Roth conversion and RMD

[SilentBirdHunter]

I am five years off from age 73 and RMD which would be high due to a large 401k.

My mom died this past year at age 102 and the plan is to use the inheritance for a Roth Conversion.
That would reduce my tax liability in later years when RMD kicks in and some tax free inheritance when we die.

What factors should I consider with Roth conversion beside potential increase in Medicare IRMAA bracket,
the five year rule, and increase from 12% to 22% tax bracket this year?
Thanks.

 

[jrabq]

I am five years off from age 73 and RMD which would be high due to a large 401k.

My mom died this past year at age 102 and the plan is to use the inheritance for a Roth Conversion.
That would reduce my tax liability in later years when RMD kicks in and some tax free inheritance when we die.

What factors should I consider with Roth conversion beside potential increase in Medicare IRMAA bracket,
the five year rule, and increase from 12% to 22% tax bracket this year?
Thanks.

I'm about the same age and in similar circumstances. The factors you mentioned are the ones I'm familiar with at the federal level, there might be a few more depending on what state you live in. In my case (NM) there is an additional hit in that Social Security becomes taxable once you cross an income threshold that's not all that high . I did a partial conversion last year and was planning to do another at the end of this year, but now reconsidering since the current tax rates are likely to be extended. The possible elimination of SS tax is also a wildcard that might make delaying the decision a wiser move, but who knows?

 

[Forkyfinder]

One thing - might be worth residing some other state without income tax if you dont already for the conversion.

 

[SilentBirdHunter]

I'm about the same age and in similar circumstances. The factors you mentioned are the ones I'm familiar with at the federal level, there might be a few more depending on what state you live in. In my case (NM) there is an additional hit in that Social Security becomes taxable once you cross an income threshold that's not all that high . I did a partial conversion last year and was planning to do another at the end of this year, but now reconsidering since the current tax rates are likely to be extended. The possible elimination of SS tax is also a wildcard that might make delaying the decision a wiser move, but who knows?

A couple other advantages...heirs inherit the money and don't have to pay taxes on it.
No RMD on Roth accounts, not required to start withdrawals at age 73.

 

[BigHornRam]

Hats off to you guys wanting to starve the beast, but damn! You only get to live life once. Spend some of that moldy money!

 

[SilentBirdHunter]

Hats off to you guys wanting to starve the beast, but damn! You only get to live life once. Spend some of that moldy money!

As I age (now 68) I have acquired all I want (boat, guns, etc.) and like hunting/fishing/backpacking/skiing/canoeing within an hours drive of our Montana house.
With no debt, we don't need much money to live a happy life.

 

[antelopedundee]

As I age (now 68) I have acquired all I want (boat, guns, etc.) and like hunting/fishing/backpacking/skiing/canoeing within an hours drive of our Montana house.
With no debt, we don't need much money to live a happy life.

Are you getting Social Security? If so, the amount converted could increase the taxable percentage of your SS a lot. Can you grow the converted amount sufficiently to pay for the tax liability? Why fret about the 5 year rule when you can always withdraw all or part of the converted amount penalty free. IMO if one has to pay taxes on some of their SS they aren't THAT bad off.
I'm 76, soon to be 77 and struggling with one more Roth conversion. A $15K conversion would increase my tax liability by about $3K.
It seems like if you're retired that you get hit with a double whammy; a big increase in your taxable SS plus the pleasure of also declaring the converted amount as income. I can imagine converting 10 times as much.

 

[SilentBirdHunter]

Are you getting Social Security? If so, the amount converted could increase the taxable percentage of your SS a lot. Can you grow the converted amount sufficiently to pay for the tax liability? Why fret about the 5 year rule when you can always withdraw all or part of the converted amount penalty free. IMO if one has to pay taxes on some of their SS they aren't THAT bad off.
I'm 76, soon to be 77 and struggling with one more Roth conversion. A $15K conversion would increase my tax liability by about $3K.
It seems like if you're retired that you get hit with a double whammy; a big increase in your taxable SS plus the pleasure of also declaring the converted amount as income. I can imagine converting 10 times as much.

My social security will increase substantially if Biden signs the bill that eliminates the Windfall Elimination Provision (WEP) that passed the House and Senate.
https://trta.org/hr-82-wep-gpo-repeal-bill-reported-to-president-biden-for-his-signature/

 

[antelopedundee]

Hats off to you guys wanting to starve the beast, but damn! You only get to live life once. Spend some of that moldy money!

Unka Sugar lets you use his money tax free for years and when it's time to pony up and pay the piper folks want to beat him out of it. Don't want to pay taxes, don't get too rich.

 

[LopeHunter]

I justify converting Traditional IRA into Roth as likely my wife and I pass away before use up our money so prefer our beneficiaries get non-taxable rather than taxable IRA distributions. Our beneficiaries earn more today than we do as retired persons so our current tax rates are comparatively lower. That may also be true on the day we pass away.

