Mother's 401k - End stage COPD- Roth Conversions

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coachd50
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Mother's 401k - End stage COPD- Roth Conversions

Post by coachd50 »

Hello Board. Thank you for being such a wealth of information. I have a question here I am hoping I can get some ideas from the group.

My mother's story is nearing the end, and she has a small either 401k or Traditional IRA (not sure if it was converted into a Traditional IRA yet). Probably a value of between $30,000-$60,000 or so. Lives in Louisiana (as do 3 of the heirs) She has already stated she simply wants it divided equally between her 4 children. In talking with my brother he mentioned that it may be smart to convert it to a Roth IRA so that the taxes paid on it would be at her tax rate (minimal retirement income) as oppose to her childrens who are all probably higher.

I know this isn't a tremendous amount of detail - somewhat hard to focus at the moment- but just was looking for any insight here.

Thank you
retiredjg
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by retiredjg »

Not enough information....I think the idea is right in one way, but I would not do it.

1. If this is the only money she has and if she ends up with high enough medical bills, she may need the money and some of it could be tax-deductible as a medical expense. Any part that is tax deductible would never be taxed. Be a shame to pay taxes that don't need to be paid.

2. If she is low income, this conversion will make her SS taxable. It may not be taxable now. (We don't know.)

3. Her final tax return is going to end up on someone's shoulders. This just adds complexity and I don't see much of a benefit.

4. I would suggest that $30k to $60k split up 4 ways is not going to be enough to be a burden on any of the heirs as to cause a tax problem, especially if spread out over the allowed 10 years.

5. In my experience, this is a time to strive for simplicity, not more stuff to deal with.


The one really beneficial thing that can be done now is see if she has named beneficiaries on the account and make sure what she wants is what is listed there. This will prevent problems later and also means that account would not be subject to probate. Just stating she wants it equally divided does not mean that is what will happen.
lakpr
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by lakpr »

Assuming her income is less than $25k for the year 2020, I do agree that Roth conversions makes sense. $25k or less 'income' + Roth conversion amount of $30k would put her income just about $55k. Of the $60k you said she has in the 401k, converting half now and half next year should keep at or very near the 12% bracket ceiling, and can save a lot in taxes for the heirs.
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celia
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by celia »

It sounds like you don't even know the account value and if it is a tIRA or 401K. It's hard for you to know what to do if you don't even know what she has. Unless you can see a recent account statement and a tax return, you can't make an informed decision. And if your mother has a trustee, that person should be helping her make the decision.

On the other hand, your brother is on the right track in that her tax bracket is likely lower than her children's so it would make tax sense for her to convert it now. If the children are in different tax brackets (not all the same), they will end up with different spendable amounts after they pay taxes on their Inherited IRA. So if your mom is adamant that they all get the same spendable amount (instead of tax-deferred amount), then it should be converted.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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celia
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by celia »

lakpr wrote: Mon Oct 19, 2020 2:30 pm Assuming her income is less than $25k for the year 2020, I do agree that Roth conversions makes sense. $25k or less 'income' + Roth conversion amount of $30k would put her income just about $55k. Of the $60k you said she has in the 401k, converting half now and half next year should keep at or very near the 12% bracket ceiling, and can save a lot in taxes for the heirs.
Although this makes tax sense, you could end up where she dies after the first "half" conversion. Then there will be 2 IRAs, traditional and Roth, leading to 8 accounts after everything is divided up. This likely too complicated for the given tax benefit. But if they do the "half" conversion in mid-December and the other in early January, this risk can be minimized. But if a 401K is involved, that throws an unknown time element into the mix.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
earlyout
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by earlyout »

A possible scenario here that could result in a very unhappy sibling occurs if a sibling has the same or lower income tax rate than the mother. If the Roth conversion is made, that sibling may end up subsidizing his wealthier siblings. You need to look at the net result to each of the beneficiaries.
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coachd50
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by coachd50 »

Thank you so much for the insight. A bit more info
As of 9/30/2020
Traditional IRA $30,500
Roth IRA $34,900

Fed Tax married filing jointly
Last years AGI 12,200
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neurosphere
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by neurosphere »

coachd50 wrote: Wed Oct 21, 2020 2:07 pm Fed Tax married filing jointly
Last years AGI 12,200
So there is a spouse, and she intends the IRAs to pass to her children when she passes?
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by Gill »

neurosphere wrote: Wed Oct 21, 2020 2:12 pm
coachd50 wrote: Wed Oct 21, 2020 2:07 pm Fed Tax married filing jointly
Last years AGI 12,200
So there is a spouse, and she intends the IRAs to pass to her children when she passes?
Not necessarily. The spouse could have predeceased her and she is still entitled to file MFJ.
Gill
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neurosphere
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by neurosphere »

