Roth with new income - or not?

[Jigger]

We are recently FIRED and need a little help.
We have $1.2 million in various 403b's and traditional IRA's. We are both turning 59 and a half this week. We are getting a $12,000 payment from the sale of some property for the next 5 years.
My question: should we put this into a Roth - one for each of us - and invest in a 10 year horizon for this money or spend it on living expenses now?
We can spend it down easy enough, but with the deferral of the income in the Roth and the looming RMD in 12 years which makes more sense?
Thanks!

 

[pb4uski]

Need more info. Will you be living off of the IRA or do you have other sources of income like a pension or taxable account monies? Is the $12k the total or the amount you will receive each year for the next 5 years?

You may want to look through the threads on Roth conversions and see if they will help you avoid or mitigate the RMD "tax torpedo".

 

[Done]

To qualify to make a Roth contribution you need earned income, not income from rentals or investments. The payments you are receiving from a sale sound like return of capital and perhaps capital gains, so I'm not sure you'll be able to contribute to a Roth.

However, if you're in a low tax bracket now and expect to be in a higher one later when RMD's (and perhaps other income) kick in, consider partial Roth conversions for several years. A Roth conversion is treated as taxable income and you'll need cash or taxable accounts to pay the increased tax bill. Be aware that increasing your reported income can have implications for other benefits such as ACA subsidies so check some of the threads on Roth conversions before making the decision.

 

[Jigger]

Thanks! We do have about $26,000 a year in pension income so we anticipate drawing $40,000 + from the IRA/403b pile. We will be in the 15% tax bracket. My wife is earning a small amount each year - only $3000 or so which makes it sound like she can do a Roth for at least part of this money? The total paid out over the contract will be $60,000 at $12,000 per year.



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[pb4uski]

There are two way to put money into a Roth.

One is contributions... money goes directly from your bank or taxable brokerage account into the Roth... but you are limited to contribution the lesser of your earned income or $6,500/year... so in your case between you and your wife you could contribute $3,000 since you have $3000 of earned income.

The second is conversions from a qualified plan (like a 403b or IRA). Conversions are not limited, but you have to pay tax on the amount converted. From what you wrote it sounds like you should have some headroom to do some conversions to the top of the 15% tax bracket.

Top of 15% bracket $75,300 + deductions (standard deduction is $12,600) + exemptions ($4,050 each) would be $96,000 of income a couple could have and stay in the 15% tax bracket if they use the standard deduction... if they itemize it would be more. You have $3,000 of earned income + $26,000 of pension income + $40,000 of IRA withdrawals for living expenses + the gain on the installment sale of the property so you should be able to do some Roth conversions at 15%.

 

[Senator]

We are recently FIRED and need a little help.
We have $1.2 million in various 403b's and traditional IRA's. We are both turning 59 and a half this week. We are getting a $12,000 payment from the sale of some property for the next 5 years.
My question: should we put this into a Roth - one for each of us - and invest in a 10 year horizon for this money or spend it on living expenses now?
We can spend it down easy enough, but with the deferral of the income in the Roth and the looming RMD in 12 years which makes more sense?
Thanks!

That $12K is not eligible for a Roth. The $3K is. All of it.

If you want a Roth, open a business, and pay yourself a wage. It can be a 1099 or a W2. A 1099 will be cheaper. A Schedule C business is all it takes. Use all or part of the $12K as business income.

You will have to pay income taxes on the money, which you will have to do no matter if it is dividend or a wage. You will also have to pay 15.3% on the money for self employment taxes. If your wages are low enough, Uncle Sam will give you a $2K tax credit to help out.