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I think it's a toss up
Old 09-30-2013, 07:52 AM   #1
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I think it's a toss up

Being a bear of little brain I thought I would post this just in case I overlooked something important regarding tIRA to Roth IRA conversion.

At 70.5 when we will both be required to take RMD we will go over the maximum for the 15% tax bracket by as much as $50k. We only have 3 years before wife takes RMD and then I am required the following year.

If I have the cash to pay the taxes now for converting some to a Roth then would it make good financial sense to convert some from tIRA to Roth IRA (in the same funds) now to reduce the RMD later?

It would only reduce the total RMD by less than $5k so we would still be in the higher tax bracket by 70.5.

Are there any good reasons not to convert and just wait to pay the taxes later?

Thanks - Cheers!
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Old 09-30-2013, 08:01 AM   #2
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It's been discussed many times. Converting from a tIRA to a Roth makes sense to lower the taxes paid on the RMD. Many people talk about maxing out the 15% bracket but that also makes sense to minimize whatever tax bracket will be incurred during the RMD cycle. Remember the RMD starts at a low % but rises rapidly.

Another benefit of converting to a Roth is tax planning for the inevitable death of one of you. The surviving spouse will most likely inherit the deceased IRA who will then be required to take the RMD. Now the surviving spouse will be paying taxes at the single rate (after the first year). That will be at a much higher tax rate and with fewer deductions.

You might want to convert into the 25% bracket now to minimize this impact. If you will be paying this rate later on your RMD, you might want to pay it now to avoid the higher single tax rate one of you will see later.

I'm pretty sure you can rollover to a Roth after beginning the RMD but not the RMD itself. If I'm wrong, I'm sure someone will correct me.
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Old 09-30-2013, 08:13 AM   #3
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Being a bear of little brain...
I thought you were a badger, not a bear...
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Old 09-30-2013, 12:10 PM   #4
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If you won't need to withdraw from the Roth in the next few years it should be beneficial to Roth convert. To the top of the 15% bracket should be pretty much a no brainer, since RMD's will take it out at 25% later. However you can probably Roth convert well into the 25% bracket (avoid AMT and over $250k AGI tax additions) and still come out ahead. Although it costs 25% in taxes going in, you add after-tax value to the tune of the taxes you paid. It's like adding some of your taxable money to the Roth and not paying future capital gains or dividend taxes on it. And you would have paid 25% later anyway. So, check the taxes, but you're likely to come out ahead by maximizing the Roth conversions under the 15% tax rate and converting the rest at the 25% tax rate.
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Old 09-30-2013, 12:51 PM   #5
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I agree with 2B that turning 70.5 does not stop you from continuing to do tIRA to ROTH conversions, so you don't have to do it all over the next 3 years.

I believe that after 70.5 you must do an RMD based on the tIRA balance at the end of the previous year, but you can also then do a ROTH conversion during the year, and you can continue to do so in future years to limit the impact of RMD's on the surviving spouse after one of you dies.
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Old 09-30-2013, 02:48 PM   #6
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Useful info - I've been converting into the 25% bracket but not maxing it out. Reading this indicates that converting more would make sense. Thanks!
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Old 09-30-2013, 08:17 PM   #7
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Thanks for all the help. I didn't know that I could continue to convert to a Roth after 70.5. It looks like I will have a little room to continue to do a few more dollars conversion after the RMD and still keep within the 25% tax bracket.

I also didn't think about the RMD for the surviving spouse on both IRAs and the resulting increase in tax bracket due to single rate. That alone would make it worth converting as much as possible while staying within the 25% bracket.

I'm finally getting a handle on the last few tweaks to managing our retirement savings. So glad to have found the forum. Thanks again.

Cheers!
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Old 10-01-2013, 05:33 PM   #8
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I have been looking at converting my tIRA to Roth to avoid the Tax Torpedo and to simplify my future taxes. At the moment, it appears that after I stop working I should convert as much as I can before RMDs kick in and defer SS until then as well. One very possible scenario is that we could be living off SS and Roth only--i.e., NO reportable income. No taxes. No need to file. How about that for a happy outcome?
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Old 10-01-2013, 05:39 PM   #9
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As 2B brought up, there may be a case for going to the top of the 25% bracket in the beginning. I think so. Another bonus is dodging any future tax schinanigans for normal income.
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Old 10-01-2013, 09:24 PM   #10
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As 2B brought up, there may be a case for going to the top of the 25% bracket in the beginning. I think so. Another bonus is dodging any future tax schinanigans for normal income.
Make sure that doesn't trigger AMT or push you above $250k AGI and those extra taxes (more or less depending on tax filing status). Depending on the specifics of income/LTCG/qualified dividends/deductions either of those can hit before you reach the top of the 25% tax bracket.
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