IRA to Roth Conversion - related question on taking SS later

[megacorp-firee]

Here is offshoot thread 3 from the Take SS Early thread:

Quote:

Originally Posted by megacorp-firee now you all have surfaced another twist on this. One additional reason to NOT take SS early is to keep the income down so that one could convert their IRA to a Roth IRA at a reasonable marginal tax rate, .... say 20%. hmmm looks like another thread to start....

Questions:
1) Doe it make sense to overtly keep taxable income down so that you can convert your IRA to a Roth at a reasonable marginal tax rate (20%?) so that you keep the RMD lower @ 70 1/2?
2) Is this another reason to take SS later?

In my instance, I will have a 50K pension and currently about 20K in a mix of qualified/non qualified dividends, tax exempt interest, taxable interest.

[REWahoo]

Quote:

Originally Posted by megacorp-firee 1) Doe it make sense to overtly keep taxable income down so that you can convert your IRA to a Roth at a reasonable marginal tax rate (20%?) so that you keep the RMD lower @ 70 1/2?

Maybe. Depends on your individual circumstances. In my case I'm planning to convert about $100K from a TIRA to a Roth at the 15% marginal rate over a 3-4 year time frame.

Quote:

Originally Posted by megacorp-firee 2) Is this another reason to take SS later?

Once again, maybe. You have to run the numbers for your own situation to see if the RMD hit at 70.5 could put you in the line of fire for what Scott Burns calls the 'tax torpedo'...assuming the tax and SS laws don't change between now and then. Could be paying 25% tax on the conversion now is less costly from a tax standpoint than getting torpedoed later. But then that's a key element of the hairball putting off all the sparks, smoke, and feuding on the "when to take SS" thread....

[mathjak107]

i have to do much more number crunching on the roth conversions as im still unsure if its worth doing any conversion. aside from giving away close to 1/3 of the dough thats generating more money im not convinced taxes will be higher at any point for me when there is no pay check vs now with 2 pay checks coming in.

a retiree can pull almost 35,000 a year out of regular retirement plans at about a 1500.00 tax bill. that combined with tax brackets rising about 3% a year and no more than a few years away from 100k being in the 15% bracket im not sure a conversion isnt pissing good money away unless your already in the tax bracket that you will be retiring in..

like i said im not saying the conversion cant help some with rmd or from getting ss taxed but in my case im not so sure .

[markf57]

I'm no expert, I still trying to figure out the dryer sheets.

I want to think that the perfect storm involves delaying SS to no later than 70, using up all your tax deferred money until you take SS, then using Roth money with SS money for the rest of life. This would remove the tax torpedo and RMD. The trick would be to convert the correct amount from tax deferred to Roth along the way. If you overconverted, you could start SS early, if you under converted, you might have a few years of issues.

Is this at all practical?

Thanks,

Mark

[HFWR]

Quote:

Originally Posted by markf57 I'm no expert, I still trying to figure out the dryer sheets. I want to think that the perfect storm involves delaying SS to no later than 70, using up all your tax deferred money until you take SS, then using Roth money with SS money for the rest of life. This would remove the tax torpedo and RMD. The trick would be to convert the correct amount from tax deferred to Roth along the way. If you overconverted, you could start SS early, if you under converted, you might have a few years of issues. Is this at all practical? Thanks, Mark

Stop making sense... :P

[New Thinking]

Quote:

I'm no expert, I still trying to figure out the dryer sheets. I want to think that the perfect storm involves delaying SS to no later than 70, using up all your tax deferred money until you take SS, then using Roth money with SS money for the rest of life. This would remove the tax torpedo and RMD. The trick would be to convert the correct amount from tax deferred to Roth along the way. If you overconverted, you could start SS early, if you under converted, you might have a few years of issues. Is this at all practical? Thanks, Mark

Makes a heck of a lot of sense for many. Although, since you would have no AGI at all under current tax rules after 70, you could keep some of your IRA income for "post-70" to use up the deductions and exemptions..But you have to be careful with that as the IRA could force the taxation of SS down the road since those thresholds are not indexed for inflation and SS is (and your IRA income might be too).

[mathjak107]

heres another thing to be careful about: usually its bantered about to do a roth conversion at some point to keep taxable income down later on. , as well as the standard advice of keeping your income generating holdings in your tax defered account and your tax managed and low turnover index stock funds in your taxable account. but becareful ,,,those low tax distributions thru the years can absolutley hammer you later on when you sell.you may owe tax on whopping gains. most of the funds i have thru the years are not tax managed and the last few few years some had tremendous taxable distributions. as much tax as we have paid thru the course of years we would still owe quite a bit if we sold . i can only imagine how much taxable income we would have if we liquidated if we didnt already have a good portion paid thru the years.

just a heads up, i dont want to debate the pros and cons of tax managed accounts

[theoldwizard]

Quote:

Originally Posted by mathjak107 i have to do much more number crunching on the roth conversions as im still unsure if its worth doing any conversion. aside from giving away close to 1/3 of the dough thats generating more money im not convinced taxes will be higher at any point for me when there is no pay check vs now with 2 pay checks coming in.

