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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.