Roth Conversion Strategy with Loss of Stretch IRA

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BigJohn
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Roth Conversion Strategy with Loss of Stretch IRA

Post by BigJohn »

Background - At retirement 5 years ago, ~65% of net worth in traditional IRA, no Roth. Doing annual Roth conversions starting at age 60 until SS (at age 70) and RMDs kick in. Current strategy is to convert an amount each year that’s about the same as my expected RMDs plus SS so taxable income is flat. Baring a change in tax law which I can’t predict, this should put me in the same tax bracket pre and post RMDs (currently converting in the 24% bracket). I choose this approach as the best simple compromise given all the assumptions and unknowns in trying to be more precise. This would leave me at about 50/50 traditional/Roth which also felt appropriate for diversity of income purposes. I ignored future tax bracket of kids (3) as both unknowable and of lower importance given stretch IRA provisions. The question is... with loss of stretch provisions, what changes, if any, should I make?

My thoughts - Lowest tax case for my kids is likely 10%/year of traditional IRA balance. Obviously no way to be certain but when combined with their normal income this would likely put them in the 32% bracket maybe in the 35% bracket. I really hate paying taxes but I think this means I should up my conversion rate to at least the bottom of the 32% bracket and maybe a bit more.

In March near market lows I did my “normal” conversion amount. I know this is a bet and I know there are both winning and losing scenarios so not looking for certainty. However, I’d appreciate any thoughts or experience on things I might be overlooking and need to consider before I go any farther. Thanks in advance.
Dougroseville
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by Dougroseville »

Christine Benz and Jeff Ptak just talked to Ed Slott on the Morningstar Long View Podcast (a very good podcast worth subscribing to).. It is probably available via most podcast platforms (I use Overcast on iOS) or below.

Ed Slott: Act Now on Historically Low Tax Rates
https://the-long-view.simplecast.com/ep ... t-b43EdIR7
https://youtu.be/M9mlAGUntrk

There is a lot of discussion about the end of stretch IRA and the age change for RMDs (70.5 to 72). Toward the end of the podcast I thought it was pretty entertaining how excited Ed Slott gets about tax law. I think this episode is of particular interest to early retirees and people less than 72 years of age.
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David Jay
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by David Jay »

BigJohn wrote: Thu Aug 20, 2020 5:04 pmBaring a change in tax law which I can’t predict, this should put me in the same tax bracket pre and post RMDs (currently converting in the 24% bracket).
Actually, according to current law, tax brackets are scheduled to sunset (return to the previous levels). So, barring a change in tax law (which I can't predict), your current 24% tax bracket becomes the 28% tax bracket in 2026.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
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FIREchief
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by FIREchief »

BigJohn wrote: Thu Aug 20, 2020 5:04 pm Background - At retirement 5 years ago, ~65% of net worth in traditional IRA, no Roth. Doing annual Roth conversions starting at age 60 until SS (at age 70) and RMDs kick in. Current strategy is to convert an amount each year that’s about the same as my expected RMDs plus SS so taxable income is flat. Baring a change in tax law which I can’t predict, this should put me in the same tax bracket pre and post RMDs (currently converting in the 24% bracket). I choose this approach as the best simple compromise given all the assumptions and unknowns in trying to be more precise. This would leave me at about 50/50 traditional/Roth which also felt appropriate for diversity of income purposes. I ignored future tax bracket of kids (3) as both unknowable and of lower importance given stretch IRA provisions. The question is... with loss of stretch provisions, what changes, if any, should I make?

My thoughts - Lowest tax case for my kids is likely 10%/year of traditional IRA balance. Obviously no way to be certain but when combined with their normal income this would likely put them in the 32% bracket maybe in the 35% bracket. I really hate paying taxes but I think this means I should up my conversion rate to at least the bottom of the 32% bracket and maybe a bit more.

