Who’s IRAs to convert to Roths now?
I am 68 and hubby is 70. Both of us have IRAs. Husb will have to take an RMD come 2011. I have 2 yrs. yet for RMD. After reading all these emails and trying to catch up FAST, I’m wondering who’s IRA we should convert “Now” … his ($700,000 value) or mine. By 2013, we will have “2” RMDs if we do nothing. I’m wondering if we should convert my IRA’s to Roths now ($250,000 value) to eliminate the double RMDs for 2013 … or chip away at his ($700,000). What do you say?
Permalink Submitted by Alan Spross on Thu, 2010-12-30 19:24
Unless one your IRAs has a much higher % of basis (non deductible contributions), it would be best to convert some of his first since he will be facing RMDs sooner. I would just ignore the fact that both of you IRAs since the amounts are probably too large to get them converted in time to avoid RMDs. Note that RMDs start out fairly small, ie less than 4% of the prior 12/31 value.
The tough part is determining HOW MUCH to convert and at what pace since it requires a high degree of planning to a detail that we cannot go into here. But since time is just about gone for a 2010 conversion (distribution must be out by tomorrow), you may be in a position where you decide to convert a decent amount while you can since you can always recharacterize all or part when you get the planning completed. In other words, you can reverse the conversion, but if you do not take the distribution for the conversion by tomorrow, then 2010 is gone without possiblity of converting any amount.
But in general, it sounds like you may be planning on converting too much of your total IRAs. You should not be paying a higher tax rate than the average top rate you would pay in retirement over time. And converting such large amounts means that much of your conversion will be in brackets higher than 25%.
Permalink Submitted by Bruce Steiner on Thu, 2010-12-30 19:39
I generally agree with Alan, except:
1. Even if the tax rate on the conversion is a little higher than the tax rate that would otherwise apply to the distributions, the conversion will probably make sense. But if the tax rate on the conversion is substantially higher than the tax rate that would otherwise apply to the distributions, the the conversion will probably not make sense.
2. Some states have limited exclusions for retirement income. In those states, each spouse may want to convert the amount of the state exclusion, with the remaining conversion by the husband for the reasons Alan pointed out.
On these numbers, a half hour discussion with competent tax/estates counsel familiar with Roth conversions might be helpful. But Alan is correct — if you convert too much, you can undo the excess, but if you convert too little, the window for 2010 closes tomorrow.
Permalink Submitted by Georgieanne Ross on Thu, 2010-12-30 22:06
Thanks. I’m finding out that converting the big CDs will put us soooo into another 2 tax brackets – not good. We will be pulling money out at higher rates than they would have gone in. That doesn’t make sense. We just converted some stocks, but I made sure my husband did them separately so if we need to re-characterize ‘ we can … that was such a good tip. I know that if the stock goes down, we need to convert it back and then re-Roth it at the lower rate. Plus get back the Tax we paid on the higher value. We also found out something great, but I want to reconfirm this. Our bank will Roth a portion of our big CDs so that we don’t have to break them up – they will stay ‘as is’ but will contain Reg IRA plus Roth IRA monies and we keep the high Jumbo rates we got. There is no need for us now to scramble to do a 2 year spread deal. We can Roth the amount we want. We have been listening to the DVDs we bought and will go over them again. Thanks to the Slott Team … I have questioned.
Permalink Submitted by Alan Spross on Thu, 2010-12-30 23:31
If the bank will split your CD IRA and convert a part to a Roth IRA, that is a good deal as I doubt that most banks would do that and continue the former higher interest rate. What a bank offers to do along these lines is not controlled by the IRS, but the operating procedures of the bank itself.
Generally, it is difficult to deal with banks on some of these issues,eg if you wanted to recharacterize a bank CD conversion, it would have to be converted back to a TIRA CD by direct transfer. A recharacterization can ONLY be done by direct transfer, not by taking the funds and rolling them over yourself. But at least with a CD you know that the value will not decline so you eliminate a value decline as the reason for recharacterization.
Permalink Submitted by Georgieanne Ross on Fri, 2010-12-31 01:30
Because we have no RMD this year … We converted some stocks right now and will pay for them in 2010 taxes. We went back to do the partial Roth conversion from a Reg IRA CD with the 2 year stretch. But they were going to send the Gov. the whole amount – lumped all together. We thought they could separate it out…. this year’s amount, and then the 2 yr stretch one. But apparently its all in one. Decided not to add more. We’ll do the future yearly Roth conversions for 2011 etc. instead.