Which Roth to Rollover, His or Hers?

[SurferLife]

We recently retired early and have the opportunity to do a 20k Roth conversion for 2024. My wife and I both have traditional balances, with hers being about 30k and mine being about 700k. I am 9 years older than her, so I had thought that maybe it'd be better to convert hers so it grows longer and also it'd just be nice to close out her traditional IRA sooner to have less accounts. We will probably need to pull from our Roth contributions since we are early retirees, so there's that too. What are the other things that I should be looking at when deciding this, or does it even matter?

[retired@50]

We recently retired early and have the opportunity to do a 20k Roth conversion for 2024. My wife and I both have traditional balances, with hers being about 30k and mine being about 700k. I am 9 years older than her, so I had thought that maybe it'd be better to convert hers so it grows longer and also it'd just be nice to close out her traditional IRA sooner to have less accounts. We will probably need to pull from our Roth contributions since we are early retirees, so there's that too. What are the other things that I should be looking at when deciding this, or does it even matter?

Generally speaking, I would imagine you'd work on a Roth conversion for the older person, assuming part of your goal is to reduce the IRA balance before RMDs begin. Or have you already started with RMDs?

Will partial IRA to Roth conversions be an annual event, or is this a one time thing?

Regards,

[SurferLife]

We recently retired early and have the opportunity to do a 20k Roth conversion for 2024. My wife and I both have traditional balances, with hers being about 30k and mine being about 700k. I am 9 years older than her, so I had thought that maybe it'd be better to convert hers so it grows longer and also it'd just be nice to close out her traditional IRA sooner to have less accounts. We will probably need to pull from our Roth contributions since we are early retirees, so there's that too. What are the other things that I should be looking at when deciding this, or does it even matter?

Generally speaking, I would imagine you'd work on a Roth conversion for the older person, assuming part of your goal is to reduce the IRA balance before RMDs begin. Or have you already started with RMDs?

Will partial IRA to Roth conversions be an annual event, or is this a one time thing?

Regards,

We won't start RMDs for 17 more years. I had planned to do Roth conversions each year, but we decided to start a farm business so we have started to earn some small income, so maybe we will do conversions some years and not others, but the idea is to do conversions when we can.

[retired@50]

We won't start RMDs for 17 more years. I had planned to do Roth conversions each year, but we decided to start a farm business so we have started to earn some small income, so maybe we will do conversions some years and not others, but the idea is to do conversions when we can.

Given the long runway in front of you (17 years) before RMDs begin, you can convert either one, as there should be plenty of time to convert as much as you'd like.

Regards,

[SurferLife]

We won't start RMDs for 17 more years. I had planned to do Roth conversions each year, but we decided to start a farm business so we have started to earn some small income, so maybe we will do conversions some years and not others, but the idea is to do conversions when we can.

Given the long runway in front of you (17 years) before RMDs begin, you can convert either one, as there should be plenty of time to convert as much as you'd like.

Regards,

We have other income and pensions so we will never be able to convert all our traditional before RMDs.

[retired@50]

We won't start RMDs for 17 more years. I had planned to do Roth conversions each year, but we decided to start a farm business so we have started to earn some small income, so maybe we will do conversions some years and not others, but the idea is to do conversions when we can.

Given the long runway in front of you (17 years) before RMDs begin, you can convert either one, as there should be plenty of time to convert as much as you'd like.

Regards,

We have other income and pensions so we will never be able to convert all our traditional before RMDs.

I wouldn't have suspected you'd want to convert all of them. Usually, for a married couple, anywhere under $500k typically doesn't pose a problem. In some cases, married couples are just happy to be under $1 million.

There are good reasons to keep some money in a tax-deferred account... Charitable giving and late-in-life deductible medical costs are two possible reasons why you would want to retain a Trad. IRA balance.

Regards,

[Uniballer]

My state offers a 20K tax exemption for pension or tIRA income per person over 59.5. So there is a benefit to ensuring we both have some tIRA balance to make it possible to get the full benefit of this exemption in some future tax year, and this affects our conversion strategy.

