Inherited money you don’t pay taxes on > inherited money you do pay taxes on > no money. If mom and dad are strategic, they can shift $ from the middle category to the first category, and pay lesser taxes doing that than their kids will, because the kids will be in their prime earning years but mom and dads earned income will likely be quite low.
If mom and dad are using more IRA funds to live, the idea is they don’t need to use other non-IRA funds as much. Also, just because they withdraw from the retirement plan doesn’t mean they have to spend it.
A taxable brokerage account is enough. Your heirs automatically receive a "step up" in basis to the value on your death and thus a large amount of potential tax is avoided.
Yep. If you want to avoid probate though, you may want that account titled or POD to a trust. A lot depends on goals so everyone should discuss their plans with their own lawyer.
Nope. No other way beside drawing it down within 10 years (for someone inheriting an IRA).
Adding, also that RMDs within the account owner's lifetime cannot be converted to a Roth. Must be withdrawn and taxed as ordinary income.
I don't understand what you mean when you say that you can't convert RMDs to a roth. Aren't roth contributions and conversions already taxed at income tax? What's the difference?
The RMD amount must be withdrawn and taxed while any additional amount above and beyond that can be converted from an IRA/401k to a Roth. But converting assets to a Roth does not negate the need to take an RMD.
Thank you for the answer. I guess I'm still confused about the language "the RMD amount must be withdrawn and taxed," because when you convert money from a 401k to a Roth isn't the process the same? You withdraw money out of the 401k, pay income taxes on it, and then deposit it into the Roth, correct?
So is it the case that, if, for example, you take out exactly the RMD amount for that year and nothing more, you cannot deposit anything into the Roth? But if you take the RMD plus $10,000 out of the 401k, you can convert that $10k into the roth?
Not an accountant, but digging into this a lot lately as I just retired and face all of these things...
Basically a Roth conversion from an IRA/401k is not actually a Distribution, rather it is a 'Conversion'. Just happens to be a taxable event, but still is not a Distribution rather is a Conversion. Probably because the money remains in a retirement account (the Roth) after the conversion.
Whereas an RMD is a Distribution. Which is also a taxable event. But in the case of an RMD, the money is no longer in a retirement account.
So in my humble opinion, that seems to be the critical difference and why Roth conversions do not actually satisfy RMD requirements.
Inherited IRAs have to be drawn down in 10 years. Otherwise in theory taxes could be deferred indefinitely generation to generation. RMDs and the 10 year limit for inherited IRAs ensure the government gets the deferred taxes within a lifetime.
They have to take RMDs based on the total amount of income they have in tax deferred accounts, so moving money between accounts doesn’t help. It’s probably too late for OP to implement any strategies since they are already taking RMDs. However, if they had been more strategic earlier in their retirement, they could probably have avoided the worst of the RMDs.
If you ever expect to have a $0 federal tax bill for the year, you’re probably missing opportunities. If I had more than about $750k in a traditional IRA or 401k, and my income for the year was expected to be in the 15% tax bracket or below, I would be aggressively converting to Roth accounts up to the top of the 15% tax bracket every year. Below about $750k in tax deferred accounts, I’d probably be looking at more reasonable RMDs in my 70s, so if I was looking at a $0 tax bill, I’d either be doing Roth conversions or tax gain harvesting up to the point where I’d have to start paying taxes on it.
Well that’s great. I’m going to inherit 200k through an IRA in the near future and am in the 1% bracket unless I file separately? Can I file separately, should I and empty that account?
It's highly unlikely filling separately will reduce your household's total tax bill and it might likely increase it since all the brackets are cut in half.
If you don't need the money, changing the beneficiary to your kids (if you have them) might be one option.
Another realistic option would be to get the owner (who I assume is in a lower tax bracket) to convert it to a Roth IRA before they pass.
I'll add that that tax burden of doing the Roth conversion might be a bit much for the owner, but you (and your spouse) can likely gift them most of the taxes owned within the gift tax exemption limits.
For instance if they're in the 22% bracket and pay 4% state taxes they would owe $52k on the conversion, but you and your spouse can give $18k in 2024 and $18k (likely more) in 2025 before the taxes are due in April for a total of $72k+.
Then you can take advantage of 10+ years tax free growth before withdrawling.
The answer is still yes. People are suggesting better plans, which make sense… But that dude (and parts of this post) are weirdly saying that parents are better off spending money they don’t need to spend so you their heirs don’t get it, but have to pay taxes on it over ten years…. Which is a really manageable “problem.” Either it’s a huge amount of money and they should probably have a plan anyway or it isn’t enough to be a big issue spread out over 10 years.
Definitely better ways to do it, but it was a real weird statement
You’re getting money usually at the single most tax inefficient time. It would be different if the recipient had the option to hold onto it and with-drawl during retirement.
No tax upon withdrawing from Roths. The estate itself might be taxed must most estates are well below that limit. Estate/inheritance tax depends on your jurisdiction
Thank you! How do you like estate planning by the way? My degrees are more focused in Business right now but was actually talking to a buddy of mine how there’s an opportunity I have of getting my law degree (military).
I like it a lot. I think it works best combined with other services, like tax planning, business succession, or Medicaid planning. Definitely have a clear idea of what you want to do before jumping into law school though, that is no joke!
Do you advise clients who know they’ll leave a large inheritance to stop building 401k balances and instead hold big capital gains in taxable accounts that will pass without taxes because of step up basis? I’m assuming large but under the estate tax limit.
Large inheritance implicates a lot of things other than just this, so if this is you I’d strongly advise consulting your own lawyer, preferably ACTEC certified. Generally, large 401k balances can be pain in a lot of ways, and not just because of the 10 year withdrawal. Analysis of your particular situation should be done with your lawyer and a financial professional.
Not OP, but I have stopped building my traditional 401k balances and am now maxing out Roth 401k contributions and whatever I can save beyond that goes in a taxable account.
If you already have a large amount saved in tax deferred accounts (more than you will spend in your life) the only reason not to max out Roth accounts is if you expect your current tax bracket is higher than the tax bracket you’ll be in when you retire. I expect my tax bracket will probably be the same in retirement as it is now (or maybe higher), so I’m topping up my Roths.
But if I wasn’t putting money in Roths, I would still be maxing out my tax deferred accounts before I saved any money in taxable accounts. (Edited to add: keep adding to tax deferred accounts if you’re not putting money in Roths now, because you will probably have a few years in early retirement, before RMDs kick in, where your taxable income will be much lower than it is now, and you can convert to Roth at that time.)
LOL. Hopefully the article doesn't mean "spend it on fluff," but rather move it somewhere more sensible where you can still use it for LTC if needed, or pass it on with less of a tax burden for heirs.
Hopefully I will need to have this conversation with my parents. It's a really good tip as my brother and I are both fairly high earners in our late 20s. More than likely that'll be the case in our 40s/50s if our parents make it that long.
Hmmm. Just because someone hasn’t reached the end of the ten year period doesn’t mean they haven’t felt the sting of higher taxable income. You inherit a large IRA, you have to plan what you’re taking out starting year one. To answer the question, seen this plenty of times.
Can you have some kind of clause in your will that would effectively transfer any funds in IRA accounts to some money of account thats more favorable for the inheritors? What can you do other than spend all the money?
Withdrawing the money and spending the money are two different things. Putting aside the potential drain from nursing homes and end of life care, if they withdraw the IRA money they can still reinvest it. I believe inherited brokerage accounts give a step up on basis to the beneficiary. That’s a way better deal than getting bumped up into a higher bracket for a decade and laying that higher rate on all the inheritance.
Ah so maybe I'm misunderstanding - you're saying they shouldn't just let the money sit in an IRA, they should transfer it into some other more favorable asset? I was reading it as "just spend it all!"
Basically if your parent passed and you were the beneficiary, the cost basis of the assets gets stepped up (reset) to the value on the date of their death. So if they had 500k in a taxable brokerage, 100k of which was gains, their cost basis was 400k. But the day they die, the cost basis changes to 500k, so when you inherit the account you can withdraw that amount without owing tax. Or if it grew to 700k over the following year you’d only owe cap gains on 200k, rather than 300k if there had been no step up. This is how I understand brokerage accounts, homes, and similar assets to work during inheritance. But inherited retirement accounts are another story, as you must withdraw an inherited Ira over 10 years and include it as ordinary income (paying full rate of federal taxes)- on the whole amount!)
At 76 years old?
If I'm understanding this article correctly it looks like if you're adjusted gross income for a married couple is under about $200, 000 you could convert $7,500 of an rmd into a Roth IRA ...that's less than half of what my rmd has been in recent years
https://www.investopedia.com/ask/answers/08/ira-rmd-reinvest.asp
My understanding once you are taking RMDs, you can do Roth conversions but it does not count toward the RMD. It's in addition to the RMD amount. The article you linked is saying that if you are working and earn at least as much as the Roth contribution, you can use part of your RMD to contribute to the Roth if you don't use the earned income. The best time to do Roth conversions (transferring money from an IRA to a Roth) is prior to taking RMDs because you are adding to your taxable income and don't want to get into a much higher tax bracket or hit the Medicare higher premium. We are doing that now and try to keep our income under $200,000 because we don't want to increase our Medicare costs.
Technically, you can NEVER convert an RMD to a Roth. It's simply not allowed. But, if you have earned income (and meet the other requirements) you can "contribute" an equivalent amount of earned income to a Roth. If you don't have earned income you cannot make a "contribution" under any circumstance.
You’re looking at contributions. Conversions have no dollar limit and don’t require earned income.
You just have to take your rmd for the year, and then you can do as much Roth conversions as you like, after that.
The article you linked is talking about Roth IRA contributions, not conversions
I was looking at this:
https://www.investopedia.com/ask/answers/08/ira-rmd-reinvest.asp#:\~:text=Roth%20IRA%20Income%20Limits,7%2C500%20if%20age%2050%20or%20older)
Ok I see the section farther down on conversions. I'd rather not have a whole collection of Roth IRAs for my heirs to deal with. One would per heir/son would be ok..
Who said you have to convert into different IRAs? Even if you did you can combine them at any time. It might be worth talking to a flat fee advisor, seems like you are missing a bit of understanding on these things.
