don’t forget that tax-exempt income (in a taxable account) gets added back for IRMAA purposes. And of course, marginal brackets halve upon first spouse’s death.
Roth’s avoid both issues.
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I think too many people ignore the change in marginal tax brackets upon the death of first spouse. IRMAA attracts all the attention, and the surcharge can definitely add to the effective tax rate, but the halving of the brackets from married to single is much more impactful.
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But if i’m in my peak earning years, I don’t see how going to a Roth today can help - unless I’m missing something. I know you mentioned I can do catch up.
I’ve even limited to 8% by my company for the top earner thing.
Thanks
Roth is all about marginal rates today vs expected marginal rates in retirement, including the few? years before RMDs begin. Need to consider both MFJ and Single filing rates (surviving spouse). And, for those with more assets than they need, consider marginal tax rates of heirs. (If your kids are making bank in NYC, perhaps paying a 37% tax marginal rate today doesn’t sound too bad!)
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If you are in the 22% marginal bracket, you are allowed to contribute to a Roth IRA. You would contribute post tax dollars that would otherwise be used to purchase Munis. Any money you contribute to the Roth can be invested in anything, and will grow tax-free for the rest of your life. At the moment, you are using excess post tax money to purchase Munis, which will have IRMAA impacts down the road.
Whoever inherits the Roth account upon your death will be required to drain it within 10 years, but no taxes will be due.
My children contribute to Roth 401(k) instead of traditional 401(k), even though they are foregoing the tax deduction of the traditional 401(k) contribution. They also do Backdoor Roths b/c their earnings exceed the Roth IRA contribution limit.
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I view a Roth as a bet on your current tax rate vs your future tax rate. With the aspect of possible IRMAA costs.
Do I wish I had put some funds in a Roth when my tax rate was lower? Sure, but in my current situation it doesn’t make a ton of sense.
@cbreeze if I end up with my current income in retirement all I can say is I am going to be having some major fun. Our situation is that DW & I are both accountants. We had carbon copy careers for the first seven years. We made the decision for DW to stay home with our first. She went back to work but at jobs that had a good schedule for kids activities. She always could have made more money. In the last 3-4 years she has really gotten back into the game and is back to making good money. I won’t fret about paying some taxes. My goal in life is not to pay any taxes. I will always do prudent things to save but nothing extreme. I will just be happy to move out of IL in retirement and get property tax relief.
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We’ve converted some of our IRA funds to Roth (over a few years, as guided by FA). It’s a way to hedge our bets about future tax rates. Also it’s nice to have diversified buckets of money available, Roth and taxable. The painful part of Roth conversion was finding other money to pay the taxes as typically it’s advised to not withhold for taxes during the conversion.
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The munis give me added cash flow today - which is why I buy them.
I could buy them in the Roth but then can’t use the income today - not to mention, I’m not sure I can put forth enough.
I am looking to maximize my income, not principal growth, which is the path my dad used and my sister and I have successfully followed. So I wouldn’t invest in equities - even in a Roth with a long time frame.
My son is contributing to a Roth 401K. My daughter is in a Colorado State Program - so has no flexibility where to go.
In the end, if I have to pay higher taxes or penalties because I earn more, I suppose that’s a good issue to have.
It’d basically be the IRMAA - because my taxable income between retirement and RMD will be low - at least that’s how I see it - correctly or otherwise. My IRAs/401Ks are mostly in equities and are in the 7 digits - so i’m going to have that and continue to have that growth, plus equities I have in a taxable account + a small pension.
It’s complex - i probably should pay a couple thousand and get a “review”. I won’t but I probably should.
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If you make an account at Bogleheads, you can post your specifics and any questions you may have. The very helpful and well-informed members will assist you and save you paying for a review.
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Maybe i’ll try that when i get time. Thanks.
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Stupid question
We have a brokerage account with some inherited funds. It’s invested, we won’t owe any taxes on it if we withdraw
Is there any reason we can’t take money out of our pre tax Ira and transfer it to the brokerage account?
