IRA Asset Transfer
We have a client that has the ability to realize over $110,000 in income at or below the 12% federal tax rate. They will need the funds for living expenses in the next year or two, so a Roth Conversion doesn’t seem to make sense. Their thought is that since the account (which is a Beneficiary IRA) is down approximately 12% year-to-date, they could move approximately $80,000 to a taxable account, pay the tax now and then pay tax on capital gains instead of income in future years. Does this make sense? It seems like they would be paying tax twice, even though it is different – ordinary income vs. capital gains. Also, if they went ahead with this should they take the RMD (approximately $6,000) before we transfer the assets or does it make any difference as it would all be coded as a distribution?
Permalink Submitted by Alan - IRA critic on Tue, 2022-09-06 21:00
It depends on whether the 12% max bracket is just a current year situation or projects to future years as well. If only the current year is this low, conversions make sense but client cannot convert an inherited IRA and would need to have their own plan to convert. Another factor is the number of years left for the inherited IRA to be stretched. If client accelerates inherited IRA distributions, there is no double taxation as client would establish a new basis for new reinvestments in taxable, so later taxes would only apply to gains incurred after the distribution, gains which would otherwise have been in the inherited IRA. Does client have a significant balance in owned retirement plans such as IRAs, 401k, etc or a DB pension. How far removed are they from SS?
Permalink Submitted by Tracy Hawbaker on Tue, 2022-09-06 21:25
They have delayed Social Security until next year, so the lower tax bracket would probably only apply in 2022 and potentially 2023. The Inherited IRA is grandfathered in (pre-SECURE Act) and is only valued at approximated $120,000. I believe they may have other retirement assets.
Permalink Submitted by Alan - IRA critic on Tue, 2022-09-06 22:27
SS taxation may increase future marginal rates, and if there are other retirement assets, the lower marginal rate this year could be used to convert those assets up to the 12% bracket top. If there is no such other assets to convert, then taking a much larger distribution from the inherited IRA than the RMD would also be beneficial, but probably not as beneficial as converting other available balances to Roth where all gains will eventually be non taxable if not already so.
Permalink Submitted by Tracy Hawbaker on Wed, 2022-09-07 14:20
If the client did convert other retirement assets to a Roth IRA, would they have to wait 5 years to take distributions? They are 66 years old.
Permalink Submitted by Alan - IRA critic on Wed, 2022-09-07 14:28
No, after 59.5 all conversions can be withdrawn without penalty anytime including conversions just completed.
Permalink Submitted by Tracy Hawbaker on Wed, 2022-09-07 15:02
If they decided to move some of the assets from the Beneficiary IRA, would you suggest that they take the RMD first as a separate transaction or does it matter?