Am I missing something regarding rolling over into a Roth IRA?

[tvguy]

Okay, I had both my broker and CPA run the numbers, and doing a rollover makes no sense for DW and I.

However, I notice a lot of the websites that have worksheets to help you decide if you should rollover your IRA into a Roth assume an after retirement tax rate of 28 percent or more.
I expect my tax rate to be zero. Our retirement income will be Social Security and the minimum distribution from our IRA, no pension. After deductions, that doesn't even add up enough to have to pay tax.
What am I missing?

Now, in the past year, I have taken over my mom's finances. She's 90 and retired at 62, taking Social Security, a small pension and the minimum distribution from her IRA. The only year she paid any tax in the past 28 years was the year she cashed in an investment and had capital gains.

 

[clh2]

If I had a boatload of cash-I would roll over my Ira into a Roth in a heartbeat! But I do not have a boatload of cash so I cannot.

My understanding, you need to start taking withdrawals from an Ira at age 70.5. (Iirc). There are no minimum withdrawals required with a Roth, so more money would pass to our DD when Dh and I are gone.

 

[tvguy]

If I had a boatload of cash-I would roll over my Ira into a Roth in a heartbeat! But I do not have a boatload of cash so I cannot.

My understanding, you need to start taking withdrawals from an Ira at age 70.5. (Iirc). There are no minimum withdrawals required with a Roth, so more money would pass to our DD when Dh and I are gone.

Well, relatively speaking, I have a boatload of cash in my IRA, but nowhere near enough in other accounts to pay the taxes I would have to pay to convert it to a Roth. 15% into an IRA for 35 years kind of snowballs. As for my kids, we plan to spend it all.....well, we plan to buy long term care insurance that has a life insurance component, so they may get something.

 

[clh2]

Well, relatively speaking, I have a boatload of cash in my IRA, but nowhere near enough in other accounts to pay the taxes I would have to pay to convert it to a Roth. 15% into an IRA for 35 years kind of snowballs. As for my kids, we plan to spend it all.....well, we plan to buy long term care insurance that has a life insurance component, so they may get something.

Maybe I should have been more specific. If I had a boatload of "free and available cash" I would convert my IRA's to a ROTH IRA in a minute. Where the "boatload of free and available cash" would pay for the taxes needed to convert the regular IRA to a Roth.

 

[Sadie22]

I express no opinion on whether we should or should not convert to Roth IRAs. I simply state that everything is subject to change. Tax rates may increase, types of accounts that were not subject to taxation may become taxable, and so on. None of us can predict the future.

 

[allison443]

Okay, I had both my broker and CPA run the numbers, and doing a rollover makes no sense for DW and I.

However, I notice a lot of the websites that have worksheets to help you decide if you should rollover your IRA into a Roth assume an after retirement tax rate of 28 percent or more.
I expect my tax rate to be zero. Our retirement income will be Social Security and the minimum distribution from our IRA, no pension. After deductions, that doesn't even add up enough to have to pay tax.
What am I missing?

Now, in the past year, I have taken over my mom's finances. She's 90 and retired at 62, taking Social Security, a small pension and the minimum distribution from her IRA. The only year she paid any tax in the past 28 years was the year she cashed in an investment and had capital gains.

Curious what is the income amount you are planning on that will lead to no tax liability? Thanks.

 

[Cheshire Figment]

Basic Rules:

1. Everything coming out of a standard IRA is taxable; both principal (as it was put in as "pre-tax") and earnings.

2. You must start taking distribution by April 1 of the year after you tern 70½.

3. Nothing coming out of a Roth IRA is taxable. The money is put in after you have paid taxes on it, and the earnings are specifically exempt from tax.

4. There is no requirement that you take any distributions.

5. If you roll an regular IRA into a Roth IRA you must pay tax on the full amount when it is rolled over. However, future earning and withdrawals are not taxable and there is no longer a requirement to take a minimum distribution annually.

Mike (CPA Retired)

 

[tvguy]

Curious what is the income amount you are planning on that will lead to no tax liability? Thanks.

Minimum distribution would put DW and I at about $18,000 in taxable income before deductions. Social Security is on top of that. Currently you have to have $21,800 in income as a couple to have to pay tax. I am, of course assuming that number does not go down. Of course we have another 6 to 10 years of work ahead and contribution to retirement.
Sat down with our financial planner and CPA last year, our retirement income will actually be a hair larger than our current after tax take home pay.

