Time for ROTH Conversions

[petsetc]

Just a friendly reminder that it's the 4th qtr and time to consider Roth conversions, particularly if you have not yet taken your Social Security. Also, since the market is down, you'll get more bang for your buck.

[villagetinker]

Thank you for the reminder, however as I recall there are some downsides to doing this, so I will add to your advice to look these conversions very carefully. I do not remember the specific downsides, but they were enough that I did not do any conversions.

[Boomer]

If you have reached RMD age, that amount must come out of your IRA first, so any conversion has to be on top of that. A Roth conversion at that point could throw you into IRMAA’s territory — but it might be worth it. (Keep in mind that you can lessen the taxing of an RMD or possibly keep out of IRMAA’s clutches with QCDs if you are charitably inclined.)

Also, before conversion, be sure you understand the 5 - year rule. ( I am still not sure if I have that one straight.)

All that being said, I highly encourage looking into converting from IRAs to Roth if the numbers work for you. There might be a sweet spot for you to do this between retirement and RMD age.

The OP makes an excellent point about doing this if you can when the market is down. Converting shares of stock in-kind might be worth looking into. You might be able to convert more shares while we are in this down market.

Yes. It is time, like the OP said, to think about Roth conversions for the 2023 tax year if you think that could work for you.

Boomer

[Kenswing]

We’ve yet started to collect SS or draw from our retirement funds. We’re converting as much as we can while staying in the lower tax bracket. I have been contributing to a Roth for years. So the 5 year rule should already be cleared. If not it certainly will be by the time we start taking distributions.

[Babubhat]

There is ZERO guarantee they don’t tax a Roth in the future. They already pushed through a massive tax increase via the inherited rules which lacked taxpayer outrage

[villagetinker]

It was the 5 year restriction that was the gottcha I was concerned about.

[Boomer]

We’ve yet started to collect SS or draw from our retirement funds. We’re converting as much as we can while staying in the lower tax bracket. I have been contributing to a Roth for years. So the 5 year rule should already be cleared. If not it certainly will be by the time we start taking distributions.


The part about the 5-year rule that I don't know if I have straight is whether new conversions have to wait 5 years. Somewhere I got the idea that any new money coming through a conversion had to wait its own 5 years. I hope I am wrong. If I am not wrong, that means that early boomers might need to be more aware of the 5-year rule if doing conversions now -- in case they might think they want the money for themselves sooner than 5 years.

Btw, you are doing exactly what I wish I had done more of. Did it for a while, although the accountant at the time asked me why I wanted to pay the kids' taxes. I did not see it like that. I saw that we might want to access some tax-free money for ourselves down the road.

Boomer

[Kenswing]

The part about the 5-year rule that I don't know if I have straight is whether new conversions have to wait 5 years. Somewhere I got the idea that any new money coming through a conversion had to wait its own 5 years. I hope I am wrong. If I am not wrong, that means that early boomers might need to be more aware of the 5-year rule if doing conversions now -- in case they might think they want the money for themselves sooner than 5 years.

Btw, you are doing exactly what I wish I had done more of. Did it for a while, although the accountant at the time asked me why I wanted to pay the kids' taxes. I did not see it like that. I saw that we might want to access some tax-free money for ourselves down the road.

Boomer We should be okay. Our situation is a little different since I was self employed. I have Roth and SEP IRA’s that I’ve been contributing to for years. The IRA that we’re converting now is from the Warden’s 401k/IRA. Even if we have to wait 5 years from three years from now to draw on hers, we can easily get by on mine.

[Boomer]

There is ZERO guarantee they don’t tax a Roth in the future. They already pushed through a massive tax increase via the inherited rules which lacked taxpayer outrage



Your post caught my attention. I did a very quick search and found an article about property held in an irrevocable trust and cost-basis. It was on some accounting site that would not let me finish reading the article without joining.

I did not get very far, but it looks like it's something they are looking at that concerns irrevocable trusts. I did not see anything about revocable trusts, but I could not get to the whole article.

Irrevocable trusts and revocable trusts are used for different reasons.

