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Currently our rental income exceeds 100% of our discretionary and non-discretionary annual expenses. We are at the mercy of higher tax brackets and Irmma. I am 2 years from RMD’s, my spouse is 3 years away. Should the market simply stay flat our RMD’s (both) will cover 100% of our annual expenses. We have been very fortunate.
Our IRA’s are in. Index funds, spread across large and small in an 84/16 stock/bond mix. Stocks are 46/38 between domestic and foreign in an approx 2/3 large cap and 1/3 smaller cap for both.
The bond allocation is divided equally in ETF’s between short tips, intermediate corporate, intermediate treasuries and foreign bonds. The bonds will start increasing closer to 20% of the portfolio in the next year. Currently the bonds can cover 3-4 years of our total spending so we shouldn’t need to sell stocks to cover RMD’s. We will also start converting some rebalancing gains, if any, to a money fund for RMD use. We also have a year’s worth of cash needs available in Roth IRA’s however plan to pass those to children.
advisors make “blanket” recommendations to convert to a Roth which to me makes no sense at our current 35% incremental tax bracket I would prefer to make an annual gift to an individual instead of to the IRS for ever $100,000 conversion.
We can also “gift” the rental property and lower our tax bracket in two years to the level of our RMD’s as we don’t anticipate any real need to increase our spending other than major medical issues which we can adjust for should they arise.
So, after the long introduction………..
what am I missing, please be critical, I have thick skin ?
are we too aggressive?
how can a Roth conversion really help today, when family could use the funds now for living or saving as they desired?
appreciate any and all constructive criticism, thank you
Hi Rob,
I’m hearing that you have too much income and pay too much taxes. Not really a problem in my view.
At 35% I wouldn’t do a conversion either. I would want to find a way to reduce RMDs. It may be too late for you, but my best suggestion is to ramp up your gifting. In addition to charity, you can give a certain amount to others, for me it is my children. I think the max is around $30,000 each for you and your spouse per year. A small amount like that probably won’t impact your tax bracket. I look at it that my residual funds will go to them anyway, and this reduces the potential tax bomb.
Of course, make sure to keep enough to cover your needs, especially long term care.
Sorry, no criticism from me. Best wishes to you and your family.
John
The limit is $19,000.
You have to report gifts over $19,000 (Form 709) but the excess will only reduce your inheritance exclusion which is currently just under $14 million. There is no effect on your current taxes.
We have a retirement financial planner who is admittedly conservative and my guess he would look at the rental property income as a risk to be considered and the asset allocation. He certainly does not take a blanket approach to Roth conversions (and I am aware of several other advisors who also do not..). We discuss them on a case-by-case basis and look at the considerations objectively-I was the one this year who argued for a higher Roth conversion than he suggested. But you are right Roth conversions are overblown and are unlikely to make or break a retirement plan. Good luck.
I largely concur. Congrats. Not sure why cash is in your Roth, though. But if that’s your biggest problem, you’re blessed.
I think the general advice about people doing Roth conversions is for people in upper 50s or lower 60s who are in retirement or about to be so that they can fill up lower brackets. That’s not your situation, so the advice is not applicable.
Since you’re charitably inclined, you’ll find things to do with your RMDs or appreciated assets. Enjoy!
Cash will be held in normal IRA the year before RMD’s. Roth are all in world stock index for maximum equity exposure
we plan to investigate a charitable RMD for up to 1/2
thanks.
You may want to consider a Charitable Remainder Trust for the rental property.
Currently a CRT is planned for a portion of the IRA RMD’s.
the rental has a very low basis so one of us passing gets a nice step-up, we just haven’t had any suggestions on who should die first and how soon. LOL
we will probably gift the rental to children and have them take our lower basis. They can then decide to do a 1031 exchange or keep the property.
our aggressive asset allocation and bond allocations in particular are most in question for me currently.
I appreciate all the comments that look at the non- benefit of a Roth conversion currently.
If you own the rental property jointly the basis will remain the same when one of you dies. However, if your children inherit the property after both of you die the basis will be stepped up to its current market value. Thus your children can simply sell the property without having to pay recaptured depreciation or capital gains taxes.
Doesn’t the basis for a widow(er) depend on the state, community property (full step-up) vs. common law (half)?
You are correct Randy with what we have been told in a community property state. Full step-up on full death, we just need to draw straws, or continue holding and paying the taxes, which is a good problem, or gift rental property with our basis and let the children do a 1031 or hold until they gift. Pon death. Of one the solution is easy, step-up and sell with no gain.
I stand corrected.
Clearly you are anything but at the “mercy” of higher tax brackets and IRMAA! Well done. What you seem to be missing is your own permission to up your discretionary spending to fit the funds you’ve created for yourselves. Enjoy a few splurges along with your gift giving.
I think your plan is well thought out. I would look to hire an hourly rate financial planner for a critique of your plan. You probably require a degree of specialization that is beyond the experience of most Humble Dollar readers, certainly beyond mine – especially with the rentals.
At the 35% tax bracket I like the phrase “at the mercy of IRMAA. I bet there are a few retirees who wouldn’t mind changing places.
I never could understand Roth conversions once a person is in their seventies.
Dick,
Regarding your second sentence as I have written🙋 😂
Congratulations! It sounds like you and your wife and have done very very well. I’m no expert, but it sounds like your level of wealth really needs a detailed financial plan exploring the different options. Running the numbers would help you quantitatively compare the options. This can be particularly true when you run the model out 15 or 20 years and see the results of whatever action you’re contemplating. Sometimes a person is way ahead paying taxes and higher IRMAA brackets sooner, but sometimes not. I’ve found using intuition alone can fail me. Gene
Robert,
You have good problems to deal with. I’m no expert when it comes to planning for high net worth couples, still, here are a few thoughts. Hopefully the CPA’s above my pay grade will chime in.
If you gift the rental properties, would it then make sense to do massive Roth conversions now in order to reduce or eliminate IRMAA (in a couple years) as well as reduce income tax down the road?
Thank you everyone for the suggestions, we are attempting to locate a “fee only” advisor. Vanguard wealth managers looked at the plan and concluded that should the rental income go away we had a 96% chance of having funds at age 100% with our IRA asset allocation so we are basically comfortable there. My wife and i are “former” CPa’s, now obsolete however. Too many new rules and tax changes to stay current.
like Dick mentioned and someone agreed, I don’t understand giving the IRS money today for a Roth conversion today when simply gifting the income producing rental property and resulting taxable income will provide a lower future tax bracket while living off of the RMD’s.
As Dan mentioned, if/once the rental income property is a reevaluation or Roth conversions would be worth calculating since our heirs could benefit from receiving Roths vs traditional IRA’s …. unless we just take Chris advice and spend more.
i forgot to mention we have an adult son that struggles with periodic mental health episodes so we have primarily supported him and will likely need to for the remainder of his life, which requires current gifting.
i still struggle with Bonds as part of the portfolio as we have always been 100% equity until we recently realized.. we are now old……….thus the equal allocations attempting to stay intermediate on the bulk with short term tips to cover at least a years worth of RMD.
thanks again everyone, keep the suggestions coming!