Gill wrote: Wed Oct 21, 2020 2:35 pm
neurosphere wrote: Wed Oct 21, 2020 2:12 pm
coachd50 wrote: Wed Oct 21, 2020 2:07 pm Fed Tax married filing jointly
Last years AGI 12,200
So there is a spouse, and she intends the IRAs to pass to her children when she passes?
Not necessarily. The spouse could have predeceased her and she is still entitled to file MFJ.
Gill
Understood. :D But it could also be that spouse is still alive. Although the OP does indeed read as if there is no spouse, or at least it's implied, but not explicitly stated. :wink: But was MFJ for 2019? Or the expected filing status for 2020? Does expected SS income change 2020 vs 2021 if there was a death during 2020?

And also, this is important for those who suggested possibly splitting the conversions over two tax years. Because filing status may change for 2020 to something other than MFJ and would affect tax calculations/assumptions.
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".
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coachd50
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by coachd50 »

neurosphere wrote: Wed Oct 21, 2020 2:55 pm
Gill wrote: Wed Oct 21, 2020 2:35 pm
neurosphere wrote: Wed Oct 21, 2020 2:12 pm
coachd50 wrote: Wed Oct 21, 2020 2:07 pm Fed Tax married filing jointly
Last years AGI 12,200
So there is a spouse, and she intends the IRAs to pass to her children when she passes?
Not necessarily. The spouse could have predeceased her and she is still entitled to file MFJ.
Gill
Understood. :D But it could also be that spouse is still alive. Although the OP does indeed read as if there is no spouse, or at least it's implied, but not explicitly stated. :wink: But was MFJ for 2019? Or the expected filing status for 2020? Does expected SS income change 2020 vs 2021 if there was a death during 2020?

And also, this is important for those who suggested possibly splitting the conversions over two tax years. Because filing status may change for 2020 to something other than MFJ and would affect tax calculations/assumptions.
I am sorry for the confusion. Yes Dad/spouse still alive, but she wishes to give to children.
I apologize for such scatter shot info. Haven't dealt with death (or impending death)this closely before. Very ignorant about the legal matters and such. Please keep in mind that in Louisiana apparently things are different than the other 49 states when it comes to succession
retiredjg
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by retiredjg »

coachd50 wrote: Wed Oct 21, 2020 2:07 pm Fed Tax married filing jointly
Last years AGI 12,200
It seems that you are saying that the two of them brought in a total of $12,200 income last year, including SS if either gets SS.

Do they have SS? If yes, doing a Roth conversion may increase your parents' tax on the SS.

Again, paying lower taxes on $30k rather than have the heirs pay taxes on $7.5k each seems like worrying about something that is not very important at this time (to me). This is not uncommon in times of stress. It is something to be aware of and watch for.
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by 123 »

coachd50 wrote: Wed Oct 21, 2020 4:26 pm Please keep in mind that in Louisiana apparently things are different than the other 49 states when it comes to succession
It is often best to establish beneficiaries on accounts to expediate settlement and avoid having to run assets through probate proceedings. Usually it's a simple matter of filing out a form, signing it, and returning it. Beneficiary designations can bypass issues and complexities introduced by state laws.
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retiredjg
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by retiredjg »

coachd50 wrote: Wed Oct 21, 2020 4:26 pm Very ignorant about the legal matters and such. Please keep in mind that in Louisiana apparently things are different than the other 49 states when it comes to succession
I suspect that the way an IRA is distributed will depend (even in LA) on whether she has designated any beneficiaries. The money will be distributed to the beneficiary(s) with no court intervention. If she did not designate a beneficiary, it will go through court and I assume (don't know for sure) that state law will apply.

If she has designated someone else (her husband) and he wishes to split it among the kids because of her wishes, that's fine but I don't believe he has to.
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coachd50
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by coachd50 »

Hello all. Thank you so much for all of the input. After reviewing 2019 taxes, the AGI was about 12,200 Standard deduction was 27,000 resulting in a tax liability of zero.


Am I correct in thinking I could probably safely convert say $8,000-$10,000 from the IRA to the ROTH IRA and they would pay no taxes on this correct? Then upon passing the heirs would have the tax benefits on $2,000-$2500 (around $400-$800 each roughly?)
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celia
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by celia »

You could run the numbers through 2019 tax software to confirm, but I suspect the whole amount could be converted tax-free.

