ROLL OVER IRA
for large IRA OF 4M plus if i and spouse will only take RMD what is better leave IRA or convert to ROTH ira?
THANK YOU.I OR MY HEIRS WILL BE ALWAYS IN HIGHEST TAX BRACKET. AFTER ME WILL GO TO KIDS IF THEY DECLINE TO GRANDCHILDREN. AS WE WITHDRAW ONLY RMD MONEY WILL GROW TAX DEFFERED FASTER OVER TIME. ULTIMATELY KIDS OR GRANDKIDS WILL END UP TAKING ALL IN 10 YEARS ARE THEY BETTER OF WITH IRA OR CONVERTED ROTH. AGAIN WE DO NOT KNOW TAX SITUATION THEN.
Unless disabled, the 10 year rule will apply to these beneficiaries for either an inherited TIRA or Roth IRA. The difference is you will owe the taxes for Roth conversions and they inherit tax free. But if they inherit a pre tax TIRA on which taxes have not yet been paid, they will have to pay the taxes over the 10 years, but you will not. If you are all in the highest bracket already, then you should be wary of that bracket increasing according to the administration’s stated tax plan. A conversion done now would then beat any rate increase, and for the converted funds there would not be further taxes upon withdrawal from the Roth. Beneficiaries could wait to year 10 and take a lump sum distribution from an inherited Roth tax free.
At a constant tax rate, if you have other money with which to pay the tax on the conversion, the Roth conversion always wins. For example, suppose you have a $1 million traditional IRA and $350,000 of other money. If you convert, you’ll have a $1 million Roth IRA. Over some period of time it grows to $2 million. If you don’t convert, your $1 million traditional IRA grows to $2 million, or $1.3 million after taxes. However, your $350,000 of other money won’t grow to $700,000 since the income and gains on it will be taxable each year.
As Alan pointed out, the top income tax rate is scheduled to revert to 39.6% in 2026, and there is pending legislation which would increase it before 2026.
See my articles on this in the April 2013, https://www.kkwc.com/wp-content/uploads/2015/04/uf_Roth_Conversions_Are_More_Attractive_Under_ATRA.pdf , and June 2018, https://www.kkwc.com/wp-content/uploads/2018/08/Tax-Reform-Opens-Window-for-Roth-Conversations.pdf , issues of Trusts & Estates.
Permalink Submitted by Alan - IRA critic on Tue, 2021-08-17 16:59
Generally, it depends on being able to convert at the same or lower tax rate than your marginal tax rate will be in the future (including IRMAA surcharges) if you did not convert. In some cases, you would also consider the tax rate you expect your beneficiaries to be subject to, which also depends on how many beneficiaries will split what is left. The best time to convert is before RMDs begin and if possible after retirement but before SS benefits begin. These are low income years where you can convert more at a lower rate. There are other variables to consider as well in arriving at HOW MUCH you should convert each year in order not to spike your tax rate too much. In addition to your IRA, you also need to consider other income you may have that affects your tax rate now or in the future.