[petsetc]

An unsolicited suggestion

For those of you who either have not yet started drawing Social Security or are in a low tax bracket, you should consider doing a Roth conversion to minimize future tax liability.

If you are already drawing Social Security, remember that a Roth conversion increases your income and therefore will increase the portion of Social Security that is taxed.

Why do a Roth conversion?
Because there is a good chance that taxes will be higher in the future …
Because once converted, the money grows tax free …
Because distribution to heirs is tax free to them …
Because ...

I use the prior year’s Turbo Tax to do a mock-up to evaluate whether and how much to convert – based on how much more I’m willing to pay in taxes.

I wish I had been more aggressive in doing conversions prior to taking Social Security.

Important - Roth conversions must be completed prior to the end of the calendar year.

JMHO

[tophcfa]

Originally Posted by petsetc

An unsolicited suggestion

For those of you who either have not yet started drawing Social Security or are in a low tax bracket, you should consider doing a Roth conversion to minimize future tax liability.

If you are already drawing Social Security, remember that a Roth conversion increases your income and therefore will increase the portion of Social Security that is taxed.

Why do a Roth conversion?
Because there is a good chance that taxes will be higher in the future …
Because once converted, the money grows tax free …
Because distribution to heirs is tax free to them …
Because ...

I use the prior year’s Turbo Tax to do a mock-up to evaluate whether and how much to convert – based on how much more I’m willing to pay in taxes.

I wish I had been more aggressive in doing conversions prior to taking Social Security.

Important - Roth conversions must be completed prior to the end of the calendar year.

JMHO

All very good points, but also consider that if you aren’t yet eligible for Medicare and are getting health care through Obamacare, converting to a Roth will increase your income and could either reduce, or whip out, any tax credits you get toward your health insurance.

[Boomer]

Getting this done before hitting RMD age can be especially helpful. Once that age hits, you have to take your RMD before you can do a conversion to Roth.

When you are of RMD age, that’s past Medicare age, and a conversion then could throw you into IRMAA’s clutches. But it could still be a good idea to do a conversion anyway.

I think if you do them while you are in a lower tax bracket, you will be very glad down the road……But just because you are older, conversions to Roth should not be off the table. There are just more things to be aware of like IRMAA, and about how using QCDs for part of an RMD can help with the AGI.

Yep. There’s still time to see what 2022 says about what you should/could do.

Boomer

Note: That’s a typo in the subject line. — that ‘or’ on the end now makes no sense. I bumped the iPad. I wish we could correct subject lines or titles here, but I guess it’s a quirk of the system that we can’t.

[retiredguy123]

Originally Posted by Boomer

Getting this done before hitting RMD age can be especially helpful. Once that age hits, you have to take your RMD before you can do a conversion to Roth.

When you are of RMD age, that’s past Medicare age, and a conversion then could throw you into IRMAA’s clutches. But it could still be a good idea to do a conversion anyway.

I think if you do them while you are in a lower tax bracket, you will be very glad down the road……But just because you are older, conversions to Roth should not be off the table. There are just more things to be aware of like IRMAA, and about how using QCDs for part of an RMD can help with the AGI.

Yep. There’s still time to see what 2022 says about what you should/could do.

Boomer

Note: That’s a typo in the subject line. — that ‘or’ on the end now makes no sense. I bumped the iPad. I wish we could correct subject lines or titles here, but I guess it’s a quirk of the system that we can’t.

I think you can edit the title of a post or a thread by clicking on "edit" and then "go advanced".

[Babubhat]

There is no reason to pay tax on RMD if the amount is material and you are willing to do a little work. Follow the rich tax strategies

[Boomer]

Originally Posted by retiredguy123

I think you can edit the title of a post or a thread by clicking on "edit" and then "go advanced".

retiredguy123!

Thank you!

I just followed your direction and voila! The mistake in my title/subject heading disappeared!

I have been around here forever and had never even once paid attention to that “go advanced” thing. Thank you for starting my day off with learning something.

Boomer

[CoachKandSportsguy]

Originally Posted by petsetc

An unsolicited suggestion

For those of you who either have not yet started drawing Social Security or are in a low tax bracket, you should consider doing a Roth conversion to minimize future tax liability.

JMHO

The above is a cost minimization strategy as opposed to a wealth maximization strategy. One point to remember, is that the recovery period from the loss of tax payments is highly variable and at times needs substantial amount of time to recover.

using a 8 percent historical average return on a portfolio, and using a high tax bracket of say 35% to move a significant portion or if you aren't in a low tax bracket which many people aren't, the recovery time is almost 5 years, and that 5 years is not a guarantee, just a long term average where some periods have been substantially longer.

The current environment is one where the recovery period is definitely longer than the average.

finance guy

[retiredguy123]

If you are able to convert all of your retirement assets into a Roth, it will help your heirs in two ways. One, they will owe no income taxes. And two, they will not need to hire a tax expert to handle the withdrawal and tax process.

If your traditional IRA, like mine, consists of a combination of pre-tax deposits and after-tax deposits, you, or your heirs, can exclude the after-tax deposits from your taxable income when you withdraw the money. If that is the case, you need to provide your heirs with a copy of your last IRS Form 8606 so they don't mistakenly pay tax on 100 percent of the account. If you have been retired for many years, the last Form 8606 may have been prepared years ago. It can be an important document that should be kept with your will. And, if you inherit a large traditional IRA, you should review the deceased's tax returns to see if they ever filed a Form 8606.

