Quote:
Originally Posted by retiredguy123
I find this example to be simple but interesting. Assume a tax rate of 30 percent, and an investment return of 10 percent. Convert $1,000 of your IRA to a Roth and pay $300 in tax. One year later, you will have $770 in the Roth. But, instead of converting, suppose you keep the $1,000 in the traditional IRA and withdraw it a year later. You will pay $330 in tax ($1,100 × 0.3) and you will have $770, the exact same amount as if you had converted it to a Roth.
Two points:
1. You are assuming that tax rates will be higher in the future, but they may not be.
2. If you ever need long term health care, assisted living, or a nursing home, you can use the traditional IRA money to pay for the care and take a huge medical tax deduction. In the case of a nursing home, 100 percent of the cost is tax deductible. With assisted living, you can deduct a percentage of the cost, which could be about 60 percent.
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Absolutely correct BUT
the problem with RMDs is that one is forced to take a higher percentage each year as your age progresses. so what's 3% now will be 5% eventually, and 7% even later. .
So if you continue to earn 10 % on the remaining IRA funds, and you take out less than the annual return, your IRA is still growing and your distribution rate is also still growing by a larger percentage than the RMD percentage = RMD % + (Annual return - RMD %)
Assuming married couple status, the IRMMA tax won't effect you until you pass
approximately $3M in the combined IRA
(assuming no other taxable income and maximum SS income for both spouses). . I didn't calculate the single IRMMA threshold but assume its about 50% less (mental estimate, not modeled out)
So if you can target reducing your IRA balances combined to below $3M, by moving to ROTH IRA, you can put off the IRMMA tax until one spouse passes away. At the end of the day, the future is uncertain, and so is this outcome of this decision . .
Assuming that the market casino still returns 10% annually, the simple payback period is about 3.5 years, round to 4 years for conservatism, being incrementally taxed at 30%, and just live off SS and any existing withdrawals to live in the villages. .
BUT this is a tax avoidance scheme for those who prefer
tax minimization versus wealth maximization. At a certain point of IRA wealth, the IRMMA tax is negligible to your total spendable income. . . .
time to visit a financial planner and look at your long term year by year assets, income, expenses, and resulting taxes. . if done properly, and I have done ours, you might be surprised at the outcome, good or bad. . i have no clue to your individual situation. .
good luck