So I have been creating spreadsheets to crunch the numbers and using online calculators to verify, and I can’t find a reasonable scenario where I wouldn’t be ahead to convert my large (to me) deductible Traditional IRA to Roth. I am in the fortunate situation where I could pay the tax bill for the conversion from proceeds from a taxable stock account. Even considering that it bumps me to the 32% tax bracket in 2018 it still seems to be the best decision for maximizing my future after tax income along with the added benefit that it gives me more flexibility. Am I missing something? Since the current year tax consequences are a 6 figure impact, I am stressing about this decision. I have met with numerous financial planners over my 20 year investing career and am always disappointed in their lack of insight. Seems like I usually pay for someone’s advise that is less knowledgeable than me. So I’m asking this board if anyone has experience with this. In what scenario would it be a bad idea to convert from a deductible traditional IRA to a Roth IRA when you can pay the current tax bill with outside funds?Thanks for your help!
So I’m asking this board if anyone has experience with this. In what scenario would it be a bad idea to convert from a deductible traditional IRA to a Roth IRA when you can pay the current tax bill with outside funds?Thanks for your help! - 2020investor-----------------I have been doing this is pieces each year for several years. Rather than doing a conversion all at once, I compute an amount to convert that will take me to the top of the 25% bracket. With the new tax law, my target for this years conversion is to top off the 24% bracket. By spreading your conversions over multiple tax years, you may not have to kick up into the 32% marginal rate.Another angle I looked at was how much will I still have in the traditional IRA by the time RMD's kick in at age 70 1/2. My concern was RMD's making my SS taxable. When I did that calculation I learned my other income was going to make my SS taxable anyway, so it became a moot point.Another angle that I have been thinking about lately but haven't put a spreadsheet to is to convert a much larger amount now and trigger the additional marginal tax rate. This may be favorable if you assume there will be much higher investment returns over the next 5 or 6 years under a Trump economy. If I convert slowly then most of those capital gains will be taxed as ordinary income coming out of the traditional IRA in annual pieces versus being tax free if those gains occur in my Roth.Food for thought. Good luck!
I'll second bighairymikes suggestion. Do partial conversions over several years to keep in the lower tax brackets.Also try to get it done before you start on Medicare. The extra income can kick you into high income groups raising your payments by several thousand per year.
I too have been using annual conversions since my first retirement year up until a few years ago when our AGI got us into the 25% bracket. Generally, the earlier in retirement, the better, so as to let the investments build up in the RIRA and not the TIRA. Were I doing this again, I think I'd 'rip the band-aide off' all at once and convert the whole TIRA enchilada the first retirement year. Yes, the tax bill would be ugly....but all other income would be low (no pension or SS yet), there'd be no IRMAA yet and all future growth and dividends would be tax free....and I wouldn't be staring at big RMDs on the horizon.BruceM
2020investor,Not an answer that exactly addresses your OP, but...If you do alot of charitable contributions (or expect to), charitable contributions from a 401K count towards your RMDs and you do not pay tax on those contributions.I was wrestling with your situation until a couple of years ago when I read about this. We have $350K in 401K accounts and have 6 years until we have to take RMDs. I expect we will be making $20K in charitable contributions when we hit 70 1/2, so, if we do not need the money to subsidize our lifestyle, I will use it for the charitable contributions.Yeah, I won't get to count them on my itemized deductions, but, by then, I will be using the standard deduction anyway.Just another thought for you to ponder. :)PW
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