With RMDs being extended up to 5 additional years how much does that change the ROTH/401K/IRA conversion analysis?
Hi RichW00,
“With RMDs being extended up to 5 additional years”
Can you explain this? Link to an article?
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx
Here is one link:
https://www.barrons.com/articles/secure-act-2-0-retirement-r…
A better link that answers my question:
https://www.kiplinger.com/retirement/retirement-plans/requir…
You’re referring to the recently US House passes SECURE 2.0 bill the Senate has yet to vote on.
But the question what effect will adding 3 years to the first RMD year have on conversion analysis, will, like everything, depend on the household, their financial needs, marginal tax rate, life expectancy, expected rate of return and so on.
Generally speaking, the longer you can delay RMDs, the higher the tax bill will be later in life. This should have no bearing on Roth conversions, as the size of these is determined by the tax effect, not on the size of the IRA. The tax condition a delayed RMD may have is to make the RMD amount so large as to put you in higher tax brackets and possible create an IRMAA event if your AGI gets too large.
BruceM
Hi RichW00,
First, you can’t count chicks until they hatch.
Many, many pieces of legislation have passed one house and not the other. They can pass both and not get a WH signature. The two houses bills may need work to resolve differences.
When it is signed into law, be concerned.
As far as 72 or 75 for a Roth conversion, I don’t believe it matters.
Just keep in mind what your projected balance will be when you start taking distributions from the IRA, RMD’s or voluntary distributions. Once you hit RMD age, you will be forced to make withdrawals.
I took my first and last RMD in January. After the RMD, I converted the last of my trad IRA. From 2010 to 2022, I did partial conversions for my wife and I.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx
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I took my first and last RMD in January
I’m envious!!
Taking my first RMD this year. Ugly.
Now I wish I had done as you and others did…sucked it up and made those Roth conversions in earlier retirement years when AGI had declined putting us into lower bracket.
Congrats.
BruceM
Hi BruceCM,
Thanks!
“Now I wish I had done as you and others did…sucked it up and made those Roth conversions in earlier retirement years when AGI had declined putting us into lower bracket.”
My planning in 2010 was trying to dig into Quicken Lifetime Planner and why it was showing a large downturn in our portfolio after I turned 70. Not a little curve down either!
I found it was RMD’s and how Quicken was handling them. The default was “Spend.” Added to the RMD was additional withdrawal to pay the tax. Essentially, it added a 3X amount to our current income and tossed the money out the window as “Spent” and tax.
I found where I could elect the handling of the excess, reinvest in taxable, but the amount was still a lot and still pushed taxes hard.
About that time, I read an article about the 2010/11 “special deal” on conversions.
I put in a $100K conversion in the planner and noticed a small but noticeable affect on future taxes.
So I tried putting in additional conversions in future years. I found that I could bump up current conversions and drop the future RMD affect to about the same tax level I was bumping up to, a much lower rate than if I left it alone.
So I came up with a plan and started it in October 2010.
Initially, I wanted to convert most of the annual growth in the trad IRA’s, mine and DW’s. Moving the higher growth stock to slow growth in the trad accounts and place it in the Roth’s.
I actually did all of DW’s IRA first.
The plan worked better than I had planned because I took advantage of the reduced tax rates when they happened and accelerated my plan.
Another factor that made me completely wipe our trad IRA’s was “what” I transferred first. When I concentrated on growth, it changed the annual growth rate, reducing it in the trad IRA’s and increasing it in the Roth IRA’s.
When I was getting closer to completing the task, the slower than planned growth in the trad accounts left them kind of stuck in time, making the conversion amounts slice much deeper than the annual growth in the accounts! Then things started to change quickly.
But something that I never imagined when planning our conversion happened. We decided to move and build a new place.
If I had left everything in our trad IRA’s, pulling out the cash to pay for the lot and building the house would have been, well, QUITE EXPENSIVE, to say the least.
But, most of our portfolio was already in Roth! No problem.
IOW, if I had not done the conversions, we would still be in our old place or I would have had to get more financing to do the build instead of paying cash. (Some photos in the links below.)
Gene
All holdings and some statistics on my Fool profile page
http://my.fool.com/profile/gdett2/info.aspx
General photos of the land and maps:
https://photos.app.goo.gl/3NC9sbPMxjzUZBc76
House Construction: From bare grass on October 17, 2021 to current.
https://photos.app.goo.gl/YdH6e5w4rwz5rknG9
Shop Construction
https://photos.app.goo.gl/rpaeujz6VqhrpZ2z7
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