In March near market lows I did my “normal” conversion amount. I know this is a bet and I know there are both winning and losing scenarios so not looking for certainty. However, I’d appreciate any thoughts or experience on things I might be overlooking and need to consider before I go any farther. Thanks in advance.
If there is any chance that you'll want to leave the IRA's in trust (for asset protection purposes), than Roth dollars are the clear winners (even if you pay a bit more in taxes than the heirs would under outright inheritance). The SECURE act is not only the death of the stretch IRA, I think it may also be the death of qualified (see through) trusts. We had a thread on this. If you are interested, I'll scrounge up the link. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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LilyFleur
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by LilyFleur »

Another consideration: Inherited IRAs are not protected from creditors in all states (see link below). In my state, most types of IRAs (traditional, Roth, simple) have less protection than ERISA-qualified retirement accounts (i.e., 401ks)

https://www.nolo.com/legal-encyclopedia ... itors.html
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BigJohn
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by BigJohn »

FIREchief wrote: Thu Aug 20, 2020 5:30 pm If there is any chance that you'll want to leave the IRA's in trust (for asset protection purposes), than Roth dollars are the clear winners (even if you pay a bit more in taxes than the heirs would under outright inheritance). The SECURE act is not only the death of the stretch IRA, I think it may also be the death of qualified (see through) trusts. We had a thread on this. If you are interested, I'll scrounge up the link. 8-)
Thanks to all for the replies.

FIREchief, my estate attorney tells my that me pass through trust is still valid it's just that my kids will have to live with the new 10 year rules for withdrawal. I thought I had read all the forum discussions on this but went back and searched anyway. I did find one on the issues with a bypass trust to avoid state inheritance tax but nothing that would indicate any concerns with a pass through trust. If you have the time and can find that link, I'd be interested.

Thanks :beer
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Nate79
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by Nate79 »

Remember that tax laws change all the time and if I were you I would plan on many changes to come. Meaning don't worry to much about things like the loss of the stretch IRA as nothing is permanent.
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FIREchief
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by FIREchief »

BigJohn wrote: Fri Aug 21, 2020 3:28 pm
FIREchief wrote: Thu Aug 20, 2020 5:30 pm If there is any chance that you'll want to leave the IRA's in trust (for asset protection purposes), than Roth dollars are the clear winners (even if you pay a bit more in taxes than the heirs would under outright inheritance). The SECURE act is not only the death of the stretch IRA, I think it may also be the death of qualified (see through) trusts. We had a thread on this. If you are interested, I'll scrounge up the link. 8-)
Thanks to all for the replies.

FIREchief, my estate attorney tells my that me pass through trust is still valid it's just that my kids will have to live with the new 10 year rules for withdrawal.
I assume you're referring to a qualified trust (i.e. one that the IRS will treat as an individual instead of an entity). The more common terminology is "see through trust" (also, "look through trust"). Yes, in most cases they will still "work," but the game has changed. This may warrant revisiting such trusts. I've been waiting for the dust to settle, which I believe was also true for many attorneys for a while after the SECURE act passed. There is a price of admission for a qualified trust, particularly an accumulation trust (which is the only one that will really provide meaningful asset protections). The price comes in at least two forms: a) restrictions on powers of appointment for the primary beneficiary and b) restrictions on successor beneficiaries (must be individuals in the eyes of the IRS). This makes it challenging to build in flexibility, particularly with respect to naming charities or non-qualified trusts as beneficiaries. Please see my signature.
I thought I had read all the forum discussions on this but went back and searched anyway. I did find one on the issues with a bypass trust to avoid state inheritance tax but nothing that would indicate any concerns with a pass through trust. If you have the time and can find that link, I'd be interested.
Here's the link to the thread I mentioned. Several of our resident experts contributed, so hopefully you'll find some useful information.

viewtopic.php?f=2&t=298113
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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FIREchief
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by FIREchief »

Nate79 wrote: Fri Aug 21, 2020 3:39 pm Remember that tax laws change all the time and if I were you I would plan on many changes to come. Meaning don't worry to much about things like the loss of the stretch IRA as nothing is permanent.
Are you suggesting that it would be reasonable to plan as if the stretch IRA could return? With Roth conversions (focus of this thread), it's use it or lose it each year with respect to conversion space.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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JDCarpenter
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by JDCarpenter »

Dougroseville wrote: Thu Aug 20, 2020 5:20 pm Christine Benz and Jeff Ptak just talked to Ed Slott on the Morningstar Long View Podcast (a very good podcast worth subscribing to).. It is probably available via most podcast platforms (I use Overcast on iOS) or below.

