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As one who is currently converting tIRA’s to Roth, I am always on the alert for information that will help me convert “the kids inheritance” with the least amount of pain. I have two more years of conversions until I begin Social Security. The proposed Social Security 2100 Act would raise the threshold for taxation on social security from the current 25000-32000 to 50,000 (single) 100,000 (married). I believe raising the SS tax threshold would eliminate a major deterrent for many retirees considering conversions and consequently raise federal tax revenue. A win - win situation to be sure. How many on this forum would be willing to convert up to the top of the 12% bracket if the proposed act if passed?
Under current law your Social Security becomes taxable when half of your SS plus all other income is greater than $25,000 for singles and $32,000 for married. Depending on your income up to 85% of your SS can be taxed. This low threshold means that even a very small pension can cause your SS to be taxed and discourages Roth conversions once SS is taken. The proposed SS 2100 Act raises that threshold to $50,000/100,000.
It can be all to related because you have two moving targets ...the higher the magi income goes the more ss gets taxed and the more ss that gets taxed the higher the taxable income
Because I'm an long term planner and enjoy figuring out how to leave my heirs better off. Also, while this is not a political thread, there is no harm in educating my fellow citizens.
As one who is currently converting tIRA’s to Roth, I am always on the alert for information that will help me convert “the kids inheritance” with the least amount of pain. I have two more years of conversions until I begin Social Security. The proposed Social Security 2100 Act would raise the threshold for taxation on social security from the current 25000-32000 to 50,000 (single) 100,000 (married). I believe raising the SS tax threshold would eliminate a major deterrent for many retirees considering conversions and consequently raise federal tax revenue. A win - win situation to be sure. How many on this forum would be willing to convert up to the top of the 12% bracket if the proposed act if passed?
I am converting up to the top of 24% bracket primarily because I don't want to take RMDs from my IRA starting at 70 (I don't need to leave inheritance, but want to keep that IRA growing tax-free for emergencies in late life). I expect my taxable income (withour RMDs from IRA) plus 1/2 SS to be right around $50k, so Roth conversion is good for me whether Larson's bill that you are mentioning passes or not.
I'm trying to figure out if at my age, 67yo, if it is worth it to convert some IRA funds to my Roth anymore since I need the funds for income now. (I'm living solely on my own funds until I claim SS in 2 years. Why take out IRA funds & put into my Roth if I'm just going to need money for income next year anyway?) I just have enough after tax monies at this point to pay the tax on one more conversion.
In fact it may be worthwhile to use Roth funds now to lessen my current tax bill instead. If I had known better starting out in retirement I would've kept more after tax monies around...
I dont know about future tax laws and am just trying to learn this stuff.. but I thought one of the main reasons for converting some IRA to a Roth in your 60's is to avoid getting bumped into a high tax rate when you have the required minimum distribution RMD at age 70.5. But this would makes sense if you had a rather large IRA amount, less if the IRA is small enough that RMD wont kick you into too high of tax rate.
I believe Roth accounts also are NOT subject to RMD at least while you are alive. I didnt check to see if this also applied for inheritance and RMD.
I dont know about future tax laws and am just trying to learn this stuff.. but I thought one of the main reasons for converting some IRA to a Roth in your 60's is to avoid getting bumped into a high tax rate when you have the required minimum distribution RMD at age 70.5. But this would makes sense if you had a rather large IRA amount, less if the IRA is small enough that RMD wont kick you into too high of tax rate.
I believe Roth accounts also are NOT subject to RMD at least while you are alive. I didnt check to see if this also applied for inheritance and RMD.
As it is now, Roth accounts do not have RMDs. You can keep money in Roth til you die without withdrawing anything. Also as it is now, when you do withdraw from Roth, you do not pay any tax on withdrawals (example: you convert $100k from trad IRA to Roth when you are 60 (and pay tax on $100k). By the time you are 90, that Roth is worth, say, $300k, and you withdraw all of the $300k at once. This withdrawal is not subject to any tax - ie, you paid tax on $100k when you converted trad IRA to Roth, but you never pay any tax on the $200k that the account has earned inside Roth for 30 years). As it is now also, if your kid inherits your Roth, the kid does not pay any tax on withdrawals, but he/she has to start taking (tax-free) RMDs as soon as he/she inherits that Roth - ie, your kid is able to inherit the whole thing, but not to grow it tax-free for much longer.
Some of that might change. There are proposals to tax all the money earned inside Roth at the time of withdrawal from Roth - however, even in that case there would be no RMDs from your own Roth (as I mentioned, RMDs from inherited Roth are already required). I doubt that proposal will succeed, because it would remove much of the incentive to do taxable Roth conversions.
The problem with RMDs is that the income cutoff for taxing social.security income is really low, and it is very easy, with a small RMD, to get to the point where you earn $25k per year (including 1/2 SS), at which point some of your SS starts being taxed. With a larger RMD, more of your SS gets taxed, and a larger RMD may also get you into a higher tax bracket. Then you ask yourself: why did I bother having an IRA, when my after-tax money (including after paying tax on a part of my SS) with the IRA is the same as it would have been without the IRA? Even without RMDs I already expect to be over the $25k and $38k cutoffs for taxation of 50% and 85% of SS, but with RMDs I would additionally pay somewhat more in taxes (and would indeed be bumped into the higher tax bracket). If the cutoff for SS taxation gets moved to $50k, my SS will be taxed if I have to take taxable RMDs, but it will not be taxed if I do not have to take taxable RMDs. I suspect a lot of people are in a similar situation, so raising the cutoff for SS taxation to $50k in applicable income might motivate more people to do Roth conversion (thus also providing increased tax revenue to the IRS in the next few years) - that is what the OP meant to say (I think).
Last edited by elnrgby; 06-26-2019 at 08:39 PM..
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