Time to do a Roth conversion?

[JimGant]

There are two events going on, neither of which have come into effect, and maybe never will. One is the Thai proposed taxing of worldwide income, regardless of remittance. The second is the possible disappearance of the Trump tax act, at the end of 2025. Both would have a tax hit, should you not convert your traditional IRA to a Roth.

 

For the worldwide tax event to come into effect -- which I believe it couldn't until, the earliest, Tax Year (TY) 2025 -- if you waited until 2025 (or whenever it came into effect), you'd pay Thai taxes on the total amount of the conversion (as they have exclusive taxation rights, per DTA) -- a total which could be a significant six-figure amount. And this conversion would be treated the same as taking a distribution from your traditional IRA, which, of course, it is -- only in total amount, instead of, say, a required minimum distribution (RMD). [see footnote]. Thus, if you converted this year, there would be no taxable event, at least to Thailand, since there's no remittance aspect to a conversion -- only an income aspect -- yet to come into play. Wait a few years to convert -- then you may be facing a Thai tax significantly greater than what you'd pay to the US -- meaning, your US tax would be completely wiped out by the Thai tax credit, so your overall taxation would be that huge hit by Thailand. Hmmmm.

 

The second event in play here is the possible canceling of the 2017 Trump tax cut, which could take affect in TY2026. The following article explains it nicely; and even 'tho aimed at Fed employees, it's mostly applicable to all.

Quote

As a refresher, a Roth conversion is when you take a distribution from your Traditional IRA, pay taxes on the total amount of the distribution, and then immediately convert the distribution into a Roth IRA, so that it can grow tax-free in the Roth IRA ever after.

https://www.fedsmith.com/2024/04/09/case-for-roth-conversions-through-2025/

 

So, convert before the Trump tax act is cancelled -- and pay less US tax on this early conversion. Plus, since you'll now have no RMD requirement, as you would have with a traditional IRA, then no taxes on an RMD, which would be at the new, higher rate. AND, no taxes to Thailand on any now non-existent RMD (which you would have, per DTA). Thus: Saving on the conversion; saving on no RMD to US at higher rate; and saving to Thailand, by having no RMD for Thailand to tax. Good stuff.

 

So, if you've considered doing a Roth conversion -- step on it. If you haven't considered it -- best do so!

 

[Note: The US-Thai DTA is explicit on: Thailand has exclusive taxation authority on US IRAs, 401ks, and the like -- spelled out in the technical explanation of this treaty. However, because the US has its 'savings clause', that allows them to tax everything, regardless of treaty language -- then, in effect, Thailand only has primary taxation rights, and the US secondary taxation rights. This doesn't affect Thailand any -- they still get to collect and keep all taxes. And the US has to absorb a tax credit from Thailand, which, should Thai taxes be low, means the US would keep some of their taxes against the IRA distribution. But, for a Roth conversion -- I would think any Thai tax credit would blow out any taxes to the US.

 

Second point here: It's totally weird that the US would allow in their tax treaties (all, not just with Thailand) that the resident country gets to keep all those taxes on IRAs -- that have sat tax deferred for years, with the US waiting to collect those taxes via avenues like RMDs -- but never does, because of some treaty language written by a dope. Oh well. Right now, if Thailand goes into worldwide taxation mode, my RMD will have to be declared on a Thai tax return. As it's around $15000/yr it will barely reach the taxable income mark -- so the big hit will still be my US taxes, with a slight dent from a Thai tax credit.]

 

[TallGuyJohninBKK]

Jim, I'm glad you posted this topic, because it brings added focus to the issue of how Americans with IRAs and Roth IRAs might be impacted by the latest PROPOSED changes to Thai tax rules for expats.  Specifically, that in the future, U.S. IRA distributions (including Roth conversions) might become subject to Thai taxation and are not shielded by the current US-Thai tax treaty.

 

However, I think the notion above of the PROPOSED Thai tax changes being something that ought to trigger folks now to suddenly do LARGE dollar value Roth conversions is a problematic one... First, because we really don't know yet what if anything the future Thai tax rules will be and/or when they might take effect.

 

But also second, making one or two-time high-value IRA to Roth conversions would be a taxable event in the U.S., and potentially push that person into a much higher (and very costly) U.S. tax bracket for the year/s in which the conversion or conversions occurred.

