Retire couple Roth Conversion Help

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divebums
Posts: 74
Joined: Tue Jan 08, 2008 8:06 am

Retire couple Roth Conversion Help

Post by divebums » Sun Nov 19, 2017 8:15 pm

Debt: None, new home and car
Annual living requirement: $75k
Tax Filing Status: Married Filing Jointly
Tax Rate: 25% Federal, 6% Maryland
Age: Him 69, Her 65 (Retired, no new contributions)
No Pensions
His Social Security $18k
Her Social Security $9k spousal until age 70 then $37k
Desired Asset allocation: 45% stocks / 55% bonds
Current Asset allocation: 47% stocks / 53% bonds (not including $360k in cash)
Portfolio: $3,352,000

Taxable at Vanguard
$360k cash
$486k VTSAX - US Stock
$484k VTIAX - Int Stock

Her Roth IRA (opened 1/27/09) at Vanguard
$11k VTSAX - US Stock

Her Rollover IRA at Vanguard
$248k VBTLX – Bonds
$257k VAIPX - TIPS

Her Inherited IRA from Mother (RMD = $6k in 2017) at Vanguard
$43k VAIPX – TIPS

His Roth IRA (opened 12/26/13) at Vanguard
$1k VTSAX - US Stock

His Rollover IRA at Vanguard
$713k VBTLX - Bonds
$331k VAIPX - TIPS

His Rollover IRA at Transamerica
$418k VTSAX - US Stock

Overview:
I’ve posted in the past requesting help in building this portfolio for my parents and many of you have helped me and for that I am very grateful. As some of you have suggested i’ve built a spreadsheet to do projections of annual portfolio totals, income sources, RMDs, conversions, taxes, etc. That has helped me and them have a much more clear picture of their financial futures. I still have a few more questions below regarding Roth Conversions I need some advice on. However, I am certainly open to any and all suggestions, tips, or over all concerns. I thank you in advance for your suggestions and help!

Questions:
1. I am considering doing Roth Conversion to the top of the 25% bracket but want to make sure I’m calculating this correctly for 2017. The table below shows $69k in conversions to the top of the 25% bracket. My understanding is that I need to do this before Dec 31. I assume it would be best to convert from his tIRA first since he’s oldest and it’s larger. Since we’re at the end of the year I assume there’s no need for a horse race so does it matter which fund I convert in his Vaguard IRA (bonds or tips)? Since there’s no race or plan to recharacterize do I still open a new, clean Roth in his name? In the new Roth do I simply buy the same fund I’m converting and pay for it with the fund in the tIRA? Is it a buy or exchange? How does the five year rule apply for someone his age with a Roth opened on 12/26/13?

Image

2. I’m considering continuing to convert to the top of the 25% bracket in the future as well. I’ve obviously not converted to exactly the $153,100 limit as I’m trying to get a ball park figure to make sure I’m doing this correctly. Do my numbers make sense? Should I consider converting into the 28% bracket? The big driver to converting was when one of them passes away the other will be in a higher bracket and converting should help minimize that pain some. Does that help us or am I over thinking this and shouldn’t convert at all?

Image

3. My Dad has Parkinson’s Disease and will likely incur higher medical expenses in the future. I’ve read many posts talking about how those expenses will help in offsetting taxes due from RMDs in the future. Should this be a consideration for our Roth Conversion schedule plan above?

4. Does keeping them in the 25% bracket keep their medicare costs from going up?

5. I’ve read we need to take the RMDs prior to doing a conversion in a given year. 2019 will be the first year he has RMDs. Should I take them as a lump in January and then start a horse race for the remainder of the year? Since he’s only got bonds and tips to convert is it even worth a horse race? I’m trying to keep this as simple as possible and will likely recharacterize prior to year end so I don’t have to file an extension.

6. Since Mom retired this year she’s had payroll taxes taken out thru August and Dad has them taken out of his SS every month. If they do a $69k conversion in December do they need to pay 4th quarter estimated taxes somehow so they don’t pay a penalty?

7. Should I have them start paying quarterly taxes next year assuming the annual conversion amount in mind?

Again, thank you so much for the help!

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Peter Foley
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Location: Lake Wobegon

Re: Retire couple Roth Conversion Help

Post by Peter Foley » Sun Nov 19, 2017 8:55 pm

If you run your scenarios through I-ORP or the Retiree Portfolio Model you should get an idea as to the payoff on your conversion approach.

A note on #4. Medicare part B premium is based on Modified Adjusted Gross income. Over $170,000 two years prior and the part B premium goes up. At the top of the 25% bracket you are over that.

Under current law if one were anticipating high medical expenses in the future it would be an incentive to hold relatively more funds in a tax deferred account.

kaneohe
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Joined: Mon Sep 22, 2008 12:38 pm

Re: Retire couple Roth Conversion Help

Post by kaneohe » Mon Nov 20, 2017 1:12 am

You might want to check your tax calculations w/ a tax calculator like the HR Block one. https://www.hrblock.com/tax-calculator/#/en/te/results
I think you might either be overcalculating the tax or using non-standard nomenclature. Usually when someone says convert to the top of the 25% bracket, to me that means that that the taxable income (including LTCG) is at the bracket limit. If you do that and have LTCG, the LTCG occupies some space in the 25% bracket and so the ordinary income does not fill that bracket. To me it looks like you are calculating ordinary income tax for that full bracket and also calculating LTCG on the CGs in that bracket. Your number for the last column looks much higher than the calculator.

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celia
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Location: SoCal

Re: Retire couple Roth Conversion Help

Post by celia » Mon Nov 20, 2017 2:29 am

You have a lot of good questions and I don't have time for a lot of good answers, but here are a few:
divebums wrote:
Sun Nov 19, 2017 8:15 pm
Portfolio: $3,352,000

Taxable at Vanguard
$360k cash
$486k VTSAX - US Stock
$484k VTIAX - Int Stock

Her Roth IRA (opened 1/27/09) at Vanguard
$11k VTSAX - US Stock

Her Rollover IRA at Vanguard
$248k VBTLX – Bonds
$257k VAIPX - TIPS

Her Inherited IRA from Mother (RMD = $6k in 2017) at Vanguard <-- The RMD seems large for the account balance. Is she taking out more than the RMD or did she inherit this a long time ago?
$43k VAIPX – TIPS

His Roth IRA (opened 12/26/13) at Vanguard
$1k VTSAX - US Stock

His Rollover IRA at Vanguard
$713k VBTLX - Bonds
$331k VAIPX - TIPS

His Rollover IRA at Transamerica
$418k VTSAX - US Stock <--I would convert his stock fund before any bond funds.


