10 Year Averaging
I hear that there is a rule that if I was born before 1936, I can use the 10-year averaging option to reduce the burden of paying taxes on retirement funds. I was born in 1931. I was speculating whether this rule will apply if I was to convert my traditional IRA to a Roth IRA in one lump sum. With the 10-year option, I will still pay all my taxes when I convert my IRA as a lump sum, but the tax bracket will be calculated as if I took the distribution in equal payments over a period of ten years.
I would appreciate your opinion on
(a) whether it is a good idea to convert an IRA to a Roth IRA at my age.
(b) Whether this 10 year rule will apply if I converted in a lump sum (approx $600 K) by not bumping me up to a higher bracket
Thanks for your opinion
n2b
Permalink Submitted by Alan - IRA critic on Wed, 2021-02-10 23:32
The 10 year option or cap gain treatment only applies to certain lump sum distributions from qualified plans (eg 401k). If your funds are already in an IRA, you cannot use the 10 year option. See Pub 575 under “Lump Sum Distributions”.
Of course, you can still convert any portion of your IRA to a Roth IRA, but only after you have completed your RMD for the year, and you cannot convert any of the RMD. Your taxable income would include both your RMD and the conversion amount. Conversions are only beneficial for advanced seniors if they have a very low taxable income year perhaps due to very high deductions, or in the case of 2020 in which there were no RMD required that had to be completed before any conversions. Some people will also convert to benefit their beneficiary who is in a higher tax bracket, and the taxes are then paid by the owner of the IRA at their lower bracket. Another possibility is if the estate tax unified credit is lowered to the point where you are subject to estate taxes, the taxes paid on conversions are removed from your estate. That used to be popular before the estate tax credit increased to where it is now. Biden’s tax plan proposes that this credit be lowered back to 5 million. But you might live in a state with a state estate tax threshold that is much lower as well. Therefore, lacking these special circumstances an advanced senior would generally not be converting, or would convert very little.
Permalink Submitted by narinder batra on Fri, 2021-02-12 06:58
Thanks Alan. Your response was very helpful. Highly appreciate your opinion about not converting when I’m hitting 90. I guess I’ll stay put and bite the bullet every year at tax time since it bumps me up to a higher bracket as well as penalizes me with higher social security tax, medicare tax, etc