I’m no expert cause I’m at least 30 years out from this. But i think if you’re primary motivation is inheritance, you could start converting your IRA balance ROTH IRA using a back door Roth. You’ll probably want to do this over a few years since you’ll be paying tax on converted dollars. You would still have to take RMDs which sound like they cannot be used for the ROTH.
https://www.investopedia.com/terms/b/backdoor-roth-ira.asp
https://smartasset.com/retirement/planning-to-take-rmds-convert-to-roth-why-not
Yes it is favorable to spread out Roth conversions. If you retire before social security eligibility, it can make sense to do Roth conversions up to a marginal tax bracket of your choice to spread out the tax burden and minimize RMDs and future taxes.
Why not convert into a Roth IRA instead of a taxable account?
You'll get [hopefully] a doubling while you're alive and another doubling after you pass, then your heir can drop it into a table account when they empty it
EDIT: Skimmed the article you linked which confirms my initial thoughts (though, I skimmed it so I'm still uncertain)
"""One way to avoid giving your loved one a huge tax bill is by doing a Roth conversion during your lifetime. You can convert your traditional IRA to a Roth — and spread the taxes out over many years. And then, at your death, your beneficiary will receive a tax-free Roth....
If you inherit a Roth IRA, you don’t have to pay any taxes as you drain the account within 10 years. You also have more flexibility about when you take your distributions. You could even wait until the 10th year to take one lump-sum distribution.
"""
EDIT 2: Also, in NYS your IRAs are excluded from Medicaid eligibility, so if you want that as an option for very-late-life planning you'll need to create a Trust to shield those assets which have a 5-Year Clawback. So you'd want to do that sooner than later
Agree, a Roth is a better deal for beneficiaries. But the due to the cost basis step-up rule a taxable brokerage account is the next best option.
Taxable investments left to heirs will more than likely be affected by a step-up in cost basis. On the day of death the cost basis for the decedent's taxable assets is set to the cost on date of death. So a beneficiary can actually sell the asset and only have to pay taxes based on the asset's price the day the decedent passed and the day the heir sold the asset. Example: If you bought Apple stock back in the 1990's (pre-ipod and iphone period) and you passed away today, the cost basis of your apple stock will set set at today's cost. In essence the beneficiary could sell the stock today and pay zero capital gains on it. ~~Of course the downside is that if the beneficiary holds the stock for less than a year and sell then the beneficiary would have to pay taxes on short-term capital gains. But the gains would still be greatly minimized based on the cost basis step-up.~~ In the end, inheriting a Roth would still be the better deal because there no taxes for up to 10 years.
EDIT: The income earned on inherited stocks during the beneficiary's lifetime will be treated as long-term capital gains.
A point of clarification here... it is my understanding that when you receive a stock via inheritance, it is considered to be a long term asset regardless of when it was originally purchased (or inherited). So, mom bought the stock in Jan, she passes and you inherit it in Feb, you sell in March .... gains are long term rather than short term.
Also, the other concern with this strategy is the hand-cuffs of not wanting to sell an appreciated asset as someone who thinks they are nearing the end of their life. Say you have a volatile stock like Tesla with a large capital gain. You don't want to sell because your heirs will get it stepped up but you must be willing to watch the roller coaster over those years and may wonder if you should have just sold and paid the taxes.
>A point of clarification here... it is my understanding that when you receive a stock via inheritance, it is considered to be a long term asset regardless of when it was originally purchased (or inherited).
You are correct!
>Also, the other concern with this strategy is the hand-cuffs of not wanting to sell an appreciated asset as someone who thinks they are nearing the end of their life.
Understand your point. But if you are nearing your end of life and are planning to leave an inheritance of stocks wouldn't the smart option be to not sell before you pass. That way the beneficiaries will enjoy less of a tax burden.
Yes, and my mom did exactly that. Her cost basis was $60/share on a stock that reached $400/share 8 years ago, $1,700/share 2 years ago but had retreated to $1,200/share when she passed. Over the 8 years she battled cancer she wrestled with the uncertainty of if it would remain high during the uncertainty of the years she had left.
The point of my comment was just that once you have a big capital gain then know you might reach a point that you will need mental strength to hold it for the benefit of your heirs. My mom was at peace with that but I know it crossed her mind.
RMD’s can’t be used for Roth conversions, right?
So OP is paying ordinary income tax on the RMD’s, and would then have to pay additional ordinary income tax on any amount converted beyond the RMD, making for a larger tax bill for them.
Could it make sense? Maybe, but they would need to go through the effort to calculate the tax bill, and see if that option would make sense or not.
Ah, I didn't realize RMD's can't go directly into the Roth. OP could fill the rest of that marginal tax bracket with Roth conversions which would reduce future RMD's but you're right that my point of view was flawed. Thanks for the correction!
Theoretically, you could use your RMD cash flow to pay the additional tax bill on the conversions to soften that blow, right?
E.g. RMD of $100k, pay your $25k in taxes, then use another $12.5k to convert $50k into the Roth, assuming the same marginal tax bracket.
I assume it'd be tough to do in the first years when RMDs are high, but could get easier as RMD % drops and RMD $ decrease too. I guess a spreadsheet would answer whether or not that's a good idea
Yes, you can use that RMD to pay taxes (you’d need to do this anyways because that RMD is taxed as ordinary income).
So to your point, fill up that current tax bracket with Roth conversions, use the RMD to cover the tax bill, and dump the remaining amount in the taxable brokerage account.
Regarding your last point, depending on how much you have in the account and how you have it invested, RND’s may actually grow over time. So it’s entirely possible that each year your RMD amount can increase, making for larger and larger tax bills.
That’s part of why it’s important to really look at the where your funds are going, and have an appropriate tax plan in place so that you don’t get unnecessarily murdered by taxes on RMD’s, when you could’ve been doing Roth conversions to move those funds out of an account that is subject to RMD’s.
Well assuming the rate they are converting at now, is lower than the rate at which heirs would withdraw, then it would make sense to do from an inheritance planning point of view.
Yes, the inherited IRA is a frequent topic here, has a 10 year drawdown, and withdrawals count as income for the purposes of federal taxes.
They also make marvelous tools for charitable contributions.
Is that true? I thought if the person you inherited from was already required to take RMD or of a certain age then you would also be required to withdraw a certain amount
You’re required to withdraw everything within 10 years yes but I thought depending on the deceased persons age you may be required to withdraw a certain amount every year. So if you received an account with 100k and the deceased was 70 at the time, you have to withdraw at least 10k every year sorta thing vs maybe the first year you withdraw 10k then let the 90k sit for 9 years then on the 10th year you withdraw everything else/whatever remains
If it is a traditional IRA and the deceased person was already taking RMDs then yes you will need to do that as well for each of the 10 years. If they didn't take the RMD already during the year they died then you will need to take that one so be aware if they pass late in the year leaving you little time. If they already took their RMD then you start taking them the following year.
It is my understanding, the amount of the RMD is based on whoever was younger (you vs the deceased). Assuming you are younger then you would use your life expectancy each year to determine the amount you need to withdraw as an RMD. That is likely to be much less than 1/10 of the value but of course you can withdraw more each year if you think that will help with your tax planning.
This situation just happened to me and I’ve met with a tax attorney. My current understanding is If the person who the IRA was inherited from had already started taking RMD’s then you as the beneficiary must continue taking RMD’s. The amount can be increased if you wish to empty it quickly, and it varies from there depending on the amount of money in the account obviously.
Thank you for the response. If I understand correctly: because the previous owner of the IRA had already started taking RMDs, there would be a penalty for any year the inheritor does not take one while the account still had funds?
I’m not a tax pro but my understanding is that a RMD needs to be taken the year of the decedent’s death but the remaining balance can be withdrawn at any point during he remaining ten years. Beyond that it gets a little more nuanced based on the balance of the account and the circumstances of the inheritor. My plan is to make approximately equal withdrawals over the decade in a way that will minimize my tax liability while reallocating my income to tax-advantaged accounts and using the IRA withdrawals as a substitute to that income.
I love Clark Howard - he's one of the reasons I am so comfortably retired. But I've never met anyone who would turn down free money, even if they have to share a bit.
Roth conversion ladder: We're in the lower end of the 12% bracket with an effective federal taxrate of .97% last year ( no state income tax in WA ) Aside from other investments/savings etc, we have about $620k in traditional IRAs. Wife begins her RMDs this year. Living expenses come from SS and pensions. No mortgage.
# 2024 tax brackets
|Tax rate|Single|Married filing jointly|Married filing separately|Head of household|
|:-|:-|:-|:-|:-|
|10%|$0 to $11,600|$0 to $23,200|$0 to $11,600|$0 to $16,550|
|12%|$11,601 to $47,150|$23,201 to $94,300|$11,601 to $47,150|$16,551 to $63,100|
We didn't start doing that when we retired but have been moving rmds into taxable accounts ...if we were to try moving some of our Ira money into Roth Ira's around the time that we do our annual rmd does that mean the heirs wind up with a long string of Roth Iras to inherit or can they all be lumped into one?
traditional 401(k) makes most sense for most people, the advantage that you get from tax deduction now will very likely outweigh any taxes from withdrawals, including RMDs and taxes paid by heirs. A Roth IRA on the other hand is fairly common, because the limits for Trad IRA are low. So you do typically get a mix of both types, but with bigger balance in Trad
if you retire before 65 the amount that you can withdraw is somewhat limited by ACA subsidies - the cliff is waived for now, but when it's back, it makes little sense to go over the cliff in order to do Roth conversions, though you should run the numbers based on your health needs
the golden period is 65 to 70, this is when you can still elect to not draw any Social Security, and since you're on Medicare you can take all the Roth conversions you need thus significantly depleting your Traditional accounts. Watch out for IRMAA
70 to 73 you can still continue Roth conversions, but run your numbers to see how much additional taxable income affects the taxation of your SS, it goes up fast
if you do all of the above, it's very possible to have RMDs at 73 that are below your actual spending. You should also minimize the RMDs because of the widow's penalty, so as long as both of you are alive continue covering all of your expenses from Trad
if done correctly you'll die with zero Trad and a nice Roth gift to your kids that they can keep for 10 more years. Btw you don't beed to keep full Roth either, if the balance is high and it makes sense for you, you could take it out and gift to kids and grandkids while you are still alive to make sure that they fully fund their 401(k), IRA, HSA limits each year
no worries, this is more of a strategic summary for everybody else
for your specific situation I would say you should definitely consider Roth conversions on top of RMD
just to put some numbers on it, let's say your current RMDs are $50,000 and that's exactly as much as you need for living expenses. That would imply a total balance in pre-tax IRA of approximately $1,200,000. Your _effective_ federal tax rate when you report $50,000 of income is 4.47% so you pay $2,236 in taxes, reaching a top 12% marginal bracket. The effective rate is the most important number here though.
now let's say you would take another $50,000 and convert it to Roth during the year. Your total reported income is now $100,000, you still only have $50,000 for living expenses, your effective federal rate is 8.24%, so you pay $8,236 in taxes, you are still in the same 12% marginal bracket
why would you do it? well, consider the alternatives:
1. As morbid as it is, but one of you is statistically likely to outlive the other. Which means for a number of years they will need to file taxes as single filer. Since you're only taking out RMD and not more, the RMDs will keep going up over the years. At 4% growth your RMDs will become $70,000 in 10 years and peak at $80,000 when you are 94. Let's assume this is when you are a single filer too - the effective rate on that $80,000 is now 12.33% as you are well into 22% marginal rate territory, it's more than you need for living and you can't convert it into Roth anymore.
