Maximum Annual Roth conversion amount ?

[Gumby]

My understanding has always been that you must put RMDs in taxable. You cannot convert RMDs to a Roth.

You can convert any amount above your RMD to a Roth, but for most people, SS+pensions+RMDs are pushing you into a higher bracket already, so you don't want even more income. The more ideal time is after you ER, but before you start SS, pension and RMDs, when you're likely to be in a lower bracket.

Yes, we're going to start Roth conversions at age 61/59 and hope to mostly drain the IRA/401k accounts before RMDs kick in, but I was hoping to be able to send the RMD money to a Roth also. After I asked earlier, I poked around in the IRS Publication 590-B, which seems to say that they treat the Roth conversion as a rollover and you can't rollover an RMD. Not particularly sensible to me, but if that's the rule, then I guess I just have to hold RMDs in a fully taxable account. Bummer. That might be another factor in the decision of how much to rollover before we hit 70. (i.e roll to 24% or 22%).

+1

Easy to read source:

https://www.marketwatch.com/story/can-i-convert-my-rmd-to-a-roth-ira-2017-07-26

Official IRS source:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions

Thanks for the Marketwatch article. It is much clearer than the IRS.

 

[PatrickA5]

It's not where the vast majority is, it's where your last dollar is taxed. If you convert now at 22% and still have a few dollars later (after 70) in the 22% bracket, it makes total sense (especially if you pay the conversion tax with money from your taxable account).

I'm not sure I'm following. At age 70, our projected RMD's plus taxable SS less standard deduction will put us maybe $5K into the 22% bracket. Why would I want to convert an additional say $80K this year at 22% when only a few $K (per year) will be taxable at 22% in the future?

Again, inheritance and the possibility of one of us having to file Single would obviously sway my decision to convert into the 22% bracket - but neither of those are a given.

 

[gauss]

I've seen this a couple times recently (maybe both from you?) and I'm trying to understand it better.

What giant medical bills will there be that aren't covered by Medicare? Nursing home costs?

Couldn't you use the medical expense deduction to offset the income from SS and pensions? It doesn't have to come from an IRA, does it?

In addition to "nursing home" aka Skilled Nursing costs, simple Assisted Living costs may also be deductible as medical expenses for a certified "Chronically Ill Individual".

If you are receiving unlicensed home care/personal care for assistance with ADLs (ie dressing, eating, toileting, transferring etc.) then this is what I am talking about.

You would need to have a licensed health care provider certify that these are medically necessary (ie no deducting your maid/butler costs if you are healthy).

This has allowed DMIL to continue itemizing deductions on Schedule A even with the recent tax law changes in 2018.

I am not sure how well know this is -- especially for those who use retail tax software to prepare their own returns.

-gauss

 

[gauss]

One case NOT to ROTH convert

One argument in support of NOT Roth converting may apply to some of you who were planning to bequest your assets to non-profit/charities as opposed to individuals.

If I am not mistaken, if you have a 501(C)3 organization as the beneficiary of your retirement account, the account will be transferred to them and no 1099-R will ever be issued. In this case you are able to give them pre-tax money as opposed to after-tax money.

-gauss

 

[steelyman]

One argument in support of NOT Roth converting may apply to some of you who were planning to bequest your assets to non-profit/charities as opposed to individuals.

This was in my mind when I was setting up estate documents, retitling accounts, reviewing beneficiary designations and so on.

 

[Perryinva]

It is indeed a harder decision as the percentage of ones portfolio that is tax deferred increases. Ours is roughly something over 60% deferred, 20% Roth, 20% cash/taxable. RMDs will always be 22/25% regardless, unless the tax brackets rise enough to eclipse our fixed income.

 

[bingybear]

I would like to better understand this statement. Do you mean that you cannot Roth convert to satisfy your RMD obligation? As, I see it, you are still removing the money from the IRA/401k account and paying the taxes on it. The question is where it ends up.

Since I was planning to keep Roth converting after 70, although at an amount that would be determined by the RMD schedule, I am particularly interested in the answer to that.

IIRC that was a response/interaction with runningbum about roth conversions where he was using the start of RMDs to determine your future tax rate when trying to analyze if a roth conversion is a good idea. (I probably did not do the reference justice.

If I understand your question ... you want to take your RMD, have it qualify as an RMD event, and have it convert that same RMD be converted into a roth.

nope see here

Q: Can I convert the required minimum distribution from my regular IRA into a new Roth IRA account after paying the income taxes if I am not working? I want to have access to the money in case an emergency comes up. — Richard D’Arezzo, Acworth, GA

A: Sorry, no. According to IRS publication 590-A, the annual required minimum distribution (RMD) from your traditional IRA cannot be converted to a Roth IRA, says Tom Mingone, a financial planner at Capital Management Group of New York. But you do have options that can minimize taxes yet provide access to your money for emergencies.

 

[RunningBum]

I'm not sure I'm following. At age 70, our projected RMD's plus taxable SS less standard deduction will put us maybe $5K into the 22% bracket. Why would I want to convert an additional say $80K this year at 22% when only a few $K (per year) will be taxable at 22% in the future?

