OT: IRA Roth Conversion
- Thread starter fg7321
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Not an expert on this. But, what I see as attractive is that, if you retire without a substantial pension and defer social security, you will have a number of years with low income before you must take RMDs. This allows you to potentially convert pre-tax retirement funds to a ROTH and pay tax at a low rate. Most advisors try to help avoid their clients from getting slammed by having large RMDs. Others can add much more detail on this topic.
You don't NEED to do this. It's a complex decision based on a lot of personal factors. The benefit you get is the tax free buildup in assets after conversion, but that is one factor among many.
I've never done a really deep dive on this. But on the surface, it doesn't make sense for me.
If you're 60, retired, and you think you'll live until you're 90, it may make sense. But I'm 60, still working, and will likely be dead around 80. So I don't see how doing this is better for me.
If you're 60, retired, and you think you'll live until you're 90, it may make sense. But I'm 60, still working, and will likely be dead around 80. So I don't see how doing this is better for me.
I retired at 53 and didn’t realize the tax benefit until a few years later. If you look at the tax table 2026 for single the 12% tax rate upper range is $50,400 and any income over that starts at 22%. Add in the standard deduction of $18,150 and tax for 12% is $68,540 but Trump added additional $6,000 deduction until 2028 to get to 74,540 for the upper limit for 12%. You can convert up to $74,540 into a Roth for 12% tax rate a year If you don’t have any other taxable income. This save you at least 10% increase in tax rate assuming you have a substantial 401k or IRA of at least $1.4 million. I transferred about 25-30,000 a year over to a Roth to stay under the 12% tax rate upper limit. In additional the tax rates should increase in the future due to the deficit.
The conversion only works if you retire early and don’t take social security until 67 and you have a substantial amount in your 401k or IRA. The saving is at least the 10% increase in tax rates and more if rates increase in the future. This applies even more going from the 24% tax rate to 32% tax rate but your IRA would need to be around $10 million maybe.
The conversion only works if you retire early and don’t take social security until 67 and you have a substantial amount in your 401k or IRA. The saving is at least the 10% increase in tax rates and more if rates increase in the future. This applies even more going from the 24% tax rate to 32% tax rate but your IRA would need to be around $10 million maybe.
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We did several conversions from tIRA to Roth. We have fairly substantial assets in tIRAs and when one of us passes RMDs will become onerous. Another reason we converted was for estate planning purposes. As stated by others, many factors should be taken into consideration.
If you are in the fortunate position (unfortunately I'm not) to be worried about estate tax then paying the income tax reduces your taxable estate subject to a 40% rate. I should add this holds true in some states although the benefit is less
It all depends on your current tax bracket vs your future one. Makes sense for some, not for others. I'm in the latter category, so no conversions for me.
^^^^^ Perfect scenario on when a conversion makes a lot of sense.
One other factor to think about when converting is that you can't withdraw the monies from the conversion for 5 years. However, I was looking to increase my tax-free income so I converted "in kind" some income producing equities from my IRA to a Roth and am allowed to withdraw the income the equity gives off tax-free as long as I don't withdraw the principal that was converted. I've been able to increase my tax-free income substantially by doing this, knowing full well that I had to pay taxes on the conversion.
For us its about estate planning, not estate tax. The kids will get the Roth tax free, along with a stepped up basis in stocks we've held for decades that are in in a taxable account.
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Worst case scenario is husband dies with large pre-tax retirement accounts. Widow gets taxed as a single on large RMDs. Family would have experienced an overall lower tax rate by converting while husband was alive. No one knows the answers. Each case is individual. But, on average, building a nice balance between pre-tax and Roth makes the best sense. In my case, I will have a large post-retirement income from 65 (pension) so I don't have a window to do Roth conversions. Absent, that, I would be doing them to achieve lower taxation. Makes huge sense for people that retire early.
One other point, I don’t want to leave a significant IRA to my beneficiaries. I rather leave them a Roth IRA. Depending on when you pass, if it’s earlier than 90, your beneficiaries may still be working in their 50-60’s. Their tax rate might be as high as 40-50% including the state income tax. That’s another reason you might do a Roth conversion with you paying even 12-24% vs them paying 40-50%.