To me, RE loans seems a whole lot better than paying a marginal 37% income tax (not to mention any state tax).
3 Likes
what you need is some financial planning, not an attorney for the Roth conversion question. Youāll need to estimate your marginal income tax rate once you start taking RMDās and compare that to your marginal income tax rate today. (And assume tax rates wonāt change, which of course they will, which is why your attorney wonāt touch such a thing)
For example, if your marginal rate (pension+SS+investments+RMDs+add backs) will put you in the 32% tax rate age 72, doing a Roth conversion today paying 24% makes sense.
The other thing to consider is marital status (if married). When the first spouse passes, the surviving spouse has a much higher tax exposure (as dollar amounts per bracket get halved).
2 Likes
And the RMDs remain the sameā¦ (from both spouses accountsā¦)
2 Likes
Basically, you should be fine if you pay the estimated tax in four equal payments on the due dates. There is a presumption that income is earned evenly throughout the year. But you canāt just wait and pay a bigger amount for the fourth quarter if the extra income was in the first quarter. Although I guess you could if you arenāt concerned with being audited, which is unlikely these days.
The annualized installment method is for taxpayers who have unequal income and want to apportion their estimated tax in the quarters where they have more income to cover that payment. For example, if your extra income would be in December instead of January, you could pay less in the first three quarters and the rest in the fourth quarter.
Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method.
3 Likes
Tacking on to your helpful info, and agreeing that the move from MFJ to Single status can have the greatest impacct.
The OP should also consider if IRMMA surcharges will apply due to projected RMDs. If so, worth looking at the ācostā of Roth conversions now, if doing so could help keep one under an IRMMA threshold. Impossible to predict future returns.
Barring any legislative changes, these are some of the changes built into the TCJA of 2017.
Under current law, the top tax bracket for individual taxpayers, estates and trust income is 37%. It reverts to 39.6% after 2025. In addition, income thresholds that apply to the top tax bracket will decline significantly. Adjusted gross income of single tax filers in excess of $418,400 and married tax filers (joint return of $470,700 would be subject to the 39.6% bracket. By comparison, the top income thresholds for 2023 (for the 37% bracket) are much higher, at $578,125 for single tax filers and $693,750 for married couples filing a joint return.
Other tax brackets will move higher after Dec. 31, 2025 as well, including:
- The current 12% rate rising to 15%
- The current 22% rate rising to 25
- The current 24% rate rising to 28%
2 Likes
Good point. And/or, whether a Roth conversion would put someone in the IRMAA category two years before claiming Medicare.
2 Likes
I have mixed feelings on the Roth rollover. Much of it seems a pay-now / pay-later things. Butā¦ my husband has concerns about RMD outlook down the road, and heās been working with the planner to address that.
I kindof wish now that I had switched to doing Roth deductions (instead of traditional tax deferred) when working, but at the time it seemed simplest to just have all our 401k money the same flavor. (Now that I can see how things work on account statements and such, I realize that taxable/Roth would have been obvious in the investment accounts).
3 Likes
Most of it is.
But Roth can also be an estate planning tool. For example, if your heir is making bank in a a high tax place like NYC, paying 37% on your own could be better than your kid paying 50+% when they inherit your tax-deferred 401k upon your demise.
3 Likes
In our case, the large distribution was in the first quarter. But it would be good if we can pay extra in each of the four quarters, instead of having to shell it all out in the first quarter.
1 Like
Itās hard to change your lifestyle, especially as you get older and think that maybe you should spend to do what you want now, when who knows what the future will bring? Itās a difficult balance.
4 Likes
Itās that changing from a saver to a spender. Our financial planner keeps telling us to spend. Soā¦we have done some bigger ticket items. BUT itās the day to day expenses where I think we should be a little more carefulā¦not spend like we are both earning large salaries. Itās my issue, not really a financial one.
5 Likes
Yeah, that does sound like a better option, but I donāt know how to get a decent real estate loan any more. This is raw land, our HELOC is at 7.75%, and we donāt want to refinance our house (mortgage will be paid off in two years at 2.25%). Doesnāt look like rates are going down any time soon.
Sorry I typed attorney, but meant accountant (who works with a financial planner I use for some money). I understand the concepts, but I wind up in analysis paralysis, and who knows what the future may bring. We were considering moving to a state where I would pay much lower state taxes, but that isnāt likely to happen now. As part of taxes this year we will consider options again.
3 Likes
In our prime funding years we were paying a 40% federal+state incremental tax rate, as we were stuck in the AMT exemption phaseout bracket, which sucked big time. I donāt think we will ever come close to that rate in retirement.
I think pretty much every analysis Iāve read says that for most people itās better to take the tax deduction during your working years.
Iād think about doing some Roth conversations but since I am getting health care on the exchange every extra dollar off income comes with an 8.5% penalty because it reduces my subsidy, so Iām not inclined.
4 Likes
Posted in error to wrong comment.
This is where I meant to respondā¦
My recent grad has decided to split his workplace contributions 50-50 between 401K and Roth 401K. I am surprised as his combined marginal Fed & state rate is 29%, and he does not need the money at the moment, so I would just fund the Roth 401K the full $22K. Obviously his decision, regardless of my thoughts.
3 Likes
So another tax question. I changed our withholding, we have several streams of income.
I think we will be ok but if I find at the end of 2023 that we will be short by a large amount again (I donāt think we will) can I send in an estimated amount to make things even?
Itās just that estimating what we will actually owe is not that easy since Iām not sure exactly how much we will be withdrawing.
I donāt want to pay penalties if I donāt have to.
At one point we were living in NJ and both working in NY. We would get dinged every year with a penalty from NJ because our NJ income (only interest and dividends - all unearned income) had not had any withholdings (despite NY taxing us heavily at both the city and state level). I ended up having to make a NJ estimated payment every year to avoid this problem.
1 Like
Is there a penalty for withholding too much? I seem to think there is.
no federal penalty for over-withholding.
Itās an interest-free loan to the government, so they appreciate over-witholding. Plus, some over-withold on purpose so they can get their ārefundā in i-bonds.
6 Likes