If this is the first year we have to do RMD’s from an IRA and 401K, how do you feel about also doing a very large Roth Conversion ( with current low 7 figure IRA balances) and paying huge tax now to go to “Never Taxed” at once this calendar year?
Thanks.
Thank you for your response. I guess one way to size a Roth conversion at age 72 would be to do the RMD ( low 6 figures total) and withhold enough taxes on that to cover that obligation. Then take the remainder and assuming we reach a 35% federal and 6.85% NYS tax rate, divide the remainder by 41.85% and do a Roth Conversion in that amount. (The actual rate should be a little lower as some will be at 24% and some at 32% till the 35% bracket is reached). That would keep it out of the highest tax bracket ( for us) and start to reduce the taxable IRA amount for subsequent years. This assumes you don’t need the RMD funds now and that you have satisfied the safe harbor withholding elsewhere of 110% of last years’ taxes owed for Federal and NYS so you don’ t have to withhold more or pay estimated tax now to avoid any penalty . Then we can use those leftover funds to cover the extra taxes on the conversion when filing next year. This could be repeated each year bringing the remaining accounts subject to RMD’s down over time albeit slowly. Using all the RMD funds for taxes ultimately is annoying , but this gets the RMD’s down going forward and allows the funds that make it to the Roth to hopefully grow without future tax requirements.
There will still be unavoidable taxable income from RMDs less any QCDs, including for surviving spouse at the higher single filer rates. These taxes depend on the amount of growth in the IRA and the number of years until the second spouse passes. Therefore, taxpayers with longer life expectancies would probably still convert part of their IRAs, but less than others would. Most taxpayers would ignore the tax rates paid by their heirs and endeavor to determine their own life expectancies and marginal rates including those for the states they are most likely to live in after RMDs begin.
Not sure I understand. If our plan is to give away every dollar in our TIRA’s, why would we convert even one dollar and incur taxes on it?
Thank you for your response. I guess one way to size a Roth conversion at age 72 would be to do the RMD ( low 6 figures total) and withhold enough taxes on that to cover that obligation. Then take the remainder and assuming we reach a 35% federal and 6.85% NYS tax rate, divide the remainder by 41.85% and do a Roth Conversion in that amount. (The actual rate should be a little lower as some will be at 24% and some at 32% till the 35% bracket is reached). That would keep it out of the highest tax bracket ( for us) and start to reduce the taxable IRA amount for subsequent years. This assumes you don’t need the RMD funds now and that you have satisfied the safe harbor withholding elsewhere of 110% of last years’ taxes owed for Federal and NYS so you don’ t have to withhold more or pay estimated tax now to avoid any penalty . Then we can use those leftover funds to cover the extra taxes on the conversion when filing next year. This could be repeated each year bringing the remaining accounts subject to RMD’s down over time albeit slowly. Using all the RMD funds for taxes ultimately is annoying , but this gets the RMD’s down going forward and allows the funds that make it to the Roth to hopefully grow without future tax requirements.
Permalink Submitted by Alan - IRA critic on Mon, 2021-07-12 14:59
If you were going to convert, the better time would have been prior to RMDs or even prior to SS if you retired early. If you convert this large an IRA in a single year you will pay the top tax rate on most of the conversion and close to the top rate on the rest. Unless there is something unusual about your future income (perhaps you have alot of rentals or expect a large inheritance for example), you would be best served with smaller incremental conversions each year that would be taxed at less than the top rate. Of course, the top rate could well increase somewhat due to legislation, so you need to keep track of that issue. You would also need to determine where the taxes on large conversions will come from. But there is no way to provide a certain answer without knowing several additional details on your situation, so you might consider running your plan by your tax preparer or other professional that could factor in all these variables including who will inherit the IRA and what bracket they might be in. If you are going to leave it to charity, you would convert far less since the charity will pay no taxes and would rather inherit a large TIRA than a smaller Roth.
Permalink Submitted by Blue_Sky on Mon, 2021-07-12 15:46
So building a bit on your comments on leaving TIRA’s to charities…is there ever ANY reason to convert TIRA dollars that you don’t intend to use for yourself or leave to heirs? My spouse and I have what I believe to be enough to live on in our brokerage, Roth accounts, a 10 year deferred salary payout (like an annuity) and SS (which we are maximizing by claiming late – ages 70 and 62. So bottom line…if we want to give away virtually all of the $ in our TIRA’s, does it make sense to convert any of it?If yes, would the optimal strategy for determining how much to donate each year largely be guided by how much we can offset taxes dollar for dollar, up to any IRS limit or cap?