RMDs vs Roth Conversions

[The Heretic]

I was watching a good vid on YT about Roth conversions and RMDs.

The gist of it was to calculate the "break even" point of doing Roth rollover conversions (from a IRA to a Roth IRA) such that in the long term (i.e., until your death or the regular IRA is depleted by RMDs) how much and how long should one perform rollovers - in order to save $ in taxes.

The YT was presenting scenarios for filing jointly and the goal was for max savings, least taxes, for the spouse beneficiary.

That is a different scenario than mine (least taxes & max savings for an heir beneficiary); there are different variables for the different scenarios.

One of the things the YTuber advised, that caught my attention, was not to concentrate only on paying less in taxes, which I had indeed been doing - but also to consider not leaving a huge IRA balance for the beneficiary to pay taxes on thru their RMDs (for a spousal beneficiary, the RMDs could, in certain situations, be spread out longer than for heir beneficiaries - the latter being ten years)

So I went looking for a calculator that would come close to my scenario. I found one that came kind of close, after trying half a dozen different ones: https://www.approachfp.com/roth-conversion-calculator/

Now be aware, this might not fit your scenario, and it doesn't completely fit mine (e.g., it doesn't take into account SS benefits, some do), and the estimated taxes are probably lower than I would actually pay, but it gives me an idea of what I want to do - which is increase the $ amount of my rollovers by quite a bit. I will pay more in taxes, but wind up with a larger balance in my Roth account.

My conclusions:

1) I would pay 2X more in taxes over the next 14 years (estimated lifetime of 85 YO).

2) My Roth balance would be 27% higher than my combined IRA + Roth balance - which would more than make up for the higher taxes by a factor of about 2.5-3X.
This excludes the scenario where the RMD would be reinvested into a taxable account - which I might or might not do for either scenario. I pull about 3% from the IRA as it is, for expenses and discretionary spending. I anticipate that besides inflation, my healthcare/homecare/etc. expenses will increase over time.

3) The RMDs will be lower with the Roth rollovers - decreasing the IRA balance over time and decreasing the RMD amount itself, until year 15 the balance of the IRA being zero, but the Roth balance being 27% larger than the combined IRA/Roth balance without the conversions.

4) Besides a larger total balance, the Roth balance would be totally tax free. Therefore, pay more taxes up front, and less taxes in the long term - when there is a beneficiary to benefit from what is left - or if I live longer than 85 years of age. In 15 years my daughter will be about FRA, so if I am still around, I can tap my Roth IRA for both out benefit. She (and her husband) will be getting SS benefits - but who knows what that will be with the way the SS fund is getting depleted?? But what she can get from my Roth will (should) more than make up for a depleted SS benefit (not to mention the equity in my real estate).

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[The Heretic]

Been running the numbers, and it seems that even if I go over $75K AGI and cut into the $6K "senior deduction" (phases out at a 6% rate over $75K - i.e., 6 cents per dollar over, plus it is a taxable income deduction - NOT a tax credit).

In the long run I would save considerable $ in taxes - to the tune of tens of thousands (total over 5-15 years) - if I can cut the number of years I have to do RMDs (starts in 2 years the year after I turn 73) and the amount of the RMD each year (which I would pull anyway - I take ~3% from my IRA for living expenses).

Also, according to the numbers, the amount in my Roth IRA would be a couple hundred thousand more than the amount in the reg IRA combined with the Roth IRA (if I did not do the rollovers).

That does not take into account the RMD $ in each scenario - at a certain point, without the rollovers, I would maybe be investing the RMD into a post-tax fund to earn $ on those amounts - but I would rather have those $ earning interest in the Roth IRA, because those would not incur taxes. Plus I (or my daughter) would not need to worry about the tax implications when taking a distribution from the Roth IRA.

Even more $ if I don't leave my daughter with an IRA that she has to take RMDs from to take it to zero inside ten years.