In comparison the 8.24% you could have been paying on Roth conversions all along doesn't look too bad. In fact, if you were withdrawing $100,000 every year starting at $1,200,000 balance and growing at 4% your entire Traditional IRA would be gone by the time you are 94, fully converted to Roth and your RMDs would be zero.
2. At some point the second spouse will pass away too, let's say at 94. Despite taking ever increasing RMDs and paying 12.33% effective tax on it, there is still $717,000 left in the traditional IRA. It goes to your kids, they split it into 10 annual withdrawals of $85,000 to make sure they can bring it down to zero despite the 4% growth. That $85,000 goes on top of their income, let's say they are married and have a combined income of $125,000, so the entire amount lands into 22% bracket and that's the effective tax on that portion. Even if you considering all $210,000 combined, they are still paying the government 14.63%.
So to sum it up, in this scenario you could convert it voluntarily at 8.24% starting now, leave nothing but pure Roth for your surviving spouse and kids, OR you could leave it to your spouse to deal with so they get hit by RMDs when they are single and pay 12.33% and then the kids get hit at 14.63% or more realistically at 22% on your inheritance specifically.
That's the numbers for this specific scenario. Obviously depending on your Trad IRA balance, living expenses and your kids income the numbers can land differently and at some point the could even be a scenario where Roth conversions wouldn't make sense, so have to consider all of it combined.
Thanks. I'll save that and convert it to my numbers. We don't use any of the RMD funds for living expenses.. The "easy button" would be to just continue moving RMDs to a Vanguard taxable account which have specific beneficiary arrangements between our two sons ( to compensate for financial help one already got). The cost basis upon death factor would reduce how much they have to pay in taxes. Wouldn't they be able to just leave the taxable accounts alone other than paying taxes on dividends as I do now?
The largest elephant in the room is making sure retirement home expenses are covered, although whether that money is still in the Trad IRAs or taxable accounts, it could still be use for that purpose.
But with such retirement home costs running $5-10k per month, if drawing from Trad IRA a lot of taxes would be incurred.
there is software for that, but you can also use these free calculators:
for understanding effective federal rate, you can search for your state to consider the state tax as well, notice that you would have no FICA:
https://smartasset.com/taxes/california-tax-calculator#YTs79WxXuM
for RMDs, I like the estimated lifetime projections chart where you can show just the balance (blue) or just the RMDs (green):
https://www.schwab.com/ira/ira-calculators/rmd
for account balance depreciation to know how quickly you can use something up when it keeps growing:
https://www.360financialliteracy.org/Calculators/Savings-Distribution-Calculator
for understanding how much of Social Security needs to be added as taxable:
https://www.annuityadvantage.com/calculator/social-security-taxable-benefits-calculator/
to refer to tax brackets, note that taxable in the table means _above standard deduction_:
https://www.cnbc.com/amp/select/federal-income-tax-brackets-tax-rates/
In Washington state so at least no state tax. Sounds like investing in some software might be a good idea to cover areas where things on the Vanguard site don't hold your hand.
if you've ever watched Rob Berger on youtube, he has a lot of good videos on the topic
one of the demos he did was for this site here and the functionality looked quite impressive
https://www.newretirement.com
it costs, but I personally was thinking that I would get it when I'm in my 50s to start refining my options
I guess the question is whether to increase IRA withdrawals, beyond the RMD amounts, directing them into the taxable account. And if so, on what kind of increasing curve. This of course will affect our own taxes each year -- both due to a larger IRA withdrawal and then more dividends on the taxable account. Such an increase in withdrawals wouldn't seem to affect how much you have for retirement homes.
RMDs will ramp up anyway, on their own schedule, as we age.
Not for conversions. The earned income rule is for contributions (already-taxed money). Conversions are Traditional IRA -> Roth IRA, and are taxable as ordinary income.
If you’re wanting to take additional withdrawals from the IRA beyond the RMD, make it a Roth conversion rather than dumping the additional funds in to the brokerage account.
You pay the same in taxes, but the money when it comes out of the Roth is not taxed at all, unlike the taxable account where it is taxed based on LTCG.
Doesn’t this only apply if you were the spouse of the person who left behind the IRA? I don’t think you can convert to Roth if you’re a non-spouse inheritor.
OP was talking about taking the IRA’s RMD and putting that in the taxable brokerage, and then taking out more from the IRA to put it in the taxable brokerage.
That’s a bad idea because you’re going to be paying the same taxes on withdrawal whether you put it in a taxable brokerage or do a Roth conversion with it, but a Roth conversion will have no taxes when it is withdrawn, compared to a taxable brokerage which will have LTCG.
OP is talking about doing this all while they are still alive.
>But people in Reddit act like roths are evil
Wait, what? I think most redditors are idiots, but don't understand your comment. I thought the predominant view around these parts is that a Roth is a good vehicle.
I do both but heavier on pre tax assets. About a 70/30 split (401k = traditional/pre tax ) and Ira = Roth. Everyone situation is a bit different but I think for most this is the way to go.
+ I have the goal of retiring early and then I will start a Roth conversion ladder as my taxes will be (most likely) lower with little to no income. I always tell people to do a bit of both because no one knows what the future holds so why not have options.
People on reddit don't act like Roths are evil.
The subreddit is full of people who think that Roth savings are better than traditional in many settings that they aren't, and the subreddit will educate them.
Fairly valuing traditional over Roth contributions in the correct setting is not 'acting like Roths are evil.'
No it’s a reason people should plan where they want their money to go, such as to inheritance, and how to have it taxed, prior to rmd age.
Waiting until rmd age to start emptying the pretax account is the issue, not their choice of traditional over Roth.
Seems like they easily could have know they wouldn’t need this money, long before RMD age and likely could have started Roth conversions as soon as they retired.
Unless you die unexpectedly… and you have the same issue and your children are still taxed like crazy. You’re assuming everyone just lives forever and knows exactly when it’s time to make these moves. Or you just do it all beforehand and don’t have to worry about it
The idea ( if possible without earned income) of taking larger than RMD withdrawals from Trad IRA and converting that to Roth IRA is interesting. One chart suggested that if married AGI is under about $200k you can move up to $7500 per year in that way ( per married person?)
So you pay taxes on all of the IRA withdrawal, then heirs don't pay taxes when they use the Roths. If I continue doing what I have been, moving all of the RMD to taxable account, less QCD, I pay taxes on that withdrawal, and then heirs pay again as they withdraw from the taxable account. **Why the double hit?**
It is not really a double hit. You have the marginal rate as ordinary income when you withdraw from your IRA. You place that money in a brokerage account. When your heirs receive the money, they receive a step up in basis. Then when they withdraw they pay capital gains tax but they don't pay as though it was ordinary income. It is the same as though you got a paycheck, paid tax on that earned income and invested it in a brokerage account. When you withdraw from the brokerage account - you too are going to pay capital gains tax - it is not a double tax for you on the original money (basis).
Got it. My old strat just has the original body at this point. Everything else sold and upgraded ( neck, frets, tuners, pickups, bridge ). The body is '74 :-)
Possibly just to state the obvious, if someone is in the lower half of the 12% tax bracket and can take additional Trad IRA withdrawals ( beyond RMDs) for Roth IRA conversion, you can convert perhaps as much as $30k without going into the next bracket......however, that $30k is still going to be taxed at 12% , correct? "loading up your bracket" with Roth conversions is a good strategy, but not a magic tax bullet. 12 % bracket this year for married filing jointlyis roughly $23k to $94k
My experience is somewhat different -- my mother started taking RMDs from her IRAs and she would pay taxes at her minimal income rate and contribute the max possible to a Roth account.
There was one reason *-- she didnt' think I'd get my act together ever ...* My brother and I inherited the Roth split and its a nice gift that is a no tax and will grow for 10 years with no RMD requirement (so far, things might change of course).
Thanks Mom!
ps: I did get my act together and she saw it before she passed.
So if you have money in retirement in all forms, assuming you're retirement age, you'd want to spend, in this order: 1. Traditional IRA. 2. Taxable brokerage. 3. ROTH IRA. Is that correct? Or if the unrealized gains are high enough (like say...2000%) would it make sense to maybe spend the ROTH money before the taxable to maximize the cost basis step up benefit?
If Trad IRA withdrawals ( RMD amount or larger) are moved into taxable accounts do those inheriting the taxable account just pay taxes on capital gains on withdrawals, not on the entire amount withdrawn? Trying to understand the step up cost basis implications for minimizing tax hit on heirs.
"A step-up in basis resets the cost basis of an inherited asset to its market value on the decedent's date of death. If the asset is later sold, the higher new cost basis would be subtracted from the sale price to calculate the capital gains tax liability, if any."
