Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Jimi
Posts: 6
Joined: Sun Mar 11, 2018 6:26 pm

Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by Jimi » Sun Mar 11, 2018 8:33 pm

Every January, Hubby and I would sit down and review/plan our savings strategy for the coming year.

Our plan for 2017 was no different from previous years; continue to max out 401K participation ($24K for me; $18K for Hubby),
contribute to Roth as best we could (usually this meant we would fund my Roth fully, Hubby's usually got $3-4K).
In terms of finances, I did the "day to day" stuff; paying the bills, doing our taxes. Hubby enjoyed the "big picture" planning.

Having lost my 27 year tech career in 2008, at age 50, to "downsizing", I spent 3 years working temp jobs. Finally in
2011, a temp position became a permanent one and I was finally able to participate in a 401K plan again.
Full participation in my 401K meant that we essentially lived on Hubby's salary (Gross $98K).

We felt like we were finally back on track. House essentially paid off ($20K balance which we had in savings but
decided to keep the cash and keep paying the $175/month mortgage payment). No other debt. Now 60, I was
considering retiring at 62. Hubby, 10 years younger, was considering participating in a transition to retirement
program at work; starting in 2021.

And then January 2018 arrived. Like always we sat down to discuss our strategy ~ but things had drastically changed.
In August 2017, without symptoms or having any risk factors, Hubby was diagnosed with Stage IV esophageal cancer
that had spread to his liver. Initially chemo was working so the 2018 budget was based on my income $48K gross
(with no 401K or Roth money being saved) + Hubby's Long Term Disability ($48K).

We thought he might live to get in one more bike ride in the Spring. We chatted a bit about what the budget would
look like once he passed away. Hubby ran numbers based on me receiving at least some social security survivor benefits.

49.5 years old, 24.5 years of marriage ~ he passed away the end of January 2018.

During my phone call meeting with Social Security this past week, I found out that because I'm still working
and we didn't have children, I'm not eligible to receive survivor benefits even though I'm already 60. When
you are younger than your full retirement age (66 years 7 months for me) earned income is put the "earnings test".

For 2018, for every dollar you earn over $17040, they deduct $1 in benefits for every $2 earned. Since my current
gross income is 70% of what it was back in 2008, I'm pretty much out of luck in terms of even coming close to
following the monthly budget hubby created for "us" on my salary alone. If I ever get the life insurance check
(7 weeks and counting), I will pay off the mortgage but that still leaves me with a $10K/year deficit if I stick
with Hubby's various categories and target amounts. If I cut back on everything except property taxes, medical
deductibles and the house maintenance account, I can pare that deficit down to $5K/year. Yes, I will be able to
make ends meet by using some of the life insurance money ~ but that just irks me. Hubby paid into the system,
do I really have to wait 6 years to collect...apparently so. I'm just thankful that I have "fall back money" to fall back on.

In what turned out to be his final weeks, Hubby reviewed with me how I would eventually transfer his Vanguard funds
(tIRA/Roth IRA) to my tIRA/Roth Vanguard funds. What we ran out of time to discuss was whether or not I should
convert some tIRAs to Roth's.

Prior to getting sick, Hubby would spend a few hours a week, reading through this forum. Once he wasn't able to
work, the daily morning routine was tea and "Bogleheads" in the breakfast nook. If he told me once, he told me a dozen
times, if I had any financial questions check the BH forum...so here I am.

All things being equal, 2018 will probably be the last time I have the opportunity to file my taxes as a Married/Joint Return.
In between crying jags and wondering why on earth Hubby had 9 soldering irons (Hubby was an electrical engineer with a
MS in software engineering; his idea of a good time was to design/create circuit boards in his basement workshop) ~ I'm thinking
this might be a good time to convert some of the tIRA money over to the Roth account.I've tried following some of the other
threads about this ~ but I feel like I'm missing something.

