Have a lot of assets sitting in pretax accounts? Own rental property? Here's a strategy to move massive funds into your post tax accounts without getting a massive tax bill!
This is a niche strategy but a powerful one I've been doing the last few years. Part of the 2017 TCJA tax revision included bonus depreciation allowing you to take the majority of your depreciation in one year instead of spread out over 27.5 years and this was made permanent with the OBBBA last year. For me, depreciation on a single property was typically a $5k deduction or so - a nice way to offset rental income taxes in the first few years but becoming less valuable as inflation did its thing. However I was able to instead take a $150k deduction in a single year through bonus depreciation (aka accelerated depreciation). Let's say I made $200k that year, I could basically completely wipe out my income after standard deduction, contributions etc. However, I instead took advantage of the low income year to make Roth conversions, allowing me to choose how much I wanted to pay in taxes. Using the example above, I could move almost $100k from pre to post tax funds in that single year and stay below the 12% bracket cap (married). I've done this the last few years and have moved roughly $250k of my traditional funds, the vast majority of my traditional ira. The bulk of my FI plan is rental income and it effectively guarantees I'll be in a higher bracket in retirement so locking in 10-12% tax rates ahead of time is very valuable to me. The $5k annual depreciation deduction I received before is pretty much eliminated, but due to inflation it would become less valuable over time anyway and since I'm 34 I'll instead use those years to grow funds in my Roth instead of my traditional.
Sounds cool right? Here comes the reason it's niche. Biggest disqualification is that you need to have REPS (Real Estate Professional Status) in order to take the deduction against your ordinary income. I'm a realtor and that allows me to use it, there are other ways to qualify but it's not really feasible if you have a job outside real estate. There are other workarounds, the most popular is via short term rentals or using a stay at home parent - I've had clients do both but it's not simple and it takes some long term planning.
The next reason its niche is simply because you need to own rental property, have funds in your traditional ready to convert and no plan to sell the property. Depreciation has to be paid back ('recaptured') when you sell so it doesn't make sense if you have any plans to sell the home in the next 5, or even 10, years (although a 1031 exchange can help). This is especially true given there's a cost involved, between your CPA and conducting a cost segregation study, this cost me around $3k each time. It's also primarily meant to be done in the first year the property is put into service. There's some additional complication (cost) if you are doing it later down the road but I was able to do it.
The deduction amount is property specific, one of mine was over $250k. I have a client who reverse engineered this and bought property specifically with this strategy in mind. I think this could also be a really great strategy during a mini retirement, in a year between jobs or in the first couple years of early retirement - you only need to qualify for REPS in the one tax year and you can do multiple properties in that single year to do a very large conversion all at once instead of spread out. I was okay with paying 12% but if you did this in a low or no income year, you could pay $0 on all or most of the conversion. Now that it's a permanent part of our tax code, I think it will become a valuable part of retirement planning for some.
I did my best to simplify this but there's a lot of nuance. This is definitely something you want to hire professionals to help work through, not just because it's legitimately complicated, but also I've heard the DIY approach to this has a high audit rate. There are DIY cost seg studies online but I found a lot of value in hiring a consultant and would recommend it. I'm happy to help answer questions if you want to work through your scenario. Hope this helps someone!