1. I am considering doing Roth Conversion to the top of the 25% bracket but want to make sure I’m calculating this correctly for 2017. The table below shows $69k in conversions to the top of the 25% bracket. Your methodology looks good but some numbers may need tweaking. My understanding is that I need to do this before Dec 31. Correct. Don't worry about converting too much, since you can always recharacterize the excess. I assume it would be best to convert from his tIRA first since he’s oldest and it’s larger. It really doesn't matter, but I look it at as his Rollover IRA is the only one holding stocks. So that should be converted first. Since we’re at the end of the year I assume there’s no need for a horse race so does it matter which fund I convert in his Vaguard IRA (bonds or tips)? Stocks, since you want to slow down the growth in the Rollover IRA, while allowing it it grow in the Roth. Since there’s no race or plan to recharacterize do I still open a new, clean Roth in his name? It is recommended since you never know if the markets might drop significantly or if you converted too much. In the new Roth do I simply buy the same fund I’m converting and pay for it with the fund in the tIRA? Pay the taxes out of taxable so you don't lose the space in the Roth (that a tax withholding could fill instead). Is it a buy or exchange? .Exchange. How does the five year rule apply for someone his age with a Roth opened on 12/26/13? The five-year rule only applies to distributions from the Roth, not conversions or contributions. In 6 weeks, the Roth will have been opened 5 years: 2013, 2014, 2015, 2016, 2017.

Image

Earlier you said the RMDs were $6,000, but you show $7,821 here.

2. I’m considering continuing to convert to the top of the 25% bracket in the future as well. I’ve obviously not converted to exactly the $153,100 limit as I’m trying to get a ball park figure to make sure I’m doing this correctly. Do my numbers make sense? Should I consider converting into the 28% bracket? The big driver to converting was when one of them passes away the other will be in a higher bracket and converting should help minimize that pain some. Does that help us or am I over thinking this and shouldn’t convert at all?

Image

If you use taxable assets to pay taxes, the qualified and unqualified dividends will decrease as the assets that generate them decrease.

3. My Dad has Parkinson’s Disease and will likely incur higher medical expenses in the future. I’ve read many posts talking about how those expenses will help in offsetting taxes due from RMDs in the future. Should this be a consideration for our Roth Conversion schedule plan above?
It depends on if the tax laws change in regard to itemized deductions. We can't discuss possible changes, but current law allows medical expenses to be itemized when they are over a certain threshold.

divebums
Posts: 74
Joined: Tue Jan 08, 2008 8:06 am

Re: Retire couple Roth Conversion Help

Post by divebums » Mon Nov 20, 2017 11:59 am

Peter Foley wrote:
Sun Nov 19, 2017 8:55 pm
If you run your scenarios through I-ORP or the Retiree Portfolio Model you should get an idea as to the payoff on your conversion approach.

A note on #4. Medicare part B premium is based on Modified Adjusted Gross income. Over $170,000 two years prior and the part B premium goes up. At the top of the 25% bracket you are over that.

Under current law if one were anticipating high medical expenses in the future it would be an incentive to hold relatively more funds in a tax deferred account.
Thanks Peter - I have tried I-ORP and the Retiree Portfolio. Both were difficult for me to follow but I will give them another try. Does the Medicare Part B premium go up a fixed amount or is it tied to how much income you have?

Regarding your comments about future medical expenses and keeping a balance in the tax deferred accounts, If I complete the conversions in my forecast over the next 10 years then the tIRAs have reduced to $1.3M still and the Roth grown to $611k. I could still use the medical expenses to offset withdrawals from the tIRAs. I was just hoping to diversify the account types a bit since I don't know exactly what the future holds regarding medical expenses. Does this theory make sense?

divebums
Posts: 74
Joined: Tue Jan 08, 2008 8:06 am

Re: Retire couple Roth Conversion Help

Post by divebums » Mon Nov 20, 2017 12:05 pm

kaneohe wrote:
Mon Nov 20, 2017 1:12 am
You might want to check your tax calculations w/ a tax calculator like the HR Block one. https://www.hrblock.com/tax-calculator/#/en/te/results
I think you might either be overcalculating the tax or using non-standard nomenclature. Usually when someone says convert to the top of the 25% bracket, to me that means that that the taxable income (including LTCG) is at the bracket limit. If you do that and have LTCG, the LTCG occupies some space in the 25% bracket and so the ordinary income does not fill that bracket. To me it looks like you are calculating ordinary income tax for that full bracket and also calculating LTCG on the CGs in that bracket. Your number for the last column looks much higher than the calculator.
Thanks Kaneohe - I will check the H&R calculator. The spreadsheet I was using was something I modeled off a post Celia made. Admittedly, I find the tax calculations with regards to LTCG confusing. Do I add the LTCG along with all other sources of income to determine which bracket i'm in then tax the LTCG at either 0 or 15% and tax the rest of it according to its bracket? I like the ease of calculators but they don't typically give you the same ease and view of a spreadsheet.

smitcat
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Joined: Mon Nov 07, 2016 10:51 am

Re: Retire couple Roth Conversion Help

Post by smitcat » Mon Nov 20, 2017 12:21 pm

divebums wrote:
Mon Nov 20, 2017 11:59 am
Peter Foley wrote:
Sun Nov 19, 2017 8:55 pm
If you run your scenarios through I-ORP or the Retiree Portfolio Model you should get an idea as to the payoff on your conversion approach.

A note on #4. Medicare part B premium is based on Modified Adjusted Gross income. Over $170,000 two years prior and the part B premium goes up. At the top of the 25% bracket you are over that.

Under current law if one were anticipating high medical expenses in the future it would be an incentive to hold relatively more funds in a tax deferred account.
Thanks Peter - I have tried I-ORP and the Retiree Portfolio. Both were difficult for me to follow but I will give them another try. Does the Medicare Part B premium go up a fixed amount or is it tied to how much income you have?

Regarding your comments about future medical expenses and keeping a balance in the tax deferred accounts, If I complete the conversions in my forecast over the next 10 years then the tIRAs have reduced to $1.3M still and the Roth grown to $611k. I could still use the medical expenses to offset withdrawals from the tIRAs. I was just hoping to diversify the account types a bit since I don't know exactly what the future holds regarding medical expenses. Does this theory make sense?

When completely filled out the RPM allows you to directly compare the base case with a Roth conversion model. You can then tweak the Roth conversions and 'watch' the resultant changes as the comparison remains clear and obvious on the output charts.
If you are like us the largest problem you will have is accurately populating the RPM in the first place, but its worth it for sure!
garbage in = garbage out

divebums
Posts: 74
Joined: Tue Jan 08, 2008 8:06 am

Re: Retire couple Roth Conversion Help

Post by divebums » Mon Nov 20, 2017 12:23 pm

celia wrote:
Mon Nov 20, 2017 2:29 am
The RMD seems large for the account balance. Is she taking out more than the RMD or did she inherit this a long time ago?