We are not converting in one year. I am staying just under the IRMAA trigger for now. IRMAA kicks in around $170,000 and increases your Medicare cost. Medicare premiums are split about 25% by you and 75% by the Feds unless IRMAA triggers then you pay additional amounts.

Roth IRAs which are inherited by anyone other than your spouse generally must be emptied in 5 or 10 years. The distributions are not taxable but cannot sit in the inherited Roth indefinitely while growing tax-free.

Tax laws change. I presume future Federal tax rates increase in my lifetime as the Debt Bomb represents more and more of our GDP. The future Federal tax rates could pencil out making a conversion now even if think will spend all your IRA funds whether Tradtional or Roth.

I lack a crystal ball so is a roll of the dice as to upcoming investment returns, tax rates in the future on Traditional IRA withdrawals and our lifespan.

 

[antelopedundee]

My social security will increase substantially if Biden signs the bill that eliminates the Windfall Elimination Provision (WEP) that passed the House and Senate.
https://trta.org/hr-82-wep-gpo-repeal-bill-reported-to-president-biden-for-his-signature/

You don't indicate how substantial the inheritance is, but it should affect you Medicare premiums for just one year I think. As far as the Roth, you can convert it over a number of years. I don't believe that every conversion event has to meet the 5 year rule, just the first one. Is the inheritance already a IRA or 401k type? For more info visit the Ed Slott website.

Ed Slott and Company, LLC - America's IRA Experts

Ed Slott & Company is one of the country's top educators for financial advisors on exit strategies for retirement.

irahelp.com

 

[BigHornRam]

My social security will increase substantially if Biden signs the bill that eliminates the Windfall Elimination Provision (WEP) that passed the House and Senate.
https://trta.org/hr-82-wep-gpo-repeal-bill-reported-to-president-biden-for-his-signature/

While we are starving the beast, we might as well bleed off what is left of it. Then what?

 

[SilentBirdHunter]

I justify converting Traditional IRA into Roth as likely my wife and I pass away before use up our money so prefer our beneficiaries get non-taxable rather than taxable IRA distributions. Our beneficiaries earn more today than we do as retired persons so our current tax rates are comparatively lower. That may also be true on the day we pass away.

We are not converting in one year. I am staying just under the IRMAA trigger for now. IRMAA kicks in around $170,000 and increases your Medicare cost. Medicare premiums are split about 25% by you and 75% by the Feds unless IRMAA triggers then you pay additional amounts.

Roth IRAs which are inherited by anyone other than your spouse generally must be emptied in 5 or 10 years. The distributions are not taxable but cannot sit in the inherited Roth indefinitely while growing tax-free.

Tax laws change. I presume future Federal tax rates increase in my lifetime as the Debt Bomb represents more and more of our GDP. The future Federal tax rates could pencil out making a conversion now even if think will spend all your IRA funds whether Tradtional or Roth.

I lack a crystal ball so is a roll of the dice as to upcoming investment returns, tax rates in the future on Traditional IRA withdrawals and our lifespan.

YES. The IRMAA bracket (Married filing jointly) based on 2022 Adjusted Gross Income Above $206,000 to $258,000
would increase monthly Medicare part B by $70, Medicare part D by $20 or about $1,080 per year.

 

[LIK2HNT]

At 61, almost 62 I realize more each day that I have more future planning to do. Seems the more you work and save the more everyone has their hand in your pockets. Goal is to enjoy retirement and leave the children a good nest egg.

 

[npaden]

I've been working at it and have about 20% of my retirement money in Roth type accounts. The last 10 years or so I've been doing backdoor Roth IRAs for my wife and I after we have used up our traditional 401k limit. Finally got our 401k plan to handle the mega backdoor Roth feature but because it is subject to all the discrimination testing it really doesn't allow much more to go in but every little bit helps.

IRMAA can be a big deal, some people I know are paying more under Medicare with IRMAA than they were under our company health insurance plan. Social security is a big scam but Medicare is even worse for high earners. No limit on the income and then if you still have income at retirement age then they really hammer you on the benefits as well.

When you see some of the calculators it is surprising how Roth conversions are a good thing for a LOT of different people.

 

[BigHornRam]

Unka Sugar lets you use his money tax free for years and when it's time to pony up and pay the piper folks want to beat him out of it. Don't want to pay taxes, don't get too rich.

Hard for me to understand all the crying over RMD going on here. This whole discussion should be titled, "How Best to Hoard Your Monopoly Money."

 

[antelopedundee]

Hard for me to understand all the crying over RMD going on here. This whole discussion should be titled, "How Best to Hoard Your Monopoly Money."

Whats the point of saving it if you don't want to spend it? You know the rules going in so why gripe? Take out what you're required to take out and enjoy it. BTW my post was sorta TIC and I don't like paying any more taxes than I need to.