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Proposed legislation limiting Roth accounts for the well off...

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  • Proposed legislation limiting Roth accounts for the well off...

    Let's say, hypothetically, a supersaver professional couple estimate their tax deferred accounts, including 401k, 403b, 457b, SEP IRA and TIRA accounts are projected to have a market value of more than 10MM looking forward to when the first spouse reaches the RMD age of 72. They currently have no Roth accounts. And further assume that this couple has the opportunity to do an approximately 500k Roth conversion in 2021 up to the top of the 24% marginal bracket due to an isolated, single year of lower taxable income for 2021. This would arbitrage their federal income tax rate on these tax deferred funds from the top marginal bracket (37% currently and who knows how much looking forward) down to 24% for 2021.

    How might the proposed Roth legislation throw a wrench in this plan? If you had this supersaver problem, would you convert 500k to Roth in 2021?



    From the summary of proposed legislation:

    Wealthy individuals with retirement accounts exceeding $10 million would be prohibited from contributing extra savings and would have a new required minimum distribution each year, according to an outline of tax legislation unveiled Monday by the House Ways and Means Committee.

    The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year. It would also prevent savers from using the “mega-backdoor Roth” strategy, regardless of income level.




    Would the 10M max allowed retirement account balance be the total of all accounts for each spouse? For the couple combined? Or the total for each separate account? In that case, this would likely be less of an issue for many.

    Would the rules be retroactive? Would the Roth conversion be disallowed if the couple has a very high income? But what if their one time tax sheltering deductions for 2021 reduce the taxable income below the $400k level in 2021?
    Last edited by White.Beard.Doc; 10-17-2021, 05:59 PM.

  • #2
    I will be interested in the responses to your questions. I think no one knows. I am aggressively converting but the value is only around 2.5 mill. I have kept bonds in these accounts primarily. The roth however is 100% equity. If it looks like 10 mill is likely I will switch to bonds. If you are less than 10 now you could increase your bonds in these accounts and use your taxable for equity. In answering your current question about a roth conversion perhaps I tax attorney. I would likely do it tho.

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    • #3
      For this one year only given your drop to the 24% bracket from the 37% one I would do the Roth conversion. Without knowing the exact rules that get passed if any it’s difficult to predict the best way to proceed in future years. If you use a DAF for charitable contributions, it may be more beneficial to pair DAF contributions with Roth conversions rather than using appreciated assets from taxable depending on how much embedded gains are involved. As proposed, I don’t believe that the $400K income restriction for Roth conversions kicks in until 2032 giving you a 10 year window for alternative solutions.

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      • #4
        Originally posted by GasFIRE View Post

        As proposed, I don’t believe that the $400K income restriction for Roth conversions kicks in until 2032 giving you a 10 year window for alternative solutions.
        Based on what you are saying, the Roth conversion should likely be fine.

        But I am wondering what happens to Roth accounts if one were to go over the 10MM. Will the non-taxable Roth become taxable? That, in effect, would lead to paying taxes on those funds twice. And that would certainly be much worse than leaving the funds in a tax deferred account and then paying taxes only once upon withdrawal, rather than twice.

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        • #5
          It is dangerous to comment on proposed legislation - so here I go:

          - Based on the document posted you can still do ROTH conversions after 2031 as long as taxable income < $400,000 single
          - Based on the document posted it looks like the large retirement accounts >10M and >20M are only reduced in the year following taxable income >$400k

          The details are important, but I'm sure there will be narrow paths around some of these problems

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          • #6
            Originally posted by White.Beard.Doc View Post

            Based on what you are saying, the Roth conversion should likely be fine.

            But I am wondering what happens to Roth accounts if one were to go over the 10MM. Will the non-taxable Roth become taxable? That, in effect, would lead to paying taxes on those funds twice. And that would certainly be much worse than leaving the funds in a tax deferred account and then paying taxes only once upon withdrawal, rather than twice.
            You've previously posted about using bonus depreciation cost seg. studies to lower taxes. Is the source of the equity for the property purchase from an IRA distribution? That's the strategy I've used to get $1.6M out of an IRA without paying taxes and lower the amount needed to cover with RMD's at 72. The ceiling on IRA accounts is another incentive to use this strategy to decrease the amount in the IRAs. I'm trying to move more out but the bottleneck is finding something to purchase at a reasonable price.

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            • #7
              I think we all have to wait and see what passes and the fine point details.

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              • #8
                Dangerous to predict until legislation is signed. Dangerous to ignore once it is.
                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                • #9
                  Originally posted by dennis View Post

                  You've previously posted about using bonus depreciation cost seg. studies to lower taxes. Is the source of the equity for the property purchase from an IRA distribution? That's the strategy I've used to get $1.6M out of an IRA without paying taxes and lower the amount needed to cover with RMD's at 72. The ceiling on IRA accounts is another incentive to use this strategy to decrease the amount in the IRAs. I'm trying to move more out but the bottleneck is finding something to purchase at a reasonable price.
                  We have not used cost seg to get money out of tax deferred accounts to purchase RE. We purchased RE and are using cost seg/bonus depreciation to shelter 2021 income from other sources. The bonus depreciation is very significant this year and it will shelter all of our 2021 income. The Roth conversion plan is the icing on the cake. If we find a good RE deal, we will repeat this plan in 2022 as that is the last year for 100% bonus depreciation.

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                  • #10
                    You have plenty in the tax deferred buckets so you may want to alter your strategy especially if you can find a real estate purchase in the next year and use the bonus depreciation to cover a distribution out of the IRA to purchase the property and kill 2 birds with one stone. You lessen the IRA tax free and therefore concern about RMDs and at the same time secure another tax advantaged income source outside of the IRA.

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                    • #11
                      White.Beard.Doc can you more fully enumerate the combination of adjustments to income, non passive losses and tax deductions that get $500k down to the top of the 24% marginal tax bracket?

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                      • #12
                        Originally posted by Bmac View Post
                        White.Beard.Doc can you more fully enumerate the combination of adjustments to income, non passive losses and tax deductions that get $500k down to the top of the 24% marginal tax bracket?
                        For 2021, my tax deductions related to RE investments throwing off bonus depreciation will exceed my total income by around 200k, meaning that if I did not do a Roth conversion, my taxable income would be negative 200k, but actually it would be zero taxable income with a 200k carry forward deduction for next year.

                        Rather than pay zero tax in 2021, and then pay tax at all the various marginal rates all the way up to 37% or more in the future, I will Roth convert 500k from a tax deferred account this year, raising my taxable income from -200k to +300k. That will allow me to pay taxes up to the top of the 24% marginal rate. I would much rather pay tax now at 10%, 12%, and 24% and thereby pay less tax in the future at 37% or more.

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                        • #13
                          Sweet situation. Great plan.

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                          • #14
                            Originally posted by White.Beard.Doc View Post

                            For 2021, my tax deductions related to RE investments throwing off bonus depreciation will exceed my total income by around 200k, meaning that if I did not do a Roth conversion, my taxable income would be negative 200k, but actually it would be zero taxable income with a 200k carry forward deduction for next year.

                            Rather than pay zero tax in 2021, and then pay tax at all the various marginal rates all the way up to 37% or more in the future, I will Roth convert 500k from a tax deferred account this year, raising my taxable income from -200k to +300k. That will allow me to pay taxes up to the top of the 24% marginal rate. I would much rather pay tax now at 10%, 12%, and 24% and thereby pay less tax in the future at 37% or more.
                            We could use you on our team.
                            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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