Order of conversions?

[Lemonade]

I've been reading a lot of the discussions about Roth conversions. A couple responders said something like 'I'm converting hers first'. I am trying to figure out the logic behind doing one (the smaller tIRA? the younger spouses tIRA?) before another?

(Of course there are exceptions and the wife may not be younger or have the smaller tIRA, but I would guess in general that is the case and these responses were specific to converting the wife's first.)

Thanks for any insight....

 

[SecondCor521]

Sometimes people just want to simplify. If there is a small IRA that can be completely converted over a few years, then people sometimes do that just to have one less account to manage.

The other reason I've seen has to do with tax planning. If there is a significant disparity in ages and IRA balances, then that will be reflected in the RMDs starting at age 73 or 75. This is because each spouse in a married couple must take their own RMDs from their own IRA(s). People may choose to convert in order to impact those RMDs in some way - either to even them out a bit, or reduce the larger one, or to match their expected cash flows better.

 

[Lemonade]

SecondCor, I can see wanting to even things out, which in my way of thinking would favor taking more from HIS (or the tIRA belonging to the older partner, generally larger) first. Before both parties begin SS and pensions, and given that SHE is statistically likely to live longer (and thus pay the singles tax rate), I'd think one would pull from the larger tIRA which is more likely to be subject to RMDs first.

I don't have modeling software, but I think it would be an interesting exercise to determine whether one option over the other had significant advantages from a purely financial perspective. Is converting to a Roth from the tIRA that will see RMDs first the best decision or is it neutral?

 

[fosterscik]

I'm someone who made sure to convert my spouse's IRA first. Why? In my case it was entirely due to DW's lack of interest/knowledge about investments and taxes so that she would have access to tax free money before having to deal with those issues on my demise (and any potential delays getting inherited funds transferred for her to access). If DW goes first it makes no difference to me whether she or I have tax deferred money

 

[Lemonade]

^ ah, I can totally understand that reasoning. Immediate access to funds giving time to figure things out. Thanks for the info!

 

[pb4uski]

Sometimes people just want to simplify. If there is a small IRA that can be completely converted over a few years, then people sometimes do that just to have one less account to manage. ...

That was our reason. DW was a SAHM who did some work outside the house so her tIRA was mostly a 401k rollover from when she did work so her tIRA was much smaller than mine so we converted her's first so we would have one less account to deal with.

If we ever end up doing Roth withdrawals I would do the same... withdraw from her Roth first and hopefully end up with one less Roth account.

For some reason we did the opposite for our HSAs. They ended up being about the same size and I calibrate withdrawals qualified medical sepnding so the balances are the same.

As of right now we have 11 accounts... online savings, my taxable brokerage, joint taxable brokerage, his and her i-bonds, my tIRA, his and her Roth IRAs, my inherited Roth IRA, and his and her HSAs. The his and her i-bond accounts will be toast next January so that would reduce it to 9. If we end up buying a new home before we sell Florida then I may kill her Roth IRA and my inherited Roth IRA for the down payment so that would be 7. At the current rate of medical spending the HSAs will be depleted in 5-7 years so that would reduce the number of accounts to 5 and I could always fold the online savings account into our brokerage account.

 

[SecondCor521]

SecondCor, I can see wanting to even things out, which in my way of thinking would favor taking more from HIS (or the tIRA belonging to the older partner, generally larger) first. Before both parties begin SS and pensions, and given that SHE is statistically likely to live longer (and thus pay the singles tax rate), I'd think one would pull from the larger tIRA which is more likely to be subject to RMDs first.

I don't have modeling software, but I think it would be an interesting exercise to determine whether one option over the other had significant advantages from a purely financial perspective. Is converting to a Roth from the tIRA that will see RMDs first the best decision or is it neutral?

To be clear, my "evening out" comment was referring to evening out the RMD cash flow over the remaining tax years or planning horizon. Some people seem to have a goal of having equal IRA values between the spouses, but that isn't what I meant.

As far as your question, it depends on so many variables that it is nearly useless to even try to say generally what is best: age of spouses, size of IRAs, size and type of other assets, overall estate plans, health of both spouses, asset allocation and placement, overall tax situation, community property state or not, state estate taxes, state estate laws, number and financial situation of heirs, etc.

 

[skyking1]

Put us in the simplify group. We're going for smallest first, then the next one we pick will be what we think we can get completely converted. Just looking to cut down on the number of accounts in the process.

 

[2017ish]

We've approached it in a mixed manner. DW entered retirement at 56 with millions in traditional IRAs. Even though, over our lifetime, it was a good thing, it was going to be an issue down the road... We've aggressively converted her accounts, to the point that she will likely have more in Roths than TIRAs by age 70.

Now (ages 64 and 63), we are focused on just getting all of my relatively small TIRAs converted to Roths (after already spending them down a bit). Thus, when we hit RMD age, we'll only have to worry about one person's TIRA--and she'll still have enough there for us to take advantage of QCDs and, if needed, medical deductions for assisted living.

 

[KM]

We converted the account that had the "lesser" performing options first.

 

[target2019]

SecondCor, I can see wanting to even things out, which in my way of thinking would favor taking more from HIS (or the tIRA belonging to the older partner, generally larger) first. Before both parties begin SS and pensions, and given that SHE is statistically likely to live longer (and thus pay the singles tax rate), I'd think one would pull from the larger tIRA which is more likely to be subject to RMDs first.

I don't have modeling software, but I think it would be an interesting exercise to determine whether one option over the other had significant advantages from a purely financial perspective. Is converting to a Roth from the tIRA that will see RMDs first the best decision or is it neutral?

I can't answer your question in the last sentence. Your details as well as those of your spouse make this a challenge to analyze with some software model approach. As others are mentioning, they have a reason to convert one tIRA over another, but the decision may not be backed up with hard numbers. There's a human side to these decisions also.

I paused on the conversion of my larger tIRA to eliminate her smaller tIRA, and convert it to Roth. So the month-to-month burden of carrying that part of her IRA is now gone--one less account and one less fund to track.

Now we're back to weighing Roth conversion(s) yearly, keeping an eye on our state's retirement income exclusion. In our situation which tIRA we convert from has no advantage short-term. Maybe I'm missing something.

 

[Alan]

We are in an unusual situation for this site as we live in England now where you are taxed as individuals, no MFJ or anything. Having much more in pension income than my wife means once I hit RMDs and/or SS that I will jump into a much higher tax band so I converted my IRA to Roth first. Tax year 2022 was the last year of conversions for DW so we now are both 100% Roth with our IRAs. DW has been taking her SS for a couple of years now, and I will start mine next year so it is good to have all that sorted.

 

[MarieIG]

I started with mine, as DH had no desire or understanding of conversions.

I started smaller conversions on his accounts last year, although it is doubtful that "we" will be able to convert the total of his accounts prior to RMWs (and I would like to keep some funds in my traditional IRA for QCDs when I qualify).