions first became available to high net worth/high income individuals, I converted half of my IRA to a Roth. My thinking at the time was to take advantage of current tax rates, because I suspected (and was later right) that top tax rates would go up. But there was also talk (nothing ever came of it) of converting to an all sales-tax system. So "I split the baby" and converted half my IRA. At the time I was married and our kids were teen & young adult and and good students. But I wasn't sure what they'd end up doing and frankly didn't think about it in terms of the IRA transaction.

Fast forward to now. A lot has changed as follows:

1. Both IRAs (Roth and Traditional) have grown nicely, even despite the current market downturn.
2. My kids are high earning professionals in top tax brackets.
3. I'm now a widower (which means I file tax as single with higher tax brackets at lower income).
4. My health has declined with some chronic stuff and it's probably a 50/50 bet that I'll even make it to RMD age at 72. One doc said that my life expectancy is 71, (but he did temper that by chuckling that many have outlived docs who give such death dates).
5. There's no more talk about going from income tax to sales tax. Put another way, I'm no longer worried about being a chump in paying big income tax that later goes away in favor of sales taxes. Just back to the usual worrying about paying the only the lowest legally required income tax. And current tax law has taxes going up in 2026 and, frankly, my own guess is that odds are high that tax law will change again and not in my favor.
6. There's a good chance I'll die with enough to be subject to Federal Estate tax and there's a 4.5% PA Inheritance tax. Again, there's even chatter about lowering the Federal Estate Tax exemption from the scheduled (about) $6Million for 2026. (But we can't discuss that beyond just my opinion that I need to consider this in tax planning.)
7. I have one grandchild and could see another sometime soon. I'm not sure that factors in to IRA planning, but I figure I'll throw that out here because it's part of the big picture and maybe I'm missing some sort of grandkid planning opportunity.

So should I convert my $800,000 traditional IRA, down from about $1M in February, to a Roth now? I'll pay tax at the top rate. It's a big bite. But it would appear that this pile is going to be income-taxed at the top rate no matter when it finally must be taxed. I don't want to leave it to charity. The money used to pay the tax will reduce my taxable estate.

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WoodSpinner
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Re: Convert to Roth at Top Tax Bracket?

Post by WoodSpinner » Sat Apr 25, 2020 9:25 am

OP,

Well the conversions main effect on the Size of your Estate is to reduce it by the taxes paid. Unless you are near the cusp of the Federal/State Estate Tax amounts I would ignore that factor.

Seems like your kids are also in top brackets so inheriting an IRA with a 10 year RMD requirement may be a mixed blessing.

A couple of questions:

Have you consulted an Estate Planning Attorney?

How old is your grandchild?

Do you need any of this money for your expenses?

WoodSpinner

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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Sat Apr 25, 2020 9:50 am

Yes I have a good estate plan done in conjunction with a good estate attorney after a lot of discussion. I certainly can go back to her about this if necessary (at $450/hr.). If I do need her, I'd rather have my thinking prepared ahead of time.

Grandchild is a year old. But since both of my adult kids are early in their baby-making years, I don't want do anything that would vastly favor early grandchildren at the expense of grandkids born later in my lifetime or after my death. I'm more inclined to only (majorly) benefit my kids and let them help their own kids. There's also the issue if there are grandkids from one adult child and none from another, I don't want to favor the family of the one with my grandkids. Yeah, I know, I might be missing generation skipping advantages. That being said, I started grandkid annual $15K 529 gifting and will do that for any and all grandkids during my lifetime (assuming neither of my adult kids decides to do the family of 10 thing 8-) ). And yeah, my current grandchild will benefit more than later grandkids if I don't live until each reaches college age. I'm ok with that relatively minor favoritism; sort of a bonus to grandkids who I get know at rate of increased benefit for however long I get to know them. Those born after I die won't get annual 529 gifts from me. Again, that being said, I'm OK with that but don't want to dump a pile of other money on some grandkids while others get less just because of birth timing. If I'm lucky enough to live until both of my adult kids reach the probable end of their own child making, I'll reassess. Put another way, my whole estate plan is subject frequent re-examination as the world continues to spin.

Unless Covid19 really does cause another 1929, I won't need the traditional IRA for myself, whether it stays traditional or converts to Roth. And I can pay the conversion tax out of other money that I probably won't need either. This is all about long term estate optimization. A few hundred thousand either way isn't going to have me trading the Lexus for a used Corolla.

sawdust60
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Re: Convert to Roth at Top Tax Bracket?

Post by sawdust60 » Sat Apr 25, 2020 10:26 am

Do some modeling with your numbers, to determine when some Roth conversions make sense.

Spread Roth conversions over multiple years to avoid top tax rates.

And IRA savings can be taxed at lower rates.

Qualified charitable distributions can satisfy RMD and result in zero tax.

Years with high medical expenses can result in less taxable income.

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WoodSpinner
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Re: Convert to Roth at Top Tax Bracket?

