ROTH CONVERSIONS AT (72) YEARS OLD & BEYOND

[ThatTonyGuy]

 LOOKING FOR OPINIONS ON MAKING ROTH CONVERSIONS AT AGE (72) AND BEYOND.  I REALIZE THAT INCOME TAXES ARE UNIQUE TO THE INDIVIDUAL PAYER, BUT LOOKING TO SEE IF ANYONE OUT THEIR HAS DONE SOME RECENTLY IN THESE LATE YEARS.  MY CONCERN IS THE UPCOMIMG "TRUMP TAX CUT ERA" IS SET TO EXPIRE AT THE END OF 2025."  PLEASE WEIGH IN ON THE PRO'S AND CON'S.  THANKS!

[Tonster521]

@ThatTonyGuy You have a valid concern regarding the expiration of the individual tax cuts provided by the Tax Cuts and Job Act (i.e., Trump Tax Cuts). Remember, Congress approved the TCJA. Trump signed the paperwork. Set to expire December 31, 2025, Congress may extend, amend the provisions, or let the tax cuts expire. Federal Income Tax (FIT) is the concern for many of us. However, the Inheritance Taxes (Federal Estate and Gift) are probably a greater concern for the Congressmen/women since most are wealthy. In 2023, you can pass almost $13 million (Single) almost $26 million (Married) to your heirs tax free. I am not sure of the amount if the TCJA expires, but it is substantially less (maybe $1 million or some indexed amount from 2017). So, for most of us folks who do not have millions to worry about, the expiration of the indexed TCJA tax brackets and marginal rates will have the biggest impact on our FIT after 2025. Currently, many of us pay marginal rates at 10%, 12% and 22% which are due on taxable income up to $100,525/Single and $201,050/Married. The expiration of the TCJA individual tax provisions will increase the marginal rates to 10%, 15% and 25%. However, I do not know the amounts of the thresholds for those corresponding tax brackets. They may or may not be indexed for inflation. So, is it worth affecting a Roth Conversion for the 3% differential? For example, converting $1,000 at the 12% marginal rate will cost you $120. You will save $30 in future FIT. If the thresholds are reduced and you are in a higher tax bracket in 2026 (25%), converting now costs you $120. However, you will save $130 in future FIT. If you can predict the direction Congress will take, please send me the winning lottery numbers. 

[GailL1]

@Tonster521 wrote 

So, is it worth affecting a Roth Conversion for the 3% differential?

=============================

Depending upon the amount that gets converted to the ROTH, the tax consequences maybe just a drop in the bucket compared to the IRMAA premium surcharges (for Parts B and D) that the OP may have to pay for at least 12 months -

Medicare.gov- 2024 Medicare Cost

Any conversion adds to their MAGI that is used in the computation to figure the IRMAA added premiums.  

Course if the OP can keep his MAGI to less than $ 103,000.00 (individual), then he/she will not have to worry about the IRMAA premium surcharge.

If one does not actually NEED the money, taking everything into consideration can save a bundle - and that also depends on the amount of RMD if there is no conversion that the OP has to take and pay taxes on -  

[Tonster521]

@GailL1 I agree that the amount of Roth Conversion may trigger an increase in one's Medicare premium (contribution) pursuant to IRMAA if one's MAGI exceed certain thresholds. It is important that you mentioned this additional consideration/cost. However, the OP only mentioned income taxes (federal) which was the subject of my reply. I tried to keep it generic and concise so other readers not aware of tax analysis and strategies could understand the Roth Conversion concept. Essentially, folks need to focus on the second example I noted wherein the taxpayer(s) converts an amount now (12%) to avoid moving to a higher tax bracket in 2026 (25%). I used $1,000 as an easy to understand example (pay $120 now and avoid $250 in 2026). For most folks, $1,000 of additional income does not move you to a higher tax bracket.  For the most part, the math is linear. So, if someone is converting $50,000 now, the tax at 12% is $6,000 versus $12,500 at 25% in 2026. Converting $100,000 now, the tax is $12,000  now versus $25,000 in 2026. And so on. Should a person realize those tax savings, it covers the cost of IRMAA for the 12 month period. The Roth Conversion may not be worth a 3% difference in tax rates, but with a greater difference (i.e.,10%,13%, etc.), it looks financially sound.

[DirkB349973]

A good financial planner could put together a picture of your costs and possible savings if that addresses your reasons for the conversions. You could figure it out yourself if you are inclined to research it. If you’re doing it to leave a tax-free inheritance, tax savings might be a secondary factor. RMDs can be burdensome and will need to be taken into account.  @GailL1 mentioned the impacts to SS taxes and Medicare costs. 

[GailL1]

In addition to any income tax which you may own on the converted amount and the amount that is being converted and will add to your income  - there are a few other money-owing things that could hit you 

1.  Tax on your Social Security Benefits 

2.  IRMAA Medicare Premium surcharges for Parts B & D.

These things if you are affected by them, may change your mind about doing the conversion - 

You should have done it at 62 for max advantage without owing these things above.