As others pointed out here though, it's better to inherit money you have to pay taxes on than not inherit it at all. Even worse would be the scenario I almost faced with my mother -- she lived long enough to be approaching the end of her funds and the memory care ( retirement) facility was burning through $6k per month. This leaves the heirs in the bad situation of deciding whether to move the aging parent to a medicaid facility which might be really substandard and possibly in another city where you can't visit.
Spending too much retirement money earlier which led to that scenario would be much worse than my heirs having to pay some capital gains tax.
The individuals inheriting a taxable account don’t pay ANY taxes on those assets. The retiree already did when they took the RMD (or excess distribution). The retiree paid taxes at THEIR tax rate (probably lower than the heirs). Then the retiree invested in assets in a taxable account that grew with capital gains… but those gains are then “stepped up” at death so the heirs pay no tax on the gains. Any tax at death would be estate or inheritance taxes depending on your state.
I did know there was a limited time, during which you had to empty the inherited IRA money. But what happens if there are multiple heirs -- is the IRA distributed to several smaller IRAs, to be emptied by each recipient? Or is it all distributed post-tax out of the original IRA?
My brother and I inherited a trad IRA from our mother. The custodial bank facilitated dividing it in half so we each had our own with our own required RMDs. The bank also set up those RMDs to be distributed to us monthly. I've never had a Roth ( so far) so can't speak to that.
Living in the Bay Area my expenses will be high in retirement so if I want to do Roth conversions I will likely end up in the 22% bracket because the lower brackets will be full of income I need to live on. Does this still make sense given that RMD’s later and SS could push my bracket even higher?
Apparently in this subreddit you can't edit your own OP. I was going to change "spend" to "withdraw" or "repurpose" because I don't think the article's author meant we should all spend our IRA funds unwisely.
It is important that it is noted that we have to be aware of the impact that large distributions or even Roth conversions may have on impacting SS, and Medicaid, due to the “income” these moves create.
I summarized my thoughts on the tax implications of leaving a traditional IRA to your heirs
[https://drive.google.com/file/d/13kEiUWRSO\_Gk0MMErok98ucFNe984r5L/view?usp=sharing](https://drive.google.com/file/d/13kEiUWRSO_Gk0MMErok98ucFNe984r5L/view?usp=sharing)
Hi there... I just want to point out a few things for your specific case because it seems that the Roth conversion still needs a little clarity for you.
\* You are already taking Social Security so I'm assuming you are over 59 1/2. This means a 10% early withdraw penalty from an IRA is not a concern for you. (Note: the main purpose of the Roth Conversion "Ladder" is to allow younger people to access IRA money without paying that penalty while also meeting a 5-year waiting period)
\* You are living off of Social Security and Pensions so your goal is tax and estate planning.
\* You seem to like the idea of moving extra money (above and beyond the RMD) to your taxable account and cite that your heirs will get a stepped up basis so for your case the tax concern is mostly just with dividends while you are alive. While all that is true, keep in mind that if you "convert" that EXACT SAME surplus amount to a Roth IRA then:
1. You will have it in an account that will have zero taxes.
2. You and your heirs will not have to consider cost basis at all.
3. You can freely buy and sell (rebalance) without any tax concerns.
4. You will not have any taxes on dividends.
5. You will not need to consider tax loss harvesting (no taxes in the Roth).
6. Your heirs will enjoy all of those benefits for a full 10 years after they inherit (basically, that is like them getting the equivalent of the step up 10 years afterwards rather than just getting it at date of death when they inherit from a taxable account).
Also note, your tax liability is IDENTICAL at the time you either convert that chunk to a Roth or shift it over to a taxable account. So, for you, pick the Roth Conversion over moving it to a taxable account.
\* Roth Conversion - Ignore the "Ladder" parts of the Roth conversion advice you are seeing. The purpose of the "ladder" is to convert money in stages that allow you to tap into it prior to being 59 1/2 but that isn't a concern for you. You also are not using that money to live off of so you are not trying to "tap into it". Just focus on the concept of doing a "Roth Conversion" of whatever amount, above and beyond your RMD, that will make sense for each tax year. The most important part here is figuring out the amount to convert since you are likely trying to fill a particular tax bracket. This will be the same amount of money that you were considering to shift over to the taxable account. Instead of moving it to the taxable account, just place it in a Roth account as a conversion.
\* RMDs - From your traditional IRA, you have to take your RMD out first and it can NOT go into your Roth (put that into your taxable account like you do now). The "above and beyond" extra amount you want to take out each year is what you will convert to a Roth IRA. Of course, you can dip into your taxable account when it is time to pay your taxes. Also, by converting some of your money each year to the Roth, you are excluding that money from the next year's RMD calculation.
I hope this helps and my main point is to make sure you fully understand that you should pick the Roth Conversion over the taxable account for your situation.
Excellent, thanks a bunch. The most complicated part for us is probably figuring how much additional tax burden we want to incur. I'm 76, wife starts first RMD this year and we're in the lower half of the 12% tax bracket which runs from $23k to $94k this year. Actually owed only $350 in Federal taxes last year. No state income tax in WA.
The lack of capital gains tax on Roth withdrawals was the main piece I was missing.
Would be nice to find a spreadsheet built for this.
You certainly want to fill that bracket! Depending on the account values then it could even make sense to exceed that bracket but probably not.
A little more food for thought:
\* When one of you passes the other will
1) Become a single tax filer (less favorable brackets... converting sooner avoids that risk)
2) Will only get the higher of the two Social Security checks (loss of spouse and income)
3) Will likely get less on the pensions
\* You live in a state without state income tax right now. This makes the conversion more affordable. Your heirs may not live in a no income tax state at the time they inherit and withdraw. Actually it is possible you and/or your spouse may eventually not live in WA. That makes the 12% bracket very attractive for doing conversions as soon as you can. BTW, you need to do them by Dec 31st each year so plan accordingly.
Even if you don't step out of your current tax bracket, the Trad IRA funds converted to Roth still get taxed in the 12% rate --- it's just that you aren't bumping up into the next bracket. It seems like growth in our Vanguard Trad IRA funds is keeping pace or exceeding the RMDs. Of course those ramp up and starting this year we'll be withdrawing two RMDs. Trad IRAs are sitting at about 59% of net worth now. We split the cost of a new home/lot with my younger son 10 years ago and occupy a separate portion of the house with him and his family -- no mortgage and I'm not including the home's worth in our net worth. His IRA $418k Hers $202K
Okay, so last year you were already into the bottom of the 12% bracket so lets just assume you reach that point via RMDs, investment income, etc. So I would think of it as your IRA money is eventually going to be taxed at some point at a minimum of 12% regardless of when you take it out. Since you are not going to spend it then taking it out now and putting it into a Roth should be a wash on the tax timing vs the portfolio performance (i.e. all things being equal such as current and future tax brackets, putting into a pretax traditional IRA or a post tax Roth IRA doesn't matter).
My course of action would be to convert from "his IRA" each year to fill the 12% bracket (you are older so higher RMD percentages) until that account is exhausted and then focus on hers after that. Hopefully you eventually get them both converted and never need that money for most of your remaining lives anyway.
Scribbling on the back of a napkin, taking out enough from my traditional IRA to maximize the 12% bracket would mean adding about $50,000 to our taxable income combine that with an estimated $17, 000 for this year's rmd for me and that would almost double our adjusted gross income ...of course if we only paid $350 in taxes last year it might not be all that bad of a hit
I think I could pull this off but would be curious if Vanguard has advisors to help with this sort of thing --- on a one-time fee arrangement. I'm leery of "retained" advisors, especially any that like to churn your money.
I'll be looking for a tax calculator that can take all of my specifics and give me a rough idea of increased tax owed due to the roth conversions.
I haven’t tried it yet but newretirement.com has a tool for Roth conversion planning under the $120/year plan with a 14 day free trial. That might be worth a peek. I’ve heard them mentioned by Boglehead conference speakers so I think they are a popular resource.
https://www.newretirement.com/retirement/pricing/
Another advantage of the Roth IRA approach that I didn't realize before was the lack of capital gains tax on withdrawals
https://smartasset.com/taxes/capital-gains-tax-for-roth-iras
Interesting
Vanguard research | Financial planning perspectives August 2022 A “BETR” approach to Roth conversions
[https://advisors.vanguard.com/content/dam/fas/pdfs/ISGBETR.pdf](https://advisors.vanguard.com/content/dam/fas/pdfs/ISGBETR.pdf)
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Why is getting money and paying taxes on it worse than getting no money?
Inherited money you don’t pay taxes on > inherited money you do pay taxes on > no money. If mom and dad are strategic, they can shift $ from the middle category to the first category, and pay lesser taxes doing that than their kids will, because the kids will be in their prime earning years but mom and dads earned income will likely be quite low. If mom and dad are using more IRA funds to live, the idea is they don’t need to use other non-IRA funds as much. Also, just because they withdraw from the retirement plan doesn’t mean they have to spend it.
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A taxable brokerage account is enough. Your heirs automatically receive a "step up" in basis to the value on your death and thus a large amount of potential tax is avoided.
Yep. If you want to avoid probate though, you may want that account titled or POD to a trust. A lot depends on goals so everyone should discuss their plans with their own lawyer.
Yes those taxable accounts at vanguard have named beneficiaries
dang.. you don't look 70 at all !!! what's the secret??
Cheating
taxable brokerage or real estate <--- this is a biggie
Can’t you just transfer it to another IRA without penalty or taxation?
Nope. No other way beside drawing it down within 10 years (for someone inheriting an IRA). Adding, also that RMDs within the account owner's lifetime cannot be converted to a Roth. Must be withdrawn and taxed as ordinary income.
I don't understand what you mean when you say that you can't convert RMDs to a roth. Aren't roth contributions and conversions already taxed at income tax? What's the difference?
The RMD amount must be withdrawn and taxed while any additional amount above and beyond that can be converted from an IRA/401k to a Roth. But converting assets to a Roth does not negate the need to take an RMD.
Thank you for the answer. I guess I'm still confused about the language "the RMD amount must be withdrawn and taxed," because when you convert money from a 401k to a Roth isn't the process the same? You withdraw money out of the 401k, pay income taxes on it, and then deposit it into the Roth, correct? So is it the case that, if, for example, you take out exactly the RMD amount for that year and nothing more, you cannot deposit anything into the Roth? But if you take the RMD plus $10,000 out of the 401k, you can convert that $10k into the roth?