Post by WoodSpinner » Sat Apr 25, 2020 10:34 am

Goodman60 wrote:
Sat Apr 25, 2020 9:50 am
Yes I have a good estate plan done in conjunction with a good estate attorney after a lot of discussion. I certainly can go back to her about this if necessary (at $450/hr.). If I do need her, I'd rather have my thinking prepared ahead of time.

Grandchild is a year old. But since both of my adult kids are early in their baby-making years, I don't want do anything that would vastly favor early grandchildren at the expense of grandkids born later in my lifetime or after my death. I'm more inclined to only (majorly) benefit my kids and let them help their own kids. There's also the issue if there are grandkids from one adult child and none from another, I don't want to favor the family of the one with my grandkids. Yeah, I know, I might be missing generation skipping advantages. That being said, I started grandkid annual $15K 529 gifting and will do that for any and all grandkids during my lifetime (assuming neither of my adult kids decides to do the family of 10 thing 8-) ). And yeah, my current grandchild will benefit more than later grandkids if I don't live until each reaches college age. I'm ok with that relatively minor favoritism; sort of a bonus to grandkids who I get know at rate of increased benefit for however long I get to know them. Those born after I die won't get annual 529 gifts from me. Again, that being said, I'm OK with that but don't want to dump a pile of other money on some grandkids while others get less just because of birth timing. If I'm lucky enough to live until both of my adult kids reach the probable end of their own child making, I'll reassess. Put another way, my whole estate plan is subject frequent re-examination as the world continues to spin.

Unless Covid19 really does cause another 1929, I won't need the traditional IRA for myself, whether it stays traditional or converts to Roth. And I can pay the conversion tax out of other money that I probably won't need either. This is all about long term estate optimization. A few hundred thousand either way isn't going to have me trading the Lexus for a used Corolla.
I am going to step back and learn — any advice I might give is above my pay grade at this point :shock:

WoodSpinner

aristotelian
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Re: Convert to Roth at Top Tax Bracket?

Post by aristotelian » Sat Apr 25, 2020 12:02 pm

Isn't the estate tax lower than the top marginal rate?

cherijoh
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Re: Convert to Roth at Top Tax Bracket?

Post by cherijoh » Sat Apr 25, 2020 1:14 pm

Goodman60 wrote:
Sat Apr 25, 2020 8:52 am
Should I convert my $800,000 IRA to a Roth?

I'm 60. About 10 years ago, when Roth conversions first became available to high net worth/high income individuals, I converted half of my IRA to a Roth....

Fast forward to now. A lot has changed as follows:

1. Both IRAs (Roth and Traditional) have grown nicely, even despite the current market downturn.
2. My kids are high earning professionals in top tax brackets.
3. I'm now a widower (which means I file tax as single with higher tax brackets at lower income).
4. My health has declined with some chronic stuff and it's probably a 50/50 bet that I'll even make it to RMD age at 72. One doc said that my life expectancy is 71, (but he did temper that by chuckling that many have outlived docs who give such death dates).
5. There's no more talk about going from income tax to sales tax. Put another way, I'm no longer worried about being a chump in paying big income tax that later goes away in favor of sales taxes. Just back to the usual worrying about paying the only the lowest legally required income tax. And current tax law has taxes going up in 2026 and, frankly, my own guess is that odds are high that tax law will change again and not in my favor.
6. There's a good chance I'll die with enough to be subject to Federal Estate tax and there's a 4.5% PA Inheritance tax. Again, there's even chatter about lowering the Federal Estate Tax exemption from the scheduled (about) $6Million for 2026. (But we can't discuss that beyond just my opinion that I need to consider this in tax planning.)
7. I have one grandchild and could see another sometime soon. I'm not sure that factors in to IRA planning, but I figure I'll throw that out here because it's part of the big picture and maybe I'm missing some sort of grandkid planning opportunity.

So should I convert my $800,000 traditional IRA, down from about $1M in February, to a Roth now? I'll pay tax at the top rate. It's a big bite. But it would appear that this pile is going to be income-taxed at the top rate no matter when it finally must be taxed. I don't want to leave it to charity. The money used to pay the tax will reduce my taxable estate.
You might find this Forbes article of interest regarding the SECURE Act that is now in effect. (The author is PA CPA that specializes in Roth conversion analysis; I have two of his books and attended one of his webinars).

You don't mention taxable investments. If you did Roth conversions what would be the source of the money to pay the taxes? If you have to sell investments to do so, would it come out of taxable or as part of your traditional IRA distribution? This can make a difference in your decision. Sometimes it makes sense to spend out of your IRA and preserve your taxable account for your heirs since they would get a step-up basis.

Also since you are 60 and mention some health issues, you might want to keep some money in traditional and draw it down for medical bills.

