Converting Trad IRA to Roth
I am planning to retire early (58). I have a very high Tax-Deferred Trad IRA, which I would like to partially convert, systematically over the next 10 years to a Roth, paying taxes along the way. The hope is that by the time I collect Social Security at age 70, I will have Roth IRA savings to supplement my income and minimize my taxes. The thought is that I will balance out my Tax Deferred, Tax Free, and Taxable investment buckets, thus minimizing my tax burden.
Do any of Ed’s followers have experience with this kind of strategy, and if so, who might be able to advise me on a proper strategy. BB
Permalink Submitted by Alan - IRA critic on Fri, 2018-06-01 19:43
Doing these conversions is only beneficial if you can convert at a tax rate that is lower than (or sometimes no more than equal to) your projected marginal rate in retirement. Paying a higher rate to convert just so you have a larger Roth bucket is usually counterproductive. A Roth is a hedge against higher taxes due to financial success by the time you reach retirement. For example, if you expect a large inheritance that will produce higher taxable income in the future, you might convert more than you otherwise would but not too much more because if the inheritance does not materialize and you converted too much you are worse off due to the conversion taxes paid. At the end of the day, you should have a plan for conversions, but you need to revisit that plan every year because some of the assumptions you make are likely to change somewhat. For example, starting this year tax rates have been reduced making conversions somewhat more attractive, but the reduction is only slated to last through 2025 under the tax bill. But there is a considerable chance that the reduction does not even make it to 2025 OR the reduction could be extended beyond 2025. Another factor to consider for married people is that when the first spouse passes, the survivor will still have most of the income but be in a higher tax bracket when filing single. That becomes a factor when one spouse is much older or there are health issues.
Permalink Submitted by WALTER OGLE on Mon, 2018-06-04 01:22
Thee is an additional set of circumstances that could make a conversion from traditional to Roth useful: consider transfering assets in kind that have a high potential of appreciation (i.e. a biotech stock that is expected to gain FDA approval shortly and have a large multi time increase in price) The transfer is taxed at current market value and if your holding does get approved and the price goes up substantuall after the conversion, you will in effect get the entire appreciation tax free after the 5 year term of existance of the Roth
Permalink Submitted by Clarence Boje on Mon, 2018-06-04 19:47
I am confused.During any given year Can I make a trustee to trustee transfer of IRA funds before I make a Required Minimum Distribution. I realize there could be a trustee penalty for an early withdrawal BUT is there an IRS penalty if I do this ? Thanks for your answer.
Permalink Submitted by Alan - IRA critic on Mon, 2018-06-04 23:01
Yes, you can. A direct trustee to trustee transfer is not a distribution, is not reportable on a 1099R or your tax return, are unlimited in number, and therefore will not be applied to your RMD. There is no tax unless you convert to a Roth IRA, and never a penalty. You would also never have an early withdrawal penalty if you are subject to RMDs and took a distribution, even if you took a distribution that was more or less than your RMD.