Rollover from IRA to Roth gradually for tax advantge

[220volt]

Hi, I’ve been lurking here for a while so I fianaly decided to finally join the club.

Situation:
My mom is 65 years old and has $30k in traditional IRA in Vanguard (rolled over from her 401K)
My dad is 69 and is also on SS and they file jointly, so their combined yearly income is around $25k.
They don’t have any other income.

My question is, how can my mom minimize taxes when she tries to withdraw from her traditional IRA. Couldn’t she rollover from IRA to Roth IRA, gradually, like rollover $10k every year for 3 years?
With their income so low, whet would be the most tax efficient way to access that money?

Any advice is appreciated.

 

[REWahoo]

Have you run their income through any tax programs? When you do you will likely find they will owe zero income tax

 

[Lawrencewendall]

She could roll it all in one year from tIRA to Roth and still stay in the 15% bracket.

25k income +30k IRA -20.8k (standard deduction + personal exemption) = 33.75 K. Top of the 15% bracket is 75.9k

or if this is correct currently
25k income - 20.8k deductions = 4.2k taxed at 10%

18.65k is top of the 10% so 18.65k - 4.2k = 14.65k can be rolled a year without leaving the 10% bracket

 

[220volt]

She could roll it all in one year from tIRA to Roth and still stay in the 15% bracket.

25k income +30k IRA -20.8k (standard deduction + personal exemption) = 33.75 K. Top of the 15% bracket is 75.9k

or if this is correct currently
25k income - 20.8k deductions = 4.2k taxed at 10%

18.65k is top of the 10% so 18.65k - 4.2k = 14.65k can be rolled a year without leaving the 10% bracket

Very interesting. I think I got it now. So the worst case scenario, she pays 10% in taxes.
So If she roll over 14k a year, do taxes come out automatically during the rollover, or is it 14k counted towards income, so it is taxed at the end of the tax season?

 

[220volt]

I am intrigued, but I am not familiar with tax programs. Are those online tax simulators or somethign similar?

Thanks

Have you run their income through any tax programs? When you do you will likely find they will owe zero income tax

 

[REWahoo]

TurboTax, H&R Block at Home, and TaxAct are three tax preparation programs you might explore.

 

[Lawrencewendall]

Very interesting. I think I got it now. So the worst case scenario, she pays 10% in taxes.
So If she roll over 14k a year, do taxes come out automatically during the rollover, or is it 14k counted towards income, so it is taxed at the end of the tax season?

I've not started the process yet so someone who has done can chime in if i'm wrong. The conversion would be reported as income at the end of the year. taxes could be out of pocket or withdrawn from the conversion since principle can be withdrawn at any time.

 

[kaneohe]

Here's Taxcaster https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
You left out some important info.....the 25K other income is all SS?
If it is, looks like you could convert 15K w/no tax.

But what are plans to withdraw from TIRA? You might find that if you withdraw some small amount, that would also not be taxed so going the Roth conversion, while ok, is just more effort for no benefit.

It all comes down to the basic guideline.......what will you pay to convert to Roth now vs what will you pay to withdraw from TIRA later. RMDs on 30K
are not very much.

You may also want to check out the survivor spouse scenario where tax brackets are narrower and rates rise faster. Of course there will be less income also.

 

[220volt]

You are absolutely correct.
I was playing with some tax calculators but it was over my head so I called up my tax person hoping she would give me advice over the phone, and she did. You 're correct, converting to Roth would be a waste of time. Because their total income is 25k only from SS, they can withdraw about 12k a year from tIRA without paying any income taxes on it.
Thanks for the advice.

Here's Taxcaster https://turbotax.intuit.com/tax-tools/calculators/taxcaster/
You left out some important info.....the 25K other income is all SS?
If it is, looks like you could convert 15K w/no tax.

But what are plans to withdraw from TIRA? You might find that if you withdraw some small amount, that would also not be taxed so going the Roth conversion, while ok, is just more effort for no benefit.

It all comes down to the basic guideline.......what will you pay to convert to Roth now vs what will you pay to withdraw from TIRA later. RMDs on 30K
are not very much.

You may also want to check out the survivor spouse scenario where tax brackets are narrower and rates rise faster. Of course there will be less income also.

 

[220volt]

I've not started the process yet so someone who has done can chime in if i'm wrong. The conversion would be reported as income at the end of the year. taxes could be out of pocket or withdrawn from the conversion since principle can be withdrawn at any time.

You are correct sir. I called my tax person and she said the same thing. Since their income is so low, and it only comes from the SS, they can withdraw about 12k (probably more) every year from the tIRA and not pay any income taxes.

 

[Koolau]

You are correct sir. I called my tax person and she said the same thing. Since their income is so low, and it only comes from the SS, they can withdraw about 12k (probably more) every year from the tIRA and not pay any income taxes.

I would love to have been in such a situation - well, maybe not. I rolled over all of my tIRAs to Roths and paid the taxes. I still have my 401(k) which may never get converted (with tIRA step in between). Low taxes would have been nice, but relatively higher income is probably better.

Yes, I would applaud going the Roth route - especially if no taxes involved. It may not make a difference in the future, but it may make a big difference if they end up "lucky" with their investments. Naturally, YMMV.

 

[kaneohe]

..............
I was playing with some tax calculators ...........................

Note that there are quite a few tax calculators out there when you google.
Although they aren't the same as full-fledged tax software,they can be quite useful and easy to use.

Note, however, that there are many what I would call pseudo tax calculators out there. One of their characteristics that stood out to me is that they ask for the taxable SS income. Well, the taxable SS income is a whole calculation
in itself, so these calculators aren't very useful if you have SS income.

The few that I saw that did the calculation of taxable SS income (with you inputting the gross SS income) were Taxcaster, the HR Block calculator ,and the one fromTax Act. (Technically these aren't exactly correct because they don't take tax-exempt income into account). Taxcaster seemed a bit cumbersome to edit inputs later.

 

[220volt]

I think in my parent's case since their only income from SS is so low it is much easier to calculate that they should not pay any taxes as long as they withdraw that IRA in increments as many above have mentioned. By my calculations, they could withdraw 20k a year without paying taxes. But probably 10k a year just to be safe.

 

[Perryinva]

Don't be short sighted. It is still worth converting to a Roth, if only because it IS such a small amount, because if some kind of emergency came up and they needed say $20k, then, BAM, they lose a large chunk to taxes. Convert to a Roth tax free over 2 years, and never worry about taxes on it again. Converting to a Roth is fast and easy, especially if done at the same place.

Also, if that is their only savings, they should never withdraw 10k a year. They would have nothing after 3 years....

 

[NgineER]

It would be beneficial to convert to Roth if (actually when) one or two of your parents pass (it will happen). Tax brackets will change and there is no tax on inherited Roth IRAs.
You can always convert more than you need and then recharacterize to the amount that will be tax free.

 

[RunningBum]

Agree with the above two posts. I see no downside whatsoever to converting as much as you can tax free to the Roth. It's possible there will be no upside, but there are scenarios where there could be some upside. Any possible hassle with converting is offset by the need to calculate MRDs and make certain those get done.

One note, don't forget about state taxes. You may be paying some of those, but that's a benefit to getting the money in a Roth since growth there won't be taxed by the state.

 

[220volt]

Those are good points about Roth. I might have her move money to Roth just in case.