Hello Bogleheads, thanks for clicking on this post. I am trying to help my parents who are concerned about future RMDs and retirement income. I am hoping for some feedback on our thinking. Please let us know if you agree, disagree, or can identify factors we haven’t considered. We appreciate the help!
Question #1. For my parent’s situation, which account would you withdraw from for the expected $9k/yr expenses not covered through existing income?
My parents’ (he 62, she 60) invested assets total $3M. $1.75M is in taxable accounts, $0.25M in Roth IRA, and $1M in tIRA. $200k home equity.
Current spending and future expected spending is $84k/yr, putting them in the 12% marginal tax bracket until RMDs start. Income from part-time employment, pension, farm ownership, dividends, and eventual social security will provide about $75k/yr.
I believe my parents could pull the extra $9k/yr from the tIRA as long as it’s taxed at 12% or lower; but the taxable account would be fine, too, especially if they use lots with the highest basis to minimize LTCG taxes.
Question #2. Should my parents convert some of their traditional IRA balances to Roth IRA, and if so, when and how much?
My parents’ goal is to maximize future value. Assuming a 3% real return annually, RMD starting at 73 would increase from $50k to $70k/yr over 15 years.
Using MDM’s calculator (https://www.bogleheads.org/wiki/Roth_co ... y_of_tools), it appears that Roth conversions starting in 2024 to the top of the 12% and 22% brackets have a positive return but might leave out some contextual factors.
In addition to estimating future RMDs and marginal tax rates, we’ve considered:
Question #1. For my parent’s situation, which account would you withdraw from for the expected $9k/yr expenses not covered through existing income?
My parents’ (he 62, she 60) invested assets total $3M. $1.75M is in taxable accounts, $0.25M in Roth IRA, and $1M in tIRA. $200k home equity.
Current spending and future expected spending is $84k/yr, putting them in the 12% marginal tax bracket until RMDs start. Income from part-time employment, pension, farm ownership, dividends, and eventual social security will provide about $75k/yr.
I believe my parents could pull the extra $9k/yr from the tIRA as long as it’s taxed at 12% or lower; but the taxable account would be fine, too, especially if they use lots with the highest basis to minimize LTCG taxes.
Question #2. Should my parents convert some of their traditional IRA balances to Roth IRA, and if so, when and how much?
My parents’ goal is to maximize future value. Assuming a 3% real return annually, RMD starting at 73 would increase from $50k to $70k/yr over 15 years.
Using MDM’s calculator (https://www.bogleheads.org/wiki/Roth_co ... y_of_tools), it appears that Roth conversions starting in 2024 to the top of the 12% and 22% brackets have a positive return but might leave out some contextual factors.
In addition to estimating future RMDs and marginal tax rates, we’ve considered:
- Impact of Roth conversions on ACA subsidies from 2024-2026 (pre-Medicare). Only one parent obtains health insurance thru the ACA marketplace. Maxing the 12% bracket would mean $3,600 in additional ACA premiums the next year. Maxing the 22% bracket would add another $10,800 in additional ACA premiums the next year.
- Impact of Roth conversions when Dad is age 63+ on IRMAA. Maxing the 12% bracket does not appear to trigger IRMAA. Maxing the 22% bracket would add $2,000 the next year in Part B/D premiums (total for both mom and dad). Note: I am modeling these by adjusting the marginal tax rate in year 1 in MDM’s calculator to approximate the increase in “next year’s” expense.
- The potential for tIRA to be used for medical and long-term care expenses that exceed the %-of-AGI threshold. My parents do not have LTC insurance.
- Future marginal tax brackets of heirs. Anticipate 22% - 24% marginal tax rates for heirs.
- State income tax. 0% for tIRA withdrawals in my parent’s state.
- Converting to the top of 12% makes RMDs more manageable (at $30-40k/yr), just pushing my parents into the current 22% bracket. It leaves about $750k in tIRA at age 80, providing optionality in case of unexpected medical/ltc expenses.
- Converting to the top of 22% bracket would exhaust the tIRA balances before RMDs. It would put my parents in the 22% bracket from ages 60-70, and the 12% around age 70.
- If no conversions, then RMDs would push my parents into the middle of the 22% bracket.
Statistics: Posted by YoungNavy — Wed Jul 03, 2024 9:33 pm — Replies 0 — Views 140