RMD, Roth Conversion opinions on our situation

[madsquopper]

Warning - longish post due to lots of relevant info. Trying to figure out the best (or least worst) options. Been playing around with some spreadsheets and would welcome any ideas, particularly if I've missed anything. Current situation:

I just turned 64, spouse is 61. Both working part time but likely to quit possibly this year or next. As far as income, we're something like a 3 income family, as she has a lifelong COLA pension of about 76K (this includes SS which kicks in at 66 but part of the pension is reduced to compensate), her part time income will be about 50K this year, and mine is around 100K. So right off the bat we're at 226K with another 10K of dividends that comes in each year.

The (2018) medicare thresholds for part B premiums are 170K, 214K, 267K, and 320K. I'll have to sign up next year, as the Medicare Advantage program we get via spouse's insurance requires this.

Then, from the new tax changes, the relevant marginal brackets (for us) seem to be 164K-315K is 24% and then 315K-400K jumps to 32%

I've estimated spending in retirement at about 160K between us; each of us tries to contribute 50%, so in effect her retirement is already funded and mine will eventually come out of savings. The 160K includes everything including taxes.

I have:
$1.1 million regular brokerage
$1.7 million IRA
$250K Roth
She has about 150K in an IRA and abut 400K in regular brokerage

I'd like to both cash in some of the substantial lLTCG in my brokerage account, and also convert some of my IRA money to Roth (to avoid the large RMD problem later on). So what I'm doing is looking at how much additional income can be generated before hitting the various thresholds. At least the 15% LTCG rate threshold is still useful.

I'm planning on delaying SS until 70.5, so for that year our "minimum" possible income would start at around 175K (her pension, my SS, and estimated RMD), so we're already over some of the thresholds without any extra Roth conversions.

Doing just some ballpark estimates, it doesn't look doing Roth conversions will be all that helpful although i haven't done the detailed calculations yet.

Opinions welcome. If you're wondering why we're still even working, we both enjoy what we're doing and it's only 3 days/week.

Larry

 

[Z3Dreamer]

I wish to ask you to clarify your info. "And mine is around 100k". This appears to be from part time work, not pension, correct?

You have no pension, just $3.05 million in accounts. Correct?

Towards the end you talk about delaying ss until 70.5. In there, you talk about $175k being the "minimum" income. Is that $76k for her pension/ss, $68k RMD and $31k for your ss?

Big picture is that you get about $31k ins SS and she gets a cola'd $76k for a total of $107k per year. To make up the shortfall ($160k minus $107k) of $53k, you have assets of $3.6 million. With a SWR of 4%, this should yield about $144k per year or some would say you only need a withdrawal rate of 1.5% Correct?

 

[RunningBum]

Probably not worth doing Roth conversions while you are working, since you have more income now than you will in retirement, so you're presumably in a higher tax bracket. Possibly not with the temporary rate reductions, so figure that out. Tax on RMDs will be painful, but it makes no sense to pay a higher rate now.


Once you retire, take another look and perhaps it'll make sense to do some conversions if your marginal rate is the same or lower than it'll be in retirement.


One factor to favor conversions is that if/when one of you dies, the other will be filing single and will be in the higher tax brackets at earlier income levels. I don't know how you factor that in.


BTW, Your LTCG rate is almost certainly 18.8% now with the additional 3.8 NIIT tax (see form 8960). At least anything that puts you over $250K will be. I think that's the threshold for MFJ.

 

[madsquopper]

Answering Z3Dreamers questions, yes, the 100K is my current income, but your statement of SS being 31K is incorrect. if delayed to age 70 it's 42K. I wasn't concerned about safe withdrawal rates, it was more of an ongoing tax minimization problem.

Larry

 

[Brat]

I would do Roth conversions as you cannot do them once you have no earned income.

 

[RunningBum]

I would do Roth conversions as you cannot do them once you have no earned income.

Totally incorrect.

 

[Sunset]

I would do Roth conversions as you cannot do them once you have no earned income.

As RB said totally incorrect.

Perhaps what was meant was you cannot do Roth Contributions once you have no work income.

 

[pb4uski]

+1 I think (or at least hope) that Brat meant contributions rather than conversions.

With repect to the OP's central question... that $76,000 of pension income spoil's any good opportunites for 0% LTCG or Roth conversions.

For 2018 the taxable income limits for 0% LTCG is $77,200 and the top of the 12% tax bracket is $77,400 (as an aside it is stoopid that they are different). Add in $24,000 for itemized deductions and you get total income of $101,200... subtract out $76,000 of pension income and $10,000 of dividends and you get a whopping $15,200 of room left for LTCG. If you replace LTCG with just Roth conversion then make that a whopping $15,400.

So OP, get used to the idea that you will be in the 22% tax bracket or higher for a long time to come.

 

[RunningBum]

I would hope he meant contributions too, but that's not relevant to the OP's questions.

 

[joeea]

I'm planning on delaying SS until 70.5

You are giving away 6 months of social security benefits?
Why?

 

[madsquopper]

Well, yes, 70 and not 70.5.

Yeah, I'm coming to the same conclusion as pb4uski. Not really complaining; we're in a pretty good financial situation compared to most people our age.

