I think this may be the key in our case to getting the Mercedes to go a very long distance. My H found a mechanic who has a shop that specializes in Mercedes. This shop does repairs and the owner also sells used Mercedes. We have only been to a dealer when a part was under warranty or when there was a recall (only once on a recall). We’ve been getting cars from this shop for the last 25 years. The owner here buys used cars from local car auctions and he’ll look for a specific car if you want this.
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Well to circumvent that one could just withdraw the funds towards the end of your life in the cheaper state/city pay the taxes and put the money into some mutual funds then let your heirs inherit the mutual funds and they will have step-up basis and won’t have to pay taxes. Their basis will start from the date they inherit the funds.
I know it’s been mentioned here before, but Bogleheads has some great discussion about Roth conversion vs not.
An accountant I trust refused to advise on whether it’s a good idea to convert, because you just don’t know what the future will bring.
The biggest benefit for me would be to help with taxes on kids’ inheritance, IF there is one.
If you happen to move from a state with state tax to a state without, that would be a good time to convert.
So far I have only a pretty small part of my money in Roth accounts.
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That’s a good question. I’ll answer as somebody who wished I had done some Roth 401k while working (instead all traditional, tax advantaged). In our case, low pensions… 401Ks are tapped as part of our retirement plan. It would be nice to have a choice of taxable / non-taxable. Example - for qualifying for ACA discounted health insurance. When talking about jumbo 401Ks, the RMD issue can becomes relevant at age 72.
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Your kids will NOT have any federal taxes on inheritance under $13.61M/person unless it is from an IRA account. Only 6 states have inheritance taxes.
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Sorry I wasn’t clear. What I was referring to is pre-tax (traditional) vs post-tax IRA or IRA like vehicle.
If I die kids will need to take pre-tax out when they may be in high tax years. Roth would work better for them.
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I assumed the point was that heirs get 100% of inheirited Roth withdrawal. They need to pay taxes on withdrawals from traditional 401K/IRA… and depending age and on rules at the time it may be forced before retirement. I think it’s nice when parents arrange that. But honestly my bigger priority is financial optimization for ourselves.
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Yes, drain the IRA accounts on yourself first. Everything else gets a step up.
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For most of our big earning (and big 401k) contribution) years, we were in the AMT phaseout bracket, which had a 35% incremental rate. With state tax, our incremental rate was over 40%.
Roth was not a realistic option for us.
I’ve done some conversations now that I’m retired, but every dollar of conversion reduces our ACA subsidy, essentially adding 8.5 percentage points to our incremental rate.
You can’t win , lol
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Thanks - I understand how it works.
My point was only related to kids and inheriting regular IRA vs Roth.
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Taxes have already been paid. Also, no RMD on the Roth. If we leave the money in a regular IRA, and we are taking an RMD, our kids will have to do so as well. And we don’t have to do an RMD on anything in our Roth either, IIRC.
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Secure Act 2.0 not going to help you delay RMDs?
Promise this is not a back door way of finding out your age.
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From the IRS website: Inherited Roth IRAs
Generally, inherited Roth IRA accounts are subject to the same RMD requirements as inherited traditional IRA accounts. Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.
Do I have to take an RMD on my Roth IRA? I thought since taxes were already paid, that was not the case.
“inherited”. Also check out inherited IRA rules - spouse vs non spouse.
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I’m putting my money into a traditional 401k now. By doing so I’m avoiding a bit over 30% in income taxes since these contributions come off of the top of my income thus saving me money at the highest rate.
When I’m pulling my money out in retirement I will be pulling out across my income spectrum so taxes will be saved at my effective rate which will be much lower than the maximum percentage that i am paying now (and saving by not paying now). If I move to a lower or no tax state I’ll save even more then.
For me, I just don’t see how paying at my top rate now to be able to save on taxes later when they should be lower makes sense. I’m ok with RMDs too. I plan on pulling my money out to pay expenses anyway. I can always put extra money I need to pull out into a brokerage account or gift it, etc.
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If I am not taking a RMD from my Roth…would my kids be required to take the RMD based on my RMD? I don’t think so. YES…I understand they will need to take the distribution of this Roth. But since the taxes are already paid, does the ten year draw down still apply? I thought that was so the government would get their taxes in a faster fashion.
Clearly…I do not fully understand.
Regardless…we have been told this is a much easier vehicle for transfer when we die. It also makes this money more accessible for us if we want or need to use it…since the taxes have been paid.
We would rather pay these taxes than have our kids have to do so…if there is anything left…
Adding…these next two years and this last one are the lowest income years we have ever or will have.
And yes…we considered how much our take home pay was increased because of our contributions to our tax deferred retirement plans.
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Is this not true?
Can I convert my IRA to a Roth IRA to avoid RMD?
Converting an IRA into a Roth IRA can help you reduce or avoid required minimum distributions (RMDs) later on. Roth IRAs, unlike traditional IRAs and 401(k)s, aren’t subject to RMD rules. So by converting your IRA to a Roth, you could avoid having to pay extra income taxes from mandatory IRA withdrawals in retirement.April 2024
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Consider how pre-tax 401(k) contributions may help avoid the Net Investment Income Tax for higher income earners.
Nothing I post constitutes tax legal or financial advice. Please seek out your own financial and tax professionals.
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