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John Yeigh posted excellent information yesterday entitled Roth Conversion Opportunities Extended
Despite my feeling that I am fairly well conversed in this matter I still read everything I can, assuming correctly, that I don’t know everything. When reading the article below:
https://humbledollar.com/2023/01/securing-lower-taxes/
This line struck me:
Take earlier IRA distributions and invest that money in a taxable account. Subsequent gains would be taxed at lower capital gains tax rates. If held until death, the investments could receive a step-up in basis and pass income-tax-free to heirs.
As I have written before I am trying to convert all of my wife’s traditional IRA into a Roth 100% invested in a world stock fund so: 1) I will only have to take RMDs from my traditional account, thus reducing our portfolio maintenance requirements, 2) my children can potentially inherit it and decades of gains tax free, and 3) lower my RMDs when I turn 73. Today I posted a comment on another of John’s linked articles on how reducing the balance in my wife’s traditional IRA to zero is harder to accomplish, due to compounding growth, than I realized (Truly a problem of the affluent)
After hopefully completing the Roth conversions and before we turn 70 (and claiming our Social Security benefits) I figured we would only withdraw funds from my traditional IRA in what limited amount was necessary to meet our expenses.
After reading this article I’m now considering continuing to withdraw enough from my traditional IRA to top off the 12% tax bracket each year until we turn 73 and investing the unspent balance 100% in a world stock fund in our taxable account. These funds could also be inherited tax free due to the step up in basis. I was already planning to increase our portfolio’s stock allocation once we claim Social Security as our income will meet most if not all of our expenses. This plan seems to make more sense than adjusting our stock allocation in my traditional IRA.
Two questions the:
1) Does this plan make sense?
2) Are others also topping off their top tax rate with the same philosophy?
My brain aches when I read these helpful pieces. Why does everything have to be so complicated?
I continue to take RMDs and haven’t done a Roth conversion, although I do have a traditional IRA and a Roth. My actual tax rate is 7.5% (tax paid divided by total income). I decided to avoid the headaches. When my spouse takes her RMDs in a few years the tax rate could change.
This discussion is making my head hurt and making me want to just take the 10% penalty on all my IRA and 401K money right now, dump it into my dividend growth portfolio and just pay the 15-20% on the dividends above 85K (married) and just move on with my life. lol
Another consideration would be to leave enough in the IRA for future Qualified Charitiable Donations/QCDs, should you be so inclined.
David, I’m not sure how converting after starting to draw Social Security would be beneficial, tax-wise. Once Social Security starts, your minimum tax rate for IRA withdrawals (be it for conversion or for income) is going to be 18.5%+ state tax, and will quickly ramp up to 22.2%+ state from there.
As you have noted, you can rarely get burned when you convert at 12%, but as you ramp up from there it gets a lot easier to do more harm than good. And, when you consider that loads of potential tax law changes could, in one swift stroke, make all but the most modest of conversions backfire, considerable caution is warranted. I’d definitely advise stress-testing your plans with some of these mind. Things such as RMD’s fo