I am just slightly older than you, but single without kids (or grandkids) and am planning to leave my residual estate (if any) to charity. I'm spending out of taxable and am planning some additional opportunistic Roth Conversions, but will stop way short of converting the whole thing. (Doing that would also put me in the top tax bracket). Before stock started taking a tumble, Roth represented ~18% of my portfolio, taxable about 23.5%, and the remainder as traditional tax advantaged.

With no Roth conversions, I am in the 22% federal bracket. I don't know exactly how much converting I'll end up doing this year but I don't plan to go above the top of the 24% marginal bracket.

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Re: Convert to Roth at Top Tax Bracket?

Post by bsteiner » Sat Apr 25, 2020 2:28 pm

cherijoh wrote:
Sat Apr 25, 2020 1:14 pm
...
You might find this Forbes article of interest regarding the SECURE Act that is now in effect. (The author is PA CPA that specializes in Roth conversion analysis; I have two of his books and attended one of his webinars).
...
I know Jim Lange (the author of that article) and was a guest on his radio show several times.

The general rule is that a Roth conversion makes sense to the extent you can convert at a rate less than, equal to, or not too much higher than the rate that would otherwise apply to the distributions. In this case, since both the original poster and his children are in high brackets, and the income tax rates are scheduled to revert to pre-2018 levels in 2026, a Roth conversion would likely make sense.

In addition, since he's in Pennsylvania which has a 4.5% inheritance tax, a Roth conversion would avoid the double tax resulting from the income tax deduction for estate taxes not being available for the state inheritance tax.

In other words, whoever receives a traditional IRA gets an income tax deduction for the Federal estate tax on it, to put him/her in about the same position as if the IRA owner had taken the IRA during lifetime and paid the income tax, so only the net after income tax would be subject to estate tax. But the income tax deduction is only available for the Federal estate tax, not state estate or inheritance taxes.

However, the SECURE Act adds another factor to the analysis. Under the SECURE Act, IRAs must generally be fully distributed by the end of the tenth calendar year after death. The original poster said that his children are just starting to have children. If they're young, but at least 27, he could leave his IRA to charitable remainder trusts for their benefit. That would replicate the stretch.

It might be worth running the numbers to compare the Roth conversion with a 10-year stretch after death to a traditional IRA going to charitable remainder trusts for the children.

I've never had occasion to consider a Roth conversion followed by leaving the Roth IRA to a charitable remainder trust, so perhaps while he's at it he might consider that possibility as well.

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celia
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Re: Convert to Roth at Top Tax Bracket?

Post by celia » Sat Apr 25, 2020 3:35 pm

OP, You’ve already identified all the important points and apparently talked them over with your estate planning lawyer. You are way ahead of many of us in that regard.

Some things you might want to discuss with your kids now to get their point of view:

Would they be willing to donate your remaining TIRA assets to charities of their choice at your death? In that case, none of you wouId have to pay the top tax rates on that money but it may be subject to estate taxes.

What would they think of you giving a fixed percentage of your estate to the grandchildren generation? It would be irrelevant of how many grandkids there are and the benefits could be held in your trust for 20 years and by then, the total number of grandkids could then be known (even if born after you die).

You could open up a 529 for yourself and for each child and fund them for 5 years upfront. (Then you would have to wait until year 6 to add more.). Then after you die, your kids can divide them up and change the beneficiaries. (See what your kids think as they may also be opening up 529s.)

No need to discuss with your kids:
Whatever Roth conversions you will do should be done this year, if you will always be in the highest tax bracket. The sooner you convert, the larger the growth will be within the Roth(s). This also is a good year to convert as stock prices are down. Maybe convert $100K anytime the market goes down another 10% and re-assess in November if you should convert some more.

Watch how you list beneficiaries on the Roths/IRAs if your trust doesn’t cover it. You may want to use “per stirpes” where appropriate, to account for a child dying before you and/or divide your Roths/IRAs up into multiple Roths/IRAs.


I’ll be back to see what other suggestions have been made.

Celia
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

Big Dog
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Re: Convert to Roth at Top Tax Bracket?

Post by Big Dog » Sat Apr 25, 2020 4:21 pm

$800k at one time will hit the 37% bracket (single).

With an estimated 12 years to RMD's (or life span), personally, I'd move over a tranche every year, ~$160k, which puts you at the top of 24% bracket, depending on any other income.

As an aside, with declining health, you are probably better off claiming SS earlier rather than later.

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Re: Convert to Roth at Top Tax Bracket?

Post by dmcmahon » Sat Apr 25, 2020 4:43 pm

I am doing the same, I see a likelihood of higher tax rates in future, plus more efforts to extract taxes from estates and capital gains, even after death. So despite being in a high bracket I am also aggressively converting my tax-deferred savings to Roth, a process I started last year, and realizing cap gains, also started last year. I’m holding back some of both for future contributions to either charitable trusts or my donor-advised fund. So long as you don’t see any prospect of a lower tax rate on any conversions, I don’t see a lot of value in deferring it. And as you say, it has the further effect of reducing your taxable estate.

illumination
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Re: Convert to Roth at Top Tax Bracket?

