Questions on doing the first Roth Conversion at age 68

[pb4uski]

I agree that the benefit of Roth conversions are typically based on tax rates as you indicate above. However, there is more at play here. The OP is planning ahead and wants to take out tax-deferred money filling lower tax brackets and put that money aside towards a purchase that will need $130-190k.

He said wanted Roth conversions in the OP.

We're looking at buying a manufactured home in Florida after selling our motorhome. For now we will retain our home in Ohio.

It looks like a Roth conversion yet this year can help us because we want as little a mortgage as possible. ...

Who do you think you are to tell him otherwise when what he wants to do is perfectly sensible?

 

[GrayHare]

It sounds like income tax rates will be going up slightly when the Trump tax cuts expire Dec 31, 2025. On that basis, it makes sense to convert some to Roth before those increases, but tax rates are tricky to predict. By then a whole new set of tax cuts might be enacted.

 

[Al18]

FYI, unless Congress extends the TCJA law, the 12% Federal Tax rate will revert to 15% on 1/1/26. A Roth IRA conversion up to fill up the 12% tax bracket sounds like a wise move.

 

[SnowballCamper]

I agree that the benefit of Roth conversions are typically based on tax rates as you indicate above. However, there is more at play here. The OP is planning ahead and wants to take out tax-deferred money filling lower tax brackets and put that money aside towards a purchase that will need $130-190k.

He said wanted Roth conversions in the OP.



Who do you think you are to tell him otherwise when what he wants to do is perfectly sensible?

HaHa... putting words in my mouth there.

He also said he sees no real tax savings with a conversion. I merely illustrated how that is true when future tax rates are the same, and agreed with him. Its a wash... no need to get snarky.

 

[pb4uski]

Probably not a wash in his case given the significant amount of money that he wants to raise and the headroom that he has remaining in the 12% bracket. Annual withdrawals or Roth conversions are his best bet and the Roth conversions that he is inclined to do give him the benefit of tax-free growth between when he withdraws and when he needs to money for the house.

And I didn't put words in your mouth. In the OP he said he wanted to do Roth conversions and in post 26 you said "Don't convert".

He will save taxes by spreading withdrawals over multiple years to take advantage of headroom in the 12% bracket rather than letting that headroom go to waste unutilized.

 

[NXR7]

You know, no matter how much information one posts or how clear they think they were, they weren't. It truly is a learning experience to see how many different ways people have read something and filled in the missing blanks.

Because manufactured homes in Florida on leased land are not considered real estate but rather personal property any loan is considered a "chattel mortgage" and not a regular mortgage. See: https://www.rocketmortgage.com/learn/chattel-mortgage

I want to minimize the amount of any loan so I'm trying to figure out how to convert pre-tax savings into spendable cash without taking a massive tax hit or incurring IRMAA. A Roth conversion seems to be the best way. With just a week left this year I could rollover part of an inherited IRA to a Roth and then in January (or later next year) I could rollover that 401(k) to a traditional IRA and then move a bigger chunk to a Roth.

I could easily cash out that 401(k) and almost buy the manufactured home with cash but the tax hit would be a lot higher plus both me and my wife would be hit with IRMAA in two years since she would go on Medicare in 1.5 years.

If I understand IRMAA correctly our total surcharge would be less than $200 a month extra plus the standard Medicare premium so it's not that big of a hit so maybe the 22% tax hit is a bigger concern? We would only hit the lowest IRMAA bracket. We do not have any income that would cause MAGI to be higher than AGI.

The question, as it always is, is what the market will do next year in a Presidential election year. Is it better to wait to do that 401(k) to tIRA early or later? Who knows? Under the terms of the 401(k) it's an all-or-nothing conversion for withdrawals of any type.

A 10% gain in the 401(k) pretty much offsets the federal tax hit. But once I roll it over to a traditional IRA it essentially becomes cash.Then I would have to figure out what to do with it. We've always lived frugally so I do not chase returns; no real need to, yet...

 

[pb4uski]

You can't convert an inherited IRA to a Roth, only a traditional contribtutory IRA unless you inherited the IRA from a spouse. But a withdrawal from the inherited IRA will accomplish your objective... just withdraw and pay the tax and put the proceeds in savings until you need it for the manufactured house purchase.

Then in 2024, rollover the 401k to an IRA and then do either Roth conversions or withdrawals to build up a kitty to pay for the manufactured home.

If you want to be aggressive and really minimize the loan you could do withdrawals to the IRMAA limit... or just to the top of the 12% tax bracket.

 

[NXR7]

You can't convert an inherited IRA to a Roth, only a traditional contribtutory IRA unless you inherited the IRA from a spouse. But a withdrawal from the inherited IRA will accomplish your objective... just withdraw and pay the tax and put the proceeds in savings until you need it for the manufactured house purchase.

Then in 2024, rollover the 401k to an IRA and then do either Roth conversions or withdrawals to build up a kitty to pay for the manufactured home.

If you want to be aggressive and really minimize the loan you could do withdrawals to the IRMAA limit... or just to the top of the 12% tax bracket.

Thank you. That pretty much agrees with what I'm now thinking and it's good to be able to get confirmation, even if it is from random people on the Internet.

And no, I did not know you could not do a Roth conversion on an inherited IRA but that makes sense because that's not earned income. I doubt Fidelity would even have allowed it.

 

[jazz4cash]

OP is squarely in the 12% bracket and over 59.5. Did I miss something that puts the OP in a different tax bracket in the future... over ~30k more taxable income? What's the long term plan for the dollars being rolled into a Roth that makes it advantageous to convert?



I think this is correct.

I was thinking the same. Now we understand SS is already included so no big increase there. OP answered the second part but not the first part.

 

[NXR7]

I was thinking the same. Now we understand SS is already included so no big increase there. OP answered the second part but not the first part.

If you're referring to this part:

"Did I miss something that puts the OP in a different tax bracket in the future... over ~30k more taxable income?"

That would just be my actions in taking big pre-tax withdrawals. When my RMDs hit in five years I expect the increase in the standard deduction, assuming we're both still alive, will cover all of the RMDs.

The RMD problem is that it will require selling some of that dividend-producing stock each year, lessening the dividend. But my planning presumes the dividends go from roughly $29,000 a year to $0 a year at age 73 so as long as the principal is still there it all works out the same. I think and hope...

 

[pb4uski]

... The RMD problem is that it will require selling some of that dividend-producing stock each year, lessening the dividend. But myyplanning presumes the dividends go from roughly $29,000 a year to $0 a year at age 73 so as long as the principal is still there it all works out the same. I think and hope...

Is that not true if you just do an in-kind transfer of dividend-producing stock each year for the amount of the RMD and then use other sources of funds or cash flow to pay the taxes?

Or if you don't have other sources of funds or cash flow to pay the taxes then sell an amount equal to the taxes in the IRA and then do a withdrawal with 100% tax withholding and then do an in-kind transfer for the remainder.