Roth conversions to shrink RMDs

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
ccf
Posts: 106
Joined: Mon Mar 09, 2015 9:13 pm

Roth conversions to shrink RMDs

Post by ccf » Mon Feb 19, 2018 5:29 am

My mother in law is 67 and she has a high 6 figure IRA that she does not expect to need any time soon because of a pension and SS.

She is in very good health and longevity runs in the family so she may very well need it in 15 or 20 years.

With the new tax brackets, she is barely in the $82k-$153k 24% bracket and will remain there for as long as it exists.

Would it make sense for her to start Roth converting amounts that would take her to the top of the Roth MAGI limits?

She'd be able to convert about $200k before RMDs start.

rkhusky
Posts: 5230
Joined: Thu Aug 18, 2011 8:09 pm

Re: Roth conversions to shrink RMDs

Post by rkhusky » Mon Feb 19, 2018 6:54 am

If she has $1M, then the first year RMD would add $36.5K to her income (divide account balance by 27.4). Would that amount bump her up into the next tax bracket? I suspect not if she is at the bottom of the 24% bracket. Removing $200K would reduce the RMD by $7.3K. Would that make a difference?

There is no income limit on Roth conversions.

carolinaman
Posts: 3065
Joined: Wed Dec 28, 2011 9:56 am
Location: North Carolina

Re: Roth conversions to shrink RMDs

Post by carolinaman » Mon Feb 19, 2018 7:01 am

She needs to consider what her modified adjusted gross income (MAGI) will be. If she exceeds $170k MAGI, Medicare Part B charges a premium. It still may be worth it, but she needs to figure out what the impact of the premium would be. An alternative, which I have used, is to take a Roth conversion that stops just short of $170k MAGI.

mbres60
Posts: 839
Joined: Tue Jul 03, 2007 1:47 pm

Re: Roth conversions to shrink RMDs

Post by mbres60 » Mon Feb 19, 2018 7:06 am

carolinaman wrote:
Mon Feb 19, 2018 7:01 am
She needs to consider what her modified adjusted gross income (MAGI) will be. If she exceeds $170k MAGI, Medicare Part B charges a premium. It still may be worth it, but she needs to figure out what the impact of the premium would be. An alternative, which I have used, is to take a Roth conversion that stops just short of $170k MAGI.
That $170k is for a married couple. Single is $85,000/year.

The Wizard
Posts: 11909
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Roth conversions to shrink RMDs

Post by The Wizard » Mon Feb 19, 2018 7:10 am

carolinaman wrote:
Mon Feb 19, 2018 7:01 am
She needs to consider what her modified adjusted gross income (MAGI) will be. If she exceeds $170k MAGI, Medicare Part B charges a premium. It still may be worth it, but she needs to figure out what the impact of the premium would be. An alternative, which I have used, is to take a Roth conversion that stops just short of $170k MAGI.
$170k is the MAGI IRMAA threshold for married couples.
It's $85k for singles.
Have the MIL levelize her annual MAGI each year from now through early 70s.
Nothing wrong with having say $130k Income as a single person each year for the next decade, but you don't want it bouncing unnecessarily high into IRMAA-land for no good reason...
Attempted new signature...

ccf
Posts: 106
Joined: Mon Mar 09, 2015 9:13 pm

Re: Roth conversions to shrink RMDs

Post by ccf » Mon Feb 19, 2018 7:14 am

rkhusky wrote:
Mon Feb 19, 2018 6:54 am
There is no income limit on Roth conversions.
Oh right. Of course, thus the whole backdoor option for non retired people :) so it could make sense to convert up to the Medicare limit (thank you carolinaman)

My thinking was: she is earning about $83k, the majority of which is from an inflation adjusted pension, and with RMDs looming it seems very very unlikely that she'll ever be in a tax bracket that is lower than 24%.

