RMD and Roth IRA conversions

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indexonlyplease
Posts: 1021
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

RMD and Roth IRA conversions

Post by indexonlyplease » Mon Dec 11, 2017 7:00 am

Trying to understand conversions.

During your working years you can contribute $5500 and $6500 after 50. I am now talking about retirement but under age 70.5 yrs. Why is it that when retired you can start withdrawing large amounts from your 401k and start putting the money into the Roth IRA. Over the working limits. I see this is a way to reduce RMD's when you reach 70.5 yrs. I also read when the RMD's start at 70.5 yrs you can no longer put that money into the Roth IRA. Only money above the RMD's.

Also, taking out just enough to keep you in the same tax bracket.

Is this correct, and is there really a big advantage of starting to moving the money early.

My example is that my pension keeps us in the 25% tax bracket. My wife still works but we max out her 401k at work. This keeps us below the Roth IRA contribution salary limits. When she retires in around 7 years I was thinking this is when I would start taking money from my 457 investment plan to supplement her loss of income. Would this be a good time to start the conversion. We are now age 53 and 50.

Hope this makes sense,

THanks

Dottie57
Posts: 3428
Joined: Thu May 19, 2016 5:43 pm

Re: RMD and Roth IRA conversions

Post by Dottie57 » Mon Dec 11, 2017 7:29 am

You are doing a conversion when moving money between the two. Mve the money directly from ira to roth ira. It is reported on taxes differently too.

Yes it is a way of controllng Rmd amounts.

rkhusky
Posts: 5211
Joined: Thu Aug 18, 2011 8:09 pm

Re: RMD and Roth IRA conversions

Post by rkhusky » Mon Dec 11, 2017 8:02 am

indexonlyplease wrote:
Mon Dec 11, 2017 7:00 am
Why is it that when retired you can start withdrawing large amounts from your 401k and start putting the money into the Roth IRA. Over the working limits.
That's the way Congress made the rules. They could have done it differently.
indexonlyplease wrote:
Mon Dec 11, 2017 7:00 am
I see this is a way to reduce RMD's when you reach 70.5 yrs. I also read when the RMD's start at 70.5 yrs you can no longer put that money into the Roth IRA. Only money above the RMD's.
Congress meant people to use their retirement funds. RMD's also provides the Gov't extra funds. Currently, RMD's are required for Traditional and Roth 401k's and for Traditional IRA's. RMD's are not currently required for Roth IRA's.
indexonlyplease wrote:
Mon Dec 11, 2017 7:00 am
Also, taking out just enough to keep you in the same tax bracket.

Is this correct, and is there really a big advantage of starting to moving the money early.

My example is that my pension keeps us in the 25% tax bracket. My wife still works but we max out her 401k at work. This keeps us below the Roth IRA contribution salary limits. When she retires in around 7 years I was thinking this is when I would start taking money from my 457 investment plan to supplement her loss of income. Would this be a good time to start the conversion. We are now age 53 and 50.
It is good to convert Traditional to Roth if the tax rate you would pay now to do the conversion is less than or equal to the tax rate you would pay later to withdraw from the account. Many people find that RMD's and Social Security push them into a higher marginal tax rate. The death of a spouse can also cause a significant increase in tax rate (single vs married filing jointly).

JW-Retired
Posts: 6756
Joined: Sun Dec 16, 2007 12:25 pm

Re: RMD and Roth IRA conversions

Post by JW-Retired » Mon Dec 11, 2017 8:25 am

indexonlyplease wrote:
Mon Dec 11, 2017 7:00 am
Is this correct, and is there really a big advantage of starting to moving the money early.

My example is that my pension keeps us in the 25% tax bracket. My wife still works but we max out her 401k at work. This keeps us below the Roth IRA contribution salary limits. When she retires in around 7 years I was thinking this is when I would start taking money from my 457 investment plan to supplement her loss of income. Would this be a good time to start the conversion. We are now age 53 and 50.
It depends on the room you have in the 25% (or 28%?) bracket at that time. All tax deferred account conversions to a Roth will add to your taxable income and get taxed at your marginal tax bracket. If it's only her 401k being maxed that currently keeps you eligible to make direct Roth contributions (MAGI < $184k), it doesn't look like you could have much room in the 25% now. Once she stops working, how little can you live on while you are doing conversions? If you start taking 457 money at that point that will obviously reduce the amount of conversions you could do while staying in a lowish tax bracket.

What tax bracket is your pension + SS + RMDs + anything else going to put you in when you are both retired and taking all your income streams? That should tell you what tax bracket to go up to for conversions.
JW
Retired at Last

indexonlyplease
Posts: 1021
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: RMD and Roth IRA conversions

Post by indexonlyplease » Mon Dec 11, 2017 5:00 pm

JW-Retired wrote:
Mon Dec 11, 2017 8:25 am
indexonlyplease wrote:
Mon Dec 11, 2017 7:00 am
Is this correct, and is there really a big advantage of starting to moving the money early.

