Roth IRA conversion and RMDs
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  #21  
Old 01-31-2018, 11:37 PM
Boomer Boomer is offline
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VT, I do not think the RMD itself can be converted to Roth, but after the RMD is taken, additional IRA funds may be converted to Roth — of course the additional amount would be taxable income, too. But at least some of the money from the RMD might go toward paying the taxes on the Roth conversion if you choose to follow up with one.

As someone mentioned earlier in this thread, the RMD as a QCD (Qualified Charitable Contribution) is a way to avoid paying income tax on the RMD.

The QCD, of course, means giving away money, but it can be worth looking into. (Options include giving more money to the government or giving it to a qualified charity.)

The RMD as a QCD has to be done exactly according to the rules. Careful records must be kept, showing the money went from the IRA directly to the charity. Also, donor-advised funds do not qualify.

For those who donate to charity anyway, the QCD might be a better way to do that (instead of itemizing the contribution) when it comes to the RMD and tax time. If the intention is to do a Roth conversion with additional IRA funds after the RMD is taken, that obviously can mean even more taxes so a QCD might help to keep those taxes down and also could be a way to keep the AGI from crossing the threshold that increases the cost of Medicare that is deducted from SS each month.

You have brought up an interesting question. I am just trying to give you a few things to learn more about. Like you said, VT, you will be getting professional advice. Please keep in mind that I am not a tax accountant or financial advisor or any such thing so I might not even know anything about what I just wrote in this post.

PS: I am not sure about this either but I think the new tax law took away the ability to recharacterize a Roth conversion.

Last edited by Boomer; 02-01-2018 at 07:45 AM. Reason: Typo

  #22  
Old 02-01-2018, 08:17 AM
retiredguy123 retiredguy123 is offline
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To answer your question, you need a crystal ball. How much return will you make in the future, what changes will be made to tax laws and rates, how long will you live? Over the years, most articles by "experts" that I have read say that you should delay paying taxes for as long as possible. That is what I plan to do. But, it is not an all or nothing decision. You can convert some money to a Roth and leave some in a tax deferred account. Diversification.
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  #23  
Old 02-01-2018, 09:10 AM
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villagetinker villagetinker is offline
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Quote:
Originally Posted by Boomer View Post


You have brought up an interesting question. I am just trying to give you a few things to learn more about. Like you said, VT, you will be getting professional advice. Please keep in mind that I am not a tax accountant or financial advisor or any such thing so I might not even know anything about what I just wrote in this post.

PS: I am not sure about this either but I think the new tax law took away the ability to recharacterize a Roth conversion.
I believe you are correct, about the returning a roth to non roth.
While I did not put any specific dollar amounts in my original post, the back of the envelope calculations show well in excess of $250,000 difference in taxes paid over a 25 year period. The difference was almost 3 to 1, in other words, paying the tax all at once the bill was about 1/3 of the 25 year total. As another poster noted, yes I need a crystal ball, but in a simplified view, if you were to convert the entire qualified account to roth account in one year, you take a large hit on taxes, then the remaining monies grow tax free. I am going to try and calculate the "breakeven" period using an assumed rate of return. Show be an interesting (no pun intended) calculation. None of this takes into account inflation, etc.
So lets keep up the discussion, as i stated before, I am looking for the gotchas that could occur with the eralry payment option.
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  #24  
Old 02-01-2018, 09:37 AM
petsetc petsetc is offline
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I think the answer is, it depends mainly on the effective (not marginal) tax rate you are in. About 10 years ago I started to convert to Roth. My method was to use my prior years copy of turbotax, mock-up my current year in December, and decide what % of tax I was willing to pay on the conversion. I then converted that amount. Even if I was off either way, it was in my "acceptable" level.

And yes, the new tax law has eliminated the "recharacterization", thus once converted, it's over.

Final thought, I cannot image it would ever be advantageous to convert all in one tax year since it would probably greatly increase your marginal and effective tax rate.

FWIW,

Andy
  #25  
Old 02-01-2018, 10:58 AM
Boomer Boomer is offline
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Good morning, VT,

I saw your response to the last part of my post #21, but my follow-up here is in reference to the first part of that post where I said I thought the RMD could not be converted to Roth -- though additional IRA funds may be.

It looks like I was right according to the following link from a Q&A on Marketwatch.

(And, hey, the guy in the picture has to be right because he has a blackboard and is pointing with a ruler so I think we better pay attention to him. I am just a woman sitting here typing, waiting for my laundry to finish.) Here's the guy:

Can I convert my RMD to a Roth IRA? - MarketWatch

Btw, the link to Vanguard, provided by Champion6 in post #7, has excellent overall information. Thanks, champion6. I have spent a little time pointing and clicking around in your link and learned a few things. Vanguard sure does present info in a clear manner.

Also, adding to the discussion, petsetc, post #24, wrote about converting along the way in years when it is practical tax-wise to do so -- thus reducing the amount of the RMD required annually after 70 and 1/2.

I am glad you started this discussion, VT. I like to learn things about taxes. (Weird. I know.)

Last edited by Boomer; 02-01-2018 at 11:08 AM.
  #26  
Old 02-01-2018, 01:18 PM
BillPoche BillPoche is offline
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Another consideration is the possibility that you may relocate to an income-taxing state in future years, either by choice or because your caregivers (children for example) need you closer to them and they live in a higher tax state. That could help support a decision to make a Roth conversion while you live in a zero or lower tax state.
  #27  
Old 02-01-2018, 01:25 PM
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villagetinker villagetinker is offline
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This is GREAT discussion and ideas,lets keep this up.
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  #28  
Old 04-01-2018, 05:58 PM
jimbomaybe jimbomaybe is offline
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Check with a professional money manage , I believe there is a 5 year ageing provision on a traditional to roth account, meaning you have to wait 5 years tom take it out
  #29  
Old 04-01-2018, 06:43 PM
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eweissenbach eweissenbach is offline
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This is an interesting discussion for the most part. The biggest variable in my mind is the growth of the investment in the future. If you convert and get outstanding growth going forward, that growth will be realized tax-free. On the other hand the money you paid in taxes would also be growing at a high rate. Several years ago there was a one or two year opportunity to convert to a roth and pay the taxes over three tax years. That was in a time when the market was low, and I considered jumping on the opportunity because the taxes would not have been onerous, and spread over three years would have been affordable. As the market has come back I think I would have enjoyed a considerable advantage, however I vacillated and ultimately did not pull the trigger. Now with the market back, and having to pay all the taxes in the year of the conversion, I feel it would be too painful. Not that paying the taxes on the RMDs isn't but I guess it's a "pick your poison" question.
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  #30  
Old 04-02-2018, 05:05 AM
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l2ridehd l2ridehd is offline
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Couple of points. Remember that the money in an IRA has never been taxed. So withdrawals are now taxed at your post retirement income. A lot depends on your pre RMD income and how much is in IRA accounts. How much income do you get from pensions and SS and other investments. And the second big factor is your spouses age. When they figure out the RMD amount it is based on 70 & 1/2 (your age) plus your spouses age. If you married a younger women you will be shocked at how small the RMD is.

There are lots of variables and moving parts that you need to consider before doing this. I looked at this in depth and for me it didn't make sense. It may in another 3 years. I had the ability to defer income into a Jacobs trust when I was working which is paid out in annual installments after I retired. I got another 3 years of those payments. After that I will look at it again.
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