Roth Conversion for retiree
I am already retired. I am 75 and my wife is 71. I have about $500,000 in IRA’s. Our income is approx $30,000 from Social Security,$9000 from a pension, $3,000 from ordinary dividends and interest. The rest of my required income approx $25,000 is taken out of my IRA’s. I have enough outside funds to pay the taxes (approx $150,000). I am not sure if I should convert all or some of my IRA’s to a Roth. Any help would be appreciated. My goal is to increase my income. I am not concerned with an inheritance.
Permalink Submitted by Alan Spross on Sat, 2009-10-31 23:33
Do you have a Roth IRA now?
Is your traditional IRA totally pre tax, or had you made non deductible contributions to it? If so, you would have an 8606 on all of your tax returns reporting IRA distributions.
Does your wife also have an IRA, either traditional or Roth?
Do either of you have long term care insurance?
Permalink Submitted by Jeffrey Hochstein on Sun, 2009-11-01 20:27
I do not have a Roth IRA now. The IRA’s are equally split between my wife and myself. We have not made any non-deductible contributions. We have long term care.
Thanks for your help.
Permalink Submitted by Alan Spross on Mon, 2009-11-02 00:16
Any Roth conversions you do now will be geared to increase your after tax income later on in your 80s, when your RMDs would increase rapidly from the current 4% to 4.25% estimated combined RMDs you must distribute now. You are currently in the 15% bracket, however the RMDs are probably causing between 65% and 85% of your SS income to be taxable. Without an RMD your SS income would be tax free.
Having LT care insurance makes conversions somewhat more attractive because it removes the possibility of huge deductible expenses expenses that would pay the taxes on your TIRA RMDs and additional TIRA distributions to pay these bills.
This year there are no RMDs, so you might consider rolling any distributions you already took (up to the amount of your RMDs) back to the TIRA no later than 11/30/09. This will set you up to either:
1) Avoid all SS taxation in 2009 if you don’t convert, or will allow you to convert amounts you want to in 2009 including the amounts you rolled back. You might convert up to the top of your 15% bracket, which will allow a somewhat larger conversion than your RMD would have been.
2) You can then consider the 2010 tax options for larger conversions in 2010 sometime next year , or just continue to convert up to the top of your 15% bracket each year and pay the taxes each year.
You will to have an tax preparer crunch some numbers for converting a large amount next year, perhaps up to 400,000 of the TIRAs. Doing that might allow you to shelter all your future SS income from taxation. On the other hand, you will have a huge tax bill for the year of conversion (or in 2011 and 2012 if you defer the conversion income). The large conversion will also subject you to surcharged Medicare Premiums for the second year after the conversion income is reported, but only for that one year. The numbers you need are tax projections for at least 15 years to see if a large conversion in 2010 makes sense.
For people still working, a mix of pre tax and Roth IRAs is generally recommended as a sort of hedging of tax bets. But for retirees, the situation is different and the taxation of SS benefits enters the picture in a big way, and suggests either large scale conversions or very little. Are you sure you have enough funds to pay the conversion taxes from other income? Is this the other income that is only generating $3,000 in dividends and interest at present?