My example is that my pension keeps us in the 25% tax bracket. My wife still works but we max out her 401k at work. This keeps us below the Roth IRA contribution salary limits. When she retires in around 7 years I was thinking this is when I would start taking money from my 457 investment plan to supplement her loss of income. Would this be a good time to start the conversion. We are now age 53 and 50.
It depends on the room you have in the 25% (or 28%?) bracket at that time. All tax deferred account conversions to a Roth will add to your taxable income and get taxed at your marginal tax bracket. If it's only her 401k being maxed that currently keeps you eligible to make direct Roth contributions (MAGI < $184k), it doesn't look like you could have much room in the 25% now. Once she stops working, how little can you live on while you are doing conversions? If you start taking 457 money at that point that will obviously reduce the amount of conversions you could do while staying in a lowish tax bracket.

What tax bracket is your pension + SS + RMDs + anything else going to put you in when you are both retired and taking all your income streams? That should tell you what tax bracket to go up to for conversions.
JW
So it sounds like I will have to wait until she retires. Then start moving money into the Roth IRA up to the 25% tax bracket max. We don't plan to take SS until 67 so that will give us some years to move money into the Roth IRA. Also, we can live the same as now with just my pension.

Thanks great info to start thinking about.

JW-Retired
Posts: 6756
Joined: Sun Dec 16, 2007 12:25 pm

Re: RMD and Roth IRA conversions

Post by JW-Retired » Mon Dec 11, 2017 8:03 pm

indexonlyplease wrote:
Mon Dec 11, 2017 5:00 pm
So it sounds like I will have to wait until she retires. Then start moving money into the Roth IRA up to the 25% tax bracket max. We don't plan to take SS until 67 so that will give us some years to move money into the Roth IRA. Also, we can live the same as now with just my pension.
Looks like a good plan!
JW
Retired at Last

indexonlyplease
Posts: 1021
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: RMD and Roth IRA conversions

Post by indexonlyplease » Tue Dec 12, 2017 6:58 am

rkhusky wrote:
Mon Dec 11, 2017 8:02 am
indexonlyplease wrote:
Mon Dec 11, 2017 7:00 am
Why is it that when retired you can start withdrawing large amounts from your 401k and start putting the money into the Roth IRA. Over the working limits.
That's the way Congress made the rules. They could have done it differently.
indexonlyplease wrote:
Mon Dec 11, 2017 7:00 am
I see this is a way to reduce RMD's when you reach 70.5 yrs. I also read when the RMD's start at 70.5 yrs you can no longer put that money into the Roth IRA. Only money above the RMD's.
Congress meant people to use their retirement funds. RMD's also provides the Gov't extra funds. Currently, RMD's are required for Traditional and Roth 401k's and for Traditional IRA's. RMD's are not currently required for Roth IRA's.
indexonlyplease wrote:
Mon Dec 11, 2017 7:00 am
Also, taking out just enough to keep you in the same tax bracket.

Is this correct, and is there really a big advantage of starting to moving the money early.

My example is that my pension keeps us in the 25% tax bracket. My wife still works but we max out her 401k at work. This keeps us below the Roth IRA contribution salary limits. When she retires in around 7 years I was thinking this is when I would start taking money from my 457 investment plan to supplement her loss of income. Would this be a good time to start the conversion. We are now age 53 and 50.
It is good to convert Traditional to Roth if the tax rate you would pay now to do the conversion is less than or equal to the tax rate you would pay later to withdraw from the account. Many people find that RMD's and Social Security push them into a higher marginal tax rate. The death of a spouse can also cause a significant increase in tax rate (single vs married filing jointly).
Thanks,

2pedals
Posts: 411
Joined: Wed Dec 31, 2014 12:31 pm

Re: RMD and Roth IRA conversions

Post by 2pedals » Tue Dec 12, 2017 8:51 am

I am 58 and plan on to retire in about 1 year. After I retire, the assets the I convert from 401k and TIRA to Roth should be "long term" and will avoid RMD's after 70.5. For me the biggest advantage to Roth accounts is in legacy estate planning. I believe my DD (a professional) will be in a higher tax bracket. She and/or her children could take advantage of the inherited Roth by using her age that would have lower RMDs and the Roth IRA could grow to be used as both as a small income stream and investment pool. So I win with lower RMDs and my DD and/or grandchildren win.

retiredjg
Posts: 32710
Joined: Thu Jan 10, 2008 12:56 pm

Re: RMD and Roth IRA conversions

Post by retiredjg » Tue Dec 12, 2017 9:27 am

indexonlyplease wrote:
Mon Dec 11, 2017 7:00 am
Why is it that when retired you can start withdrawing large amounts from your 401k and start putting the money into the Roth IRA. Over the working limits. I see this is a way to reduce RMD's when you reach 70.5 yrs.
You don't have to be retired to do this. You can convert as much as you want any time you want and still make whatever contribution to Roth IRA that you want.

