What do you think
It's that time. I must start to take the RMD. We don't need the additional income yet. Both have defined pensions and Social Security. My options seem to be take the money and place into a taxable fund or withdraw and place in Roth account. CFP states I have to take a large tax hit, but never pay tax again if I transfer to the Roth. It will sit there and grow. CFP is trustworthy and has proven this over the years. Looking to see if others have done the Roth conversion from a traditional IRA. THANKS.
|
Just to clarify, you cannot withdraw RMD money and put it into a ROTH. But, you can use other retirement money and do a ROTH conversion, but that will mean paying more taxes above the taxes you owe on the RMD money. For example, if your retirement account has $100,000, and you need to withdraw $5,000 in RMD, then only the $95,000 still in the account would be eligible to convert to a ROTH. The $5,000 RMD withdrawal is taxable and cannot be deposited into a ROTH or any other retirement account. In my opinion, it is not a good idea to do a ROTH conversion that will increase your tax bill.
|
I converted one traditional IRA to a Roth IRA. I was not pleased with the outcome - "take a large tax hit" was the reason.
My opinion is I would rather pay annual taxes on smaller amounts - hence lower tax bracket - than the one-time tax on a larger amount - assuming a higher tax bracket. I have a second traditional IRA that I am leaving as is. Like you, I don't need the RMD now. I decided that I will use the RMDs to fund 529 accounts for the grand kids for as long as I can. There is no clear-cut right answer. It's personal. Good luck with your decision. |
It all depends on your personal tax situation - I too have a near term RMD coming up, and in my situation, the RMD is going to drive me into a higher tax bracket, but there is really nothing I can do to reduce that - a Roth conversion would simply further drive up my tax bill. I'm just going to bite the bullet, take the annual RMD and send most of it to my kids in the form of a gift, and ask them to be prudent with it. I can't see where I can do anything else.
|
Thank you for your response.
|
15 years ago, well before I started to take SS, my income took a huge one time hit in a single tax year. I chose to convert my IRA to a ROTH that year as it was the only chance I would ever have and due to my situation the tax bill was not all that bad. I am very glad I did it but my circumstances at the time were an anomaly.
. All I can say is do the math and of course consult with your accountant, financial advisor or other financially knowledgable source first. |
Did your CFP tell you about IRMAA? (Income Related Monthly Adjusted Amount):
When recipients of Medicare have an AGI that crosses certain thresholds, the government adds extra charges to Medicare premiums. The hit comes two years after the tax filing. For a couple, filing jointly, those AGI thresholds have been starting at $170,000. I realize most retirement incomes do not cross into such amounts, but a big RMD in one year could throw some taxpayers into paying a lot more for Medicare, if they are not aware of this possibility and take out a big chunk of change with a willingness to take a tax hit but without having all the pieces of the puzzle. Also, do you know about the QCD? (Qualified Charitable Distribution). If you are charitably inclined and have reached RMD age, you might look into using a QCD. The contribution must go directly to a qualified charity. It cannot go to a donor-advised fund. The QCD became a permanent part of the tax law in 2015. It was around before that, but Congress would decide to do it from year to year and often last minute which made tax planning harder. Part of the beauty of a QCD is that it counts toward the RMD but incurs absolutely no income tax because the amount of the QCD never appears as part of the AGI. But the guidelines must be followed perfectly with good record keeping. Also, a QCD could come in handy to stay under those Medicare premium thresholds while meeting an RMD requirement that could throw you over. As I understand a Roth Conversion, the amount transferred can be done only after the RMD required amount has been met. If any of this info interests you as you plan for your RMD, you can find lots of info with a Googling, or of course, with a tax accountant. I know. I sound like I just gave you a homework assignment. (But please keep in mind that I am not a CPA or CFP or anything of the sort so please do your homework.) :) |
Another potential advantage to not doing a ROTH conversion is that you can reserve the taxable account to pay for a future large medical expense, such as an out-of-pocket assisted living or nursing home stay. You can withdraw taxable retirement money for the medical expense and take a medical tax deduction in that year or years and avoid the income tax.