Again, inheritance and the possibility of one of us having to file Single would obviously sway my decision to convert into the 22% bracket - but neither of those are a given.

My general point is that it's the marginal tax rate that is important, not the lower tax rates you pass through. So when you say that most of it is taxed at 10% and 12%, I say I don't care about that part, I care about the part that is in 22%.

If I could calculate it exactly, I would convert enough now at 22% so that my income at 70 would all be at 12% or less, and any cap gains and QDivs would be at 0%, to avoid any RMDs that are taxed at 12% and push the same amount of LTCGs/QDivs into being taxed at 15% for an actual 27% marginal rate. I would also see if I could keep myself out of the SS tax torpedo and convert enough to avoid that too.

This can be complicated to calculate though, and requires some assumption about growth rates and future tax brackets. For just $5K over, it's understandable if you decide it's good enough. My personal view is that taxes are probably more likely to be higher in a few years than they are now, plus if I were married I would take into account the possibility of one of us dying, so I would be converting more. $80K more? I don't know, how many years do you have left to convert? $80K one year seems like it might not take all of that $5K out, but I haven't tried to run those numbers.

 

[RunningBum]

One argument in support of NOT Roth converting may apply to some of you who were planning to bequest your assets to non-profit/charities as opposed to individuals.

If I am not mistaken, if you have a 501(C)3 organization as the beneficiary of your retirement account, the account will be transferred to them and no 1099-R will ever be issued. In this case you are able to give them pre-tax money as opposed to after-tax money.

-gauss

This is true. I made the same point recently in a different thread. If this is your plan, I wouldn't convert anything you didn't plan to spend on yourself. In your lifetime, you could donate some of it with a QCD, and for after death make the charity your beneficiary and it goes to them without tax, just as you said.

 

[Kwirk]

I’ve largely used up my after-tax accounts to pay taxes on past Roth conversions. So, I plan to ttake distributions in the future to pay taxes on Roth conversions. My understanding is that I can’t convert the RMD to a Roth but I can use the RMD to pay taxes on a separate conversion (and on the RMD itself, of course).

 

[AbbA]

I will be able to afford the taxes from after tax accounts so for me it is taking care of the hit now while I know I can afford.

This thread is quite fascinating but also hard to wrap my head around. Luckily or not, I don't need to delve in this topic yet but I have a few (dumb?) questions.

When you convert from tIRA to Roth, do move 100% of this pre-tax amount that you decided to convert to Roth IRA and pay 22% or 24% taxes from your taxable account?
If so, does this mean you pull that money from your savings account or CD to pay taxes or do you sell mutual funds, bonds, or stocks to pay those taxes?
If the latter, then it's another piece of taxable money that has to be included in the calculations/planning so you don't tip over into the higher tax bracket, right?
Oh, and if you don't reside in a no income tax state, then do you pay another 5-10% for state taxes?
When you plan on converting large amounts of money what kind of future growth rate (and inflation rate) do you assume for your tIRA that forces you consider/plan a conversion to begin with?
A lot of people discussing when to begin SS (62 vs. FRA vs. 70) try to guess when they will break-even, what's the break-even point for converting now and paying taxes now vs. not converting at all?

We cannot control our time on this earth but reading this thread makes me wonder which 'team' wins in the long run: one that says 'I'll pay taxes when it's due and not earlier' or the one like on this thread who plans far far into the future?

Any spreadsheets out there to look at instead of purchasing i-ORP?

Interesting but very complex topic, IMO.

 

[HI Bill]

Is there really a right answer for most of us? To make the right decision, you have to make assumptions on market returns, longevity, and future tax rates. And you have to assume that ROTH accounts will remain untaxed.

 

[SecondCor521]

This thread is quite fascinating but also hard to wrap my head around. Luckily or not, I don't need to delve in this topic yet but I have a few (dumb?) questions.

1. When you convert from tIRA to Roth, do move 100% of this pre-tax amount that you decided to convert to Roth IRA and pay 22% or 24% taxes from your taxable account?
2. If so, does this mean you pull that money from your savings account or CD to pay taxes or do you sell mutual funds, bonds, or stocks to pay those taxes?
3. If the latter, then it's another piece of taxable money that has to be included in the calculations/planning so you don't tip over into the higher tax bracket, right?
4. Oh, and if you don't reside in a no income tax state, then do you pay another 5-10% for state taxes?
5. When you plan on converting large amounts of money what kind of future growth rate (and inflation rate) do you assume for your tIRA that forces you consider/plan a conversion to begin with?
6. A lot of people discussing when to begin SS (62 vs. FRA vs. 70) try to guess when they will break-even, what's the break-even point for converting now and paying taxes now vs. not converting at all?

7. We cannot control our time on this earth but reading this thread makes me wonder which 'team' wins in the long run: one that says 'I'll pay taxes when it's due and not earlier' or the one like on this thread who plans far far into the future?

8. Any spreadsheets out there to look at instead of purchasing i-ORP?

Interesting but very complex topic, IMO.

Numbers added. My answers, others may answer differently:

1. Yes and yes.

2. I think it would be wherever someone was getting their spending money from. I don't distinguish between tax expenses and any other expenses, although I do account for things by category in Quicken. So in my case I sell from taxable when I need money. The proceeds go into my savings account and then to my checking account and then to spending.

