HWhen I say ‘tax bomb’ I am referring to what happens to millions of retirees who max out all of their tax exempt retirement accounts for decades, and then are forced to take rmd’s out of those accounts in the year in which they celebrate their 73rd birthday. When it comes time to take rmd’s out of a multimillion dollar tax sheltered account, he runs the risk of paying taxes at a rate of 32%, 37% or even higher (if a spouse dies and starts paying as a single taxpayer, and/or the tcja has expired).
He looks backwards and sees that he has frugally lived on retirement income of, say, $120,000 per year at a 22% maximum tax rate. He also sees that the tax rate was 22% up to $201,000 at that time. He could have shifted thousands of dollars from his 401k to a Roth IRA annually, paid a 22% tax each year, and then watch it grow tax free and not be subject to rmd’s or additional taxes thereafter.
I did not know anything about Roth IRA conversions for years because my cpa told me I made too much money for traditional Roth contributions. I didn’t think to ask the question until I read a post by aj345 here at tmf. After dilly dallying a year or two, I showed my numbers to my cpa and she helps me figure how much to convert each year.
It is a fact based decision made on an annual basis. I am conservatively converting up to the 24% threshold, and I arguably could profit by converting up to the 32% threshold.