Roth IRA Conversion (Part 2): 2024 Tax Planning Strategies and Inherited IRAs
In the world of retirement planning, a Roth IRA offers unique tax benefits that can significantly impact your financial future. Part 2 of our exploration into Roth IRA conversions will delve into strategies for 2024 tax planning, especially focusing on inherited IRAs and how they interact with conversions.
Understanding Roth IRA Conversions
A Roth IRA conversion involves transferring funds from a traditional retirement account (like a 401(k) or traditional IRA) into a Roth IRA. This conversion entails paying taxes on the amount converted since traditional accounts are often tax-deferred. However, once the funds are in a Roth IRA, they grow tax-free, and qualified withdrawals during retirement are also tax-free.
Why Consider a Roth Conversion?
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Tax Diversification: By converting to a Roth IRA, you spread out your tax liabilities over time. This can be particularly advantageous if you anticipate being in a higher tax bracket in retirement.
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Tax-Free Withdrawals: Unlike traditional IRAs, Roth IRAs allow for tax-free withdrawals of both contributions and earnings after age 59½, provided the account has been open for at least five years.
- No Required Minimum Distributions (RMDs): Roth IRAs do not impose RMDs during the account holder’s lifetime, offering more flexibility in retirement planning.
2024 Tax Planning Strategies
As you approach 2024, consider incorporating the following strategies into your Roth IRA conversion plans:
1. Analyze Your Current and Future Tax Situation
Before converting, assess your current income and projected future income. If you anticipate falling into a higher tax bracket, converting now could help lock in a lower tax rate.
2. Use the Opportunity of Low Income Years
If you experience a year with significantly reduced income (e.g., due to job loss, sabbatical, etc.), it might be advantageous to convert during that period when your tax rate is lower.
3. Gradual Conversions
Instead of converting a lump sum, consider gradual conversions over several years to minimize the tax impact in any single year. This strategy allows for careful management of your taxable income.
4. Consider State Taxes
Keep in mind that some states tax distributions differently. Assess how conversion might affect your state tax situation, especially if you plan to relocate or retire in a different state.
Inherited IRAs and Roth Conversions
When it comes to inherited IRAs, the rules for conversions can be different and need to be understood thoroughly:
1. Types of Inherited IRAs
There are two primary types of inherited IRAs:
- Inherited Traditional IRA: Taxable distributions must be taken, and while you may convert to a Roth IRA, taxes will need to be paid on the converted amount.
- Inherited Roth IRA: Qualified distributions are tax-free, but there are still rules concerning distributions that beneficiaries must follow.
2. Five-Year Rule and Distributions
For inherited Roth IRAs, beneficiaries must take required distributions, but these can be tax-free if the account has been open for at least five years. If you convert an inherited traditional IRA to a Roth IRA, you need to consider the tax implications carefully.
3. Estate and Beneficiary Planning
Managing inherited IRAs effectively involves ensuring your estate plan aligns with your financial goals. Consider how conversions might impact your beneficiaries, especially in terms of their tax liabilities.
4. Consult a Financial Advisor
Given the complexities surrounding inherited IRAs and Roth conversions, working with a financial advisor can help tailor strategies that fit your unique situation and goals.
Conclusion
Roth IRA conversions can be a powerful tool in tax planning, especially as you strategize for 2024 and beyond. Understanding how these conversions interact with inherited IRAs is crucial for maximizing tax efficiency and ensuring your retirement savings work most effectively for you and your beneficiaries. Always consider your current and future tax situations, and don’t hesitate to consult a financial professional to navigate these important decisions.
By employing the right strategies at the right time, you can leverage the benefits of Roth IRAs to enhance your financial security in retirement.
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A great series – thank you!
Your discussions are crystal clear. I particularly appreciate the absence of drama in your presentations. Thank you.
Love this throughly clear well explanation!!!! THANK YOU!
Thank you, very well explained and super helpful for the current planning. My husband and I are doing with retirement in front of us in two years!
Very well explained. Great work! Thank you!
This series is so complete and informative that beats a lot of other videos on the same topic. Often using web financial tool to calculate but don’t know the details of why and I am often not so confident. Through this series I understand the calculation and can make decisions on myself.
Your content is outstanding as you can read along and really understand this so much easier! Thanks NERDS!
This is a great tutorial… the entire series is fabulous! This is the first one I've seen that clearly explains how conversions work and how to calculate the benefit. Thanks!
Look how wide the 24% bracket is right now. And 24% is only 2% higher rate (than the immediately lower bracket of 22%). But if you exceed the 24% it takes a much bigger jump to 32%. Might be good to consider filling up the 24% bracket, unless you are very optimistic about lower rates or less income in the future.
A very good video on this topic. I have been doing these calculations each year. However much of my income comes at the end of the year as distributions from mutual funds and end of year interest. Therefore the calculations are done at the end of December. Complicating the calculations is the fact that there are tax brackets to consider (as you explain thoroughly), and also the Income Related Monthly Adjustment Amounts (IRMMA) brackets that effect those who are on Medicare or Medicare "Advantage" plans. A Roth conversion may keep you from entering the next higher tax bracket, but can push you into the next higher IRMAA bracket. That will increase your monthly Medicare premiums two years later. This applies to those single filers who earn $103,000 or joint filers who earn $206,000 in 2024.
Thank you so much. I would rather have you as my accountant then the one I have this year.
Lots of elderly people are putting their RMD right back into their 401K’s. What are the consequences of that?
I love your pace. Thank you!
Great Video on this subject. A video thought would be is there some logic for people who have a cash invest, IRA balance and a Roth balance to use all the different pools for tax pulling during retirement. Another idea since the next level up from 22% is 24% should we go to the next level and convert more since really it's only a 2% increase and growing at tax free. Thanks again and a great job !!!
New subscriber here,,,great video. Do you have or can you do a video on so called “back door” Roth conversion? Thanks
Great videos. Your voice lends itself to such presentations. I Liked and Subscribed.
I’d like to see you tackle the complex topic of PAYING for Roth conversions.
You could also discuss withholding when dispersing or converting.
Great video on this subject! I didn't realize the tax rates were going to change in 2026. I was planning on doing ROTH conversions in 2024 when I plan on retiring. I'm purposely going to defer taking much income in 2024 so I can fill the bracket by converting IRAs to my existing ROTH account. 2024 will be a tough year from an income standpoint, but well worth the trouble to save on future taxes. I was already planning on doing a smaller conversion in 2025, but it may make sense to take an additional 22% hit on additional transfers since the income limits drop from 89k to 76k and the rate goes to 25%.
Thanks for doing the video!
Hello Nerds, kudos to you! Words can’t express enough how beneficial and comprehensive part 2 of your Year End Tax Planning strategies 2023-2025 have been. Part 1 was very informative also to understand the need which I have emulated to the point of staying below the IRMA/Medicare Taxes threshold. You have put it in such a manner that makes converting a no brainer. What I find, it mirrors my situation so I can relate and have been doing that which you have just confirmed. Thank you!
I’ll be 72 in Dec. 2023. So I have only up to 2025 to convert any remaining 401K until the rates sunset. Now, if I didn’t and wait. I would have lost out on the opportunity. If the rates do go down, then I’ll continue to convert using the lower rates. Still a win!
However, can a QLAC, Qualified Annuity Longevity Contract be used at the same time in conjunction with a Roth conversion as a means to further reduce taxes or not? Pointing out the year/s when taking the income from the QLAC may make sense. Keep up the good work! And, thank you once again!
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.
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.