 

Here's the U.S. tax brackets chart for 2024:

 

 

https://www.nerdwallet.com/article/taxes/federal-income-tax-brackets#2024-tax-brackets-and-income-tax-rates

 

As folks can see, for this year, anything over $100K of taxable income (including IRA to Roth conversions) for a single filer would start out at a 24% U.S. income tax rate, and total taxable income for the year in excess of about $192,000 would get taxed by the feds at varying rates between 32% and 37% for the current year.

 

Now, totally absent the Thai taxation issues, I know the financial advice I've always been given about IRA to Roth conversions is that, ideally, you want to spread them and the converted amounts out over time, so that when you do conversions, they don't kick you into a higher (or much higher) tax bracket that you'd otherwise be in.

 

Now, IF the Thai authorities do go thru with their latest plan (unlike the prior one they seem to have suddenly abandoned after months of discussion and debate about implementation), will the latest plan make it sensible for an American to do a single or maybe two very large amount Roth conversions, and how would doing so wash out between the U.S. and proposed Thai taxation schemes.

 

That part seems very unclear to me at present..

 

[JimGant]

3 hours ago, TallGuyJohninBKK said:

I think the notion above of the PROPOSED Thai tax changes being something that ought to trigger folks now to suddenly do LARGE dollar value Roth conversions is a problematic one..

My point was, if you've been thinking about doing a Roth, maybe sooner is better than later. But you'll probably have enough warning on whether or not you need to do it by the end of this year, if it looks like the new worldwide taxation will kick in in 2026.

 

All the other caveats and guidance on doing a Roth have been around for some time. The article I referenced does a good job of delineating these. The only real kicker -- other than the Thai worldwide income aspect -- is if Trump's tax cuts get eliminated, which I would guess, is doubtful. But, again, hey, if you've considered doing a Roth, some new ammunition to assist your decision. [I've never done one, and don't plan to do one. If my RMD gets taxed by the Thais, no big deal, as it will be a minimum amount, as it barely pokes into the taxable income level. Plus, the Thai taxation will then be a tax credit against the US tax on this same RMD. Ho hum.]

[JimGant]

4 hours ago, TallGuyJohninBKK said:

will the latest plan make it sensible for an American to do a single or maybe two very large amount Roth conversions, and how would doing so wash out between the U.S. and proposed Thai taxation schemes.

If you convert before the Thai implementation of worldwide taxation, there's no Thai taxation, since there' s no remittance involved with a conversion. But once Thai worldwide taxation comes into effect, if you convert at that point, the conversion is taxable by Thailand, since remittance is no longer a requirement. And the DTA says Thailand has exclusionary taxation rights on IRA taxable income events. US taxation on the conversion would be affected by any Thai taxation to the extent the US would have to absorb a Thai tax credit against its taxation on the IRA conversion.

Edited June 15 by JimGant

[TallGuyJohninBKK]

If I'm reading the Thai and U.S. tax tables correctly for 2024, Thailand has overall higher tax rates for the same amounts of income than does the U.S. for a single filer right now -- just going off the tax tables, not factoring in exemptions or deductions.

 

For example, if I did a $100,000 IRA to Roth conversion as my only taxable income for the year, all of it would be taxed by the U.S. at 22% or less (the first $47K or so would be taxed at 10% and 12%, while everything from $47K to $100K would be taxed at 22%)

 

If I did that same transaction and it was fully taxable in Thailand, everything from roughly $27K (1M THB) to $54K would be taxed at 25%, and everything from $54K (2M THB) to $100K would be taxed at 30%.

 

Obviously, if a person already had OTHER regular taxable income and the abovementioned IRA conversion was being added on top of the regular taxable income, then the add-on income from the conversion would be being taxed in the higher tax brackets to start with.

 

In Thailand, you get to the 35% tax rate for all taxable income of roughly $136,650 (5 million THB) and above. In the U.S., roughly $100K to $192K of taxable income is only getting taxed at an incremental 24% rate for that bracket, AFAICT.

 

Depending on the total taxable income amounts involved, the differences in tax rates between the U.S. and Thailand seem like those could result in many thousands of extra dollars of taxation occurring here if driven by large amount IRA to Roth conversions under the proposed new Thai taxation rules on foreign income.

 

 

Edited June 15 by TallGuyJohninBKK

[JimGant]

23 minutes ago, TallGuyJohninBKK said:

Depending on the total taxable income amounts involved, the differences in tax rates between the U.S. and Thailand seem like those could result in many thousands of extra dollars of taxation occurring here if driven by large amount IRA to Roth conversions under the proposed new Thai taxation rules on foreign income.