Of course, every one has different amounts in their IRAs/401Ks, different expenses and different tax situations, so this may not work out for every one, but it is worth looking at for the long term. I wish I had considered this five years ago - or even sooner; it would have been a lot better then and I would have had more time to implement it.

That said, I think I am going to go ahead with this plan. I am still running numbers to find a sweet spot. So far, while I would get into the marginal 22% tax rate, the effective tax rate will average out to ~15%

I would really prefer to get this done before I turn 80YO. Pretty sure I will live that long unless I get sick with cancer or have a heart attack/stroke, but not at all sure about longer than that. I would feel a LOT better having my $ in a Roth IRA than in a pre-tax regular IRA waiting to be a tax bomb for me or my daughter.

 

[dplev4]

Roth conversions save taxes for your beneficiaries. They typically save taxes for you over the loving term, but not always, and especially if you are still receiving income from other sources. In those circumstances it can actually cost you more. For example a Roth conversion may move you into a higher tax bracket, which will also likely increase your Medicare monthly charges, and which will double if your filing jointly. In the calculations I've tried, the upfront costs now are high enough that it's a loss over and above the conversion costs. A few years down the road when some of our income sources dry up, it will make more sense, although I'm asking our financial planner to price this out, as my first rmd withdrawal is 16 months away.

So I've been trying to figure this out as well. About the only two conclusions I've come to at this point are, to take my rmd at 73 and not by April of the following year, as the delay would require me to take two distributions in my 74th year and that would put me into higher tax brackets and bump us into worse Medicare brackets. The second conclusion is to take a monthly rmd distribution instead of waiting until December to take it (which is what I had planned to do to maximize my investment potential). It appears that over the long term monthly distributions even out and the predicability helps you better financial and tax plan, with negligible investment loss. On average…..

Anyway I appreciate this thread as it's something I've been working on too. So thanks.

 

[The Heretic]

Roth conversions save taxes for your beneficiaries. They typically save taxes for you over the loving term, but not always, and especially if you are still receiving income from other sources. In those circumstances it can actually cost you more. For example a Roth conversion may move you into a higher tax bracket, which will also likely increase your Medicare monthly charges, and which will double if your filing jointly. In the calculations I've tried, the upfront costs now are high enough that it's a loss over and above the conversion costs. A few years down the road when some of our income sources dry up, it will make more sense, although I'm asking our financial planner to price this out, as my first rmd withdrawal is 16 months away.

So I've been trying to figure this out as well. About the only two conclusions I've come to at this point are, to take my rmd at 73 and not by April of the following year, as the delay would require me to take two distributions in my 74th year and that would put me into higher tax brackets and bump us into worse Medicare brackets. The second conclusion is to take a monthly rmd distribution instead of waiting until December to take it (which is what I had planned to do to maximize my investment potential). It appears that over the long term monthly distributions even out and the predicability helps you better financial and tax plan, with negligible investment loss. On average…..

Anyway I appreciate this thread as it's something I've been working on too. So thanks.

All true.

My two income sources are SS benefits and a monthly ~3% withdrawal from my regular IRA (the growth has been at least twice that much, despite the withdrawal).

I am single and file single, so I don't have to take into consideration anybody else's income/etc.

I've been doing Roth rollover/conversions, but they have not been enough to do little more than slightly slow the speed of my regular IRA growth. I need to not only slow the growth, but make the transfer of funds deplete the regular IRA in 5-10 years, so I am going to increase the size of the rollovers by 2-3X.

I do also agree about the monthly RMDs - it smooths out the income, while at the same time averaging out the withdrawals and balance in IRA. I am not at the point where I have mandate RMDs yet. By the time I need to take RMDs, I hope that the RMD amount will be close to my 3% withdrawals that I use for living expenses and discretionary spending.

The one thing that calculator may or may not take into account is other income (such as SS benefits) and the taxes on the other income. It also does not allow for increasing/decreasing the rollover amount, and once the IRA balance gets below the rollover amount, it stops taking the rollover from the IRA to the Roth (I would prefer it take the remaining balance). It could also total some of the amounts and give some feedback on savings on taxes - I had to calculate the latter myself.

