mathjak107 said:
the question i have is though,were you in a higher tax bracket when working than you are now even with the rmd's?
The short answer is "Yes".
The long answer:
I started contributing to an IRA in the early '80s but 1986's tax reform took away the deduction. We made non-deductible contributions to conventional IRAs from then until I retired in 2002. We started Roth IRAs in 2003.
Between 1988-2001 my annual earned income was between $40K-$60K and spouse was roughly the same. I don't remember the tax code's brackets but our spreadsheet shows that from 1983-2001 we've paid between 16-23% federal income taxes.
I have a $35K annual pension (subject to federal tax) and our deductions will no longer beat that down below the 15% bracket. So when we pay our taxes today, without salary or RMDs and only living off a pension & SWR, we're starting in the 15% bracket.
If I had to start taking RMDs in 2031 (and spouse in 2032), I suspect our ~$100K IRAs would have doubled at least twice (Rule of 72 divided by 6% implies doubling every 12 years, an extremely conservative tax-deferred assumption) producing a $400K balance with an RMD of $400K/27.4=$14.6K/year each for myself and my spouse. I suspect that our IRAs will easily achieve an 8% APY and have a value closer to $650K, which would be a pair of RMDs of nearly $24K each. If today's married/joint 15% tax bracket rose at 3.5%/year inflation for the next 25 years from $61,300 to $145K, the 10% bracket would only rise from $15,100 to $36K and the COLA'd pension would rise from $35K/year to $82K/year. Even with inflation-adjusted brackets and lower IRA RMDs we'd still be in the 15% bracket. If the IRAs do well and RMDs are higher we'd be pushing the top of the 15% tax bracket.
Spouse starts pulling down her military pension in 2022. That'll put us solidly in the 25% bracket without enough deductions to ever see 15% again.
I didn't add in the effects of Social Security but spouse and I will be pulling down approx $10K/year at age 62. Of course if we were confronted with that RMD math we'd be tempted to hold off until age 70.
Things could change. Congress could lower taxes even further, the nation could adopt a flat-tax code with few (if any) deductions, and SS could go bankrupt. But when I look back over Congress' past 25 years of achievements, I suspect that the next 25 years will be pretty much more legislative gridlock. When you consider the effects of a rising deficit and a dropping dollar, I find it hard to believe that anyone can lower taxes. In fact 78 million voting Baby Boomers will have plenty of motivation to make sure that Congress taxes the hell out of the slackers adopts fiscally prudent measures to reduce the deficit, maybe even reduce the national debt, and restore SS's viability.
So I can do enough math to confidently predict that in 25 years I'll be dealing with a hairball of RMDs and paying taxes in at least the 25% bracket. It seems advantageous to exploit our current temporarily lower incomes to convert to Roth IRAs in order to avoid RMDs & higher taxes altogether. I suspect that's a lot more likely to occur than having Congress swoop in to save us, so I'm gonna pay taxes now.
This is not a simple situation. Conversions are affected by at least six factors (present & future income, present & future tax brackets, Social Security income, and paying conversion taxes with funds outside of the IRA). You can't apply a few thumbrules to an inherently complex formula with multiple factors and expect it to apply to even a large minority of the crowd.
But Roth conversions might not make sense for everyone. Everyone has to do their own math for their own situation. What's your math show for yours?
