[TSO/ISPF]

Originally Posted by retiredguy123

Inherited IRA rules are a pain in the neck. For some people, the best thing to do is to systematically convert your traditional IRA to a Roth and save your heirs a lot of hassle. Do the math and watch out for IRMA.

For the sake of those readers in their younger stages of retirement, the advice from some financial planners is to do Roth conversions prior to RMD. Watch your tax bracket and convert as much as possible prior to that first RMD year. Who knows, the laws could change and it may not matter how well you plan. Sorry if this has already been mentioned.

[Babubhat]

Ed Slott is the dean of retirement plan analysis. Read his site.

Ed Slott and Company, LLC |

https://twitter.com/theslottreport

[Boomer]

Originally Posted by heims01

For the sake of those readers in their younger stages of retirement, the advice from some financial planners is to do Roth conversions prior to RMD. Watch your tax bracket and convert as much as possible prior to that first RMD year. Who knows, the laws could change and it may not matter how well you plan. Sorry if this has already been mentioned.

That is excellent advice. I was doing exactly that. I wish I had done more. Time got away from me.

Anybody in this boat should take note.

Boomer

[Bay Kid]

Originally Posted by heims01

For the sake of those readers in their younger stages of retirement, the advice from some financial planners is to do Roth conversions prior to RMD. Watch your tax bracket and convert as much as possible prior to that first RMD year. Who knows, the laws could change and it may not matter how well you plan. Sorry if this has already been mentioned.

If they could they would change the laws to take as much as possible of our retirement.

[Stu from NYC]

Originally Posted by Boomer

That is excellent advice. I was doing exactly that. I wish I had done more. Time got away from me.

Anybody in this boat should take note.

Boomer

If you do convert to a Roth you lose the opportunity to grow your money after conversion (the portion you have previously paid in taxes). That 25% paid in taxes could be working and growing for you for many years.

As a result it is not clear to me that a roth conversion is such a good idea.

[dewilson58]

Originally Posted by Stu from NYC

If you do convert to a Roth you lose the opportunity to grow your money after conversion (the portion you have previously paid in taxes). That 25% paid in taxes could be working and growing for you for many years. As a result it is not clear to me that a roth conversion is such a good idea.

You are correct.

Conversions are not right for everyone.
Conversions are not always a good idea.
Conversions can cost you $$$

Conversions are possible hedges, possible.

[TNGary]

Originally Posted by Babubhat

Ed Slott is the dean of retirement plan analysis. Read his site.

Ed Slott and Company, LLC |

https://twitter.com/theslottreport

Thanks Babuhat, interesting site, also as an fyi discusses:
"Securing a Strong Retirement Act of 2022,"
A bill designed to increase savings in IRAs and company plans has passed the House of Representatives, but it’s not yet law. Link Below if interested,

House Passes SECURE 2.0 Bill, But It’s Not Law Yet | Ed Slott and Company, LLC

[Babubhat]

Forming a 501c3 is the nuclear bomb of eliminating tax on the RMD. Perfectly legal. Wealthy all do it. Minimal effort and cost if your tax liability would be material. You can do good and save taxes, including sales tax

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.

Learned Hand

[DAVES]

Originally Posted by bob47

2022 required minimum distributions for IRAs got locked in at the end of 2021 when markets were high. It's not hard to imagine markets will still be lower at the end of 2022. Are there any suggested strategies in this situation to prepare for the distribution? Maybe in kind distributions from the IRA to the brokerage account is the best strategy?

The question for all is do we think the market will go up. Truth, honest truth is I don't know. Perhaps, an answer. RMD you are told what you must take out, AND EXPOSE TO TAX. If, you do not, you forget, or whatever, the penalties are severe.

What to do? We have been fed endlessly dollar cost averaging in terms of putting money in. You can, I AM using the same logic for my force withdrawals. If, you have your IRA and taxable account in the same brokerage, it is easy to do and the money will be in your taxable account the next day.

