Too late to convert?

Submitted by Debbie Shavitz on Thu, 2019-12-05 19:25

My husband and I are 68 and 69, haven’t taken social security yet and have traditional IRA’s. I reexamine converting to Roth IRA’s every year, but the question and financial calculations are too complicated and I put it off. I MUST make a decision this 2019 tax year within the next week. I have special circumstances such as no heirs, just charities; longevity in both our genes; an NOL to use up, we are using Medicare which has income limits. We are at a $0 percent tax bracket because of our NOL for another 2 1/2 years if our income stays the same (which it will be close), then we will be at the 22% bracket. Calculations are very difficult because they are multi faceted. There is a basic software (plug in a few numbers) on Charles Schwab website, but that doesn’t take in the special circumstances we have. Is there some easy to use, relatively inexpensive software that I can plug in numbers and keep changing the scenarios?
Do you believe converting to Roth IRA’s always saves you taxes and is always a great idea? Or with no guarantees in life as to stock portfolio values; tax rates; Medicare rates, it is too hard to tell. Even our income. We are invested with a large portion in something that gives us 1099’s and reportable as ordinary income. I like the regular checks in the bank, however it keeps tax brackets higher, but I don’t know how long we will do that so what our income will be in the future. The only thing that will be stable, is that my husband will begin taking SS at 70 on 5/23/1950 and I will be 70 on 8/12/1951. We are already on Medicare and our part be is the lowest due to our NOL and no tax liability.

To covert or not to convert; and how much every year –that is the question. And how much can you really save in taxes?Because I started trying calculations and was coming up with, if I drag it out, it may cost us a lot more in taxes. Which doesn’t seem right.

Any help would be appreciated.
Thanks,
Debbie Shavitz



Submitted by Debbie Shavitz on Fri, 2019-12-06 16:50

Why has everyone else’s questions been answered, primarily by IRAcritic and mine has been ignored?  D I have to ask in a different way?

Submitted by Alan - IRA critic on Fri, 2019-12-06 17:52

  • The problem is that your questions involve so manresponsey variables, it would require a very lengthy response, almost like a financial plan. I will attempt an abbreviated .
  • Generally, the goal is to attempt to level your marginal rate ( more generally taxable income) over this year and future years. To the extent the NOL will provide you with space to convert, then an incremental conversion is a no brainer. You will end up with a higher conversion this year, a lower conversion in 2020 when H’s SS and first RMD kick in, and lower yet or maybe no conversion starting in 2021 when your SS and RMD are added. While each of your first year RMDs can be deferred to 4/1 of the following year, that would result in 2 RMDs due in the second RMD year. If you choose to defer, that would accelerate your conversions into the deferred year, but this is one of the complex variables since deferral of the RMD and the conversions can be done partially. I can’t help you with any possible flexibility to how you apply the NOL, but that is something to explore.
  • Obviously, you are aware that projecting future marginal tax brackets is a calculated guess, so any software programs (none of which I know of are as comprehensive as you are looking for) would require an input of those calculated assumptions. The largest two events that are difficult to predict are death of a spouse and/or an expensive LTC event, the latter being affected by whether you have LTC insurance and if it covers most of the costs.
  • I Orp is one of the more comprehensive calculators, but many who use it report that it may be overly slanted toward conversion recommendation.
  • Conversion to Roth will proportionately reduce your RMDs and therefore your taxable income, so is general the first dollars converted are the most beneficial since they reduce RMDs at your highest rate. Once you have converted a large portion, your future tax rates will have been reduced to possibly less than what you are paying for the conversion, and that is when you would stop converting. Therefore, the first conversion is usually more beneficial than the second, etc etc. Broadly speaking, conversions are a hedge against financial success (eg good investment experience, AND also premature death of a spouse which may nearly double marginal rates for the survivor, while retaining the pre tax IRA is a hedge against the opposite circumstances such as a 2008 style bear market.
  • You might consider IRMAA surcharges as equivalent higher tax rates, and while conversions will increase IRMAA exposure 2 years beyond, eventually conversions should reduce IRMAA surcharges.
  • To your question, a conversion is not always wise. Some people over convert, but most do not because of the immediate pain of the higher tax bill. So even with a more comprehensive calculator than exists, you are still inputting calculated guesses. This year and perhaps next year appear to be your best limited window for conversions, but you should re visit this calculation every year based on ever changing circumstances.

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