Possibly doing a large Roth Conversion this year

[JRretires]

This is my first year of retirement.  I somehow was able to go the entire year so far without withdrawing any funds from my IRA or 401k.   I decided instead to sell the profits from my tech stocks which I bought at a low during Covid.  I had $36,000 dollars of realized gains.   I also withdrew $4000 RMD from my inherited IRA from my father for an Adjusted Income of $40,000 , which I have paid my living expenses so far this year with. .

When I did a 1040ES, with my all my deductions for being over 65, with the standardized deduction subtracted from my Adjusted income.  I currently owe no or very little income taxes this year.    I think this would be a perfect year to do a large Roth Conversion of a $100,000 dollars.   Do you agree that this would be an excellent year to do that large a conversion.   I realize that it will still be painful in April to write a large check for taxes that I do not actually owe yet.   Do you agree that I should do this and how much do you think the Roth Conversion could cost me?

[fanfare]

Ideally, convert just under the amount that would bring your tax from zero to above zero.

Otherwise convert more up to the tax you find acceptable.

The trick is, to accurately calculate your 2025 AGI, deductiona and incorporate the 2025 Tax brackets, etc.

It is no longer allowed to reverse a conversion if you make a mistake.

@JRretires 

[JRretires]

Thank you for taking the time to answer my question.  I will have an accountant and my financial advisor assisting me.   Because I will have no withdrawals from my IRA or 401k this year.  I can afford to pay more income taxes than if I was withdrawing funds from my IRA.  I  came up with a $100,000 as a large enough number to lower my taxes in the future.  I was  trying to get your opinion if this amount is to large an amount if I have no further Capital gains this year which I should not.  And maybe how much or how large a check I would need to write to do a $100,000 Roth Conversion.

[AmeliesUncle]

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@JRretires wrote:

I will have an accountant and my financial advisor assisting me.  

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This is a discussion that you need to have with them.  

You are right that this could be a good year to do a conversion or withdrawal.  However, with no other information, arbitrarily picking $100,000 to pay tax before you need to doesn't make sense. 

Knowing your age, when you plan on collecting Social Security, how much your Social Security will be, the total value of your Traditional retirement account, your plans, your goals, your needs, your wants and more all come into play with strategizing what to do with retirement funds.  That is why you need to have some discussions with your tax preparers and financial advisor.

[JRretires]

Thank you I understand your concerns.  I will start collecting Social Security in two years at 70.  My financial advisor agrees with doing it, just not the amount,.  Her firm Wealth Enhancement is working on a Roth Conversion plan ,  and I will have my accountant look it over.  Thanks again.

[baldietax]

You didn't mention your filing status but look out for the long term cap gains on the 36k once your income goes above a certain level the tax on that moves from 0% to 15% which will cost $5400.  If you don't have any other income there should be some minimal amount of Roth Conversion which together with the RMD would offset your standard deduction (plus the additional $6k deduction form the 'big bill' for over 65s), and still keep your LTCG rate at 0%.  Above that amount you would start paying tax and the effective tax rate on that additional amount of Roth Conversion may be quite high when you take the jump in LTCG into account.

Check your safe harbor for estimated tax (see Form 2210 lines 1-9), the smaller of 100% of 2024 tax (110% if AGI > 150k or 75k if filing MFS), or 90% of 2025 tax.  If 2025 is a big jump in income when you start doing Roths then you would probably base this off 2024 tax.  Either way you may need to pay Q4 ES and then file Form 2210 AI to avoid a penalty.

If you continue to do Roth conversions annually, the advantage of a low prior year tax goes away and you should pay quarterly ES.  If you base the quarterly ES off prior year tax going forward it's a fixed known amount and it doesn't matter when you do the Roth conversions, and rather than waiting til year-end you do them right away to take more advantage of the tax exempt growth (i.e. you could do your 2026 Roth conversion in January not December).

If able, pay tax electronically and directly at irs.gov rather than checks/vouchers etc.

But these are considerations and tax math your wealth and accounting people should cover.

[JRretires]

Thank you for taking the time to answer my question.  Your answer was very confusing.  I am a single 67 year old retired man with no other income other than the $36,000 dollars LTCGs and a $4000 dollar RMD on an inherited IRA.  My LTCG rate is still zero because of this and with my single standardized deduction along with my deductions for being over 65 ,  my current federal income tax is also zero..  I have made no withdrawals from my IRA or 401 k this year.  I did have $20,000 cash in my brokerage account at the beginning of the year.  I have been able to pay all of my living expenses this year with these assets on a $5400/ month budget.

