My wife and I are near 68, retired and collecting Social Security benefits. We have more than $1 million in traditional IRAs and our adjusted gross income exceeds the Medicare Part B and D thresholds, thus we are paying much higher premiums because I have been converting assets in my IRA to Roth IRA annually while staying within my tax bracket.
I like to take advantage of the 2018-2025 lower tax rate by converting as much IRA to Roth IRA annually and still stay within the 24% rate. My goals are to pay the lowest lifetime tax, pass a big Roth IRA to children, and pay the lowest lifetime Medicare premiums. My wife wants to pay the least tax now and defer tax as long as possible. Who is more correct and did we miss something?
James Ferguson III, a managing partner with Roan Capital Partners, agrees with the thinking behind this strategy and says his firm has used these strategies many times in what sounds like similar scenarios.
"To take a step back, there are many factors to consider when executing Roth conversions," says Ferguson. "You described some of the major considerations and objectives."
Add this as well: At age 72, required minimum distributions kick in. "This can play into the strategy as a major consideration when you have substantial traditional IRA balances for tax purposes and also converting traditional IRAs to Roth IRAs," says Ferguson.
The surcharge on Medicare Part B and D can be a fair amount of additional costs certainly, but he views that as an investment in the ability to minimize taxes and a net gain long term. "The argument I would make hearing this question is that if the assets are truly going to be passed to the children then the Roth conversions make total sense long term," says Ferguson. "Roth IRAs are actually removed from inclusion in estate taxation."
Using the similar logic that most use when converting to Roth IRAs -- that taxes will be higher in the future -- many feel the likelihood that estate taxes could be as well.
The last point on this is that "re-characterizations" are no longer allowed, meaning you cannot reverse the decision to convert, or the amount -- like you could a couple years back -- within the same year. "This impacts the importance of when and how you convert throughout the year along with risk tolerance, objectives, and income needs from assets," says Ferguson.
"Giving a simplified example, if you had all of your IRAs in a moderate passive portfolio and a couple of the index funds or ETFs are down in line with the S&P 500, you could choose to convert those while trading at lower values," he says. "By doing this you pay 'less' tax on the lower value at that time and then invest the same way, or more aggressively, in the Roth IRA since the growth will be fully tax-free after five years -- especially when the goal is passing assets long term. The strategy with Roth conversions can become very dynamic when evaluating these factors and I would consider all these issues in conjunction as well as longevity/family health history."
My wife and I are near 68, retired and collecting Social Security benefits. We have more than $1 million in traditional IRAs and our adjusted gross income exceeds the Medicare Part B and D thresholds, thus we are paying much higher premiums because I have been converting assets in my IRA to Roth IRA annually while staying within my tax bracket.Subscribe for full article
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