We are retired, over 59 1/2, MFJ in 12% tax bracket. Family of 4, would like to keep MAGI below 39,300 to receive max ACA subsidies. We are considering Roth conversion as our taxable income is quite low. Or we have money in a Transamerica VA. Should we: do the Roth conversion up to the 39k or take $ out of VA and pay ordinary income tax. We will pay tax either way, and don't really have any need for the VA?
thanks BHers
Which taxable withdrawal makes the most sense
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Re: Which taxable withdrawal makes the most sense
The knee-jerk reaction is "get the money out of the annuity" because most annuities are a bad deal. But it depends on the specifics of the annuity (e.g., is there still a surrender fee? what is the guaranteed interest rate? Other wrinkles specific to your annuity?)
Re: Which taxable withdrawal makes the most sense
Is your marginal tax rate ever going to go up? If it won't, then you don't benefit much from Roth conversions; you avoid future RMDs that you won't need, and you get more money into a tax-advantaged account if you pay with the conversion from a taxable account. But if your marginal tax rate will become 22.2% when you start Social Security because of the phase-in of SS taxation (see Taxation of Social Security benefits on the wiki), then there is a significant benefit to converting at 12%.
Also, how large is the variable annuity?
The other issue is that withdrawing from the variable annuity increases your available cash, while converting the traditional IRA to a Roth decreases your available cash by the amount of tax due. Thus, it might make sense to withdraw enough from the variable annuity to cover your cash needs, including the tax due on the conversion. For example, if you can safely have $10K more in income and have the right amount of cash now, convert $8800 in the traditional IRA to a Roth, and withdraw $1200 from the variable annuity to cover the $1200 tax bill. If you need money for spending, deplete the variable annuity first.
For improved cash flow, the other option might be to convert the variable annuity to a fixed annuity, with payments for your life or joint lives. The advantage is that when you annuitize an annuity, the payments are prorated between return of your initial investment and gains for tax purposes. When you withdraw from a variable annuity without annuitizing, withdrawals are entirely taxable until you have withdrawn all your gains.
Also, how large is the variable annuity?
The other issue is that withdrawing from the variable annuity increases your available cash, while converting the traditional IRA to a Roth decreases your available cash by the amount of tax due. Thus, it might make sense to withdraw enough from the variable annuity to cover your cash needs, including the tax due on the conversion. For example, if you can safely have $10K more in income and have the right amount of cash now, convert $8800 in the traditional IRA to a Roth, and withdraw $1200 from the variable annuity to cover the $1200 tax bill. If you need money for spending, deplete the variable annuity first.
For improved cash flow, the other option might be to convert the variable annuity to a fixed annuity, with payments for your life or joint lives. The advantage is that when you annuitize an annuity, the payments are prorated between return of your initial investment and gains for tax purposes. When you withdraw from a variable annuity without annuitizing, withdrawals are entirely taxable until you have withdrawn all your gains.
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Re: Which taxable withdrawal makes the most sense
Do you have gains in taxable accounts? If so, you could tax gain harvest?relentless1 wrote: ↑Tue Sep 28, 2021 11:45 am We are retired, over 59 1/2, MFJ in 12% tax bracket. Family of 4, would like to keep MAGI below 39,300 to receive max ACA subsidies. We are considering Roth conversion as our taxable income is quite low. Or we have money in a Transamerica VA. Should we: do the Roth conversion up to the 39k or take $ out of VA and pay ordinary income tax. We will pay tax either way, and don't really have any need for the VA?
thanks BHers
That said, if your income continues to stay low you might be in 0% LTCG now and in the future
Both are tax arbitrage with Roth being based on marginal income tax rates while tax gain harvest is about LTCG rates
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Update: Which taxable withdrawal makes the most sense
thanks for reply. Taxable income will be much higher in at 70. 12% next 5 years, then 24%. So conversions make sense. However can only convert small amounts for next 5 years to keep ACA subsidies.
VA has 40k so I either convert 10k per year into Roth or start taking $ out for this useless VA. Have to pay taxes either way. Just wondering which would be more efficient. ie move 40k over 4 years into Roth or dispose of this VA during the same time frame. Have taxable assets to cover taxes, have taxable gains to harvest but still leaves me with VA or Roth question.
thanks
VA has 40k so I either convert 10k per year into Roth or start taking $ out for this useless VA. Have to pay taxes either way. Just wondering which would be more efficient. ie move 40k over 4 years into Roth or dispose of this VA during the same time frame. Have taxable assets to cover taxes, have taxable gains to harvest but still leaves me with VA or Roth question.
thanks
Re: Update: Which taxable withdrawal makes the most sense
How much of that is contribution and how much is gain?
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Re: Which taxable withdrawal makes the most sense
17k original investment
Re: Update: Which taxable withdrawal makes the most sense
Thus only $23K (plus whatever growth occurs in the future) will be taxable when withdrawn. Under the assumption that it is indeed a "useless VA", prioritizing "withdrawal from the annuity" over "Roth conversion" seems reasonable. Given the specific numbers, it appears you will be able to do some of each.