_{By William Baldwin, Forbes Staff, Dec 3, 2023}

If you have a big wad in a pretax IRA, sit down with your accountant now. Taxes are likely headed higher.

 

Tax rates are going up. Do your conversions now. That’s a starting point in the complex game of IRA manipulation. But the general rule must be accompanied by footnotes and provisos. For these subtleties we turn to Robert S. Keebler, an accountant in Green Bay, Wisconsin, who has elevated tax bracket management into an art form.

Large sums are at stake. Keebler’s firm has had occasion to advise on eight-figure IRAs, with potential savings into the millions of dollars. For a prosperous but not wealthy upper-middle-class client, the difference between doing nothing and making the optimal moves could be a few hundred grand.

Roth conversion means the prepayment of income tax on some portion of your retirement account, leaving that sum immune to future tax. The time to think hardest about converting is when you are nearing or in retirement.

If you pay the tax from funds outside the account (the only rational way to go about this), and if your tax bracket in later years will be not much lower than it is now (often but not always true), a conversion is likely to leave you better off.

Where is your tax rate headed after you retire? Not necessarily down. For one thing, the required minimum distribution from any unconverted IRA may keep you in a surprisingly high bracket. Next, the Trump-era tax cuts of 2017 end on January 1, 2026. Finally, the budget deficit (recently $1.7 trillion) may force Congress to boost taxes even beyond the 2026 rates now on the statute books.

Make your own guess about who’s going to win the next election and what laws will be passed, but, Keebler says, “Any reasonable position would recognize that rates are more likely to go up than to go down.”

Here are some of Keebler & Associates’ Rothification schemes:

The Bracket Fill. The 24% federal rate applies on a married joint return to taxable income between $191,000 and $364,000. It might make sense to do just enough converting this year, and again in 2024 and 2025, to take advantage of this low rate. You fill the bracket but don’t go beyond it.

With an income in this range you will land in the 28% or 33% federal bracket in 2026. Now, your marginal rate—what you pay in tax on an incremental dollar of income—is not so simple. The kinky Pease limitation, resurrected from the crypt by the expiration of the 2017 law, will add roughly a percentage point to your effective federal rate. On the other hand, resi-dents of spendthrift states will again be able to deduct state and local income taxes.

Adding it up, upper-middle-incomers are likely to see a benefit from paying some IRA taxes now rather than later.

The time to think hardest about converting your pre-tax IRA to a Roth is when you are nearing or in retirement. 

The Trump Roll. With this maneuver you wait until December 2025 to see what Congress cooks up. If nothing, you convert a chunk of money at the low rates still in effect. Four months later you pay the year 2025 federal and state taxes on this sum. The state tax becomes deducti-ble on your 2026 federal return.

The Endgame. A widow worth $3 million wants to leave $1 million each to her two kids. With the remainder she aims to cover nursing care or, if she never needs that, a charitable bequest. She should leave that last $1 million in an unconver-ted IRA. When the money comes out it will be either offset by a medical deduction or exempt.