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it goes by your total income plus the conversion as income
I am not aware of tax software that lets you just "practice" or run theoretical scenarios. I am hesitant to begin filing my 2023 taxes on turbotax just to run this scenario.
I suppose I can save this attempt for when I do my real taxes, then before submitting them I could add in a Roth conversion and see the difference, then erase it. I would just hate to do somethign stupid and accidentally file it that way.
Be better to do Roth conversions, then there will be no tax upon withdrawal.
Quote:
Originally Posted by Igor Blevin
I am not aware of tax software that lets you just "practice" or run theoretical scenarios. I am hesitant to begin filing my 2023 taxes on turbotax just to run this scenario.
I suppose I can save this attempt for when I do my real taxes, then before submitting them I could add in a Roth conversion and see the difference, then erase it. I would just hate to do somethign stupid and accidentally file it that way.
My concern is the tax consequences and lump sum liability. Just to put some very rough numbers to your concept, just for scope of impact.
As mathjak said, I need to do a more sophisticated analysis, but until then I do a rough out that may or may not be accurate at all, but this is my fear.
Just making up some numbers here.
Assume - $100,000 income
Assume - $300,000 401k
I convert that $300,000 into a roth.
Now my income is $400,000 for the year. (I am generalizing. Forget exemptions, deductions, AGI. Stick with me here).
Tax brackets
24% $95,376 to $182,100.
32% $182,101 to $231,250.
35% $231,251 to $578,125.
Tax burden for $400,000 (very roughly, as I said no exemptions or deductions)
@ 24% $20,814
@ 32% $15,728
@ 35% $59,062
Total = $95,604
So I would need to pay the IRS over $95,000 in one year for the Roth conversion, unless they take some payement plans, since my IRA money is committed, or unless they allow you to make that payment from the balance of the funds being rolled over.
If they allow payment from the converted money, my $300,000 value 401k converts to a $294,596 value Roth IRA.
In the meantime, I have paid a 35% tax rate on 168,750 dollars of that money in the conversion
It is really easy to just say "Convert to a Roth" but I think the devil is in the details.
Or do I have this 100% totally wrong, and you don't have to pay normal income taxes on a conversion from a 401K to a Roth?
Don't worry about the accuracy of my numbers or method as I am just doing a very quick example of how much higher my tax burden would be converting a 401k rather than just withdrawing it. I realize that there are complex factors my infantile calculation omits that a good tax program would include, but my point is very simple.
I need a huge lump sum payment to convert $300,000 from a 401k to a Roth.
I would incur 35% taxes on half the money being converted.
It seems that converting a $300,000 401k to a Roth IRA on top of a normal $100,000 annual income would cost $95,000 lump sum in taxes that I don't have sitting around.
It also seems that I would incur a nosebleed 35% tax rate on half the money being converted, rather than paying 24% taxes to just withdraw that money, not to mention the portion taxed at 32%.
Last edited by Igor Blevin; 08-09-2023 at 10:13 AM..
when the number in the conversion grow large it just is not worth it
Yes. People make suggestions without details. So suggestions to "convert to Roth" should come with qualifiers. Its one thing to tell a 20 year old to open a Roth vs 401k, but telling a retiree to convert to a Roth is a much different potential issue.
Meanwhile, I will have to ponder how dividends and income limits and Medicare affect my financial planning.
I posted this thread because I had only been thinking in terms of draining my 401k to beat the higher 2026 tax brakets. I had not even been thnking in terms of capital gains taxes as a consideration.
So at least I am thinking in broader terms than I had been, but apparently it is very complicated and hard to really maximize your situation without having a very good tax accountant.
Location: Was Midvalley Oregon; Now Eastside Seattle area
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Quote:
Originally Posted by mathjak107
especially if within two years of medicare .
those surcharges can be awful at the higher levels.
remember , medicare goes back two years to set your premium
and resets every year on the previous 2 years.
How bad the IRRMA will be, will depend on if and how you plan for the Medicare tax.
It's manageable if you plan. We will have extra spending power in 2024 when the IRRMA goes away.
YTMV
How do you know the tax rates will not be renewed? Plus you can also not predict the growth in your funds. They may grow more than the tax savings.
I can only go by existing conditions. I don't have a crystal ball.
I am making assumptions that may or may prove true.
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