Since she feels pretty strongly about conserving her money and doesn't desire to spend it down, it seemed worthwhile to tuck as much into a Roth as possible?

ccf
Posts: 106
Joined: Mon Mar 09, 2015 9:13 pm

Re: Roth conversions to shrink RMDs

Post by ccf » Mon Feb 19, 2018 7:25 am

The Wizard wrote:
Mon Feb 19, 2018 7:10 am
It's $85k for singles.
Hm.. ok I looked up the premiums:

$85,000 - $107,000: +$642/year
$107,000 - $133,500: +1596 year
$133,500 - $160,000: +$4180/year

So converting $200,000 (4 years until RMD, $50k per year to stay under the $133,500) would be her tax rate of 24% plus 3.2% in premium increases.

That might be worth it to her. Doing anything more does not seem to make sense.

livesoft
Posts: 61418
Joined: Thu Mar 01, 2007 8:00 pm

Re: Roth conversions to shrink RMDs

Post by livesoft » Mon Feb 19, 2018 7:29 am

Does she have money to pay the taxes on the conversion(s) from non-IRA sources?
Wiki This signature message sponsored by sscritic: Learn to fish.

ccf
Posts: 106
Joined: Mon Mar 09, 2015 9:13 pm

Re: Roth conversions to shrink RMDs

Post by ccf » Mon Feb 19, 2018 7:30 am

livesoft wrote:
Mon Feb 19, 2018 7:29 am
Does she have money to pay the taxes on the conversion(s) from non-IRA sources?
Not in cash but she has a $100k taxable account.
Last edited by ccf on Mon Feb 19, 2018 7:33 am, edited 1 time in total.

The Wizard
Posts: 11909
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Roth conversions to shrink RMDs

Post by The Wizard » Mon Feb 19, 2018 7:33 am

ccf wrote:
Mon Feb 19, 2018 7:25 am
The Wizard wrote:
Mon Feb 19, 2018 7:10 am
It's $85k for singles.
Hm.. ok I looked up the premiums:

$85,000 - $107,000: +$642/year
$107,000 - $133,500: +1596 year
$133,500 - $160,000: +$4180/year

So converting $200,000 (4 years until RMD, $50k per year to stay under the $133,500) would be her tax rate of 24% plus 3.2% in premium increases.
Right. I'm in one of those higher IRMAA tiers myself.
So it comes down to planning your Roth conversions prior to age 70 to get your MAGI close to what it will be after age 70.
Use a spreadsheet..
Attempted new signature...

pshonore
Posts: 6383
Joined: Sun Jun 28, 2009 2:21 pm

Re: Roth conversions to shrink RMDs

Post by pshonore » Mon Feb 19, 2018 8:12 am

ccf wrote:
Mon Feb 19, 2018 7:25 am
The Wizard wrote:
Mon Feb 19, 2018 7:10 am
It's $85k for singles.
Hm.. ok I looked up the premiums:

$85,000 - $107,000: +$642/year
$107,000 - $133,500: +1596 year
$133,500 - $160,000: +$4180/year

So converting $200,000 (4 years until RMD, $50k per year to stay under the $133,500) would be her tax rate of 24% plus 3.2% in premium increases.

That might be worth it to her. Doing anything more does not seem to make sense.
Think your numbers are slightly off for 2018. There is also a surcharge for Part D (an additional ~25% of the part B surcharge.)
Here's a link to the Kitces article on the subject:
https://www.kitces.com/blog/irmaa-medic ... hresholds/

gsmith
Posts: 198
Joined: Sun Mar 21, 2010 1:02 am

Re: Roth conversions to shrink RMDs

Post by gsmith » Mon Feb 19, 2018 9:20 am

There's also a five year rule that taxes roth conversions, even if the original owner passes away before satisfying the time period.
I believe it only covers earnings, but it wasn't clear to me in my research.