Post by illumination » Sat Apr 25, 2020 5:07 pm

So what is your total estate worth now? You think eventually it will be over $11.4 million? Or you think the exemption gets cut in half and then it's a problem for your estate?

If you feel reasonable certain it will start getting into the estate tax, I would convert the Roth IRA even at a higher tax bracket, especially if you have kids that are also in the top brackets. Any dollars over the estate tax limit you would pay a 40%, and then they would inherit an IRA and pay a top bracket. So it's taxed twice. If you can get the estate under the limit, potentially this same money is only taxed once. I don't know about PA tax and estate taxes, but if that's also one you can escape by lowering the estate with "after tax" dollars, even better

I would also aggressively gift members of your family the max and gift 529s for grandchildren.

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celia
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Re: Convert to Roth at Top Tax Bracket?

Post by celia » Sat Apr 25, 2020 5:08 pm

OP, There’s another concurrent thread in which you may be interested regarding improving the wiki page for ‘Stretch IRAs’:

viewtopic.php?p=5212635
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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celia
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Re: Convert to Roth at Top Tax Bracket?

Post by celia » Sat Apr 25, 2020 5:35 pm

dmcmahon wrote:
Sat Apr 25, 2020 4:43 pm
...I am also aggressively converting my tax-deferred savings to Roth, a process I started last year, and realizing cap gains, also started last year. I’m holding back some of both for future contributions to either charitable trusts or my donor-advised fund.
Why would you want to realize capital gains when your estate will get a step-up In value when you die?

And don’t tax-deferred accounts have to pay the taxes on account withdrawal before you give them to a Charitable Trust or Donor Advised fund? Give IRA assets away, instead, using QCDs after age 70.5.

illumination
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Re: Convert to Roth at Top Tax Bracket?

Post by illumination » Sat Apr 25, 2020 5:48 pm

celia wrote:
Sat Apr 25, 2020 5:35 pm
dmcmahon wrote:
Sat Apr 25, 2020 4:43 pm
...I am also aggressively converting my tax-deferred savings to Roth, a process I started last year, and realizing cap gains, also started last year. I’m holding back some of both for future contributions to either charitable trusts or my donor-advised fund.
Why would you want to realize capital gains when your estate will get a step-up In value when you die?

If you are dealing with a 40% estate tax, getting it under that threshold and paying the capital gains rate instead could be cheaper.

Say you were $100 over the estate tax threshold, and paying a capital gains rate on a security brought the entire estate under the limit.

$100 x 15% capital gains = $85 left
$100 x 40% estate tax = $60 left

Since the highest capital gains is still way lower than the estate tax, it can make sense in those situations.

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dmcmahon
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Re: Convert to Roth at Top Tax Bracket?

Post by dmcmahon » Sat Apr 25, 2020 6:34 pm

illumination wrote:
Sat Apr 25, 2020 5:48 pm
celia wrote:
Sat Apr 25, 2020 5:35 pm
dmcmahon wrote:
Sat Apr 25, 2020 4:43 pm
...I am also aggressively converting my tax-deferred savings to Roth, a process I started last year, and realizing cap gains, also started last year. I’m holding back some of both for future contributions to either charitable trusts or my donor-advised fund.
Why would you want to realize capital gains when your estate will get a step-up In value when you die?

If you are dealing with a 40% estate tax, getting it under that threshold and paying the capital gains rate instead could be cheaper.

Say you were $100 over the estate tax threshold, and paying a capital gains rate on a security brought the entire estate under the limit.

$100 x 15% capital gains = $85 left
$100 x 40% estate tax = $60 left

Since the highest capital gains is still way lower than the estate tax, it can make sense in those situations.
That, plus it's by no means clear the step-up basis will continue. I did mention, discreetly because of forum rules, proposals for extracting more tax from capital gains, even after death! :wink:

MJS
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Re: Convert to Roth at Top Tax Bracket?

Post by MJS » Sat Apr 25, 2020 9:20 pm

cherijoh wrote:
Sat Apr 25, 2020 1:14 pm
With no Roth conversions, I am in the 22% federal bracket. I don't know exactly how much converting I'll end up doing this year but I don't plan to go above the top of the 24% marginal bracket.
Are you also considering the IRMAA brackets in planning Roth conversions?
https://phillipjamesfinancial.com/blog/ ... -surcharge

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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Sun Apr 26, 2020 7:03 am

I'm glad that I decided to post this. I ran the numbers with Turbotax and it appears that if I had made the conversion in 2019, exactly 36% of my TIRA would have gone to taxes. It's a big bite, but after reading all this, esp BSTEINER, I think I'm going to do it. I'll probably wait until after the November election. I might convert half in 2020 and half in 2021 or I might do it all in 2020. Depends on how the tax landscape looks in December. Thank you all for your input. There might be more good thoughts so I'll keep watching.
Last edited by Goodman60 on Sun Apr 26, 2020 8:45 am, edited 1 time in total.

afan
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Re: Convert to Roth at Top Tax Bracket?

