Question on Roth conversion strategy

[Stwicky]

My wife has a small trad IRA (~$200,000) and she is 64, six years older than me.


I am 58 and have ~$300,000 in a trad IRA and about $3.2 million in a rolled over 401k.


We are both now retired. Is it better to begin converting her IRA to Roth or to begin converting my $3.5 million retirement fund to a Roth. Or is there no difference between converting hers and converting mine.


I am in a position to convert about $45,000 per year for the next few years.

 

[pb4uski]

Assuming that you plan to stay married and view your finances as a single unit, I would convert hers first so after 4-5 years it is all Roth and then shift to conversions on yours only to reduce the number of accounts that you have to deal with... but only by one so it is sort of six of one or a half-dozen of the other.

Is there a reson that you have two tIRAs rather than one or did I misread your post?

 

[Stwicky]

Assuming that you plan to stay married and view your finances as a single unit, I would convert hers first so after 4-5 years it is all Roth and then shift to conversions on yours only to reduce the number of accounts that you have to deal with... but only by one so it is sort of six of one or a half-dozen of the other.

Is there a reson that you have two tIRAs rather than one or did I misread your post?

Thanks for the input. Converting all of hers and then working on mine was the plan. I have two different accounts just because they are split between Fidelity and Vanguard. My company 401K rollover only was available with Vanguard.

 

[SecondCor521]

The only difference I see in terms of which IRA to take from would be with respect to RMDs. She'll need to take RMDs on her remaining IRA balance when she reaches 72, which will be six years before you hit that same time frame and have to start your RMDs. Reducing the balance on either of your IRAs will reduce the RMDs for that person, and there's a time difference that might matter from a long term tax planning perspective.

The other thing that could in theory make a difference is if your estate plan treats your IRAs differently. For example if it were a second marriage for both of you and her IRA goes to her kids and your IRA goes to your kids, that could be a consideration - converting down her balance could sort of "disinherit" her kids, which could be an issue.

...

As an aside, now that you've completed the rollover, you could combine your IRAs, either at Fidelity or Vanguard whichever you like. One less account, which I would view as a good thing. (For RMD purposes, the IRS treats your two IRAs as one combined IRA account, although you can take your RMD from either one or both in any combination you like.)

 

[oldtimer]

By chance will you and spouse be living in a state that exempts some of retirement withdrawals by individual from state taxes? That may sway you to converting your IRA over wife's. Another advantage of both having IRAs is $100k annual QCD limit is by individual.

We don't live in a state with that advantage so we decided to convert 100% of hers before 72 to simplify the RMD calculation. Plus our QCDs will not reach the limit.

 

[OldShooter]

Conversions are basically tax rate arbitrage. If you convert now, will the net taxes (considering ACH, IRMAA, state taxes, etc.) you pay be more or less than the taxes you would expect to pay on later withdrawals from funds left in the tIRA? IOW, will your future net tax rate be higher or lower than your current one? RMDs may drive the future tax rate higher, but a careful look is necessary. If your future net rate will be lower, then conversions are probably not a good idea.

 

[pb4uski]

Thanks for the input. Converting all of hers and then working on mine was the plan. I have two different accounts just because they are split between Fidelity and Vanguard. My company 401K rollover only was available with Vanguard.

Ah, I think that I see. Do you plan to combine your tIRAs at any point to reduce the number of accounts that you need to deal with? Also, when you get to RMD time it is easier if you only have one tIRA account since the RMD calculation is across all your tIRAs.

 

[Al18]

I would NOT convert you wife’s IRA. At $200k, assuming 4% growth in mostly fixed interest/CD, will result in a $10K RMD starting at age 72.

Your $3.5M IRA, assuming 4% growth will throw off $140K per year. You’ll need to convert more than that amount per year to Roth if you want to reduce your IRA balance.

I

 

[Exchme]

If it's just a straight math problem of converting the balance of an older person vs. a younger person, the math is going to favor converting your wife's first. That keeps as many $ as possible in tax-preferenced accounts for as long as possible. RMDs put money in taxable where it will incur tax drag year after year, so you want to avoid that day as long as possible.

Others have noted a variety of life circumstances and tax complications that might mean this is not a simple math problem.

As pb4uski mentioned, just the simplification of only having one person having to fool with RMDs when you are older might be a good enough reason to focus on converting her's first. We converted my wife's small IRA first just for that reason.

 

[RetireBy90]

Lots of different things to consider, mostly taxes. After 2025 the current tax rates will revert to higher rates unless extended or made permanent. Not probably on your radar but when one passes, any RMDs will be taxed at single rates which are higher than married filing jointly. Once your RMDs kick in your Medicare will be more costly due to IRMAA.
Consider also your expenses in retirement. If you want to buy a beach house, and use your TIRA to do this, you will owe taxes on the TIRA draws to fund this causing a higher rate perhaps. If you convert to Roth you can make lumpy withdraws without considering the taxes or IRMAA expenses.
You probably know all the reasons too. Convert already, So I would convert all of her IRA first then yours.

 

[MSDalt]

One additional consideration is the Secure 2.0 Act that has been languishing. At one time, a provision had been mentioned which would exempt RMD from retirement accounts valued below $100K.
Although my wife is older, we are resisting conversions from her (<$100K) account in favor of my larger one, operating under the (perhaps misguided) hope that she may eventually qualify of the exemption.
In the meantime we are proceeding with large conversions, believing that tax rates this low will not last, given the huge government debt. According to CNN, net interest payments for government debt were $475B during fiscal 2022, "more than the government spent on veterans’ benefits and transportation – combined."
It seems that your wife will be affected by IRMAA next year, based upon your 2021 joint income. You have 7 years before RMD affect your IRMAA. Consider how big your portfolio will be in 7 years and what RMD will be then.