Personal Finance (Not Investing) • Roth conversion in retirement.

In my case, this "sufficient amount" to convert will need to occur in 2025 in one swoop, and will trigger a 32% marginal tax rate (or 21% effective) in addition to the LTCG @ 15% plus 3.8% NIIT plus IRRMA that otherwise would not incur.

Apologies if this is too specific, but if not...why one big conversion at a high marginal rate instead of spreading the amount over "a few" years?

In my case, the optimal window for Roth conversion is closing, based on a few factors/presumptions: less favorable income tax rates coming back for one, and two, our other income streams will begin the year after. Therefore, spreading out multiple years, while maybe desirable, does not provide the best outcome based on my calculations. Intuitively, I think consecutive and spread-out conversions (of the same total amount) will result in less income tax being paid. However, the problem with this stretched-out conversion is that it would cause more amounts to be converted whose gains are subject to the income tax rate tiers rather than being tax free. At the end, one would incur much more tax obligations after all. 
In my exercise I did run a 10-spread (2025-2034) scenario as comparison, except in which I would empty out the tax deferred account in 10 conversions instead of a run-in with RMD schedule. So, Scenario (a) being 10-spread, vs. Scenario (b) one swoop conversion in 2025, and everything else being identical, the result is interesting. 
* in terms of income tax paid - (b) is 44% of (a) in the first 10 years, but 170% more for the next 10 years because RMD continues for (b) but (a) would not.
* (b) incurs about the same LTCG tax overall as that of (a), all in the 15% bucket due to other income streams starting to happen for (b). but (a) triggers much more NIIT tax, like 300% more even though the CG amount under calculation is the same.
* Factoring the State income tax in the equation, the net difference in tax paid between (a) and (b) over the years is relatively small, averaging a few thousand $ a year.* The big difference is the net result - portfolio value of the respective Roth IRA (tax free) accounts, running up to half a $mil difference in favor of (b).

Edit - Excuse me, I got the scenario designations wrong, now corrected.

Statistics: Posted by Oxford7458 — Sat Oct 19, 2024 12:26 am — Replies 12 — Views 893

---