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Considering the tax-law changes, I am wondering what experts here think about the advantages of rolling over IRAs/legacy 401ks into Roth-IRAs. Likelihood of legislative changes to bring the tax rates back up after 2-4 years seems high.
This is actually not a "roll over" but a 'conversion" if your IRAs are in tax deferred accounts which I am assuming they are since your mentioned taxes.
Be aware that doing these conversions can impact more than just income tax on these conversions. If you are over age 65, conversions can push you into an income range that could triggers added costs to medicare or might reduce or eliminate other tax deductions (student loan interest, ACA premium subsidy, medical expenses, etc.).
If you are young and will be in a lower tax bracket as a result of the new Tax changes I would not hesitate so long as you have a funding source for the tax liability on these conversions. Hell, if you typically get a tax refund, getting less of a tax refund due to a Roth conversion is a perfect way to fund the conversion.
Finally, by doing periodic Roth conversions you are reducing future RMDs (after age 70.5). RMDs essentially force you to distribute away (lose) tax deferred IRA investments incrementally. With a Roth conversion you are electing to 'convert' these tax deferred investments into tax free status. This will benefit you (tax free distributions during your lifetime) and your spouse (spousal roll over of your Roth to them - maintaining its tax free status) and non-spouse (5 year rule - tax free distributions for them).
"Likelihood of legislative changes to bring the tax rates back up after 2-4 years seems high."
Conversely, if one assumes there won't be any legislative changes, the tax rates will still revert in eight years (after 2025). So prognostications aside, it seems like a good idea to take advantage of the changes while one can.
If you are in a higher bracket, another change that makes larger conversions more feasible now is the virtual elimination of the AMT. (It hasn't been eliminated, but it now kicks in at such a high level that it's all but gone.)
Normally I consider Roth conversions somewhat of a wash if one uses some of the IRA money to pay the taxes on converting, but now may be an exception. Assuming you're over 59.5 (so that withdrawals are not penalized), the benefit is that you could be paying a lower rate on your pre-tax money now than if you wait and withdraw it later.
For example, suppose you're in the 22% bracket, but were and will be in the 25% bracket. If you've got $1000 in the IRA, you convert $780 and use the remaining $220 to pay taxes. If you wait until your tax rate reverts to 25%, then you'll get a net $750 after-tax.
Of course, paying for the conversion with non-IRA is always better, even now.
You do have to watch for side effects of increasing AGI, as bee noted.
One other gotcha - if you were itemizing deductions before but will be taking a standard deduction now, then your marginal rate just went up on the state level, even if it dropped on the federal level. For example, you might be somewhere like Calif. or NYC where your local income tax rate is around 10%. Previously, that cost you only 7.5% (because you got to deduct it against your 25% federal rate). Now, if you don't itemize, you pay the full 10%. So you're paying around 2.5% more at the local level, essentially wiping out any reduction in your federal marginal rate.
Finally, remember that you can no longer recharacterize if you change your mind.
Comments
Be aware that doing these conversions can impact more than just income tax on these conversions. If you are over age 65, conversions can push you into an income range that could triggers added costs to medicare or might reduce or eliminate other tax deductions (student loan interest, ACA premium subsidy, medical expenses, etc.).
If you are young and will be in a lower tax bracket as a result of the new Tax changes I would not hesitate so long as you have a funding source for the tax liability on these conversions. Hell, if you typically get a tax refund, getting less of a tax refund due to a Roth conversion is a perfect way to fund the conversion.
Finally, by doing periodic Roth conversions you are reducing future RMDs (after age 70.5). RMDs essentially force you to distribute away (lose) tax deferred IRA investments incrementally. With a Roth conversion you are electing to 'convert' these tax deferred investments into tax free status. This will benefit you (tax free distributions during your lifetime) and your spouse (spousal roll over of your Roth to them - maintaining its tax free status) and non-spouse (5 year rule - tax free distributions for them).
https://fidelity.com/building-savings/learn-about-iras/inherited-ira-rmd
Conversely, if one assumes there won't be any legislative changes, the tax rates will still revert in eight years (after 2025). So prognostications aside, it seems like a good idea to take advantage of the changes while one can.
If you are in a higher bracket, another change that makes larger conversions more feasible now is the virtual elimination of the AMT. (It hasn't been eliminated, but it now kicks in at such a high level that it's all but gone.)
Normally I consider Roth conversions somewhat of a wash if one uses some of the IRA money to pay the taxes on converting, but now may be an exception. Assuming you're over 59.5 (so that withdrawals are not penalized), the benefit is that you could be paying a lower rate on your pre-tax money now than if you wait and withdraw it later.
For example, suppose you're in the 22% bracket, but were and will be in the 25% bracket. If you've got $1000 in the IRA, you convert $780 and use the remaining $220 to pay taxes. If you wait until your tax rate reverts to 25%, then you'll get a net $750 after-tax.
Of course, paying for the conversion with non-IRA is always better, even now.
You do have to watch for side effects of increasing AGI, as bee noted.
One other gotcha - if you were itemizing deductions before but will be taking a standard deduction now, then your marginal rate just went up on the state level, even if it dropped on the federal level. For example, you might be somewhere like Calif. or NYC where your local income tax rate is around 10%. Previously, that cost you only 7.5% (because you got to deduct it against your 25% federal rate). Now, if you don't itemize, you pay the full 10%. So you're paying around 2.5% more at the local level, essentially wiping out any reduction in your federal marginal rate.
Finally, remember that you can no longer recharacterize if you change your mind.