[Laker14]

I'm mulling over the idea of making some substantial Roth conversions from my regular IRA account.

Other than a couple of homes, one in TV and one on a lake in NY, all of my money is in IRAs. I'm 71, and with the amount in my IRAs, and my yearly draw, I am in a comfortable position, UNLESS...where my plan gets shaky is if I or my wife live into our mid-90s (we have some history of long life-spans as well as some history of early demise, so it's a crap shoot), and we have all of our money in IRAs, we could get into some very heavy RMD years, with exorbitant tax rates, and serious depletion of our wealth.

So, it seems to me that Roth conversions over the. next 10 years could be a good hedge against that. From my calculations, somewhere in the 4 or 5 year range would be the break-even point. After that it's a clear win.

From what I've researched, the immediate costs would be obviously, more income tax now, and a bump in our Medicare premiums. Factoring those in, we get the tax back later when we withdraw the Roth money tax-free, and at the pace required of our lifestyles, not at a pace dictated by the IRS.

Furthermore, there is a very good chance that only one of us would survive into such an old age, and the survivor would be taxed at the Single rate, which would be even more of a burden.

As long as I am certain (and I'm as certain as I can be) that we won't need to tap the Roth IRA for 10 years, this seems like a no-brainer.

I'm interested in the opinions of others who may have done this, or are considering doing this, and what their thought processes are.

[dewilson58]

Convert = guaranteed tax payment.

No Convert = maybe tax payment.

[rjm1cc]

From your question I think you understand the calculations. Picking up on the increase in Medicare premium was good.
Once you are done with the conversions the Medicare premium will be higher the next year. I think you can appeal this. Remember they are a year behind because they can not know your current income until the year is completed. I would go for it.

[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.

[Stu from NYC]

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.

I agree. Paying taxes now removes the growth from those funds. Who is to say the govt might decide to tax ROTH funds down the road.

Who would have thought we would be paying taxes on our SS income.

[CoachKandSportsguy]

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.

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

[Blueblaze]

Every time I do the math, I decide to stay the course. I pull out enough to hit the limit of the 15% tax bracket. It keeps me over RMD, and steadily moves savings to the taxable side, so if the gooberment decides to suddenly confiscate 401K money, as they've so often threatened, at least I've got enough they can't touch to avoid the Kibble diet. My Fidelity guy tried to get me to do a ROTH conversion, but I just can't see handing over mass sums until I have to. Of course, if you're already living in the high tax brackets, what difference does it make? You might as well do it now, while taxes are relatively low. Being that wealthy has never been a problem I had to face.

[GoRedSox!]

Not everyone invests the same....I can't assume 10% return in retirement because I can't or won't put the entire IRA at investment risk when I am depending on it for income. I am not going to average 10% return because I am closer to 50/50 between equities and guaranteed funds. I was making over 5% on guaranteed side for the last couple years, but it looks like that is about to come to an end. I am still not going higher on the equities mix than 50/50 unless it drops to 0.1% again...and even then I wouldn't go higher than 60/40. I may be more conservative than others....or maybe I would put more at risk if it was just me, but I have my wife to consider.

I have never really worried about the RMD's, perhaps because I have the philosophy that if I live into my 90's, I will be happy to deal with higher RMD's. I'll sign for that right now. At age 80, the RMD is still only about 5%. At age 90, it is 8.2%. I hope I live to complain about having to pay tax on 8.2% of my IRA in 2050. I am not going to argue if the numbers work out that it may be more advantageous for tax purposes to convert to Roth in the long run. It may be, but I am not going to give up such a huge chunk of my IRA in income taxes in one year plus pay the higher Medicare premiums when I have no idea how long I am going to live. Good luck to everyone, these are not easy decisions to make and what may be right for one is not necessarily right for everyone.

[jimbomaybe]

Tough decision that has to be made on ones individual situation , desires and concerns, one thing that hasn't been mentioned yet is the estate planning aspect, here again everyone is going to have a different perspective. I did a conversion some years ago , it was sizable enough that my hand cramped up writing the check to Uncle Sugar. OK I'm something of a "tightwad" , they took the buffalo off the nickel because PETA complained that people like me were squeezing them too hard

[blueash]

Originally Posted by Stu from NYC

Who would have thought we would be paying taxes on our SS income.

Well pretty much everyone as it has been taxable since 1984

[walterray1]

Originally Posted by CoachKandSportsguy

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

To original OP Could you expand on your comments regarding IRMMA tax? You mention $3mm in IRA for married couple. Are you referring to a distribution of that amount or overall account value. My understanding is that account value only comes into play for RMD if one is at the RMD age. AGI threshold for max IRMAA impact on Medicare Part B for married couples filing jointly is $750,000 regardless of income source. Are we talking about two different things?

[JoelJohnson]

Originally Posted by dewilson58

Convert = guaranteed tax payment.

No Convert = maybe tax payment.

Not "maybe", someone WILL pay the taxes at some point.

[dewilson58]

Originally Posted by JoelJohnson

Not "maybe", someone WILL pay the taxes at some point.

Not if donated.

[Plinker]

Don’t forget, you will not be able to access the converted ROTH money for a period between 4 years plus one day to 5 years, depending on what date you do the conversion. Regardless of the date of your conversion, the IRS starts counting the 5 year wait on January 1st of the year of conversion. So, a conversion on July 1st has a 4 1/2 year wait while a December 31st conversion only waits 4 years plus one day. Consider waiting until mid-December to convert. Each conversion starts a new wait period.

[AMB444]

Originally Posted by Stu from NYC

Who would have thought we would be paying taxes on our SS income.

Minnesota pays tax on SS.