If my gross income for 2018 is $48K, is it simply a matter of withdrawing $50K from my tIRA account (so my gross income will now
be $98K) and with the $24K joint tax deduction just pay whatever that tax is on the $74K amount? Or should I move up to the 22%
bracket and take out enough to maximize that bracket? Or even higher? Now that Hubby's tIRA has been merged with mine, the
total is close to $1M. Using the calculator here: https://www.taxreformcalculator.com/ the tax numbers don't look pretty
once I have to start filing as a single person in 2019 ~ not to mention my RMDs looming in the not too distant future.
Since I have a very good medical plan through work, my current plan now is to work till I'm 65.

Thanks in advance for your help....

Lafder
Posts: 3718
Joined: Sat Aug 03, 2013 7:56 pm
Location: East of the Rio Grande

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by Lafder » Sun Mar 11, 2018 9:47 pm

Condolences! You are doing exactly what I have told my husband to do if anything happens to me, post on bogleheads and follow their advice.........so it makes me sad for you to see you are in that exact position after losing your husband. He was a wise man.

Consider taking the time to post all holdings in this format. If you know your husband's user name (perhaps a moderator can help you find it if you don't) you can see if he previously posted all holdings. But if not, and even if he had posted, you would want the most up to date info. This will get all of your holdings in one place to figure out what you have and talk you through what to do with it all. Even if you change nothing, it gets it all in one place.

viewtopic.php?f=1&t=6212

I believe you need to get holdings converted to your name so they are inherited IRAs. Other folks here know more than I do on details. Yes it can make sense to do Roth conversions. But you will have to pay tax on the money converted, so it may not be worth doing now.

Welcome here,
Peace.
lafder

123
Posts: 3302
Joined: Fri Oct 12, 2012 3:55 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by 123 » Sun Mar 11, 2018 10:27 pm

Without more details on assets and expenses I can only suggest a general alternative. Perhaps instead of working and doing a Traditional IRA to Roth IRA conversion you should simply stop working and begin taking distributions from Traditional IRAs. You may also have issues of how much SSA you would receive now versus getting your "own" at 62, 65, or 70. Your other income, including Traditional IRA withdrawals, affects the amount of SSA benefits that are taxable should you elect to receive them. Lots to think about, can't be in a rush.
The closest helping hand is at the end of your own arm.

NOLA
Posts: 324
Joined: Sun Jul 10, 2011 1:23 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by NOLA » Sun Mar 11, 2018 11:37 pm

Really sorry for your loss and I'm sure you will get some sound advice from many of the great members here.

User avatar
FiveK
Posts: 4846
Joined: Sun Mar 16, 2014 2:43 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by FiveK » Mon Mar 12, 2018 11:09 am

Jimi wrote:
Sun Mar 11, 2018 8:33 pm
All things being equal, 2018 will probably be the last time I have the opportunity to file my taxes as a Married/Joint Return.
...
I'm thinking this might be a good time to convert some of the tIRA money over to the Roth account.I've tried following some of the other
threads about this ~ but I feel like I'm missing something.

If my gross income for 2018 is $48K, is it simply a matter of withdrawing $50K from my tIRA account....
Jimi, welcome to the forum and condolences on your loss.

Your thinking appears good! Yes, your tax rate is likely lower for 2018 than it will be for the next several years. If so, doing a Roth conversion now is probably good.

It may be semantics, but you probably don't want to "withdraw" money from the tIRA. Instead, do a tIRA->Roth conversion at the brokerage where the tIRA is held.

E.g., if your tIRA is at Vanguard, see How to convert a traditional IRA to a Roth IRA | Vanguard. Other brokerages should have similar options.

For how much to convert: perhaps consider your expected income in retirement, what tax bracket that leads to, and convert up to the top of that bracket now.

As already noted, the more details on assets, expected income and expenses, the more likely responses will be useful. Best wishes!

