Should I do IRA to Roth Conversion at age 69 years old?

[edmund360]

I would  like to know if it was prudent for myself and spouse {MFJ} to Convert {~600K}  IRA funds into a Roth in annual {smaller} increments of 20-30K annually over <20 year, in spike of fact I’m in the 22% Tax bracket due to annual SSI & Pension funds.  

Rationale:  Based on fact that money gets taxed at the highest rates, the marginal rates, and so your tax rates will be increasing over time and with the RMD tax rate which increases each year.  The tax rates are also set to revert back to higher rates in 2026. If I or spouse pass away the other will be a single filer with again higher tax rates. Not to mention Medicare surcharges, National debt forcing higher taxes, etc, etc. Also you will leave beneficiaries with taxable income and therefore less money is passed down to them.

I was informed in younger years that Roth Conversions are popular when your in your 50’s, so at retirement age it’s not effective, due to present value of the dollar, and not enough time to generate the Roth income.

Any ideas on this? I notice there are some Financial Companies pushing this concept as well?

[Critter-3]

This is a question for you to discuss with a local professional retirement planner  but here is my 2 cents ...

At your age taking such a hit to your balance in the account will take quite some time to be made up in the long run.  The more you reduce your investment by paying taxes in advance will hinder it's ability to increase in value especially if you are not investing in high risk situations. I doubt you will be getting the 10% in the following example : 

The Rule of 72

The rule of 72 is a simple method to determine the amount of time investment would take to double, given a fixed annual interest rate. To use the rule of 72, divide 72 by the annual rate of return.

For example, assume an investor invests $20,000 at a 10% fixed annual interest rate. He wants to estimate the number of years it would take for his investment to double. Instead of using the rule of 70, he uses the rule of 72 and determines it would take approximately 7.2 (72/10) years for his investment to double.

[dmertz]

If you have other money with which to pay the taxes so that you can convert the entire distribution from the IRA to Roth, it generally makes sense to convert an amount that increases your AGI up to the top of the 22% tax bracket as long as you expect your tax bracket in the future to be no lower than 22% and the AGI increase does not have any side effect such an an increase in the amount of Social Security income that is taxed or causes an increase in Medicare Part B and D IRMAA.  The assumption is that you expect the investments in your IRAs to grow, so that growth would be better in a Roth IRA where the growth will be tax-free when the requirements for qualified Roth IRA distributions have been met (you have already met the age requirement, so all that remains is the requirement that it be at least 5 years from the beginning of the year for which you made your first Roth IRA contribution, including the year in which you made any rollover and conversion contributions to a Roth IRA).  Certainly the fact that in 2026 your tax bracket will revert to being 25% should be considered as a reason to convert now, even, perhaps allowing you to consider converting up into the present 24% tax bracket.  When you get up into the 24% tax bracket, be sure to watch out for Net Investment Income Tax that can add another 3.8% to your marginal tax rate on part or all of your investment income.

Note that once you reach the year that you reach age 72, no Roth conversion can be done from a particular traditional IRA until the RMD for that IRA has been satisfied.

Having a lot of tax-deferred retirement savings can be a tax time-bomb, so the earlier you begin to manage that the better.  Always consider the money in your tax-deferred retirement accounts to be partially belonging to the government in proportion to your future marginal tax rate; only part of the money is yours unless your future marginal tax rate is 0% due to having relatively low income, but that seems unlikely in your situation.

[chashm]

I spent a fair amount of time studying this last year for my spouse & I - we're a bit younger (64 & 66) and have more in traditional IRAs, plus a beneficiary IRA under the new SECURE Act 10 year distribution rule.   Picking 2035 as a 'who's ahead' point, a 6-year (until we have to take RMDs) level Roth conversion of roughly 70% of the traditional IRAs was 5.5% worse than leaving it all in traditional IRAs from a total asset perspective.  Even out 25 years, the conversion doesn't make sense.

On the other hand doing the conversion basically pre-paid the taxes on a whole lot of money.   I chose to put off paying the tax man and didn't do the conversion.

If you go the conversion route, you have to have enough 'outside' income to cover the tax bill.  

As other replies have noted, what your estate planning expectations may significantly influence your decision.  Non-spouse beneficiaries have to clear out traditional IRAs in 10 years.  Roth IRAs can be annuitized for the beneficiary's lifetime otherwise for 5 years (if the beneficiary is a trust, for example). 