I would not take advice from any poster, INCLUDING ME, without confirming it. Something to investigate. The REQUIRED IRA withdrawal is taxed at your highest tax rate. No long term gains etc apply. The tax can be huge. You can donate up to 100,000 to A CHARITY and avoid paying TAX on it. It is UP TO 100,000 you may choose not to give that much. Reminder, this forced withdrawal is taxed as ordinary income and may well increase the tax you owe on other income. As stated CONFIRM what I am saying. The charity must be listed as 501c3, I think that is the code. Most charities, LEGITIMATE CHARITIES are so listed. You cannot double dip. Avoid tax on your RMD and take it as a tax deduction.

[DAVES]

Originally Posted by TNGary

Thanks Babuhat, interesting site, also as an fyi discusses:
"Securing a Strong Retirement Act of 2022,"
A bill designed to increase savings in IRAs and company plans has passed the House of Representatives, but it’s not yet law. Link Below if interested,

House Passes SECURE 2.0 Bill, But It’s Not Law Yet | Ed Slott and Company, LLC

A bit contrarian perhaps. I've read they keep changing the tax code as too many people learn how to deal with it. Imagine our tax code is one hundred and eighty-six thousand pages. It is interesting to me, our government assumes continued INFLATION, long term.

[Stu from NYC]

Originally Posted by DAVES

A bit contrarian perhaps. I've read they keep changing the tax code as too many people learn how to deal with it. Imagine our tax code is one hundred and eighty-six thousand pages. It is interesting to me, our government assumes continued INFLATION, long term.

Congress made up of lots of lawyers wants to ensure full employment for lawyers with some help for CPA's

[Boomer]

Originally Posted by heims01

For the sake of those readers in their younger stages of retirement, the advice from some financial planners is to do Roth conversions prior to RMD. Watch your tax bracket and convert as much as possible prior to that first RMD year. Who knows, the laws could change and it may not matter how well you plan. Sorry if this has already been mentioned.

Originally Posted by Boomer

That is excellent advice. I was doing exactly that. I wish I had done more. Time got away from me.

Anybody in this boat should take note.

Boomer

Originally Posted by Stu from NYC

If you do convert to a Roth you lose the opportunity to grow your money after conversion (the portion you have previously paid in taxes). That 25% paid in taxes could be working and growing for you for many years.

As a result it is not clear to me that a roth conversion is such a good idea.

Originally Posted by dewilson58

You are correct.

Conversions are not right for everyone.
Conversions are not always a good idea.
Conversions can cost you $$$

Conversions are possible hedges, possible.

"Regrets, I have a few. . .but then again. . .I did it my waaaaaaay".........

au contraire, stu and dew, I have only one regret with this one. Like I said in my response to heims01 (who originally suggested the idea of Roth conversions before RMD age) I did it. I just wish I had done more. It can work quite well for some.

There are retirees in a biz where they can retire in their 50s . . .well. . .there used to be anyway. That's just one example of a scenario where it can make a lot of sense to do Roth conversions, especially if income is lower early in retirement, resulting in a lower tax bracket.

Roth Conversion? You gotta know when to do it, decide to take the hit early, and then — watch it grow again — for years and years. And if there is enough time ahead of you, the RMD can be significantly minimized. I wish I had kept doing those conversions. I was into it for a while. (sigh)

It's like choreography. . .you have to get the dance just right.

My point is that those conversions are something for individuals to be aware of, so they can decide if it can work for them. There is no need to be dismissive of the idea.......Yeah. I know. I see. At least the two of you included a little hedge in your posts. I'll give you that.

Boomer (who sometimes knows stuff, but never pretends she does when she does not)

[CoachKandSportsguy]

Retiredguy has several very good points about planning, withdrawals, and investments.

