Roth IRA Conversions
My wife and I are retired, ages 61 and 62, with $560,000 (tax deferred) in the Thrift Savings Plan, $143,000 in Roth IRA’s, $95,000 in a taxable account, and $11,000 in a traditional IRA. I have a $17,500/year pension, and we will need to supplement our income by about $18,000 starting next year. We hope to wait until we reach 70 to collect Social Security, which would be about $45,500/year at that time.
We are thinking of doing a trustee to trustee rollover from the TSP to a traditional IRA and then do yearly conversions to Roth IRA’s over the next 7-8 years, filling up our 15% bracket.
Does it make sense to take the yearly $18,000 from the traditional IRA and to convert the rest of our traditional IRA to Roth IRA’s, paying the taxes from our taxable account? This way we would be paying tax on a smaller amount of our Social Security later on.
Or, as many people recommend, to draw down the taxable account first, before we touch the traditional IRA? (The Roth IRA’s would be left for last).
Permalink Submitted by Alan - IRA critic on Wed, 2017-05-10 23:14
Withdrawing from the TSP and/or TIRA rollover for the 18k you need appears to be a clear advantage while your taxes are low (no SS, RMDs or earned income). It also appears clear that you should NOT convert over the top of the 15% bracket. The gray area is whether you should convert all the way to the top of that bracket every year or somewhat less. Since the first dollars converted are the most beneficial because they reduce your taxable income from RMDs from the top down, you might start out converting to the top of the 15% bracket, but then re visit this plan each year to see if you are reducing the balance of your pre tax retirement assets enough to have lowered your expected rate in retirement enough. You can even recharacterize some of your conversions if they lose money or it appears the taxes are higher than you expected for some reason. Remember your RMDs start at less than 4% of the balance, and remain about the same in dollar terms if your TIRA has no gain or loss. If you have gains, your RMD rises and it falls if you have losses. I do not have a program to crunch the numbers here, so these comments are just general observations. I would NOT draw down the taxable amount first in this scenario, as you will need it to pay conversion and other taxes and since your tax rates will be lower right after retirement, you should use pre tax assets first.
Permalink Submitted by Peter Karakondis on Thu, 2017-05-11 00:50
Thank you for your response. My main reason for the Roth conversions is to avoid paying tax on a large portion of our SS once it begins. Are you saying that maybe we should not convert everything, and instead leave around $150,000-250,000 in the TIRA (or TSP) if we will still be in the 10% bracket once we begin SS and RMDs? Thanks again for your response.