How much do YOU think YOU need to retire? ...and at what age will you (and spouse) retire? (Part 1)

[coolweather]

<p>But we have to take RMD at 70 and 1/2 with traditional plan.</p>

[mom2collegekids]

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<p>^^Funny, 3togo. If you aren’t a supermodel, yep, clothes generally help!</p>
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<p>I have no interest in going to a nude beach. To me, it would be a day’s worth of TMI.</p>

[coolweather]

<p>Igloo - The reason I am thinking about conversion is my investment in Roth will give a very high return (if I am lucky) that can offset the conversion tax.</p>

[Iglooo]

<p>coolweather, I meant for a and b. You can do either way, pay the conversion tax from IRA itself or keep it whole and pay tax from outside money.</p>

<p>BTW roth 401k is also subject to RMD.</p>

<p>I think it was notrichenough who posted an article stating roth may not be as beneficial as first thought. If I could reduce income from other sources and use RMD to live on, it may be not so smart to pay so much tax upfront to convert.</p>

[notrichenough]

<p>If you are going to withdraw the money in the Roth for living expenses, you have to consider your incremental rate now vs. your overall rate when retired. For many if not most people the Roth is not a good deal.</p>

<p>If you are using a Roth for estate planning purposes, that is a different issue.</p>

[Iglooo]

<p>Even then, I just wonder. You don’t pay tax on gains in roth but you don’t pay tax for the capital gains at death anyway. If you accumulated $1M in your 401k, the convertax will be about half a million. That’s huge and i wonder what that buys.</p>

[notrichenough]

<p>Gains in an IRA or 401k are never treated as capital gains though, and assets in these accounts don’t get any kind of stepped up basis after death.</p>

[coolweather]

<p>It’s good to know I can do either way. But I probably will not do it.</p>

[Iglooo]

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Gains in an IRA or 401k are never treated as capital gains though, and assets in these accounts don’t get any kind of stepped up basis after death.

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<p>True. What I meant was if you are passing on your roth to your children, gains in roth doesn’t really take advantage of tax free nature of roth since the same in a taxable account can be passed down without paying gains tax.</p>

[DrGoogle]

<p>hayden,
The answer to your question is no. Here is the link
<a href=“Can you put required minimum distributions into a Roth? - MarketWatch”>http://www.marketwatch.com/story/can-you-put-required-minimum-distributions-into-a-roth-2014-02-14&lt;/a&gt;

Q. My wife and I file a joint tax return, we are both over 70 years of age, and have had our IRA for over 20 years. Question: If we take up to $12,000.00 of Required Minimum Withdrawals from our IRA, can we move it after having taxes taken out into a Roth IRA? And, Can we then take money out of the Roth IRA as needed without having to leave the money for a certain period of time in the Roth IRA? If you can answer these two questions I would greatly appreciate it. Thanks — W.C. </p>

<p>A. None of the Required Minimum Distribution can be converted or otherwise deposited into a Roth IRA. Only amounts in excess of your RMD can be converted to a Roth IRA.

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[busdriver11]

<p>" The reason I am thinking about conversion is my investment in Roth will give a very high return (if I am lucky) that can offset the conversion tax."</p>

<p>@coolweather, if this is true, that you have a high return and it should continue to be high, then convert that account. If you have a choice, convert on a day (if they actually let you pick the day) that the market is down, so your account is at a lower value, and less conversion taxes to pay. Of course, it’s not like we actually know the future and can even do a good job of picking that one!</p>

<p>They aren’t going to withhold money from your account (I am certain of that for the IRA, don’t know about the 401K but I’d assume the same). You pay the tax on the conversion when you file your taxes. Do not pay the tax from the converted account, at all costs, keep all the money intact. If this is the account with the highest return, you should keep the maximum amount of money in there, because now it will all be tax free, no RMDs. We made sure and did not even pay our advisors fee from our Roth.</p>

<p>I’d verify everything with your brokerage before you do it.</p>

[notrichenough]

<p>But Roth distributions are never taxed, even when inherited, so I am not sure what you mean by "doesn’t really take advantage of tax free nature of roth ".</p>

[DrGoogle]

