More Roth Conversions or Gifting?

[MrLoco]

Hello All. I have a situation in which I would appreciate some feedback / advice.
We have been performing Roth Conversions for the past 10 years and now have the following breakdown:
TAXBLE: $ 2.0 M
Tax Deferred IRA: $ 2.0M

ROTH IRA: $ 2.0 M

So a pretty even split among the groups. I am 65 and will need to take RMD's from the Trad. IRA at age 73...in 8 more years. At this point we feel that gifting ( to our 2 adult children) may supersede the desire to do additional Roth Conversions by simply selling $200,000/ year out of the Trad. IRA, pay the taxes , and still reduce the amount of RMD's required beginning in 8 years at age 73. True, by continuing to to more Roth Conversions, this would provide even more tax free distributions to the adult children in later years, but would not reduce the State Estate Tax they would need to pay....which now stand at $1.7 M ( exemption amount).

So by simply withdrawing from the Trad. IRA , this allows us to achieve 2 goals. Reduce future RMD's AND begin gifting now to reduce State Estate taxes down the road. We can pay the taxes due on the withdrawals out of taxable. We feel this gets some of the money out of our estate now and the children can use it to reduce some of their costs/ expenses.

Any comments/ feedback is appreciated.

[delamer]

Sounds like a good idea to me, as long as you can psychologically deal with all the current extra income taxes. You have the financial part of the taxes handled.

Giving with a warm hand to responsible, hard-working young people is a great option. Making them wait for everything until you are both gone (and they are possibly retired themselves) doesn’t make sense unless you have concerns about your own financial welfare.

[tibbitts]

Hello All. I have a situation in which I would appreciate some feedback / advice.
We have been performing Roth Conversions for the past 10 years and now have the following breakdown:
TAXBLE: $ 2.0 M
Tax Deferred IRA: $ 2.0M

ROTH IRA: $ 2.0 M

So a pretty even split among the groups. I am 65 and will need to take RMD's from the Trad. IRA at age 73...in 8 more years. At this point we feel that gifting ( to our 2 adult children) may supersede the desire to do additional Roth Conversions by simply selling $200,000/ year out of the Trad. IRA, pay the taxes , and still reduce the amount of RMD's required beginning in 8 years at age 73. True, by continuing to to more Roth Conversions, this would provide even more tax free distributions to the adult children in later years, but would not reduce the State Estate Tax they would need to pay....which now stand at $1.7 M ( exemption amount).

So by simply withdrawing from the Trad. IRA , this allows us to achieve 2 goals. Reduce future RMD's AND begin gifting now to reduce State Estate taxes down the road. We can pay the taxes due on the withdrawals out of taxable. We feel this gets some of the money out of our estate now and the children can use it to reduce some of their costs/ expenses.

Any comments/ feedback is appreciated.

I don't understand your estate tax situation (what is "exemption amount" and what's the tax rate?): assuming you leave things as they are how much state estate tax will be due, given reasonable projections?

Generally $2M in deferred for MFJ doesn't seem like a problem. Even for filing single it's not the worst we've seen here.

You are thinking of gifting $200k/yr? That seems like a lot given your situation.

[Exchme]

It's a complicated analysis, depending on factors like your life spans, other income, whether you are subject to IRMAA, the amount of unrealized capital gains you have in taxable, future rates of return, your kids tax brackets, the state estate tax rate, your choice of asset location, SS benefits and when you claim them.

There is no substitute for modeling it, but I would be very surprised if the idea of making large withdrawals from tax deferred and making gifts was anywhere close to optimal.

My guess, without knowing your situation or doing any modeling, is go ahead and make gifts to kids if you want, but do it out of taxable, you can gift the shares directly if you want, no need to go to cash first (though that passes them the capital gain tax liability on the unrealized gains). Then the larger earner defers claiming SS until age 70 and between now and SS claiming, do Roth Conversions up to the top of the base IRMAA tier, paying taxes out of taxable and spending down taxable to live on.

[Jack FFR1846]

You may want to do some figuring of what the actual state estate tax will be.

Also, with gifting $200k, will that reduce that $1.7M estate limit?

You might want to do a combination of gifting, Roth converting and pulling IRA money to pay tax.

[MrLoco]

Hello All. I have a situation in which I would appreciate some feedback / advice.
We have been performing Roth Conversions for the past 10 years and now have the following breakdown:
TAXBLE: $ 2.0 M
Tax Deferred IRA: $ 2.0M

ROTH IRA: $ 2.0 M

So a pretty even split among the groups. I am 65 and will need to take RMD's from the Trad. IRA at age 73...in 8 more years. At this point we feel that gifting ( to our 2 adult children) may supersede the desire to do additional Roth Conversions by simply selling $200,000/ year out of the Trad. IRA, pay the taxes , and still reduce the amount of RMD's required beginning in 8 years at age 73. True, by continuing to to more Roth Conversions, this would provide even more tax free distributions to the adult children in later years, but would not reduce the State Estate Tax they would need to pay....which now stand at $1.7 M ( exemption amount).

So by simply withdrawing from the Trad. IRA , this allows us to achieve 2 goals. Reduce future RMD's AND begin gifting now to reduce State Estate taxes down the road. We can pay the taxes due on the withdrawals out of taxable. We feel this gets some of the money out of our estate now and the children can use it to reduce some of their costs/ expenses.

