Reply To: Roth Conversion for Older Couple?

Home Fairmark Forum Retirement Savings and Benefits Roth Conversion for Older Couple? Reply To: Roth Conversion for Older Couple?

Alan S.

One issue is how much you want to weight your own and spouse’s tax benefits from conversion vs. those to your daughter. Due to her 32% bracket, and now limited 10 year period to distribute an inherited IRA and pay the taxes, she would benefit considerably from inheriting more Roth assets then TIRA assets, more than you would. As for your situation, if you pass first, your wife’s income is reduced by 45% of your military pension and also by the lower SS benefit, but that reduction may not be enough to keep her in the 22% bracket when looking at the single filer brackets. If she goes to 24%, no big deal, but entering the 32% bracket would be painful. But if she passes first, your pension does not reduce, so you will have higher remaining income than she would if you pass first. Much of this depends on which portion of the 22% bracket you fall, and where you stand with respect to the various IRMAA tiers. As you know, IRMAA is a one time premium incurred the minute you exceed the threshold, that does not increase as MAGI rises from there until the next threshold is entered, so IRMAA is incurred quite differently compared to a typical marginal tax rate situation. Nonetheless, you need to consider both, and you could use a tax program for analyzing the income tax cost of various conversion amounts, then add the IRMAA surcharge to those taxes based on IRMAA MAGI tiers. Since IRMAA is a year to year situation, conversions only increase IRMAA for 1 year (2 years later), but they might also decrease future IRMAA due to smaller RMDs resulting from the conversions. Therefore, with enough effort which might be come tedious the older you get, you can determine the cost for your a current year conversion, but determining the benefits of these conversions down the road is more of a calculated guess or crap shoot. Whatever amount you choose to convert, it is likely to be more helpful to the surviving spouse alone than to both of you while living. Therefore, you might want to consider being more conservative with the conversion amounts as long as both of you remain healthy, but once one of you starts to decline, you might want to ramp up the conversions since you may only have a year or two including the year of the first death to convert under the joint filer tables. Glad you mentioned your LTC coverage, because the better that is, the more likely you avoid high deductible medical expenses, and that suggests higher Roth conversions. Conversions are not subject to NIIT, but they can push other income that is subject (your taxable brokerage account) over the NIIT threshold. Since you must complete your RMD before converting, and both are taxable, QCDs help to reduce taxable income allowing you to convert more. On the other hand, if your QCDs are going to be a high % of your RMD, then you might convert less or not at all, since you are not paying much in taxes due to large QCDs. Therefore, the question is how much of your RMD is going to be offset by QCDs?