As I understand it, the decision to convert a traditional IRA to a Roth is all about the lowering the marginal tax rate on the converted amount. So for example, someone might top off the 12%, 22% or 24% bracket, because these might revert to 15%, 24% and 28% in 2026. Or by converting prior to RMDs and/or starting Social Security, someone can subject an amount to a lower tax rate.
As an alternative tax avoidance strategy I am considering living on funds from taxable brokerage accounts until I have liberated all of my capital gains. I would limit my AGI to not exceed the 0% capital gains ceiling.
This would appear to save 15%, which is probably much more than the Roth conversion would. Am I missing anything? I know a lot depends on how much is left to heirs versus being spent. Both the Roth IRA and leaving stocks with stepped-up basis have advantages over the traditional IRA
Another factor to consider is how much income the heirs already are making, both relative to the parents and to each other. My brother and his wife have a daughter who is an MD with a very high income, and she is married to another MD who is doing just as well. Their combined income puts them in a much higher tax bracket than their retired parents. Anything converted from IRA to ROTH before it becomes inherited is very much to the daughter’s advantage. Of course nothing is simple; they also have a son who is married and doing fine but is much closer to just getting by.
Note that tax rates are much higher for singles (because the limits are lower). Best to do your Roth conversions while you are married.
If you have low income years, that’s a good time for Roth conversions. And better before RMDs begin because Roth conversions are in addition to the RMDs.
Consider deferring Social Security or pensions and living on your IRA or 401k etc to work down the balance and collect larger checks later.
As I understand it, the decision to convert a traditional IRA to a Roth is all about the lowering the marginal tax rate on the converted amount.
For me, it’s more about ensuring that RMDs aren’t going to push me into a significantly higher tax bracket. The tax bracket and standard deduction growth rate has been lowered by being figured based on the chained CPI (allows substitutions), rather than the CPI (which doesn’t allow substitutions). That means if your Traditional portfolio is just keeping up with CPI, more of your disbursements will be pushed into higher brackets. If your Traditional portfolio exceeds CPI (i.e. you have a few percent of real growth), even more of your disbursements will be taxed at higher rates. And the higher rate issue is compounded by the fact that, under current law, tax rates are scheduled to increase to their previous rates beginning in 2026.
Given that you appear to identify as an engineer, I would suggest putting together a spreadsheet on what happens to your taxes if you choose to let your Traditional accounts ride until you are forced to take RMDs, with the assumptions:
ordinary income tax brackets and the standard deduction grow at a rate that is 0.25% or 0.5% less than your anticipated inflation rate
you have a growth rate of 0% - 5% over your anticipated inflation rate in your Traditional accounts, depending on how aggressive your investing style is
85% of your SS income in current dollars at the age you anticipate taking SS, adjusted up by your anticipated inflation rate (SS increases have not been tied to the chained CPI yet, so don’t adjust this down by the 0.25% or 0.5%)
any pension income that will be taxed at ordinary income rates
If you are married, you also need to figure that one of you will end up being taxed as a single filer at some point, which will basically halve the MFJ tax brackets for the level of income you are anticipating by not exceeding the 0% capital gains brackets.
As an alternative tax avoidance strategy I am considering living on funds from taxable brokerage accounts until I have liberated all of my capital gains. I would limit my AGI to not exceed the 0% capital gains ceiling.
On the other hand, capital rates are not scheduled to increase under current law. So your delta in capital gains tax savings is 0%, vs 3% - 4% just for the changes scheduled under current law in 2026.
I know a lot depends on how much is left to heirs versus being spent. Both the Roth IRA and leaving stocks with stepped-up basis have advantages over the traditional IRA
I would say it depends a lot more on what your asset location (different than asset allocation) percentages are. Having a large percentage of your portfolio in Traditional accounts leaves you a lot less flexibility in how much you will pay in taxes. That’s even more true for a single filer.
Given that you appear to identify as an engineer, I would suggest putting together a spreadsheet on what happens to your taxes if you choose to let your Traditional accounts ride until you are forced to take RMDs, with the assumptions: - ordinary income tax brackets and the standard deduction grow at a rate that is 0.25% or 0.5% less than your anticipated inflation rate - you have a growth rate of 0% - 5% over your anticipated inflation rate in your Traditional accounts, depending on how aggressive your investing style is - 85% of your SS income in current dollars at the age you anticipate taking SS, adjusted up by your anticipated inflation rate (SS increases have not been tied to the chained CPI yet, so don’t adjust this down by the 0.25% or 0.5%) - any pension income that will be taxed at ordinary income rates
Indeed, I have just such a spreadsheet. It is great for evaluating options. Not useful for finding the optimal strategy of withdrawals from various accounts – that depends on trying out some potentially good ideas. The spreadsheet depends on a lot of assumptions about the growth of my accounts. And it is not obvious what the criteria should be for optimality. We know a dollar in Taxable vs Roth vs T-IRA has different values.
Me: I know a lot depends on how much is left to heirs versus being spent. Both the Roth IRA and leaving stocks with stepped-up basis have advantages over the traditional IRA
AJ: I would say it depends a lot more on what your asset location (different than asset allocation) percentages are. Having a large percentage of your portfolio in Traditional accounts leaves you a lot less flexibility in how much you will pay in taxes. That’s even more true for a single filer.
I learned late in my accumulation phase that 401k/T-IRA wasn’t always the best place for an investment dollar. We weren’t usually eligible for Roth contributions. So, we’re sitting at T-IRA 79%, Roth 6%, Taxable 15%.
I learned late in my accumulation phase that 401k/T-IRA wasn’t always the best place for an investment dollar. We weren’t usually eligible for Roth contributions. So, we’re sitting at T-IRA 79%, Roth 6%, Taxable 15%.
In retrospect not the most optimal for you but it did encourage savings for retirement. If I knew 20 years ago what I know now, we would have made different allocations BUT the 401K encouraged saving for retirement and it has made our retirement more secure.
I learned late in my accumulation phase that 401k/T-IRA wasn’t always the best place for an investment dollar. We weren’t usually eligible for Roth contributions. So, we’re sitting at T-IRA 79%, Roth 6%, Taxable 15%.
Yeah, I hear you. Even after doing some Roth conversions, spending some 401(k) money for expenses and doing NUA out of my 401(k) next month to move company stock into my taxable account at a relatively low cost, my Traditional is still going to be nearly 3 times my Roth. I’m trying to get them closer to 50/50 before RMDs, which may be a challenge.
That said, I also wasn’t always eligible for Roth IRA contributions, and my employer didn’t offer a Roth 401(k) until the year before I retired. But that’s why I’m focusing on Roth conversions at the moment.