In my mom's case, her distributions are $5,600 a year, plus $5,000 in pension, (plus social security), so she falls below the $11,200 income level that you have to start paying taxes at. But her social security covers all her expenses, the distribution and pension all go into savings.

 

[tvguy]

Basic Rules:

1. Everything coming out of a standard IRA is taxable; both principal (as it was put in as "pre-tax") and earnings.

2. You must start taking distribution by April 1 of the year after you tern 70½.

3. Nothing coming out of a Roth IRA is taxable. The money is put in after you have paid taxes on it, and the earnings are specifically exempt from tax.

4. There is no requirement that you take any distributions.

5. If you roll an regular IRA into a Roth IRA you must pay tax on the full amount when it is rolled over. However, future earning and withdrawals are not taxable and there is no longer a requirement to take a minimum distribution annually.

Mike (CPA Retired)

That is my understanding. But as I have posted, I don't get why you would pay taxes now to convert to Roth when you likely wouldn't earn enough to pay any tax when you withdrew the money when you retire....assuming minimum distributions.

 

[Tinkerdreams]

One of the things that is needed to be understood is that not only does the government mandate that you begin drawing from your IRA's, 401Ks, etc., but they also tell you how much. Here is the breakdown from age 70 on.

Age Percentage
70 27.4
71 26.5
72 25.6
73 24.7
74 23.8
75 22.9
76 22
77 21.2
78 20.3
79 19.5
80 18.7
81 17.9
82 17.1
83 16.3
84 15.5
85 14.8
86 14.1
87 13.4
88 12.7
89 12
90 11.4
91 10.8
92 10.2
93 9.6
94 9.1
95 8.6

This is very annoying to me because I will not need what the government says to withdraw. I would rather decide how much I do need. It's just comforting to know that I have the money if needed.

 

[tvguy]

One of the things that is needed to be understood is that not only does the government mandate that you begin drawing from your IRA's, 401Ks, etc., but they also tell you how much. Here is the breakdown from age 70 on.

Age Percentage
70 27.4
71 26.5
72 25.6
73 24.7
74 23.8
75 22.9
76 22
77 21.2
78 20.3
79 19.5
80 18.7
81 17.9
82 17.1
83 16.3
84 15.5
85 14.8
86 14.1
87 13.4
88 12.7
89 12
90 11.4
91 10.8
92 10.2
93 9.6
94 9.1
95 8.6

This is very annoying to me because I will not need what the government says to withdraw. I would rather decide how much I do need. It's just comforting to know that I have the money if needed.

Yes, that is what I have been referring to as "minimum distribution".
My mom has dealt with this for 28 years, her Social Security more than covers all her expenses........her pension her travel.....her IRA money just is a potential tax liablity that goes from one account to another.

 

[rlduvall]

That is my understanding. But as I have posted, I don't get why you would pay taxes now to convert to Roth when you likely wouldn't earn enough to pay any tax when you withdrew the money when you retire....assuming minimum distributions.

I'm with you on this one. Since I had a "defined retirement plan" at work when my deceased mother left me a small IRA, I was forced to roll it over into a Roth IRA. The taxes definitely hurt that year and I personally don't see it growing that significantly to where the tax rate I may be at in 'so many' years will ever make up for it. Of course, in that situation I had no choice, but you do. I think alot of it depends on your age, also. If I was under thirty, maybe even under forty, I can see the advantage, but I am just not going to see that much growth in my Roth IRA for it to be this stupendous and wonderful investment opportunity that is sold to all of us.

 

[amcnj]

I agree with previous posters to reveiw your situation and see what would happen tax wise if you do not convert to a roth. If you truly will not have to pay any tax in retirement the roth conversion may not be your best option. Unless you are considering it for inhertance or some other reasons.

Also the table showing Age and Percentage, I think should really be Age and life expectancy. So at age 70 you do not have to withdraw 27.4% of your savings, but rather 1/27.4% of it. That is take your account, divide it by 27.4 and that is the amount you would need to withdraw.