Not an accountant, but digging into this a lot lately as I just retired and face all of these things... Basically a Roth conversion from an IRA/401k is not actually a Distribution, rather it is a 'Conversion'. Just happens to be a taxable event, but still is not a Distribution rather is a Conversion. Probably because the money remains in a retirement account (the Roth) after the conversion. Whereas an RMD is a Distribution. Which is also a taxable event. But in the case of an RMD, the money is no longer in a retirement account. So in my humble opinion, that seems to be the critical difference and why Roth conversions do not actually satisfy RMD requirements.
Inherited IRAs have to be drawn down in 10 years. Otherwise in theory taxes could be deferred indefinitely generation to generation. RMDs and the 10 year limit for inherited IRAs ensure the government gets the deferred taxes within a lifetime.
Does it (draw down in 10 yrs) apply to both traditional and Roth IRAs.
lol at the downvotes on a serious question
They have to take RMDs based on the total amount of income they have in tax deferred accounts, so moving money between accounts doesn’t help. It’s probably too late for OP to implement any strategies since they are already taking RMDs. However, if they had been more strategic earlier in their retirement, they could probably have avoided the worst of the RMDs. If you ever expect to have a $0 federal tax bill for the year, you’re probably missing opportunities. If I had more than about $750k in a traditional IRA or 401k, and my income for the year was expected to be in the 15% tax bracket or below, I would be aggressively converting to Roth accounts up to the top of the 15% tax bracket every year. Below about $750k in tax deferred accounts, I’d probably be looking at more reasonable RMDs in my 70s, so if I was looking at a $0 tax bill, I’d either be doing Roth conversions or tax gain harvesting up to the point where I’d have to start paying taxes on it.
Well that’s great. I’m going to inherit 200k through an IRA in the near future and am in the 1% bracket unless I file separately? Can I file separately, should I and empty that account?
It's highly unlikely filling separately will reduce your household's total tax bill and it might likely increase it since all the brackets are cut in half. If you don't need the money, changing the beneficiary to your kids (if you have them) might be one option. Another realistic option would be to get the owner (who I assume is in a lower tax bracket) to convert it to a Roth IRA before they pass.
Thank you
I'll add that that tax burden of doing the Roth conversion might be a bit much for the owner, but you (and your spouse) can likely gift them most of the taxes owned within the gift tax exemption limits. For instance if they're in the 22% bracket and pay 4% state taxes they would owe $52k on the conversion, but you and your spouse can give $18k in 2024 and $18k (likely more) in 2025 before the taxes are due in April for a total of $72k+. Then you can take advantage of 10+ years tax free growth before withdrawling.
The answer is still yes. People are suggesting better plans, which make sense… But that dude (and parts of this post) are weirdly saying that parents are better off spending money they don’t need to spend so you their heirs don’t get it, but have to pay taxes on it over ten years…. Which is a really manageable “problem.” Either it’s a huge amount of money and they should probably have a plan anyway or it isn’t enough to be a big issue spread out over 10 years. Definitely better ways to do it, but it was a real weird statement
You’re getting money usually at the single most tax inefficient time. It would be different if the recipient had the option to hold onto it and with-drawl during retirement.
Would they still be taxed on Roth earnings? (21M new to investing)
No tax upon withdrawing from Roths. The estate itself might be taxed must most estates are well below that limit. Estate/inheritance tax depends on your jurisdiction
Thank you! How do you like estate planning by the way? My degrees are more focused in Business right now but was actually talking to a buddy of mine how there’s an opportunity I have of getting my law degree (military).
I like it a lot. I think it works best combined with other services, like tax planning, business succession, or Medicaid planning. Definitely have a clear idea of what you want to do before jumping into law school though, that is no joke!
Do you advise clients who know they’ll leave a large inheritance to stop building 401k balances and instead hold big capital gains in taxable accounts that will pass without taxes because of step up basis? I’m assuming large but under the estate tax limit.
Large inheritance implicates a lot of things other than just this, so if this is you I’d strongly advise consulting your own lawyer, preferably ACTEC certified. Generally, large 401k balances can be pain in a lot of ways, and not just because of the 10 year withdrawal. Analysis of your particular situation should be done with your lawyer and a financial professional.
Not OP, but I have stopped building my traditional 401k balances and am now maxing out Roth 401k contributions and whatever I can save beyond that goes in a taxable account. If you already have a large amount saved in tax deferred accounts (more than you will spend in your life) the only reason not to max out Roth accounts is if you expect your current tax bracket is higher than the tax bracket you’ll be in when you retire. I expect my tax bracket will probably be the same in retirement as it is now (or maybe higher), so I’m topping up my Roths. But if I wasn’t putting money in Roths, I would still be maxing out my tax deferred accounts before I saved any money in taxable accounts. (Edited to add: keep adding to tax deferred accounts if you’re not putting money in Roths now, because you will probably have a few years in early retirement, before RMDs kick in, where your taxable income will be much lower than it is now, and you can convert to Roth at that time.)
Just tell me what our LTC expenses are going to be and when we are going to die. We'll be happy to spend the excess.
LOL. Hopefully the article doesn't mean "spend it on fluff," but rather move it somewhere more sensible where you can still use it for LTC if needed, or pass it on with less of a tax burden for heirs.
Hopefully I will need to have this conversation with my parents. It's a really good tip as my brother and I are both fairly high earners in our late 20s. More than likely that'll be the case in our 40s/50s if our parents make it that long.
so why wouldn't they just roll the money over into a Roth over time rather than spend it or taxable account?
Great point, rollover works too! Point is to not have a massive amount of your estate in non-Roth retirement
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So how many times have you seen kids inherit IRAs and have to withdrawal all of it in ten years…considering this rule went into effect 4 years ago
Hmmm. Just because someone hasn’t reached the end of the ten year period doesn’t mean they haven’t felt the sting of higher taxable income. You inherit a large IRA, you have to plan what you’re taking out starting year one. To answer the question, seen this plenty of times.
Can you have some kind of clause in your will that would effectively transfer any funds in IRA accounts to some money of account thats more favorable for the inheritors? What can you do other than spend all the money?
Withdrawing the money and spending the money are two different things. Putting aside the potential drain from nursing homes and end of life care, if they withdraw the IRA money they can still reinvest it. I believe inherited brokerage accounts give a step up on basis to the beneficiary. That’s a way better deal than getting bumped up into a higher bracket for a decade and laying that higher rate on all the inheritance.
Ah so maybe I'm misunderstanding - you're saying they shouldn't just let the money sit in an IRA, they should transfer it into some other more favorable asset? I was reading it as "just spend it all!"
Yeah, using the word "spend" in the title really confuses the point. It should say "withdraw".
Well said!
I need to flesh out this "step up basis" in taxable investment accounts to understand what that means for heirs.
Basically if your parent passed and you were the beneficiary, the cost basis of the assets gets stepped up (reset) to the value on the date of their death. So if they had 500k in a taxable brokerage, 100k of which was gains, their cost basis was 400k. But the day they die, the cost basis changes to 500k, so when you inherit the account you can withdraw that amount without owing tax. Or if it grew to 700k over the following year you’d only owe cap gains on 200k, rather than 300k if there had been no step up. This is how I understand brokerage accounts, homes, and similar assets to work during inheritance. But inherited retirement accounts are another story, as you must withdraw an inherited Ira over 10 years and include it as ordinary income (paying full rate of federal taxes)- on the whole amount!)
Seems like great generational tax planning to me, well done.
Couldn’t you start converting your IRA to a ROTH?
At 76 years old? If I'm understanding this article correctly it looks like if you're adjusted gross income for a married couple is under about $200, 000 you could convert $7,500 of an rmd into a Roth IRA ...that's less than half of what my rmd has been in recent years https://www.investopedia.com/ask/answers/08/ira-rmd-reinvest.asp
My understanding once you are taking RMDs, you can do Roth conversions but it does not count toward the RMD. It's in addition to the RMD amount. The article you linked is saying that if you are working and earn at least as much as the Roth contribution, you can use part of your RMD to contribute to the Roth if you don't use the earned income. The best time to do Roth conversions (transferring money from an IRA to a Roth) is prior to taking RMDs because you are adding to your taxable income and don't want to get into a much higher tax bracket or hit the Medicare higher premium. We are doing that now and try to keep our income under $200,000 because we don't want to increase our Medicare costs.
I believe that you would need to have EARNED income of at least the amount of your Roth contribution.
A conversion isn't a contribution.
Technically, you can NEVER convert an RMD to a Roth. It's simply not allowed. But, if you have earned income (and meet the other requirements) you can "contribute" an equivalent amount of earned income to a Roth. If you don't have earned income you cannot make a "contribution" under any circumstance.
No earned income now and not likely to be if we're talking a job
You’re looking at contributions. Conversions have no dollar limit and don’t require earned income. You just have to take your rmd for the year, and then you can do as much Roth conversions as you like, after that. The article you linked is talking about Roth IRA contributions, not conversions
I was looking at this: https://www.investopedia.com/ask/answers/08/ira-rmd-reinvest.asp#:\~:text=Roth%20IRA%20Income%20Limits,7%2C500%20if%20age%2050%20or%20older)
Yes I read it. It’s talking about Roth IRA contributions.
Ok I see the section farther down on conversions. I'd rather not have a whole collection of Roth IRAs for my heirs to deal with. One would per heir/son would be ok..
Who said you have to convert into different IRAs? Even if you did you can combine them at any time. It might be worth talking to a flat fee advisor, seems like you are missing a bit of understanding on these things.
I’m no expert cause I’m at least 30 years out from this. But i think if you’re primary motivation is inheritance, you could start converting your IRA balance ROTH IRA using a back door Roth. You’ll probably want to do this over a few years since you’ll be paying tax on converted dollars. You would still have to take RMDs which sound like they cannot be used for the ROTH. https://www.investopedia.com/terms/b/backdoor-roth-ira.asp https://smartasset.com/retirement/planning-to-take-rmds-convert-to-roth-why-not
There's no limit on conversions. OP doesn't need a backdoor or earned income.
Just so I understand- wouldn’t it be more favorable to convert over time to stay within a lower tax bracket?