Assuming that the IRA owner is keeping, not donating, the RMD or otherwise tax sheltering the RMD, the important points are
1) RMD is taxed at ordinary income rates.
a) how the IRA portfolio is constructed should generate enough cash to pay the RMD annually from the cash
b) this approach avoids selling portfolio to pay RMD
c) this approach requires rebalancing your portfolio from growth equities to income equities / bonds as you age.
d) assuming 100% invested in SP500 index example, selling the required amount in May each year is acceptable to maintain a constant investment thesis, however, see point 4 below. 100% equity with no re-investable income is a very high risk retirement strategy.
2) Withholding taxes on IRA distributions
a) you get to decide, it can be anywhere between 0% and 100%, your choice.
b) If you select 0% withheld, you can take the entire distribution and reinvest it in a taxable account exactly as in the IRA
c) if 0% withheld, the taxes are paid out of any taxable account you have.
With this approach you should pay estimated taxes quarterly to avoid IRS penalties
d) If you have high medical expenses, take out an equal IRA amount as the deduction offsets the additional taxes
3) Taxes represent a drag on success. If you are successful, you will have a tax applied,
a) success creates other tax effects, which is why all financial analysis alternative comparisons are done on an after tax basis!
b) tax rates can change, so the future is still uncertain, and always will be uncertain.
c) how and from where you pay taxes can be as simple or as complicated as you decide.
d) the closer you are to passing on the IRA to your beneficiaries, the more you should take out of the IRA to pay lower taxes than the working beneficiaries incremental tax rates. They will appreciate you passing your wealth in a taxable account, which has a very high minimum tax threshold.

4) future returns on equity, bonds, real estate, cash, are always uncertain. Sometimes more uncertain than at other times.
a) currently, the future returns are more uncertain than in the recent past 20 years.
b) the investment markets have long term average returns, which must have tax rates applied for after tax returns for compounding models
c) as a retiree, you do not have the long term ahead of you, so returns will become more variable and more precious
d) as a retiree, avoiding asset drawdowns is paramount to maintaining the ability to generate a return/income


These are general guidelines to start applying to a financial model of your income and expenses after one stops working. Not all working stiffs can contribute to a ROTH IRA, we can not. . . so after we stop working, converting to a Roth after losing 25% estimated taxes, requires about 6 years at after inflation 4% return, 8 percent investment return less 4% inflation. however, if you time the withdrawal poorly, the time to get back the taxes paid may be significantly longer, See point 4 above, so using a conservative return and a harsher inflation rate should be used to be realistic. .

good luck in your choices. . .

[Stu from NYC]

Originally Posted by Boomer

"Regrets, I have a few. . .but then again. . .I did it my waaaaaaay".........

au contraire, stu and dew, I have only one regret with this one. Like I said in my response to heims01 (who originally suggested the idea of Roth conversions before RMD age) I did it. I just wish I had done more. It can work quite well for some.

There are retirees in a biz where they can retire in their 50s . . .well. . .there used to be anyway. That's just one example of a scenario where it can make a lot of sense to do Roth conversions, especially if income is lower early in retirement, resulting in a lower tax bracket.

Roth Conversion? You gotta know when to do it, decide to take the hit early, and then — watch it grow again — for years and years. And if there is enough time ahead of you, the RMD can be significantly minimized. I wish I had kept doing those conversions. I was into it for a while. (sigh)

It's like choreography. . .you have to get the dance just right.

My point is that those conversions are something for individuals to be aware of, so they can decide if it can work for them. There is no need to be dismissive of the idea.......Yeah. I know. I see. At least the two of you included a little hedge in your posts. I'll give you that.

Boomer (who sometimes knows stuff, but never pretends she does when she does not)

Interesting post and if you time converting to a Roth when you have a small income for the year yes you can come out ahead but not an easy thing to think long term about when your income drops a lot.

I was not being dismissive of people converting to a Roth but just gave my thought as to one major negative of doing so. I have thought long and hard about doing this a number of times but the opportunity cost of doing so tells me not to do it. BTW my cpa is in complete agreement with me for whatever that is worth.

[retiredguy123]

Originally Posted by Stu from NYC

Interesting post and if you time converting to a Roth when you have a small income for the year yes you can come out ahead but not an easy thing to think long term about when your income drops a lot.

I was not being dismissive of people converting to a Roth but just gave my thought as to one major negative of doing so. I have thought long and hard about doing this a number of times but the opportunity cost of doing so tells me not to do it. BTW my cpa is in complete agreement with me for whatever that is worth.

I think that converting to a Roth may make sense for someone who has a short life expectancy, doesn't need the money, and has children who are in a higher income tax bracket than they are. One of the big advantages for your beneficiaries is that they inherit the Roth account tax free, and they avoid the complicated distribution rules for inheriting a Traditional IRA.

I would also point out that one advantage to not converting to a Roth is that, if you go into a nursing home or assisted living, you can use Traditional IRA distributions to fund the cost and get huge medical tax deductions.