|
Quote:
I am pretty sure that the medical deduction for 2019 will be only the amount that exceeds 10% of AGI. Under the new tax law, in 2017 and 2018, that amount was what exceeded 7.5 % of AGI. But now, two years later, that law is allowing the medical deduction only in the amount that exceeds 10% of AGI. The rest — no deduction. As I am sure you know — if said taxable account is holding stocks that are sold to pay medical expenses and the stocks have increased in value from the cost basis, that is when the capital gains tax kicks in. Soooooo, let’s say stocks are held inside a Roth and have increased beyond cost basis. When the need for the money arrives, the stocks then can be sold while still inside the Roth and then the cash can come out tax free. A decision to convert to Roth has to play through different scenarios, all individually based It is definitely not a one-size- fits-all thing. - - - - Geez. Whatinthehellisthematterwithme? I find myself fascinated by conversations about taxes. I get pulled in on TOTV sometimes, but I try hard to resist doing this in my real life. But (sigh) that does not always work. I think I bored the hell out of some friends at a dinner party last week when I went waxing philosophic on the wonders of the QCD. I really must give myself a little credit though because I did stop when I saw one guest fall face down asleep in his stroganoff. |
Quote:
|
Quote:
|
Quote:
Hey, maybe you can answer this question for me about Roth conversions. Can stocks be transferred in-kind from a traditional IRA to a Roth if the ordinary income tax is paid on the face value of the stock at the time of the transfer? Btw, I think converting, once in a while, on the way to 70 and 1/2 can work out as a good option if the tax year projection is shaking out to make sense to do it while you can. And you are absolutely right about how quickly costs of nursing home and long care can pile up. But it would still be better if they had left the in excess of AGI percentage at 7.5%. Actually, I am pretty sure that just before the tax law changed, it was 10% except for those over 65 — who got 7.5%. Too bad they could not have left that age 65 thing alone. |
Quote:
|
The Qualified Charitable Donation can be a valuable way to manage this situation. The funds have to go directly to the charity. This will satisfy the Required Minimum Distribution, not affect your Adjusted Gross Income (thus avoiding taxes and possible Medicare premium increases) and also support a cause that is important to you.
If you support your church with monthly contributions, or your church's building fund, you can pay the entire year's obligation with this one transfer. |
Quote:
Darn it, rg123, we were having a fine conversation and then you had to go all tribal on me. I could respond by saying that I do not agree with your theory. I could go on to point out that it looks to me like a chunk of change from the tax law is in the hands of corporate CEOs who too often choose to drive much of it into stock buybacks to inflate share price. I realize the fact that I do not like the top-heavy use of a lot of that money makes me a bit of an enigma, to some, because I have an interest in the market. Oh well, rg, it was fun to discuss a little econ with you, but then you decided to try to take me down that road to nowhere. It would be a waste of time for both of us. |
Quote:
I have thought for a long time that churches, during stewardship drives, should include a brief explanation of the QCD to make more people aware of it so they can learn more, if interested. This is especially true in TV where there are so many thriving churches supported by retirees — some who have reached or are getting close to 70 and 1/2. Providing wider knowledge of the QCD could result in a win-win. |
Quote:
|
My understanding is that you could convert a portion of your conventional IRA every year instead of a full conversion into a Roth. This would lessen the impact on taxes. An accountant would have this information.
