Accelerated Roth conversions
My wife and I, age 74, have about $3 mil together in Traditional Rollover IRAs. We’ve been using QCDs, taking RMDs, and making modest partial Roth conversions the last couple years, and are currently paying Medicare IRMAA premiums. I’m keenly interested in accelerated Roth conversion plans to pay extra taxes and IRMAA for a few years, in order to reduce and avoid additional taxes and IRMAA premiums in future years. I’ve found only very minimal information online about this idea, but thought Ed Slott & Company could render some opinions and advice. Please advise.
Permalink Submitted by Alan - IRA critic on Sun, 2025-03-02 13:43
By converting now after RMDs and SS payments have begun, you will be accelerating taxable income and IRMAA surcharges instead of paying them later. If you want to convert, they should generally be modest amounts geared to where you fall in your marginal tax rate and basically treating IRMAA surcharges as an additional income tax, although unlike income tax rates once you pass an IRMAA tier, there is no additional surcharge until you reach the next tier.
With large RMDs and your IRA invested mostly in fixed income, you will find that your taxable brokerage account that is funded by the RMDs and the returns on stocks will grow quickly, while your IRA balance will remain roughly the same.
Keep in mind, to the extent you plan to use QCDs for donations or IRA funds to pay for LTC expenses if you do not have LTC insurance, you would convert somewhat less because those distributions from your IRA would not be taxable. LTC expense would be high enough so that you would probably be itemizing.
Another variable is once the health begins to decline for either spouse and it appears that the survivor will be filing single at those higher rates, conversions should be increased.
Therefore, you should develop a general long term plan, but also revisit it annually. You should complete your QCDs before you complete your RMD and complete the RMD before converting any additional amounts. The first dollars out of your IRA are deemed to apply to your RMD, and RMDs cannot be rolled over, as a conversion is a rollover. When your current tax picture for the year becomes clearer late in the year, you will be better suited to determine the optimal amount to convert. Of course, this involves some detailed number crunching and analysis, and you may not want to do this yourself at some point. There may be some conversion calculators available on line or if you use a tax preparer that also does tax planning, they could assist when that time comes.
You will also need a plan for tax payments to avoid an underpayment penalty. You could pay quarterly estimates based on 110% of your prior year tax liability or have taxes withheld from your RMD, which is easier and more flexible, as it does not matter when withholding is paid.
Permalink Submitted by John Payne on Mon, 2025-03-03 22:14
Thanks, Alan. That’s a lot to juggle and coordinate. Your reply is helpful.