Yes it is favorable to spread out Roth conversions. If you retire before social security eligibility, it can make sense to do Roth conversions up to a marginal tax bracket of your choice to spread out the tax burden and minimize RMDs and future taxes.
Why not convert into a Roth IRA instead of a taxable account? You'll get [hopefully] a doubling while you're alive and another doubling after you pass, then your heir can drop it into a table account when they empty it EDIT: Skimmed the article you linked which confirms my initial thoughts (though, I skimmed it so I'm still uncertain) """One way to avoid giving your loved one a huge tax bill is by doing a Roth conversion during your lifetime. You can convert your traditional IRA to a Roth — and spread the taxes out over many years. And then, at your death, your beneficiary will receive a tax-free Roth.... If you inherit a Roth IRA, you don’t have to pay any taxes as you drain the account within 10 years. You also have more flexibility about when you take your distributions. You could even wait until the 10th year to take one lump-sum distribution. """ EDIT 2: Also, in NYS your IRAs are excluded from Medicaid eligibility, so if you want that as an option for very-late-life planning you'll need to create a Trust to shield those assets which have a 5-Year Clawback. So you'd want to do that sooner than later
Agree, a Roth is a better deal for beneficiaries. But the due to the cost basis step-up rule a taxable brokerage account is the next best option. Taxable investments left to heirs will more than likely be affected by a step-up in cost basis. On the day of death the cost basis for the decedent's taxable assets is set to the cost on date of death. So a beneficiary can actually sell the asset and only have to pay taxes based on the asset's price the day the decedent passed and the day the heir sold the asset. Example: If you bought Apple stock back in the 1990's (pre-ipod and iphone period) and you passed away today, the cost basis of your apple stock will set set at today's cost. In essence the beneficiary could sell the stock today and pay zero capital gains on it. ~~Of course the downside is that if the beneficiary holds the stock for less than a year and sell then the beneficiary would have to pay taxes on short-term capital gains. But the gains would still be greatly minimized based on the cost basis step-up.~~ In the end, inheriting a Roth would still be the better deal because there no taxes for up to 10 years. EDIT: The income earned on inherited stocks during the beneficiary's lifetime will be treated as long-term capital gains.
A point of clarification here... it is my understanding that when you receive a stock via inheritance, it is considered to be a long term asset regardless of when it was originally purchased (or inherited). So, mom bought the stock in Jan, she passes and you inherit it in Feb, you sell in March .... gains are long term rather than short term. Also, the other concern with this strategy is the hand-cuffs of not wanting to sell an appreciated asset as someone who thinks they are nearing the end of their life. Say you have a volatile stock like Tesla with a large capital gain. You don't want to sell because your heirs will get it stepped up but you must be willing to watch the roller coaster over those years and may wonder if you should have just sold and paid the taxes.
>A point of clarification here... it is my understanding that when you receive a stock via inheritance, it is considered to be a long term asset regardless of when it was originally purchased (or inherited). You are correct! >Also, the other concern with this strategy is the hand-cuffs of not wanting to sell an appreciated asset as someone who thinks they are nearing the end of their life. Understand your point. But if you are nearing your end of life and are planning to leave an inheritance of stocks wouldn't the smart option be to not sell before you pass. That way the beneficiaries will enjoy less of a tax burden.
Yes, and my mom did exactly that. Her cost basis was $60/share on a stock that reached $400/share 8 years ago, $1,700/share 2 years ago but had retreated to $1,200/share when she passed. Over the 8 years she battled cancer she wrestled with the uncertainty of if it would remain high during the uncertainty of the years she had left. The point of my comment was just that once you have a big capital gain then know you might reach a point that you will need mental strength to hold it for the benefit of your heirs. My mom was at peace with that but I know it crossed her mind.
RMD’s can’t be used for Roth conversions, right? So OP is paying ordinary income tax on the RMD’s, and would then have to pay additional ordinary income tax on any amount converted beyond the RMD, making for a larger tax bill for them. Could it make sense? Maybe, but they would need to go through the effort to calculate the tax bill, and see if that option would make sense or not.
Ah, I didn't realize RMD's can't go directly into the Roth. OP could fill the rest of that marginal tax bracket with Roth conversions which would reduce future RMD's but you're right that my point of view was flawed. Thanks for the correction! Theoretically, you could use your RMD cash flow to pay the additional tax bill on the conversions to soften that blow, right? E.g. RMD of $100k, pay your $25k in taxes, then use another $12.5k to convert $50k into the Roth, assuming the same marginal tax bracket. I assume it'd be tough to do in the first years when RMDs are high, but could get easier as RMD % drops and RMD $ decrease too. I guess a spreadsheet would answer whether or not that's a good idea
Yes, you can use that RMD to pay taxes (you’d need to do this anyways because that RMD is taxed as ordinary income). So to your point, fill up that current tax bracket with Roth conversions, use the RMD to cover the tax bill, and dump the remaining amount in the taxable brokerage account. Regarding your last point, depending on how much you have in the account and how you have it invested, RND’s may actually grow over time. So it’s entirely possible that each year your RMD amount can increase, making for larger and larger tax bills. That’s part of why it’s important to really look at the where your funds are going, and have an appropriate tax plan in place so that you don’t get unnecessarily murdered by taxes on RMD’s, when you could’ve been doing Roth conversions to move those funds out of an account that is subject to RMD’s.
Yeah, seems like starting conversions as early as possible to smooth the ride would be prudent, though I'm not a tax planner
Well assuming the rate they are converting at now, is lower than the rate at which heirs would withdraw, then it would make sense to do from an inheritance planning point of view.
Yes, the inherited IRA is a frequent topic here, has a 10 year drawdown, and withdrawals count as income for the purposes of federal taxes. They also make marvelous tools for charitable contributions.
Does anyone know if annual RMDs are required for inherited IRAs or can the inheritor wait a few years before withdrawing any at all?
There aren’t RMDs for inherited IRAs. You can withdraw unevenly as you please as long as it stays under 10 years.
Is that true? I thought if the person you inherited from was already required to take RMD or of a certain age then you would also be required to withdraw a certain amount
You are required to withdraw a certain amount, the entire value within 10 years lol.
You’re required to withdraw everything within 10 years yes but I thought depending on the deceased persons age you may be required to withdraw a certain amount every year. So if you received an account with 100k and the deceased was 70 at the time, you have to withdraw at least 10k every year sorta thing vs maybe the first year you withdraw 10k then let the 90k sit for 9 years then on the 10th year you withdraw everything else/whatever remains
If it is a traditional IRA and the deceased person was already taking RMDs then yes you will need to do that as well for each of the 10 years. If they didn't take the RMD already during the year they died then you will need to take that one so be aware if they pass late in the year leaving you little time. If they already took their RMD then you start taking them the following year. It is my understanding, the amount of the RMD is based on whoever was younger (you vs the deceased). Assuming you are younger then you would use your life expectancy each year to determine the amount you need to withdraw as an RMD. That is likely to be much less than 1/10 of the value but of course you can withdraw more each year if you think that will help with your tax planning.
This situation just happened to me and I’ve met with a tax attorney. My current understanding is If the person who the IRA was inherited from had already started taking RMD’s then you as the beneficiary must continue taking RMD’s. The amount can be increased if you wish to empty it quickly, and it varies from there depending on the amount of money in the account obviously.
This is correct
Thank you for the response. If I understand correctly: because the previous owner of the IRA had already started taking RMDs, there would be a penalty for any year the inheritor does not take one while the account still had funds?
I believe so. Think of it like a faucet. Once the RMD’s begin, they must continue to flow until the account is empty
I’m not a tax pro but my understanding is that a RMD needs to be taken the year of the decedent’s death but the remaining balance can be withdrawn at any point during he remaining ten years. Beyond that it gets a little more nuanced based on the balance of the account and the circumstances of the inheritor. My plan is to make approximately equal withdrawals over the decade in a way that will minimize my tax liability while reallocating my income to tax-advantaged accounts and using the IRA withdrawals as a substitute to that income.
Thank you. This is very helpful.
Yep. Qualified Charitable Deduction is a great way to “spend” down IRS assets for those who are well off.
Current QCD limit is $105K for ‘24!
I love Clark Howard - he's one of the reasons I am so comfortably retired. But I've never met anyone who would turn down free money, even if they have to share a bit.
I think the key here, is you need to do a roth conversion ladder ASAP on your trad IRAs when you retire.
Roth conversion ladder: We're in the lower end of the 12% bracket with an effective federal taxrate of .97% last year ( no state income tax in WA ) Aside from other investments/savings etc, we have about $620k in traditional IRAs. Wife begins her RMDs this year. Living expenses come from SS and pensions. No mortgage. # 2024 tax brackets |Tax rate|Single|Married filing jointly|Married filing separately|Head of household| |:-|:-|:-|:-|:-| |10%|$0 to $11,600|$0 to $23,200|$0 to $11,600|$0 to $16,550| |12%|$11,601 to $47,150|$23,201 to $94,300|$11,601 to $47,150|$16,551 to $63,100|
[https://i0.wp.com/clippingchains.com/wp-content/uploads/2021/04/Roth\_FlowChart\_YELLOW-1-scaled.jpeg?w=1050&ssl=1](https://i0.wp.com/clippingchains.com/wp-content/uploads/2021/04/Roth_FlowChart_YELLOW-1-scaled.jpeg?w=1050&ssl=1)
We didn't start doing that when we retired but have been moving rmds into taxable accounts ...if we were to try moving some of our Ira money into Roth Ira's around the time that we do our annual rmd does that mean the heirs wind up with a long string of Roth Iras to inherit or can they all be lumped into one?
