Strategy Help Needed for Large IRA

Submitted by Les Schiller on Mon, 2013-04-15 16:21

Age 66 with IRA in excess of 2.3 million. Have other sources to fund current living.No children. I am in the 15% tax bracket and have been capping that bracket with Roth conversions. Does it make any sense to make Roth conversions up to the 25% bracket for the next four years. Are there any other strategies that will help to lower my RMD’s when I have to begin taking them?



Submitted by Alan - IRA critic on Mon, 2013-04-15 17:24

  • Have you filed for SS retirement benefits yet? If not, delaying until 70 will increase your benefit by about 32% and provide more bracket head room to convert the next 4 years. You might want to look at your future gross income from RMDs starting around 85k as a target for your additional conversion amount, such that your taxable income would stay roughly the same before and after RMDs, but would be used for conversions before your first RMD distribution year. Right now, if you are stopping at the top of the 15% bracket, you are probably not able to convert very much each year.
  • You might also want to look into longevity insurance, particularly if your health is good and you do not insure LT care. IRS proposed Regs would allow you to buy a deferred annuity up to 100k with distributions starting around age 85. In the meantime the amount used to purchase the IRA annuity would not be included in your IRA value for calculating your RMD. google longevity insurance for more info. The 100k limit may also be raised in the future. 


Submitted by Bruce Steiner on Mon, 2013-04-15 22:34

To the extent you can pay the tax on the conversion out of other assets, the Roth conversion generally makes sense to the extent the tax rate on the conversion is less than, the same as, or not too much higher than the tax rate that would otherwise apply to the distributions.  It’s worth exploring the extent to which additional Roth conversions might make sense.



Submitted by Joe Luby on Wed, 2013-04-17 14:42

One of the least understood strategies for reducing both RMDs as well as the tax owed on large Roth conversions is to apply valuation adjustments to alternative investments, when applicable.  It is very common to find IRAs holding illiquid non-traded alternative assets which are incorrectly valued at their net asset value (NAV) or original purchase price.  The proper valuation for tax reporting of Roth conversions and for calculating RMDs annually is fair market value (FMV).  FMV will often be lower than NAV due to the illiquid nature of many alternative investments.  For example, a properly valued alternative investment might have a NAV of $100 and a FMV of only $65 when determined by a qualified appraisal.  Obviously, the tax owed on a $65 Roth conversion is easier to swallow than the tax owed on a $100 transaction.  The lower FMV is also the value used when calculating the RMD resulting in a lower mandatory distribution.These comments are not intended as a recommendation to add illiquid alternative investments to a portfolio simply for the potential tax benefits.  But if they are already present in an IRA or are appropriate for a particular investor’s portfolio, these additional opportunities for tax planning should not be overlooked.



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