As far as the beneficiaries, does her spouse/your dad(???) have other income-producing assets? If not, I think he will need the IRA much more than the kids. Or do the 4 of you plan to support him for the rest of his life?

I don't know anything about LA taxes and inheritance but, in most of the country, the spouse is entitled to be first beneficiary on retirement accounts, if the contributions to the retirement account were withheld from joint assets (wages) while your mom was working.
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coachd50
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by coachd50 »

celia wrote: Tue Oct 27, 2020 2:19 pm You could run the numbers through 2019 tax software to confirm, but I suspect the whole amount could be converted tax-free.

As far as the beneficiaries, does her spouse/your dad(???) have other income-producing assets? If not, I think he will need the IRA much more than the kids. Or do the 4 of you plan to support him for the rest of his life?

I don't know anything about LA taxes and inheritance but, in most of the country, the spouse is entitled to be first beneficiary on retirement accounts, if the contributions to the retirement account were withheld from joint assets (wages) while your mom was working.
Father will be ok financially. He was "fire" before it was cool and popular LOL. Based on my back of the envelope calculations, converting the entire 30,000 to ROTH would result in a tax liability that my father would pay the following year. Wanted to avoid that. 2019 numbers showed an AGI of 12,200 and a standard deduction of 27,000 resulting in 0 taxable income.
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coachd50
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by coachd50 »

celia wrote: Tue Oct 27, 2020 2:19 pm You could run the numbers through 2019 tax software to confirm, but I suspect the whole amount could be converted tax-free.

As far as the beneficiaries, does her spouse/your dad(???) have other income-producing assets? If not, I think he will need the IRA much more than the kids. Or do the 4 of you plan to support him for the rest of his life?

I don't know anything about LA taxes and inheritance but, in most of the country, the spouse is entitled to be first beneficiary on retirement accounts, if the contributions to the retirement account were withheld from joint assets (wages) while your mom was working.
Father will be ok financially. He was "fire" before it was cool and popular LOL. Based on my back of the envelope calculations, converting the entire 30,000 to ROTH would result in a tax liability that my father would pay the following year. Wanted to avoid that. 2019 numbers showed an AGI of 12,200 and a standard deduction of 27,000 resulting in 0 taxable income.
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by retiredjg »

If that AGI of $12,200 was from SS, you need to see if your proposed conversion will make any of the SS taxable. A small conversion probably won't, but you should see.
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coachd50
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by coachd50 »

retiredjg wrote: Tue Oct 27, 2020 3:35 pm If that AGI of $12,200 was from SS, you need to see if your proposed conversion will make any of the SS taxable. A small conversion probably won't, but you should see.
Isn't that what I was doing when comparing the 12,200 AGI to the standard deduction?
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celia
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Re: Mother's 401k - End stage COPD- Roth Conversions

Post by celia »

coachd50 wrote: Tue Oct 27, 2020 5:59 pm
retiredjg wrote: Tue Oct 27, 2020 3:35 pm If that AGI of $12,200 was from SS, you need to see if your proposed conversion will make any of the SS taxable. A small conversion probably won't, but you should see.
Isn't that what I was doing when comparing the 12,200 AGI to the standard deduction?
No. SS is not taxable if your other income is low. But as your other income increases, some of the SS is taxed as regular income until 85% of it is taxed. The recent addition in this thread to account for her spouse still living and that her spouse FIREd throws any calculations we might assume, out the window. So it is best to ask him what he thinks, since he apparently also has other taxable assets. Maybe he had a capital loss last year which brought down their AGI, but maybe that won't apply this year. So I don't think we have enough info to help on the tax issue.

So, now your dad may still be financially independent which is a completely different picture than you originally presented. It is even possible that any Roth conversion your mom does will be taxed at a higher tax bracket than what you or your siblings are in.

But since we are talking about Roth conversions anyway, if your dad hasn't yet started RMDs (now required at 72) and has a lot in tax-deferred accounts, maybe he should be doing Roth conversions on his own account. If he hasn't yet calculated what his tax bracket will be when he is 72 and taking SS and RMDs (and Single), he should do that ASAP. If he is "shocked", Roth conversions before that point is a way to level out his tax bracket for the rest of his life. Many of us find that once we retire, it is better to have level taxes for the rest of our lives rather than a few years of low taxes (which he may now be enjoying) followed by huge taxes once RMDs begin, that will continue for the rest of one's life. In addition, once he is widowed, he will have to start filing as Single. The space in each tax bracket for Singles is half as much as for MFJ. Your dad's window for filing MFJ will be closing soon.
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