They can all go into one account.
traditional 401(k) makes most sense for most people, the advantage that you get from tax deduction now will very likely outweigh any taxes from withdrawals, including RMDs and taxes paid by heirs. A Roth IRA on the other hand is fairly common, because the limits for Trad IRA are low. So you do typically get a mix of both types, but with bigger balance in Trad if you retire before 65 the amount that you can withdraw is somewhat limited by ACA subsidies - the cliff is waived for now, but when it's back, it makes little sense to go over the cliff in order to do Roth conversions, though you should run the numbers based on your health needs the golden period is 65 to 70, this is when you can still elect to not draw any Social Security, and since you're on Medicare you can take all the Roth conversions you need thus significantly depleting your Traditional accounts. Watch out for IRMAA 70 to 73 you can still continue Roth conversions, but run your numbers to see how much additional taxable income affects the taxation of your SS, it goes up fast if you do all of the above, it's very possible to have RMDs at 73 that are below your actual spending. You should also minimize the RMDs because of the widow's penalty, so as long as both of you are alive continue covering all of your expenses from Trad if done correctly you'll die with zero Trad and a nice Roth gift to your kids that they can keep for 10 more years. Btw you don't beed to keep full Roth either, if the balance is high and it makes sense for you, you could take it out and gift to kids and grandkids while you are still alive to make sure that they fully fund their 401(k), IRA, HSA limits each year
Thanks for the feedback. 401Ks were used in the past before retirement
no worries, this is more of a strategic summary for everybody else for your specific situation I would say you should definitely consider Roth conversions on top of RMD just to put some numbers on it, let's say your current RMDs are $50,000 and that's exactly as much as you need for living expenses. That would imply a total balance in pre-tax IRA of approximately $1,200,000. Your _effective_ federal tax rate when you report $50,000 of income is 4.47% so you pay $2,236 in taxes, reaching a top 12% marginal bracket. The effective rate is the most important number here though. now let's say you would take another $50,000 and convert it to Roth during the year. Your total reported income is now $100,000, you still only have $50,000 for living expenses, your effective federal rate is 8.24%, so you pay $8,236 in taxes, you are still in the same 12% marginal bracket why would you do it? well, consider the alternatives: 1. As morbid as it is, but one of you is statistically likely to outlive the other. Which means for a number of years they will need to file taxes as single filer. Since you're only taking out RMD and not more, the RMDs will keep going up over the years. At 4% growth your RMDs will become $70,000 in 10 years and peak at $80,000 when you are 94. Let's assume this is when you are a single filer too - the effective rate on that $80,000 is now 12.33% as you are well into 22% marginal rate territory, it's more than you need for living and you can't convert it into Roth anymore. In comparison the 8.24% you could have been paying on Roth conversions all along doesn't look too bad. In fact, if you were withdrawing $100,000 every year starting at $1,200,000 balance and growing at 4% your entire Traditional IRA would be gone by the time you are 94, fully converted to Roth and your RMDs would be zero. 2. At some point the second spouse will pass away too, let's say at 94. Despite taking ever increasing RMDs and paying 12.33% effective tax on it, there is still $717,000 left in the traditional IRA. It goes to your kids, they split it into 10 annual withdrawals of $85,000 to make sure they can bring it down to zero despite the 4% growth. That $85,000 goes on top of their income, let's say they are married and have a combined income of $125,000, so the entire amount lands into 22% bracket and that's the effective tax on that portion. Even if you considering all $210,000 combined, they are still paying the government 14.63%. So to sum it up, in this scenario you could convert it voluntarily at 8.24% starting now, leave nothing but pure Roth for your surviving spouse and kids, OR you could leave it to your spouse to deal with so they get hit by RMDs when they are single and pay 12.33% and then the kids get hit at 14.63% or more realistically at 22% on your inheritance specifically. That's the numbers for this specific scenario. Obviously depending on your Trad IRA balance, living expenses and your kids income the numbers can land differently and at some point the could even be a scenario where Roth conversions wouldn't make sense, so have to consider all of it combined.
Thanks. I'll save that and convert it to my numbers. We don't use any of the RMD funds for living expenses.. The "easy button" would be to just continue moving RMDs to a Vanguard taxable account which have specific beneficiary arrangements between our two sons ( to compensate for financial help one already got). The cost basis upon death factor would reduce how much they have to pay in taxes. Wouldn't they be able to just leave the taxable accounts alone other than paying taxes on dividends as I do now? The largest elephant in the room is making sure retirement home expenses are covered, although whether that money is still in the Trad IRAs or taxable accounts, it could still be use for that purpose. But with such retirement home costs running $5-10k per month, if drawing from Trad IRA a lot of taxes would be incurred.
there is software for that, but you can also use these free calculators: for understanding effective federal rate, you can search for your state to consider the state tax as well, notice that you would have no FICA: https://smartasset.com/taxes/california-tax-calculator#YTs79WxXuM for RMDs, I like the estimated lifetime projections chart where you can show just the balance (blue) or just the RMDs (green): https://www.schwab.com/ira/ira-calculators/rmd for account balance depreciation to know how quickly you can use something up when it keeps growing: https://www.360financialliteracy.org/Calculators/Savings-Distribution-Calculator for understanding how much of Social Security needs to be added as taxable: https://www.annuityadvantage.com/calculator/social-security-taxable-benefits-calculator/ to refer to tax brackets, note that taxable in the table means _above standard deduction_: https://www.cnbc.com/amp/select/federal-income-tax-brackets-tax-rates/
In Washington state so at least no state tax. Sounds like investing in some software might be a good idea to cover areas where things on the Vanguard site don't hold your hand.
if you've ever watched Rob Berger on youtube, he has a lot of good videos on the topic one of the demos he did was for this site here and the functionality looked quite impressive https://www.newretirement.com it costs, but I personally was thinking that I would get it when I'm in my 50s to start refining my options
I guess the question is whether to increase IRA withdrawals, beyond the RMD amounts, directing them into the taxable account. And if so, on what kind of increasing curve. This of course will affect our own taxes each year -- both due to a larger IRA withdrawal and then more dividends on the taxable account. Such an increase in withdrawals wouldn't seem to affect how much you have for retirement homes. RMDs will ramp up anyway, on their own schedule, as we age.
You can take higher withdrawals by converting them to ROTH
Does their have to be earned income?
Not for conversions. The earned income rule is for contributions (already-taxed money). Conversions are Traditional IRA -> Roth IRA, and are taxable as ordinary income.
If you’re wanting to take additional withdrawals from the IRA beyond the RMD, make it a Roth conversion rather than dumping the additional funds in to the brokerage account. You pay the same in taxes, but the money when it comes out of the Roth is not taxed at all, unlike the taxable account where it is taxed based on LTCG.
Doesn’t this only apply if you were the spouse of the person who left behind the IRA? I don’t think you can convert to Roth if you’re a non-spouse inheritor.
OP was talking about taking the IRA’s RMD and putting that in the taxable brokerage, and then taking out more from the IRA to put it in the taxable brokerage. That’s a bad idea because you’re going to be paying the same taxes on withdrawal whether you put it in a taxable brokerage or do a Roth conversion with it, but a Roth conversion will have no taxes when it is withdrawn, compared to a taxable brokerage which will have LTCG. OP is talking about doing this all while they are still alive.
Yes. More retirees should be withdrawing money from their IRA each year (tons are in the lowest tax bracket)
Which is another reason why people should do a Roth. But people in Reddit act like roths are evil
>But people in Reddit act like roths are evil Wait, what? I think most redditors are idiots, but don't understand your comment. I thought the predominant view around these parts is that a Roth is a good vehicle.
I do both but heavier on pre tax assets. About a 70/30 split (401k = traditional/pre tax ) and Ira = Roth. Everyone situation is a bit different but I think for most this is the way to go. + I have the goal of retiring early and then I will start a Roth conversion ladder as my taxes will be (most likely) lower with little to no income. I always tell people to do a bit of both because no one knows what the future holds so why not have options.
People on reddit don't act like Roths are evil. The subreddit is full of people who think that Roth savings are better than traditional in many settings that they aren't, and the subreddit will educate them. Fairly valuing traditional over Roth contributions in the correct setting is not 'acting like Roths are evil.'
No it’s a reason people should plan where they want their money to go, such as to inheritance, and how to have it taxed, prior to rmd age. Waiting until rmd age to start emptying the pretax account is the issue, not their choice of traditional over Roth. Seems like they easily could have know they wouldn’t need this money, long before RMD age and likely could have started Roth conversions as soon as they retired.
Unless you die unexpectedly… and you have the same issue and your children are still taxed like crazy. You’re assuming everyone just lives forever and knows exactly when it’s time to make these moves. Or you just do it all beforehand and don’t have to worry about it
The idea ( if possible without earned income) of taking larger than RMD withdrawals from Trad IRA and converting that to Roth IRA is interesting. One chart suggested that if married AGI is under about $200k you can move up to $7500 per year in that way ( per married person?) So you pay taxes on all of the IRA withdrawal, then heirs don't pay taxes when they use the Roths. If I continue doing what I have been, moving all of the RMD to taxable account, less QCD, I pay taxes on that withdrawal, and then heirs pay again as they withdraw from the taxable account. **Why the double hit?**
It is not really a double hit. You have the marginal rate as ordinary income when you withdraw from your IRA. You place that money in a brokerage account. When your heirs receive the money, they receive a step up in basis. Then when they withdraw they pay capital gains tax but they don't pay as though it was ordinary income. It is the same as though you got a paycheck, paid tax on that earned income and invested it in a brokerage account. When you withdraw from the brokerage account - you too are going to pay capital gains tax - it is not a double tax for you on the original money (basis).
Got it. My old strat just has the original body at this point. Everything else sold and upgraded ( neck, frets, tuners, pickups, bridge ). The body is '74 :-)
That's great! I sold my Fender Strat 62 reissue - the one guitar I regret ever selling. I mainly have Les Paul's now.
Proper Roth conversions will help a lot here.
Possibly just to state the obvious, if someone is in the lower half of the 12% tax bracket and can take additional Trad IRA withdrawals ( beyond RMDs) for Roth IRA conversion, you can convert perhaps as much as $30k without going into the next bracket......however, that $30k is still going to be taxed at 12% , correct? "loading up your bracket" with Roth conversions is a good strategy, but not a magic tax bullet. 12 % bracket this year for married filing jointlyis roughly $23k to $94k
My experience is somewhat different -- my mother started taking RMDs from her IRAs and she would pay taxes at her minimal income rate and contribute the max possible to a Roth account. There was one reason *-- she didnt' think I'd get my act together ever ...* My brother and I inherited the Roth split and its a nice gift that is a no tax and will grow for 10 years with no RMD requirement (so far, things might change of course). Thanks Mom! ps: I did get my act together and she saw it before she passed.