Indeed. That's why I gave the "heads up" warning for those contemplating a Roth conversion -- 'cause if you wait until the worldwide tax scheme happens, you're in for a potentially big hit with a substantial conversion.

[TallGuyJohninBKK]

Frankly, whether the new Thai tax rules come into effect or they don't, I'd prefer to NOT be taking any discretionary / non-mandatory financial decisions like an optional LARGE amount IRA to Roth conversion that could result in EITHER the U.S. or the Thai governments taking a 30-35% tax cut of my earnings/distributions.

 

But, if I needed to do a large IRA distribution for some reason, it might very well be financially worthwhile to AVOID being a Thai tax resident for the year in question, avoid the Thai 35% maximum tax rate, and settle for a 24% tax rate in the U.S., and avoid amounts that would push me into any higher tax bracket ($192K and above).

 

 

Edited June 15 by TallGuyJohninBKK

[Thailand J]

IRA distribution or conversion to ROTH pushes up to $47000 of my long term capital gain and dividends (pretty much all my incomes nowadays) from 0% tax to 15% tax.

The table below is the additional tax when I do a conversion.

Might as well go up to 24%, about 190K a year.

 

 

Edited June 16 by Thailand J

[Yellowtail]

It is hard to imagine for someone at or near retirement converting makes sense to me. Pay tax on the principle to avoid paying taxes on the growth later? 

 

 

[gamb00ler]

3 hours ago, Yellowtail said:

It is hard to imagine for someone at or near retirement converting makes sense to me. Pay tax on the principle to avoid paying taxes on the growth later? 

You can only avoid tax on the IRA/401k balance if you keep your withdrawals so low that your total income is covered by your personal exemption(s).  That's not practical for many and may not be possible once you reach the age where RMD's kick in.

 

The major downside of Roth conversion is the acceleration of taxation on the amount converted to the current tax year rather than later when voluntary or mandatory withdrawals are made.  Also, withdrawal of the converted funds will incur a penalty if done before at least 4 years following conversion.

 

To do a thorough analysis you need some tools to reduce the effort.  I use a donation-ware Excel spreadsheet that will essentially do your taxes for a single year.   With it I can easily manipulate my income level and see all the effects and the final tax total.  For example, the spreadsheet will automatically calculate the change in tax on your SSA benefits for the different income levels.  The spreadsheet will NOT total up your total tax over a number of years to facilitate comparison of different conversion/withdrawal strategies.

 

https://sites.google.com/view/incometaxspreadsheet/home

 

I have used it quite a lot for tax planning ... if anyone has questions about it I can likely help.

 

Edited June 16 by gamb00ler

[Thailand J]

On 6/16/2024 at 6:21 PM, Yellowtail said:

It is hard to imagine for someone at or near retirement converting makes sense to me. Pay tax on the principle to avoid paying taxes on the growth later? 

 

 

Pay tax now or pay later the results are the same. if you invest in the same investments  and if the tax rates are the same.

 

Say Balance=B, Tax=T, Growth=G

 Conversion means tax the balance and let it grow in Roth and withdrawal tax free,

 Yield=B x T  x G, tax comes first.

 

Let the balance grow in traditional IRA and pay tax at withdrawal. yield=BxGxT, tax comes last.

 

My math teacher told me AxBxC=AxCxB,

so BGT=BTG, if you invest in the same investments( same growth G) and if the tax rates (T)are the same. Tax rate is the tricky part, you'll need to compare your present tax rate to your anticipated future tax rate to see if conversion is for you.

 

 

Edited June 21 by Thailand J

[Yellowtail]

9 hours ago, Thailand J said:

Pay tax now or pay later the results are the same. if you invest in the same investments  and if the tax rates are the same.

 

Say Balance=B, Tax=T, Growth=G

 Conversion means tax the balance and let it grow in Roth and withdrawal tax free,

 Yield=B x T  x G, tax comes first.

 

Let the balance grow in traditional IRA and pay tax at withdrawal. yield=BxGxT, tax comes last.

 

My math teacher told me AxBxC=AxCxB,

so BGT=BTG, if you invest in the same investments( same growth G) and if the tax rates (T)are the same. Tax rate is the tricky part, you'll need to compare your present tax rate to your anticipated future tax rate to see if conversion is for you.

