Opening a Roth IRA. Need help with strategy
by mpt follower » Tue Feb
25, 2014 12:07 am
Dear all,
Please review my tax strategy. I would appreciate your input.
I am turning 66 this year and my wife and I are retired. I have a large traditional IRA as well as enough in my after tax account plus income from pensions and SS to most likely last me and my wife well until my 80s. Given this fact, my plan is to slowly convert the IRA into a Roth IRA. First, by withdrawing the maximum up to the top of my tax bracket, now 15% until 70.5, and then the RMD (required minimum distribution).
My thought is that it is very possible that we will never have to touch the funds in the IRA, thus they will pass to my children. Does that make sense?
Erwin
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Joined: 28 Apr 2007
Re: Opening a Roth IRA. Need help with strategy
by dickenjb » Tue Feb
25, 2014 9:18 am
It may well be a good strategy to do Roth conversions. Bear in mind that once you reach the year in which you turn 70.5, the RMD must come out firstbefore you do any Roth conversion, and it must stay out unless you have earned income to support Roth contributions.
So your idea of "never touching the IRA(s)" while noble can't be done. Required Minimum Distributions are exactly that - Required and DIstributions. Can't be converted to a Roth, the IRS wants their due.
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The no-tax IRA plan.
by Taylor Larimore » Tue Feb 25, 2014 9:27 am
mpt follower wrote:Dear all,
Please review my tax strategy. I would appreciate your input.
I am turning 66 this year and my wife and I are retired. I have a large traditional IRA as well as enough in my after tax account plus income from pensions and SS to most likely last me and my wife well until my 80s. Given this fact, my plan is to slowly convert the IRA into a Roth IRA. First, by withdrawing the maximum up to the top of my tax bracket, now 15% until 70.5, and then the RMD (required minimum distribution).
My thought is that it is very possible that we will never have to touch the funds in the IRA, thus they will pass to my children. Does that make sense?
mpt follower:
Yes. Converting to a Roth IRA during low-income years before Social Security and RMDs kick in makes very good sense. The result:
Contributions were tax-deductible
Earnings are tax-free
Withdrawals are tax-free.
Best wishes.
Taylor
"The Majesty of Simplicity" -- Jack Bogle
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Re: Opening a Roth IRA. Need help with strategy
by harmony » Wed Feb
26, 2014 4:04 am
You say your funds will cover you “well until your eighties” so I wonder how you and your wife plan to fund long-term care. If funds would need to be taken from your recently converted Roth IRA, you would already have paid the taxes and thus forfeited a Schedule A tax deduction available for this, a large medical expense. When it comes, the LTC expense could extend beyond the MFJ 15% tax bracket, so some of the deduction could be for funds that would otherwise be taxed above 15%. It might help to determine whether there would be more taxable income by taking funds from a taxable account or from your tax-deferred account. You might earmark the account with the highest tax liability for this. Give your POA designee instructions to withdraw these funds in the same year/s that you also have the LTC expense.
Before SS begins, one can do a much larger annual Roth rollover. Once SS begins, the rollover will be smaller. And once RMDs begin, the rollover that can fit within the 15% bracket will be even smaller. When one of a couple passes away, the survivor's tax bracket changes to single and he/she may get a proportionately larger SS benefit, which further diminishes available space in the 15% bracket. These factors suggest making the biggest Roth rollovers early on. After a few years, one can compare the Roth and non-Roth accounts. Use an investment calculator (several good ones online) to see if you are keeping enough in non-Roth accounts to potentially use for long-term care. But of course, the more you keep in the IRA, the more will have to come out as RMDs, so continue to put the excess in taxable. If you want to maximize a Schedule A deduction, Instruct your POA to take the taxable portion out first. One may not live to know the final outcome, just know all your options and diversify your choices along the way.
An inherited Roth IRA is one of the best ways to allow your inheritance to grow for a future generation, but enveloping it within a trust structure can be even better for various reasons. I have found the writings of Ed Slott and Bruce Steiner (a contributor to this forum) very helpful in this regard. A trust can protect the Roth “stretch” IRA, but the wrong wording can make it taxable.
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Joined: 24 Nov 2013
Re: Opening a Roth IRA. Need help with strategy
by mpt follower » Wed
Feb 26, 2014 7:04 am
harmony wrote:You say your funds will cover you “well until your eighties” so I wonder how you and your wife plan to fund long-term care. If funds would need to be taken from your recently converted Roth IRA, you would already have paid the taxes and thus forfeited a Schedule A tax deduction available for this, a large medical expense. When it comes, the LTC expense could extend beyond the MFJ 15% tax bracket, so some of the deduction could be for funds that would otherwise be taxed above 15%. It might help to determine whether there would be more taxable income by taking funds from a taxable account or from your tax-deferred account. You might earmark the account with the highest tax liability for this. Give your POA designee instructions to withdraw these funds in the same year/s that you also have the LTC expense.
Before SS begins, one can do a much larger annual Roth rollover. Once SS begins, the rollover will be smaller. And once RMDs begin, the rollover that can fit within the 15% bracket will be even smaller. When one of a couple passes away, the survivor's tax bracket changes to single and he/she may get a proportionately larger SS benefit, which further diminishes available space in the 15% bracket. These factors suggest making the biggest Roth rollovers early on. After a few years, one can compare the Roth and non-Roth accounts. Use an investment calculator (several good ones online) to see if you are keeping enough in non-Roth accounts to potentially use for long-term care. But of course, the more you keep in the IRA, the more will have to come out as RMDs, so continue to put the excess in taxable. If you want to maximize a Schedule A deduction, Instruct your POA to take the taxable portion out first. One may not live to know the final outcome, just know all your options and diversify your choices along the way.
An inherited Roth IRA is one of the best ways to allow your inheritance to grow for a future generation, but enveloping it within a trust structure can be even better for various reasons. I have found the writings of Ed Slott and Bruce Steiner (a contributor to this forum) very helpful in this regard. A trust can protect the Roth “stretch” IRA, but the wrong wording can make it taxable.
I have taken care of your LTC question. I have covered it with an insurance policy that we acquired years back. At that time it seemed reasonable, now in retrospect, maybe not too smart.
With respect to the tax bracket, you right, I will end up paying taxes at a higher bracket once RWD kicks in, but too late for that.
For the other issues you have brought up, I need to think about them further.
Thank you for your insightful comments!
Erwin
Posts: 999
Joined: 28 Apr 2007
Re: Opening a Roth IRA. Need help with strategy
by BL » Wed Feb 26, 2014 10:06 am
Not sure if you are or have considered delaying SS for highest earner until age 70? That gives you more room for conversions and gives you a higher COLAd income for you and your survivor in the future.
If you are still within the 15% bracket, you can continue to convert to Roth after first removing the RMD. If you are saving for heirs, that still makes sense to me and we continue to do it with the fairly small amounts possible.
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Re: Opening a Roth IRA. Need help with strategy
by mpt follower » Wed Feb 26, 2014 11:13 am
BL wrote:Not sure if you are or have considered delaying SS for highest earner until age 70? That gives you more room for conversions and gives you a higher COLAd income for you and your survivor in the future.
If you are still within the 15% bracket, you can continue to convert to Roth after first removing the RMD. If you are saving for heirs, that still makes sense to me and we continue to do it with the fairly small amounts possible.
For health related reasons I opted to begin taking SS at 62. Only time will tell if that was smart.
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