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Should we convert traditional IRA to Roth?
Old 03-09-2017, 06:56 AM   #1
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Should we convert traditional IRA to Roth?

Our scenerio: i am 61, DH 64. ER 3 years ago. DH does consulting earning $50K which makes us unable to get ACA subsidy. Cost for ACA $18,000 yr. We will take SS at FRA $24000 yr (I will get half of that at my FRA)

Yearly COL including taxes $70K
Traditional IRA 40/60 1 MIL
Cash (CD's), etc $200,000

We own our cars and house. No debt. We will need a car in a year or two. Health, thankfully, good. Retired to a lower COL area, so not much we can tweak with that. DH will get MC in a year, me in 4, so that expense should go down. He'll hopefully consult for next 2-3 years, as long as they need him.

I am aware that by your ER standards we don't really have a lot of $$. My main question is whether to convert traditional to roth. We are in the 15% bracket now. When we do have to take RMD we should only have SS+RMD, as we have no pensions.

Thank you for your time. Any other info you need please ask, and any other advice, please don't hesitate to offer!
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Old 03-09-2017, 07:02 AM   #2
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This planner is designed to answer that question. https://www.i-orp.com/
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Old 03-09-2017, 08:32 AM   #3
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Thank you for the link. I have used Firecalc over the years and it gives me 100% barring anything catastrophic of course. But when I read on here various scenarios it seems we would need a lot more money. As long as my DH can do some consulting it is paying the bills until we go to full retirement. I keep thinking we'll be ok, but any opinions are appreciated
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Old 03-09-2017, 09:17 AM   #4
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Quote:
Originally Posted by Carol1862 View Post
.......... My main question is whether to convert traditional to roth. We are in the 15% bracket now. When we do have to take RMD we should only have SS+RMD, as we have no pensions.
..............
One main reason to convert traditional IRAs to Roth IRAs is to reduce the the tax burden once you have to start taking RMDs. The iOrp site calculator allows you to determine whether conversion and how much conversion is optimal. You can also do a sample tax return using an online tool like Taxcaster to do what-if scenarios.
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Old 03-09-2017, 09:27 AM   #5
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One additional factor to consider, whether running iOrp or just trying to get handle on this issue--you have (roughly speaking) 5 years of additional life expectancy than your spouse. Your tax rate is likely to be based on single person brackets at some stage and you'll be dealing with RMDs at that point....

For us, with less rough projections for DW's lifespan, that has definitely influenced my thinking on Roth Conversions.

E.T.A.: SSA actuarial life table:https://www.ssa.gov/oact/STATS/table4c6.html
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Old 03-09-2017, 09:28 AM   #6
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When you are FRA a rough estimate is you will have $40K (4% from IRA) + $24K + $12K = $76K /yr not counting any of the $200K savings. So it seems you are totally fine.

When you take out RMD's the RMD the first year will be: $36,496.35 which is less than the projected retirement amount. So you really are not affected by the tax torpedo too much.

You could plug the numbers into tax software to get an approximation.

As to converting IRA to ROTH, I normally would say do it up to the 15% tax rate limit, so you reduce how much tax you will pay at 70.5, but I'm not sure you would save money, so the only reason I could see to do it would be in the case of one of you has bad heath.

In the event of an early demise of one of you, see this thread for an example: Widows beware!
Taxes do rise a bit with a single deduction vs being a couple.
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Old 03-09-2017, 09:59 AM   #7
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Another thing, I didn't think about is even when you reach RMD, you can still convert some to Roth IRA in addition to your RMD. The only thing that is unknown is the tax rate years from now. I still have 13 years till RMD. My husband has about 5 years till RMD. Which account to convert first? Which account has the max benefit, tax wise. I'm still struggle with it.
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Old 03-09-2017, 12:45 PM   #8
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Take your 2016 tax return. Add the difference between taxable income and $75,300 and see how your tax changes... most likely it will go up by 15% or less of what you added. IMO, 15% isn't a bad price to pay now given that your marginal tax rate was probably much higher when you deferred that income and that you'll probably be in a higher tax bracket once SS starts.
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Old 03-09-2017, 02:34 PM   #9
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There are two ways a Roth conversion can save on taxes. The first is by allowing you to withdraw IRA money at a lower tax rate now than you might pay in the future. The second is by sheltering a little more after-tax value in the Roth account than you have in the IRA. Pretty much 15% of your IRA balance belongs to the IRS. But 100% of your Roth IRA belongs to you. By doing a Roth conversion you get to give the IRS their 15% and then "contribute" that same tax amount to the Roth account. That's more tax sheltered value for you.

Do you have excess taxable assets? That could be income (which seems lower than spending now), taxable brokerage account, or maybe some of that cash. Roth converting would allow you to effectively shelter a little bit of that (equal to the conversion taxes) in a Roth account instead of a taxable account. At that point it would be tax free instead of incurring capital gains/dividends/interest taxes in a taxable account. Obviously, if this looks beneficial, doing this conversion earlier saves more in taxes.

If your capital gains are taxed at 0% in your taxable account already then you would have no savings there. Sheltering those gains in a Roth wouldn't be lowering your taxes.

As long as your RMD's look like they'll be coming out at 15% tax rate and your current marginal rate is 15% then there is no tax rate advantage to withdrawing/Roth converting now versus later.

If neither of those things apply, just keep an eye out for years where you might drop into the 10% bracket. If DH stops consulting and SS hasn't started yet your income may be pretty low. That might be an opportunity to Roth convert up to the top of the 10% bracket, pull some of the IRA out at 10% now instead of 15% later, while still keeping it in a tax advantaged retirement account.

Also be aware that you can convert any time during the calendar year, multiple times, figure your taxes in April the next year, and then "recharacterize" (reverse) all or any part of any of those conversions. So it is possible to make it all come out perfect when you do your taxes. Although it is a bit of extra paperwork on your taxes and possibly with the brokerage.
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Old 03-10-2017, 05:36 AM   #10
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Thank you so much for all of your responses. We have a lot to look into, and appreciate your well detailed responses and links.
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