Spreading ROTH Conversions

Submitted by Brooks Rimes on Wed, 2019-11-06 22:19

My wife and I both have a large IRA to convert to ROTH. We’re 4 and 8 years from being 70 and starting our SSA benefits. I should have started the conversions sooner but am doing modeling now of converting over a number of years. The taxes are much lower if I do it over 10 years vs. 4 or 5 years. There will be some RMDs required of the partially converted IRAs but they are relatively small (first year 3.65%) and their tax small compared to the tax saving from spreading.

Is there any reason not to convert over a 10 year period?

Thanks!



Submitted by Alan - IRA critic on Thu, 2019-11-07 00:14

  • The basic factor in determining if a conversion is beneficial is comparing the marginal tax rate you will pay for the conversion with your expected average marginal rate in the future if you did not convert. While the future tax rate is just a subjective projection, your current rate can be easily determined with tax software. After your RMDs begin and are added to your SS income, adding a conversion on top could result in the tax paid on the conversion being higher than the expected future rate. This of course is less likely if you can complete your conversions before your RMDs begin and even more so if you could delay your SS benefits to 70. You could then convert more each year from now to 70 without spiking your marginal rate.
  • If you can still convert at a rate that is lower than or sometimes no higher than your expected rate in retirement, you would find that the conversion amount after RMDs begin would be reduced by the amount of the RMD if you did not want your taxable income to increase. Note that once you reach 70.5, your RMD for the IRA you wish to convert from must be completed before you can do a conversion since the first distributions you take in an RMD year are deemed to apply to the RMD, and you cannot convert RMDs.
  • In short, you need to crunch the numbers each year if you want to really control the taxes you pay. You will also have to consider IRMAA surcharges once you start Medicare. While these are tier based premium surcharges they can be treated like additional income taxes for purposes of analyzing conversion amounts.

Submitted by Brooks Rimes on Thu, 2019-11-07 15:06

Thank you for the helpful information, Alan.  I will have to look into IRMAA, have not heard of it.  What are your thoughts about living another 25-30 years and having the ROTH account growth be tax free.  I have been using TurboTax to do some of the crunch the numbers you mention.  Do you know of a better tool?  Any thoughts about the software at http://www.maxifiplanner.com?Brooks

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