Accelerating the Roth Conversion?

[Tekward]

It looks like the long discussed changes for inherited IRAs will be signed on Friday. Anybody else adjusting their strategy?

https://www.cnbc.com/2019/12/17/law...lar-retirement-tax-break-for-the-wealthy.html

"The new rules around the stretch IRA would require beneficiaries of 401(k) plans and IRAs to withdraw all the money from inherited retirement accounts over 10 years."

Of course I could just plan to spend it all and live to 100

 

[donheff]

This may cause an uptick in Charitable Remainder Unitrusts (CRUTS).

 

[PatrickA5]

No changes for me. We probably won't have a large enough stash that it will be overly burdensome to our 3 kids to withdraw over 10 years. I imagine one of my kids will withdraw it the first year - but that's another topic!

 

[pb4uski]

Unknown at this time. Likely no change but it might prompt us to increase conversions to the top of the next tax bracket to reduce tIRA balances.

It might which of our 2 kids inherit what because one is in a high tax bracket and the other is not.... may give lower tax bracket kid more tIRA and higher tax bracket kid more Roth to try to reduce the total that the tax man gets and even out the inheritance on an after-tax basis rather than a pre-tax basis. Still unsure whether we'll actually do this though. but considering it.

 

[N02L84ER]

We will probably keep to our same Roth conversion plan. We currently have 7 named IRA beneficiaries and expect the IRA balance by the time we are in our 70s to amount to less than $41K per beneficiary.

 

[CardsFan]

We are considering converting into the 22% bracket, but have not yet pulled the plug.

My first reaction was "OMG, we need to convert more, and fast" (one DS who will inherit it all). I have spent the last few hours running some simple "what if's", and am not so inclined to jump into the deep water.

Bottom line, without doing mega-conversions to the top of the 24% bracket (or higher), we can't make a big dent in the tIRA in the next 3 years. DW is taking her SS next year, at the same time as Medicare (less than 1/3 of mine at FRA). I will take SS at FRA (2022).

So, my current thought is to convert into the 22% bracket, but below the IRMAA cliff, for the next 3 years. At that point, about 35% of assets will be in after tax accounts (with step up basis) and about 16% in Roth. BUT, I am pushing a bunch of money from 0% tax into 12% by doing this, so still on the fence.

FWIW. I figure DS (and future DIL next year) will be mostly in the 24% bracket, with some moving higher, with no conversions. Mostly in 24% bracket with conversions. (based on a 10 year pay-out). But they would be in the 24% bracket without the inherited tIRA.

So, maybe we can save them some by converting now, or maybe the market will tank, and we didn't save them a dime.

At this point, I am a victim of analysis paralysis. I'll decide tomorrow.

 

[SecondCor521]

I'll think it through more carefully over time, but my initial thoughts:

Encourage my Dad to prefer tIRA withdrawals over Roth or taxable, with the thought that helps reduce the 10-year-torpedo.

Possibly disclaim more of my portion of my beneficiary share of my Dad's tIRA in favor of my three kids, with the thought that spreading out a 10-year-torpedo among four taxpayers might be better than mostly one (me). I was planning on disclaiming some of the tIRA already, but for quite different reasons.

Possibly I'll be biased to spend more of my own money rather than leave an inheritance, since this law has disincentivized me from doing the latter.

I'm probably also going to be more inclined to do more of my own tIRA to Roth conversions, for similar reasons. Although now I have another year or two to do them.

 

[almost there]

"Accelerating the Roth Conversion?"

How are ROTH's safe? Why would this make you Accelerate your Roth Conversion's?

"This would be true for both traditional, pretax retirement accounts and tax-free Roth accounts. Failing to withdraw funds within the 10-year period would result in a 50% tax penalty on assets remaining in the account"

 

[Sunset]

"Accelerating the Roth Conversion?"

How are ROTH's safe? Why would this make you Accelerate your Roth Conversion's?

"This would be true for both traditional, pretax retirement accounts and tax-free Roth accounts. Failing to withdraw funds within the 10-year period would result in a 50% tax penalty on assets remaining in the account"

They are as safe as IRA's. Just withdraw within the rules.

Reason to ramp up conversions, is to reflect a change of plan from stretch IRA's to convert now, and 30 yrs when I die the ROTHs will be larger and still tax free withdrawals. Rather than taxable IRA's withdrawals to add to heir's income for taxes.

