Should I Consider Roth Conversions Now Or After I Retire?

Dear Liz: My hubby and I some waited until property 70 to commencement Social Security. I will beryllium 72 successful September and americium considering retirement. My hubby is retired, 74, and taking required minimum distributions (RMDs). We person ever tried to maximize contributions to our pre-tax status accounts and are now realizing nan downside arsenic we salary taxes connected those mandatory withdrawals. Should I see Roth conversions now aliases aft I retire? I recognize I will request to salary taxes connected those conversions, but would it beryllium champion to do that erstwhile my income is lower? I americium reasoning astir my kids and their future.

Answer: Late-in-life Roth conversions tin beryllium tricky. The magnitude you person is removed from RMD calculations, lowering early taxation bills. But nan conversion is added to your existent taxable income, perchance making much of your Social Security taxable and temporarily raising your Medicare premiums (thanks to income-related monthly accommodation amounts aliases IRMAA) successful summation to generating a large taxation bill.

Theoretically, a conversion could still make consciousness if your existent taxation complaint is little than nan 1 you’ll person erstwhile you commencement required minimum distributions astatine 73. The lawsuit for conversion is strengthened if you want to walk this money to your kids. They apt would person to quiet immoderate inherited status relationship wrong 10 years, and they could beryllium successful their highest earning (and tax-paying) years erstwhile they do so. By converting now, you would successful effect beryllium paying nan taxation measure for them, possibly astatine a little complaint than they mightiness face, and allowing them to inherit nan money tax-free.

A taxation pro tin thief you pinch nan calculations truthful you’ll understand nan financial effect of a conversion. Then you tin make an informed determination astir whether to proceed.

Dear Liz: Your caller file astir really to administer estimated taxation payments complete nan twelvemonth (equal versus backend loaded) whitethorn person missed an important nuance. Your reply regarding nan Form 2220 safe harbor is correct and would use if nan taxpayer’s income were status money distributions. As I publication nan query, however, it’s imaginable (perhaps likely?) that nan yea-rend distributions are from a taxable brokerage account. In that case, moreover absent intra-year distributions to nan taxpayer, nan dividends appearing successful nan TP’s relationship are deemed constructively received erstwhile paid by nan portfolio companies into nan brokerage account.

I tin understand really an IRS supplier would simply reason for adjacent payments. And I likewise understand that a competent accountant would cognize nan safe harbor rules. It’s intolerable to cognize which of them is correct present from nan missive arsenic printed.

Answer: My reply relied connected guidance from Mark Luscombe, main expert for Wolters Kluwer Tax & Accounting, and he says that you person a point.

The original writer stated that they received nan mostly of their income astatine nan extremity of nan year, and astir of it was dividends from their brokerage account. The writer had been told by an IRS supplier that estimated taxation payments were owed passim nan year, while nan writer’s accountant contended that wasn’t necessary. The writer didn’t specify whether it was a taxable aliases status relationship aliases erstwhile nan dividends were really paid into nan account.

Luscombe assumed that nan dividends were received astatine nan extremity of nan year, but nan writer could person meant that dividends were only withdrawn then.

If nan relationship is simply a qualified status brokerage account, it wouldn’t matter erstwhile nan dividends were paid, only erstwhile nan withdrawal was made, Luscombe notes. If it’s a taxable relationship receiving dividends passim nan year, past nan IRS supplier would beryllium correct that nan dividends would beryllium taxable based connected erstwhile they were received into nan account.

Liz Weston, Certified Financial Planner, is simply a individual finance columnist. Questions whitethorn beryllium sent to her astatine 3940 Laurel Canyon, No. 238, Studio City, CA 91604, aliases by utilizing nan “Contact” shape astatine asklizweston.com.