Which spouse to convert Roth first?
Spouse 1 is 60 years old, self-employed, and plans to keep working until at least age 70. Spouse 2 is 71 years old and retired. Spouse 1 contributes the maximum to a SEP IRA, a Roth IRA, and spouse 2’s spousal Roth IRA.
Spouse 1 has $550K in a SEP IRA and $30K in a Roth. Spouse 2 has $850K in a traditional IRA and $16K in a Roth. There is no guaranteed retirement income other than Spouse 2’s Social Security.
There is a taxable brokerage account of $250,000 that could be tapped to pay the taxes. Should Spouse 1 convert their account first or Spouse 2? Should they do a big conversion and wipe out the taxable account to pay for it or do smaller conversions every year?
Permalink Submitted by Alan - IRA critic on Fri, 2021-06-11 22:25
Best to convert from spouse 2’s IRA since RMDs start next year and these conversions will start to reduce RMDs almost immediately. In addition spouse 1 may benefit fully if the proposed increase in the RMD age becomes law, whereas spouse 2 may only benefit for the increase to 73. The challenge is determining HOW MUCH to convert each year. Conversions should not be so large that the marginal rate paid for them is higher than what the estimated rate would be later on without the conversion. IRMAA surcharges should be added into the analysis and treated as if they were income taxes. Once spouse 2 reaches RMD age, the RMD must be completed before any conversions are done. Spouse 2 is also eligible for QCDs, and any such QCDs also present timing issues with respect to the RMD.
Permalink Submitted by Jean Thoensen on Sat, 2021-06-12 17:24
Thank you for your reply, Alan. As a consumer, I don’t have access to the professional tools you have.Not planning to do QCDs at this point.I can model this in a TurboTax file. So find a conversion amount that keeps the marginal rate the same without triggering the IRMAA surcharge?
Permalink Submitted by Alan - IRA critic on Sat, 2021-06-12 18:05
That would be only a general goal. It is an easy decision to convert in a year in which your marginal rate is abnormally low because you have reduced income or high deductions. It also matters where you fall in your marginal bracket, and how much higher the next bracket is. For example, converting to the top of the 12% bracket may be obvious, but the next higher bracket is 22% so you may want to stop there. The IRMAA surcharges would only occur in the 22% or higher bracket, so if you are converting in that bracket you might stop short of triggering IRMAA. But since IRMAA is not a tax rate, if you trigger an IRMAA surcharge, you might want to convert up to the top of the IRMAA tier but avoid triggering the next higher IRMAA tier. Finally, if the health of a spouse begins to deteriorate sharply, conversions should likely be accelerated since the surviving spouse will have higher tax rates when filing single. If a spouse dies suddenly, that year is the final year to file jointly, so future tax rates will be automatically higher for the survivor, making it wise to convert much more in that final year of joint filing.
Permalink Submitted by Jean Thoensen on Sat, 2021-06-12 20:16
Tax bracket is expected to be 22% when older Spouse 2 starts taking RMDs. Retirement hasn’t lowered the tax bracket for this couple since younger Spouse 1 is still working.Should they convert an amount that keeps them within the 22% bracket? Current health is fine.
Permalink Submitted by Alan - IRA critic on Sat, 2021-06-12 20:20
Probably. If this is the last year before RMDs, there should be more space this year to convert than next year, but if proposed legislation results in the first RMD year going to 73, the older spouse may be able to convert more next year as well. They should keep track of this legislation.
Permalink Submitted by Jean Thoensen on Sat, 2021-06-12 20:29
Alan, thank you for your concise, yet thorough, comments. Excellent information that I can use.
Permalink Submitted by Maria Ku on Thu, 2021-06-17 01:27
They may be significant in some states.
Permalink Submitted by Jean Thoensen on Sat, 2021-07-24 19:31
Thank you for the reminder about state tax rates. The modeling that I’m doing in TurboTax includes state taxes.