There is another thing to consider if you have a traditional IRA. If you move into an assisted living facility or a nursing home, a large percentage of the cost will be tax deductible medical expenses. In the case of a nursing home, 100 percent is tax deductible. And, it could be about 60 percent in assisted living. So, that could be another way to avoid tax on your IRA.

[CoachKandSportsguy]

Originally Posted by retiredguy123

IAnd, if you inherit a large traditional IRA, you should review the deceased's tax returns to see if they ever filed a Form 8606.

If you move into an assisted living facility or a nursing home, a large percentage of the cost will be tax deductible medical expenses. And, it could be about 60 percent in assisted living. So, that could be another way to avoid tax on your IRA.

Excellent points about alternatives which are helpful. My mom is 96, and in assisted living, and am draining her IRAs at zero taxes to pay for memory care assisted living, prior to paying with personal assets. . . and even then , I have the option to move her to a all government paid facility after the IRA is drained, as their monies are all in trusts.

There are no known assets planners who can tell you how long you will live and how you will live. That is an unknown which no one knows. A car accident tomorrow or out living your assets are both possible outcomes with only probability estimates.

good luck. . and the future is always uncertain, don't ever think otherwise.

[Stu from NYC]

There is an opportunity cost in paying taxes earlier than you have to.

For example if you paid 25% in taxes to convert to a roth that 25% is no longer earning you a return.

[Maker]

Originally Posted by Stu from NYC

There is an opportunity cost in paying taxes earlier than you have to.

For example if you paid 25% in taxes to convert to a roth that 25% is no longer earning you a return.

That's not quite right.
Let's say you have $1000 in IRA. Earns 10% ($100). In one year that's now $1100. Withdraw it and pay 25% tax, you get $825.
Instead convert to roth and pay 25% tax today. You have $750 in the roth. Earns 10% ($75). In one year that's now $8250. Withdraw it and pay no tax, you get the exact same $825.

The variable is what tax rates are you encountering today vs the future. Will other income (social security) be taxed? And inheritance issues.
It's great to have tax free money in a roth in case you encounter a big expense that would otherwise require IRA assets withdrawn at a much higher tax bracket.

[Romad]

Originally Posted by petsetc

An unsolicited suggestion

For those of you who either have not yet started drawing Social Security or are in a low tax bracket, you should consider doing a Roth conversion to minimize future tax liability.

If you are already drawing Social Security, remember that a Roth conversion increases your income and therefore will increase the portion of Social Security that is taxed.

Why do a Roth conversion?
Because there is a good chance that taxes will be higher in the future …
Because once converted, the money grows tax free …
Because distribution to heirs is tax free to them …
Because ...

I use the prior year’s Turbo Tax to do a mock-up to evaluate whether and how much to convert – based on how much more I’m willing to pay in taxes.

I wish I had been more aggressive in doing conversions prior to taking Social Security.

Important - Roth conversions must be completed prior to the end of the calendar year.

JMHO

If you are 63 or older, the increased income could affect your Medicare cost as Part B is means tested based one one’s AGI from 2 years ago.

[PersonOfInterest]

Sadly the Retirement accounts that were to yield tax savings in retirement didn't work out in many cases. Many individuals took tax savings when they deposited into Traditional IRA accounts in anticipation that when they took the funds out after retirement that they would be in a lower tax bracket and therefore pay less tax on the funds that become 'income' when withdrawn. The majority of those who are now, or soon to be, retired are Not in a lower tax bracket. Some, in fact, may be in a higher tax bracket in retirement than they were when they were contributing to their IRAs.

[rsmurano]

IMO, the best time to do a Roth conversion is when the stock market/your holdings are down 30-50% then you aren’t paying all the capital gains as you would be paying if the market was high. If we enter a deep recession next year and the market tanks, then it might be right to do it.

Remember there are other issues when doing this conversion. You can’t take any money out of it for 5 years. Also, the income you generate on this conversion you will have to be in that tax bracket for 2 years paying higher Medicare premiums, after 2 years they use your current income.

For me, I would only consider this conversion if I was caught in the stock market and it dropped 50%, and I had enough money in my taxable accounts to hold me over until I can withdraw from the Roth.

Also remember they adjusted the age you have to take rmd out now. I think for me it’s 75 years old. In the next 8 years, they might adjust it even higher

[petsetc]

Originally Posted by rsmurano

IMO, the best time to do a Roth conversion is when the stock market/your holdings are down 30-50% then you aren’t paying all the capital gains as you would be paying if the market was high. If we enter a deep recession next year and the market tanks, then it might be right to do it.

Remember there are other issues when doing this conversion. You can’t take any money out of it for 5 years. Also, the income you generate on this conversion you will have to be in that tax bracket for 2 years paying higher Medicare premiums, after 2 years they use your current income.

For me, I would only consider this conversion if I was caught in the stock market and it dropped 50%, and I had enough money in my taxable accounts to hold me over until I can withdraw from the Roth.

Also remember they adjusted the age you have to take rmd out now. I think for me it’s 75 years old. In the next 8 years, they might adjust it even higher

Respectfully, there is no capital gains considerations in a Roth conversion since the withdrawal from a TIRA is treated as ordinary income.

Also, the 5 year period is only applies to the converted funds, not to the entire Roth balance and the 5 yr count begins on Jan 1 of the year of the conversion. For a Dec, 2022 conversion the year count begins Jan 1, 2022.