March 5, 2019 at 2:08 am #2488b1_leeParticipant
To Alan S. – I posted this in “Other Tax Topics” forum, Kaneohe suggested to post here to get your take on this.
To others – Please dispense your wisdom as well.
My wife and I are near 68, retired and collecting SSA benefits. We have more than 1 MM in traditional IRAs and our AGI exceeds Medicare Part B and D threshold, thus paying much higher premiums because I have been converting IRA to Roth IRA annually while staying within my tax bracket. If we don’t have any traditional IRA, we would pay regular Medicare Part B & D premiums.
I like to take advantage of 2018-2025 lower tax rate by converting as much IRA to Roth IRA annually and still stay within the 24% rate. I assume 2026 & beyond our tax rate will go higher than pre 2018 (22 trillion deficit already!). Will not be able to convert everything before RMDs start. Will use non-IRA money to pay for conversion. My goals are pay lowest life time tax, pass big Roth IRA to 2 children, and pay lowest life time Medicare premiums.
My fear is if I don’t aggressively convert, IRA balance will continue to grow, thus never ending cycle of ever higher RMDs, Medicare Part B & D premiums and tax.
My older child could be in my tax bracket in 5-10 years. The young one probably will be 15-20 years. They are 5 years apart.
My other goal is have them stretch on their inherit Roth IRAs. Taking minimum RMDs annually based on their ages and allow further defer & growth of Roth balances. Also, don’t want their annual RMDs to increase their AGIs.
My wife wants to pay the least tax now continue to defer much to the future.
Who is more correct and did we miss something?March 6, 2019 at 11:22 pm #2865DTASFABParticipant
There are too many moving parts and too many unpredictable variables to try to manage/manipulate it so closely. Seven years ago, I inherited a substantial 403b that I rolled into an inherited traditional IRA. I’ll be 40 later this year. I’ve been taking only the RMDs and nothing more each year while the tax deferred portion continues to grow. I also have a full time job with good benefits, but extremely modest salary, which keeps me in a low tax bracket, but in a state with high income tax. I’m also unmarried without children, so my named beneficiary is a 501(c)3 charity. These are all factors that may or may not apply to your beneficiaries, but they all matter in crunching the numbers in order to determine the best course of action.
Many people have advised me to use the roth option in my 457b plan at work and to contribute the maximum to my roth IRA, but I’m sticking with traditional because I don’t anticipate my beneficiary will change and by the time I have to start taking RMDs from my own retirement accounts, the inherited IRA will then be eligible for QCDs. That’s assuming we’re playing by the same rules in 30 years that are in effect right now, which is a huge uncertainty. If I don’t live past about age 70-75 and the rules stay the same or similar, that will maximize the total donation to my charity beneficiary and minimize the amount taken by the IRS.
As a general rule, I think it’s best to avoid paying the IRS for as long as possible. The outside money you’d be using to pay income tax on a roth conversion could itself be invested in a post-tax investment account that would be subject to capital gains, but not until you sell, and if you die before selling individual positions, your beneficiaries get a step up in basis. If you have significant losses prior to your death, you can harvest those losses to offset some income on your final 1040 return. This assumes you have at least a few days or weeks to get your affairs in order prior to death.
By not converting to roth, your beneficiaries will have to take taxable RMDs each year from the inherited TIRA, but those RMDs will be relatively small until those beneficiaries reach their 50s or 60s, when they will start to accelerate significantly. But maybe by then they’ll be earning less and won’t be in a high bracket anymore. Whether you convert or not, the IRA that your beneficiaries will inherit will not grow any faster or slower, since you’d be using outside money to pay the taxes due on the conversions. And unlike their own roth IRAs, the beneficiaries will at some point have to take RMDs from your roth IRA after your death. The only question is whether those distributions will be taxable or not.
My arbitrary guess is that even after paying long-term capital gains tax, the growth on the money used to invest in an after-tax account (rather than using that money to pay for a conversion now) will be enough to cover the taxes due on your beneficiaries’ inherited TIRA RMDs.
It’s all dependent on any potential changes in tax code, some of which could be predictable, but some of which may come out of left field. So in all probability, it’s more about subjective opinion than it is about hard facts.
I would say my only concern with not converting to roth is the chance that congress will do away with the lifetime stretch on inherited TIRAs before you die. They’ve talked about it twice in past years and it never went anywhere because they’re more interested in kicking debt into the future and generating more revenue today so budgets can get balanced and politicians can brag about it when campaigning. That’s why the roth has become so popular.
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