Roth conversions: Are you changing your plan?

[CardsFan]

The other threads regarding pending legislation to change RMD age and eliminating stretch tIRA's for non-spouses has me considering a change.

My tIRA is substantial, and unless one of us spends a lot of time in LTC, odds are we will never need it. RMD's will likely be re-invested or gifted.

We have one DS (37), who will inherit everything (except what we might donate to charities) when we are both gone. Not yet married, but I am assuming he will be by that time. With a stretch IRA he has a good chance to stay in the 24% bracket.

With a 10 year required withdrawal plan, he should be in the 24% bracket for some of it, and then in the 32% bracket.

With a 5 year required withdrawal plan, a lot of it will be in the 32% bracket, and may even get to the 35% bracket.

Plan up to now: convert in the 12% bracket until taking SS at FRA. Stop converting for 4 years and enjoy low taxes. Start RMD's at 70.5, and convert above that to the top of the 24% bracket. IRMAA will hit us there, so we might back off a little.

If the 10 year payout is adopted, I might stay with the original plan. But if the 5 year plan is adopted, it looks like it might make sense to take some big tax hits over the next few years to get at least 1/2 of the tIRA converted.

Anyone else thinking about this? (I know, really good problem to have).

 

[RunningBum]

My tIRA is already mostly converted, and I still hope to finish it by 70. Probably won't help to wait til 72--I'd like to be fully converted by the time I start SS.

But yes, if it were larger I'd probably be more aggressive about converting it.

I'd ignore anyone who scoffs at any such strategy because it's a "good problem to have". It's not a matter of it being a problem, it's a matter of optimizing your financial situation for you and your heirs. Why not try to minimize taxes, even if paying more taxes doesn't cause you any hardships?

 

[Doribe]

A change in federal laws doesn't change my plans. I converted up to the top of the 24% margin last year and intend to do so again this year. I want to get this done before Medicare IRMAA and SS become a factor. The remainder will be converted a little at a time, up to one of the IRMAA brackets. In any case, I intend to be our of tITA before RMDs begin.

I'm mostly concerned with myself and DH. I am looking forward to the simplification of only having taxable and Roth accounts.

 

[SecondCor521]

The elimination or reduction of the stretch IRA provision would affect my father and my siblings.

Currently he just takes his RMDs and spends them. It turns out that with rare exception, that keeps him pretty much on an even keel cash flow-wise.

What we do depends on what the law ends up being - my understanding is there are several variants floating around. If there is an exemption amount per beneficiary, I'll probably talk to everyone about adding the next generation (9 grandkids) as beneficiaries to his tIRA and maybe his Roth as well. If there is a time limitation, I'll probably consider recommending that my Dad do some Roth conversions above and beyond his RMD amounts.

It's a little tricky as the marginal tax brackets involved vary across thirteen people and one trust, and will vary over time.

I have a tickler to remind me to look at this in the fall.

 

[Alan]

I have now converted all of my tIRA to a Roth, and plan to complete DW’s tIRA to Roth conversions within 3 years before she draws SS at her FRA.

 

[Sunset]

Our plan is the same, do conversions to ROTH, paying tax now to get it out before RMD time.
It's basically tax planning for the near future, and is not affected by the change in the RMD law or inheritance of IRA's.

 

[copyright1997reloaded]

Hopefully this isn't a thread crash...I have started looking at Roth conversions and back-door Roth conversions and decided to post here instead of a new thread:

1. I am still working (now full time 'post-retirement' teaching gig) and can contribute to a 457 plan and can do Traditional or Roth. So far I've continued to do traditional to take advantage of w-2 income reduction. This is partially because I have a traditional pension and also was getting 409 plan distributions from previous mega-corp over a 10 year basis. Those things (pension, 409 distribution, current job, interest/divs/capital gains) have me in a 32% marginal federal bracket (filing single). Ugh.

2. I have some money in my prior mega-corps 401k that is after tax. I would like to covert this to a Roth so that future growth is tax free and is not subject to RMD.

3. I also have some money in a non-deductible IRA, which I would also like to do a conversion to a Roth.

4. My understanding after doing some reading is that:
a) After Tax when rolled will result in two parts:
i) Original after tax contribution amount can be rolled to Roth IRA
ii) Gains on after tax contribution can be rolled to Traditional IRA
b) Non-Deductible IRA when rolled with results in two parts:
i) Original non-deductive contributions can be rolled to Roth IRA
ii) Gains on these can be rolled to Traditional IRA

5. I am fortunate in that my mega-corp After Tax can be requested separately than the rest of the 401k (i.e. the pre-tax contributions, employer match, etc.)