What would he the difference between doing that and a Roth IRA?
Maybe capital gains? Not sure?
You can take money out of your pre-tax IRA and transfer to the brokerage account, but you will pay tax on the amount of the money you take out of the IRA. Additionally, any earnings on the money after it is deposited in your brokerage account will create tax liability (dividends and capital gains).
If you instead withdraw that same amount of money from your IRA and deposit it in a Roth IRA account, you will still pay taxes on the amount of the money withdrawn from the IRA, but you will never pay taxes on any earnings on the money invested in the Roth account.
So if you do not need to spend your RMD, or if you are not yet RMD age and have the ability to pay the taxes on the money withdrawn from the IRA, depositing it in a Roth IRA is a great strategy. You do not want to pay the taxes on the IRA withdrawal from the IRA funds, but instead use your brokerage account to pay the taxes.
Editing to add (b/c of Bluebayou’s helpful correction) that you cannot use your RMD to fund a Roth. You can at any time move money from an IRA to a Roth IRA, but once you have attained RMD age, you would only be able to convert to Roth an amount in excess of your RMD. The RMD cannot be deposited/transferred to your Roth account.
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I would think if you remove funds from a pre-tax IRA, they would be taxable.
So unless you’re moving from one tax deferred to another, you would create a taxable situation. That’s how I’m seeing this anyway.
P.S. No such thing as a stupid question.
Capital gains will not come into play here because every dollar you withdraw from the IRA is taxed as ordinary income, whether you withdraw it as part of your RMD or if you withdraw it to convert to Roth–same tax treatment.
Funds that are held in your post tax brokerage account could enjoy the more favorable capital gains tax treatment, but Roth funds are never taxed. Maybe that is what you were thinking of with your question about capital gains?
I just noticed that your brokerage account includes inherited funds. The basis for the investments held in that account was reset on the date you inherited the money, but you will pay taxes on any gains in value between the date you inherited and the date you cash out/liquidate + any dividends or capital gain distributions from the funds in the account. If you do not spend the money and there is significant appreciation in the value of the funds in the account, the basis will step up for your heirs.
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Thanks so much for that explanation! It was so easy to understand!
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Thank you for saying that. Sometimes I fear I am too verbose.
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small nit: RMD withdrawals cannot be put into a Roth account. Roth conversions in the same year can only be completed with additional tIRA funds (beyond the required withdrawal) after the RMD is taken. (hopefully, that is clear?)
However, if you have a spouse not yet subject to RMD’s, that spouse can still convert to a Roth directly (assuming over 59.5 years of age, or account is 5+ years)
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THANK YOU for that correction!
I am going to edit my comment in case someone does not read your correction.
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I am suspecting that the parents will put expectations on their adult children (and may have done a lot of this already) - and when the parents run into ‘crises’ in FL, they will reach out to their adult children for help.
I didn’t expect the reactions received.
“My sibling moved 2 hours away from my parents, she wanted my parents to retire and move to her town so they could help her. For 30 years she complained that my parents moved south.” - Now that is a gal that wanted the earth to revolve around her and somehow thought it was right to complain about the parents not dancing to her tune. I wonder if she has a lot of selfish tendencies.
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I have been trying to work out whether to pay off our HELOC (4.74%, jumps to 7% in 4 months) with 401K withdrawals, which would put us into the 32% marginal tax bracket. Have not been able to figure this out, so I asked AI.
AI first said, do not pay off the HELOC, at either rate, it makes no financial sense whatsoever. Then it asked to put in more details. When I put in more details, it told me to withdraw and pay off the HELOC, because I have a tax bomb coming at age 75.
Funny, in one case it is so certain that I need to not withdraw, but when I give it more information, it says I’m in an unusual situation and completely changes its direction. We have an appointment with an E-money advisor coming up, and I’m very curious what he will say! I definitely don’t totally trust AI, though it brings up good points.
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