 

 

And had your math teacher been a savvy investor, they likely would not have been a math teacher. (just kidding) 

 

Traditional IRA ONLY makes sense if you can fully benefit from the deduction. If your tax situation is such that you're paying little or no tax, the Roth is the only way to go. 

 

I think the topic is about someone at or near retirement converting a Traditional IRA to a Roth. I do not see how that makes sense.

 

 

[Thailand J]

In my post above  the results will be the same, if the IRA and Roth IRA are invested in the same type of investments and the interest rates are the same, also I assumed part of the distribution from the IRA is used to pay tax and the remaining goes into Roth.

But most people would just do a rollover conversion by depositing the entire distribution into Roth, and pay tax out of pocket. Entire distribution is allowed to grow in Roth  resulting a bigger tax free payout in the future.

 

[gamb00ler]

21 hours ago, Yellowtail said:

I think the topic is about someone at or near retirement converting a Traditional IRA to a Roth. I do not see how that makes sense.

It does make sense if you are able to do the conversion and pay very little tax or none at all.

 

In my case COVID made most of my income disappear and if those opportunities ever re-appeared I would have already moved to Thailand.  I was collecting only a small amount of pension so my annual income was low and I was living on accumulated after tax savings.  In that case I had unused income exemptions.  Near the end of the tax year I knew exactly what my taxable income would be so I topped up my income using Roth conversion to the maximum tax free amount.  All the benefits of Roth conversion with no tax.  I could have just made normal qualified IRA distributions (also with no tax) but I still wanted the benefit of tax free growth in a Roth.  The only downside to my conversion was I would have to wait until the 5th tax year (really only 4 elapsed years) to withdraw from the Roth without penalty.

[Yellowtail]

3 minutes ago, gamb00ler said:

It does make sense if you are able to do the conversion and pay very little tax or none at all.

 

In my case COVID made most of my income disappear and if those opportunities ever re-appeared I would have already moved to Thailand.  I was collecting only a small amount of pension so my annual income was low and I was living on accumulated after tax savings.  In that case I had unused income exemptions.  Near the end of the tax year I knew exactly what my taxable income would be so I topped up my income using Roth conversion to the maximum tax free amount.  All the benefits of Roth conversion with no tax.  I could have just made normal qualified IRA distributions (also with no tax) but I still wanted the benefit of tax free growth in a Roth.  The only downside to my conversion was I would have to wait until the 5th tax year (really only 4 elapsed years) to withdraw from the Roth without penalty.

If you have little or no income perhaps. But if you file single, you start paying taxes at around $13K, yes?

 

 

 

 

[gargamon]

On 6/16/2024 at 7:21 PM, Yellowtail said:

It is hard to imagine for someone at or near retirement converting makes sense to me. Pay tax on the principle to avoid paying taxes on the growth later? 

 

 

Once you hit retirement, you are forced to withdraw from your regular IRA, a taxable event. You do not have to withdraw from a roth. I've been moving money from my regular IRAs to roths for decades. Now that I'm getting a couple of years from 70, I wish I had moved more and paid the taxes at that time. Now I'm moving only the amount that keeps me around the 12% tax. It's still going to be painful having to pay the taxes on the withdrawals along with the social security which I'll start at 70, the latest possible and largest amount time.

 

Of course, if you don't have much money in your retirement accounts, it makes little difference anyway.

[FruitPudding]

So, you're telling me Thailand can get its grubby, little paws on your tax sheltered investment accounts abroad??

[Yellowtail]

7 minutes ago, gargamon said:

Once you hit retirement, you are forced to withdraw from your regular IRA, a taxable event. You do not have to withdraw from a roth. I've been moving money from my regular IRAs to roths for decades. Now that I'm getting a couple of years from 70, I wish I had moved more and paid the taxes at that time. Now I'm moving only the amount that keeps me around the 12% tax. It's still going to be painful having to pay the taxes on the withdrawals along with the social security which I'll start at 70, the latest possible and largest amount time.

 

Of course, if you don't have much money in your retirement accounts, it makes little difference anyway.

No, not once you hit retirement. You do not have to take Minimum Distributions (RMD) until you are 73, and then you only have to draw out $25K a year. 

 

 

 

 

 

 

 

 

 

[gargamon]

35 minutes ago, Yellowtail said:

and then you only have to draw out $25K a year. 

You got a link for that? I can't find it anywhere. Good news if true.

