Pay more tax so son pays less?
An 85 year old TIRA and RIRA owner with a 2- to 3-year life expectancy has a U.S. income tax marginal rate of 15%, his 52 year old son and IRA and estate beneficiary has a marginal rate of 25%.
Q.: Beside taking his RMD, would it be financially wise or unwise for the IRA owner to do a Roth IRA conversion or to take an added distribution each year to increase his taxable income to the end of the 15% bracket?
Permalink Submitted by Alan - IRA critic on Wed, 2015-12-02 19:02
Yes, it would be wise to convert to the top of the 15% bracket for the son’s benefit. However, it may not always be beneficial if the owner does not have long term care insurance, and could blow through a large amount of money in his final years. In that case, not converting would allow for a large medical deduction to offset the taxes due on IRA distributions, both the RMD and additional amounts to pay for the LT care or other uninsured medical costs. In that case, most of the taxes would be avoided entirely due to itemized deductions. If less than 85% of owner’s SS income is included in taxable income a conversion will also increase the portion of SS income included in AGI. The result is the added amount of SS income increases the tax rate of 15% to 27.75% untll all SS income has been included @ 85%. Accordingly, a detailed analysis is needed to determine how much, if any, to convert.
Permalink Submitted by Amar Patel on Wed, 2015-12-02 23:34
I’ve got this other thread going, where I ask similar questions and attempt to describe a calculation I’m trying: https://irahelp.com/forum-post/25803-taxable-social-security-benefits-pay-now-or-pay-later
Permalink Submitted by Bruce Steiner on Sun, 2015-12-06 00:00
Why limit the conversion to the top of the 15% bracket. If the distributions would otherwise be taxable at 25%, why not convert at least to the top of the 25% bracket?Since at a constant tax rate the Roth is preferable, it may make sense to convert to the top of the 28% bracket.If the IRA owner has a short life expectancy, it may even make sense to convert beyond the 28% bracket.It may be worth the effort to run some numbers.