Post by afan » Sun Apr 26, 2020 8:36 am

Not clear from your description:

Are you already in the 37% bracket without any Roth conversions?
Or would you enter this bracket only as a result of converting?

If the latter, then you can save on taxes by spreading out your conversions over a number of years so that you do not bump up into the top bracket.
Although you indicate you have a relatively low life expectancy, you have a decade or more to go, assuming no breakthroughs extend that. You have time to do a series of conversions, rather than all at once, perhaps saving a lot of taxes along the way.

This would also let you see how the tax landscape looks each year and adjust your conversions in response. It is possible that changes in valuations of financial instruments, up or down, could be large enough to affect your plans.

Given your plans to leave your money to your children and grandchildren, a trust with those provisions would be better than outright bequests.
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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Sun Apr 26, 2020 8:45 am

This was a duplicate post in error.

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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Sun Apr 26, 2020 8:50 am

afan wrote:
Sun Apr 26, 2020 8:36 am
Not clear from your description:

Are you already in the 37% bracket without any Roth conversions?
Or would you enter this bracket only as a result of converting?

If the latter, then you can save on taxes by spreading out your conversions over a number of years so that you do not bump up into the top bracket.
Although you indicate you have a relatively low life expectancy, you have a decade or more to go, assuming no breakthroughs extend that. You have time to do a series of conversions, rather than all at once, perhaps saving a lot of taxes along the way.

This would also let you see how the tax landscape looks each year and adjust your conversions in response. It is possible that changes in valuations of financial instruments, up or down, could be large enough to affect your plans.

Given your plans to leave your money to your children and grandchildren, a trust with those provisions would be better than outright bequests.
In all honestly, I have to run more numbers to answer your question but I think I'm at or near the top of the tax brackets. I might save a few dollars by spreading it out over a number of years. Like I said above, if I had converted it all to Roth in 2019, 36% of the amount would have gone to taxes.

But the big factor that you're missing here in spreading it out over multiple years is that, while we cannot discuss the odds of this here, my personal concern is that taxes are going to jump fast and furious for single people with high net worth/high income (me). Part of converting the whole TIRA in 2020 is my personal bet on the concern that "it's a huge chunk now versus an even 'huger' chunk later".

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Prokofiev
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Re: Convert to Roth at Top Tax Bracket?

Post by Prokofiev » Sun Apr 26, 2020 8:54 am

Goodman60 wrote:
Sun Apr 26, 2020 7:03 am
I'm glad that I decided to post this. I ran the numbers with Turbotax and it appears that if I had made the conversion in 2019, exactly 36% of my TIRA would have been taxable. It's a big bite, but after reading all this, esp BSTEINER, I think I'm going to do it . . . There might be more good thoughts so I'll keep watching.
What health insurance and LTC insurance do you have? If you are in poor health now at 60, you may expect to incur substantial health care costs over the next 10-15 years. This would be deductible and drop you into a much lower bracket. I would never convert 100%. Years ago, my parents had an IRA we were considering converting at 25%. Turned out that we spent down almost the entire balance at 0% over the next 4 years on nursing home costs.

I see this as a form of tax diversification. Once you pre-pay the $300k of tax, you can never get that back. Your upside is relatively small, but the downside could be quite large. Worst case - your kids get a $800k inherited IRA and pay tax spread over their life-times. Not too bad.
Last edited by Prokofiev on Sun Apr 26, 2020 9:07 am, edited 1 time in total.
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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Sun Apr 26, 2020 9:05 am

Prokofiev wrote:
Sun Apr 26, 2020 8:54 am
Goodman60 wrote:
Sun Apr 26, 2020 7:03 am
I'm glad that I decided to post this. I ran the numbers with Turbotax and it appears that if I had made the conversion in 2019, exactly 36% of my TIRA would have been taxable. It's a big bite, but after reading all this, esp BSTEINER, I think I'm going to do it . . . There might be more good thoughts so I'll keep watching.
What health insurance and LTC insurance do you have? If you are in poor health now at 60, you may expect to incur substantial health care costs over the next 10-15 years. This would be deductible and drop you into a much lower bracket. I would never convert 100%. Years ago, my parents had an IRA we were considering converting at 25%. Turned out that we spent down almost the entire balance at 0% over the next 4 years on nursing home costs.

I see this as a form of tax diversification. Once you pre-pay the $300k of tax, you can never get that back. Your upside is relatively small, but the downside could be quite large. Worst case - your kids get a $800k inherited IRA and pay tax spread over their lives. Not too bad.
This is an EXCELLENT point for me. I have great health insurance (it's expensive but I don't expect it to go away before I hit Medicare). But I'm uninsurable for LTC. I don't like to think about it, but yeah, I could end up spending big dollars on Long Term Care and would be able (or have my tax-aware, responsible adult kids, on my behalf), convert the Roth in years where my out of pocket LTC medical costs lower or zero out my taxable income. Thank you for pointing that out.

