Roth conversions
I am 71 and currently receive SSA benefits. In 2 years I will start IRA RMDs. In 3 years my wife will start SSA benefits and 3 years after that her IRA RMDs will start. Over the last week I have been doing modeling with 3 financial planning software programs considering Roth conversions to reduce the coming federal and state income taxes.
In order to reduce total lifetime income taxes it is necessary to do substantial Roth conversions soon. This is a problem because the conversions create taxable income. The early income taxes due to the conversions are so large that it may take 15 years in order to breakeven and it will only be in years 16 to 20 that I will realize income tax savings. So, to avoid overpaying taxes for 15 years, I am now considering doing no Roth conversions.
Regarding the effect on estate planning, this may not be a problem if the remaining IRA balances are bequeathed to charitable organizations and if a life insurance policy is purchased to cover the taxes for any IRA balance bequeathed to family.
Does this make sense?
Permalink Submitted by Alan - IRA critic on Mon, 2024-10-28 12:31
It seems that this year and the next couple of years might allow modest conversions at the lowest marginal rates since other income is slated to increase shortly thereafter. In general, you should be attempting to equalize taxable income over your remaining years while keeping in mind that once the first spouse passes, the surviving spouse will be filing as single and marginal rates will increase. Otherwise, if you will be pushing 90 before breaking even, conversions make less sense, particularly once the rate you will pay for conversions rises due to other income being phased in over the next 6 years.
I don’t know that purchasing a life policy makes sense unless your health is good enough to qualify and avoid surcharges. Taxes for RMDs and other distributions needed can usually be paid from the RMD funds, and withholding can be used to avoid quarterly estimates.
QCDs will also reduce taxable RMDs and if the surviving spouse is going to name a charity as beneficiary, larger conversions probably make less sense.
It helps if your modeling software includes the effects of IRMAA.