 

[SuzanneSLO]

I'm with you on this one. Since I had a "defined retirement plan" at work when my deceased mother left me a small IRA, I was forced to roll it over into a Roth IRA. The taxes definitely hurt that year and I personally don't see it growing that significantly to where the tax rate I may be at in 'so many' years will ever make up for it. Of course, in that situation I had no choice, but you do. I think alot of it depends on your age, also. If I was under thirty, maybe even under forty, I can see the advantage, but I am just not going to see that much growth in my Roth IRA for it to be this stupendous and wonderful investment opportunity that is sold to all of us.

I was confused by your response. My understanding is that an IRA inherited from someone other than your spouse CANNOT be rollovered into any account, Roth or otherwise.

You options are to take a distribution, pay the taxes and then contribute it to your own IRA (or do anything else you want with it) or retitle the account as an inherited IRA and take no less than the required minimum distributions from that account for the rest of you life. With the second option, you only pay taxes on the amounts withdrawn each year.

The second option should be available to everyone, even those contributing to other retirement plans.

When my FIL passed away 12 years ago, my DH retitled the account, paid no taxes when doing this and continues to take RMD each year based on his life expetancy. At this point, the account is larger than it was when he inherited it. He also contributed to his IRA the year he inherited the account. -- Suzanne

 

[rlduvall]

I was confused by your response. My understanding is that an IRA inherited from someone other than your spouse CANNOT be rollovered into any account, Roth or otherwise.

You are right - "rollover" of the inherited IRA was a bad term for me to have used. Because of my mother's age, it became necessary for me to take a required minimum distribution. Since I am trying to set up additional money over my employer sponsored 401(k) for retirement, and Traditional IRAs are not an option for me because of that, the investment broker kept touting the wonderful world of Roth IRAs. This broker originally being my mother's investment broker; he obviously didn't want to see the money removed from his company. I elected to set up the inherited IRA as a Roth IRA - meaning I paid all the required taxes on the inherited IRA. BUT, I have yet to see any decent return and I don't think at my age I would ever set a Roth IRA up over a Traditional IRA - if it's an option. I would have been better off taking the RMD of the inherited IRA each year and setting up a Roth IRA then - each and every year. Instead, we were pushed into a higher tax bracket the one year I did it.

Hope this helped with your confusion. : )

 

[SuzanneSLO]

You are right - "rollover" of the inherited IRA was a bad term for me to have used. Because of my mother's age, it became necessary for me to take a required minimum distribution. Since I am trying to set up additional money over my employer sponsored 401(k) for retirement, and Traditional IRAs are not an option for me because of that, the investment broker kept touting the wonderful world of Roth IRAs. This broker originally being my mother's investment broker; he obviously didn't want to see the money removed from his company. I elected to set up the inherited IRA as a Roth IRA - meaning I paid all the required taxes on the inherited IRA. BUT, I have yet to see any decent return and I don't think at my age I would ever set a Roth IRA up over a Traditional IRA - if it's an option. I would have been better off taking the RMD of the inherited IRA each year and setting up a Roth IRA then - each and every year. Instead, we were pushed into a higher tax bracket the one year I did it.

Hope this helped with your confusion. : )

Got it! Thanks for clearing this up for me. -- Suzanne

 

[cassandrap83]

That is my understanding. But as I have posted, I don't get why you would pay taxes now to convert to Roth when you likely wouldn't earn enough to pay any tax when you withdrew the money when you retire....assuming minimum distributions.

You do not have to take minimum distributions out of a Roth. You can CONTINUE to let it grow and grow - tax free!

 

[dawnball]

Minimum distribution would put DW and I at about $18,000 in taxable income before deductions. Social Security is on top of that. Currently you have to have $21,800 in income as a couple to have to pay tax. I am, of course assuming that number does not go down. Of course we have another 6 to 10 years of work ahead and contribution to retirement.

Have more years to retirement, or a need/desire for more income during retirement. I probably have 30+ years to retirement, and anticipate wanting more than $21,800 in income when I retire. I also don't anticipate that Social Security will exist in a meaningful way for me, so I don't "count" that income in my plans.

Also, if you want to do a backdoor-Roth (because you make too much money to contribute to a deductible IRA), you'll have to roll all of your traditional IRAs over.

So, it's (apparently) not a good idea for you, but it's a good idea for some people.