Any comments/ feedback is appreciated.

I don't understand your estate tax situation (what is "exemption amount" and what's the tax rate?): assuming you leave things as they are how much state estate tax will be due, given reasonable projections?

Generally $2M in deferred for MFJ doesn't seem like a problem. Even for filing single it's not the worst we've seen here.

You are thinking of gifting $200k/yr? That seems like a lot given your situation.

The current estate tax exemption amount of $1.7M is deducted from the amount of the value of the estate. So in our situation, $1.7M would be subtracted from about $6.5M ( Invested assets of $6.0M + Home $500,000). Current State Estate Tax due on this number would be about $400,000 that the children would have to pay out of the estate if both me and my wife died today. Plus, since all the assets in the Roth are equities; the total value of the estate will probably grow to well over $10M. Plus, future State Estate Taxes may also increase. And the estate may well be over the Federal limit as well. Thank you for your feedback. Much appreciated.

[MrLoco]

It's a complicated analysis, depending on factors like your life spans, other income, whether you are subject to IRMAA, the amount of unrealized capital gains you have in taxable, future rates of return, your kids tax brackets, the state estate tax rate, your choice of asset location, SS benefits and when you claim them.

There is no substitute for modeling it, but I would be very surprised if the idea of making large withdrawals from tax deferred and making gifts was anywhere close to optimal.

My guess, without knowing your situation or doing any modeling, is go ahead and make gifts to kids if you want, but do it out of taxable, you can gift the shares directly if you want, no need to go to cash first (though that passes them the capital gain tax liability on the unrealized gains). Then the larger earner defers claiming SS until age 70 and between now and SS claiming, do Roth Conversions up to the top of the base IRMAA tier, paying taxes out of taxable and spending down taxable to live on.

Thank you for your feedback. I have looked at gifting from taxable as well. Problem is there is no opportunity for tax loss harvesting as almost all assets in taxable have shown healthy gains over the years and we may want to preserve these assets for a potential future step up in basis to pass on to the children if the step up opportunity is still available. Unfortunately, we may be in higher IRMAA tiers forever due to 2 pensions, 2 future SS benefits, Dividends from taxable, and future RMD's from Trad. IRA. First World problems...but problems still. We may do a combination of withdrawals as someone else suggested from taxable and tax deferred to smooth out the current tax liability. Thanks again. Much appreciated.

[tibbitts]

The current estate tax exemption amount of $1.7M is deducted from the amount of the value of the estate. So in our situation, $1.7M would be subtracted from about $6.5M ( Invested assets of $6.0M + Home $500,000). Current State Estate Tax due on this number would be about $400,000 that the children would have to pay out of the estate if both me and my wife died today. Plus, since all the assets in the Roth are equities; the total value of the estate will probably grow to well over $10M. Plus, future State Estate Taxes may also increase. And the estate may well be over the Federal limit as well. Thank you for your feedback. Much appreciated.

Thanks for explaining that. My only comment is that you did extremely well at diversifying tax treatment for your savings and a lot of us wish we had done as well.

[Navillus1968]

Hello All. I have a situation in which I would appreciate some feedback / advice.
We have been performing Roth Conversions for the past 10 years and now have the following breakdown:
TAXBLE: $ 2.0 M
Tax Deferred IRA: $ 2.0M

ROTH IRA: $ 2.0 M

So a pretty even split among the groups. I am 65 and will need to take RMD's from the Trad. IRA at age 73...in 8 more years. At this point we feel that gifting ( to our 2 adult children) may supersede the desire to do additional Roth Conversions by simply selling $200,000/ year out of the Trad. IRA, pay the taxes , and still reduce the amount of RMD's required beginning in 8 years at age 73. True, by continuing to to more Roth Conversions, this would provide even more tax free distributions to the adult children in later years, but would not reduce the State Estate Tax they would need to pay....which now stand at $1.7 M ( exemption amount).

So by simply withdrawing from the Trad. IRA , this allows us to achieve 2 goals. Reduce future RMD's AND begin gifting now to reduce State Estate taxes down the road. We can pay the taxes due on the withdrawals out of taxable. We feel this gets some of the money out of our estate now and the children can use it to reduce some of their costs/ expenses.

Any comments/ feedback is appreciated.

I assume you live in Rhode Island? The Rhode Island $1.7M exemption amount is per person, plus you have an unlimited spousal exemption. Even if you & your spouse both died together, your combined $3.4M exemption should produce a taxable estate of 'only' $2.6M if your net worth is $6M today. Taxes owed to RI on $2.6M would be much less than $400k, about $28k according to the chart here- https://learn.valur.com/rhode-island-estate-tax/

If you die at different times, it should be easy to build a will that keeps the deceased spouse's estate under the $1.7M exemption amount (I think this amount is inflation-adjusted going forward), with your 2 kids as heirs & bequeath the remainder to the surviving spouse, all tax-free. Obviously, the surviving spouse would need a plan to aggressively reduce the remaining estate via gifting &/or charitable giving/bequests, etc. to further minimize RI taxes.

If you're not a RI resident, disregard.