Curious… if I intend to do incremental IRA conversions to a Roth starting in 2021, would it be better to try and have them all done by 2025 when current reduced tax rates are due to expire, or, extend them beyond that until my 70th birthday (2028) when RMDs and SS benefits kick in, giving me an extra three years to spread the tax payments?
At 63, I’m not aware of how to determine if 85% of SS will be taxable, nor how large my RMD’s might be this far out, according to your suggestion. Although you do state “your best conversion opportunities are now.” Please advise.
Yes, makes sense to not convert this year, and perhaps convert some incremental amount next year due to partial year earnings. 2022 and the few years thereafter prior to SS benefits are claimed appear to be your prime years to convert as long as the marginal rate you pay for the conversions is less than what you would expect after all SS benefits and RMDs are factored in.
So to summarize and confirm, if the plan is not to claim SS until age 70 (2028) …and… RMD’s don’t kick in until 2030 (age 72)….and….we have no employment income starting next year, then I take it the “sweet spot” years to convert to be 2021-2028.Assuming no big fluctuations during those years, can it be as simple as dividing the amount in my traditional IRA by 8 years and converting 1/8th each year in order to “distribute the tax pain equally?” Or, if there is concern about tax rates going up should I consider converting more $ in near-term years (i.e.,2021-2025)?
You basically have it right, except the incremental amount you choose to convert each year should be driven by that year’s marginal rate vs what you expect it to be after 72. Most people’s breakdown of income such as pensions, rentals, investments in taxable brokerage accounts, etc results in a conversion analysis that only will convert a part of their TIRA in the long term, not the entire balance. It depends on the amount of your IRA in relation to the total of other taxable income you have.
Ok thanks…
One more variable…we are planning to move to another state next year, and it could be a no state tax state like NV or AZ. Better to wait until after that move to convert I suspect?
Does age difference play any role in timing of conversions? I will be 63 next year; she will be 55, so I have been assuming it would make more sense (as you suggested) to convert my IRA first before starting conversions on hers since she won’t be claiming SS until roughly 2036, give or take a year .
It makes more sense to convert yours first for two reasons – you are older and would face RMDs 8 years sooner, and your basis % is higher than hers. Claiming SS benefits adds joint income and reduces the space for conversions, so if each spouse can delay until 70, it will create more space for conversions prior to claiming.
Given all the great advice here, I have tried out various online “conversion” calculators to help pin down more specifics on numbers, taxes, etc. I keep getting “post-conversion numbers that suggest I’m less well-off by converting…but…I think it could be HOW I’m using the calculators and the numbers I’m entering. My questions:
Permalink Submitted by Alan - IRA critic on Mon, 2020-10-05 20:59
It is not predictable when tax rates will change. They could be increased as early as 2021, or they could be increased only for those in higher brackets. Your RMDs do not begin until the year you reach 72, so your SS benefits will start prior to RMDs. Therefore, each year you need to determine how much you can convert that year at marginal rates you expect to be lower or at least not higher than what you expect your rate to be later on when your taxable income is higher. With future income rising starting with SS benefits, your best conversion opportunities are now. Perhaps you should convert to the top of your current bracket, or if you are expecting 85% of SS to be taxable and your RMDs to be large enough, perhaps you should convert beyond the top of your current bracket. Remember, once you are eligible for Medicare, you also have to be aware of the MAGI theshold for IRMAA, which surcharges your Medicare premiums, and could be analyzed as if it were a higher income tax for planning purposes.