 

[almost there]

Right, but the new 10 yr rule applies to both Trad and Roth.
Was thinking there might be a new advantage to convert more now.
But applies to both.

 

[RunningBum]

Possibly disclaim more of my portion of my beneficiary share of my Dad's tIRA in favor of my three kids, with the thought that spreading out a 10-year-torpedo among four taxpayers might be better than mostly one (me). I was planning on disclaiming some of the tIRA already, but for quite different reasons.

Can you do that? This is what I'd like to do if I can. I'm a beneficiary of my Dad's tIRA along with my brothers and sisters. Can I disclaim some or all of my share and pass it to my son? I was under the impression that if I disclaim my share, it would be spread among the other beneficiaries--my siblings, rather than my son.

 

[bingybear]

Can you do that? This is what I'd like to do if I can. I'm a beneficiary of my Dad's tIRA along with my brothers and sisters. Can I disclaim some or all of my share and pass it to my son? I was under the impression that if I disclaim my share, it would be spread among the other beneficiaries--my siblings, rather than my son.

+1

 

[H2ODude]

Think I may have said this before but I don't see it mentioned often. I'm a fan of the the conversions primarily because it's likely one of us will be paying as a single taxpayer some day so I'd prefer to pay the tax now as MFJ. We're hovering around a 2% increase in marginal that I don't think is that significant compared to the difference between MFJ and Single. Just something to think about.

 

[pb4uski]

+1

+2 According to Ed Slott:

... When a beneficiary chooses to disclaim inherited IRA funds, the funds will then go to the next beneficiary entitled to receive the funds. How is that beneficiary determined? Generally, the beneficiary designation form makes this determination so your first step must be to examine the language of that form. Often, these forms provide that if there are multiple primary beneficiaries and one beneficiary disclaims, that beneficiary’s portion would be split among the other beneficiaries.

If you and your siblings all disclaim as primary beneficiaries then the funds would go to the contingent beneficiary. If none is listed, then the funds would go to the default beneficiary as provided by the terms of the document. Sometimes this is the IRA owner’s estate, but not always.

One important rule to keep in mind is that when you disclaim, you are not able decide who you would like to receive the funds instead of you. ...

https://www.irahelp.com/slottreport...aries-disclaim-and-dictate-where-ira-funds-go

 

[copyright1997reloaded]

Disclosing a lot here, perhaps more than I should - but looking for feedback and opinions:

I changed my strategy earlier this year when it was originally passed by the house. Background:
+ retired from mega-corp with decent pension plus 10 year 409 plan distributions
+ went back to work (part time and now full time) teaching (college)
+ some capital gains on security mergers in cash/interest
+ single filer
= marginal tax rate problems (some $ in 32% marginal)
So my strategy was to tax defer (t 407b and t 403b) as much of my college gig salary as possible (i.e. most of it after taxes/forced retirement contributions/medical) just to try to keep in the 24% marginal federal bracket.

With the changes, my strategy has changed to:
- no longer have mega-corp 10 year distribution (2019 was the last payment)
- turn down summer online courses (reduce college gig pay)
- not a penny more towards traditional 457 or 403B. Instead have as much as possible go towards 403B Roth. (Unfortunately my employer does not have a Roth 457 so I am capped at $26K.)
= again try to stay in 24% marginal.

However, I am giving serious reconsideration to my employment. My child is in 12th grade, going off to college next fall. I am 62. My plan was to continue to teach until 65 -- both because I really enjoy it and because at 65 my forced retirement contributions result in a pension from the teachers retirement fund. While it isn't a super crazy amount of money, it still is worth considering (about $10K/year in terms of a single-life annuity).

I have a significant amount of money in existing tax-deferred vehicles (401K, 403B, 457B, t IRA) -- now about $1.8M. My original plan after leaving mega-corp was to Roth convert it, but as you can see that was put on the side because of employment. In addition, it has grown nicely over the last ten years.

