In this video (Part 2) I demonstrate how to calculate the tax impact of the conversion from a Traditional IRA to a Roth IRA, including income and tax bracket considerations.
00:00 Introduction
00:55 Tax Cuts and Jobs Act Expires on December 31, 2025
06:17 Presidential Election | Split Congress | Tax Legislation
13:51 Lock In Roth IRA Conversion Now Before the TCJA Expiration
20:33 Historical Tax Rates in the United States
24:30 Beneficiary Planning (Inherit a Traditional IRA or a Roth IRA) | Secure Act
31:17 Example of Your Child Inheriting a Roth vs Traditional IRA
30:23 Remember to Watch for Part 3 Where we will use Turbo Tax for Roth Conversions
Roth Conversion Videos
Part 1:
Part 3: Coming Soon
Traditional IRA vs Roth IRA Video
#inheritance #taxcuts #electionday…(read more)
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In Part 1 of this series, we discussed the benefits and considerations of converting a traditional IRA to a Roth IRA. In this article, we will explore year-end tax planning strategies for Roth IRA conversions in 2023 and 2024.
Roth IRA conversions can be a powerful tax planning tool, but they require careful consideration of the potential tax implications. As we approach the end of 2023 and look ahead to 2024, it’s important to evaluate whether a Roth IRA conversion makes sense for your individual financial situation.
One effective strategy for Roth IRA conversions is to time them in years when your income is lower than usual. This could be due to a variety of reasons, such as taking a sabbatical, retiring, or experiencing a decrease in earnings. By converting a traditional IRA to a Roth IRA during a low-income year, you may be able to minimize the tax impact of the conversion and take advantage of lower tax rates.
Additionally, consider any potential changes to tax laws that may impact Roth IRA conversions in 2024. With a new year on the horizon, it’s essential to stay informed about any proposed tax legislation that could affect the tax treatment of Roth IRA conversions. Consulting with a tax professional can help you navigate the potential changes and develop a strategy that aligns with your financial goals.
Another year-end tax planning strategy to consider is the partial Roth IRA conversion. Instead of converting your entire traditional IRA balance to a Roth IRA in one year, you could opt for a partial conversion. This allows you to spread the tax liability over multiple years, potentially minimizing the impact on your overall tax situation. By converting smaller amounts over time, you may be able to stay within a lower tax bracket and manage the tax consequences more effectively.
It’s also important to consider the impact of a Roth IRA conversion on other aspects of your financial plan, such as estate planning and retirement income. Roth IRAs offer unique benefits, such as tax-free withdrawals in retirement and the ability to pass assets to beneficiaries tax-free. By incorporating these benefits into your overall financial strategy, you can maximize the value of a Roth IRA conversion beyond just the immediate tax implications.
Before proceeding with a Roth IRA conversion, it’s crucial to review your overall financial situation and consult with a financial advisor or tax professional. They can help you assess the potential tax implications, consider your long-term financial goals, and develop a comprehensive strategy that aligns with your individual needs.
In conclusion, Roth IRA conversions can be a valuable tax planning tool, especially when approached strategically. As we approach the end of 2023 and look ahead to 2024, it’s important to evaluate the potential benefits of a Roth IRA conversion as part of your year-end tax planning efforts. By considering factors such as income levels, potential tax law changes, and partial conversions, you can make informed decisions that support your overall financial plan.
Investing in Roth IRA can be a good choice since they are funded with after tax dollars, your contributions can grow tax-free over time. When you withdraw money from your Roth IRA in retirement, you won’t have to pay tax on it, which will help you keep more of your hard-earned money. Compounding is the process of earning interest on your initial investment, as well as on the interest that investment earns. This means that over time, your investment can grow exponentially. So the earlier you start investing, the more time your investment has to grow through compounding.
The Pre TCJA numbers would benefit from an inflation adjustment to make them more comparable. Thank you for the fantastic illustrations on all three parts of your Roth conversion video series.
I do believe that up through 2025 will be best time to do conversions and that tax rates will revert back to the old rates in 2026. But you are using the same income ranges from 2017. Won’t they be adjusted upwards for inflation? You are showing the top of the 15% bracket at 75,900 but wasn’t that the top as of 2017? I believe that that will be adjusted for inflation and will be a much higher income amount by 2026.
My problem is your main comparison is between doing Roth conversions now versus later. Obviously now is better in that scenario. But the real issue is between doing Roth conversions now versus never, and just taking out the money as needed or as required for RMDs. As for your second example, you assume one's children will be in a higher tax bracket. Sadly that is often untrue. These are days of downward mobility, not upward mobility as in the past.
I’m so glad I didn’t really make any big mistakes when I started my investment journey last year. So far I’ve just been sticking small amounts of money into companies I’m sure will continue to exist for the next five years and if the stocks do well, I hold on. If not, I reinvest the bad ones into the good ones so I can get higher gains. I gained about $9.5k from putting in $4k into NVIDIA earlier this year so that was pretty nice.
When they changed that inheritance tax Law, all they did is take our hard earned money we saved for our children. Tax greedy state and government. And the 401k plans took to long to offer Roth IRA's in work 401k plans. It should of been 20 years to withdraw the money not 10 years.
Can you do a video on Roth Conversion and Medicare IRMAA tiers? How to decide which tier to convert to ?
In 2026, assuming the Congress does nothing, will cause the tax bracket percentages to go back to the 2017 levels. But the bracket dollar values will have increased due to the yearly inflation adjustment, independently of what the percentages are. This would make your dollar amount differences that you showed to be incorrect.
