tIRA to Roth because of 2027 deadline on tax brackets

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Stoic9
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tIRA to Roth because of 2027 deadline on tax brackets

Post by Stoic9 » Fri Mar 15, 2019 6:37 am

I'm at the bottom of the 22% bracket so whether I take now or later my money will be taxed at 22% based on current rules. However I turn 70 in 2027 which is when tax brackets are scheduled to raise back up (if not sooner). Anyone else considering this strategy?

rkhusky
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Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by rkhusky » Fri Mar 15, 2019 7:27 am

I thought the TCJA was currently valid through 2025.

Retiredron
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Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by Retiredron » Fri Mar 15, 2019 7:33 am

The key question is: Are you sure your marginal tax bracket will not be 25% when the current tax rates expire in 2026? Have you built a spreadsheet showing your estimated projected annual income from 2019 through your early 70s? If not, I would recommend you undertake that exercise which will include required RMDs and SS. When I did my spreadsheet recently it was a real eye opener.

While we can't predict future tax rates I have taken a conservative approach in my spreadsheet and used the higher tax rates starting in 2026 and beyond. When I projected my income in 2026 and 2027 I'm in the 25% bracket. With some significant partial Roth conversions starting now and continuing the next 5 years I'm able to bring my RMDs down about $22K per year which gets me back below the 25% bracket. I will be able to stay within the current 22% bracket the next 5 years doing these partial Roth conversions and plan to delay SS until 70. I'm currently 64.

Hope this helps.

Topic Author
Stoic9
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Joined: Mon Dec 10, 2018 7:14 am

Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by Stoic9 » Fri Mar 15, 2019 9:08 am

Retiredron wrote:
Fri Mar 15, 2019 7:33 am
The key question is: Are you sure your marginal tax bracket will not be 25% when the current tax rates expire in 2026? Have you built a spreadsheet showing your estimated projected annual income from 2019 through your early 70s? If not, I would recommend you undertake that exercise which will include required RMDs and SS. When I did my spreadsheet recently it was a real eye opener.

While we can't predict future tax rates I have taken a conservative approach in my spreadsheet and used the higher tax rates starting in 2026 and beyond. When I projected my income in 2026 and 2027 I'm in the 25% bracket. With some significant partial Roth conversions starting now and continuing the next 5 years I'm able to bring my RMDs down about $22K per year which gets me back below the 25% bracket. I will be able to stay within the current 22% bracket the next 5 years doing these partial Roth conversions and plan to delay SS until 70. I'm currently 64.

Hope this helps.
With the current projections I have a about a 90K spread before I reach the next tax bracket (22-24) or possible future 25% in 2027. I can see an increase of 30K for SS in 2027 and a possible 10-15K increase through other funds. That still leaves 45K with projected RMD of 30-35K so I believe I will either be in the 22% if the tax brackets become permanent or 25% if they expire. I believe they will expire. We all make assumptions when planning our futures, another I make is life expectancy (for me 75 +- 2 years). I was curious if anyone else made this assumption on taxes and developed a plan. The plan I'm exploring is taking out of IRA and pay 22%, place in taxable accounts to pass on to child as opposed to waiting for RMD's and paying 25% and putting in taxable. The outlier is possible gains.

Topic Author
Stoic9
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Joined: Mon Dec 10, 2018 7:14 am

Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by Stoic9 » Fri Mar 15, 2019 9:10 am

rkhusky wrote:
Fri Mar 15, 2019 7:27 am
I thought the TCJA was currently valid through 2025.
Correct, affecting the 2026 tax year, however I hit RMD in 2027.

Richard1580
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Joined: Fri Aug 25, 2017 7:53 pm

Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by Richard1580 » Fri Mar 15, 2019 9:19 am

My wife and I are retired. When I did income/spending projections over the next 10 years, I discovered that RMDs were going to be substantial and far beyond our anticipated needs.

I do not expect that the tax cuts will be extended. Given that scenario, we decided to begin converting our tIRAs to Roths and take advantage of the reduced tax rates. It is a case of “pay me now or pay me (more) later.”

Putting together a cashflow spreadsheet that extended to our RMD dates was eye-opening.

TBillT
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Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by TBillT » Fri Mar 15, 2019 10:08 am

It is law speculation which is not encouraged here...I've heard some talk of moving the RMD age out older like SS, so it can go both ways.

But yes you have to look at your current tax bracket and do an RMD calcuation to see what might happen at RMD time. Then you have make a judgement call. If you are very heavy tIRA which is probably getting more common now as baby boomers were really the first to have IRA's and 401Ks for most but not all of their careers, then you can see the handwriting on the wall.

retiringwhen
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Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by retiringwhen » Fri Mar 15, 2019 10:14 am

TBillT wrote:
Fri Mar 15, 2019 10:08 am
It is law speculation which is not encouraged here...I've heard some talk of moving the RMD age out older like SS, so it can go both ways.

But yes you have to look at your current tax bracket and do an RMD calcuation to see what might happen at RMD time. Then you have make a judgement call. If you are very heavy tIRA which is probably getting more common now as baby boomers were really the first to have IRA's and 401Ks for most but not all of their careers, then you can see the handwriting on the wall.
For planning purposes, the law IS that rates will go up in 2026. It reasonable to discuss plans that agree with that truth as a valid assumption.

I am planning Roth Conversions with that assumption as part of my estimates. With that said, the future is undefined, so an individual should make their own assumptions and analyze their situation with probably more than one possible COA in the future when it comes to tax rates.

Richard1580
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Joined: Fri Aug 25, 2017 7:53 pm

Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by Richard1580 » Fri Mar 15, 2019 10:21 am

retiringwhen wrote:
Fri Mar 15, 2019 10:14 am

For planning purposes, the law IS that rates will go up in 2026. It reasonable to discuss plans that agree with that truth as a valid assumption.

I am planning Roth Conversions with that assumption as part of my estimates. With that said, the future is undefined, so an individual should make their own assumptions and analyze their situation with probably more than one possible COA in the future when it comes to tax rates.
Spot on. I would stress that everyone should factor in the impact RMDs will have on your tax situation in retirement (in so far as that is practicable). The result might surprise you and impact your planning.

dknightd
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Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by dknightd » Fri Mar 15, 2019 10:40 am

I do not see taxes going down. But I could be wrong

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: tIRA to Roth because of 2027 deadline on tax brackets

Post by rkhusky » Fri Mar 15, 2019 11:59 am

Stoic9 wrote:
Fri Mar 15, 2019 9:10 am
rkhusky wrote:
Fri Mar 15, 2019 7:27 am
I thought the TCJA was currently valid through 2025.
Correct, affecting the 2026 tax year, however I hit RMD in 2027.
Affecting up to the 2025 tax year, the tax returns of which are filed in 2026.

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