<p>I have both 401K and Roth IRA. No traditional IRA because I figured out the mess of doing tax when you have non-deductible IRA, deductible IRA, and Roth IRA. Luckily my employer let me transfer the deductible IRA to 401K.
When my husband and I retire, his 401K will be used and he will take RMD at 70.5, the some money is for things that’s not foreseeable, right now retirement income and expenses are roughly the same. My 401K will be slowly converted to Roth IRA under the tax rate so I won’t have to pay any tax, most likely we will not need my money and I’m younger, have more time for the investment to grow.
But it depends, busdriver did the conversion early and made good gain. I don’t like to pay tax yet, I’ll wait to see what my tax rate will be when I retire.</p>

[arisamp]

<p>@notrichenough‌ - in an earlier post you said
What do you expect your effective tax rate to be when you are retired? If you won’t be paying more in taxes then than you are now, a conversion doesn’t make much sense.</p>

<p>How do you know what you effective tax rate will be when retired? H and I are both working right now. We are in a fairly high tax bracket, do get hit with AMT consistently. When we retire, we will have our investment returns, but won’t our earned income drop down almost to zero? Wouldn’t that effectively drop our tax rate? I don’t know how the retirement effective tax rate can be more than what it is when the person is working/earning income.</p>

[DrGoogle]

<p>I use TurboTax to help me. I create fake return with assumed income and expense.</p>

[Iglooo]

<p>notrichenough, I am not explaining myself well. Let me try again. Let’s assume, you are using roth for estate planning. Let’s assume you have $100K in IRA that you convert to roth paying tax at 30%(?). You let it grow untouched to pass it down to your kid. By then it doubled to $200K. The kid pays the estae tax if applicable. You do the same in a taxable account. You buy an index fund that produces no dividends that you never sell and it also grew to $200K when your kid inherits it. Again your kid pays the estate tax. The kid has the same amount of money either way but your estate is short by the amount of tax you had to pay in conversion to roth.</p>

[notrichenough]

<p>“How do you know what you effective tax rate will be when retired?”</p>

<p>You don’t know for sure, you can only guess. So when I do these calculations I assume the current rates and brackets will be what they are today.</p>

<p>“I don’t know how the retirement effective tax rate can be more than what it is when the person is working/earning income.”</p>

<p>Exactly! This is why Roths are not a good deal for most people if you will use the money during your retirement.</p>

[notrichenough]

<p>“but your estate is short by the amount of tax you had to pay in conversion to roth.”</p>

<p>But you had to pay taxes on the $100k you used to fund the taxable account. That might be more or less than the taxes paid to convert.</p>

<p>And suppose the account doubles again after your kid inherits it. In the taxable account he now owes capital gains on $200k. In the Roth account he would owe zero.</p>

[DrGoogle]

<p>Roth IRA remains tax free status if you have it for at least 5 years when you pass it to your heirs. Of course it’s less tax than regular IRA because it’s after tax income.
<a href=“Inherited Roth IRA -”>http://fairmark.com/retirement/roth-accounts/roth-distributions/inherited-roth-ira/&lt;/a&gt;

There is one way Roth IRAs provide an estate tax benefit. Roth IRAs contain after-tax dollars. That means the size of your estate has been reduced by the amount of tax you paid on those dollars. The result is that you have a smaller taxable estate even though the value of what you’re passing to your beneficiaries may be as great or greater than if you had a traditional IRA. That’s why you may hear people say you receive estate tax savings from a Roth IRA. The estate tax savings come from the fact that you’ve already paid the income tax, not from any special estate tax rule that applies to Roth IRAs.

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If you inherit a Roth IRA from someone other than your spouse, you aren’t permitted to make contributions to the inherited IRA or combine it with any Roth IRA you established for yourself. What’s more, you have to follow the minimum distribution rules for inherited IRAs.</p>

<p>The distribution rules that apply to an inherited Roth IRA are the same as the ones used for traditional IRAs in a situation where death occurs before the “required beginning date” for minimum distributions. This is true without regard to the age of the Roth IRA’s owner at death, because there is no “required beginning date” for distributions from Roth IRAs.

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[notrichenough]

<p>Good point @DrGoogle‌, at today’s exemption amounts estate tax is not likely to be an issue for us. If it ever drops back to $1mil, we could have problems.</p>