I'm no expert, but after reading The Retirement Savings Time Bomb ... And How to Defuse It the real benefit in converting an IRA to a Roth is for the people who will inherit it ! Less money for Uncle Sam (if done correctly)

To long for me to try and explain here (and I would screw it up). Buy the book or get it from your library.

[mathjak107]

Quote:

Originally Posted by theoldwizard I'm no expert, but after reading The Retirement Savings Time Bomb ... And How to Defuse It the real benefit in converting an IRA to a Roth is for the people who will inherit it ! Less money for Uncle Sam (if done correctly) To long for me to try and explain here (and I would screw it up). Buy the book or get it from your library.

if you really want to pass wealth on theres better ways thru life insurance trusts . as a retiree i would want to do whatever works out best for me unless i was soooo wealthy i didnt need all the dough

[teejayevans]

Quote:

Originally Posted by theoldwizard I'm no expert, but after reading The Retirement Savings Time Bomb ... And How to Defuse It the real benefit in converting an IRA to a Roth is for the people who will inherit it ! Less money for Uncle Sam (if done correctly)

Not for me, the big benefit is pay now vs pay later, if I can pay taxes at
15% now, I'm going to do it.
TJ

[mathjak107]

Quote:

Originally Posted by teejayevans Not for me, the big benefit is pay now vs pay later, if I can pay taxes at 15% now, I'm going to do it. TJ

are you in the 15% tax bracket it now if you convert? why is that a good deal?

did you know as a retiree you can pull almost 35,000 a year from your ira's or 401k and pay as little as 1500.00 regular tax on it

[teejayevans]

Quote:

Originally Posted by mathjak107 are you in the 15% tax bracket it now if you convert? why is that a good deal? did you know as a retiree you can pull almost 35,000 a year from your ira's or 401k and pay as little as 1500.00 regular tax on it

To me, 15% tax is an arbitrary limit, so for a single person, thats about
39K, after that it jumps 10%, a pretty big jump, and I don't see taxes
going down in the future, hence I would take my 15% when I can.
I expect my income to be much less than 39k and that will allow me
to move money (39K-income) to roth.

I assume that 1500 is for 2 over the age of 65.

I look at retirement in 3 phases:
phase 1: before 59.5
phase 2: 59.5-70.5
phase 3: 70.5-death

phase 1: plan A is to live off taxable accounts, plan B is to do a 72t if I run short, so this is an idea time to move $ to roth
phase 2: when taxable accounts run out, start tapping 401k/IRA, when I take SS will depend on situation, for my purposes, I assume its not going
to be there.
phase 3: start taking min. distributions of the 401K

throughout phase 2,3 if I can move $ to roth at 15% or less, I will do it.
If I'm going to be taxed at 25% because of big withdrawl, I'll take money
out of roth.

Obviously the 15% applies because of my expected income, everybody's
situation is different. All subject to change of course. But by the time I
hit phase 2, I'll be somewhat tax diversified.
TJ

[mathjak107]

taxes will drop in the future too i feel, they have been for over 20 years. every year the brackets extend upward by 3% . within the next few years 100k will be in the 15% bracket.


my plan is to hit the ira's first when i retire, reducing my rmd's by 70

[teejayevans]

Quote:

Originally Posted by mathjak107 taxes will drop in the future too i feel, they have been for over 20 years. every year the brackets extend upward by 3% . within the next few years 100k will be in the 15% bracket.

brackets are adjusted for inflation, unless we have some horrible inflation
in "the next few years", you won't see 15%/100K for 30 years. Don't forget
the alternative minimum tax that is now hitting the middle class, that isn't
being adjusted for inflation.

The country is in debt and this is during the good times, if we have a
recession it will only get worst, SS is going broke. Someday we'll have to
pay our check, when that happens, taxes will go up.
TJ

[mathjak107]

this year for a married couple 15% is almost 64,000. . the point is we are paying less taxes as time goes on not more.. i cant see anyway most of us would not be in a lower bracket with no pay check coming in then when working.

[Cut-Throat]

Quote:

Originally Posted by teejayevans The country is in debt and this is during the good times, if we have a recession it will only get worst, SS is going broke.

No, the Defense Department is going broke. They just blew $500 Billion on a needless war. - S.S. is still generating a surplus. You are drinking the GOP Koolaid my friend!