I am mid 50s and met with my CPA and, especially with equity prices down, I am going to try to convert as much as I can of my traditional IRA to a Roth IRA but stay in the 24% Fed tax bracket, as it jumps up to 32% beyond. Short term tax pain, but hopefully it will be well worth it in 10+ years at withdraw time. I currently have 35% of IRA $ in a Roth and 65% in a Traditional IRA. There seem to be so many advantages to Roth IRA, not only for the individuals involved but also for those that may inherit these accounts with no RMDs. I am not planning to touch these funds for 10+ years. Have others here done the same or planning to do the same? Many Thanks!
Hopefully, your CPA also made you aware of the 3.8% NIIT (Net Investment Income Tax) tax, which kicks in over an AGI (before deductions) of $250k for MFJ and $200k for Single/HOH. Conversion income is not considered investment income, but if you have any other investment income (dividends, capital gains, interest, etc.) it would be subject to NIIT if you actually did conversions to push your income to the very top of the 24% bracket.
Not exactly. IRAs (including Roth IRAs) inherited by non-spouses were required to take RMDs even before the SECURE Act. The SECURE Act changed that to a requirement for inherited IRAs to be fully disbursed within 10 years of the original owners death, but didn’t say anything about RMDs during those 10 years. In February, 2022, the IRS issued proposed rules relating to the SECURE Act that required non-spouse beneficiaries of IRAs (including Roth IRAs) inherited after 2019 to not only fully disburse the inherited account within 10 years after the death of the original owner, but would also require beneficiaries to take an RMD for each of those 10 years. These regulations could go into effect as early as January, 2023.
I’ve been doing Roth conversions for several years.
AJ
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Hi @WEBspired,
I started doing annual conversions in 2010.
In Jan 2022, I took my first and last RMD then converted the remainder of the IRA.
Gene
All holdings and some statistics on my Fool profile page
https://community.fool.com/u/gdett2/activity (Click Expand)
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YES!! This is our first year doing a conversion.
Both DW and I have 100% in TIRAs and have opened up Roth IRA accounts at Fidelity where we have our TIRAs. In order for me to determine how much we can convert this year and stay in the 12% bracket, I purchased H&R Block Tax software to do my best simulation of where we will be at the end of December, then did “what if” scenarios of various conversion amounts (reported on 1099-R) within the software to determine how much we can convert.
It looks like we are able to convert about 10% of our TIRA this year and still stay within our 12% bracket. This adds approximately $5,000 in Fed Tax and changes our tax return from getting a $1,000 refund to paying $4,000. We will pay this tax bill from our after tax savings account.
We plan on doing this for the next 7 years or so as we are just turning 65 now and will be subject to RMDs in 7 years.
I like the option of the Roth account being totally tax free now and the fact that the amount in our Roth will not be subject to RMDs which would put us in a much higher tax bracket in later years.
Hope this helps!
'38Packard
==> TIRA → Roth Conversion newbie
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I was recently reading about this and thought I saw where you had to have your Roth for five years. Was I mistaken on this? Thanks…doc
Well, in order to take qualified withdrawals, so that you don’t have to pay any taxes or penalties on whatever money you withdraw, you must meet 2 criteria:
- You must have had a Roth IRA open and funded for at least 5 tax years
- You must be at least 59 1/2, dead (so actually your beneficiary would be making the withdrawals), disabled or meet another exception, as listed in IRS Pub 590-B 2021 Publication 590-B (irs.gov)
If you don’t meet both of those criteria, then there are ordering rules to determine if you will pay taxes and/or penalties on withdrawals. That said, if you are already over 59 1/2 but you are just now starting a Roth IRA by doing conversions rather than contributions, you’re pretty much going to be putting the money away for 5 years to avoid taxes and penalties, because each conversion is also subject to it’s own individual 5 year rule - so you better be pretty sure you’re not going to need the money for a while.
I will also point out that Traditional retirement account withdrawals/RMDs aren’t necessarily something to be totally avoided, especially if you are planning on self-funding for any end of life medical costs, like long-term care. If you are going to be digging into those retirement accounts to pay for enough in expenses to get a Schedule A deduction, you can often end up paying little or no taxes on your Traditional account withdrawals. Additionally, you always have at least the standard deduction, plus the lower brackets (currently 10% & 12%, scheduled to revert to 10% and 15% beginning in 2026) to fill up before you are likely to start paying taxes even close to the rate that you avoided when making the contributions. So trying to convert your entire Traditional account balance to a Roth account is likely to be sub-optimal from a lifetime tax standpoint.
AJ
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Thanks to all for your interests and comments. AJ, great point, I will try to lower conversion to keep total AGI under 250K total, as my COA did not mention the NIIT. My current Roth has been active well over 5 years. Do I understand you correctly that with any New conversion $ to the Roth that I would need to wait at least 5 years before withdrawing those funds without tax? The new inheritance rules are helpful as well. Thanks everyone for your insight!
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Since your current Roth has been active for more than 5 years, once you reach 59 1/2, the conversion clock doesn’t matter. If you want to take withdrawals before you are 59 1/2, you need to follow the ordering rules outlined in Pub 590-B (linked above), which allows you to take out original contributions first without taxes or penalties, and then conversion contributions by year. For those conversions that are at least 5 years old, there are no taxes or penalties. If the conversion is less than 5 years old, there will be a penalty. If you get to the point in the ordering rules where you are withdrawing earnings before 59 1/2, there will be both taxes and penalties.
