Craig Wear argues that the standard advice to convert only up to your tax bracket each year doesn't work for large IRAs. A couple with $1.5 million at 63 would pay $2.5 million in taxes doing nothing, but a strategic conversion plan cuts that to $550k, saving $1.95 million.
We love Roth conversions, but there's a lot of differing advice on the best way to go about it. The common advice is for you to convert up to the top of your current tax bracket each year and just stop. And on a smaller account, that's fine, probably the best way to do it. But look at the clock. Required distributions start in your 70s. If you're 63 with $1.5 million converting in small bites inside of a low bracket, man, you run out of years before you run out of IRA. You'll cut the problem down some, but it's hundreds of thousands of dollars short of a more strategic So instead, let's look at what happens when Bill and Susan follow a custom conversion plan. It includes a large conversion that takes them above their current tax bracket. And if that raises any flags for you, good. That means you're paying attention. Yes, converting above your tax bracket will give you a short period of higher taxes and higher Medicare costs. But consider it a small bump in the road that is all smooth sailing once you get past that part. Under that plan, the total family tax is about $550,000. Compared to the do-nothing plan, that's $1.95 million less in tax. Now, that's more like it.