In other words, I have no idea what I am talking about on this one, but I do know that had they come after stepped-up cost basis for all inheritance there would have been great consternation in the land. I can't imagine that one flying under the radar. But from what I could find, it looked like there might be something up with property inherited from irrevocable trusts.

A keyword search should easily find more details for the whole story. But I need to go watch Gunsmoke now. (That's my zone-out favorite lately. I loves me some justice.)

Boomer

[RICH1]

Some good information here.. always enjoy reading about people that don’t pull from their Social Security.
Spending their life avoid paying taxes rather than enjoying it! Financial planners are enjoying their lives with your money..

[huge-pigeons]

Who says people aren’t having fun spending their retirement earnings while not paying taxes? We spend 6 digits of money each year buying jut stuff, way more than needed, without spend a $1 on taxes. At the same time, my net worth goes up more than what we spend. All without paying any advisor.

As for a Roth conversion, This is not a slam dunk decision. IMO, the time to do this was in 2020 when the market was down 35% or more and you knew it was coming back in a hurry, ‘V’ shaped recovery. Your portfolio was way down, you could have sold and paid a lot les taxes, reinvested the money into the same stocks/equities (after 30 day waiting period), then recovered all the money you paid for taxes.
Now, the market is up compared to 2020 or even last year, so you aren’t selling/converting at the lows.

Besides that, you have the drawbacks, or at least in my eyes:
1) you can’t take money out of a Roth for 5 years. So if you start a Roth today, you will have to wait until 10/11/2028 to take money out.
2) congress has adjusted the year that you have to take your rmd based on your birthdate. I have to start taking mine at 74, my wife even later.
3) you don’t know how much your taxes will be in the future, it could be lower or higher, depending who is in the WH. Right now, congress is working on that we don’t pay any taxes on our social security. Maybe they will have something to help out the retirees later on.
4) I think the economy is still going to have a major recession in the next couple of years if not sooner, and if it does go down 30-40% again, then I will be open to a conversion. I’m going to open up :2 Roths for my wife and I so we won’t have to wait the full 5 years if we do.
5) we don’t need the money from our Ira’s or non taxable accounts, and if/when we do, we draw down our taxable accounts 1st

[crash]

The part about the 5-year rule that I don't know if I have straight is whether new conversions have to wait 5 years. Somewhere I got the idea that any new money coming through a conversion had to wait its own 5 years. I hope I am wrong. If I am not wrong, that means that early boomers might need to be more aware of the 5-year rule if doing conversions now -- in case they might think they want the money for themselves sooner than 5 years.

Btw, you are doing exactly what I wish I had done more of. Did it for a while, although the accountant at the time asked me why I wanted to pay the kids' taxes. I did not see it like that. I saw that we might want to access some tax-free money for ourselves down the road.

Boomer

It is a 5 year wait to start withdrawing gains. That is only from opening the account not each deposit. You really want to get it funded before rmd’s kick in at 73 since it is on top of those.

[Caymus]

Some good information here.. always enjoy reading about people that don’t pull from their Social Security.
Spending their life avoid paying taxes rather than enjoying it! Financial planners are enjoying their lives with your money..

That is always the major dilemma. How much $$ should be spent on fun and how much should be spent on a "tombstone".

[Packer Fan]

Some good information here.. always enjoy reading about people that don’t pull from their Social Security.
Spending their life avoid paying taxes rather than enjoying it! Financial planners are enjoying their lives with your money..

What does one have to do with the other? they are not connected in any way. If you have saved and invested well, your social security is secondary and it makes sense for the higher earner to Wait to take it as a hedge against longevity and inflation. Plenty to spend out of other accounts and avoid huge RMDs in the future. I always enjoy reading about people who are dependent on their SS and being happy it is not me. My 89 year old father took his at 62 against my advice and gripes every day about how pathetic his SS payment is.

[Packer Fan]

5 year rule is simple if you are over 59 1/2. You just have to have a ROTH account open somewhere for at least 5 years and withdrawals are tax free.

