Roth Conversions at age 77

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Murv2479
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Roth Conversions at age 77

Post by Murv2479 »

I'm know I have let the boat sail longer than I should have. But I am considering starting to make Roth conversions in order to 1.
reduce rmd's as I get into the higher age brackets. 2. Allow tax free withdrawals later in life if needed. And primarily 3. Allow adult children tax free Roth Inheritance rather than regular IRA.
I am 77 wife 75.
My wife and I have 38,500 in Soc. Sec. Income. 30, 000 in Pension income, 2,000 in 403b rmd income and 16,700 in IRA rmd income.
Adds up to little over $87,000. With $27,400 deductions, I pay tax on 60,000.
Plan would be to take about $20,000 in additional ira withdrawals and roll about $17,000 over into Roth. I would need about $3000 to pay the taxes. This will also make me pay tax on more SS income. Have no assets outside of tax advantaged.
As long as things go the way they have...this plan has no big advantage to me. But, as as Inheritance it would be easier on my two kids 50 plus in age. Or if my wife or I would require nursing home care some day. In 10 years I could get $170,000 moved out from current $400,000 tax advantaged.
What say you'all.
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retired@50
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Re: Roth Conversions at age 77

Post by retired@50 »

Murv2479 wrote: Fri Jun 18, 2021 11:22 am I'm know I have let the boat sail longer than I should have. But I am considering starting to make Roth conversions in order to 1.
reduce rmd's as I get into the higher age brackets. 2. Allow tax free withdrawals later in life if needed. And primarily 3. Allow adult children tax free Roth Inheritance rather than regular IRA.
I am 77 wife 75.
My wife and I have 38,500 in Soc. Sec. Income. 30, 000 in Pension income, 2,000 in 403b rmd income and 16,700 in IRA rmd income.
Adds up to little over $87,000. With $27,400 deductions, I pay tax on 60,000.
Plan would be to take about $20,000 in additional ira withdrawals and roll about $17,000 over into Roth. I would need about $3000 to pay the taxes. This will also make me pay tax on more SS income. Have no assets outside of tax advantaged.
As long as things go the way they have...this plan has no big advantage to me. But, as as Inheritance it would be easier on my two kids 50 plus in age. Or if my wife or I would require nursing home care some day. In 10 years I could get $170,000 moved out from current $400,000 tax advantaged.
What say you'all.
If you think the money in the traditional IRA could be needed to pay for medical bills or nursing home care, then leaving it in the traditional IRA probably makes more sense.

As I understand it, if you have a large medical expense in a given year, it can become a tax-deductible expense. If the deduction threshold is met, this would basically allow you to take the money from the traditional IRA without paying taxes on it.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
RetiredCSProf
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Re: Roth Conversions at age 77

Post by RetiredCSProf »

I think it is a toss-up. You can start converting to see how it works out for you. I am 73 and still making Roth conversions for the same reasons that you gave. I do not have a set goal of when I will stop converting, but certainly by age 87 -- when the curve heads downward and any potential growth in tax-deferred is overtaken by age-based RMDs.
curmudgeon
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Re: Roth Conversions at age 77

Post by curmudgeon »

Murv2479 wrote: Fri Jun 18, 2021 11:22 am I'm know I have let the boat sail longer than I should have. But I am considering starting to make Roth conversions in order to 1.
reduce rmd's as I get into the higher age brackets. 2. Allow tax free withdrawals later in life if needed. And primarily 3. Allow adult children tax free Roth Inheritance rather than regular IRA.
I am 77 wife 75.
My wife and I have 38,500 in Soc. Sec. Income. 30, 000 in Pension income, 2,000 in 403b rmd income and 16,700 in IRA rmd income.
Adds up to little over $87,000. With $27,400 deductions, I pay tax on 60,000.
Plan would be to take about $20,000 in additional ira withdrawals and roll about $17,000 over into Roth. I would need about $3000 to pay the taxes. This will also make me pay tax on more SS income. Have no assets outside of tax advantaged.
Ordinarily I wouldn't expect Roth conversions to move the needle much at your size of IRA, but, your pension income plays a significant effect. Right now, you are squarely in what is sometimes referred to as the "tax torpedo", which is simply a zone of higher marginal tax rates caused by the funky way in which Social Security benefits are taxed. While you are in the nominal 12% tax bracket, additional dollars of income effectively cost 22% in taxes. If one of you were to pass away, requiring the survivor to file a single, they might have a nominal 22% bracket but actually be paying an effective 38% marginal rate. In 2026, with the scheduled tax bracket reversion, these number would go even higher. You may have been seeing this in recent years in the way your taxes have increased as your RMDs have gone up. If you didn't have the pension income, you likely wouldn't be seeing this.

