Sourcing Taxes for Roth Conversions

Hoping the HD community can provide some clarity on this issue.

We are in retirement, have some pension income, drawing the lesser social security benefit and deferring the larger till 70.  We are 4 years from the larger SS benefit and 9 ears from RMDS.

We have relatively large traditional IRAs as well as Roths which were funded during our working years,  however, we have minimal taxable investments.

We are starting to visualize the tax, IRMAA, surviving spouse penalty freight train that is coming down the track once SS and RMDs turn on.  We have done periodic small Roth conversions but they’re not moving the needle in terms of meaningfully reducing our traditional IRA balances (and the resultant prospective RMDs).  The only way we could do large Roth conversions would be to pay the tax out of tax deferred funds.  This, however, seems to violate what appears to be a cardinal rule of Roth conversions – Always pay the tax out of after tax cash.

I recently came upon this video by Ben Brandt and he takes a completely different perspective saying it’s perfectly fine for “super savers” to pay the Roth conversion tax out of tax deferred dollars because their goal is not the perfect Roth but rather to reduce traditional IRA balances.  He basically says after tax sourcing would be ideal but don’t be a Roth “purist” or “perfectionist” and just pay the tax from wherever you can.   Further, paying the tax out of IRA withholding allows one to pay any taxes owed in December (assuming that’s the time of the Roth conversion) and avoid quarterly payments since the IRS considers taxes paid through withholding to be paid evenly throughout the year.

There’s more to the video as his overall thesis is, at the beginning of the year,  pick a % of your IRA that you are going to withdraw after considering tax brackets, IRMAA thresholds, other income, etc.   Those $$$ are to be spent/gifted first and then whatever remains, if any, is your Roth conversion.  He emphasizes that spending/gifting is the priority and not the Roth conversion.

Anyway, I liked his perspective and would appreciate any input especially on the it’s fine to pay the tax out of the traditional IRA if that’s your only source and the goal is to reduce that balance.

Finally, I ran this tax issue by a fee only financial advisor and he concurred.  Convert big and pay the tax out of withholding from an end of the year IRA distribution.  When asked about the loss of the OBBB $12K deduction or busting IRMAA threshold #1, he said those are just “noise” and not significant compared to the downstream savings that would be achieved by getting traditional IRA balances reduced.

Of course, if a rogue AI program turns us all into paper clips, I’m going to regret front loading tax payments.  🙂