Roth Conversions for Childless Couple

[Fotodog]

Thanks Karen, good point about having tax free money available for lumpy expenses.

 

[teej1985]

We have no children or other family members that we want to leave a large inheritance to. But we have several charities we support. We do QCDs from our IRAs every year which substantially reduces our RMDs. Roth conversions do not make sense for us.

You can make the charities beneficiaries of your IRAs and they won't pay any taxes on what's left in there also.

 

[Sunset]

Its all dependent on what your accounts look like. .....
2. Having money in the Roth allows for tax free withdrawals in years I have lumpy expenses, ie I replaced my car this year, if I didn't have enough free cash I would have used my Roth to avoid pushing into the higher tax bracket.

..

+ 1

We have been doing Roth conversions, and certainly one benefit after years of doing them is we have a pile of cash for large lumpy expenses without worries.

Eight years ago, I didn't consider this, and paid cash for a new vehicle, it really hurt my available cash for a few months and I felt really constrained in my spending for the next while.

 

[Finance Dave]

can't directly answer the Roth question, but maybe consider gifting your neices/nephews annually up to the gifting limit so you can give them money over time.

 

[Which Roger]

You can make the charities beneficiaries of your IRAs and they won't pay any taxes on what's left in there also.

DW and I have a DAF with Fidelity, and have the DAF as a beneficiary on our retirement accounts. Then we have a legacy plan in the DAF that says which charities will receive the money.

 

[braumeister]

DW and I have a DAF with Fidelity, and have the DAF as a beneficiary on our retirement accounts. Then we have a legacy plan in the DAF that says which charities will receive the money.

We do the same, as well as designating charities as IRA beneficiaries.
It's an easy process, simply done online.

One extra consideration, recommended by many charities, is to ensure they are aware of the fact that they are a beneficiary. There have been some occasions where these fall through the cracks, but if the charity has an opportunity to notify the institution of their correct address/account information it goes more smoothly.

 

[imnontrad]

If you plan to leave money to charities then definitely do NOT convert this money. Also, if you think that one of you will need long term care in the future that is not covered by Medicare but is tax deductible, that is another pot of money to not convert.
If you are leaving part of your estate who is either older than you or no more than 10 years younger, they can still use the lifetime withdrawal rate instead of the 10 year requirement (but if they die, the person who inherits would have the 10 year rule).
As for the rest - it depends on what you tax rate is now and what you expect it to be in the future when RMDs start. And you have to consider the tax rate (and Medicare brackets) after one spouse dies too.
Another thing to consider is if you are leaving the account to others what their tax bracket may be at the time and their life circumstances. this inheritance and the 10 year withdrawal rule may put them in a higher tax bracket or even make them ineligible for some assistance programs. In those cases, this inheritance may be more of a burden than a gift. Yes, you could let them pay. But if they have circumstances like a disabled child that would lose access to necessary medical treatments because the family income too high or something, your "gift" becomes a curse.
Some people choose to convert a little each year but just up to the level of their tax or Medicare bracket orone step higher to avoid a burden for themselves or their heirs later.

 

[rayvt]

True, but if one of you dies, will the "pay 22% later" still hold?

That's not an "if", it's "when". Unless both die in a car crash, the couple will eventually be a single.

 

[SecondCor521]

Another thing to consider is if you are leaving the account to others what their tax bracket may be at the time and their life circumstances. this inheritance and the 10 year withdrawal rule may put them in a higher tax bracket or even make them ineligible for some assistance programs. In those cases, this inheritance may be more of a burden than a gift. Yes, you could let them pay. But if they have circumstances like a disabled child that would lose access to necessary medical treatments because the family income too high or something, your "gift" becomes a curse.

In those scenarios, a disclaimer can help.

 

[orbops]

DW and I are in our mid 60's and in the 12% tax bracket. We are retired and withdrawing some funds from our IRA's now to the top of the 12% bracket.
Am I missing something?

One thing to consider for doing a Roth conversion is that it could serve as a tax free emergency fund. In my situation, having the Roth allowed me to buy a $30K car without worrying about the $3K federal and $1.5K state taxes. It also allowed me to use an Inherited Roth IRA as a down payment when we moved after retirement. The Roth could also be used to keep your AGI in the 12% bracket once you hit 73 since it could give you about 7-8 years in a Roth.

 

[NoEZmoney]

If it hasn't been mentioned earlier, don't forget that thanks to the Secured Act vers. 2.0, kids who inherit parent's IRAs have only 10 years to withdraw. It used to be indefinite. This could bump their taxes higher.

Converting IRAs to ROTH IRAs solves the 10 year withdrawal requirement and allows the beneficiary to withdraw when they want. At least this is what I've read in Kiplinger's article recently.

