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If I knew then what know now I would have started converting IRAs to Roth IRAs years ago. Our income consists of pension, social security, RMDs and part-time income. Based on what I presume will be higher taxes for everyone in the future, I am considering converting a large sum of IRA money to Roth IRAs, getting a large tax hit for this year (2021). This will raise our Medicare premiums and move us into the next tax bracket. By moving a lot of funds to Roth IRA, I am hoping to reduce our taxable income (from RMDs) for future years, paying less taxes and reducing Medicare premiums. Any opinions on this strategy??
I started partial Roth conversions last year. Everyone’s situation is different. The members over at the Early Retirement board were incredibly knowledgeable and immensely helpful to me. Not sure if you’re on that board but that was my experience
If I knew then what know now I would have started converting IRAs to Roth IRAs years ago. Our income consists of pension, social security, RMDs and part-time income. Based on what I presume will be higher taxes for everyone in the future, I am considering converting a large sum of IRA money to Roth IRAs, getting a large tax hit for this year (2021). This will raise our Medicare premiums and move us into the next tax bracket. By moving a lot of funds to Roth IRA, I am hoping to reduce our taxable income (from RMDs) for future years, paying less taxes and reducing Medicare premiums. Any opinions on this strategy??
Based on hindsight, early is better. When Roth first became available , I didn’t do a conversion. Now I am 83 and RMD’s have become very painful.
I think you have identified the factors that need to be considered.
Hard for us to comment as we do not know your age, what RMD's would be etc. etc.
I would probably lean toward converting over a few years. Make the first conversion now. Then as we get to the end of the year make a decision to do the rest of the conversion or postpone to next year. The hope is you can make your final distribution before a change in taxes becomes effective.
This is an interesting question. We have the same questions - with considerable pre-tax savings (>5M) and additional considerations such as a possibility/interest in moving to a high(er) income tax state later in retirement.
As rjm1cc says, the answer will differ from situation to situation. I would interested in paying someone to do this type of financial analysis for us. Of course, it you offer it to someone, they'd do the analysis but how good that analysis is will vary. I don't need a shallow cookie cutter analysis with simplistic and undeclared assumptions. I, therefore, hesitate to proceed without knowing the resource who would do a good job.
What is the right type of professional specialization that would cater to it - a CPA? a financial planner? something else?
KAVM if you have that much I can tell you that you can do it or not. Either way you have a problem that most people can't even imagine. As Southern Man says he is experiencing pain at the RMD pool. I don't think I will ever get to that problem. My <1M provides me with all the fun money I need and I don't have that RMD crunch that will bother us much.
At the low of the market I decided to make a partial conversion to Roth so I now have a substantial holding (up 60% from March) that is not subject to future taxes.
I just finished my taxes and the difficult issue is getting comfortable with the change in cash position after paying taxes. Less flexibility as a chunk of flexibility went to the IRS.
Based on hindsight, early is better. When Roth first became available , I didn’t do a conversion. Now I am 83 and RMD’s have become very painful.
They might be painful now but I for one really enjoyed the tax deductions of IRA's when I needed them. I am old school. Never pay taxes until you must. Tax evasion is illegal. Tax avoidance is legal. I am 78 and other than RMD's, I take nothing from my IRAs at this time.
If I knew then what know now I would have started converting IRAs to Roth IRAs years ago. Our income consists of pension, social security, RMDs and part-time income. Based on what I presume will be higher taxes for everyone in the future, I am considering converting a large sum of IRA money to Roth IRAs, getting a large tax hit for this year (2021). This will raise our Medicare premiums and move us into the next tax bracket. By moving a lot of funds to Roth IRA, I am hoping to reduce our taxable income (from RMDs) for future years, paying less taxes and reducing Medicare premiums. Any opinions on this strategy??
I converted my entire IRA to Roth in two biggish chunks, on a low-market day in 2019, and on the day when the market cratered in 2020 (age 59 and 60). I took an earlyish full retirement in March last year at 60, and used much of the earnings from part time work in both years to pay tax on the conversion. The value of my Roth increased (tax-free) by 50% from the time I completed the conversion in March last year. I do not intend to touch this Roth for the next 20 years.
To me it made sense to do it that way because I could take tax advantage of temporarily very decreased value of my IRA, and because the Roth still has plenty of time for tax-free growth til I start nibbling on it.
Move in in two or three big chunks?
Uh, I'm not ready to push myself into the from the 22% to 35% tax bracket to do that.
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