User avatar
Epsilon Delta
Posts: 7422
Joined: Thu Apr 28, 2011 7:00 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by Epsilon Delta » Mon Mar 12, 2018 2:27 pm

Lafder wrote:
Sun Mar 11, 2018 9:47 pm
I believe you need to get holdings converted to your name so they are inherited IRAs. Other folks here know more than I do on details. Yes it can make sense to do Roth conversions. But you will have to pay tax on the money converted, so it may not be worth doing now.
As a spouse there are two choices, adopt the IRAs as your own or leave them as inherited IRAs for benefit of the surviving spouse.

There may be reasons to leave the husbands IRAs as inherited IRAs rather than adopting them as your own. Adopting them as your own is irrevocable, but can be done even years later. So it's more flexible to leave them as inherited IRAs for now. You can revisit this in a few months or a few years when your plans are more certain. When you notify Vanguard of the death they may suggest moving them to your own IRA but will title them as inherited IRAs if you ask for it. The title of an inherited IRA will be something like "Epsilon Delta; IRA VFTC as custodian; Benef Mrs. Epsilon Delta".

As long as they remain inherited IRAs in the deceased spouse's name RMDs begin the year deceased would have reached age 70.5. If I understand correctly this is later than when the widow reaches age 70.5.

In some states (NY in particular) income from an inherited IRA may get favorable state tax treatment. It is considered pension income for the decedent and entitled to the decedents $20k state tax free pension allowance.

If you were younger than 59.5 another advantage would be you could withdraw from the inherited IRA without an early withdrawal penalty, but this does not apply to you.

The main downside to leaving these as inherited IRAs is if you die your heirs will have RMDs based on your or your husbands life expectancy and not their own. A minor issue is that you cannot do a Roth conversion on an inherited IRA unless the spouse adopts it as her own. This is not a problem if the survivor has her own IRAs to convert, since it does not matter much which IRAs are converted.

User avatar
Artsdoctor
Posts: 3298
Joined: Thu Jun 28, 2012 3:09 pm
Location: Los Angeles, CA

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by Artsdoctor » Mon Mar 12, 2018 4:52 pm

Jimi,

You have my deepest sympathy. We are all touched that you've had the wherewithal to jump into the forum, and I hope we can give some helpful advice.

You didn't provide enough financial details to give you a specific answer although there are a couple of concepts to keep in mind. You touched on one of them.

When you file MFJ, you're going to have more opportunity to convert IRA's to Roth's because tax brackets; it's obviously more restrictive when you're filing as single. When a spouse spaces at the very beginning of the year, you have time to make your way to the accountant and plan accordingly. He or she can talk to you about stepped up bases and conversions at a far more leisurely pace than if a death had occurred at the very end of a year. You may very well find that it is going to be helpful to convert to a Roth, and that you may benefit from selling an investment because of a stepped up basis (or perhaps this won't be helpful since everyone's situation is different).

These days will be hard. Your accountant may not be entirely comfortable with discussing some of these things despite it being an integral part of the job--just bear in mind that some people have varying levels of familiarity with these very difficult periods.

If you feel overwhelmed and most of your investments are at Vanguard, they can manage your investments for you. There are many ways to handle this.

Again, I am very sorry for your loss.

Jimi
Posts: 6
Joined: Sun Mar 11, 2018 6:26 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by Jimi » Tue Mar 13, 2018 6:21 am

Thanks everyone ~ I appreciate all your thoughtful replies.

I am currently working on getting all my financial information in the format that Lafder pointed me to so that I can post it here. Hubby actually left me a couple spreadsheets with most of the fund information already summarized, I just need to gather a couple more "pieces/parts".

Jimi ~

Jimi
Posts: 6
Joined: Sun Mar 11, 2018 6:26 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by Jimi » Tue Mar 13, 2018 7:23 pm

So here are my current holdings ~

Emergency fund: $30K

Monthly expenses $3725.00; this exceeds my current take home pay by $1125/month.
My current plan is to use some of the Life Insurance money (once I get it) to cover this deficit. The down side of this
is that I can no longer contribute to my work IRA. Current take home pay is ~ $2600/month.