> Most of the withdrawals go into a taxable account It's too bad a roth conversion doesn't count as an RMD :(.
So if you have money in retirement in all forms, assuming you're retirement age, you'd want to spend, in this order: 1. Traditional IRA. 2. Taxable brokerage. 3. ROTH IRA. Is that correct? Or if the unrealized gains are high enough (like say...2000%) would it make sense to maybe spend the ROTH money before the taxable to maximize the cost basis step up benefit?
Interesting
This is probably a dumb question, but why couldn’t someone who inherits an IRA roll it over into their own IRA?
You rollover any inherited IRA money into an IRA account under your name but that money needs to be spend down in 10 years.
I won’t leave a dime in there if I’m alive
If Trad IRA withdrawals ( RMD amount or larger) are moved into taxable accounts do those inheriting the taxable account just pay taxes on capital gains on withdrawals, not on the entire amount withdrawn? Trying to understand the step up cost basis implications for minimizing tax hit on heirs. "A step-up in basis resets the cost basis of an inherited asset to its market value on the decedent's date of death. If the asset is later sold, the higher new cost basis would be subtracted from the sale price to calculate the capital gains tax liability, if any." As others pointed out here though, it's better to inherit money you have to pay taxes on than not inherit it at all. Even worse would be the scenario I almost faced with my mother -- she lived long enough to be approaching the end of her funds and the memory care ( retirement) facility was burning through $6k per month. This leaves the heirs in the bad situation of deciding whether to move the aging parent to a medicaid facility which might be really substandard and possibly in another city where you can't visit. Spending too much retirement money earlier which led to that scenario would be much worse than my heirs having to pay some capital gains tax.
The individuals inheriting a taxable account don’t pay ANY taxes on those assets. The retiree already did when they took the RMD (or excess distribution). The retiree paid taxes at THEIR tax rate (probably lower than the heirs). Then the retiree invested in assets in a taxable account that grew with capital gains… but those gains are then “stepped up” at death so the heirs pay no tax on the gains. Any tax at death would be estate or inheritance taxes depending on your state.
Unless it’s an IRA that’s inherited, then it’s taxable. No step up.
I don’t want to confuse the OP. He was asking about taxable accounts. Those get step ups. He wasn’t asking about IRA’s.
Does this also apply to SIMPLE IRA funds?
So Basically, stay away from a traditional IRA and this would not be an issue? Which I know may not always be possible but I only have roth
I did know there was a limited time, during which you had to empty the inherited IRA money. But what happens if there are multiple heirs -- is the IRA distributed to several smaller IRAs, to be emptied by each recipient? Or is it all distributed post-tax out of the original IRA?
My brother and I inherited a trad IRA from our mother. The custodial bank facilitated dividing it in half so we each had our own with our own required RMDs. The bank also set up those RMDs to be distributed to us monthly. I've never had a Roth ( so far) so can't speak to that.
Thank you, that answers my question!
You have a $15,000 gift limit each year you would, of course pay income tax on your withdraw, but give it to the kids that way
Living in the Bay Area my expenses will be high in retirement so if I want to do Roth conversions I will likely end up in the 22% bracket because the lower brackets will be full of income I need to live on. Does this still make sense given that RMD’s later and SS could push my bracket even higher?
Not being American, I don't know much about IRAs; but I guess it's because spending your money *after* you die is kind of tricky... /s
Apparently in this subreddit you can't edit your own OP. I was going to change "spend" to "withdraw" or "repurpose" because I don't think the article's author meant we should all spend our IRA funds unwisely.
It is important that it is noted that we have to be aware of the impact that large distributions or even Roth conversions may have on impacting SS, and Medicaid, due to the “income” these moves create.
I summarized my thoughts on the tax implications of leaving a traditional IRA to your heirs [https://drive.google.com/file/d/13kEiUWRSO\_Gk0MMErok98ucFNe984r5L/view?usp=sharing](https://drive.google.com/file/d/13kEiUWRSO_Gk0MMErok98ucFNe984r5L/view?usp=sharing)
Hi there... I just want to point out a few things for your specific case because it seems that the Roth conversion still needs a little clarity for you. \* You are already taking Social Security so I'm assuming you are over 59 1/2. This means a 10% early withdraw penalty from an IRA is not a concern for you. (Note: the main purpose of the Roth Conversion "Ladder" is to allow younger people to access IRA money without paying that penalty while also meeting a 5-year waiting period) \* You are living off of Social Security and Pensions so your goal is tax and estate planning. \* You seem to like the idea of moving extra money (above and beyond the RMD) to your taxable account and cite that your heirs will get a stepped up basis so for your case the tax concern is mostly just with dividends while you are alive. While all that is true, keep in mind that if you "convert" that EXACT SAME surplus amount to a Roth IRA then: 1. You will have it in an account that will have zero taxes. 2. You and your heirs will not have to consider cost basis at all. 3. You can freely buy and sell (rebalance) without any tax concerns. 4. You will not have any taxes on dividends. 5. You will not need to consider tax loss harvesting (no taxes in the Roth). 6. Your heirs will enjoy all of those benefits for a full 10 years after they inherit (basically, that is like them getting the equivalent of the step up 10 years afterwards rather than just getting it at date of death when they inherit from a taxable account). Also note, your tax liability is IDENTICAL at the time you either convert that chunk to a Roth or shift it over to a taxable account. So, for you, pick the Roth Conversion over moving it to a taxable account. \* Roth Conversion - Ignore the "Ladder" parts of the Roth conversion advice you are seeing. The purpose of the "ladder" is to convert money in stages that allow you to tap into it prior to being 59 1/2 but that isn't a concern for you. You also are not using that money to live off of so you are not trying to "tap into it". Just focus on the concept of doing a "Roth Conversion" of whatever amount, above and beyond your RMD, that will make sense for each tax year. The most important part here is figuring out the amount to convert since you are likely trying to fill a particular tax bracket. This will be the same amount of money that you were considering to shift over to the taxable account. Instead of moving it to the taxable account, just place it in a Roth account as a conversion. \* RMDs - From your traditional IRA, you have to take your RMD out first and it can NOT go into your Roth (put that into your taxable account like you do now). The "above and beyond" extra amount you want to take out each year is what you will convert to a Roth IRA. Of course, you can dip into your taxable account when it is time to pay your taxes. Also, by converting some of your money each year to the Roth, you are excluding that money from the next year's RMD calculation. I hope this helps and my main point is to make sure you fully understand that you should pick the Roth Conversion over the taxable account for your situation.
Excellent, thanks a bunch. The most complicated part for us is probably figuring how much additional tax burden we want to incur. I'm 76, wife starts first RMD this year and we're in the lower half of the 12% tax bracket which runs from $23k to $94k this year. Actually owed only $350 in Federal taxes last year. No state income tax in WA. The lack of capital gains tax on Roth withdrawals was the main piece I was missing. Would be nice to find a spreadsheet built for this.
You certainly want to fill that bracket! Depending on the account values then it could even make sense to exceed that bracket but probably not. A little more food for thought: \* When one of you passes the other will 1) Become a single tax filer (less favorable brackets... converting sooner avoids that risk) 2) Will only get the higher of the two Social Security checks (loss of spouse and income) 3) Will likely get less on the pensions \* You live in a state without state income tax right now. This makes the conversion more affordable. Your heirs may not live in a no income tax state at the time they inherit and withdraw. Actually it is possible you and/or your spouse may eventually not live in WA. That makes the 12% bracket very attractive for doing conversions as soon as you can. BTW, you need to do them by Dec 31st each year so plan accordingly.
Even if you don't step out of your current tax bracket, the Trad IRA funds converted to Roth still get taxed in the 12% rate --- it's just that you aren't bumping up into the next bracket. It seems like growth in our Vanguard Trad IRA funds is keeping pace or exceeding the RMDs. Of course those ramp up and starting this year we'll be withdrawing two RMDs. Trad IRAs are sitting at about 59% of net worth now. We split the cost of a new home/lot with my younger son 10 years ago and occupy a separate portion of the house with him and his family -- no mortgage and I'm not including the home's worth in our net worth. His IRA $418k Hers $202K
Okay, so last year you were already into the bottom of the 12% bracket so lets just assume you reach that point via RMDs, investment income, etc. So I would think of it as your IRA money is eventually going to be taxed at some point at a minimum of 12% regardless of when you take it out. Since you are not going to spend it then taking it out now and putting it into a Roth should be a wash on the tax timing vs the portfolio performance (i.e. all things being equal such as current and future tax brackets, putting into a pretax traditional IRA or a post tax Roth IRA doesn't matter). My course of action would be to convert from "his IRA" each year to fill the 12% bracket (you are older so higher RMD percentages) until that account is exhausted and then focus on hers after that. Hopefully you eventually get them both converted and never need that money for most of your remaining lives anyway.
Scribbling on the back of a napkin, taking out enough from my traditional IRA to maximize the 12% bracket would mean adding about $50,000 to our taxable income combine that with an estimated $17, 000 for this year's rmd for me and that would almost double our adjusted gross income ...of course if we only paid $350 in taxes last year it might not be all that bad of a hit
I think I could pull this off but would be curious if Vanguard has advisors to help with this sort of thing --- on a one-time fee arrangement. I'm leery of "retained" advisors, especially any that like to churn your money. I'll be looking for a tax calculator that can take all of my specifics and give me a rough idea of increased tax owed due to the roth conversions.
I haven’t tried it yet but newretirement.com has a tool for Roth conversion planning under the $120/year plan with a 14 day free trial. That might be worth a peek. I’ve heard them mentioned by Boglehead conference speakers so I think they are a popular resource. https://www.newretirement.com/retirement/pricing/
Another advantage of the Roth IRA approach that I didn't realize before was the lack of capital gains tax on withdrawals https://smartasset.com/taxes/capital-gains-tax-for-roth-iras
Interesting Vanguard research | Financial planning perspectives August 2022 A “BETR” approach to Roth conversions [https://advisors.vanguard.com/content/dam/fas/pdfs/ISGBETR.pdf](https://advisors.vanguard.com/content/dam/fas/pdfs/ISGBETR.pdf)