There is probably software out there that does that, and more - like Right Capital - but they are not free.

That said, it provides enough info for me to get a general idea of what I want to do. I am tempted to write some software to do the things that I mention, but right now, I have other things to do.

 

[dplev4]

That sounds pretty well thought out. I'm going to start working on mapping out Roth conversion costs. I ought be able to see what that will do to our taxes and Medicare. Hopefully I'll be able to get the right amount for the rollover, although (and I suppose this is good news) I won't be able to convert enough to not have to take some hits from RMD's too.

 

[The Heretic]

That sounds pretty well thought out. I'm going to start working on mapping out Roth conversion costs. I ought be able to see what that will do to our taxes and Medicare. Hopefully I'll be able to get the right amount for the rollover, although (and I suppose this is good news) I won't be able to convert enough to not have to take some hits from RMD's too.

I will still have RMDs for some years to come, but if I did my math right, the RMDs will be less than the 3% I pull every year anyway, and more importantly, the RMD amount that is required, will get lower every year, instead of higher, because the regular IRA balance will get lower.

 

[The Heretic]

Another reason to do Roth conversions is the fact that we now have at least a 2-4 year (probably 4 year) window where the tax brackets remain the same, plus, if you qualify, the $6K deduction.

 

[The Heretic]

Just watched a vid on when to stop doing Roth conversions.

A couple of criteria:

1) If you anticipate healthcare costs later in retirement that would exceed the 7% threshold and the std deduction enough to where it makes sense to be able to take advantage of that deduction. Instead of paying that expense from your Roth, pay it from your regular IRA because most of that expense will be deductible.

Example: You have a heart attack and there is $20K that Medicare/et. al. does not pay. Or you expect long term home care or nursing home care.

2) Don't let your taxable income (AGI) fall below the std deduction - e.g., right now, for me, the std deduction would be almost $24K. In addition to my SS benefits (such that zero percent of them are taxable), I can have ~$7K of additional income (say, from my regular IRA) and pay zero tax in the year because the std deduction would cover it.

A variation of this would be to continue rollovers until your regular IRA got down to that point where your RMD for that year would bring your AGI up to match your std deduction, but not much over it, if at all. This is what I am thinking I will do - at least until/if the std deduction changes.

RMDs generally increase each year because your estimated remaining life expectancy gets shorter - so they want you to spend it down. So I would need to change it each year.

Looking at the spreadsheet I have, that would leave me enough to possibly cover a single large medical expenditure that exceeds medicare/et. al. covered costs (chemo for cancer is probably the most expensive one) - or at least cover a significant part of the expenditure, while the expenditure would be tax deductible. At the same time, the amount in the regular IRA would not be a huge tax burden for my daughter to take RMDs on over a 10 year period.

 

[Tanc15]

Just watched a vid on when to stop doing Roth conversions.

A couple of criteria:

1) If you anticipate healthcare costs later in retirement that would exceed the 7% threshold and the std deduction enough to where it makes sense to be able to take advantage of that deduction. Instead of paying that expense from your Roth, pay it from your regular IRA because most of that expense will be deductible.

Example: You have a heart attack and there is $20K that Medicare/et. al. does not pay. Or you expect long term home care or nursing home care.

2) Don't let your taxable income (AGI) fall below the std deduction - e.g., right now, for me, the std deduction would be almost $24K. In addition to my SS benefits (such that zero percent of them are taxable), I can have ~$7K of additional income (say, from my regular IRA) and pay zero tax in the year because the std deduction would cover it.

A variation of this would be to continue rollovers until your regular IRA got down to that point where your RMD for that year would bring your AGI up to match your std deduction, but not much over it, if at all. This is what I am thinking I will do - at least until/if the std deduction changes.