Ed Slott: Act Now on Historically Low Tax Rates
https://the-long-view.simplecast.com/ep ... t-b43EdIR7
https://youtu.be/M9mlAGUntrk

There is a lot of discussion about the end of stretch IRA and the age change for RMDs (70.5 to 72). Toward the end of the podcast I thought it was pretty entertaining how excited Ed Slott gets about tax law. I think this episode is of particular interest to early retirees and people less than 72 years of age.
Thanks, this looks intriguing. FWIW,the "long view" link includes a full transcript of the podcast.

Responding to the O.P., we were/are in a similar position to you. Our retirement accounts were only 5% Roth in '17 when we retired at 57/56; and we had only three years living expenses in taxable. My/Our choice was to convert to the top of the 24% bracket each year, at least until that bracket goes away--even though it has essentially been our only income in these early retirement years. Moreover, we are keeping our Roths at 100% equities whilst maintaining a 60=40 overall portfolio for right now (rising glide path....). We are now at 29% Roths after three years.

Both for ease of life/RMD/taxation when we (she?) hits true old age, and for our high income children's sake, it seems sensible to convert, particularly at these rates.
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bsteiner
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by bsteiner »

Your analysis is good. Each case is different. However, with tax rates scheduled to revert to pre-2018 levels in 2026, the doubling of the joint return brackets scheduled to revert to pre-2018 law in 2026, and most beneficiaries having to take the entire IRA within 10 years thus often putting them in higher brackets, Roth conversions will make sense more often than the did before the Tax Cuts and Jobs Act of 2017 and before the SECURE Act.
ScottyDog
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by ScottyDog »

Dougroseville wrote: Thu Aug 20, 2020 5:20 pm Christine Benz and Jeff Ptak just talked to Ed Slott on the Morningstar Long View Podcast (a very good podcast worth subscribing to).. It is probably available via most podcast platforms (I use Overcast on iOS) or below.

Ed Slott: Act Now on Historically Low Tax Rates
https://the-long-view.simplecast.com/ep ... t-b43EdIR7
https://youtu.be/M9mlAGUntrk

There is a lot of discussion about the end of stretch IRA and the age change for RMDs (70.5 to 72). Toward the end of the podcast I thought it was pretty entertaining how excited Ed Slott gets about tax law. I think this episode is of particular interest to early retirees and people less than 72 years of age.
Just listened...very good info. A question came to mind --as a retired couple at age 70 with one child/48 and 2 grandchildren/11 and 9, does it
make any sense to name the grandchildren a partial beneficiary on our Traditional IRA's vs. all going to child to save on taxes ? I can see the new
10 year rule affecting our adult child's taxes quite a bit when distributions are added to his own income each year.
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Nate79
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by Nate79 »

FIREchief wrote: Fri Aug 21, 2020 3:51 pm
Nate79 wrote: Fri Aug 21, 2020 3:39 pm Remember that tax laws change all the time and if I were you I would plan on many changes to come. Meaning don't worry to much about things like the loss of the stretch IRA as nothing is permanent.
Are you suggesting that it would be reasonable to plan as if the stretch IRA could return? With Roth conversions (focus of this thread), it's use it or lose it each year with respect to conversion space.
As long as someone is not going to have serious remorse when all the tax laws change multiple times then it may not matter but personally I would not be all in on a plan born out of a sudden and drastic tax law change. We do not know how the laws will change, only that they will change.

I'll never forget a humorous exchange on here some time ago where someone in their 20s was planning their withdrawal plan in retirment 40 years from then with all the details drawn out including tax strategy, etc.
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FIREchief
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by FIREchief »

Nate79 wrote: Fri Aug 21, 2020 10:50 pm
FIREchief wrote: Fri Aug 21, 2020 3:51 pm
Nate79 wrote: Fri Aug 21, 2020 3:39 pm Remember that tax laws change all the time and if I were you I would plan on many changes to come. Meaning don't worry to much about things like the loss of the stretch IRA as nothing is permanent.
Are you suggesting that it would be reasonable to plan as if the stretch IRA could return? With Roth conversions (focus of this thread), it's use it or lose it each year with respect to conversion space.
As long as someone is not going to have serious remorse when all the tax laws change multiple times then it may not matter but personally I would not be all in on a plan born out of a sudden and drastic tax law change. We do not know how the laws will change, only that they will change.