Not related to my situation but just something I thought about on your situation...had you done the TIRA-to-Roth conversion, it sounds like you'd be out the money either way...to the nursing home or to Uncle Sam. Perhaps it would have been the nursing home that would have actually lost out to the fact that your parents paid tax to convert. Your family lost either way...life savings all to nursing home or life savings part to IRS and the rest to nursing home. I don't know the exact situation but just saying that it's possible that even picking the right strategy is winning the financial battle but losing the financial war. I'm sorry your parents had to go to a nursing home.

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Prokofiev
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Re: Convert to Roth at Top Tax Bracket?

Post by Prokofiev » Sun Apr 26, 2020 9:25 am

Goodman60 wrote:
Sun Apr 26, 2020 9:05 am

This is an EXCELLENT point for me. I have great health insurance (it's expensive but I don't expect it to go away before I hit Medicare). But I'm uninsurable for LTC. I don't like to think about it, but yeah, I could end up spending big dollars on Long Term Care and would be able (or have my tax-aware, responsible adult kids, on my behalf), convert the Roth in years where my out of pocket LTC medical costs lower or zero out my taxable income. Thank you for pointing that out.


And it doesn't just need to be a nursing home. You could have home health care (nurse) and assistance (maid, cleaners, etc) as deductible expenses for many years while staying in your residence.


Not related to my situation but just something I thought about on your situation...had you done the TIRA-to-Roth conversion, it sounds like you'd be out the money either way...to the nursing home or to Uncle Sam.


No, that's not correct. My parents had $500k in a roll-over IRA and $1.5MM in taxable accounts. We spent about $375k over 3.5 years on my Mom's nursing home and took these expenses out of the IRA virtually tax-free. My father only survived a week in the same facility and had almost no extra expenses. The taxable estate was distributed with step-up basis after her death, so no taxes there. I do have a small inherited IRA that remained
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WoodSpinner
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Re: Convert to Roth at Top Tax Bracket?

Post by WoodSpinner » Sun Apr 26, 2020 9:29 am

bsteiner wrote:
Sat Apr 25, 2020 2:28 pm
In addition, since he's in Pennsylvania which has a 4.5% inheritance tax, a Roth conversion would avoid the double tax resulting from the income tax deduction for estate taxes not being available for the state inheritance tax.
I am not sure I fully understand these points, can someone check my logic?

By converting early and paying taxes (e.g. 36%, by OP estimate for a 1 year lump conversion), you reduce the overall value of the estate. This reduces the PA estate tax as well which is no longer deductible. Is this close?
bsteiner wrote:
Sat Apr 25, 2020 2:28 pm
In other words, whoever receives a traditional IRA gets an income tax deduction for the Federal estate tax on it, to put him/her in about the same position as if the IRA owner had taken the IRA during lifetime and paid the income tax, so only the net after income tax would be subject to estate tax. But the income tax deduction is only available for the Federal estate tax, not state estate or inheritance taxes.
Totally lost on this! Are you saying that if you pay an estate tax on a traditional IRA that it resets the basis (for Federal tax purposes) and you would only pay additional Federal tax on the gains made after the transfer?

WoodSpinner

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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Sun Apr 26, 2020 9:49 am

Prokofiev wrote:
Sun Apr 26, 2020 9:25 am
Goodman60 wrote:
Sun Apr 26, 2020 9:05 am

This is an EXCELLENT point for me. I have great health insurance (it's expensive but I don't expect it to go away before I hit Medicare). But I'm uninsurable for LTC. I don't like to think about it, but yeah, I could end up spending big dollars on Long Term Care and would be able (or have my tax-aware, responsible adult kids, on my behalf), convert the Roth in years where my out of pocket LTC medical costs lower or zero out my taxable income. Thank you for pointing that out.


And it doesn't just need to be a nursing home. You could have home health care (nurse) and assistance (maid, cleaners, etc) as deductible expenses for many years while staying in your residence.


Not related to my situation but just something I thought about on your situation...had you done the TIRA-to-Roth conversion, it sounds like you'd be out the money either way...to the nursing home or to Uncle Sam.


No, that's not correct. My parents had $500k in a roll-over IRA and $1.5MM in taxable accounts. We spent about $375k over 3.5 years on my Mom's nursing home and took these expenses out of the IRA virtually tax-free. My father only survived a week in the same facility and had almost no extra expenses. The taxable estate was distributed with step-up basis after her death, so no taxes there. I do have a small inherited IRA that remained
Well, I'm sorry you ended up spending that much on your mother's care. But glad your tax bet turned out right for you. Hopefully all that money spent provided great care for your mom in her last years.

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Re: Convert to Roth at Top Tax Bracket?

