Fund Roth or convert TIRA? Or do both?

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eldinerocheapo
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Fund Roth or convert TIRA? Or do both?

Post by eldinerocheapo » Thu May 28, 2020 9:14 am

Hi, I'm retired while my wife still works, primarily for health benefits until she turns 65. (She's 60 now, I'm 62). No SS yet, and we've funded our Roth IRAs to the $7k max for several years now. Would you keep funding at this $14k annual level, or use some of the funds to help convert a TIRA to a Roth IRA to help mitigate a $1.6 million balance subject to RMD's 10 years from now? Since we'd like to remain in the 12% tax bracket which is somewhere around $80k, I figure we could take our annual income of $62k and offset the upper end of the bracket to convert funds. As an example...

$80k plus $24.4 (marital standard deduction) comes to around $104k less the original $62k of income to allow for a conversion of $42k annually which comes to $5040 in estimated taxes. This leaves us with around $9k to fund our Roth IRA's with, split evenly.

Does this sound logical, or have I missed anything? Anyone tried and succeeded with something different? Thanks.
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livesoft
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Re: Fund Roth or convert TIRA? Or do both?

Post by livesoft » Thu May 28, 2020 9:25 am

We do both.

We use tax-prep software to get right up to the top of the 0% LTCG/qualified dividend tax point which I think is a $200 difference with the 12% marginal income tax bracket (though maybe the government fixed that).

Although my spouse has done a small "safe amount" Roth conversion back in March 2020, we will revisit in December 2020 after all our other income is known to finish off the Roth conversion. We have already contributed the max to our Roth accounts in late March 2020.

Be aware that going over can bump one up to a higher margin income tax bracket than one might think:
viewtopic.php?p=4919005#p4919005

I suppose if you have no taxable account investments (including no interest from savings accounts and CDs) and no tax credits, then your tax calculations may be easier than ours. Potential loss of tax credits turned out to be big deal for us and we had to avoid losing them.
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Chip
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Re: Fund Roth or convert TIRA? Or do both?

Post by Chip » Thu May 28, 2020 9:39 am

Roth conversions must be completed by the end of the calendar year. But you can make IRA contributions up until the filing deadline (normally 4/15). You can use this to help with income & tax planning.

What I would do is complete Roth conversions to what I believe is slightly over the top of the bracket, then use contributions to a traditional IRA in 2021 to lower my income to hit the bracket exactly. You can contribute to both a Roth and a traditional IRA as long as the total of those contributions doesn't exceed the 7k limit per person.

I saw that in your example you weren't planning to fully fund the IRA contributions. Do you have money in taxable accounts that you could spend down to allow you to do this?

RetiredAL
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Re: Fund Roth or convert TIRA? Or do both?

Post by RetiredAL » Thu May 28, 2020 9:53 am

I did both for 3 years when I retired. The regular contributions stopped when my Dad took ill and
I had to look after him, so no time to occasionally work consulting for my former employer. The conversions continued.

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Watty
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Re: Fund Roth or convert TIRA? Or do both?

Post by Watty » Thu May 28, 2020 9:59 am

eldinerocheapo wrote:
Thu May 28, 2020 9:14 am
or have I missed anything?
You also need to look at your numbers and tax rates three ways, as a couple and as if one of you survives the other. A survivor will be filing tax returns in the higher single tax brackets.

You should check this web site to see what it suggests about when you should start Social Security.

https://opensocialsecurity.com/

It varies wildly with the ages, income, and genders but often it will suggest that one spouse start at 62 and that the other wait until they are near 70.

You also have to understand how Social Security is taxed since it is complex. That makes estimating your future tax brackets a lot more complex.

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

If you are going to do Roth conversions I would wait until December to do those when your 2020 numbers are more firm. Since you have ample funds doing Roth conversions up to the top of the 12% federal tax bracket each December would be an easy choice.

The 12% tax bracket is scheduled to revert to 15% in 2026. The 22% tax bracket will go back to 25% then. Between the way Social Security is taxed and the tax rates that a single survivor would pay doing Roth conversions up to the top of the 22% federal tax bracket is worth considering.
Fund Roth or convert TIRA? Or do both?
A third option would be for your wife to fund her deductible 401k and and IRA and for you to do Roth conversions in your IRA account. Since she two years younger than you that would mean that she would not need to start her RMDs for two extra years. You could also do more Roth conversion in a low tax bracket.
eldinerocheapo wrote:
Thu May 28, 2020 9:14 am
still works, primarily for health benefits until she turns 65.
With most(but not all) companies she can use COBRA for 18 months(36 in a few states). She may be able to retire at 63.5 and use COBRA until she is 65. If she retired earlier then you could do more Roth conversions before the RMDs starts.

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