IRA conversion to ROTH

Submitted by Thomas Partridge on Wed, 2023-09-06 17:32

I have a high net worth client with 2 million plus in a former 401K plan, retired, 67 in low tax State of MN, with Federal + State
approx 37%. I was thinking on having them convert 1-million before years end and another in 2024. Any advantage to doing
part this year or all now in 2023? When is the rate going to potentially increase to what %? This money would be placed in
preservation, legacy account and only with no future market risk or fees. If it makes sense they can receive an immediate 40%
increase on the money converted fully knowing the 370,000.00 on one million needs to come from somewhere else to satisfy
IRS.



Submitted by David Mertz on Wed, 2023-09-06 19:01

  • Such a large Roth conversion probably makes no sense.  Most of a $1M Roth conversion would be taxed by MN at 9.85% and by the feds at an average of 36%, plus any increase in Net Investment Income tax or taxation of Social Security benefits.  That would mean coming up with more than $450,000 to pay the taxes.
  • The client has at least 5 years before RMDs from the 401(k) begin.  It would make much more sense to limit Roth conversions to just topping out the current federal or state tax bracket or perhaps the next tax bracket.  Federal tax brackets are scheduled to go up by only 2% to 3% in 2026, so it doesn’t make any sense between now and then to go more than one tax bracket up from what it would be without the Roth conversion.  $50,000 to $100,000 of Roth conversion each year would probably make more sense.

Submitted by Alan - IRA critic on Wed, 2023-09-06 19:44

You might check out any NUA potential if the 401k holds employer shares, and if a qualified LSD is possible. And if the plan holds any after tax contributions, there may be flexibility in assigning them to either reducing the taxable NUA cost basis or to reduce conversion taxes.

Submitted by PaulC on Thu, 2023-09-07 19:50

I’m surprised to have someone refer to my home state of Minnesota as “low tax”. I concur with the suggestion that Roth conversions would make more sense if spread out over the remaining pre-RMD years at lower dollar amounts. That would be more tax-efficient even if it means some of the conversions are occurring after the possible “sunset” of the current lower TCJA tax rates. Of course, future tax rates are unknown, with or without sunset, but I wouldn’t count on them being reduced. This situation could benefit from multi-year tax planning. The strategy would make even more sense if part of the objective is legacy planning and you’d rather leave your heirs the tax-free asset of an inherited Roth, rather than one that comes with a built in tax bill.

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