Questions about converting to a Roth

Submitted by Janet Preis on Mon, 2020-05-18 17:16

I am 75 yrs old, have a traditional IRA worth over $500,000.00. My tax bracket is 34%. Would it be worth to begin converting to a Roth at this time before the IRAs get hit to pay off all the US debt. I listened to Ed’s conversation on the radio Saturday with Josh Jelinski and it sounded like he recommended this. Does age affect the decision of paying all the tax up front? What other considerations should factored into this
? Are there some numbers regarding net worth and health that come into play? Thanks.
JP



Submitted by Alan - IRA critic on Tue, 2020-05-19 00:47

  • The prime factor is still your current marginal rate and where you stand in that bracket vrs your expected rate in the future. However, two other factors are whether you choose to to look at your IRA in terms of the expected tax rate of your beneficiaries, since a Roth balance reduced by conversion taxes works better for a higher marginal rate beneficiary, while an inherited TIRA is reduced by the beneficiary’s tax rate. And if you are married, the surviving spouse will be paying taxes at higher rates filing as single, therefore you might factor in the relative health and age differences between the spouses.  If you good long term care coverage, you might convert more than if you do not, since paying the high deductible costs of LTC will offset the distribution taxes from a pre tax IRA distribution.
  • Net worth usually indicates a higher current marginal tax rate, but not estate taxes any longer due to the current high exemption, but that could be reduced later on. Conversion taxes reduce your taxable estate. Some states have a much lower state estate tax exemption.
  • Since you wili be taking RMDs for the duration, the 2020 RMD waiver presents a unique opportunity to convert to Roth this year since you will not also have your RMD in your taxable income. If you convert what would have been your 2020 RMD, you will have the same taxable income and reduce your TIRA balance as you would have with an RMD, but be able to do so without a net increase in taxable income caused by having an RMD and a conversion in the same year. 
  • When crunching the numbers, be aware of how much you can convert without spiking your tax bracket or triggering IRMAA surcharges on your Medicare premiums.
  • Whatever plan you develop, you will have to revisit it almost every year to determine if the factors you used to develop an initial plan have changed.

Add new comment

Log in or register to post comments