Anybody else trying to figure out their 2025 IRA strategies on a Saturday night? Well, maybe this crowd would, but I admit this isn't something I would be normally doing.
And yet, here I am, with an open question for anyone who is reading:
I am considering using money from my Traditional IRA to contribute to my annual Roth IRA, starting this year. The reason why is because money continues to be tight as I enter year 2 of my hope-it-will-continue-to-hold early retirement, and I would like to eventually close my Traditional IRA some day anyways, to avoid the eventual RMD.
I should also note that I have roughly 20 years to get this transition done, so it's not like I'm in a rush, but this seems like as good a year as any to get started, right? What do you guys think? My current contribution limit is $8k, so I believe that will not impact me greatly on the tax front, since I am no longer actively working anyways.
January 5th, 2025 at 02:51 am 1736045485
Instead, figure out how much you can CONVERT by looking at what your current tax bracket is expected to be for 2025 and then convert around up to the top of that bracket. Use tax software because there are a lot of "tax torpedoes" that can have unexpected tax consequences that you are unlikely to catch by eyeballing it, and leave a margin for error since there are always unpredictable income events. If you have a lot of investments in a *taxable* individual brokerage account, this is especially likely as mutual funds may make capital gains distributions to shareholders, particularly in December, which can't be predicted before October or so. If you look at the December 2024 statement from your taxable brokerage account and turn to the supplementary information, it should indicate which funds if any made capital gains distributions. Funds that make them one year are likely to do so the next, but the amounts can vary considerably from year to year.
We often make an early in the year Roth conversion estimate and then update it later in the year and consider a second conversion around November or so, or in case of a big market drop.
January 5th, 2025 at 02:55 am 1736045745
That also argues for doing a Roth conversion this year.
January 5th, 2025 at 03:05 am 1736046354
January 5th, 2025 at 09:20 pm 1736112027
January 5th, 2025 at 09:30 pm 1736112617
Independently, I also learned that conversions could also potentially increase tax premiums on social programs like Medicare and Social Security. Therefore, ideally, I should take care of this business before I reach that point.
January 8th, 2025 at 12:41 am 1736296883
Yes, you do need to watch out for impacts on Medicare and Social Security--those are two of the "tax torpedoes" I mentioned. However, note that Medicare has a two-year look-back, so any conversion now would affect your 2026 Medicare premiums if you are on Medicare by then. If you will be younger than 63 by the end of the year, you don't need to worry about the increased Medicare premiums (known as IRMAA, income-related Medicare Adjustment Amount). And even then, moving from the base Medicare tier at $185/month for Part B to Tier II at $259/month is a total increase of $888 for the year (plus an additional increase for Part D premiums, but still only around a thousand total increase). Then it depends on what your overall income and assets are as to whether that matters. Most of my clients have 2 to 5 million in their portfolios and find that the long-term potential tax benefits are worth the short-term tax hit. YMMV, as they say.
January 10th, 2025 at 08:59 pm 1736542792
January 10th, 2025 at 09:04 pm 1736543081
January 11th, 2025 at 04:00 pm 1736611219
So for now, you have absolutely NO worries about effects on IRMAA--that kicks in when you are 63 because of the two-year look-back. You could convert up to the top of the 12% (or even 22% tax bracket, but probably not necessary), pay the taxes early, and, depending on the amount of your tax-deferred assets, you could get those down low and get almost everything into Roth accounts and not have to worry about RMDs at all on your own accounts (if you end up inheriting a Roth account, you will be subject to the 10-year rule, but still, no tax).
It's not necessary to get the tax-deferred down to zero--remember, there's going to be a standard deduction. You want to get your taxable income (interest and dividends, plus if you end up having any self-employment income) down to about the size of your standard deduction, so that your taxable income is around zero (and not a negative number--when your taxable income is a negative number, you've not been optimally efficient). Assuming that the taxation of capital gains remains the same, you don't need to worry about those until your taxable income hits $48,350 in 2025; then long-term gains are taxed at 15%.
January 11th, 2025 at 04:08 pm 1736611693
January 12th, 2025 at 02:08 am 1736647687
I just want to clarify that my retirement is more like a life wish and an earnest attempt more than a guarantee if you know what mean. There is always a possibility that things might not work out, or who knows maybe I get bored of it, and end up returning to work. For now though, I'm just going to take it one baby step month at a time.
January 17th, 2025 at 10:37 pm 1737153467
January 23rd, 2025 at 07:37 pm 1737661021