6. I am not-fortunate in that I have other IRA's and thus have the issue of the pro-rata basis rule. I have a traditional IRA and even worse had yet another 401k from some consulting work I did post mega-corp that I just rolled a year ago from the 401k to a rollover tIRA. This is a a "Duh" moment in that 401k's are not subject to the pro-rata rules.

7. A method to avoid the pro-rata rules is to convert tIRA's to 401k's. The bad news is my old mega corp 401k doesn't allow rollovers into the plan unless you are a current employee. The (maybe) VERY GOOD news is that my current teachers 457 plan allows rollovers into the plan and I since I am working I qualify!

Thus I can do the following:
1) Do rollovers of my traditional IRA's into my current school system 457 plan, specifically my always been there traditional IRA and the traditional IRA that I created from the not-too-wise 401k rollover from my consulting gig.
2) Then do a request to rollover my old mega-corp After tax contributions (plus gains) to a) Roth IRA for original contributions and b) tIRA for gains.
3) Take b) from 2) and roll that INTO my current educational 457 plan.
4) Once all that is done, do a backdoor Roth on the non-deductible IRA.

This will also allow me to do (for 2019) a non-deductible IRA contribution and immediately turn around and do a backdoor Roth conversion on it.

Starting in 2020 when I no longer have 409 payments (and thus lower income), stop contributing to the deductible 457 and instead do Roth version of it.

Sorry for this being so long, I'm just trying to make sure I'm not missing something here. Whether it is worth it for me to do this convoluted mess is a good question.

 

[SecondCor521]

If you're in the 32% bracket now I certainly would agree that doing the traditional 457 is the better option (unless you know you'll be in a higher bracket later, which is uncommon).

Regarding:

"b) Non-Deductible IRA when rolled with results in two parts:
i) Original non-deductive contributions can be rolled to Roth IRA
ii) Gains on these can be rolled to Traditional IRA"

I don't think that is accurate. A non-deductible IRA is just a traditional IRA which has contributions which were not deducted. You can convert traditional IRAs to Roth IRAs, but you'll pay taxes on the gains and a 10% penalty if you do the conversion before 59.5. You cannot, as far as I know, segregate contributions and gains in a non-deductible IRA when doing conversions as you imply in the quoted section above.

Overall, your four-step plan does work (excepting the minor correction above). There are some timing requirements related to your IRA balances as of the end of the calendar year in which you do these things, so you should be aware of those. Generally speaking I believe it is that you have to have a zero balance in all of your traditional IRAs (other than the nondeductible one) at the end of the year in which you do the conversions. But you can determine the exact rule if you read Form 8606 and its instructions very carefully.

I did what you describe in order to get rid of my non-deductible traditional IRA and simplify my financial life, but I had fewer accounts than you do. Up to you whether it's worth it.

 

[copyright1997reloaded]

If you're in the 32% bracket now I certainly would agree that doing the traditional 457 is the better option (unless you know you'll be in a higher bracket later, which is uncommon).

Regarding:

"b) Non-Deductible IRA when rolled with results in two parts:
i) Original non-deductive contributions can be rolled to Roth IRA
ii) Gains on these can be rolled to Traditional IRA"

I don't think that is accurate. A non-deductible IRA is just a traditional IRA which has contributions which were not deducted. You can convert traditional IRAs to Roth IRAs, but you'll pay taxes on the gains and a 10% penalty if you do the conversion before 59.5. You cannot, as far as I know, segregate contributions and gains in a non-deductible IRA when doing conversions as you imply in the quoted section above.

Overall, your four-step plan does work (excepting the minor correction above). There are some timing requirements related to your IRA balances as of the end of the calendar year in which you do these things, so you should be aware of those. Generally speaking I believe it is that you have to have a zero balance in all of your traditional IRAs (other than the nondeductible one) at the end of the year in which you do the conversions. But you can determine the exact rule if you read Form 8606 and its instructions very carefully.

I did what you describe in order to get rid of my non-deductible traditional IRA and simplify my financial life, but I had fewer accounts than you do. Up to you whether it's worth it.

Thank you on catching the issue with b). I would likely still do the conversion on this one as it is a minimal amount of money (basically just one year) and since I am over 59.5 no 10% penalty.

Thank you also for the form 8606 & instructions pointer. That should be next on my to-do list (once I get through the end of term grading swamp).

Another potential positive of this plan would be consolidation of accounts, which are far too many. It is perhaps time to pay more attention to making the unwinding of my estate easier. Another negative (sort of) is that my tIRA accounts are mostly invested in individual equities and if I put them in my employers 457 they will have to be invested in low-cost passive mutual funds (waiting for OldShooter to comment any second now... ).