When to convert to Roth IRA
I am 90 years old and have a traditional IRA of about $600K and I am withdrawing an ever increasing RMD annually even though I don’t need this money for my living expenses. This bumps up my taxable gross income (MAGI) every year which triggers increased Medicare and prescription drug premiums along with the taxes taken out of my Social Security.
Would it be better for me to pay the taxes by converting all my TIRA into a Roth IRA and get back to a lower income bracket for the subsequent years or continue to stick with the RMD approach and continue to pay the taxes annually. I realize that for somebody at a younger age it would be a no-brainer. I would appreciate your views on the pros and cons for somebody at my age
Thanks for your opinion
Permalink Submitted by Alan - IRA critic on Tue, 2021-10-05 19:33
The answer depends on whether you want to consider just your own taxes, or if you want to factor in the financial situation for your beneficiaries as well.
The problem with converting a large amount, which will be taxable in addition to your RMD of roughly 50,000, is that your marginal tax rate will increase and your IRMAA surcharge on Medicare premiums will rise into a higher tier 2 years later (2023 will be based on 2021 income). Offsetting the higher income tax in 2021 and higher IRMAA in 2023 will be the potential for lower income taxes after 2021 and lower IRMAA in 2022 and after 2023, since the conversion plus large RMDs will reduce your TIRA balance considerably. So you would need to crunch the numbers while taking a guess at your life expectancy.
Your RMDs will be slightly reduced starting next year since new RMD tables go into affect. Your 2022 divisor for age 91 will be 11.5 compared to a divisor of 10.8 had the current tables continued. This will reduce your 2022 RMD by roughly 3000 assuming your 12/31/2021 balance remains at 600,000.
If you have a good handle on your taxable income, you could manage your conversions to stay out of your next higher bracket and the next higher IRMAA tier, but the IRMAA MAGI tier cannot be known until a couple months before the iRMAA year (2023). These tiers are now receiving inflation adjustments every year again, and with inflation on the rise, they could rise considerably, giving you more room to determine your conversion amount.
If you want to consider your beneficiaries, higher income beneficiaries will benefit more from inheriting Roth IRAs and lower income beneficiaries would benefit more from an inheriting larger TIRA balances and non IRA assets that have not been reduced by your payment of conversion taxes. As for SS taxation, it sounds like you are well past the 85% max that is included in your income, so conversion may not reduce the amount of SS income you must report as taxable.
Permalink Submitted by n2b on Thu, 2021-10-07 23:09
Thanks Alan. You’ve given me a lot to chew on. There are too many variables to come to a clear cut decision. The inflation adjusted IRMAA with a two year lag of past income adds a complexity in projecting the tax estimates. Thanks for the insight anywayn2b