[M2inOR]

I'm about to do my 3rd year of Roth conversion. Each year we did it, we ended up in the top tax bracket as expected. Unexpected was IRMAA. Fortunately, my wife's employer had a medical premium account for retirees to pay the IRMAA fees for both of us.

Conversion isn't for everyone, but has worked well for us.

The other advantage of the Roth is for beneficiaries of our estate. Traditional IRAs when inherited must be spent within 10 years. Roths don't.

Conversion isn't for everyone. Seek an advisor who specializes with conversions, and understand the advantages and disadvantages. Fortunately for us, it makes good sense.

Our trigger was that we looked into the future when RMDs would be required. Ours would have thrown off income placing us in the upper tax bracket as we would have income that exceeded what we made during our working years. Yes, we saved a lot, and our investments did very well.

We expect future tax increases will occur regardless of who's in the White House. With a Roth, I don't expect the government to renege and start taxing them.

[mbalsama]

Just a friendly reminder that it's the 4th qtr and time to consider Roth conversions, particularly if you have not yet taken your Social Security. Also, since the market is down, you'll get more bang for your buck.

Here are some Roth IRA Conversion Considerations

Pro’s

1. Income is tax free for life
2. Assets grow tax free for life
3. No Required Minimum Distributions at age 72
4. No RMD’s for spousal beneficiaries
5. Although RMD’s are required for non spousal beneficiaries, income and growth is still tax free
6. Possible No state or local Income taxes due on conversions, only Federal taxes - depends where you live
7. Federal tax rate is at the lowest now for conversions - 37%
8. A conversion now can protect against future tax law changes
9. Use conversion to take advantage of market conditions:
1. If the market is low, take advantage of stock market declines - pay lower taxes on conversion amount and benefit when assets rebound
2. If the market is high, convert assets to cash and buy back when it is lower
10. Future earnings does not count towards IRRMA - Medicare premium surcharge

Con’s

1. Income tax is due in the year of conversion
2. Subject to Five-Year-Rule - cannot withdraw any earnings for 5 years (withdraw of contributions OK)
3. Each conversion is subject to a separate Five-Year-Rule
4. Trigger IRMMA and pay higher Medicare Part B & Part D premiums for one year

[petsetc]

Two comments - the 5 year period applies to YEAR ROTH is initial opened ( Jan 1 is the same as DEC 31) and an inherited ROTH also has a 10 year draw down window.

[M2inOR]

Sorry I was not clear when I commented on the 10 year rule for beneficiaries. Yes, must empty the account, but no taxes due. Time limit varies depending on relationships.

If it were conventional IRA, there are RMDs and taxes for beneficiaries.

If all this seems complex, read the many publications available or seek an advisor who is familiar and knowledgeable about conversions and taxes

[HJBeck]

You mentioned that you started taking your RMD at age 74. I thought the new law said one must start at 73. The exception was that one could wit till April 15th of the following year one turns 73. Am I misunderstanding this? The draw back in waiting till April 15th of the following year is that you must take an additional withdrawal for that year. Thus additional tax burden. Am I seeing this incorrectly

[ElDiabloJoe]

FWIW, I'm only 54 and I opened my Roth in 2019. I have a good amount in an IRA (was combined from various 457(b) plans). My CPA / Fee-only advisor has us on a program that converts from the IRA to the Roth annually in such an amount as to not move us up a tax bracket. I have a long horizon in order to accomplish this, so I am not in any rush.

[MidWestIA]

Roth IRA five-year rule says you cannot withdraw earnings tax-free until it's been at least five years since you first contributed to a Roth IRA account.

The IRMA withdraw effect when it jumps and part D increases too plus getting in a higher tax bracket

Part B costs for those with higher incomes - Medicare Interactive (https://www.medicareinteractive.org/get-answers/medicare-health-coverage-options/original-medicare-costs/part-b-costs-for-those-with-higher-incomes)

[mrf0151]

If you don't need the money for 5 years, then it is really to your advantage to roll IRA to Roth. We have done this incrementally for several years now before age 73 hits. If the Feds stay away in the future, then it will be a winner.