This IRA has been twice inherited from each of her parents. I'm assuming that's why the RMD is large.

<--I would convert his stock fund before any bond funds.

The stock fund at Transamerica is complicated. Its the only fund I was not able to move to Vanguard because it has a death benefit rider that they have paid for over the years that requires a minimum balance. I'll look into it more but I was intentionally avoiding touching it. I rolled over a large portion of it to Vanguard to create the other IRA but still keep the maximum death benefit viable.

Earlier you said the RMDs were $6,000, but you show $7,821 here.

I will check my numbers for errors. My initial estimate for RMD was $6k but when I checked Vanguard I found out it was $7821. I will correct that.

If you use taxable assets to pay taxes, the qualified and unqualified dividends will decrease as the assets that generate them decrease.

I definitely plan to use taxable assets to pay the taxes.

It depends on if the tax laws change in regard to itemized deductions. We can't discuss possible changes, but current law allows medical expenses to be itemized when they are over a certain threshold.

Without getting into a guess on the new tax laws, assuming the medical expense deduction and itemization doesn't change, does it make sense to convert still? As i mentioned in an earlier reply, after 10 years the tIRAs have reduced to $1.3M still and the Roth grown to $611k. I could still take advantage of high future medical expenses by withdrawals from the tIRA and also created the benefit of the Roth balance since they essentially have no Roth money at all now. I will try to use i-ORP or the Retiree spreadsheet for some help in deciding conversions but I found them both difficult to follow. I was hoping that converting to the 25% bracket would give some larger conversions over the next 5 years or so and build up the Roth and help with future taxes. Once they are both on SS and getting RMDs there won't be much room in that bracket anymore. My thinking was to at least minimize the tIRA some and grow the Roth while it was still an option but the tIRA will never be converted below $1.2M at that rate.
[/quote]

divebums
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Re: Retire couple Roth Conversion Help

Post by divebums » Mon Nov 20, 2017 12:27 pm

smitcat wrote:
Mon Nov 20, 2017 12:21 pm
When completely filled out the RPM allows you to directly compare the base case with a Roth conversion model. You can then tweak the Roth conversions and 'watch' the resultant changes as the comparison remains clear and obvious on the output charts.
If you are like us the largest problem you will have is accurately populating the RPM in the first place, but its worth it for sure!
garbage in = garbage out
I agree with you Smitcat, it seems like a powerful tool for adjusting conversion amounts and getting a clear look at the results. It's populating the base correctly that i'm struggling with.

Is the wiki the best source of "directions" to use the file or is there something else I can refer to to make sure I input the details correctly?

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FiveK
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Re: Retire couple Roth Conversion Help

Post by FiveK » Mon Nov 20, 2017 12:55 pm

divebums wrote:
Mon Nov 20, 2017 12:05 pm
I like the ease of calculators but they don't typically give you the same ease and view of a spreadsheet.
In that case you might consider the personal finance toolbox spreadsheet.

Using the numbers in the first column of the spreadsheet you posted (the "No Conversions" column), it appears the federal tax would be $6,885.

That's the good news (comparing it to $14,365). The rest of the news is the marginal rate they will pay for tIRA withdrawals above the RMD amount, shown in the chart below:
Image

bsteiner
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Re: Retire couple Roth Conversion Help

Post by bsteiner » Mon Nov 20, 2017 1:05 pm

You could create a spreadsheet, showing the result (how much money there would be) in each case, based on some reasonable assumptions, when your beneficiaries take their last required distribution.

Or, given the benefits of the Roth conversion, you could simply convert up to the top of the 28% bracket each year.

smitcat
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Re: Retire couple Roth Conversion Help

Post by smitcat » Mon Nov 20, 2017 1:21 pm

divebums wrote:
Mon Nov 20, 2017 12:27 pm
smitcat wrote:
Mon Nov 20, 2017 12:21 pm
When completely filled out the RPM allows you to directly compare the base case with a Roth conversion model. You can then tweak the Roth conversions and 'watch' the resultant changes as the comparison remains clear and obvious on the output charts.
If you are like us the largest problem you will have is accurately populating the RPM in the first place, but its worth it for sure!
garbage in = garbage out
I agree with you Smitcat, it seems like a powerful tool for adjusting conversion amounts and getting a clear look at the results. It's populating the base correctly that i'm struggling with.

Is the wiki the best source of "directions" to use the file or is there something else I can refer to to make sure I input the details correctly?
I do not know of an easy way to learn how to populate the RPM - I will say that after we figured out each section we sat there and said ...'that was obvious'. But it was not so clear prior to figuring it out in our case anyway.
We learned from the Wiki, we learned from the hidden drop down notes in each section , we also learned a bunch from the long post here on Bogle on how to use this tool.
Kudos to the inventor/owner here on this site for a powerful tool and for checking in on that post to answer all concerns and to update the tool when glitches are found.
We also find the IORP a good tool, but given you question here the RPM is a real good fit for your use.

kaneohe
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Re: Retire couple Roth Conversion Help

Post by kaneohe » Mon Nov 20, 2017 1:42 pm

divebums wrote:
Mon Nov 20, 2017 12:05 pm
kaneohe wrote:
Mon Nov 20, 2017 1:12 am
You might want to check your tax calculations w/ a tax calculator like the HR Block one. https://www.hrblock.com/tax-calculator/#/en/te/results
I think you might either be overcalculating the tax or using non-standard nomenclature. Usually when someone says convert to the top of the 25% bracket, to me that means that that the taxable income (including LTCG) is at the bracket limit. If you do that and have LTCG, the LTCG occupies some space in the 25% bracket and so the ordinary income does not fill that bracket. To me it looks like you are calculating ordinary income tax for that full bracket and also calculating LTCG on the CGs in that bracket. Your number for the last column looks much higher than the calculator.
Thanks Kaneohe - I will check the H&R calculator. The spreadsheet I was using was something I modeled off a post Celia made. Admittedly, I find the tax calculations with regards to LTCG confusing. Do I add the LTCG along with all other sources of income to determine which bracket i'm in then tax the LTCG at either 0 or 15% and tax the rest of it according to its bracket? I like the ease of calculators but they don't typically give you the same ease and view of a spreadsheet.
viewtopic.php?t=86849 see the spreadsheet by tfb on 12/1j0/11 here for a nice graphical way to think about it. The link talks about QDIV but it applies to LTCG also Your words sound right but devil in the details. You stack the LTCG income on top of the ordinary income. Subtract out the deductions/exemptions from the bottom of the stack (ordinary income). Find out what brackets the LTCG is and tax at 0 or 15% (note that part may be at 0% and the rest at 15% under certain conditions but I think in your case income is high enough that all is 15%.
Tax the ordinary income at the bottom of the stack as if no LTCG. Then add the two taxes for total.

