Using CRUT tax deduction for Roth IRA conversion?

Forum|Forum|1 year ago
December 13, 2024
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I am seeking help with an situation where I use the immediate tax deduction available from moving highly appreciated assets to a FlipNIMCRUT to convert an existing IRA to a Roth IRA. For simplicity, let's say I have an existing $1m traditional IRA and a $1m brokerage account position (with a low cost basis / high capital gain). It's my understanding that, after moving the asset to the CRUT, I can spread out the tax deduction for up to 5 years, but it's limited to 30% of AGI given its asset class. Would it make sense to move the asset to a FlipNIMCRUT that delays distributions for up to 5 years while doing a Roth IRA conversion with the tax deduction? I would live off of savings with low expenses meanwhile. Since the deduction is limited to 30% of AGI, BUT also any IRA conversion amount is considered income, how would this work, assuming $200K is converted for each of 5 years? (Let's leave out any ongoing gains/losses in the IRAs during the process for more simplicity). Does this mean I can only use 60K of the deduction each year (300K total) and would have to pay income tax out of pocket on the remaining 700K (140K per year)?

Opus 17

Employee

Assuming everything you say is true (I don't know what a CRUT is, but I do understand IRAs), then I don't see any way out of paying tax on most of the Roth conversion.

First, it's not a backdoor Roth, it's just a simple Roth IRA conversion. If you convert any amount from a traditional to a Roth IRA, that amount is taxable income and included in your AGI. Assuming you have some kind of offset that can offset 30% of your AGI, you would still pay tax on the rest. If you converted the entire $1M all at once, you would owe about $400,000 in taxes, of which you could offset 30%. If you spread it over 5 years and converted $200K per year, you would owe about $70,000 per year of which you could offset 30% and pay the rest.

Be aware that, in addition to income tax, you will pay net investment tax if you convert more than the threshold amount (including your other income).

https://www.irs.gov/individuals/net-investment-income-tax

So the tax bite could be quite high.

M-MTax

CRUT = Charitable remainder trust......actually Charitable remainder (Uni)trust

Opus 17

Employee

@M-MTax wrote:

CRUT = Charitable remainder trust......actually Charitable remainder (Uni)trust

So essentially, donating to charity and use the tax deduction to offset other income. Sounds fine, except if there is a 30% AGI limit, I don't see any way to avoid paying tax on 70% of the Roth conversion, regardless of whether you do it all at once or spread it out. To reduce the overall taxes, I would look at your other income, your filing status, and the appropriate marginal rates, to try and avoid bumping into a higher bracket by spreading out the conversions. But I don't see a way around the 30% limit.