Post by bsteiner » Sun Apr 26, 2020 10:28 am

WoodSpinner wrote:
Sun Apr 26, 2020 9:29 am
bsteiner wrote:
Sat Apr 25, 2020 2:28 pm
In addition, since he's in Pennsylvania which has a 4.5% inheritance tax, a Roth conversion would avoid the double tax resulting from the income tax deduction for estate taxes not being available for the state inheritance tax.
I am not sure I fully understand these points, can someone check my logic?

By converting early and paying taxes (e.g. 36%, by OP estimate for a 1 year lump conversion), you reduce the overall value of the estate. This reduces the PA estate tax as well which is no longer deductible. Is this close?
bsteiner wrote:
Sat Apr 25, 2020 2:28 pm
In other words, whoever receives a traditional IRA gets an income tax deduction for the Federal estate tax on it, to put him/her in about the same position as if the IRA owner had taken the IRA during lifetime and paid the income tax, so only the net after income tax would be subject to estate tax. But the income tax deduction is only available for the Federal estate tax, not state estate or inheritance taxes.
Totally lost on this! Are you saying that if you pay an estate tax on a traditional IRA that it resets the basis (for Federal tax purposes) and you would only pay additional Federal tax on the gains made after the transfer?
...
You're close.

Suppose you have a $1 million IRA and you and your beneficiaries are in a 40% income tax bracket. If you withdraw your IRA during your lifetime, or if you convert to a Roth, and pay $400,000 of income tax, only $600,000 (your $1 million IRA less $400,000 of income tax will be included in your estate. If there's no state estate or inheritance tax, the estate tax on this $600,000 will be $240,000, and your beneficiaries will have $360,000 after income and estate taxes.

Suppose instead you died holding your $1 million traditional IRA. One might think that the estate tax value of the IRA would be $600,000, so that the result would be the same. Instead, whoever receives the IRA gets an income tax deduction for the $400,000 of estate tax, and only pays income tax on $600,000. The income tax is $240,000, and your beneficiaries will have $360,000 after income and estate taxes. So ignoring the other benefits of the Roth conversion, the result is the same either way.

Suppose, however, that you live in a state that has a state estate tax and that you're in the 16% state estate tax bracket. (That was the top bracket in every state before 2002.) The state estate tax is deductible against the Federal estate tax (at one time it was a credit.) So your estate tax bracket is 16% state and 33.6% Federal, for a total of 49.6%. You die holding your $1 million traditional IRA. Your estate pays $160,000 of state estate tax and $336,000 of Federal estate tax, for a total of $496,000. Your beneficiaries collect your IRA, deduct the $336,000 of Federal estate tax, and have taxable income of $664,000, and pay income tax of $265,600. The total estate and income taxes are $761,600, and they're left with $238,400.

If you instead withdrew or converted your IRA to a Roth, you would have paid $400,000 of income tax. The remaining $600,000 would be subject to estate tax at 49.6%. The estate tax would be $297,600. The total income and estate taxes are $697,600, and they're left with $302,400, which is about 27% more than if you didn't convert.

The effect of this isn't as great in Pennsylvania since the inheritance tax on transfers to issue is only 4.5%.

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Re: Convert to Roth at Top Tax Bracket?

Post by afan » Sun Apr 26, 2020 11:54 am

Goodman60 wrote:
Sun Apr 26, 2020 8:50 am

But the big factor that you're missing here in spreading it out over multiple years is that, while we cannot discuss the odds of this here, my personal concern is that taxes are going to jump fast and furious for single people with high net worth/high income (me). Part of converting the whole TIRA in 2020 is my personal bet on the concern that "it's a huge chunk now versus an even 'huger' chunk later".

But you need to model the costs and savings against the risk of tax increases, how high and how soon.

If 36% of the total conversion would go to taxes, then you are well below the 37% bracket before switching to Roth. You would pay a lot in extra taxes to do it all this year.

The inheritance tax issue would somewhat favor converting. You might also consider moving to a state without a death tax.
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Re: Convert to Roth at Top Tax Bracket?

Post by cherijoh » Sun Apr 26, 2020 2:55 pm

MJS wrote:
Sat Apr 25, 2020 9:20 pm
cherijoh wrote:
Sat Apr 25, 2020 1:14 pm
With no Roth conversions, I am in the 22% federal bracket. I don't know exactly how much converting I'll end up doing this year but I don't plan to go above the top of the 24% marginal bracket.
Are you also considering the IRMAA brackets in planning Roth conversions?
https://phillipjamesfinancial.com/blog/ ... -surcharge
I turn 62 in December this year. I don't have to worrry about IRMAA yet. I'm not even sure I need to worry next year since the surcharge for 2023 (based on 2021 taxes) would only apply for my first month of Medicare enrollment due to my Dec birthday. I do plan to factor that in for 2022 and beyond.