Kistler26
Posts: 2
Joined: Sun Feb 18, 2018 9:46 pm

Re: Roth conversions to shrink RMDs

Post by Kistler26 » Mon Feb 19, 2018 9:42 am

I am new member yesterday feb 18-2018. What a site! I'll be on 24/7 Question is about Shrinking my RMD. I am currently single and 87 and good health. In 2005, my Roth was 13k and trad IRA was 160k. I,ve been slowly converting to Roth ever since. Now Roth is 218k and trad is 45 k.....Roth is in Vanguard Wellington and Wellesley about 50-50 which makes me very high % in equities for my age. My AGI runs about 45k to 50 k, and I try to keep it under 50k so that I don't lose my V.A. health insurance( they run a means test every few years). Should I continue to slowly convert? My CPA,in his generlal year end letter, says there are disadvantages to converting to a Roth, but he doesn't elaborate.

User avatar
Epsilon Delta
Posts: 7423
Joined: Thu Apr 28, 2011 7:00 pm

Re: Roth conversions to shrink RMDs

Post by Epsilon Delta » Mon Feb 19, 2018 10:02 am

gsmith wrote:
Mon Feb 19, 2018 9:20 am
There's also a five year rule that taxes roth conversions, even if the original owner passes away before satisfying the time period.
I believe it only covers earnings, but it wasn't clear to me in my research.
There are two different five year rules.

Since the person referred to by the OP is over 59.5 only one of them matters.
In this case what matters is when her first Roth IRA was established. If it was more than 5 years ago then any withdrawal is tax and penalty free. If a conversion is the first Roth for her then she or her heirs can withdraw the amount of the conversion at any time tax and penalty free, but if they withdraw more than that within 5 years it will earnings and will be taxed.

In practice this does not present much difficulty for either the Roth owner or the heir. Even with a heirs RMD it's easy to avoid taxes unless the Roth grows beyond even unreasonable expectations (which would be a good problem to have).

rkhusky
Posts: 5230
Joined: Thu Aug 18, 2011 8:09 pm

Re: Roth conversions to shrink RMDs

Post by rkhusky » Mon Feb 19, 2018 11:47 am

If she pays the taxes out of the tIRA and stays in the same tax bracket, tIRA and Roth results will be exactly the same. If she pays taxes out of a taxable account, doing the Roth conversion has a slight advantage, although cap gain taxes would eliminate some of the advantage. What with the IRMAA issue, you might have to run different scenarios through your tax software.
Last edited by rkhusky on Mon Feb 19, 2018 11:58 am, edited 1 time in total.

User avatar
House Blend
Posts: 4425
Joined: Fri May 04, 2007 1:02 pm

Re: Roth conversions to shrink RMDs

Post by House Blend » Mon Feb 19, 2018 11:55 am

Things to check/think about:

1. IRMAA thresholds (already mentioned). Those get bumped up at $85K, $107K, $133.5K, and $160K Single MAGI. The levels do not get inflation adjusted unless congress passes a new law. (But the premium bumps are subject to annual changes.)

Might want to do some conversions now if doing so could make it possible to keep her MAGI permanently below $107K, for example.

2. The SS tax hump. Sounds like she will safely stay above that, meaning that 100% of her SS benefit is 85% taxable. Inside the hump, your marginal tax rate will be higher than what the tax tables would suggest.
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

3. State taxes.

4. QCDs. Once she reaches age 70.5, she can donate all or part of her RMD to charity. It won't count as part of her AGI, so is better than a Schedule A deduction. If charitable giving is important to her, it is possible that she won't actually have a tax "problem" caused by large RMDs.
https://www.bogleheads.org/wiki/Qualifi ... tributions

5. A substantial taxable account, with annual tax leakage from dividends or interest or other distributions. She may not have a taxable account now, but if she doesn't spend her RMDs and doesn't do the QCD thing, she eventually will. This and #1 are perhaps the only arguments in favor of a Roth conversion when the future marginal rate and current marginal rate are exactly the same.

6. Beneficiaries. Certainly you don't want to Roth convert money destined for charity, but perhaps she wants to prepay income tax on money destined for her grandchildren.

Post Reply