Debt: $20K Mortgage; ($178/month); will pay off once I receive Life Insurance check

Tax Filing Status: Married Filing Jointly for 2018 only; will have to file Single 2019 onward

Tax Rate 2017: Federal: 25%
VT State: 3.55% on 1st $62.6K of taxable income + 6.8% on taxable income
between $62.6K & $151.2K

State of Residence: VT

Age: 60

Current Retirement Asset allocation: 60% stocks /40% bonds
Hubby's tIRA and Roth IRAs were rolled over into my tIRA/Roth IRA accounts. The numbers below
reflect the rollover amounts.

> tIRA: Vanguard VBIAX Balanced Index Admiral fund; low 7 figures
> Roth IRA: Vanguard VBIAX Balanced Index Admiral Fund; $72K

>At some point I will receive $198K in life insurance.
$20K will pay off mortgage; I will use $60K to cover yearly expenses between now and the time
I can start receiving survivor benefits. I will invest the remainder in the Vanguard Tax Managed Balanced Fund (VTMFX).

**Desired International allocation: can't say I have one

Hubby walked me through what he determined to be the "best practice" for making tIRA withdrawals when the time comes.
Personally I have not thought about when that will be.
But to determine the amount:
First year: take a maximum of 4% of the Fund amount.
2nd year: Take same amount as first year + rate of inflation.
Based on current value, 4% would be in the the $50K range

When I reach 66 years/6 months, I can start receiving survivor benefits of $1900/month (probably a tad more with COLA)
with no "earnings test" being applied to my income. Since my medical plan is through work, looks like I will now
be working until I'm at least 65.

I will defer taking my own SS benefits until I'm 70.5; my benefit will be in the $2200/month range.

Goal is to be in the 12% tax bracket.

cas
Posts: 272
Joined: Wed Apr 26, 2017 8:41 am

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by cas » Wed Mar 14, 2018 8:24 am

Here's a post to bump your thread back up to the top of the pile, since it is an important question, and people may not have noticed that you've now added lots of information and posted in the requested format.

stw
Posts: 19
Joined: Wed Jul 05, 2017 10:29 am

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by stw » Mon Mar 19, 2018 3:14 pm

I've been following this thread. I checked back in to see the latest replies - looks like it got lost in the shuffle.

Peace to you, Jimi. I wish you well as you work through all of this.

Jimi
Posts: 6
Joined: Sun Mar 11, 2018 6:26 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by Jimi » Sun Apr 15, 2018 1:05 pm

Hi Everyone,

Just wanted to thank the folks that took the time to send along suggestions to me.

Here's what I ended up doing:

While I liked 123's suggestion that "Perhaps instead of working and doing a Traditional IRA to Roth IRA conversion you should simply stop working and begin taking distributions from Traditional IRAs ", at this point in time, I'm not ready to stop working. Besides enjoying my work, there are actually some advantages to keep working; great medical & dental coverage & full pension amount if I work until 65. Retiring at 65 also means I can also purchase dental insurance for the rest of my life through the group policy.

Based on FiveK's suggestion and the additional reading I did in this forum, it looked like I had the potential to be in the 22% tax bracket once RMDs kicked in. So last month I did a Roth Conversion up to the top of that bracket. Hubby died in January and had only received one disability check in 2018. That actually gave me a little more wiggle room for converting since it's essentially just my salary ($48K) that I'm working with for 2018. I am paying the estimated taxes (Federal & State) using life insurance money.

I paid off the mortgage ($20K) with life insurance money.

I mentioned that my salary alone didn't cover the various budget categories so again, using life insurance money, I funded each of the various categories (Insurance/Car Maintenance/Dogs etc.) for a full year. I will parcel out my bi-weekly check as far as it goes into the more critical categories (property tax, insurance, house maintenance) to get a jump on the 2019 balances. I also fully funded my Roth for 2018.

I was going to send the rest of the life insurance money to my Vanguard Tax Managed Balanced Fund (VTMFX) but in the end I chickened
out and sent only $20K there and put the balance in a 1yr CD. I will review this again when the CD comes due.