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celia
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Re: Retire couple Roth Conversion Help

Post by celia » Tue Nov 21, 2017 8:45 pm

divebums wrote:
Mon Nov 20, 2017 12:23 pm
celia wrote:
Mon Nov 20, 2017 2:29 am
<--I would convert his stock fund before any bond funds.

The stock fund at Transamerica is complicated. Its the only fund I was not able to move to Vanguard because it has a death benefit rider that they have paid for over the years that requires a minimum balance. I'll look into it more but I was intentionally avoiding touching it. I rolled over a large portion of it to Vanguard to create the other IRA but still keep the maximum death benefit viable.
See if you can convert the value to a bond fund, then exchange the same value of a bond fund in a tIRA to a stock fund. Then convert!

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Peter Foley
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Re: Retire couple Roth Conversion Help

Post by Peter Foley » Tue Nov 21, 2017 9:41 pm

Divebums wrote:
Does the Medicare Part B premium go up a fixed amount or is it tied to how much income you have?
There are tables on the web that cover this but here is the basic formula.

Monthly premium for married filing jointly:

Modified Adjusted Gross Income 2 years prior, Monthly premium
<170,000 , 134
170,000 - 214,000 , 187.5
214,000 - 320,000 , 267.90
320,000 - 428,000 , 348.30
> 428,000 , 428.60

Single MAJI is 50% of MFJ.

divebums
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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 10:18 am

Peter Foley wrote:
Sun Nov 19, 2017 8:55 pm
A note on #4. Medicare part B premium is based on Modified Adjusted Gross income. Over $170,000 two years prior and the part B premium goes up. At the top of the 25% bracket you are over that.
It looks like going above $170k in MAGI would jump their medicare premiums from $134 to $187. That's a yearly increase of $1284 for both of them combined. I will do my best to use/understand the Retiree Portfolio Model but my gut feel is that the future tax savings from Roth conversions would greatly offset that premium increase. Am I off base with that thought?

divebums
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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 10:28 am

FiveK wrote:
Mon Nov 20, 2017 12:55 pm
Using the numbers in the first column of the spreadsheet you posted (the "No Conversions" column), it appears the federal tax would be $6,885.
kaneohe wrote:
Mon Nov 20, 2017 1:12 am
You might want to check your tax calculations w/ a tax calculator like the HR Block one. https://www.hrblock.com/tax-calculator/#/en/te/results
I think you might either be overcalculating the tax
Thanks FiveK and kaneohe - I used the H&R tax calculator and was able to duplicate FiveK's $6885. I think rather than trying to see it graphically on a spreadsheet i'll use the H&R or Taxcast calculator and vary the conversion amount to get my tax. I also read the thread you suggested on graphical representations of income and taxes and realize that its definitely not as easy as I had thought to see it like that. Too many changing variables with SS, LTCG, QDIV, etc. I think rather than trying to fill a certain bracket it might make more sense to try and shoot for a level tax every year so we can budget for it. It looks like 85% of their SS will always be taxed and the increase in medicare premium is much smaller than the tax savings they should realize in the long run by doing the conversions.

divebums
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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 10:43 am

celia wrote:
Tue Nov 21, 2017 8:45 pm
See if you can convert the value to a bond fund, then exchange the same value of a bond fund in a tIRA to a stock fund. Then convert!
I probably didn't explain that account very well. They created this IRA account decades ago before I started helping them consolidate to Vanguard. They pay a large death benefit rider fee (1.5% I think) so that mom will get a "high water" mark value on that account if Dad passes away. It's worth $418k now but even if the market drops 50% she'll never get less than $409k. The account had much more in it but I rolled over the largest amount possible while still retaining a high enough balance to take advantage of this death benefit. I could roll it all out now but we've kept it as a pseudo insurance incase the market drops. That's why i'm reluctant to convert from that account and reduce the balance. I haven't talked to the financial advisor about RMDs impact on the balance. Honestly, I hate that account but i'm not sure what to do about it at this point. Thoughts?

divebums
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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 11:00 am

I'm assuming I'll have them start paying quarterly taxes in 2018. However, since she worked for 8 months in 2017 (retired August) and had taxes taken out do we need to pay a 4th quarter tax if we do a large conversion right now? Can you even pay just a 4th quarter tax?

kaneohe
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Re: Retire couple Roth Conversion Help

Post by kaneohe » Wed Nov 22, 2017 11:23 am

divebums wrote:
Wed Nov 22, 2017 11:00 am
I'm assuming I'll have them start paying quarterly taxes in 2018. However, since she worked for 8 months in 2017 (retired August) and had taxes taken out do we need to pay a 4th quarter tax if we do a large conversion right now? Can you even pay just a 4th quarter tax?
Possibly.......you can use the tax calculator to determine what their tax will be with different conversions. One safe harbor is withholding 90% of the tax for this yr. If you meet this, ok. If not you might want to pay the difference in Q4. You can pay just Q4 but you're supposed to demonstrate that you paid the right amount by filling out Sch AI of F2210,not the most pleasant thing to do........basically like doing 4 tax returns. If you can do additional withholding before yr. end, that would be simpler.

divebums
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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 11:30 am

kaneohe wrote:
Wed Nov 22, 2017 11:23 am
Possibly.......you can use the tax calculator to determine what their tax will be with different conversions. One safe harbor is withholding 90% of the tax for this yr. If you meet this, ok. If not you might want to pay the difference in Q4. You can pay just Q4 but you're supposed to demonstrate that you paid the right amount by filling out Sch AI of F2210,not the most pleasant thing to do........basically like doing 4 tax returns. If you can do additional withholding before yr. end, that would be simpler.
F2210 sounds horrible. Especially since they've sold many things this year in an attempt to consolidate at Vanguard and simplify. This is going to be a messy tax year for them so i'd rather not do it 4x!

How can I do additional withholding before year end since they are both retired?

Chip
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Re: Retire couple Roth Conversion Help

Post by Chip » Wed Nov 22, 2017 11:33 am

divebums wrote:
Wed Nov 22, 2017 11:30 am
How can I do additional withholding before year end since they are both retired?
Take a distribution from one of their tIRAs and withhold the entire distribution.

kaneohe
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Re: Retire couple Roth Conversion Help

Post by kaneohe » Wed Nov 22, 2017 11:42 am

If SS can do it fast enough, you could see how much they can withhold. Have you analyzed whether it is beneficial or not to convert to top of 25% bracket? What would that RMD be taxed at if you didn't convert now? Would a 1 yr delay be a problem while you either set up w/h or pay the equal estimated tax payments.

pshonore
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Re: Retire couple Roth Conversion Help

Post by pshonore » Wed Nov 22, 2017 11:48 am

divebums wrote:
Wed Nov 22, 2017 11:30 am
kaneohe wrote:
Wed Nov 22, 2017 11:23 am
Possibly.......you can use the tax calculator to determine what their tax will be with different conversions. One safe harbor is withholding 90% of the tax for this yr. If you meet this, ok. If not you might want to pay the difference in Q4. You can pay just Q4 but you're supposed to demonstrate that you paid the right amount by filling out Sch AI of F2210,not the most pleasant thing to do........basically like doing 4 tax returns. If you can do additional withholding before yr. end, that would be simpler.
F2210 sounds horrible. Especially since they've sold many things this year in an attempt to consolidate at Vanguard and simplify. This is going to be a messy tax year for them so i'd rather not do it 4x!

