Roth conversions going forward
I have been converting some of my traditional IRA to Roth each year and keep our MAGI under the IRMAA limit. With taxable pension & SSA I had a 100k window of opportunity (each year) but RMDs for me begin in 2023 and a few yrs later for my wife. This will reduce our window significantly so that exceeding the IRMAA # may ultimately happen years down the road. All this said, I was comfortable with this plan until recent news about Roth caught my attention. Is there any proposed legislation that would be a problem for us ? Changes to SSA, life expectancy, IRMAA tiers can all tweak my plan but obviously “within IRMAA” is far from 450k. I always think of TIRA as Traditional IRA .. does it have another meaning .. sorry, I’m confused. Thanks in advance as I know this is a great service .. sincerely, Ron
Permalink Submitted by William Tuttle on Wed, 2021-10-06 19:07
Proposed initial (2022) MAGI limits are only on Roth conversions of non-deductible basis. Under the proposals Roth conversions of pre-tax balances will not be subject to MAGI limits until 2032.
Permalink Submitted by Ron Corcoran on Wed, 2021-10-06 20:10
So, only after tax contributions, most likely to 401k and then converted and called TIRA ? I think I read somewhere that the pre-tax conversion limitation would be limited to very hi-income .. eg 450k. Would you agree with that assessment ? Thanks, Ron
Permalink Submitted by Alan - IRA critic on Thu, 2021-10-07 23:46
Yes, effective in 2022, there would be no rollovers of after tax qualified plan balances within the plan or of IRA basis to a Roth IRA. This is for everyone regardless of income. Pre tax conversions are disallowed only for higher income (adjusted taxable income, not MAGI) taxpayers starting in 2032. The threshold will be 400,000 ATI for single filers, 450,000 for joint filers.
Permalink Submitted by Ron Corcoran on Sun, 2021-10-10 12:30
So, for those still working and putting after-tax money in 401k, or trad IRA, can convert to a Roth and only pay taxes on the gains, if any ? I’d guess its a bit more complex if you’re not 59.5 as withdrawals from 401k or trad IRA would be penalized ? Please describe this process (mine is only a guess) and define what a TIRA is. This may be a one-time opportunity for younger earners, albeit likely a higher tax bkt.
Permalink Submitted by Alan - IRA critic on Sun, 2021-10-10 15:07
This is true for a 401k after tax sub account which can be treated separately from the rest of the plan, but IRA conversion taxes must reflect all non Roth IRA values in total. Therefore, an IRA back door Roth hinges on having as little pre tax balance in IRAs as possible. Therefore, the process is simpler with a 401k and the possible after tax contributions that can be made are much higher than the IRA contribution limit. There is no 10% penalty in either case since the penalty does not apply to conversions or in plan Roth rollovers to the Roth 401k balance. Employer plans may limit the number of distributions per year or mandate whether the rollover can go to the Roth IRA or Roth 401k, or perhaps participant’s choice. This strategy becamen popular starting in 2010 when the 100,000 MAGI limit to do a Roth conversion was lifted. However, under proposed legislation 2021 would be the last year that after tax or non deductible TIRA contributions (IRA basis) can be converted.
“TIRA” is an abbreviation for traditional IRA as opposed to a Roth IRA.
Permalink Submitted by Ron Corcoran on Sun, 2021-10-10 17:30
If I have accumulated an After Tax balance in my 401k along with earnings (may be significant), I can do a one-time conversion within the plan, and pay taxes on the earnings. I recognize the tax brkt and taxes due may be objectionable, but my question is, would those earnings be moved to the Roth 401k as well ! I’d have to assume so, please elaborate.
Permalink Submitted by Ron Corcoran on Sun, 2021-10-10 17:37
If I have accumulated an After Tax balance in my 401k along with earnings (may be significant), I can do a one-time conversion within the plan, and pay taxes on the earnings. I recognize the tax brkt and taxes due may be objectionable, but my question is, would those earnings be moved to the Roth 401k as well ! I’d have to assume so, please elaborate.
Permalink Submitted by Alan - IRA critic on Sun, 2021-10-10 19:06
Yes, the earnings in your after tax sub account would also be moved to the Roth IRA. If the plan also allows you to roll the after tax account out of the plan, you could also do a direct rollover of the after tax amount to your Roth IRA and the earnings to a TIRA. This avoids any current taxes.
Permalink Submitted by Ron Corcoran on Thu, 2021-10-07 21:14
Proposed legislation for near term only pertains to Roth conversions of non-deductable contributions = after-tax .. right ?This same legislation proposes to limit Roth conversions of deductable (pre-tax) out in 2032 and at high-income levels (eg 450k MFJ) ?
Permalink Submitted by Alan - IRA critic on Thu, 2021-10-07 23:46
Correct.