And lastly, because it just felt wrong to stop saving for retirement after all these years, I signed up to contribute $250/pay period to my 401K. Yes, I admit it feels weird because if the goal is to convert more of the tIRA to the Roth account over the next several years, why am I still contributing to my 401K? Guess it's my way of trying to keep the "family" financial goals alive~ even if the family now is just me. It also gives me a little breathing room in terms of single tax brackets come 2019.

~ Jimi

User avatar
FiveK
Posts: 4846
Joined: Sun Mar 16, 2014 2:43 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by FiveK » Sun Apr 15, 2018 3:07 pm

Jimi wrote:
Tue Mar 13, 2018 7:23 pm
State of Residence: VT
Age: 60
> tIRA: Vanguard VBIAX Balanced Index Admiral fund; low 7 figures
> Roth IRA: Vanguard VBIAX Balanced Index Admiral Fund; $72K
>At some point I will receive $198K in life insurance.
When I reach 66 years/6 months, I can start receiving survivor benefits of $1900/month (probably a tad more with COLA)
I will defer taking my own SS benefits until I'm 70.5; my benefit will be in the $2200/month range.
Jimi wrote:
Sun Apr 15, 2018 1:05 pm
...it looked like I had the potential to be in the 22% tax bracket once RMDs kicked in. So last month I did a Roth Conversion up to the top of that bracket.
...since it's essentially just my salary ($48K) that I'm working with for 2018. I am paying the estimated taxes (Federal & State) using life insurance money.
Good choice on the Roth conversion.

If you can afford (and by that I mean "have enough cash on hand to pay the taxes") to convert more, that might still be favorable. See the charts below, and the personal finance toolbox spreadsheet if you would like to use more accurate income numbers.

The first shows marginal rates for 2018, using MFJ filing status, VT tax brackets, and $48K W-2 income.
The second shows marginal rates for 2018, using S filing status, VT tax brackets, and $48K W-2 income. In other words, assuming 2019 will be the same as 2018 except for filing status. It won't, but probably close enough for an example.

Image

Image

Things will only get "worse" (tax-rate-wise) when SS benefits kick in.

Jimi
Posts: 6
Joined: Sun Mar 11, 2018 6:26 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by Jimi » Sun Apr 15, 2018 3:40 pm

Thanks for the link and the charts FiveK.

When I see hubby again, I will have to tell him he should have left me more life insurance so I could have dealt with bigger chunks of Roth Conversions... :wink: With the recent conversion, my Roth account bumped up to $210K.

So much to think about ~ it's almost paralyzing. In all the years we spent pouring over finances and mapping out a strategy for retirement, having one of us die young was never a scenario we considered.

User avatar
FiveK
Posts: 4846
Joined: Sun Mar 16, 2014 2:43 pm

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by FiveK » Sun Apr 15, 2018 4:00 pm

Jimi wrote:
Sun Apr 15, 2018 3:40 pm
...dealt with bigger chunks of Roth Conversions... :wink: With the recent conversion, my Roth account bumped up to $210K.
You have already captured the lion's share of the benefits with the conversion you made. Higher conversions might be favorable, but likely in the "few percent" range - probably not enough to jump through hoops for. Good luck!

Sandi_k
Posts: 697
Joined: Sat May 16, 2015 11:55 am
Location: SF Bay Area

Re: Widowhood, Budgets and tIRA to ROTH IRA Conversion ?

Post by Sandi_k » Sun Apr 15, 2018 6:04 pm

Jimi, it might be worth noting that you could possibly plan for retirement at age 63.5 - and use COBRA for 18 months of health care coverage. (Don't know if that still gives you retiree dental, but thought it might be worth an explicit shout-out).

My condolences for your loss; DH and I haven't talked about an early passing, either - although I do have an "In Case of Death" file on my laptop for him. :(

Good vibes and thoughts headed your way - you're doing well at keeping your chin up.

Post Reply