Roth conversion questions

21

The rule only applies to individuals under the age of 59.5. From kitces.com two 5-year rules for Roth IRA contributions and conversions:
" withdrawals within 5 years of conversion by someone who is already over age 59 1/2 are not subject to the early withdrawal penalty, regardless of the 5-year conversion rule, simply because being over age 59 1/2 itself is an exception to the penalty"

22

Thanks for clarifying! It’s great to know that the 5-year rule doesn’t apply to those over 59.5 for penalty purposes. Always good to double-check the specifics, especially with Roth conversions. Appreciate the insight!

23

I took another gigantic swing at the Roth Conversion question… should I convert, if so, how much, all of that. How can avoid the first IRMAA cliff? The second IRMAA cliff? These questions and Google Sheets kept me up until the wee hours this morning.

Basically, I replicated an RMD calculator that you might see at AARP, Schwab. The key is to grab the official IRS RMD divisors so you can compute your RMD year-by-year. So line-by-line in the Sheet it models your IRA end-of-year balance and RMD, but very importantly I added columns:

  1. My Social Security (starting age 70, 25% haircut in 2033)
  2. Her Social Security (ongoing, 25% haircut in 2033, it could end by age 75 {cancer})
  3. My QLAC (starting age 82, but I had to inflation adjust it)
  4. Interest & Dividends
  5. Voluntary distributions from the IRA (conversion to Roth or consumption)
  6. QCD
  7. IRMAA cliff threshold - will change after widowerhood from 218k 2026$ to 109k 2026$
  8. I assumed a real rate of growth of 7.3%
  9. All Dollars in the sheet were presented in 2026$, the year I start retirement

What is found was amazingly helpful. It turns out that my Traditional IRA, which is quite large, is barely small enough to convert to Roth or use up and avoid all IRMAA cliffs. Here’s the real take away:

If I manage it carefully, the best I can hope for tax-wise is to stay in the 22% bracket my whole entire life, and my effective tax rate will be 16%. That is the optimum situation, and it’s unrealistic for me to expect anything better.

If I defer, defer, defer IRA distributions early in retirement, it will bite me later. If I overconvert early in retirement, I would have paid too much in taxes early on when I could have spent the money.

The plan right now works, except after my QLAC kicks in, I have to do some QCDs to tamp down the MAGI. I am totally fine with that.

Of course, a 30 year spreadsheet isn’t going to be right out 30 years, but the closer you get to the present, the less-wrong it will become. At least you point the boat in the right direction, you make course corrections every year as you go along.

If the growth is high, the problem gets worse. If the growth is low, the tax problem gets better. The problem gets better or worse depending on her prognosis. All of the tax laws could utterly change. Social Security and Medicare could utterly change. But at least I have an easy to use tool to take a look ahead and make some kind of intelligent guess about how to handle my IRA.

24

There is a solid chance that the government will charge tax when you try to cash out your Roth in the future.

The government may say it is “losing money” by letting people cash out their Roths “without paying taxes.”