[fanfare]

Assume you are in the 12% bracket with AGI of 48000.

A $100,000 conversion will put half in the 22% and half in the 24% bracket.

That's $23,000 to IRS plus your state tax  which is substantial.

If your current tax is Zero, that would be half in the 12% and half in th 22% bracket ==  $17,000

It's Pay me now or pay me later", probably at higher rates later.

OR, maybe you want your heirs to get that tax free income.

[JRretires]

Your answer is still confusing but I assume that you are arguing for the pay me now. I do not to expect to have any more Capital Gains the rest of the year.   I took $14,000 of my Capital Gains and bought a 3 month CD which vested last week.  I will use this $14,000  dollars to pay my living expenses for the rest of the year.  My current tax obligation is zero ( although my accountant had me make a $1000 dollar ES to Virginia last month). So I assume your pay me now argument is to do the $100,000 Roth conversion now,  and pay the $17,000 tax now instead of the $23,000 tax, Correct?.

[baldietax]

I'll add an example to help clarify my response above but excuse my napkin tax math as I don't have 2025 turbotax with the new brackets and deductions - so pls verify but hopefully this helps illustrate:

If you're single and over 65 your standard deduction for 2025 will be 15750+6000 =21,750 

Taxable income bracket for 0% LTCG rate is $48350.  Ordinary income "fills up this bucket" first, whatever space is left for your LTCG is taxed at 0% the rest at 15%.  So the bigger the Roth Conversion the more you push your LTCG into the 15% rate

If you do a $30k Roth conversion plus $4k RMD your taxable income will be 30000 + 4000 + 36000 - 21750 =48,250.  Your LTCG will be fully 0%.  You will pay tax on $12250 = $1232 (almost all in the 10% bracket).

Good deal so far.  But if you do a 100k Roth conversion your taxable income will be 100000 + 4000 + 36000 - 21750 =118,250.  You will now pay 15% rate on the full $36k LTCG for $5400; plus ordinary tax on 82250 is $13009 (15.82%).  Your total tax will be $18409.  The additional 70k in Roth Conversion is triggering additional 18409-1232 =17,177 in tax including the LTCG effect, so this extra conversion is effectively being taxed at 25% (not great).

Note this does not take into account any taxable interest or dividends you must surely have on the $20k in Brokerage and the 14k you put into the CD etc.

Other conversion amounts in-between 30k and 100k will partially trigger the 15% LTCG rates.

If this LTCG is a one-off you are probably better off doing a smaller Roth this year that preserves the 0% LTCG rate but your wealth advisors should advise on that.

Not a CPA, hope that helps.

[JRretires]

I appreciate that you are trying to save me money on my taxes this year.  What confuses me about your concern is that I thought the whole point of a Roth Conversion is to save me taxes that I will pay on my IRA withdrawals in the future.   So won't a $100,000 dollar conversion this year, be better for reducing the  taxes on my IRA withdrawals in the future?

[baldietax]

Depends your overall situation and what RMDs you're trying to optimize and when and the projected tax rates on those distributions; so those are questions for your wealth and accounting people.  But generally paying a high tax rate now erodes the future benefit of doing the conversion.  You could convert that additional 70k in January and likely still pay less tax than doing it in this year, without affecting the 'time' in the Roth by much.

[JRretires]

Thanks for trying but you have totally confused me. Since I am 67 and not 73,  the only RMD that I have is for my inherited IRA from my father.  It is only a little over $4000 dollars a year.

[baldietax]

Right so when you're 73 you'll need to start making RMDs from your 401K/IRA.  The benefit of the Roth Conversion is to grow the money with tax free withdrawals, and it's not subject to those RMDs.  So you're paying tax this year to avoid paying tax in future years, at some future projected tax rate.  Based on your total retirement account balance you can figure out what your RMD schedule will look like, and also consider tax on social security which is triggered for certain income levels.  How much and how fast to convert to Roth depends what that overall picture looks like.

This article from Fidelity may be helpful

https://www.fidelity.com/viewpoints/wealth-management/insights/roth-ira-conversion

Also a note above I think your deduction will be higher by $1950 for over 65 than I used above; and the new additional 6k deduction from the 'big bill' phases out for AGIs between 75k and 150k.

https://www.hrblock.com/tax-center/irs/tax-law-and-policy/one-big-beautiful-bill-senior-tax-deductio...

I don't think I can help further on this - I was trying to answer your original question on the tax implications of a large Roth Conversion and whether it's a good year to do it, and make sure you're not surprised by the jump in LTCG tax.  Hopefully this has given you some points to consider when discussing further with your advisors.