3. Correct. I do my taxes in December every year ahead of time so I know what effect any Roth conversions will have on my tax bill.

4. Correct. In my case, my state's top marginal rate is 6.95%. If you're living in a state with an income tax and plan to move at some point, you could account for that in your analysis.

5. I assume long term historical averages. In the case of my RMD projections, I assume a 10% growth rate on my IRA, 2.24% on my SS benefit, 2% on tax and IRMAA brackets, and 7.7% on IRMAA surcharges.

6. I don't calculate break even. I figure if I'm paying taxes at a lower marginal rate now vs. a higher marginal rate later, that I'm ahead.

7. It depends on what value you attach to planning ahead and whether you think it's possible to successfully do so. Personally, I like planning ahead (up to a point), and I think it's possible to do so successfully. Although I think there are more planner types on this board, there are some who just say, "Whatever, I have enough" and that's OK too.

8. i-orp is free - or at least I thought it was. You could investigate the case study spreadsheet published by the user MDM on the MMM forum. It's free also.

 

[Trooper]

The issue I'm having with converting to higher than the 12% bracket is that some of the conversion will be at 27% until we reach 22%. For us that is about $38K, until our ordinary income hits $78,950 (MFJ), when the marginal rate goes back to 22%.

Am I looking at this correctly?

 

[pb4uski]

The issue I'm having with converting to higher than the 12% bracket is that some of the conversion will be at 27% until we reach 22%. For us that is about $38K, until our ordinary income hits $78,950 (MFJ), when the marginal rate goes back to 22%.

Am I looking at this correctly?

Yes, you are looking at it perfectly, just perfectly.

Once you breach the top 12% bracket (actually the top of the 0% qualified income bracket which is $200 less than the top of the 12% ordinary income bracket), additional conversions up to the amount of qualified income get taxed at 27% (the additional ordinary income at 12% and the additional ordinary income pushes qualified income from 0% to 15%). And once all qualified income has been pushed out of the 0% bracket to the 15% bracket then the marginal rate reverts to the 22% ordinary rate.

 

[RunningBum]

The issue I'm having with converting to higher than the 12% bracket is that some of the conversion will be at 27% until we reach 22%. For us that is about $38K, until our ordinary income hits $78,950 (MFJ), when the marginal rate goes back to 22%.

Am I looking at this correctly?

Yes, you definitely are. What I've done is stop conversions to the point at which qualified dividends and LTCGs start getting pushed into being taxed at 15% (avoiding that effective 27% rate) most years, and then pick a year where I blow past it and convert to the top of 22% or 24%.

Whether it makes sense for you to do a larger conversion in some years depends on how big your tIRA is and whether you'll hit other such tax humps like the SS hump where you could be pushed into even higher rates as you also push more SS benefits into being taxed.

 

[Trooper]

Yes, you are looking at it perfectly, just perfectly.

Thanks

Yes, you definitely are. What I've done is stop conversions to the point at which qualified dividends and LTCGs start getting pushed into being taxed at 15% (avoiding that effective 27% rate) most years, and then pick a year where I blow past it and convert to the top of 22% or 24%.

Thanks and same here. I have yet to pick the "blow past it" year, however. Thinking that this might be the year, but the taxes due are scaring me off.

Whether it makes sense for you to do a larger conversion in some years depends on how big your tIRA is and whether you'll hit other such tax humps like the SS hump where you could be pushed into even higher rates as you also push more SS benefits into being taxed.

Totally agree. Currently our tIRAs represent about 70% of our egg. We are aged 61 and 60 now and plan to take SS at 70, right when RMDs kick in. Oh, where's the crystal ball?

 

[RetireBy90]

I'm sure this has already been posted to some degree but to add another data point, we have pension and other income of around $100K and will continue this for our lifetime. This number is COLA adjusted. Due to this, our current rate is close to 22% after standard deduction. This is my first year of no W2 income.

Starting this year we are doing conversions into 24% bracket for 2 reasons. 1) I believe our marginal rate will be higher after current rates expire at end of 2025; and 2) I want to pay the tax man now while I can afford it and have that monkey off my back. In 7 years when I turn 70 and get into the RMD game I hope to have enough converted that the RMD can be covered with a QCD. Hoping this makes finances a bit easier to manage as cognitive ability makes it more of a challenge.

 

[SecondCor521]

I'm fairly certain that the new SECURE Act that is likely to become law tomorrow raises the RMD age to 72 for those who are not already 70.5. That change probably doesn't affect people's decisions much, but we should all probably revise our spreadsheets.

 

[bingybear]

I'm fairly certain that the new SECURE Act that is likely to become law tomorrow raises the RMD age to 72 for those who are not already 70.5. That change probably doesn't affect people's decisions much, but we should all probably revise our spreadsheets.

some others may need to change plans if they're likely to inherit a non-spouse IRA. This may be a good reason to ignore the 27% hump and do conversion to higher brackets. It may depend on how wide the 27% hump is. Preparation for additional assets (non-spousal IRAs) may become more important for some.