If you haven't already, I do suggest you open a Roth with a nominal sum to start the 5-year Roth click ticking.

[dmertz]

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 Picking 2035 as a 'who's ahead' point, a 6-year (until we have to take RMDs) level Roth conversion of roughly 70% of the traditional IRAs was 5.5% worse than leaving it all in traditional IRAs from a total asset perspective.  Even out 25 years, the conversion doesn't make sense.

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My calculations have always shown that if the rate of return on the savings that would be used for taxes is the same as the rate of return in either the traditional and Roth IRAs, break-even is immediate.  Consider that the balance in the traditional IRA is the sum of your eventual tax liability on the total value of the traditional IRA and the amount that remains after you have paid the taxes.  In the traditional IRA that's effectively a tax-free portion that belongs to you and a portion that belongs to the government.  By paying the taxes now with savings, allowing you to covert the entire balance of the traditional IRA distribution to Roth, you are trading savings outside of the IRAs that are subject to non-zero taxes on the their growth for savings inside the Roth IRA that grow tax free.

Certainly if you have use a portion of the traditional IRA distribution to pay the taxes on the conversion and cannot convert that portion to Roth, break-even can be substantially delayed or even impossible, so perhaps that is what you are doing in your calculations.  But, since it seems that you would find a reduction in future RMDs beneficial, it sounds like you would have the necessary funds outside of retirement accounts to pay the taxes and allow Roth conversion of the entire traditional IRA distribution (unless that source of funds itself has embedded taxes, such as appreciated stock that you would have to sell).

[fanfare]

Roth IRAs can be annuitized for the beneficiary's lifetime otherwise for 5 years (if the beneficiary is a trust, for example). 

@dmertz  I thought Roth IRAs have the same 10-year liquidation rule as a Traditional IRA.

[fanfare]

If you like the idea of pay now rather than pay later,

then keep your AGI under $200,000 to avoid the add-on  taxes mentioned above.

that's for filing single. look up the number for MFJ returns.

[fanfare]

If you're a NJ resident senior and your conversion puts your NJ taxable income (Line 27) over $100,000, you'll be a very unhappy camper.

[dmertz]

For both traditional and Roth IRAs, the tax code changes implemented by the SECURE Act dictate that if the beneficiary is an Eligible Designated Beneficiary, the beneficiary is subject to annual RMDs based on the beneficiary's life expectancy.   A designated beneficiary (a trust that is qualified for look-through or an individual) who is not an EDB is subject to the 10-year rule.  If the beneficiary is a non-individual such as a trust that is not qualified for look-through or an estate, the 5-year rule applies if the decedent dies before the Required Beginning Date for RMDs or annual RMDs based on the decedent's life expectancy if the decedent dies after RBD.

[fanfare]

Convert a small amount  (whatever small is to you) of IRA to ROTH IRA each year and buy Bitcoin.

If you're a true believer, convert more.

[chashm]

Hmm.

I set up a simple Roth conversion analysis.   If you just add up the values of your accounts,  you have less money at the end of the day by doing the conversion, having lost the opportunity to earn money on the taxes you paid to do the conversion.  However  If you discount the traditional IRA by the taxes that will eventually be paid on its withdrawals, yes, the conversion makes sense after a few years (4 with my numbers).  

I had done a much more complete analysis of my particulars, including federal and NY state tax tables, effects of SECURE including the new RMD start age, the expiration of TCJA rates in '26, having to distribute my inherited IRA over the next 10 years, when we plan on starting Social Security,  Medicare IRMAA on parts B&D, inflation, our projected living expenses, but not the 3.8% NII. 

In this analysis a full Roth conversion is a bad deal both from a total asset and a post-tax asset view at low (2% over inflation), largely I think because the tax hit is so high, pushing us well into 42% marginal tax during the conversion years from which we never recover.  At higher growth rates (say 4% over inflation, a more reasonable long-term rate),  conversion of most of the money is better, but not a whole lot - 4.5% after-tax out in 2044.

So, still kind of a wash.  

[dmertz]

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However  If you discount the traditional IRA by the taxes that will eventually be paid on its withdrawals, yes, the conversion makes sense after a few years (4 with my numbers).

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Yes, you have to do that to make a fair comparison.  It's all about what you (or your beneficiaries) get to keep.   If you expect your beneficiaries to inherit the accounts, you'll want to take their marginal tax rates into account into figuring the net value of the traditional IRAs.