Because of the way your pension income interacts with the tax on your SS benefits, essentially all of your IRA withdrawal with be taxed at 22% (28% in 2026+). Probably higher marginal rates if one of you passes away, depending on specifics of pension and SS benefit changes at that point. Congress may change the way SS benefits are taxed in the future, but it hasn't been a point of focus; I think the current mechanism has been in place for 28 years.

In your circumstance, you have a bit of space where you can do Roth conversions at 12%. This is the zone between where you hit the top point of more of your SS being taxed and the bottom of the 22% nominal bracket. That would be doing about $25000 in additional withdrawal for conversion and tax. You might as well take as much advantage of that space as you can.

A more aggressive option would be to convert well into the 22% bracket, up to the IRMAA threshold of higher medicare rates, which is about $176K gross income this year. About $120K of withdrawal/conversion. Reasons to do this would be if you expect tax brackets to revert higher as currently scheduled (or other tax increases in the future), as well as the potential of an extended period of you or your wife filing single (the single case is affected by what the survivor benefits would be from SS and pension). If it were me, I would give serious consideration to doing this over the next several years, paying the tax with withholding on the conversion.
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FiveK
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Re: Roth Conversions at age 77

Post by FiveK »

curmudgeon wrote: Fri Jun 18, 2021 4:21 pm In your circumstance, you have a bit of space where you can do Roth conversions at 12%. This is the zone between where you hit the top point of more of your SS being taxed and the bottom of the 22% nominal bracket. That would be doing about $25000 in additional withdrawal for conversion and tax. You might as well take as much advantage of that space as you can.
+1

Murv2479, see Using a spreadsheet and Ira to Roth or not. for some tax rate pictures that illustrate curmudgeon's points. If you know some Excel, you could use the referenced tool for your own "what if...?" exercises.
curmudgeon
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Re: Roth Conversions at age 77

Post by curmudgeon »

A couple of other points:

1) If you make charitable donations, a Qualified Charitable Donation (QCD) can be made as part or all of your RMD. This keeps that part of the IRA distribution completely off of your taxes, which might impact the desirability of Roth conversions.

2) I like the following online tax estimation tool, which I find fairly powerful and flexible, but reasonably easy to use. It makes it pretty easy to do "what if"s for various tax scenarios and quickly see the actual difference in taxes rather than just the nominal tax bracket (that is, it shows the impact of various types of income and the impact in tax on SS benefits).

https://www.mortgagecalculator.org/calc ... ulator.php
MrBeaver
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Re: Roth Conversions at age 77

Post by MrBeaver »

Murv2479 wrote: Fri Jun 18, 2021 11:22 am As long as things go the way they have...this plan has no big advantage to me. But, as as Inheritance it would be easier on my two kids 50 plus in age.
With children at 50+, it’s worth considering what their tax situation might be 10 years from now. Could they be retired and pre-SS distributions at the time? If so, inheriting a traditional IRA that must be distributed within 10 years might cause that income to be taxed in the 0% or 12% (now, scheduled to go back to 15% before 10 years is up) brackets. Essentially, compare the tax rate you would pay on the extra IRA money now to the tax rate they might pay on it in the timeframe of 7-15 years from now.

Unless they have very large traditional IRA/401k balances, inheriting an IRA with a 10-year rule may not be a large tax burden to them, especially when compared to your current 22% tax torpedo status since you are already receiving social security distributions.

I second all the spreadsheet suggestions. They will help you understand what your true marginal tax rate is. Just compare that to your children’s projected future tax rate, not their current one.
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celia
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Re: Roth Conversions at age 77

Post by celia »

Murv2479 wrote: Fri Jun 18, 2021 11:22 am My wife and I have 38,500 in Soc. Sec. Income....

This will also make me pay tax on more SS income.
The most that SS can be taxed is 85% of it. So once $32,725 is taxed, no more will be taxed. And many states don't tax any of it.

