I'm finally getting around to looking at Roth conversions and I'm struggling to deal with all of the factors. Rough situation:
1. DW and I are 60. We will take SS at 67. We will have a combined amount of ~$60k.
2. We have way more in after-tax than pre-tax. Our pre-tax IRA's are around $1.5M. We produce about $100k of after-tax income, of which about 40% is capital gains with qualified dividends.
3. Only a tiny pension of $2500 per year that never rises. We will stop earning any money from consulting,etc starting next year.
4. We would probably start RMD's at age 75. Until then, we'd probably live off after tax accounts. I can't find the table that shows how much to withdraw starting at age 75. All of the tables start at 72 or 73.
5. We might need Obamacare for 3 years starting in 2 years.
6. I'm pretty sure we will end up in the 22% tax bracket typically, until the RMD's hit. For now, I'm assuming 22% bracket. Theoretically I could get after-tax income down into the 12% bracket if I tried hard enough.
7. My health is such that I would be surprised to make it past 81. My wife might.
8. I haven't yet started looking at Medicare IRMAA. Does that get recalculated constantly? Don't understand anything yet about that calculation.
Should we be doing Roth conversions? I guess once the RMD's hit at age 75+, it would bump us into the 24% or maybe even 32% bracket? So many moving parts.
I'm far from claiming even the barest level of expertise on this topic, so take anything I say with that in mind. That said, have been following all the Roth conversion threads in an attempt at understanding.
Seems to me that the biggest reason for you to consider conversion is that your wife may be plunged into a higher tax bracket sooner than typical given your shorter life expectancy. But, the impact is gonna depend on your taxable income at that point in time.
One thing I've taken away from the whole Roth conversion discussion is that there is usually no right answer unless you are able to convert at very low rates, like 0%-12%. Beyond that, its a roll of the dice on pay now vs pay later.
Personally, I like the idea of doing some conversions. I have about $2M of pre-tax t-IRA/401K dollars, and that's projected to grow to nearly $5M by the time I reach age 75 (assuming untouched) and start kicking off ~$200K of RMD, escalating rapidly from there. If I convert $500M of that to Roth, I can lower the pre-tax dollars to $4M by age 75, RMD of $160K. But, in converting, I will have pre-paid a mess of taxes.
So, in the end, would it be worth it. Actually, in my case, it's hard to get the math to work unless I kick off really early, like in my early 70's, and even then the benefit too DW is fairly small. I suspect this is because I'll always be in a relatively high tax bracket, at/near 22% and above. Not much juice to squeeze at that level. Nonetheless, I like the idea of having a bucket of tax-free money for potential lumpy expenses, so I don't get thrust into an even higher tax bracket in a big BTD year.
P.S. Meant to note that we're close in age, retirement income, and level of pre-tax assets, so thought might be helpful to share my thinking on the topic. Also, similarly we have somewhat more taxable than pre-tax, so don't expect to ever need to touch the pre-tax stuff, absent RMD's.
P.S. Thinking about it further, summarizing my reasons for planning some amount of conversions (in spite of fact that models are telling me it doesn't much matter in my case):
(1) Income and tax smoothing - avoid getting pushed into higher tax brackets in lumpy expense years (difficult to model)
(2) Hedge against higher tax bracket if one of us becomes a single filer
(3) Hedge against future legislative tax increases which I view as very real risk (state and fed)
(4) Depending on how I go about liquidating r.e. investments, might have a bucket of after-tax cash to use to strategically lower tax bracket for a few years and facilitate some conversions below the 22% bracket. TBD