But I think I should be able to do small Roth Rollovers in years I'm not selling too much out of my taxable investments. I have some shares in an international index fund in taxable that are currently underwater, so I am also contemplating doing some tax loss harvesting this year that may result in tax loss carryovers for future tax years.

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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Mon Apr 27, 2020 10:01 am

I'm the Original Poster. I went back and ran some more Turbotax scenarios. If I use my 2019 tax return (I expect the next few years to look somewhat similar), and converted my entire TIRA in 2019, the tax man would have gotten 36% of it.

If I did the conversion over 2 years, or converted half in 2019, the tax man would have gotten 35% of it.

If I did the conversation over 4 years, or converted 1/4th in 2019, the tax man would have gotten 31% of it.

If we knew tax rates would be the same through 2025, it would make sense to spread the conversion out. But the savings might not be great enough, versus converting all in 2020 and letting the tax man take 36% of it, to roll the dice that taxation will stay the same for that long.

So I think I'm back to where I was to begin with...see how the election pans out (we can't discuss that, but we can agree that it's prudent to wait until after that before making tax bets) and decide in November/December what to do.

Anyone else reading this have more insights on this with this additional data?
Last edited by Goodman60 on Mon Apr 27, 2020 3:57 pm, edited 1 time in total.

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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Mon Apr 27, 2020 3:56 pm

Sorry, I again reposted instead of editing my above reply...that I did finally edit correctly.

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Re: Convert to Roth at Top Tax Bracket?

Post by FiveK » Mon Apr 27, 2020 5:07 pm

Goodman60 wrote:
Mon Apr 27, 2020 10:01 am
If I did the conversation over 4 years, or converted 1/4th in 2019, the tax man would have gotten 31% of it.
IRMAA tiers become an issue when you reach age 63. You could calculate those separately from TurboTax or use a tool such as the two spreadsheets below that include both taxes and IRMAA:
personal finance toolbox
Retiree Portfolio Model

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Re: Convert to Roth at Top Tax Bracket?

Post by busdriver » Mon Apr 27, 2020 5:26 pm

Not being sure what tax rates will be in the future, all we have to plan with is what's on the books for now. With that in mind, current rates/brackets extend thru 2025 with reversion to 2017 rates/brackets resuming in 2026. That's what I am using for planning purposes.

Our plan is to use the next four to five years to convert our total low seven digit IRA accounts to Roth in hopes to lessen taxes over our lifespan and have substantial Roth account to pass on to heirs. We will most likely venture into 37% bracket territory this year and use 35% for remaining years.

I have been using Income Strategy website, (www.incomestrategy.com), to run different plans to see the results. Subscription runs $20/month and can cancel at any time. After inputting personal data and linking accounts it comes up with several plans to show what taxes and final balance would be at the end of the life you input. The software is aware of IRMAA and its' tiers. This may or may not be of value to you, but might be worth $20 for a month to play with. I've been subscribing for almost two years now and after a few expert help sessions, ($125), have been able to come up with a few plans that beat the best of strategies that are built into the program. With wild swings of the market, (up or down), the optimal plan can change. The plan's bias is for highest ending balance without regard to taxes paid, so comparing plans can help decide where the best value is.

When the market dipped the middle of March, I made a partial conversion. Should there be another large dip before year-end, I will fill-up the balance conversion for the year; otherwise, will do it at year-end.

You might want to try contacting CPA/Attorney James Lange, (author of Forbes article linked in previous post), for input and plan as this is his specialty. I have most of his books and they are invaluable. His website is https://paytaxeslater.com.

Please keep us posted on what you decide.

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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Tue Apr 28, 2020 11:34 am

busdriver wrote:
Mon Apr 27, 2020 5:26 pm

Please keep us posted on what you decide.
I'll do nothing for now and re-evaluate after the November election. I'll try to remember to come back here and post at that time. Thank you all for your help here. This post and the ideas that came from it (esp keeping some in Roth to cover an eventual tax-free conversion in years where I might have big medical bills) are very helpful. I'm leaning toward converting 1/4 of my traditional IRA in December of this year and another 1/4 in 2021, unless my interpretation of the election causes me to accelerate and do it all in 2020. And I'll leave the other half as a Roth, available for conversion, if and when I have big medical bills someday.

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Re: Convert to Roth at Top Tax Bracket?

Post by stateofsss » Tue Apr 28, 2020 10:48 pm

I wouldn't do it. Let your kids inherit the money and then they can take it out over 10 years. I don't think they need it, but this is just too big of a tax hit especially with everything going on in the world.

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Goodman60
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Re: Convert to Roth at Top Tax Bracket?

Post by Goodman60 » Fri May 01, 2020 9:48 am

stateofsss wrote:
Tue Apr 28, 2020 10:48 pm
I wouldn't do it. Let your kids inherit the money and then they can take it out over 10 years. I don't think they need it, but this is just too big of a tax hit especially with everything going on in the world.
You may be very well right. I'll continue to think on this and see how the world rapidly evolves as we get through 2020.

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