 

[meleana]

We have one child, but our other consideration is death of a spouse and future tax rates. So we are doing a few small conversions up to the 12% tax bracket.

But we are paying the taxes out of the conversion accounts, using our taxable cash to live on until we start collecting SS at age 70.

 

[pb4uski]

That's not an "if", it's "when". Unless both die in a car crash, the couple will eventually be a single.

Ok ray... any other nits you want to pick?

 

[MarieIG]

Under OP's scenario, since he is not close to the contingent beneficiaries, my only serious concern would be the tax rates faced by the surviving spouse.

 

[TheWizard]

Under OP's scenario, since he is not close to the contingent beneficiaries, my only serious concern would be the tax rates faced by the surviving spouse.

We talk about this a fair amount, but seldom mention that the surviving spouse could remarry at some point.

But if he/she remarries someone in a similar financial situation, then income taxes would be roughly the same: double the number of people, double the AGI.

If saving on taxes is the priority, then remarrying a nearly destitute individual would be the optimal solution.

I don't think this would be my priority, but then, I'm not planning on marrying again...

 

[carty1]

Roth Conversions

Same boat as the OP. No Roth conversions for me. Majority (back in the day) were saying "You must do Roth conversions!". It was the same garbage as "Don't take your ss early!" Hogwash! Do what is comfortable for you in your situation.

 

[MarieIG]

We talk about this a fair amount, but seldom mention that the surviving spouse could remarry at some point.

But if he/she remarries someone in a similar financial situation, then income taxes would be roughly the same: double the number of people, double the AGI.

If saving on taxes is the priority, then remarrying a nearly destitute individual would be the optimal solution.

I don't think this would be my priority, but then, I'm not planning on marrying again...

What could possibly go wrong?

 

[JoeWras]

Same boat as the OP. No Roth conversions for me. Majority (back in the day) were saying "You must do Roth conversions!". It was the same garbage as "Don't take your ss early!" Hogwash! Do what is comfortable for you in your situation.

One person's garbage is another's gold.

 

[pb4uski]

One person's garbage is another's gold.

and ignorance is bliss.

IMO Roth conversions are most beneficial when you are in the 12% bracket and expect to be in the 22% tax bracket once you start pensions, SS and are subject to RMDs. If you are in 22% and will later be in 24% then the impact is negligible.

We will be in that first category so Roth conversions will be very beneficial for us.

I have a friend whose only retirement income is SS and a rental so he'll do 0% Roth conversions and convert his entire tITA before RMDs rather than pay 10% later, so not garbage for him either.

 

[JoeWras]

and ignorance is bliss.

IMO Roth conversions are most beneficial when you are in the 12% bracket and expect to be in the 22% tax bracket once you start pensions, SS and are subject to RMDs. If you are in 22% and will later be in 24% then the impact is negligible.

Yes. With no job and limited investment income, we have plenty of room to fill to top of 12%. And why not do that? It isn't a garbage idea.

Agree that it gets trickier once you hit 22%. Perhaps doing it then is "clean office paper trash."

 

[ncbill]

Still doing Roth conversions to the top of the 12% bracket (MFJ) so hopefully our kids will inherit our Roth accounts, tax-free, ~30 years from now.

I've mentioned this before but I still regret not converting mom's IRA to Roth back ~20 years ago when she was ill, paying any taxes out of my pocket.

Though given her medical expenses back then probably no tax would have been owed.

Considering how much it has grown since that time, which means the taxable annual RMD on that inherited IRA now affects my ability to convert our IRAs to Roth.

 

[Duke of Sands]

A second on the notion of a Roth being a good source of "lumpy" funds. We gave a fairly large gift to our daughter to help with her down payment for a house, unexpectedly needed due to sale of the home that she was renting. Felt good to see her future inheritance used now for such a good benefit and in a painless way with respect to our tax bill.

 

[Markola]

^^^^^^ I haven’t modeled it for us but I tend to think of our Roths as lumpy income too, which we’ll use each year during RMDs to buy down our taxable income into the lower bracket.

 

[karen1972]

If saving on taxes is the priority, then remarrying a nearly destitute individual would be the optimal solution.

I don't think this would be my priority, but then, I'm not planning on marrying again...

Ha I didn't plan on it but I will be getting married next year to a long time BF who will have really no taxable income.. I kid him all the time I'm marrying him for the sweet sweet tax breaks.

 

[pb4uski]

^^^^^^ I haven’t modeled it for us but I tend to think of our Roths as lumpy income too, which we’ll use each year during RMDs to buy down our taxable income into the lower bracket.

How does one

...buy down our taxable income into the lower bracket.