Thinking about converting all ($170K) of my IRA to Roth in one year (pay, taxes)

[Newporttom]

For several years, my wife and I have been converting our IRA's over to Roths. Did mine first since it was smaller and I am older. We are almost retired. I am retired, she is still working). Our current income leaves us about $20K short of the top of the 15% bracket, so we normally convert about $20K, to "top off the bracket".

I'm considering converting her entire remaining IRA of almost $170K this year. Our income going forward is pretty predictable depending on what "stage" we are in.

Stage 1 (current) - I'm retired, she's working, neither collecting SS. This will end NLT Dec 31st, of 2018 because she will then apply for SS (working or not).

Stage 2 - (NLT Jan 1 2019) I'm retired, She's not, we're both collecting SS. Hers is regular, mine is a restricted application where I get half of her FRA SS.

Stage 3 - We are both retired. We're both collecting SS. Hers is regular, mine is a restricted application where I get half of her FRA SS.

Stage 4 - We are both retired. I turn age 70 (In June 2021). We are both on regular SS.

Stage 5. I'm gone. This stage could occur tomorrow or anytime along the way or well past Stage 4.

In every case I can be pretty darn sure what our income situation will be.

What got me started about considering a lump sum conversion was two things. It appears next year she is going to still be working (shows little interest in retirement yet), yet we will pick up $23K in SS benefits between us which will be 85% taxable. So, to keep within the (now) 12% bracket we ether have to put the $23K into a 401K (not matched), or simply not do a conversion.

And....I have no idea if this situation might extend a couple more years.... so at least one possibly 2-3 years with no conversions.

The second thing that got me thinking was looking at taxes and year end net worth stuff. She started 2016 with almost exactly $171K in her rollover. We converted/withdrew $21K in 2016 and $20K in 2017, yet her total at the end of 2017 was $168.2K. So over the course of 2 years and $41K in conversions/withdrawals, we had only reduced the balance by less then $3,000.

At that rate it would take us forever to convert it all. And it's not really because of the strong market. I'm primarily invested in income stocks. They don't have great increases. But I get $12,000 in income thrown off by that account.

So, next year (and maybe more) not only would we have no conversions, but the likelihood that the total dollars increases more than a moderate amount.

One of the reasons I'm pretty fanatical about getting everything converted is because our retirement income reduces dramatically when I kick off. I'd like her to be in a position where she is paying no income tax. That will be the case if everything is converted to a Roth.

So I explored the tax ramifications of converting the whole $170K this year. It would cost me an extra $32K, which I would take out of the IRA money, so only $138K would make the trip.

But every year after that our taxes would be significantly less because there was no conversion. In Stage 2 however, assuming we didn't convert anything there would be no difference (but would increase the numbers of years of future conversions). But for every year we are in Stage 3 we save about $8K in taxes. Every year in Stage 4 about $5K in taxes for as long as it would take to finish the conversion. One of the reasons for this is our SS would be 85% taxed with conversions and 50% taxes with no conversions.

Basically in 4-5 years the tax savings will pay back the tax hit I took, and it will take a minimum of 6 years to convert the money. In reality it will probably take longer since it earns $12K a year.

And I've instantly solved the tax problem for the wife of me dying before it's converted.

So I've convinced myself it makes sense. What I'm concerned about is whether there is some "high income" penalty I'm not considering for 2018. We would be just under the Medicare Surtax limit of $250K. And since my wife will be 65 this year her charge for Medicare should be based on 2016 taxes.

Am I missing anything?

[mathjak107]

your premiums change each year based on income 2 years prior .

keep in mind that the increases in medicare actually kick in at 170k for a couple . but since that has not changed they only talk about the next level which is 214k .

from above 170k for a couple ,each will pay 187.50 instead of 134 .00

above 214k as a couple each will pay 267.90

[Newporttom]

This was the kind of info I was looking for. I thought (apparently incorrectly) that your Medicare payment was a "snapshot" from 2 years before you turn 65 but now I guess it's a rolling snapshot.

If this is correct than in 2020 we'd pay an additional kicker of about $2,600 and then return to normal in 2021.

Not a showstopper for me.

[mathjak107]

yes it is a rolling 2 year period .

we got hit with the max increase when we sold assets in 2014 triggering the highest level . we were not retired yet nor on medicare . but in 2016 we got notice we were being bumped thousands to the highest premium level . i appealed it and we won the appeal thanks to them classifying my retirement as a life changing event .

they rolled as back and issued a credit for all we paid

[Newporttom]

So as a follow up....

I did one more recalculation on the payback period, and saw it would not have a 5 year payback period. In fact at 5 years it was still about $10K negative. If I live 10 years that's when we break even. If I go sooner, the payback would vary based on how much she would need to withdraw.

I pulled the trigger anyway. This was a few days into Feb. Withheld over $30K for the extra taxes. So total value went down $30K and income went down a little over $2,000. And for a week or so that bothered me.

And then it didn't. The lower total became the "new normal" as did the lower income figure, which is still at a figure that more than meets our needs. And now that it's all said and done, I feel a great sense of relief that it's been taken care of.

Can withdraw money any time we need and taxes are never a factor. Never have to worry about RMD's. I know when I'm gone enough of her income will be either SS or Roth so she won't pay taxes at all.

I think the sense of peace I have now is like when people pay off their mortgage even though folks can make an argument that they would be better off investing the money.

So that's how things ended up.

[jiminnm]

New Medicare premium calcs went into effect this year and the recently signed budget bill has also changed the calculation of Medicare premiums. An upper income tier has been added, the previous upper tiers have been expanded downward and the amounts increased.

This is one article on it:
https://www.wsj.com/articles/medicar...019-1519316589

An excerpt:
"individuals with incomes of $500,000 or more and couples earning $750,000 or more will be broken out of the current top bracket and required to pay 85% of the cost of their Medicare parts B and D benefits, up from 80% now. (In contrast, Medicare beneficiaries with incomes of $85,000 or less—or $170,000 or less for couples—pay only 25% of the cost of their benefits.) For higher-income beneficiaries, this increased premium surcharge comes on the heels of a separate increase that went into effect on Jan. 1. Under that increase, Medicare beneficiaries with incomes of $133,501 to $160,000 (or $267,001 to $320,000 for couples) now must pay 65% of the cost of their parts B and D benefits, up from 50% before Jan 1. And beneficiaries with incomes between $160,001 and $214,000 (or $320,001 and $428,000 for couples) were shifted from a 65% surcharge into the highest income group that currently pays 80% of the cost of their benefits."