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Posted by Gary on August 28, 2008, 5:04 am
I'm facing a sticky problem. I've been a good saver all my life, and
as a result I have a great deal of money in traditional IRAs. I'm age
75 and as a result taking out RMDs on these IRAs. These RMDs push my
income (pension, dividends and social security) to well over $100,000,
causing me to spend more for medicare. And I assume in the future
there will be other income-based tests for entitlements. I'm further
concerned that taxes will be substantially higher in the future
(financing a war, etc.), making my situation even worse than it is now!
So I'm seriouisly considering converting all the IRA money (after he
RMD) to Roth IRA this year. I would have one big tax hit next April
(hopefully still at low tax rates) and considerable tax and entitlement
relief in future years. In addition I am considering converting
most-to-all of my regular investments to tax-frees.
The economic advantage or disadvantage of doing this depends very
heavily on the assumptions, especially the assumptions about tax rates
in future years. Those of you involved in financial planning: what are
you assuming about tax rates in the next 5-10 years?
Also, if you care to comment about this, what other assumptions do you
think are critical? And is there anything so stupid about this
conversion plan of mine that I have completely overlooked?
Thanks in advance for your comments.
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Posted by joetaxpayer on August 28, 2008, 12:08 pm
Gary wrote:
> I'm facing a sticky problem. I've been a good saver all my life, and as
> a result I have a great deal of money in traditional IRAs. I'm age 75
> and as a result taking out RMDs on these IRAs. These RMDs push my
> income (pension, dividends and social security) to well over $100,000,
> causing me to spend more for medicare. And I assume in the future there
> will be other income-based tests for entitlements. I'm further
> concerned that taxes will be substantially higher in the future
> (financing a war, etc.), making my situation even worse than it is now!
Gary, you don't mention if you file single or joint.
For single, your 28% bracket in 2008 goes from $78,850 - $164,550
If Joint, the 28% bracket from $131,450 - $200,300
I think converting enough to 'top off' just that bracket may be a
helpful strategy. Without more numbers from you, I can't tell for sure.
But any more (converted) will send you into the 33% bracket, which is
really the highest rate for you. I doubt you'll be subject to that rate
despite future changes to the tax rates. The 'phantom tax rates' created
by phaseout of entitlements are a tough one. You are penalized for your
own success and thrift.
Joe
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Posted by on August 28, 2008, 4:54 pm
> Gary wrote:
[considering rolling IRA to Roth, paying taxes now]
> Gary, you don't mention if you file single or joint.
> For single, your 28% bracket in 2008 goes from $78,850 - $164,550
> If Joint, the 28% bracket from $131,450 - $200,300
>
> I think converting enough to 'top off' just that bracket may be a
> helpful strategy. Without more numbers from you, I can't tell for sure.
Just be careful - the "marginal rate" according to the tax
tables is far from the whole picture. If you push your AGI
up by doing this, it can affect other things which have
AGI-tied phaseouts, as well as the potential deductibility
of certain things (ie. medical and miscellaneous dedutions).
The only way to really know how this will affect your overall
taxes is to actually run the numbers on your individual
situation. It may be worth paying an accountant to do it
for you.
--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting
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Posted by Elizabeth Richardson on August 28, 2008, 7:00 pm
I'm age 75
>> and as a result taking out RMDs on these IRAs. These RMDs push my income
>> (pension, dividends and social security) to well over $100,000, causing
>> me to spend more for medicare.
>
> Gary, you don't mention if you file single or joint.
> For single, your 28% bracket in 2008 goes from $78,850 - $164,550
> If Joint, the 28% bracket from $131,450 - $200,300
>
> I think converting enough to 'top off' just that bracket may be a helpful
> strategy. Without more numbers from you, I can't tell for sure.
Joe, although I don't remember any of the particulars, this sounds like a
situation in which your strategy of donating RMDs to charity might apply.
Perhaps you could repeat it here.
Elizabeth Richardson
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Posted by Douglas Johnson on August 28, 2008, 2:35 pm
>So I'm seriouisly considering converting all the IRA money (after he
>RMD) to Roth IRA this year.
> And is there anything so stupid about this
>conversion plan of mine that I have completely overlooked?
The problem I see is that you are making a large bet on something that is
completely unpredictable. I mean we're talking about Congress here.
The usual recommendation around here is that you diversify your tax risks --
some money taxable, some IRA tax deferred, some Roth tax exempt. This way you
have some protection no matter what happens.
If you have strong feelings about future taxes, you could put more emphasis on
one type of account or another. But I wouldn't go "all in" on any of them.
-- Doug
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
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