Looking for Advice on Roth IRA

[ERPRECY]

Have not posted for almost 10 years now but still remember how this group helped with my early investment mistake (Annuities). Retired in 2011 and DH followed in 2016. Now we’re both 67 and don’t quite know how to determine how much of our IRAs need to be moved to Roth before 72. Our current annual income from Pensions and SSS is 92K, which is really all we need. No mortgages. Our current IRA balance is $3.2M (currently with Fidelity, mostly in Vanguard index funds & Wellington) So far, we have $350K in Roth IRA but probably need to convert so much more. Any suggestions will be most welcome.

 

[SevenUp]

Take a look at Roth IRA conversion - Bogleheads.

If you expect to leave everything to charity and die at the same time, not doing any conversions is probably best (because the charity won't pay any tax).

If you think one of you may predecease the other, and/or your heirs would be subject to high marginal rates when they have to liquidate the IRA within 10 years, aggressive conversion is probably best.

 

[pb4uski]

It probably too late to do anything meaningful at this point. When you start RMDs they will be about ~$125k, increasing your income to ~$217k, solidly in the 24% tax bracket (which will likely be 28% by then since many expect personal rates to revert to the old rates in 2025). Just be prepared to pay much higher taxes and convert to the top of the 0% preferences income tax bracket between now and then.

If you don't have any preferences income you could convert into the 22% tax bracket and may be able to avoid going into the 24% tax bracket depending on your IRAs growth between now and then, but the impact of 2-3% probably won't be very meaningful.

 

[RetireBy90]

In my opinion, it depends on what you plan to do with the retirement savings. My plan is to pass along the Roth accounts to sons and the TIRA to charity. We don’t need any of the RMDs at this point as our other income more than supports our lifestyle. We plan to cover RMDs with Qualified Charitable Donations or QCDs so at 66 now, I’ll do conversions for a couple more years until I start SS. Just one option.

 

[OldShooter]

My plan is to pass along the Roth accounts to sons ...

You expect your sons' future tax rates to be higher than the rate you'll pay on the conversion? That is not our situation.

 

[sengsational]

I agree with PB that it's not going to make a big difference. It's a lot of work to understand how to use it properly, but the i-orp calculator can be run with and without Roth conversions to get an idea of the magnitude of the increased available spending.

 

[Dash man]

Have not posted for almost 10 years now but still remember how this group helped with my early investment mistake (Annuities). Retired in 2011 and DH followed in 2016. Now we’re both 67 and don’t quite know how to determine how much of our IRAs need to be moved to Roth before 72. Our current annual income from Pensions and SSS is 92K, which is really all we need. No mortgages. Our current IRA balance is $3.2M (currently with Fidelity, mostly in Vanguard index funds & Wellington) So far, we have $350K in Roth IRA but probably need to convert so much more. Any suggestions will be most welcome.

Pralana Gold is a good tool to get an idea of what you should do. You may also consider using a CFP professional tax advisor (hourly or fixed fee) to help.
We’ve chosen to do aggressive conversions and we were in a similar position to you a few years ago. We’ll be 66 this year, so we got a little more of a head start. We’ll complete our conversions before RMDs kick in with a little left in IRAs for charitable contributions.

 

[RetireBy90]

You expect your sons' future tax rates to be higher than the rate you'll pay on the conversion? That is not our situation.

No way to know, I’m paying now just because of the unknown. Also if we decide to spend some big bucks we can take as much or as little as,we want at any time from the Roth without any worry about taxes.
Of course, each situation is different and there are several reasons to convert or not.

 

[Koolau]

It probably too late to do anything meaningful at this point. When you start RMDs they will be about ~$125k, increasing your income to ~$217k, solidly in the 24% tax bracket (which will likely be 28% by then since many expect personal rates to revert to the old rates in 2025). Just be prepared to pay much higher taxes and convert to the top of the 0% preferences income tax bracket between now and then.

If you don't have any preferences income you could convert into the 22% tax bracket and may be able to avoid going into the 24% tax bracket depending on your IRAs growth between now and then, but the impact of 2-3% probably won't be very meaningful.

Don't forget the various "cliffs" that $217K may cross (Medicare is the first one and I think it has various levels) see https://www.early-retirement.org/fo...-trigger-income-levels-for-2022-a-111659.html

 

[ERPRECY]

Thank you for all the comments. I also had been doing a lot of reading and what-if calculations. At this point, pb4uski’s comments appeal the most to us. Also, maybe we need to up the splurging. Life is too short.

 

[TheWizard]

Since OP & spouse are same age and have already started SS, I would take advantage of next five years and Roth convert roughly $125k per year, which is your combined RMD on $3.2M five years from now.

Some years, the $3.2M balance will grow, regardless of the $125k conversion; this year it might not.

To figure a more precise conversion amount, you'll need to look at projected IRMAA tier thresholds and then figure your projected AGI each year in early December.

Don't be afraid of the IRMAA tiers. If you're going to be in them in five years, might as well get into them now at the same level...

 

[Dash man]

Since OP & spouse are same age and have already started SS, I would take advantage of next five years and Roth convert roughly $125k per year, which is your combined RMD on $3.2M five years from now.

Some years, the $3.2M balance will grow, regardless of the $125k conversion; this year it might not.

To figure a more precise conversion amount, you'll need to look at projected IRMAA tier thresholds and then figure your projected AGI each year in early December.

Don't be afraid of the IRMAA tiers. If you're going to be in them in five years, might as well get into them now at the same level...

+1
With a tIRA balance that large, the RMDs will be huge in their 80s.

 

[Koolau]

+1
With a tIRA balance that large, the RMDs will be huge in their 80s.

There are lots of worse problems to face, but that IS a biggie! I often encourage the "young'uns" here to limit their qualified money - emphasizing Roths and taxable funds. I ended up with too much in my 401(k) and spent years fixing that to keep my RMDs manageable. So far, I've been successful. I guess we'll see in the future since YMMV.