[shess]

I am 9 years older than her, so I had thought that maybe it'd be better to convert hers so it grows longer and also it'd just be nice to close out her traditional IRA sooner to have less accounts.

I initially was thinking in this direction. Over time I realized that in some cases, having traditional IRAs can be useful. For instance, if we both have tIRA accounts, we can do QCDs from both accounts. I haven't sat down and fully quantified this, but I think that in your situation, I'd probably argue that her tIRA is worth holding.

That said ... if you rolled her entire account over just to get rid of an account, I'd have troubles arguing with that.

The fact that you'll hit RMDs earlier might argue for doing rollovers against your account first. On the other hand, $30k of rollovers on your $700k account aren't going to really move the needle a lot.

Hmm. I'd also consider the timing of when you can start withdrawing without penalties. Before that point, your taxes won't care which account you rollover. After that point, there's not as much advantage to doing rollovers rather than just pulling the funds out as distributions. I tried to gear my rollover plan to even things out between now and when we hit RMDs, where before 59.5years it's conversions, and after it will be distributions, then we'll hit RMDs. But we have a significant chunk of very-low-basis stock in taxable, so I am more inclined towards drawing down tIRA directly and hopefully getting a basis step-up on the taxable.

[SurferLife]

We won't start RMDs for 17 more years. I had planned to do Roth conversions each year, but we decided to start a farm business so we have started to earn some small income, so maybe we will do conversions some years and not others, but the idea is to do conversions when we can.

Given the long runway in front of you (17 years) before RMDs begin, you can convert either one, as there should be plenty of time to convert as much as you'd like.

Regards,

We have other income and pensions so we will never be able to convert all our traditional before RMDs.

I wouldn't have suspected you'd want to convert all of them. Usually, for a married couple, anywhere under $500k typically doesn't pose a problem. In some cases, married couples are just happy to be under $1 million.

There are good reasons to keep some money in a tax-deferred account... Charitable giving and late-in-life deductible medical costs are two possible reasons why you would want to retain a Trad. IRA balance.

Regards,

I'm assuming that the tIRA will grow to over 1M, but we'll see... Our pensions cover a lot of our expenses but we will need to tap our retirement funds on occasion. I did not know I could use tIRA funds for medical costs, how does that work?

[SurferLife]

My state offers a 20K tax exemption for pension or tIRA income per person over 59.5. So there is a benefit to ensuring we both have some tIRA balance to make it possible to get the full benefit of this exemption in some future tax year, and this affects our conversion strategy.

My state will tax my retirement conversions and tIRA withdrawals. However, they currently do not tax my military pension, so that's fabulous.

[SurferLife]

I am 9 years older than her, so I had thought that maybe it'd be better to convert hers so it grows longer and also it'd just be nice to close out her traditional IRA sooner to have less accounts.

I initially was thinking in this direction. Over time I realized that in some cases, having traditional IRAs can be useful. For instance, if we both have tIRA accounts, we can do QCDs from both accounts. I haven't sat down and fully quantified this, but I think that in your situation, I'd probably argue that her tIRA is worth holding.

That said ... if you rolled her entire account over just to get rid of an account, I'd have troubles arguing with that.

The fact that you'll hit RMDs earlier might argue for doing rollovers against your account first. On the other hand, $30k of rollovers on your $700k account aren't going to really move the needle a lot.

Hmm. I'd also consider the timing of when you can start withdrawing without penalties. Before that point, your taxes won't care which account you rollover. After that point, there's not as much advantage to doing rollovers rather than just pulling the funds out as distributions. I tried to gear my rollover plan to even things out between now and when we hit RMDs, where before 59.5years it's conversions, and after it will be distributions, then we'll hit RMDs. But we have a significant chunk of very-low-basis stock in taxable, so I am more inclined towards drawing down tIRA directly and hopefully getting a basis step-up on the taxable.

This gives me a lot to think about and I agree on the points about both keeping hers and converting hers. You are right, 30k does not move the needle much, so does it really matter? I think I may want to simplify our accounts more than optimize them financially, which would mean reduce hers. Though, at the end of the day I tend to do what is most financially advantageous, so maybe convert mine? We won't spend down all our retirement funds so I'm concerned about RMDs and want to avoid them at all costs, so we can build more wealth and also leave an inheritance for our children.

