Considering making an IRA to Roth conversion in 2020 OR waiting and giving it to charity tax free in future - guidance requested | Ed Slott and Company, LLC

Considering making an IRA to Roth conversion in 2020 OR waiting and giving it to charity tax free in future - guidance requested

Hello - I'm considering making an IRA to Roth conversion this year 2020, since RMDs are not required. 1) if I add to an existing Roth account, is the entire amount now subject to the "holding it for 5 year rule" before taking a withdrawal, or just the new part added. While I'm not expecting to take a withdrawal within 5 years, one never knows. OR because of uncertainty, should I just set up an additional ROTH account, and segregate that new money so there is no question about co-mingling ROTH money and accounting?

2) On the consideration of making an IRA conversion to a Roth, OR not worrying ever about the taxes owed (eventually) waiting until I'm old enough to do a tax free charitable gift, after I'm 72 (if I don't need the money), OR at end of life give the entire amount to charity, tax free. A conversion opportunity exists now with the no RMD requirement freeing up more money to do this.....but who wants to pay the taxes now when maybe I may not need to? There's also future unknown tax law changes (like taxing the ROTH, like they eventually did with Social Security...). How should I look at this decision? Thx.

  1. If you are taking RMDs then you are well past 59.5 and all conversion 5 year holding periods ceased at 59.5. If you made your first first contribution of any kind prior to 2016 your Roth is now completely qualified and tax free. No reason not to convert into your existing Roth IRA, but EVEN if you were still subject to the holding period, opening new accounts would not benefit you since all your Roth IRA accounts are taxed as if they were one combined account.
  2. A conversion is most beneficial if you convert at a tax rate lower (and in some cases about equal to) what you expect your marginal rate to be in retirement. But if you plan to make a charity your IRA beneficiary, there is no sense paying conversion taxes unless you expect to use up more of your IRA and not have that much left for charity. Since a charity does not pay taxes, the IRA is worth the same to them whether it is a TIRA or a Roth IRA. You would have to factor in how much of your IRA you expect to use during your lifetime, and that estimate is basically just a guess. 
  3. In addition to leaving the IRA to a charity, if you plan on making large QCDs (eligible at 70.5 even though RMDs start at 72) you also would not convert. Again, you would have to factor in how large the QCD will be in relation to your RMD.
  4. If Congress eventually reneges on Roth IRA taxation, they would almost surely have to do it on a year forward basis. In other words, your Roth earnings to that date would never be taxed, but earnings after that date would be subject to tax, or perhaps would count in determining how much SS must be included in income. Since Congress is prone to kicking the can down the street, and conversions produce immediate tax revenue which will be desperately needed, it is not likely that Roth earnings after a certain date will be taxed since that would shut down much of the revenue raising conversion activity.

Thank you SO much!


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