AJ
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For my own use/purposes, I created a “cheat sheet” to help me quickly reference when Taxes and/or the 10% Penalty might be applied to Roth IRA distributions (I’m assuming all Converted principal amounts were already taxed in the year they went into the Roth):
| Pre-59.5 | Post-59.5 | |||
|---|---|---|---|---|
| < 5 yrs | > 5 yrs | < 5 yrs | > 5 yrs | |
| Contributions | - | - | - | - |
| Conversions | Penalty | - | - | - |
| Earnings | Tax+Penalty | Tax+Penalty | Tax | - |
Note that the 5-year test is applied differently to Conversions and Earnings, although both consider the starting date to be January 1 of the starting year:
- Conversions: 5-year timeline applies individually to each Conversion
- Earnings: 5-year timeline starts with the tax year of the first Roth IRA Contribution
Additionally, there are Exceptions which can exempt distributions from the 10% Penalty.
I found this to be a helpful resource: Roth IRA Withdrawal Rules — Oblivious Investor
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Hi Gene,
When you strategized your Roth conversion strategy to optimize (or minimize) the tax due, did you use any particular financial planning software to help you? I need an incremental plan
I don’t think such a thing exists standalone. That’s because the Roth conversion decision is:
- Very individual
- Depends on various personal assumptions
- Depends on various legislative assumptions
And all three of the above are assumptions over a relatively long period of time that spans years and decades.
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Hi @pneuma,
When I discovered my “issue” with having a rather large trad IRA when RMD’s start, I was using the Quicken Lifetime Planner. NOTE: The “problem” had to do with the size of our trad IRA assets, not simply the “start of RMD’s.”
At any rate, to plan for our conversion amounts, I used a fairly simple spreadsheet.
Basic components:
- A column of Income
- A column of deductions
- A table of Tax Rates and Bracket Info
- Standard Deduction Info (to compare to deductions)
If you are 63 or older and plan to start Medicare at 65, you need to include a table of IRMAA offsets for Medicare since conversion amounts may affect this.
This was always an estimate. Normally, I did my conversions on the first business day of the year. Some years, I did 75% to 90% then, leaving the rest for later in the year. I did that when I thought I might have extra income later in the year.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)
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I can’t say I strategized my ROTH conversions. Once I heard about and understood the RMD issue I followed a simple (minded) approach. Toward the end of the year I did a rough-cut estimate of my income and taxes for the year. The goal was to calculate how much more taxable income it would take before I hit the top of the 24% bracket. Whatever that was, that was the number I would enter when initiating the conversion on my custodian’s (broker’s) web site, 24% of the amount going to federal taxes and 7% to state.
Besides being a procrastinator, I did this late in the year because my IRA withdrawals are not especially predictable. For 2023 there were five withdrawals before the December conversion, sometimes two months in a row, other times after two months of none. So far this year I haven’t had to do any, but that will change soon.
I would point out that in addition to trying to hit the top of a particular bracket, the NIIT (Net Investment Income Tax) limits also need to be considered. This is an additional tax of 3.8% that is applied to investment income (dividends, capital gains, interest) above an AGI limit. Here are the limits by filing status:
MFJ - $250k
Single, HOH - $200k
MFS - $125k
The NIIT limit is not indexed to inflation. That means while a single filer is able to convert to the top of the 24% bracket in 2024 ($191,950) without triggering NIIT on their investment income, that might not be true in 2025. For 2024, MFJ filers can only convert $49,950 into the 24% bracket before triggering NIIT.
AJ
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Good point, AJ. Since all my significant investments are currently within my IRA and ROTH it doesn’t apply to me - yet. When I have to deal with RMDs next year, any excess beyond expenses will probably go into my first accounts, that might eventually start producing enough of such income to matter.
I must also say that I have learned so much from reading your participation on these boards, and I am really grateful for that. Your tremendous contribution is much appreciated. Thanks a heap!
Hi @aj485,
Unless you have a bunch of sales/dividends/interest in a taxable account, royalties, passive partnerships, or some other NIIT applicable income while doing Roth conversions, NIIT does not apply.
NIIT only applies to the lesser of the amount of the “special income” or the amount over the threshold.
Pub 590-B says: net investment income doesn’t include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), or 457(b) plans, and IRAs).
They apply to AGI but are not included in NIIT.
Correct?
Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)
Does Roth conversion amounts count as “investment income” for NIIT? Let’s say a couple has $200,000 ordinary W-2 taxable wage income, and converts $100k TIRA to Roth IRA. Do they have to pay NIIT on the $50k conversion above the $250k base amount (MAGI)?
Hi @MarkR,
Per Pub 590-B, No.
See my post above yours.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)
Not correct. NIIT applies when your total income (i.e. AGI - not just investment income) is greater than the NIIT limit. It is applied to the amount of investment income above the limit.
No. You have to think of income as a stack, with investment income at the top. Any investment income that’s over the NIIT limit will have the NIIT tax applied.
AJ
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No.
Since they don’t have any investment income, they don’t have to pay NIIT. However, if their income were instead:
$125k W-2 wage income
$75k investment income (capital gains, dividends and/or interest)
$100k conversion income
Then they would owe NIIT on $50k of the investment income.
AJ