RMDs generally increase each year because your estimated remaining life expectancy gets shorter - so they want you to spend it down. So I would need to change it each year.

Looking at the spreadsheet I have, that would leave me enough to possibly cover a single large medical expenditure that exceeds medicare/et. al. covered costs (chemo for cancer is probably the most expensive one) - or at least cover a significant part of the expenditure, while the expenditure would be tax deductible. At the same time, the amount in the regular IRA would not be a huge tax burden for my daughter to take RMDs on over a 10 year period.

The Heretic,

I read your posts and just wanted to reach out and introduce my self. My name is Tanner, I'm an Investment Advisor in Tigard, Oregon. If you ever wanted to sit down and discuss your options further, I'd like to offer my services. Let me know. Thanks, Tanner
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[Jay Walk]

• Should you do Roth Conversions?
• 
  
• You don't need access to the funds for five years;
• AND you can pay any related taxes from sources other than their conversion;
• AND you meet one or more of the following:
  • You hold a sizable amount (multi millions) of assets in traditional retirement accounts but want access to tax-free assets or to reduce RMDs in the future.
  • You expect your future tax bracket to be higher than it currently is.
  • You expect your taxable income to be high in retirement (in one of the top four federal tax brackets).

Notice that it is mostly "money managers" pushing Roth Conversions.

 

[Stomper]

Geez.... what a labyrinth of schemes to navigate! Whatever happened to the KISS (Keep It Simple Stupid) method of managing life?!

 

[The Heretic]

Geez.... what a labyrinth of schemes to navigate! Whatever happened to the KISS (Keep It Simple Stupid) method of managing life?!

The IRS and income tax happened

 

[The Heretic]

• Should you do Roth Conversions?
• 
  
• You don't need access to the funds for five years;

There are a LOT of exceptions to this rule.

In short, for the most part, it does not apply to me. Also, I do not plan to need access to the funds. I pulls funds I need from my regular IRA which has 4X as much $ in it as my Roth IRA. The reasons I want to convert are long term tax planning, for both me (RMDs) and my daughter (who will inherit all of the funds).

• AND you can pay any related taxes from sources other than their conversion;

You pay the same amount of taxes whether you pay them from your regular IRA or other sources where you paid income tax (almost every source will be pre-paid tax sources - with a few exceptions).

• AND you meet one or more of the following:
  • You hold a sizable amount (multi millions) of assets in traditional retirement accounts but want access to tax-free assets or to reduce RMDs in the future.
  • You expect your future tax bracket to be higher than it currently is.
  • You expect your taxable income to be high in retirement (in one of the top four federal tax brackets).

Notice that it is mostly "money managers" pushing Roth Conversions.

Do the math.

Roth conversions are not for everybody. There are a lot of variables; future plans, taxes, whether you have heirs, filing status {single, joint), the size of the conversions, your current income and source of income, etc. - but RMDs can play a large role that comes into play even if you have a regular IRA that is less than $1M.

 

[ma96782]

Last year (tax year 2024) was my first year to start doing my TRADITIONAL IRA to ROTH IRA conversions. I wished that I had started sooner.

That being said......
EVERYONE has a different situation and idea(s) about how they want things to work out. Be it for themselves and/or IF there will be beneficiaries involved.



Aloha, Mark

 

[The Heretic]

Last year (tax year 2024) was my first year to start doing my TRADITIONAL IRA to ROTH IRA conversions. I wished that I had started sooner.

I started Roth conversions a few years back. I wish two things:

1) I had started earlier.
2) I had converted more each time - I was looking at the short term (the current tax year) rather than the long term (future taxes and RMDs).

 

[ma96782]

Aloha, Mark

 

[Jay Walk]

There are a LOT of exceptions to this rule.

In short, for the most part, it does not apply to me. Also, I do not plan to need access to the funds. I pulls funds I need from my regular IRA which has 4X as much $ in it as my Roth IRA. The reasons I want to convert are long term tax planning, for both me (RMDs) and my daughter (who will inherit all of the funds).


