To Convert To Roth Or Not?

Submitted by Blue_Sky on Mon, 2019-09-23 13:18

I’m largely familiar with the benefits of the Roth, but pondering if our “life variables” are such that it makes sense given where we stand:

* Husband is 61, wife is 53. We both plan to retire in 18 months.
* We are in our highest earning years and consequently a very high (our highest ever) tax bracket presently and will be again next year. Not expected to drop until we retire in 2021.
* No children to consider in estate planning. Planning to donate bulk of our estate to charities, not heirs
* We have the liquid assets (outside IRA) to cover the tax should we convert
* We will NOT qualify to make direct contributions to Roth this year or next due to AGI limits
* Plan to tap non-retirement accts for living expenses before tapping IRAs, so Roth growth period could be as much as 6-8 years
* Plan to delay claiming SS until husband is 70 (9 yrs away) and wife is at least 67 (13 yrs away)

I know there are some pretty smart people out here so welcome the ensuing discussion.



Submitted by Alan - IRA critic on Mon, 2019-09-23 16:52

  • If you were leaving assets to individuals, this would probably be a more or less typical situation where you would do incremental conversions starting in 2021 through 2028 or whenever your RMDs and SS benefits begin. The current reduced tax rates are also due to expire after 2025.  These conversions would attempt to equalize your taxable income from 2021 forward, however after one of you passes, the survivor will face much higher single filing rates for an undetermined duration. At 65 you may also face IRMAA surcharges, which should be factored in as if it was an addition to your marginal rate. 
  • The additional challenge in your situation is that the charities do not benefit from inheriting a Roth since they will owe no taxes anyway. You might want to consider QCDs once you reach 70.5 (and spouse also at 70.5) as this is a very tax efficient way to transfer some funds to charities while you are still living, and reduce the tax bill for the rest of your RMDs. But planning for how much of your assets both of you will need while still living must be done to get some idea of how much will be left to charity. This is a difficult exercise that requires making educated guesses, potentially with a high error rate. Suffice it to say that you would be converting LESS when charities will inherit to avoid wasting tax money, however HOW MUCH less is the challenge. If you either one of you is expected to outlive the mortality statistics, you may still want to convert almost as much, since these conversions will reduce your RMDs including when one of you is filing single at the higher rates. Once you make a plan, I would revisit it every year with respect to the amount you convert 2021-2028 reflecting changes in your expense including medical expense, travel, and other variables. Each year that passes makes the future a little clearer as there is less time for unpredictable events to occur. 
  • Remember, when RMDs begin the order of your TIRA transactions will be QCD (not prior to 70.5 to the day) portion of the RMD, then remainder of the RMD, and last any conversions that year, although you may well be done with conversions once the RMDs begin, other than perhaps small ones that do not inflate your tax bracket or trigger IRMAA.

Submitted by Blue_Sky on Mon, 2019-09-23 17:20

To quote one of my favorite movies, Margin Call….”speak as you might to a young child…or a Golden Retriever.”       I’m afraid I can’t discern whether you’re suggesting conversion is a good or not so good option. 

Submitted by Alan - IRA critic on Mon, 2019-09-23 17:27

Depends on the actual numbers and your taxable income projections over time. The analysis can be very detailed so it is not possible to come up without specifics. But just to take a guess, assuming your entire financial situation fits into the average category, incremental conversions starting in 2021 will likely be beneficial, but those would probably stop when you reach 70. If anything, you perhaps should convert somewhat less than if you were NOT leaving IRAs to charity, but I cannot estimate how much less.

Submitted by Blue_Sky on Mon, 2019-09-23 17:47

Thanks. And can you add any more detail to “assuming your entire financial situation fits into the average category,” average meaning?

Submitted by Alan - IRA critic on Mon, 2019-09-23 18:06

Average ranges starting 2021 might be something like retirement plan assets for both spouses of  600k – 1.2mm, SS benefits of 35k-45k when claimed, other non retirement assets of 200k-500k not counting personal home, annual living costs of 50k-100k, and modest debt. Expecting 0 inheritances over 100k. Again, these are highly subjective ranges. However, your actual planning should be done with real numbers – maybe retain a financial planner to do an initial plan in 2021. These forums are not meant to drill down into large amounts of personal detail which requires special software programs to analyze, and most people do not want to put this detail on line in any event.

Submitted by Blue_Sky on Mon, 2019-09-23 19:24

If you mean “combined” assets of 600k-1.2mm, all I’ll add is we ( as a couple) are a bit more than double the high end if that changes anything. Very helpful to understand “average” so we can see where we might stand relative to your comments. Very much appeciated.

Submitted by Bruce Steiner on Mon, 2019-09-23 19:38

If you’re leaving a substantial portion of your estate to charity, then instead of converting you could leave your traditional IRAs to charity.  Since the charities are tax-exempt, they won’t pay any income tax on the IRA benefits.

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