My issue with the conventional IRA that I didn’t realize until 70 1/2 is that the percentages that you are required to withdraw increase every year. The downside of this occurs during an economic downturn (Great Recession) when you would like to stop withdrawals but the RMD is still required on a conventional IRA. There are a number of RMD calculators on the internet. You can plug in your numbers and watch the withdrawal percentages go up and your account value go down. |
Take the money and go on an extra vacation trip
|
Quote:
As far as those down years are concerned, that is why leaving a moat of cash around stocks can be especially important at RMD age -- to avoid being put in the position of having to sell stocks to pay taxes. Even though the ROI on cash is not much, at RMD age, investing in the cost of sleep could be counted as ROI. An additional hit in that down year stock selling scenario could be for dividend investors who buy and hold for dividend income. They could lose on both stock price and the income stream. As we all know, the bull never runs forever. With an awareness of brackets and Medicare premium income thresholds, there is still time to project taxes to see if there is room for a conversion to Roth -- which for RMD agers can be done only after the RMD amount has been met. Could be worth looking at -- or not. As I have made quite obvious in posts I have been writing, for some reason, I feel the need to preach about the potential benefit of using the QCD as part or all of the RMD. It can make such good sense in some situations. (I try not to preach in person about the wonders of the QCD -- though sometimes I can't help it.) Here is a link to an article from Kiplinger that clearly lays out all the QCD stuff. (I like the style of Kiplinger articles -- short, clear, and nothing esoteric.) Rules for Making a Tax-Free Donation from an IRA Warning: My advice is worth exactly what you are paying for it. But if it has started you thinking, please get professional advice. I am not a CPA or a CFP or anything of the sort. For all anybody knows, I could be a retired high school English teacher. |
You cannot take RMD monies from your IRA and turn around and put them in a Roth IRA.
|
There are many options for you and everyone's situation is a bit different. A lot depends on your current taxable income, your RMD amount, your medicare premium, and your estimate tax burden over the next several years. If you trust your CPA than follow his advice. You should always ask about QCD's, Roth conversions and any other options you and your CPA can think of, but taxes are hard to avoid. I personally could never make a IRA to ROTH conversion work. Even using the backdoor method didn't make sense.
When I retired I had a 10 year tax problem due to a rabbi trust. This also caused me to end up with the highest medicare payments allowed. And now it is causing RMD's to be taxed at the highest rates. I got two more years until the trust is fully paid out and I can develop a different plan. My current RMD goes 100% to taxes and for the first time in my lifetime I got a tax refund. I basically use it to pay my estimated quarterly taxes. In two more years I will change that and look at the ROTH and QCD's again. One other point to bring up and that is the Medicare amount looking at 2 years past AGI. That is how they do it. However if you can demonstrate that your AGI will have a dramatic change in taxable income, the local SS office can and will adjust the amount you pay in medicare premiums. When I receive my last rabbi trust payment I will take that zero balance statement to the SS office and get my medicare payment reduced for the following tax year. It will drop that monthly hit from around $500 to around $120. So about a $4000 annual savings. This would include the part D penalty savings. I only point these options out to demonstrate that it is a complicated question and getting a good CPA that you trust to review all options is your best choice. |
We cannot answer this for you
Quote:
My view is you are always better off paying taxes later. If you convert your IRA to a Roth and since you state you have a pension, you are likely in a 30% bracket on your last dollars. Assuming your IRA is 10,000, the true number does not matter You convert it all and your 10,000 is now 10,000-30%=7,000. Actually it is worse than that as that 10,000 is added to your taxable income. You may want to explore leaving your IRA to your heirs as an inherited IRA. They inherit it at it's current value so no one pays tax on the gains. Yes, they will need to take a withdrawal every year-a minor pain but a gift that keeps on giving. The RMD is calculated based on you living to 100. So, there is likely to be a left over balance to use in your will as an inherited IRA. It is not much money but that is what my mother did for my sister and I. |
Quote:
But, when you say that, with an inherited IRA, no one pays tax on the gains, that is not really correct. If you have a fully taxable Traditional IRA, your heir will pay tax at their ordinary income tax rate when they withdraw the money. And, actually, the RMD is calculated based you living to be 115+, not 100. |
All times are GMT -5. The time now is 11:04 PM. |
Powered by vBulletin® Version 3.8.11
Copyright ©2000 - 2024, vBulletin Solutions Inc.
Search Engine Optimisation provided by
DragonByte SEO v2.0.32 (Pro) -
vBulletin Mods & Addons Copyright © 2024 DragonByte Technologies Ltd.