I am not sure this was discussed before and obviously everybody's situation is different.
This is not a question on how much to convert on a yearly basis, based on some tax bracket preference, but rather on what the total lifetime target for conversion of pre-tax accounts should be.
There seem to be two main motivations for Roth conversions, at least motivations I care about:
1. Avoiding large RMDs, especially for a surviving spouse
2. Avoiding a large tax bill for heirs
Let's ignore for a moment #2. My view is that if heirs will be pushed into a high tax bracket due to inheritance, it would mean they are successful and that is generally a good problem to have, so I am not trying to optimize for that.
So let's focus on #1 only, managing the RMD impact on taxes for a surviving spouse. Let's say one couple MFJ are 60 and they currently have $2M in pre-tax IRAs. They have 15 years to do conversions. To simplify, let's assume for the purpose of this example, the amount stays at the same level in current dollars.
My thinking is that is does not make much sense to target a 100% conversion of the entire $2M amount to Roth by age 75, but rather get to a target that would get the surviving spouse in a low bracket like 12%, so roughly target to have a little over $1M non converted. I realize that there are many variables in play, including how well the investments do, tax laws, etc. But it should give a good year to year planning target on how much to convert. This would help minimize income and hence other income related factors.
Am I thinking about this in the right way?
This is not a question on how much to convert on a yearly basis, based on some tax bracket preference, but rather on what the total lifetime target for conversion of pre-tax accounts should be.
There seem to be two main motivations for Roth conversions, at least motivations I care about:
1. Avoiding large RMDs, especially for a surviving spouse
2. Avoiding a large tax bill for heirs
Let's ignore for a moment #2. My view is that if heirs will be pushed into a high tax bracket due to inheritance, it would mean they are successful and that is generally a good problem to have, so I am not trying to optimize for that.
So let's focus on #1 only, managing the RMD impact on taxes for a surviving spouse. Let's say one couple MFJ are 60 and they currently have $2M in pre-tax IRAs. They have 15 years to do conversions. To simplify, let's assume for the purpose of this example, the amount stays at the same level in current dollars.
My thinking is that is does not make much sense to target a 100% conversion of the entire $2M amount to Roth by age 75, but rather get to a target that would get the surviving spouse in a low bracket like 12%, so roughly target to have a little over $1M non converted. I realize that there are many variables in play, including how well the investments do, tax laws, etc. But it should give a good year to year planning target on how much to convert. This would help minimize income and hence other income related factors.
Am I thinking about this in the right way?
Statistics: Posted by idc — Tue Nov 19, 2024 1:52 am — Replies 1 — Views 214