 

[RunningBum]

It is a good situation, but I never apologize or feel the need to justify why I'd want to optimize my tax situation.

 

[Brat]

OK, since I blew that ROTH conversion question I have a question to ask the experts: since DH & I are both in the minimum required distribution phase can any of our MRD traditional IRA money be stashed in an existing Roth after paying income taxes? At some point I concluded that wasn't possible but maybe the rules have changed. What about sums in excess of our MRDs?

 

[kaneohe]

OK, since I blew that ROTH conversion question I have a question to ask the experts: since DH & I are both in the minimum required distribution phase can any of our MRD traditional IRA money be stashed in an existing Roth after paying income taxes? At some point I concluded that wasn't possible but maybe the rules have changed. What about sums in excess of our MRDs?

You cannot stash the RMD in Roth. Sums in excess, yes. The order seems to be important too..........if you take out more than the RMD and stash the excess, that is ok ......provided that the first $$ out of the TIRA were not put in the Roth. If you take the first $$ and put them in a Roth, they will be considered excess contributions that you will pay a penalty on each yr until removed......even if you remove more than RMD.....of course if you remove all in one swoop, who can tell which was RMD and which was not.

 

[Brat]

I think the wise approach would be to take the RMDs then a week later do a Roth conversion. I want to make sure that we are still in the 12% marginal rate bracket.

I don't intend to ever need to spend our Roth $, leave it for the kids when we pass away. If they have Roths they can add it to their Roth accounts where it can grow to be passed to the next generation.

 

[RunningBum]

I think the wise approach would be to take the RMDs then a week later do a Roth conversion. I want to make sure that we are still in the 12% marginal rate bracket.

I don't intend to ever need to spend our Roth $, leave it for the kids when we pass away. If they have Roths they can add it to their Roth accounts where it can grow to be passed to the next generation.

I hate to pick on you again, but inherited Roths have RMDs from the year you inherit. There won't be taxes since it's a Roth, but the money can't be tucked away for generations. You shouldn't merge your own Roth with an inherited Roth for this reason.

In my "death letter" to my son I've made sure he knows to keep the inherited Roth separate and that he'll have to take RMDs. He could take the whole thing out, without taxes, but I've suggested it's better to let as much grow tax free as allowed.

 

[Brat]

I used an internet financial website as my source, obviously incorrect - or lacking in details.

OK, let's say that my non-spouse beneficiary is 50 at the time of inheriting my Roth. That person doesn't use my life expectancy (as the case of an inherited regular IRA with RMDs) but their own. Page 42 of IRS Pub 590b they have 34.2 years left of life expectancy and they commence withdrawals tax free on that basis within one year. The Roth continues to grow. I don't see any guidance in the IRS publication that would prevent my beneficiary from naming their children or spouse as beneficiaries, do the rate of distributions then re-set based on their life expectancy as it is an inherited Roth?

Did I miss anything? Can the beneficiary select the annuity option for the Roth distribution or must it be designated by the grantor? Obviously I too need to leave instructions for my heirs.

 

[RunningBum]

I used an internet financial website as my source, obviously incorrect - or lacking in details.

OK, let's say that my non-spouse beneficiary is 50 at the time of inheriting my Roth. That person doesn't use my life expectancy (as the case of an inherited regular IRA with RMDs) but their own. Page 42 of IRS Pub 590b they have 34.2 years left of life expectancy and they commence withdrawals tax free on that basis within one year. The Roth continues to grow. I don't see any guidance in the IRS publication that would prevent my beneficiary from naming their children or spouse as beneficiaries, the rate of distributions then re-sets based on their life expectancy as it is an inherited Roth.

Did I miss anything? Obviously I too need to leave instructions for my heirs.

That's all correct.

From your post before it sounded a lot like you were saying your kids could lump it into their own Roth accounts, and like you, never take anything from it, and pass the entire account down to the next generation. I just wanted to make sure it's clear that the accounts must be kept separate, and RMDs will drain the account at least somewhat.

 

[RunningBum]

Also note that for an inherited IRA, you don't get to reset the life expectancy each year as you do for your own IRA. For example, if I were to die today, my son would be 28 when he had to start taking RMDs from it, which is a life expectancy of 55.3. So he'd have to divide my balance by 55.3 to take his RMD. The next year, he'd divide by 54.3, then 53.3, and so on, until he is dividing by 1 or less at age 84, meaning he'd have to take it all. This is unlike a non-inherited IRA, where you'd be dividing by 8.1 (current table) at age 84. This makes it a lot harder for Roths to be passed down multiple generations. The first heir to live to their life expectancy at the time they inherited would drain it all.


https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries


Not saying that passing down a Roth is a bad idea, though holding onto significantly appreciated assets which get a step up basis is probably even better, isn't it? I haven't actually done the math on that yet.

 

[GrayHare]

I don't see any guidance in the IRS publication that would prevent my beneficiary from naming their children or spouse as beneficiaries, do the rate of distributions then re-set based on their life expectancy as it is an inherited Roth?

Inheriting a previously-inherited IRA does not reset the RMD divisor, instead the divisor continues to get smaller each year as it would have otherwise.