How can I do additional withholding before year end since they are both retired?
Its actually its not that bad as long as you have decent records of when the income was received by month. Remember you may need to do the same for Maryland. I do it every year (make all RMDs and optional conversions in the 4th quarter)

divebums
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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 12:10 pm

Chip wrote:
Wed Nov 22, 2017 11:33 am
Take a distribution from one of their tIRAs and withhold the entire distribution.
[/quote]

That's a great idea. I didn't realize you could withhold the entire distribution. So the side effects of doing this is everything that comes along with showing more income (more tax, possible medicare premium implications, etc), right?

divebums
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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 12:28 pm

kaneohe wrote:
Wed Nov 22, 2017 11:42 am
If SS can do it fast enough, you could see how much they can withhold. Have you analyzed whether it is beneficial or not to convert to top of 25% bracket? What would that RMD be taxed at if you didn't convert now? Would a 1 yr delay be a problem while you either set up w/h or pay the equal estimated tax payments.
I'm leaning towards converting at least to the top of the 25% (likely) or possibly the 28% bracket. They've already paid roughly $8k in federal and $3k in state taxes this year through W-2s before retiring. The 25% conversion would require an additional $19k federal and $3k state taxes and the 28% conversion would require an additional $42k federal and $7k state.

If I was going to withhold an entire distribution to pay the difference in tax due to the conversion then i'd actually have to take out a bit more to cover the tax on the distribution as well. Wow, endless circle to avoid paying the underpayment penalty.

I'm not sure what you mean by the 1 year delay. I'll set up quarterly for them next year as well as having it taken out from SS.

This is another driver for me to setup yearly conversions to a set amount of tax each year. It makes their budgeting and quarterly payments much easier.

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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 12:31 pm

pshonore wrote:
Wed Nov 22, 2017 11:48 am
Its actually its not that bad as long as you have decent records of when the income was received by month. Remember you may need to do the same for Maryland. I do it every year (make all RMDs and optional conversions in the 4th quarter)
I was assuming I would have them pay quarterly taxes, take the RMD in January, convert in February, and recharacterize by Dec 31 for simplicity.

Do you not pay quarterly taxes? Why do you choose to do RMDs and conversions in 4th quarter?

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Info_Hound
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Re: Retire couple Roth Conversion Help

Post by Info_Hound » Wed Nov 22, 2017 12:53 pm

No one has mentioned the dreaded AMT, something to keep an eye on while doing a ROTH conversion as it will definitely change what you expect to pay in federal taxes.

Cited from the IRS website.
https://www.irs.gov/businesses/small-b ... ndividuals

https://taxfoundation.org/2017-tax-brackets/

The table below seems to post without the appropriate spacing that makes it easily readable, but is concise with its info.

How is the AMT calculated? The Alternative Minimum Tax exemption amount for tax year 2017 is:

Single Married, filing jointly
Exemption amount (above which you're taxed at 26%) $53,900 $83,800
Income at which exemption begins to phase out $119,700 $159,700
Income at which 28% tax rate kicks in $186,300 $186,300
Income at which exemption phases out completely $335,300 $494,400

divebums
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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 1:07 pm

Info_Hound wrote:
Wed Nov 22, 2017 12:53 pm
No one has mentioned the dreaded AMT, something to keep an eye on while doing a ROTH conversion as it will definitely change what you expect to pay in federal taxes.
Thanks Hound - The H&R tax calculator has a line item for AMT also. It looks like all the conversions i've modeled to keep them in the 25% bracket avoids the AMT. Might be yet another reason to not exceed that bracket!

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Re: Retire couple Roth Conversion Help

Post by pshonore » Wed Nov 22, 2017 1:15 pm

divebums wrote:
Wed Nov 22, 2017 12:31 pm
pshonore wrote:
Wed Nov 22, 2017 11:48 am
Its actually its not that bad as long as you have decent records of when the income was received by month. Remember you may need to do the same for Maryland. I do it every year (make all RMDs and optional conversions in the 4th quarter)
I was assuming I would have them pay quarterly taxes, take the RMD in January, convert in February, and recharacterize by Dec 31 for simplicity.

Do you not pay quarterly taxes? Why do you choose to do RMDs and conversions in 4th quarter?
I have minimal withholding (enough to cover pensions and SS) for State and Federal. That allows me to pay 130% or so of state tax in the years I itemize (5 State payments) and 60 to 70% (3 state payments) in the alternate years I don't. I make a large Fed payment in January. RMDs and conversions are probably 40% or so of income. Don't forget you have until Oct 15 of the following year to recharacterize (at least for now). Of course that will normally reduce your tax liability and mess up the calculations.

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Re: Retire couple Roth Conversion Help

Post by Chip » Wed Nov 22, 2017 3:42 pm

divebums wrote:
Wed Nov 22, 2017 12:10 pm
That's a great idea. I didn't realize you could withhold the entire distribution. So the side effects of doing this is everything that comes along with showing more income (more tax, possible medicare premium implications, etc), right?
Yes, precisely. It's something you CAN do, but probably shouldn't in your situation. It's a different story for those facing RMDs. Many here advocate taking a distribution in December to finish off their RMD and have all of their taxes withheld at that time, vs. withholding throughout the year.

I would just pay the estimated taxes and fill out F2210. You could try getting some withholding done through Social Security but that will be minimal or nothing since it's so late in the year.

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Re: Retire couple Roth Conversion Help

Post by pshonore » Wed Nov 22, 2017 3:44 pm

Chip wrote:
Wed Nov 22, 2017 3:42 pm
divebums wrote:
Wed Nov 22, 2017 12:10 pm
That's a great idea. I didn't realize you could withhold the entire distribution. So the side effects of doing this is everything that comes along with showing more income (more tax, possible medicare premium implications, etc), right?
Yes, precisely. It's something you CAN do, but probably shouldn't in your situation. It's a different story for those facing RMDs. Many here advocate taking a distribution in December to finish off their RMD and have all of their taxes withheld at that time, vs. withholding throughout the year.

I would just pay the estimated taxes and fill out F2210. You could try getting some withholding done through Social Security but that will be minimal or nothing since it's so late in the year.
Only problem with December RMDs is it doesn't leave much time for Roth conversions if applicable.

