IRA too big. Best way to minimize taxes and maximize estate

[retiredtoolate]

Hi,

I REALLLY like your site!  There are a lot of great ideas and I have read through many of your articles and forum posts and learned a lot.

Through 30+ years of savings and investing, our investment accounts have done very well.  My wife and I are 60 and 59.  We are both retired as of this year.  I am looking for advice on how to minimize taxes through our lifetime and how to minimize estate taxes.  In all honesty, I never thought our estate would be big enough to worry about the estate tax but now I am pretty sure it will. 

Approximate Current Values:
Traditional IRA - 4,000,000
Roth IRA - 950,000
Brokerage - 1,800,000
Real Estate - 750,000 (includes two rental homes)

We are buying health insurance through the ACA.  Our estimated income this year is 150K so we get a decent subsidy.  Family of 4.

Next year my plan is to convert about $33100 (24800 standard deduction + 8300 HSA contribution) from a traditional to Roth IRA and then harvest about 80000 long term gain and pay no tax.  What a deal!  This also allows me to still get a pretty good ACA subsidy fpr 2022.  Since the "enhanced" ACA benefit is set to expire after next year, subsequent years will look very different.  We will be well over the ACA cliff so will ignore it.

Starting in 2023, my though is to convert about $300,000 to a Roth each year, paying $54,000 in taxes per year until we have to start taking RMD's.  I plan to convert an amount that takes us to the top of the 24% tax bracket.  This will move about 3M to a Roth IRA over the next 10 years.  I will pay the taxes and pay for our living expenses out of our brokerage account so will probably never need to touch the Roth IRA's.  We will also delay SSN payments until full retirement age.  Once we begin taking RMD's we will probably use that for our living expenses and not need to take much from the brokerage accounts.  It may still be a good idea to convert more to a Roth each year while taking RMD's.

From the spreadsheet I created, converting 3M to a Roth will result in over $1M less lifetime taxes, not to mention leaving a lot of money to our heirs without tax consequences when they withdraw it.  However, paying .5M taxes in the next 10 years reduces future earnings by well over 1M, which is where I get confused as to what the best option is.

Any suggestions or comments, other than we should have retired 5 to 10 years ago?

[gocurrycracker]

What you have described is a reasonable plan.

The question to ask is will your heirs pay tax at a rate higher or lower than 24%? If higher, then your plan is the best option. If lower, then be less aggressive.

The answer to this question is also the answer to whether it is better to pay tax now vs later ("paying $0.5 million in tax now reduces future earnings by $1 million.") Paying 24% tax now and paying 24% tax later will result in identical outcomes (associative property of multiplication.)

Unfortunately this is a very difficult question to answer because we don't know many things - future tax law, future health insurance law, age of inheritance, heir income during the 10 years post-inheritance, investment returns between now and age of death, etc...


One thing to consider - if you are still getting ACA subsidies this year and next, then Roth conversions also result in an 8.5% ACA tax (each $1 of Roth conversion will increase your ACA subsidies by $0.085.) Effective tax rate is then more like 32.5%

Some time ago I explored lifetime tax minimization for a high net-worth couple:
https://www.gocurrycracker.com/reader-financial-review-scared-death-early-retirement/

[retiredtoolate]

Thank you for the reply!  I had read the article you referenced a couple times before posting and have read it again.  It is full of great information.

I am pretty sure our heirs will be in a bracket higher than 24% with their income and the required IRA withdrawals, especially if we don’t do any conversions now.

Another concern is that the Tax Cuts and Jobs Act of 2017 are set to expire in 2025.  The 24% tax bracket will become the 28% bracket.  In my opinion, with all the money the Feds are printing, future taxes will need to go up to pay the debt.  If this happens, a Roth conversion now looks even better.

I know that your pay now or pay later math working out the same is correct as long as the percentage is the same.  The really nice thing with a Roth conversion is that there isn’t a pay later option!  The worst thing with a traditional brokerage account is that there is only a pay every time you sell option.  Fortunately, long term capital gain rates aren’t too bad and you have control over when you sell.

Thank you for everything you do to help people plan for and manage their retirement!

[gocurrycracker]

If taxes go up, yes better to pay now vs later. They may go up, but probably not because of federal debt
(Fun read: https://amzn.to/3B2FsNp)

The no pay later option on a Roth is nice, I agree. It's only because you pay now though, so it isn't free.

For the specific plan of $300k annual Roth conversions...
Any dividend or capital gain distributions from the brokerage account will be taxed at 15% + 3.8% NIIT vs 0% (?) if you do no Roth conversions. That is another few thousand dollars of tax per year (maybe 10% increase in total tax.)

At age 60 the legal cost of health insurance premiums can be 3x the cost at age 25. For a household of 2, heath insurance premiums could be on the order of $25k/year - the cliff can be massive. Adding the cost of going over 400% FPL to total tax paid could give you a marginal rate much higher than 28%+.

I don't know if either of these factors are significant without looking deeper, but they should be included in any analysis.


With $4 million in Traditional IRA now some Roth conversions are warranted. I'd probably aim for having TIRA values at less than $2.5 million at age 70-ish. Maybe <$2 million with SS and rental income filling lower brackets.
https://www.gocurrycracker.com/is-your-401k-too-big-part-2/

This might mean filling the 22% bracket and stopping. (Although 24% isn't that much more and maybe you just fill it because it is easiest.)