Look at your most recent tax return, line 6a to see how much SS was reported and line 6b to see how much was taxed. If you are already being taxed on 85% of it (or very close), convert away...

Once we get to 2026, the tax brackets will go back to 2017 levels, since today's brackets are temporary. Of course, Congress can pass anything else in the meantime.

To be confident of what your taxes should be for this year, run your numbers through tax software and hope the tax laws don't change meanwhile.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
RetiredAL
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Re: Roth Conversions at age 77

Post by RetiredAL »

Murv2479 wrote: Fri Jun 18, 2021 11:22 am I'm know I have let the boat sail longer than I should have. But I am considering starting to make Roth conversions in order to .... reduce rmd's as I get into the higher age brackets. I am 77 wife 75.
OP, you are never too late if the conversion prevents you later being in a higher tax bracket. Converting for your descendants largely comes down to personal choice. You likely don't want to drain your differed balance too much, since those $ can beneficially be used for Long Term Care.

I start RMD's next year and I will carefully eye-ball if I need to do any conversions on top of the RMD. With our RMD, thanks to the SS Tax Torpedo, we will be squarely in the 22% bracket. My goal is to proactively prevent whoever is the survivor is, from from being thrust in the 33% bracket somewhere down the road.

edit to add: I fully contributed to our Roth's since near year 1 of Roths. Thus we already have a fair mount of $ in our Roth's. The Roth $ will be our last to spend money and most likely it will go to our kids
Last edited by RetiredAL on Fri Jun 18, 2021 9:37 pm, edited 1 time in total.
Topic Author
Murv2479
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Re: Roth Conversions at age 77

Post by Murv2479 »

I am in a state that does not tax pensions or SS. I pay zero state tax. So this is not a consideration.
Yes both of my kids are married and with spouses and all do pretty well. They would have pensions and 401k's. Would be difficult to estimate their tax situation in the future. But something to think about.
I never thought about taking even more so that would increase my tax bracket. Unlike many on this forum I actually use my rmd's to maintain my living standard. So I would not want to subject myself to greater taxation.
What I really need is a change in the taxation of SS to avoid the tax torpedo.
I will try out some of the tax estimation calculators.
Dick D
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Re: Roth Conversions at age 77

Post by Dick D »

I am 76 and am making Roth conversions of 30k for at least the next 3 years for the following reasons:
1) my tax rate will go up 3% in three years .
2) to avoid putting my spouse in a higher tax bracket if I pass on before her.
3) for the benefit of my heirs.
Topic Author
Murv2479
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Re: Roth Conversions at age 77

Post by Murv2479 »

Thanks all, I have pretty much decided that I will take approximately a $20,000 additional withdrawal from my IRA for the foreseeable future.This will go into a Roth account. This will get me right up to the 22% bracket and make all of my SS taxable. I have gone through this with my wife and she basically understands the reasons. But, she would be weak on execution if something happened to me.
I need to sit down with my son-in- law and go through this with him. In the year of my death I'm pretty sure I would want to take all the way up through the 22% bracket. This would allow about $90,00 to be moved in that year. Those single brackets are scary.
Of course I would review this annually and make adjustments.
Maybe they will adjust the taxation of SS benefits
delamer
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Re: Roth Conversions at age 77

Post by delamer »

Do the two accounts that require RMDs both belong to the same spouse?

One thing that I’m starting to struggle with (we are still a few years away from RMDs) is which spouse’s account should be converted first.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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retired@50
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Re: Roth Conversions at age 77

Post by retired@50 »

delamer wrote: Sat Jun 19, 2021 3:14 pm One thing that I’m starting to struggle with (we are still a few years away from RMDs) is which spouse’s account should be converted first.
My inclination would be to perform conversions on the older spouse's account first.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
curmudgeon
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Re: Roth Conversions at age 77

Post by curmudgeon »

delamer wrote: Sat Jun 19, 2021 3:14 pm Do the two accounts that require RMDs both belong to the same spouse?

One thing that I’m starting to struggle with (we are still a few years away from RMDs) is which spouse’s account should be converted first.
I guess this could depend on your age differences; the older might hit RMDs significantly sooner.

There's also the potential that instead of inheriting the IRA, a surviving spouse might wish to disclaim all or part to pass it on directly to the secondary beneficiaries if they've decided that they don't need it for their own use.

