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Too late to start Roth Conversions?
Old 02-22-2020, 11:06 AM   #1
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Too late to start Roth Conversions?

I will apologize in advance for yet another Roth thread. I have read many, and I find the various reasons pro and con rather confusing, especially as many of the conversations don't address my particular concerns.

So, here I go...

After 2020, DW and I will have used up enough of our after tax funds that in 2021 we will need to start tapping the IRAs for some living expenses.

I will turn 67 in 2020 (September), DW will turn 63. I started taking my SS at 62 and a few months, DW will start next year.

After the SS payments, what we will want to take from the IRA funds will amount to a WR of about 2.8% of the whole pool of IRAs. That will get us right to the doorstep of the 22% bracket. I won't have much in the way of LTCGs to protect at that point, so I am not too frightened of going into the 22% bracket if there is a benefit down the road.

To make matters a bit more confusing, of the total amount in the IRA pool,

62% of the total are my t-iras, which will be subject to my RMD schedule,
23% is DW's t-ira, subject to her RMD schedule
and 15% is an inherited IRA, i'm the beneficiary, and RMDs are ongoing.


So, if I wasn't concerned about leaving a widow and saddling her with the RMDs subject to tax rates on a single filer, and if I wasn't concerned about the likely tax hit to our heirs should there be a large sum of money in IRAs upon our deaths, I wouldn't really worry about this at all. But I am concerned about those two things.

One idea I have is that starting in 2021 I could convert to Roth IRAs up to the 22, or even 24 % tax brackets, OR..

I could just withdraw those same number of dollars, and leave them unsheltered.
Would it make much of a difference at our ages?

If I were to take more than the RMDs at this point for either strategy, it seems to me that I might as well take it from the inherited IRA, since those RMDs will step up more precipitously as I age, with a finite point in time when I would have to empty that account. Also, were I and DW to die with money in there, that is the least favorably treated, tax-wise, for any heirs.

I would much appreciate the input of the group.

Thanks.
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Old 02-22-2020, 11:22 AM   #2
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I am not so sure I would worry about tax implications for your Heirs. But looking after DW upon my demise would be/is my paramount concern. All well and good for me to say as we do not have any heirs that we are concerned to that level about.

We are not doing any Roth conversions as we have enough in Taxable to last us for the foreseeable future and the returns on them put us into our desired tax bracket. Paying Tax on our tIRAs is a fact of life and something I am not going to worry about.

As long as DW is looked after for her foreseeable future, I am a happy camper.
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Old 02-22-2020, 11:28 AM   #3
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It sounds like that once you are subject to RMDs on your non-inherited IRAs that no matter what you do that you will be in the 22% tax bracket for life. Right?

If so, I'd consider doing Roth conversions to top of the 22% tax bracket to drain as much as possible since it is a matter of paying 22% now or 22% or more later.

But I think that you are worrying abut the right things... the impact of your passing on your widow being vaulted into higher tax brackets (though I guess one could argue that 24% isn't much different from 22%) and similar for your kids... and another one is the risk of generally higher tax personal rates in the future so better to 22% now than 25% or 28% later if tax rates revert.

IRMAA may be another consideration since you are on Medicare.
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Old 02-22-2020, 11:51 AM   #4
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I would be less concerned about the heirs if I had confidence that the government would continue to allow STEP-Ira transfers in the future. I have no such confidence.
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Old 02-22-2020, 11:55 AM   #5
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We are 71/62.
I have decided to convert almost all tIRA money to Roths.
The SECURE Act has changed everything.
We will pay 24% at the margin so our daughter can avoid possible 40% at the margin when her mother dies.
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Old 02-22-2020, 12:14 PM   #6
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Quote:
Originally Posted by HadEnuff View Post
I would be less concerned about the heirs if I had confidence that the government would continue to allow STEP-Ira transfers in the future. I have no such confidence.
What is a STEP-Ira transfer?
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Old 02-22-2020, 02:04 PM   #7
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Quote:
Originally Posted by HadEnuff View Post
I would be less concerned about the heirs if I had confidence that the government would continue to allow STEP-Ira transfers in the future. I have no such confidence.
Quote:
Originally Posted by pb4uski View Post
What is a STEP-Ira transfer?
sorry, I meant "Stretch" IRA...and it's not a transfer, it's just a choice one makes in how one takes the distributions from an inherited IRA, and I see now that they no longer are an option, but you could elect a 10 year distribution?

Is that correct?
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Old 02-22-2020, 04:00 PM   #8
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Quote:
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sorry, I meant "Stretch" IRA...and it's not a transfer, it's just a choice one makes in how one takes the distributions from an inherited IRA, and I see now that they no longer are an option, but you could elect a 10 year distribution?

Is that correct?
For most non-spouse inherited IRAs, the beneficiary must drain the account within 10 years of the death of the owner... it could be right away, over time or on the the day before the 10th anniversary of death.

IMO part of the reason for the change was because some rich people with big IRA balances were designating their grandchildren and great-grandchildren as beneficiaries and Congress objected to people taking advantage of the loophole so they closed it. I think the 10 years is onerous but it is what it is.
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Old 02-27-2020, 05:59 AM   #9
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thanks again for the input. I haven't disappeared, but rather, I've been crunching numbers, creating some spreadsheets making assumptions (always dangerous) about returns on investments, future tax brackets, and RMDs..

It looks as if the first few years of RMDs, when added to our SS, will put me just about exactly flush with our projected spending. We will neither have a surplus of "after tax" dollars, nor will we have to dig into the AT dollars already accumulated.
However, in my 4th year of RMDs, DW will hit the magic age, and she will be subject to RMDs as well, and that, combined with my upward creeping RMD %, if my assumptions are anywhere close to correct, by the time I am 80, we'll have increased our AT pile by 190K.

Unless we make some big capital expenditure, like buying a 2nd home in Florida (unlikely), our AT pile would be 250K to 300K depending again on the accuracy of my assumptions.

Next questions: if we find ourselves in a position where our RMDs are providing us more cash after taxes than we need to live on, can one convert part of the RMD amount to a Roth?

By the time RMD ages have arrived, does it make more sense than just keeping the cash, and gifting it to heirs before we croak, if it's obvious we won't need it to spend ourselves?

Our marginal tax rate during these early years of RMDs would put us in the 22% MTR, with plenty of room before we'd hit the next plateau.
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Old 02-27-2020, 07:25 AM   #10
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No, one cannot convert part of their RMD to a Roth, but one can do Roth conversions in addition to RMDs.
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