Roth conversions

[eswilliams12]

I am 60 years old and my husband is 70 years old. We have both retired and our 2023 AGI is $70K. We have the ability to do Roth conversions, but have a few things to consider:

We have to stay below the Medicare income limit of $206K for couples - which means we can convert about $136K from traditional IRA to Roth IRA. However, I will be without health insurance starting at the beginning of 2026 and will have to be on the affordable care act. I noticed it is also AGI driven. I'm thinking to get the lower health insurance rate, I should not convert until I turn 65, which will be in 2029.  

If I convert, my health insurance will be higher per month. If I don't convert, I will be having to take out a larger portion of RMD's when my husband turns 72.  The math for the conversion is this: $136K a year for 3 years equals $408K at 15% effective rate is $61,200. Insurance for 36 months at $1,200 a month (guessing) is $43,000. 

The math says do the conversion and pay the higher premiums. Is there anything I'm not considering?

[Jennifer_A]

For Roth conversions, there are a few factors to be away of:

1.  You can make as many conversions as you wish from a traditional IRA to a Roth IRA. But you can also make as little meaning you can choose $0 for some years.

2. If you are under 59 1/2, each conversion starts a 5-year rule.  Meaning if you make a conversion in 2024, you must wait at least 5 years to withdraw or you will get a 10% early withdrawal penalty.  However, since you are over 59 1/2, the 5-year conversion rule does not apply to you and so there will be no early distribution penalty.

While this may not apply to you now, it is also worth keeping in mind that Social Security Income is taxable. For joint returns, combined income up to $44,000 makes 50% of benefits taxable while combined income of more than $44,000 make 85% of benefits taxable.

You may want to consider the benefits of opening an HSA:

1. HSA contributions are pre-tax

2. HSA distributions are not taxed when used to pay for qualified medical expenses.

3. HSA plans can be invested.

4. HSA funds can be used to pay for long-term care premiums.

You can qualify to make contributions to an HSA if:

1. You must have a High Deductible Health Plan.

2. You are not on Medicare and have no other health care coverage.  But you can have an Affordable Care Act plan.

3. You are not a beneficiary on another person's tax return

Even if you no longer qualify to make contributions to an HSA, you don't have to withdraw the funds right away.  You can save your qualified medical expenses receipts for as long as you wish and reimburse yourself from the HSA account when it best serves you.

[Edited 6/28/2024|12:31pm PST]

[dmertz]

RMD age for your husband is 73, not 72.  For you it will be age 75.

There is no 5-year conversion rule for those over age 59½.  The 5-year period for conversions only has to do with early-distribution penalties and those over age 59½ have no early-distribution penalties.  (The 5-year clock for distributions of earnings accrued in the Roth IRA to be tax free is a separate clock.)

Regarding HSA contributions, there is no requirement that you be under age 65, but those 65 and over have usually signed up for Medicare Part A which would make them ineligible to contribute to an HSA, so most people are ineligible to contribute to an HSA for the month they turn age 65 and the months thereafter.

[marvin2it]

There are multiple considerations relevant to the conversion of a Traditional IRA to a Roth IRA,  Most importantly, the tax paid on the conversion will reduce the amount of your retirement savings immediately and therefore the amount of earnings on those reduced savings in the future.  Accelerating the tax on retirement accounts generally only makes sense if the income from conversion will be taxed today at a lower rate than distributions will be taxed in the future.  This is not often the case with retirees who will ultimately have their conservatively invested IRA account balances distributed to themselves rather than their children or other beneficiaries after their death.

Also, when considering the tax rate at which IRA distributions will be taxed now versus the future, the marginal tax rate in 2024 for joint filers with taxable income above $94,301is 22%. 

[fanfare]

"the tax paid on the conversion will reduce the amount of your retirement savings immediately and therefore the amount of earnings on those reduced savings in the future. "

The tax on  a  Roth IRA once established is zero whereas the tax on a Traditional IRA can be 40% or more, which also kicks in IMRAA surcharge.

Zero tax on retirement income also means zero tax on Social Security income.

My niece is in the 12% bracket and is converting her Inherited IRA to a Roth IRA over time.

The Roth IRA in one year is already up 16% over contributions.

@eswilliams12