With investment accounts coming off a very good year and current tax rates unlikely to change for a while, it’s hard to make the case for paying taxes now to convert traditional IRAs and 401(k)s to Roth accounts.
Boldin, formerly known as NewRetirement, hears from all kinds of users who saved well in tax-deferred accounts during their careers, and now, as they approach retirement, see required minimum distributions looming as an issue.
“It dawned on them,” said Steve Chen, Bouldin’s CEO. “Most of our users are millionaires over the age of 50, and they are starting to realize that it’s not just about the returns – it’s about where your money is.”
If you’re likely to take more than you’re required to from your qualified retirement accounts each year to cover living expenses, you’re generally not going to be fussy about your RMDs, and Roth conversions aren’t right for you. If you’re worried that your eggs won’t last your whole life, thinking about taxing now or taxing later isn’t worth your time.
Concerns about RMDs are usually only for people with large balances in tax-deferred accounts that would more than cover their needs. The idea is that you systematically withdraw large sums of money from your accounts, convert that money to a Roth account, and pay the tax due with other savings so that you don’t reduce the amount you have set aside for future tax-free growth by the amount you pay the tax with the withdrawal itself. What would be considered large amounts could range from $25,000 to $200,000 a year for several years, he said. Nicholas Yeomansa certified financial planner based in Georgia.
It’s best to make this type of conversion when you’re in the 24% or lower tax bracket and think your rate will rise in the future, either because you anticipate that your income or the tax law may change. It is also best to do this when Financial markets are fallingso you pay less in taxes and can capture the improvement of growth in the Roth, where it will happen tax-free and where there are no RMDs looming for you or your heirs to worry about.
However, so Not the situation now. The stock market has risen sharply this year, and the incoming Trump administration, with the help of Republicans in the House and Senate, will likely act to either cut tax rates or extend current ones.
“I don’t think people had that on their bingo cards 45 days ago,” he said. Stash Grahaman asset manager based in Washington, DC
But that doesn’t mean Roth conversion activity has stopped. On the contrary, the situation presented an alternative case for accomplishing this. For one thing, your RMD amount will be credited by your account balance as of December 31, and many people will face higher RMDs next year because of gains this year.
Graham also noted that whatever happens in the next few years regarding the tax code won’t last forever — and may be no longer than the length of a typical multi-year Roth conversion strategy, which could be as long as 10 years. What will happen in the next two years could be replaced by changes in seven or eight years.
“We still advise clients, especially younger clients, that if their future earnings potential is higher, let’s go ahead and convert now,” Graham said. “If you want to make that conversion, it’s probably cheaper to do it now, rather than later.”
Graham said he had just had this discussion with a wealthy, recently retired client in his mid-60s who was considering his next RMD. the The main time frame to start these types of transfers This is usually before age 63, when additional income may trigger additional Medicare IRMAA charges.
The client may have been a little late, but he wasn’t thinking about himself. He intended to leave this money to his children, and he wanted to rip the band-aid off and make a big transfer so they wouldn’t be saddled with an inheritance that they would have to pay tax on for over 10 years at their high rates. His thinking was this: He was in the low 30% tax bracket, and now he was in a much lower bracket – certainly less than what his children would pay. “It’s a one-time event and he feels like he can handle it,” Graham said.
Graham’s job was to take this plan, do the math on it, and compare it to alternatives, such as extending the transfers over five years or more, or donating some of the money.
Another layered strategy is one the Yeomans used with a client who used the tax savings from a large charitable donation to cover the tax hit of a Roth conversion. Most of the time, this works best with Qualified charitable donation From an IRA, which allows you to give away up to $105,000 and have it meet the RMD and reduce the RMD next year (this amount will rise to $108,000 in 2025, as QCDs are now indexed for inflation). You must be at least 70½ years old to do so.
Many clients have large stock positions in brokerage accounts, perhaps from company options or due to inheritance. As it grows, spending it creates a tax burden, so one solution is to donate this stock directly to a charity or place it in a donor-advised fund for distribution later. If you accumulate a few years of intentional donations, you’ll likely be able to itemize your Schedule A expenses instead of taking the standard deduction.
“We determine how much tax savings the donation would generate, and then we go back to the type of Roth conversion that would launder those tax savings,” Yeomans said. The result is that the client is able to do a Roth conversion, be generous, realize no capital gains, and end up paying no additional taxes. “We are also projecting future RMDs,” Yeomans added. “It’s a great strategy that’s been overlooked.”
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