1.So perhaps a better plan is to stop working soon (and forgo the teacher pension)?
2.Or do big conversions and deal with the higher bracket now (32% or even 35%) with the assumption that rates will be worse in the future? (Part of the reason this is hard to swallow is because of the big jump from 24% to 32% - OUCH. If it were 24% to 27% or whatever it is less of an impact.)
3.Or just relax, have a beer, and keep on keeping on? (And revisit if there is a big downturn which would make the conversion less painful in terms of tax impact.)

p.s. I'm not even sure that Roth conversion is the best approach. Perhaps it is better to instead invest in individual securities hoping that eventually they will bring a good step up in basis upon my death.

 

[RunningBum]

p.s. I'm not even sure that Roth conversion is the best approach. Perhaps it is better to instead invest in individual securities hoping that eventually they will bring a good step up in basis upon my death.

Sorry, I don't have a comment on the main body of your post. However, this part caught my eye. I saw a similar post just yesterday, so read my reply to it.

http://www.early-retirement.org/for...income-optimization-99854-19.html#post2340965

That doesn't mean you'd favor adding to the taxable account over the Roth. It means if you already have highly appreciated assets in taxable, and plan to leave money to an heir, you are probably better taking from a Roth than selling those assets in taxable.

If you start from scratch with a $1000 investment, putting it in taxable and letting it grow untouched until you die is no better than putting it in a Roth and doing the same for your heirs. In fact if your investment generates any taxable dividends or interest, it will do worse in the taxable account.

 

[pb4uski]

.... However, I am giving serious reconsideration to my employment. My child is in 12th grade, going off to college next fall. I am 62. My plan was to continue to teach until 65 -- both because I really enjoy it....

(empsis added)

We often talk about not letting the tax tail wag the dog.... but even more important is not letting the tax tail wag the quality of life dog... so add that to your thinking.

To be honest, having that much money in tax-deferred at your age, particularly as a single filer, means that you're toast no matter what you do.... think of it as a success tax... you deferred that income expecting that your tax rate in retirement would be lower and it worked out differently because you were more successful than you expected to be.

 

[SecondCor521]

Can you do that? This is what I'd like to do if I can. I'm a beneficiary of my Dad's tIRA along with my brothers and sisters. Can I disclaim some or all of my share and pass it to my son? I was under the impression that if I disclaim my share, it would be spread among the other beneficiaries--my siblings, rather than my son.

Disclaiming is a process governed by state and federal law. In my case (Idaho), it is currently permissible under both. In fact, partial disclaimers are allowed under both. Your state law may differ, and laws can change.

@pb4uski's reply is accurate. What happens to the disclaimed property is not decided by the disclaiming beneficiary; it is determined by the way beneficiaries are listed (and what state and federal law say about how disclaiming works).

In my particular case, my state law says that if I disclaim, the property flows as if I had predeceased the original owner (my father). The IRA is at Vanguard, and the primary beneficiaries are my siblings and I, listed as "secondcor521 per stirpes". There are no secondary/contingent beneficiaries listed.

(I think I disagree slightly with Mr. Slott in that I think state law would control rather than what the beneficiary form says, but I'm not an expert.)

The "per stirpes" designation means that it is my father's intention that if I were to actually die before him, he would want my share to go to my kids, rather than be divided among my siblings. This is, in fact, my father's intention; it also just happens to facilitate the operation of disclaiming.

There are certain time and filing requirements to disclaimers - in my case I basically have to write a letter to the executor (my sister) and possibly file it with the court. The requirements are straightforward but must be followed.

I've given my sister a heads up about this so she knows it's something I might do. It may also be a maneuver that helps them - they both also have three kids, so the original IRA could be split among 12 people instead of 3.

Because of the way this whole process works, any amount I disclaim has to be divided equally between my three kids. I can't say 40% to the oldest and 30% to the younger two, or something like that. Again, that's OK with me, because that's what I'd want anyway.

This is all based on my fairly careful and fairly extensive review of my own situation. I plan to go over it with an estate planning attorney before I actually execute it to make sure it will actually work the way I intend to.

 

[RunningBum]

Good explanation. I don't know if my dad lists us with "per stirpes". I don't think it'll amount to that much and I don't really want to rock the boat. We've found for things like this he's likely to either ignore it or go overboard and spend thousands of $$ to redo everything. With the 10 year option I can at least hold off on taking any while I'm trying for ACA subsidies. The way he looked when I saw him this fall he could easily live another 10 years anyway. I think I'm less exposed to IRMAA but if I had to it wouldn't bother me to just let my siblings get my share.