Roth Conversion For Older Couple
We are a retired couple in our mid-80s with traditional IRAs, my Roth IRA, and a joint taxable investment account. Wife’s IRA represents only 3% of total portfolio. Our income is in the form of RMDs (including the use of QCDs annually), my military pension, and our social security benefits with the 85% of the SS being taxable now and always in the future. Our income from these sources exceeds our normal budget needs and the excess either goes to cash or our taxable investment account. My wife will receive 55% of my military pension if I pass first and if I do pass first, I see her remaining in the 22% bracket as a single person. And these brackets mentioned are the current brackets subject to change around 2025 or 2026.
Recognizing both IRMAA and NIIT rules, I am wondering if we should continue to do Roth conversions bringing our MAGI up to either the first step of IRMAA (approx. $176K) with no additional Medicare premium or go beyond into the next step and up to the point where the MAGI takes us into the next step of IRMAA up to $222K where we only pay an additional Medicare premium of $59.40 per month each (no Part D coverage). My understanding is that if we go up to $222K MAGI the additional premium would start in 2023.
We are both in excellent health for our ages and have good long-term care insurance in place since 1997. Upon passing our daughter will inherit all the accounts. Her MFJ current tax bracket is 32% and most likely to remain there until retirement and possibly thereafter.
So, my question boils down to is whether I should continue to do Roth conversions and up to what MAGI, knowing that we have the cash to cover either conversion amount. Replies would be appreciated including addressing any aspects that I may not have thought about.
Permalink Submitted by Alan - IRA critic on Wed, 2021-09-01 20:56
Tom, your info is very thorough. One issue is how much you want to weight your own and spouse’s tax benefits from conversion vs. those to your daughter. Due to her 32% bracket, and now limited 10 year period to distribute an inherited IRA and pay the taxes, she would benefit considerably from inheriting more Roth assets then TIRA assets, more than you would. As for your situation, if you pass first, your wife’s income is reduced by 45% of your military pension and also by the lower SS benefit, but that reduction may not be enough to keep her in the 22% bracket when looking at the single filer brackets. If she goes to 24%, no big deal, but entering the 32% bracket would be painful. But if she passes first, your pension does not reduce, so you will have higher remaining income than she would if you pass first. Much of this depends on which portion of the 22% bracket you fall, and where you stand with respect to the various IRMAA tiers. As you know, IRMAA is a one time premium incurred the minute you exceed the threshold, that does not increase as MAGI rises from there until the next threshold is entered, so IRMAA is incurred quite differently compared to a typical marginal tax rate situation. Nonetheless, you need to consider both, and you could use a tax program for analyzing the income tax cost of various conversion amounts, then add the IRMAA surcharge to those taxes based on IRMAA MAGI tiers. Since IRMAA is a year to year situation, conversions only increase IRMAA for 1 year (2 years later), but they might also decrease future IRMAA due to smaller RMDs resulting from the conversions. Therefore, with enough effort which might be come tedious the older you get, you can determine the cost for your a current year conversion, but determining the benefits of these conversions down the road is more of a calculated guess or crap shoot. Whatever amount you choose to convert, it is likely to be more helpful to the surviving spouse alone than to both of you while living. Therefore, you might want to consider being more conservative with the conversion amounts as long as both of you remain healthy, but once one of you starts to decline, you might want to ramp up the conversions since you may only have a year or two including the year of the first death to convert under the joint filer tables. Glad you mentioned your LTC coverage, because the better that is, the more likely you avoid high deductible medical expenses, and that suggests higher Roth conversions. Conversions are not subject to NIIT, but they can push other income that is subject (your taxable brokerage account) over the NIIT threshold. Since you must complete your RMD before converting, and both are taxable, QCDs help to reduce taxable income allowing you to convert more. On the other hand, if your QCDs are going to be a high % of your RMD, then you might convert less or not at all, since you are not paying much in taxes due to large QCDs. Therefore, the question is how much of your RMD is going to be offset by QCDs? You might find a thred posted by skyman interesting. He is erasing taxable RMDs entirely via QCDs, and therefore is not converting as he otherwise might have.