Part 1 & 2, great videos! Are the spreadsheets available for download?
In your example you had 89,450 dollars as your top bracket but if you add in your deduction of 27,700 dollars plus 3,000 more if your a senior citizen you would be at 120,150 -50,000= 70,150 you could convert each year. Am I wrong?
I lost over $70K when everything started to tank. Not because I was in an exchange that went belly up. I was just stupid to hold and because that's what everyone said. I'm still responsible. It just taught me to be a better investor now that I understand more of what could go wrong. It took me over two years of being in the market, I'm really grateful I find one source to recover my money, at least $10k profits weekly. Thanks so much Mrs Belinda Owens
I thought that an annual inflation adjustment gets made to the dollar thresholds for each % bracket. So if the TCJA sunsets in 2025, won't the dollar thresholds get adjusted upward for inflation between 2017 and 2025 and then we revert to the older % but dollar thresholds are adjusted above the prior? Thank you for your educational video. I am retired and have been making conversions for 2 years and will continue until 2025.
For the 2023 year end Roth conversion, how to pay estimated tax and avoid IRS tax penalty even if we pay the estimated tax before the quarter end deadline1/15/2024? Let’s say I convert 50K by Dec 31,2023,I heard that from IRS point of view I should pay the tax of the 50k throughout 2023, not just one lump sum by the closest deadline of 1/15/2024, and I would get tax patently because of that. Please comment and give suggestions. Thanks
I subscribed! Just found your videos on my YouTube channel feed this morning. Coincidentally, I was thinking about doing this planning next week. I have an MBA, been an Audit Committee chair but not a CPA. I have been dreading doing the research and then developing the spreadsheet. I’m looking forward to the last video to see if there are going to be any Roth contribution requirements that disqualify me. I am in my 70s on Social Security and still have 1099 NEC and employment income. My 2024 income will drop substantially though I still have to take RMDs. Your videos are well organized, and the clarity of the presentation is great! THANKS
Great video. Clarify years of confusion of Roth IRA and tradition IRA in regard to inheritance
Increasing tax rates are the reason I rolled over my 401k to a Roth. I don’t want to be 59 paying taxes on current income on withdrawals made from my retirement account.
Your example at the very end made things crystal clear plus your example at the end was probably where a larger amount of people are
Obviously those who have two or three or four times the amount of money in the IRA. It applies to them also but those are the ones that normally have the CPAs doing their taxes and working up tax plans whereas those of us in that half $1 million range usually won’t pay for a CPA so anyway it was great and I appreciate watching this video. Thank you.
Great video, very much appreciated. Can't wait for part 3 to keep learning. Suggesting/requesting a video explanation on partial Roth conversions on Fixed Indexed Annuities and how these are done. Thanks again!!
Nice video, however what gets me is, how can you say with a straight face that the govt, facing the fiscal cliff and tax shortfall, which we all know isn’t going to be addressed until there’s no more road left down which to kick the can, won’t pull out all the stops and tax anything and anyone it wants? I have absolutely no faith that the tax-free status of Roths will actually hold 20 years into the future. The govt will change the rules when it has to, to get to our money. We’re heading into uncharted waters here.
Will they at least adjust the brackets for inflation between 2017 and 2025 if the TCJA expires?
I'm not sure if it will be in part 3, but in part one, it was mentioned that this video would go into paying the taxes on the conversion using external funds. It is certainly an option, but not everyone has the savings to cover such a large tax expense, and likely their W-2 withholdings will also be insufficient. This leaves many with the option of withholding the funds from their traditional IRA to cover the taxes owed on the conversion. The issue I often see is anyone I've ever seen talk about Roth conversions fail to mention that the funds withheld from the account are treated as a withdrawal, therefore subject to the 10% IRS penalty. Basic (emphasis on basic) Example: Let's say you want to convert $100,000 to Roth. Withhold 20%(example), so the remaining $80,000 is now Roth. the $20,000 used for taxes is treated as a withdrawal so you now owe $2,000. Just something I think more people need to understand.
Best Roth conversion tutorial on You Tube! Thank you for the detailed and thorough explanations of the process. Looking forward to the Turbo Tax reporting process!
Interesting! What if I move up 2 marginal rates? When I start consistent withdrawals would I likely be overpaying up front?
I am thinking of doing a Roth conversion before year end, but don’t know if converting will affect my Gross income due to now getting reduce medical coverage with the ACA affordable care act which my payments are low due to my income status mostly from capital gains and interest.
I also want to do a Roth contribution, but the only earned income that I have is with IHSS home care provider, but on my W2 line 1 show zero earnings and no federal or state tax deductions because the person I care for lives with me, but they take fica and Medicare out. So usually I don’t even file my IHSS earnings because it shows no earnings on W2.
Thanks for the great video. Can you show us how and when to make estimated taxes to the IRS and also the state level?
Great tutorial.I converted 50k from IRA to Roth 1 month ago, and will do it again 2024 and 2025. Thanks.
This has been a great tutorial set so far! Thanks!
i have a question, im over 62 and collecting social security as my total income , ive got about 50k in traditional ira and a small amount in a roth ira. The roth was started in 2020 so i am into year 3 of the 5 year timetable of being able to withdraw after 5 years without penalty. Ive analyzed my tax situation and have decided on doing a backdoor roth conversion of my traditional ira (half this year and half on jan 1 for next year) the question i have is does the backdoor conversion start as year 1 in my roth or does it just fall in line with the 3rd year of 5 year timetable of the roth i already have in place?
Been looking forward to this Part 2.