You pay the same amount of taxes whether you pay them from your regular IRA or other sources where you paid income tax (almost every source will be pre-paid tax sources - with a few exceptions).


Do the math.

Roth conversions are not for everybody. There are a lot of variables; future plans, taxes, whether you have heirs, filing status {single, joint), the size of the conversions, your current income and source of income, etc. - but RMDs can play a large role that comes into play even if you have a regular IRA that is less than $1M.

Agreed,
Every retirement plan is unique. RMD's are often advertised as beneficial in every scenario, which is incorrect.
Is why they often leave out what tax rate you will pay at RMD time and also missing is the loss on the taxes you pre-pay.
Is also why they tell you to pay taxes with your savings account (so your retirement balance does not go down).
Hiding the loss as not to compare apples to apples.

 

[The Heretic]

Agreed,
Every retirement plan is unique. RMD's are often advertised as beneficial in every scenario, which is incorrect.
Is why they often leave out what tax rate you will pay at RMD time and also missing is the loss on the taxes you pre-pay.
Is also why they tell you to pay taxes with your savings account (so your retirement balance does not go down).
Hiding the loss as not to compare apples to apples.

In my case I have a daughter/SIL who will inherit almost all of my retirement funds. Due to various/sundry issues, they have sudden unplanned expenses that they will need to cover. Also, for various reasons, they do not have savings to speak of, retirement or otherwise.

Later in life, some of those expenses can and probably will become large.

I often help them with these expenses, because before retirement I earned quite a bit more than they ever will, I eliminated almost all of my debt decades ago, and set aside regular & retirement savings. I also made an investment in real estate that has bore fruit.

I don't want to see my daughter struggling after I am gone. Also, I don't want them to make serious mistakes with what I leave them due to complicated tax laws regarding IRAs/Social Security/IRMAA/etc. So I want to leave them as much as possible, and make it as simple as possible for them to access those funds - preferably without tax implications.

For our situation, that means that most of what I leave them, other than real estate (the equity is currently a little more than what I have in my IRAs), will be in a Roth IRA (about 10% will be in the regular IRA). They will still need to eventually withdraw funds from the Roth IRA - but they can wait until the tenth year, if they wish to let the Roth IRA continue growth without paying taxes on any withdrawal. The RMDs from the regular IRA should be small enough to be in the lowest tax brackets.

I have already informed them that they should sell my real estate upon my death (assuming the market price is good) - and I assume they would. Since the basis price resets to its current market value when they inherit it, they probably won't need to pay much, if any tax on capital gains - at that time. They could maybe even keep it for some years if they wish (they would have to live here for two years) and exclude another $500K in profit (filing jointly).

The funds from the real estate would last them for a while (depending on timing), and they might even be able to not withdraw fund from the Roth until the tenth year. I am going to advise them only withdraw from it before the tenth year, if they have to - in order for it to continue growing.

 

[The Heretic]

I forgot to mention that I anticipate that after the 2028 POTUS election, the tax brackets will be readjusted back to the pre-Trump tax cuts. So I want to take advantage of the current brackets and the $6K "senior deduction" while they exist.

Hell, after the 2026 elections, we might even see some adjustments then. I hope not.

I will reassess on a yearly basis.

 

[2ndtimer]

My wife and I have been converting our traditional IRA's to our Roth IRA's for years, while trying to stay within the 12% tax bracket. The new additional $6k deduction each for 2025 enabled us to each convert 25k this year. My RMD's will start in 2028, and my plan is for a portion of those to be qualified charitable deductions, which go directly from my traditional IRA to our church, which count towards RMD, but do not count as income, thereby avoiding income tax on that amount. Until the RMD's start we will continue to convert as much as possible while keeping our adjusted gross income within the 12% tax rate.
Once we start taking the RMD's, we plan to pay the taxes owed and gift the remaining funds to max out our 3 boys Roth IRA's. That way, the government will only get one bite of our apple!