Quote:
Originally Posted by dewilson58
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When you convert a qualified account to a Roth IRA, you create taxable income in the conversion year. The income is taxable at your marginal rate. The taxable amount is the current value of the assets transferred, excluding any nondeductible contributions. The IRS has you value the conversion equal to the amount of taxable income you would create had you simply withdrawn the proceeds rather than converting them into a Roth IRA.
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This is quite important.
Fortunately (unfortunately?), I just learned of ROTH conversions this past year. A friend had been doing this with small sums for the last two years, so I didn’t pay too much attention.
Wife and I retired a few years ago, and we moved from Oregon to The Villages with well funded IRAs and proceeds from our Oregon home sale. Investing since the 70s, and fully funded our IRAs and 401Ks since then. We paid attention to that 70s scare that Social Security wouldn’t be there.
Once retired, we’ve delayed taking SS until a few years from now when we turn 70 1/2. That 8% additional benefit growth is welcome.
We started paying attention to RMDs and were quite surprised as we’re likely to have a comfortable income but be in a new, very high tax bracket.
Soooo… ROTH conversion and establishing a Giving account made sense. Developed a plan in November with an advisor. Checked his math with my own calculations. Calculated likely estimated taxes, and converted 25% of our IRAs to ROTH in December. Paid our estimated taxes earlier this month, and it was the largest amount of $$$ we ever handed over to the IRS. We’ll convert the rest over the next 3 years.
No one knows for sure what future tax laws may require us to pay, but it’s comforting to know that we should be OK for the rest of our sunset years. Those new ROTH accounts will grow tax free and with the right investments, grow well beyond our needs.
Math and reading comprehension skills are very important at this point of our retirement. We gladly pay advisors to explain the details and provide reference reading material.
For those looking into ROTH conversions, spend your time understanding the near term tax consequences. Also, be sure to understand your break even point. It is not something for everyone.