I'll never forget a humorous exchange on here some time ago where someone in their 20s was planning their withdrawal plan in retirment 40 years from then with all the details drawn out including tax strategy, etc.
Yeah, I can see that. Unfortunately for many, RMDs can become a ticking tax timebomb that needs to at least be considered. If a person has less than ten years, than "all the tax laws changing multiple times" is highly unlikely. Doing nothing while waiting/watching for favorable tax law changes may not be a wise option. :oops:
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
MJS
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by MJS »

Another cost to include when estimating the price of Roth conversions is IRMAA. Once you are over 63, a MFJ income over $174k will effect your Medicare Part B and D payments at age 65, adding $840 to $3,385 EACH to your annual Medicare fees. $6770 per year adds up!

https://www.cms.gov/newsroom/fact-sheet ... eductibles discusses IRMAA.
RetiredCSProf
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by RetiredCSProf »

Also, consider the NIIT tax in deciding the amount to convert to Roth each year. If filing status is MFJ, the 3.8% NIIT tax takes a bite before you hit the top of the 24% bracket.
Good Listener
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by Good Listener »

I personally think that using current tax rates or even the expiration of them to the old tax rates is not necessarily a good idea. I believe tax rates are going to going to go up massiveky for everybody in the future. I would convert everything you can now. I am doing that even in the 35% bracket. Good luck
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BigJohn
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by BigJohn »

FIREchief wrote: Fri Aug 21, 2020 11:17 pm
Nate79 wrote: Fri Aug 21, 2020 10:50 pm
FIREchief wrote: Fri Aug 21, 2020 3:51 pm
Nate79 wrote: Fri Aug 21, 2020 3:39 pm Remember that tax laws change all the time and if I were you I would plan on many changes to come. Meaning don't worry to much about things like the loss of the stretch IRA as nothing is permanent.
Are you suggesting that it would be reasonable to plan as if the stretch IRA could return? With Roth conversions (focus of this thread), it's use it or lose it each year with respect to conversion space.
As long as someone is not going to have serious remorse when all the tax laws change multiple times then it may not matter but personally I would not be all in on a plan born out of a sudden and drastic tax law change. We do not know how the laws will change, only that they will change.

I'll never forget a humorous exchange on here some time ago where someone in their 20s was planning their withdrawal plan in retirment 40 years from then with all the details drawn out including tax strategy, etc.
Yeah, I can see that. Unfortunately for many, RMDs can become a ticking tax timebomb that needs to at least be considered. If a person has less than ten years, than "all the tax laws changing multiple times" is highly unlikely. Doing nothing while waiting/watching for favorable tax law changes may not be a wise option. :oops:
I agree with both of you... RMDs are a ticking tax time bomb and I have less than 10 years left to lessen the explosion. And yes, changes in tax law can make decisions today wrong in hindsight. This was true when I started conversions but I decided that trying to predict the future here was just as useless as trying to time the market. So I make decisions based on the current law and will have no regrets if/when things change as I'm convinced it's the best I can do.
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by Soon2BXProgrammer »

BigJohn wrote: Thu Aug 20, 2020 5:04 pm Background - At retirement 5 years ago, ~65% of net worth in traditional IRA, no Roth. Doing annual Roth conversions starting at age 60 until SS (at age 70) and RMDs kick in. Current strategy is to convert an amount each year that’s about the same as my expected RMDs plus SS so taxable income is flat. Baring a change in tax law which I can’t predict, this should put me in the same tax bracket pre and post RMDs (currently converting in the 24% bracket). I choose this approach as the best simple compromise given all the assumptions and unknowns in trying to be more precise. This would leave me at about 50/50 traditional/Roth which also felt appropriate for diversity of income purposes. I ignored future tax bracket of kids (3) as both unknowable and of lower importance given stretch IRA provisions. The question is... with loss of stretch provisions, what changes, if any, should I make?