For the most part, I might suggest "some of each". Though in my own specific case, we converted all of my wife's IRA first just because it was fairly small and that made one less account to keep track of.
delamer
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Re: Roth Conversions at age 77

Post by delamer »

curmudgeon wrote: Sat Jun 19, 2021 3:24 pm
delamer wrote: Sat Jun 19, 2021 3:14 pm Do the two accounts that require RMDs both belong to the same spouse?

One thing that I’m starting to struggle with (we are still a few years away from RMDs) is which spouse’s account should be converted first.
I guess this could depend on your age differences; the older might hit RMDs significantly sooner.

There's also the potential that instead of inheriting the IRA, a surviving spouse might wish to disclaim all or part to pass it on directly to the secondary beneficiaries if they've decided that they don't need it for their own use.

For the most part, I might suggest "some of each". Though in my own specific case, we converted all of my wife's IRA first just because it was fairly small and that made one less account to keep track of.
I plan to start my own thread on this issue so as not to derail this one (and to add my details).

But I thought of the “some of each” solution too.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Roth Conversions at age 77

Post by Sheepdog »

At 88 I am still making conversions. Why now? .... to assist my heirs. My goal is to to owe not over 12% federal income tax on the conversion. (If I didn't make conversions, I would owe little to no tax.)

As a side note. I have I Bonds purchased in 2000 to 2002 which have tripled in value and will be 4 times before long. They will cause taxes due on several hundred thousand dollar gains . (federal only, but not state.) On those, I guess my estate will pay the taxes due.
Unless you try to do something beyond what you have already mastered you will never grow. (Ralph Waldo Emerson)
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Re: Roth Conversions at age 77

Post by retiredjg »

Murv2479 wrote: Fri Jun 18, 2021 11:22 am This will also make me pay tax on more SS income.
Have you looked at this closely? I find it hard to believe with the pension and the two RMDs that you don't have enough "other income" to make the max of 85% of your SS taxable. However, I've only looked at single, not MFJ and could be wrong. But even if you are correct, it can't be much extra could it?

As long as things go the way they have...this plan has no big advantage to me. But, as as Inheritance it would be easier on my two kids 50 plus in age.
With the RMDs, the tax-deferred accounts should not grow a lot. That could mean $200kish for each kid which could be spread out over 10 years. I'm not sure that is a significant burden.

Or if my wife or I would require nursing home care some day.
If you require nursing home care, you might have medical bills large enough to be tax deductible. It could be nice to have some pre-tax money to pay that with....making sine of those dollars "never taxed".

In 10 years I could get $170,000 moved out from current $400,000 tax advantaged.
If you are only thinking $17k a year, no big deal. I don't see much harm in that.

What say you'all.
So far, I vote "no" but my guess is that small conversions would be harmful.

Thanks all, I have pretty much decided that I will take approximately a $20,000 additional withdrawal from my IRA for the foreseeable future.This will go into a Roth account. This will get me right up to the 22% bracket...
You should not go right up to the 22% bracket because that will put you into IRMAA territory which will increase your Medicare premiums for two people by something like $700 each per year (assuming you are on Medicare).

To avoid IRMAA, you want to stay under $174kish AGI (aggregated gross income). Note that IRMAA is based on AGI and tax brackets are based on taxable income (after all deductions) so do not get those confused.
Topic Author
Murv2479
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Re: Roth Conversions at age 77

Post by Murv2479 »

The bottom of the 22% bracket.
I have never paid tax on all of our S S.
Topic Author
Murv2479
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Re: Roth Conversions at age 77

Post by Murv2479 »

curmudgeon wrote: Fri Jun 18, 2021 6:55 pm A couple of other points:

1) If you make charitable donations, a Qualified Charitable Donation (QCD) can be made as part or all of your RMD. This keeps that part of the IRA distribution completely off of your taxes, which might impact the desirability of Roth conversions.

2) I like the following online tax estimation tool, which I find fairly powerful and flexible, but reasonably easy to use. It makes it pretty easy to do "what if"s for various tax scenarios and quickly see the actual difference in taxes rather than just the nominal tax bracket (that is, it shows the impact of various types of income and the impact in tax on SS benefits).

https://www.mortgagecalculator.org/calc ... ulator.php
This calculator is very handy. Thanks for the link. Looks like I can move about $26000 above the rmd...but at a cost of $4300. My rnd would come down every year in the future allowing more to be moved.
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