If you will always be in the 25% bracket due to your pension, I'd start converting now up to the top of the 25% bracket or the Roth contribution limit, whichever is lower. If you were older, you'd also have to watch the IRMAA limits (for Medicare).

If it appears you could drop into the 15% bracket when your wife stops working, I'd wait and convert at 15% instead of 25%.

Being so young, it seems like you can get a lot converted before RMDs start.

indexonlyplease
Posts: 1021
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: RMD and Roth IRA conversions

Post by indexonlyplease » Fri Jan 12, 2018 7:42 am

2pedals wrote:
Tue Dec 12, 2017 8:51 am
I am 58 and plan on to retire in about 1 year. After I retire, the assets the I convert from 401k and TIRA to Roth should be "long term" and will avoid RMD's after 70.5. For me the biggest advantage to Roth accounts is in legacy estate planning. I believe my DD (a professional) will be in a higher tax bracket. She and/or her children could take advantage of the inherited Roth by using her age that would have lower RMDs and the Roth IRA could grow to be used as both as a small income stream and investment pool. So I win with lower RMDs and my DD and/or grandchildren win.
I just read you post again. I am thinking the same way. I believe we will use very little of the Roth IRA if any.

2pedals
Posts: 411
Joined: Wed Dec 31, 2014 12:31 pm

Re: RMD and Roth IRA conversions

Post by 2pedals » Fri Jan 12, 2018 11:00 pm

indexonlyplease wrote:
Fri Jan 12, 2018 7:42 am
2pedals wrote:
Tue Dec 12, 2017 8:51 am
I am 58 and plan on to retire in about 1 year. After I retire, the assets the I convert from 401k and TIRA to Roth should be "long term" and will avoid RMD's after 70.5. For me the biggest advantage to Roth accounts is in legacy estate planning. I believe my DD (a professional) will be in a higher tax bracket. She and/or her children could take advantage of the inherited Roth by using her age that would have lower RMDs and the Roth IRA could grow to be used as both as a small income stream and investment pool. So I win with lower RMDs and my DD and/or grandchildren win.
I just read you post again. I am thinking the same way. I believe we will use very little of the Roth IRA if any.
An excellent book on the subject is, "Retire Secure!: A Guide To Getting The Most Out Of What You've Got by James Lange".

indexonlyplease
Posts: 1021
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: RMD and Roth IRA conversions

Post by indexonlyplease » Sun Jan 14, 2018 9:24 am

2pedals wrote:
Fri Jan 12, 2018 11:00 pm
indexonlyplease wrote:
Fri Jan 12, 2018 7:42 am
2pedals wrote:
Tue Dec 12, 2017 8:51 am
I am 58 and plan on to retire in about 1 year. After I retire, the assets the I convert from 401k and TIRA to Roth should be "long term" and will avoid RMD's after 70.5. For me the biggest advantage to Roth accounts is in legacy estate planning. I believe my DD (a professional) will be in a higher tax bracket. She and/or her children could take advantage of the inherited Roth by using her age that would have lower RMDs and the Roth IRA could grow to be used as both as a small income stream and investment pool. So I win with lower RMDs and my DD and/or grandchildren win.
I just read you post again. I am thinking the same way. I believe we will use very little of the Roth IRA if any.
An excellent book on the subject is, "Retire Secure!: A Guide To Getting The Most Out Of What You've Got by James Lange".
I will check it out. thanks

Miriam2
Posts: 2088
Joined: Fri Nov 14, 2014 11:51 am

Re: RMD and Roth IRA conversions

Post by Miriam2 » Sun Jan 14, 2018 10:59 pm

indexonlyplease wrote:
2pedals wrote: An excellent book on the subject is, "Retire Secure!: A Guide To Getting The Most Out Of What You've Got by James Lange".
I will check it out. thanks
For me the better book on Roth IRAs is "Go Roth!" by Kaye Thomas, who maintains the highly regarded tax website www.Fairmark.com. The book is well written, nicely organized and not too complicated.

I found James Lange's book ponderous, not well organized and poorly edited.

indexonlyplease
Posts: 1021
Joined: Thu Apr 30, 2015 12:30 pm
Location: Pembroke Pines, FL

Re: RMD and Roth IRA conversions

Post by indexonlyplease » Mon Jan 15, 2018 9:03 am

Miriam2 wrote:
Sun Jan 14, 2018 10:59 pm
indexonlyplease wrote:
2pedals wrote: An excellent book on the subject is, "Retire Secure!: A Guide To Getting The Most Out Of What You've Got by James Lange".
I will check it out. thanks
For me the better book on Roth IRAs is "Go Roth!" by Kaye Thomas, who maintains the highly regarded tax website www.Fairmark.com. The book is well written, nicely organized and not too complicated.

I found James Lange's book ponderous, not well organized and poorly edited.
Thank you, I like simple reading.

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