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Re: Retire couple Roth Conversion Help

Post by divebums » Wed Nov 22, 2017 5:18 pm

Chip wrote:
Wed Nov 22, 2017 3:42 pm
Yes, precisely. It's something you CAN do, but probably shouldn't in your situation. It's a different story for those facing RMDs. Many here advocate taking a distribution in December to finish off their RMD and have all of their taxes withheld at that time, vs. withholding throughout the year.

I would just pay the estimated taxes and fill out F2210. You could try getting some withholding done through Social Security but that will be minimal or nothing since it's so late in the year.
I'm confused why it would be a bad idea for us? This isn't an RMD. It would be a distribution and probably my simplest way of paying taxes on a conversion. I will look at F2210 and see how complicated it's going to be. Not to mention it's late in the year and I don't know if i'll have time to complete it and get a check into the IRS. Is the money due by 12/31?

Looks like the underpayment penalty is 4% of the underpayment balance. If I converted to the top of the 25% bracket the underpayment would be $19k. 4% is a $760 penalty. Is that how it is computed? Maybe it's easiest (not cheapest) to just pay the penalty and make sure I pay quarterly next year???

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Re: Retire couple Roth Conversion Help

Post by kaneohe » Wed Nov 22, 2017 9:59 pm

divebums wrote:
Wed Nov 22, 2017 5:18 pm
Chip wrote:
Wed Nov 22, 2017 3:42 pm
Yes, precisely. It's something you CAN do, but probably shouldn't in your situation. It's a different story for those facing RMDs. Many here advocate taking a distribution in December to finish off their RMD and have all of their taxes withheld at that time, vs. withholding throughout the year.

I would just pay the estimated taxes and fill out F2210. You could try getting some withholding done through Social Security but that will be minimal or nothing since it's so late in the year.
I'm confused why it would be a bad idea for us? This isn't an RMD. It would be a distribution and probably my simplest way of paying taxes on a conversion. I will look at F2210 and see how complicated it's going to be. Not to mention it's late in the year and I don't know if i'll have time to complete it and get a check into the IRS. Is the money due by 12/31?

Looks like the underpayment penalty is 4% of the underpayment balance. If I converted to the top of the 25% bracket the underpayment would be $19k. 4% is a $760 penalty. Is that how it is computed? Maybe it's easiest (not cheapest) to just pay the penalty and make sure I pay quarterly next year???
The check for Q4 est tax is due 1/15 of the next yr. You need to go thru F2210 Sch AI to calculate the penalty. It's probably less than you think. You have 2 factors: interest rate and amount. The other factor is time..........how long was that payment late. If it is due 1/15, the time is how late you are compared to that. If you pay 4/15 , you're 3 mos. late and you pay 1/4 of the amount you calculated.

One thing to keep in mind : in an RMD yr, you must take the RMD before you can convert. You cannot convert the RMD. That means you will be withdrawing both the RMD and the conversion amounts.

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celia
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Re: Retire couple Roth Conversion Help

Post by celia » Thu Nov 23, 2017 12:48 am

divebums wrote:
Wed Nov 22, 2017 10:43 am
celia wrote:
Tue Nov 21, 2017 8:45 pm
See if you can convert the value to a bond fund, then exchange the same value of a bond fund in a tIRA to a stock fund. Then convert!
I probably didn't explain that account very well. They created this IRA account decades ago before I started helping them consolidate to Vanguard. They pay a large death benefit rider fee (1.5% I think) so that mom will get a "high water" mark value on that account if Dad passes away. It's worth $418k now but even if the market drops 50% she'll never get less than $409k. The account had much more in it but I rolled over the largest amount possible while still retaining a high enough balance to take advantage of this death benefit. I could roll it all out now but we've kept it as a pseudo insurance incase the market drops. That's why i'm reluctant to convert from that account and reduce the balance. I haven't talked to the financial advisor about RMDs impact on the balance. Honestly, I hate that account but i'm not sure what to do about it at this point. Thoughts?
I wasn't clear either! I'm not suggesting you reduce the balance. Instead, change the holdings to be partly (all?) bonds. That will keep it at a more consistent balance.

Meanwhile, in the Vanguard IRA, you can exchange an equivalent value of bond funds to stock funds. This will keep the Asset Allocation the same, assuming that the current AA is "correct" for her situation. Then, you could start converting the stock funds. The AA will still be the same unless you withhold some of the distribution for taxes.

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Re: Retire couple Roth Conversion Help

Post by Chip » Thu Nov 23, 2017 4:01 am

divebums wrote:
Wed Nov 22, 2017 5:18 pm
I'm confused why it would be a bad idea for us? This isn't an RMD. It would be a distribution and probably my simplest way of paying taxes on a conversion. I will look at F2210 and see how complicated it's going to be. Not to mention it's late in the year and I don't know if i'll have time to complete it and get a check into the IRS. Is the money due by 12/31?
One reason I said that is that it is a bad idea for you is that you are trying to maximize your Roth conversion at a given tax cost, and pay the taxes from the taxable account. Sending a tIRA distribution to the IRS doesn't help with this goal. But the main reason is that you haven't done the conversion yet. If you do the conversion now and send in the correct estimated payment by 1/15 you will owe NO PENALTY from the conversion. That is, IF you fill out Form 2210 correctly using the annualized income installment method (Schedule AI).

You don't have to complete F2210 now. You already have estimated the amount of tax due for the entire year for your various conversion scenarios. You already know how much will be withheld by the end of the year. The difference between those numbers is the amount to send the IRS for the 4th quarter estimated tax payment. You can fill out 2210 and 2210AI when you complete their tax return.

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Re: Retire couple Roth Conversion Help

Post by divebums » Thu Nov 23, 2017 10:24 am

celia wrote:
Thu Nov 23, 2017 12:48 am
I wasn't clear either! I'm not suggesting you reduce the balance. Instead, change the holdings to be partly (all?) bonds. That will keep it at a more consistent balance.

Meanwhile, in the Vanguard IRA, you can exchange an equivalent value of bond funds to stock funds. This will keep the Asset Allocation the same, assuming that the current AA is "correct" for her situation. Then, you could start converting the stock funds. The AA will still be the same unless you withhold some of the distribution for taxes.
Ohhhh, I understand now. Thanks for that advice. Most of the funds at Transamerica had outrageous ERs. I think they had a bond fund that wasn't too bad. I'll definitely look into that.

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Re: Retire couple Roth Conversion Help

Post by divebums » Thu Nov 23, 2017 10:33 am

Chip wrote:
Thu Nov 23, 2017 4:01 am
One reason I said that is that it is a bad idea for you is that you are trying to maximize your Roth conversion at a given tax cost, and pay the taxes from the taxable account. Sending a tIRA distribution to the IRS doesn't help with this goal. But the main reason is that you haven't done the conversion yet. If you do the conversion now and send in the correct estimated payment by 1/15 you will owe NO PENALTY from the conversion. That is, IF you fill out Form 2210 correctly using the annualized income installment method (Schedule AI).

