Considering a Phased Roth Conversion
I would like to obtain some advice regarding the conversion of my Regular IRA to a Roth. If I did a complete conversion I’d create a substantial tax liability, one that I’m not willing to take on at this point. I’m fast approaching the point of having to commence RMDs. I’m considering increasing the size of my withdrawals. If, for instance, I was to withdraw an amount that was two or three times the size of the RMD, the first portion would satisfy the RMD and the balance would be converted to a Roth. I suppose this is similar to paying off a mortgage quicker that required. The goal would be to deplete the Regular IRA and build up the Roth over time. What I’m trying to figure out is whether this strategy is worth the trouble of paying the taxes sooner and hoping that the anticipated tax-free returns in the Roth would leave me in a better place, once the regular IRA was closed. If anyone is (1) aware of a calculator that might be available which could help me analyze the approach I’m considering, or (2) would care to comment on the advisability of taking this path, I’d appreciate it.
Permalink Submitted by Alan - IRA critic on Mon, 2018-10-22 18:11
The main point is limiting conversions to amounts that will be taxed at a rate that is lower or is some cases equal to your expected marginal rate throughout retirement. Every dollar converted will reduce future RMDs and eventually your RMDs may be reduced enough to make your marginal rate in retirement lower. Once that future marginal rate drops down to the rate you are paying on your conversions, you stop the conversions. Things change (eg a bear market), so any plan needs to be revisited each year, probably late in the year. Of course, you will have more headroom to convert prior to when RMDs begin since the RMDs will not yet be included in your income. Tax rates have also been reduced until 2026, although that could be changed by more legislation. You have to be careful when choosing a conversion amount because you can no longer recharacterize the conversion if your overshoot, or if the conversion suffers an investment loss. The general approach in all this is to equalize your taxes each year and a surrogate for that is your taxable income, although now that the rates have been reduced if you do the extra work to estimate your actual tax bill instead of just taxable income, you would have a more accurate estimate. You also have to be aware of certain thresholds such as the MAGI amount that triggers IRMAA, which is surcharged Medicare premiums for Parts B and D. If your conversions result in your MAGI going over the various IRMAA tiers, you will owe the additional Medicare tax 2 years later. I do not know of a calculator that addresses this much detail, as the ones available are probably quite superficial.