[SurferLife]

We won't start RMDs for 17 more years. I had planned to do Roth conversions each year, but we decided to start a farm business so we have started to earn some small income, so maybe we will do conversions some years and not others, but the idea is to do conversions when we can.

Given the long runway in front of you (17 years) before RMDs begin, you can convert either one, as there should be plenty of time to convert as much as you'd like.

Regards,

We have other income and pensions so we will never be able to convert all our traditional before RMDs.

I wouldn't have suspected you'd want to convert all of them. Usually, for a married couple, anywhere under $500k typically doesn't pose a problem. In some cases, married couples are just happy to be under $1 million.

There are good reasons to keep some money in a tax-deferred account... Charitable giving and late-in-life deductible medical costs are two possible reasons why you would want to retain a Trad. IRA balance.

Regards,

I looked into using the tIRA to pay for medical costs. With the very specific requirements listed, I don't see that we'd ever qualify. We have military medical coverage, so I don't see us paying any extreme costs that would exceed 7.5% of our AGI, though you never know...

[shess]

I'm assuming that the tIRA will grow to over 1M, but we'll see... Our pensions cover a lot of our expenses but we will need to tap our retirement funds on occasion. I did not know I could use tIRA funds for medical costs, how does that work?

Hopefully someone will correct me if I'm wrong, but I think there is no particular magic about using a tIRA for medical costs. Rather, the situation is that late in life, it is common to have a few years where your medical costs are so high that you end up far beyond the 7.5% AGI limitation, leading to a large itemized deduction, possibility to the point that you get pushed back into the 15% or even 0% tax band. Say if you're in a nursing home for medical reasons, then a very large fraction of your total yearly expenses may be deductible. In that case, you may be able to pull money from the tIRA tax free, which is better than whatever rate you would have paid on conversions 20 years prior.

Of course, there are a lot of caveats in this, so I wouldn't exactly call this consideration a "plan". Instead, I think of it more as a reason to not convert the last year or two worth of expenses out of the tIRA, as long as there are other larger accounts available to convert. QCDs are much the same consideration, I can imagine doing tens of thousands in QCDs, so that seems pretty reasonable to set aside.

[SurferLife]

I'm assuming that the tIRA will grow to over 1M, but we'll see... Our pensions cover a lot of our expenses but we will need to tap our retirement funds on occasion. I did not know I could use tIRA funds for medical costs, how does that work?

Hopefully someone will correct me if I'm wrong, but I think there is no particular magic about using a tIRA for medical costs. Rather, the situation is that late in life, it is common to have a few years where your medical costs are so high that you end up far beyond the 7.5% AGI limitation, leading to a large itemized deduction, possibility to the point that you get pushed back into the 15% or even 0% tax band. Say if you're in a nursing home for medical reasons, then a very large fraction of your total yearly expenses may be deductible. In that case, you may be able to pull money from the tIRA tax free, which is better than whatever rate you would have paid on conversions 20 years prior.

Of course, there are a lot of caveats in this, so I wouldn't exactly call this consideration a "plan". Instead, I think of it more as a reason to not convert the last year or two worth of expenses out of the tIRA, as long as there are other larger accounts available to convert. QCDs are much the same consideration, I can imagine doing tens of thousands in QCDs, so that seems pretty reasonable to set aside.

It's possible that there are some nursing home costs in the future, so I agree that we shouldn't convert all of our funds, not that we'd even be able to.

I do like the idea of QCDs from those accounts, and I had not considered that previously.

[bberris]

My state offers a 20K tax exemption for pension or tIRA income per person over 59.5. So there is a benefit to ensuring we both have some tIRA balance to make it possible to get the full benefit of this exemption in some future tax year, and this affects our conversion strategy.

There are several states with earned income taxes that exempt pension and IRA income completely. I wonder how they tax Roth conversions.

[aristotelian]

My state offers a 20K tax exemption for pension or tIRA income per person over 59.5. So there is a benefit to ensuring we both have some tIRA balance to make it possible to get the full benefit of this exemption in some future tax year, and this affects our conversion strategy.