[Etaoin Shrdlu]

1 hour ago, Yellowtail said:

No, not once you hit retirement. You do not have to take Minimum Distributions (RMD) until you are 73, and then you only have to draw out $25K a year. 

 

 

 

 

 

 

 

 

 

 

The amount of RMDs are based upon the total balance of all IRS/401k accounts at December 31st of the prior year and your age. There is a slightly different calculation used if a spouse is significantly younger than the owner of the account(s). The IRS publishes tables and gives instructions how to calculate the amount.  Here's a link to dig into: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

[Ben Zioner]

On 6/15/2024 at 7:39 PM, JimGant said:

Indeed. That's why I gave the "heads up" warning for those contemplating a Roth conversion -- 'cause if you wait until the worldwide tax scheme happens, you're in for a potentially big hit with a substantial conversion.

So, why not being "non resident" the year you make such conversion?

[JimGant]

1 hour ago, Ben Zioner said:

So, why not being "non resident" the year you make such conversion?

Sounds like a lot of trouble, for an action that's really not very critical to your financial planning -- particularly for those of us who now have pretty extensive roots here.

Edited June 23 by JimGant

[Ben Zioner]

14 minutes ago, JimGant said:

Sounds like a lot of trouble, for an action that's really not very critical to your financial planning -- particularly for those of us who now have pretty extensive roots here.

I must admit that I don't know what amounts of taxes are involved here. But if I lost my LTR exemption I 'd be liable for 800K IT a year, enough to consider taking extended holidays in 2 or 3 neighbouring countries.

 

 

Edited June 23 by Ben Zioner

[JimGant]

1 hour ago, Ben Zioner said:

But if I lost my LTR exemption I 'd be liable for 800K IT a year,

Wow, that sounds ominous. Must be cap gains. Can you elaborate? Thanx.

[Ben Zioner]

Just now, JimGant said:

Wow, that sounds ominous. Must be cap gains. Can you elaborate? Thanx.

Not much to say, my Pension is about 100000 USD. Hence the LTR.

[Yellowtail]

4 hours ago, gargamon said:

You got a link for that? I can't find it anywhere. Good news if true.

Sorry, my mistake, not sure where I got that. 

 

Here's a nifty RMD calculator: 

Calculate Your RMD - RMD Calculator| Charles Schwab | Charles Schwab

 

 

 

[Yellowtail]

For all you married guys, you can also open Roths for your wives, and contribute the full amount, even if they have no earned income. 

 

 

 

 

[Thailand J]

12 hours ago, Ben Zioner said:

I must admit that I don't know what amounts of taxes are involved here. But if I lost my LTR exemption I 'd be liable for 800K IT a year, enough to consider taking extended holidays in 2 or 3 neighbouring countries.

 

 

I cannot imagine paying Thai IT on my income.

I'll have to stop Roth conversion, still I have high dividend, and capital gain some years.

I'll have a pied-a-terre here and there, I don't have to be away 6 months continuously.

Imposing existing Thai tax codes on US income is just as ridiculous as to expect someone with average Thai salary to live in US.

 

Edited June 23 by Thailand J

[Ben Zioner]

1 hour ago, Thailand J said:

Imposing existing Thai tax codes on US income is just as ridiculous as to expect someone with average Thai salary to live in US.

Totally correct. It should nullify any of the attraction Thailand had left as a retirement destination.

 

Also when was the last time they readjusted the IT brackets for inflation?

Edited June 24 by Ben Zioner

[Cryingdick]

I don't have to report my Roth in the USA so I am not sure why any other country would know about it. I put my dividend stocks in it to avoid realized ga8ns as ordinary income. I have been a long term investor in tech and chips and having a few hundred (shares of NVDA thousands after the split) in your roth is a good idea in case you hit a homerun.. The way i manage fkucruTiins and emergencies is to always add to my Roth and have a margin account at a brokerage to invest and use leverage should something go bad, you can basically be 100% invested that way. You get a tax free egg, a savings account that yields 5% or so, and a revolving credit facility based upon secured loans that is around 6.8% and that can be tax deductible.

 

i use the margin account to front load the Roth a year ahead of time which is allowed. Then i pay it down as the loan is flexible and not a monthly requirement. Don't get ne woing i dint do that all the time but the tax free money in the back and a fairly low interst source of revolving credit is a powerful combination

Edited June 24 by Cryingdick