IRA or Roth IRA if I have no heirs?
I am 60, single, with no children and no heirs. I don’t plan on retiring until I am 70. I have $300K in a traditional IRA, $300K in mutual funds in a brokerage account, $20K in a Roth IRA, and have $50K equity in a home worth $250K. My income is just over the limit for contributing to or converting to a Roth IRA. I am looking forward to 2010, when I will be able to convert all or part of the traditional IRA to a Roth IRA. The excellent “retirement time bomb” book doesn’t seem to cover the case where you don’t care about your money when you die. I want to maximize my spending power during my own lifetime, and don’t want to outlive my money.
In this scenario, is my best strategy to keep my traditional IRA, or to take the tax hit in 2010 when I’m 62 and convert it to a Roth? Secondly, should I maximize my contributions to the Roth whenever possible (in years when my income is below the contribution ceiling, and between 2010 and when I retire)?
Thank you VERY much for any guidance you can offer
Permalink Submitted by BruceM on Fri, 2008-08-22 22:59
As a single person at your income level, you’re most likely in the 28% marginal Fed tax bracket plus state tax…and a large Roth conversion could put you into the 33% Fed marginal rate. You’d need to figure it out, but your additional income tax on a Roth conversion could cost you 30 to 40% of the conversion amount if 2010 represents your typical working year.
Typically, the reason individuals convert $$ into a Roth is either because they think their tax rates will remain constant or go up in retirement or they don’t want to be subject to RMD’s at 70.5, or they want to pay the tax in their living years so that their heirs will not have to pay the income tax when they take future withdrawals.
With no family heirs, one alternative many use is to designate their favorite charity (including alma mater) as the beneficiary. If such is the case with you, a Roth conversion would be a waste, as the charity would not have to pay tax on their inheritance from the IRA.
Once your income drops to the point of Roth contribution eligiblility, and you wish to contribute to your IRA, it wouldn’t make much sense to contribute to a non-deductible traditional IRA when you can contribute to a Roth. But if your income drops low enough (
Permalink Submitted by Daphne O'Keefe on Sat, 2008-08-23 21:28
I really appreciate your very thorough analysis, Bruce. Thank you VERY much.
Permalink Submitted by Janine Janine on Sun, 2008-08-24 20:40
With an income that high, I am puzzled as to why you have such a low equity in your home, given the interest rates on a mortgage.
Additionally, with extensive assets already and the fact that you plan to accumulate for another 10 years, I doubt that you will outlive your retirement resources. If it were I, I would enjoy some of the fruits of my labor in my 60’s while I was still young, robust in health and vibrant, especially since you do not have heirs that you need to provide for. Who knows what the future holds! Or even tomorrow, for that matter!
Permalink Submitted by Daphne O'Keefe on Mon, 2008-08-25 18:11
The reason that I have relatively low equity in my home is that I only purchased it 7 years ago and its market value has increased very slowly. In the early 90’s, I took a job in a small town dominated by a very large company (my employer). In the late 90’s, I left town to change jobs. Bad timing — at the very time I put that home on the market, the big co. announced they were relocating their headquarters, and the local housing market plummeted. I was lucky to sell the house at a small loss a year later. My new employer had a relocation package, but that doesn’t offset the failure to accumulate equity in the first house. There may also be a lesson here in moving and starting all over on a 30-year mortgage when you’re in your 50’s. As we now see, you can’t count on further equity growth if there’s a housing bubble. The timing of a housing bubble can be as painful — and more difficult to foresee and avoid — as a stock market bubble.
I LOVE your advice about enjoying the fruits of my labor while I still can. You are so right! All of us earnest retirement planners need to remember our priorities. That is why I am going on vacation in France in a couple of weeks.
Permalink Submitted by Janine Janine on Mon, 2008-08-25 19:44
Thank you for your very gracious response to my unsolicited advice!
You are going to France? Good for you!! I have traveled extensively in Europe, So America, the Far East and, of course, in the US including Alaska and Hawaii, and I have a working knowledge of French, Spanish and Italian; yet France is my very favorite: the culture, the cuisine, the language, the people and their style. Paris, in particular, is certainly the City of Light and very walkable. Contrary to what many Americans claim, the people are truly friendly and helpful.
Enjoy your trip!
PS To those who object to this post, I do realize that this is a forum on retirement issues!