My thoughts - Lowest tax case for my kids is likely 10%/year of traditional IRA balance. Obviously no way to be certain but when combined with their normal income this would likely put them in the 32% bracket maybe in the 35% bracket. I really hate paying taxes but I think this means I should up my conversion rate to at least the bottom of the 32% bracket and maybe a bit more.

In March near market lows I did my “normal” conversion amount. I know this is a bet and I know there are both winning and losing scenarios so not looking for certainty. However, I’d appreciate any thoughts or experience on things I might be overlooking and need to consider before I go any farther. Thanks in advance.
A couple things to think through.

If you are MFJ currently, you should see what sort of taxes the survivor might pay if one spouse outlived the other for a few years. It could be quite pain full. One way to think through that is to give some money (pretax ira assets) to the kids when either spouse dies, because that inheritance if in a pretax IRA, gets it own 10 year period. Then when second spouse dies, if more pretax IRA's it gets it's own 10 year distribution window
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WoodSpinner
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by WoodSpinner »

BigJohn wrote: Thu Aug 20, 2020 5:04 pm Background - At retirement 5 years ago, ~65% of net worth in traditional IRA, no Roth. Doing annual Roth conversions starting at age 60 until SS (at age 70) and RMDs kick in. Current strategy is to convert an amount each year that’s about the same as my expected RMDs plus SS so taxable income is flat. Baring a change in tax law which I can’t predict, this should put me in the same tax bracket pre and post RMDs (currently converting in the 24% bracket). I choose this approach as the best simple compromise given all the assumptions and unknowns in trying to be more precise. This would leave me at about 50/50 traditional/Roth which also felt appropriate for diversity of income purposes. I ignored future tax bracket of kids (3) as both unknowable and of lower importance given stretch IRA provisions. The question is... with loss of stretch provisions, what changes, if any, should I make?

My thoughts - Lowest tax case for my kids is likely 10%/year of traditional IRA balance. Obviously no way to be certain but when combined with their normal income this would likely put them in the 32% bracket maybe in the 35% bracket. I really hate paying taxes but I think this means I should up my conversion rate to at least the bottom of the 32% bracket and maybe a bit more.

In March near market lows I did my “normal” conversion amount. I know this is a bet and I know there are both winning and losing scenarios so not looking for certainty. However, I’d appreciate any thoughts or experience on things I might be overlooking and need to consider before I go any farther. Thanks in advance.
Do you live in a state that taxes SS?

I am in one that does not. What I found is that trying to match AGI in Real dollars from 60-69 to 70-79 ( or longer) didn’t align my Effective Tax rates due to how SS was Not Taxed at the state level.

That said, it’s clear that if your converting into the 24% bracket, this is scheduled to increase back to 28% in 2026. It’s certainly not a bad decision (I am contemplating something similar). Doubly so since conversions before 63 will not impact IRMAA costs.

My own plan is to convert from age 58-71 but be more aggressive before 63 and even more aggressive during major market corrections. Overall goal is to convert about 50% of my IRA before RMDs begin at 72 and to defer SS till 70.

This leaves me some money in the IRA for QCDs (an important Retirement goal) and to cover large medical care expenses.

Good luck

WoodSpinner
markcoop
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by markcoop »

I plan to convert to the point where there are no IRMAA considerations (Currently $174k). This is also below any NIIT considerations for MFJ. So, that is not to the top of the 22% bracket, but close enough. Hopefully that will put enough of a dent so that RMDs and issues like the loss of the stretch IRA will not be a consideration. I imagine that is the sweet spot for some people. For some the top pf 12% bracket will be the sweet spot. And for some it will be much higher (top of the 22% or 24% bracket). Those seem to be the tiers of conversion.
Mark
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BigJohn
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Re: Roth Conversion Strategy with Loss of Stretch IRA

Post by BigJohn »

Thanks to all for the comments. Some of these issues I’ve already considered but might be helpful to others reading the discussion. Other issues were good food for thought and additional analysis as I tweak my plans. As always, this forum provided me with good advice and new perspectives on a difficult and complex issue.
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