You don't have to complete F2210 now. You already have estimated the amount of tax due for the entire year for your various conversion scenarios. You already know how much will be withheld by the end of the year. The difference between those numbers is the amount to send the IRS for the 4th quarter estimated tax payment. You can fill out 2210 and 2210AI when you complete their tax return.
Thanks Chip. I misunderstood and thought I had to fill out the F2210 now to send in a 4th quarter estimate tax payment. So I just estimate what they owe using any calculator I like and send it in now as an estimated quarterly payment. I'm assuming I would do the same thing for state, right? I use turbotax to file their taxes so i'm assuming that turbotax will walk me through the F2210 when I file. Is that all correct?

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Re: Retire couple Roth Conversion Help

Post by FiveK » Thu Nov 23, 2017 11:32 am

divebums wrote:
Thu Nov 23, 2017 10:33 am
I use turbotax to file their taxes so i'm assuming that turbotax will walk me through the F2210 when I file.
Yes, although you will have to provide TT with your tax-related income and expenses for the following YTD periods:
1/1-3/31
1/1-5/31
1/1-8/31
1/1-12/31

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Re: Retire couple Roth Conversion Help

Post by Chip » Thu Nov 23, 2017 11:37 am

divebums wrote:
Thu Nov 23, 2017 10:33 am
Thanks Chip. I misunderstood and thought I had to fill out the F2210 now to send in a 4th quarter estimate tax payment. So I just estimate what they owe using any calculator I like and send it in now as an estimated quarterly payment. I'm assuming I would do the same thing for state, right? I use turbotax to file their taxes so i'm assuming that turbotax will walk me through the F2210 when I file. Is that all correct?
Normally you'd do the same thing for the state. But I don't know what state you're in - some have weird rules.

Form 2210 and Sch AI aren't difficult. I don't know how much help TT gives you. But the hard part is gathering the income and deduction information for each of the periods. TT is no help there - you're on your own.

Has anyone mentioned the safe harbor rules on estimated taxes?

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Re: Retire couple Roth Conversion Help

Post by divebums » Thu Nov 23, 2017 11:43 pm

Chip wrote:
Thu Nov 23, 2017 11:37 am
Has anyone mentioned the safe harbor rules on estimated taxes?
We're in Maryland.

What are the safe harbor rules?

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Re: Retire couple Roth Conversion Help

Post by FiveK » Fri Nov 24, 2017 12:06 am

divebums wrote:
Thu Nov 23, 2017 11:43 pm
What are the safe harbor rules?
See https://www.irs.gov/publications/p17#en ... k100032385:
In most cases, you must pay estimated tax for 2017 if both of the following apply.
* You expect to owe at least $1,000 in tax for 2017, after subtracting your withholding and refundable credits.
* You expect your withholding plus your refundable credits to be less than the smaller of:
90% of the tax to be shown on your 2017 tax return, or
100% of the tax shown on your 2016 tax return (but see Special rules for farmers, fishermen, and higher income taxpayers , later).
Thus, if either of the items above do not apply you have found a "safe harbor" and will owe no federal penalty. Maryland may have similar rules.

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Re: Retire couple Roth Conversion Help

Post by divebums » Sun Nov 26, 2017 7:50 pm

FiveK wrote:
Fri Nov 24, 2017 12:06 am
In most cases, you must pay estimated tax for 2017 if both of the following apply.
* You expect to owe at least $1,000 in tax for 2017, after subtracting your withholding and refundable credits.
* You expect your withholding plus your refundable credits to be less than the smaller of:
90% of the tax to be shown on your 2017 tax return, or
100% of the tax shown on your 2016 tax return (but see Special rules for farmers, fishermen, and higher income taxpayers , later).
Thus, if either of the items above do not apply you have found a "safe harbor" and will owe no federal penalty. Maryland may have similar rules.
Thanks FiveK - If i'm reading this correctly then I don't think I qualify for safe harbor. If we do the conversion then i'd expect to owe an additional $19k in taxes for 2017 so the first statement applies. I don't believe they will have an refundable credits and their current withholding is under $10k so the second statement applies as well. I'm assuming that means we need to pay fourth quarter taxes to avoid the penalty.

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Re: Retire couple Roth Conversion Help

Post by divebums » Sun Nov 26, 2017 8:00 pm

divebums wrote:
Thu Nov 23, 2017 10:24 am
celia wrote:
Thu Nov 23, 2017 12:48 am
I wasn't clear either! I'm not suggesting you reduce the balance. Instead, change the holdings to be partly (all?) bonds. That will keep it at a more consistent balance.

Meanwhile, in the Vanguard IRA, you can exchange an equivalent value of bond funds to stock funds. This will keep the Asset Allocation the same, assuming that the current AA is "correct" for her situation. Then, you could start converting the stock funds. The AA will still be the same unless you withhold some of the distribution for taxes.
Thanks for pushing me on this. I spoke with Transamerica to better understand the death benefit and learned a few things. This money is invested in an annuity within the tIRA. The expense ratio on the IRA + death benefit + index fund is 1.92%!! Crazy! Fortunately, because they have been in for several years there are no longer surrender fees to get out of the annuity. We're going to get out of the annuity and roll the balance to his tIRA at Vanguard and likely invest it in Total Stock Market to maintain their AA.

Couple of questions about that...
1. Are there any hidden concerns i'm not aware of in getting out of an annuity like this and rolling it to Vanguard tIRA?
2. I'm assuming this rollover will take a few weeks and I don't want to wait much longer in 2017 to do this conversion and miss the opportunity. Should I convert from the bond or TIPS fund in his Vanguard tIRA and balance out the AA with the rollover when it is complete? This rollover complicates things and I don't want to make a mistake.

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Re: Retire couple Roth Conversion Help

Post by divebums » Tue Nov 28, 2017 7:00 pm

celia wrote:
Thu Nov 23, 2017 12:48 am
I wasn't clear either! I'm not suggesting you reduce the balance. Instead, change the holdings to be partly (all?) bonds. That will keep it at a more consistent balance.

Meanwhile, in the Vanguard IRA, you can exchange an equivalent value of bond funds to stock funds. This will keep the Asset Allocation the same, assuming that the current AA is "correct" for her situation. Then, you could start converting the stock funds. The AA will still be the same unless you withhold some of the distribution for taxes.
Thanks for pushing me on this. I spoke with Transamerica to better understand the death benefit and learned a few things. This money is invested in an annuity within the tIRA. The expense ratio on the IRA + death benefit + index fund is 1.92%!! Crazy! Fortunately, because they have been in for several years there are no longer surrender fees to get out of the annuity. We're going to get out of the annuity and roll the balance to his tIRA at Vanguard and likely invest it in Total Stock Market to maintain their AA.