My state will tax my retirement conversions and tIRA withdrawals. However, they currently do not tax my military pension, so that's fabulous.

That limit is not shared when you file jointly?

[Uniballer]

My state offers a 20K tax exemption for pension or tIRA income per person over 59.5. So there is a benefit to ensuring we both have some tIRA balance to make it possible to get the full benefit of this exemption in some future tax year, and this affects our conversion strategy.

My state will tax my retirement conversions and tIRA withdrawals. However, they currently do not tax my military pension, so that's fabulous.

That limit is not shared when you file jointly?

I assume you mean the 20K per person IRA or pension exemption in New York State; it is per person and to get 40K worth of exemptions you need to draw 20K each.

[retired@50]

We won't start RMDs for 17 more years. I had planned to do Roth conversions each year, but we decided to start a farm business so we have started to earn some small income, so maybe we will do conversions some years and not others, but the idea is to do conversions when we can.

Given the long runway in front of you (17 years) before RMDs begin, you can convert either one, as there should be plenty of time to convert as much as you'd like.

Regards,

We have other income and pensions so we will never be able to convert all our traditional before RMDs.

I wouldn't have suspected you'd want to convert all of them. Usually, for a married couple, anywhere under $500k typically doesn't pose a problem. In some cases, married couples are just happy to be under $1 million.

There are good reasons to keep some money in a tax-deferred account... Charitable giving and late-in-life deductible medical costs are two possible reasons why you would want to retain a Trad. IRA balance.

Regards,

I looked into using the tIRA to pay for medical costs. With the very specific requirements listed, I don't see that we'd ever qualify. We have military medical coverage, so I don't see us paying any extreme costs that would exceed 7.5% of our AGI, though you never know...

Precisely, you never know. Living in an assisted living facility or a board and care facility with 24 hour help is very expensive. If you're receiving help with 2 or more activities of daily living, then the costs will easily grow to 6 figures annually, and will be deductible. So, when you take a large withdrawal from your IRA, it could be spent on medical expenses that turn out to be deductible. I've seen this happen to more than one person in my sphere of acquaintances.

Regards,

[teen persuasion]

My state offers a 20K tax exemption for pension or tIRA income per person over 59.5. So there is a benefit to ensuring we both have some tIRA balance to make it possible to get the full benefit of this exemption in some future tax year, and this affects our conversion strategy.

There are several states with earned income taxes that exempt pension and IRA income completely. I wonder how they tax Roth conversions.

The NYS $20k per person exemption also counts for Roth conversions after 59.5.

I am simultaneously adding to my SIMPLE IRA, while converting from DH's much larger tIRA. I want my IRA to be large enough to support $20k conversions every year, not run out.

[Lou354]

Do you already have a Roth IRA? Does your wife? If not, each of you should do some level of Roth conversion so you start the 5 year clock running. Beyond that, I would emphasize converting your tIRA because doing so will reduce your RMDs and therefore potentially allow for more total Roth conversions over time.

[SurferLife]

Do you already have a Roth IRA? Does your wife? If not, each of you should do some level of Roth conversion so you start the 5 year clock running. Beyond that, I would emphasize converting your tIRA because doing so will reduce your RMDs and therefore potentially allow for more total Roth conversions over time.

We have Roths and have already started doing conversions.

[rkhusky]

Max yearly QCD is $105K per account and appears to increase over time. Do you plan to donate more than that once you are both 70.5? Doesn’t appear that wife’s account is sufficiently large to play much of a role. I would convert to get rid of it.

[Wiggums]

I'm assuming that the tIRA will grow to over 1M, but we'll see... Our pensions cover a lot of our expenses but we will need to tap our retirement funds on occasion. I did not know I could use tIRA funds for medical costs, how does that work?

Since your pensions cover a lot of your expenses, I would say ANY conversion that you do is helpful.

We also have pensions. We were doing large conversions until we bumped up against the Medicare two year look back. With 11 years to RMDs, we are being constrained by IRMAA, NIIT, and other considerations while our tIRA continues to grow.
Leaving a nice chunk in the traditional IRA for possible medical, QCDs is a good strategy.