Ed Slott: Here's the Secret to Good Tax Planning

"You never want to leave a low tax bracket unfilled," he said. "Low tax brackets need to be maximized each year, but how much to convert each year can be trickier now since many of the new tax breaks have income caps."

Advisors, Slott told ThinkAdvisor, have to weigh "which tax deductions may apply and keep Roth conversion income from pushing income over these limits and losing tax deductions." These include the $6,000 tax break for seniors, the increased SALT deduction and the breaks for tips and overtime.

'Never ... Waste a Low Tax Bracket'

"Always pay taxes at the lowest rates — that's it. It's that simple," Slott said on the Bogleheads podcast.

"If you always pay, not at the rates, at your rates, because rates could be high but your rates personally because of deductions could be low; or rates could be low but your rate is higher because you had to increase business or personal income. So always pay at your lowest rates — even if that means, and here's the part that gets people ... even if it means paying a tax before it's required."

That's where the Roth conversion comes in, Slott continued.

"People don't like to pay a tax before they have to," Slott said. "Many people have this minimum mentality, I call it, they focus on RMDs, required minimum distributions — which means, 'I am not touching my IRA till they take me out screaming and kicking and force me to take it out at age 73.' But then look at all the years of low rates that you blew. You never want to waste a low tax bracket."

The key to the Roth conversion: "When you convert, you control your tax rates," Slott relayed. "By converting certain amounts, looking at the brackets, you can convert and control the taxes you want to pay and given today's low rates, I would make sure that nobody wastes 24% bracket or lower — these are historically low brackets."

In separate comments to ThinkAdvisor on Friday, Slott said that while he's a "big fan of Roth conversions due to the long-term tax benefits — mainly NO lifetime RMDs, income tax-free withdrawals in retirement and for beneficiaries — most non-spouse beneficiaries must still withdraw the inherited Roth funds by the end of the 10th year after death."

However, "they are not subject to RMDs for years 1-9 of the 10-year term and when they withdraw the balance in year 10, all of those funds will come out income tax-free."

That said, "the best tax planning — meaning saving the most in lifetime and beneficiary taxes — comes down to this: Always pay taxes at the lowest rates …and that may be right now, and for at least the next few years with the new law extending the low tax rates," Slott continued.

While advisors know the Roth conversion benefits, the new tax provisions in the new tax law are "clouding the issue," Slott added in his comments to ThinkAdvisor. "The key is to focus on the long-term retirement and estate plan."

When Roths Don't Make Sense

The rule of never wasting a low tax bracket would also "be a reason to keep some traditional IRA funds (don’t convert) and use those eventual withdrawals or RMDs to fill the lower tax brackets, especially with larger standard deductions or maybe itemized deductions," Slott said. "If there are few other sources of income, then IRA funds withdrawals will use those low brackets so they aren’t wasted.'

Also, don’t convert if the client's plan is to give to charity.

"Use the traditional IRA for that," Slott said. "IRAs (not Roth IRAs) are the best funds to give to charity."

Also, while this is a tough one to know, "if you anticipate large future medical bills (everyone will eventually have some), then keep some traditional IRAs on hand so that using those funds to pay medical bills can be partially offset with the medical deductions," Slott advised.

In addition, he said, anyone receiving financial aid for college "based on income might not want an income spike in those years — they might want to avoid a Roth conversion that could disqualify them."