Couple of questions about that...
1. Are there any hidden concerns i'm not aware of in getting out of an annuity like this and rolling it to Vanguard tIRA?
2. I'm assuming this rollover will take a few weeks and I don't want to wait much longer in 2017 to do this conversion and miss the opportunity. Should I convert from the bond or TIPS fund in his Vanguard tIRA and balance out the AA with the rollover when it is complete? This rollover complicates things and I don't want to make a mistake.

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celia
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Re: Retire couple Roth Conversion Help

Post by celia » Thu Nov 30, 2017 4:14 am

divebums wrote:
Tue Nov 28, 2017 7:00 pm
Couple of questions about that...
1. Are there any hidden concerns i'm not aware of in getting out of an annuity like this and rolling it to Vanguard tIRA?
2. I'm assuming this rollover will take a few weeks and I don't want to wait much longer in 2017 to do this conversion and miss the opportunity. Should I convert from the bond or TIPS fund in his Vanguard tIRA and balance out the AA with the rollover when it is complete? This rollover complicates things and I don't want to make a mistake.
1. I don't know enough about annuities to answer.
2. You can convert anything you want this year. Then after the TransAmerica money has landed in his Rollover IRA at Vanguard, he can exchange the Roth holdings to be a stock fund. At the same time, in the Rollover IRA, change the same amount of the stock fund to bonds or TIPS. The goal is to end up with the same assets, but change their location. The conversions will be taxed, but not the exchange of assets within the IRAs. The following year, convert some of the stock fund that remains in the Rollover IRA.

Note that they should also do a custodian-to-custodian transfer of assets, without selling the assets and buying them again after they reach Vanguard. And make sure that the transfer form that you fill out at Vanguard shows the account number the assets should be put in. By not selling, they will remain invested in the market the whole time.

Chip wrote:
Wed Nov 22, 2017 3:42 pm
divebums wrote:
Wed Nov 22, 2017 12:10 pm
That's a great idea. I didn't realize you could withhold the entire distribution. So the side effects of doing this is everything that comes along with showing more income (more tax, possible medicare premium implications, etc), right?
Yes, precisely. It's something you CAN do, but probably shouldn't in your situation. It's a different story for those facing RMDs. Many here advocate taking a distribution in December to finish off their RMD and have all of their taxes withheld at that time, vs. withholding throughout the year.

I would just pay the estimated taxes and fill out F2210. You could try getting some withholding done through Social Security but that will be minimal or nothing since it's so late in the year.
Please don't withhold anything for taxes. You want to get money in the Roth NOW, not sitting at the IRS. They have until January 15 to send in a check to the IRS to cover the estimated shortfall in taxes along with the voucher found on page 9 of https://www.irs.gov/pub/irs-pdf/f1040es.pdf
Don't worry about the worksheet included in that link as you seem to know how much more they will owe. The address where it should be sent depends on their state as shown in the directions. Also send in a check and voucher for their state before January 15.

There are several "safe harbor" rules which avoid the penalty for being under-withheld. The easiest one is to have pre-paid enough taxes (through withholding and estimated tax payments) to be more than what the previous year's tax liability was. Then Form 2210 will not need to filled out. (It is a real pain!) When helping them file their taxes, there should be a question as to what the previous year taxes were or you can start the return by importing the tax forms from the previous year. The previous year carry-over will already see what their taxes were.

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celia
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Re: Retire couple Roth Conversion Help

Post by celia » Thu Nov 30, 2017 6:42 am

Let's answer the rest of your original questions.
divebums wrote:
Sun Nov 19, 2017 8:15 pm
4. Does keeping them in the 25% bracket keep their medicare costs from going up?
There are several "triggers" in the tax code that make your taxes increase unexpectedly, such as: (note that the limits shown are for 2017)

* Taxpayers who have only Social Security as their only income usually don't have to pay any taxes on it. But as other income (or conversions) is added, that makes their SS taxed, until 85% of it is taxed (line 20b)
* Alternative Minimum Tax (line 45)
* Form 8959 Medicare Tax (line 62) is an additional 0.9% tax on wages over $200k Single, $250k MFJ.
* Form 8960 Net Investment Income Tax (line 62) is an additional 3.8% tax on investment income if MAGI is over $200k Single, $250k MFJ.

* Taxpayers with MAGI over $85k (Single) or $170k (MFJ) are subject to increased monthly Medicare premiums and Plan D drug premiums two years later. The delay is due to taxes for the current year being due in the following April or October, and Medicare doesn't find out until then who is subject to (or no longer subject to) the surcharges. See Medicare Premiums: Rules For Higher-Income Beneficiaries. This is not collected on Form 1040.

* Loss of ACA subsidy when over 400% of the poverty level. This coordinates with the premiums you paid throughout the year for health care on the exchanges and the shortfalls or over-payments are accounted for on Form 1040 for that year.

5. I’ve read we need to take the RMDs prior to doing a conversion in a given year. 2019 will be the first year he has RMDs. Should I take them as a lump in January and then start a horse race for the remainder of the year? Since he’s only got bonds and tips to convert is it even worth a horse race? I’m trying to keep this as simple as possible and will likely recharacterize prior to year end so I don’t have to file an extension.
If you still have stock funds after taking the RMD, you should continue to convert them. In addition, at the same time, you can also convert the same amount of bonds or TIPS. Before year-end you would need to decide which one to keep (one with the higher value) and recharacterize the other one. [If the stock market was down at the end of the year, you would likely keep the bonds/TIPS.] This is a "horse race".
6. Since Mom retired this year she’s had payroll taxes taken out thru August and Dad has them taken out of his SS every month. If they do a $69k conversion in December do they need to pay 4th quarter estimated taxes somehow so they don’t pay a penalty?
Yes. Mail them in by January 15. There likely won’t be a penalty if the amount withheld plus the estimated taxes sent in are more than last year’s tax liability.
7. Should I have them start paying quarterly taxes next year assuming the annual conversion amount in mind?
Yes, unless enough can be withheld from monthly SS benefit or something else.

divebums
Posts: 74
Joined: Tue Jan 08, 2008 8:06 am

Re: Retire couple Roth Conversion Help

Post by divebums » Sun Dec 03, 2017 8:23 pm

celia wrote:
Thu Nov 30, 2017 6:42 am
Let's answer the rest of your original questions.
Thank you Celia so much for all your help! Your advice makes our decision much more clear. I will follow this up in a few months once the rollovers, conversions, and taxes are complete (unless I have more questions before then).

Thank you to everyone else as well for all your help and advice! This forum is the first place I've come to for many years for good advice.

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