I don’t know. It would be a great thing to do with an inherited IRA, I would think.
I will inquire with my CPA and FA and report back.
ETA: from my CPA. “Inherited IRAs are eligible for QCD (Qualified Charitable Distribution) however you (the current owner) must still meet the age requirement of 70 ½ years old in order to elect QCD from your RMD.”
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I am not that familiar with annuities and am trying to understand how this works. Is the 5.9% close to the market rate?
If you withdraw $100k from your IRA and donate it to a college, e.g., in exchange for a lifetime payment of $5,900/year, how does that compare with the alternative of withdrawing $100k, paying tax on the RMD (assume 50%), and buying a $50k annuity on the open market?
Thanks.
I’m no expert, but I pulled this from a NY Life website.
New York Life Guaranteed Lifetime Income Annuity II1
| Age | Single Life | Joint Life |
|---|---|---|
| 65 | 6.81% | 6.13% |
| 70 | 7.55% | 6.71% |
| 75 | 8.54% | 7.50% |
| 85 | 11.44% | 9.92% |
I guess the answer to your question depends upon your age, but if you are 73 and have to take an RMD, I think you would be much worse off it you paid $50K in tax and got a 7% interest rate on $50K, which would be a payment of $3500, rather than a payment of $5900.
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Surely you have to pay tax on the whole of the $5900 whereas most of the $3500 is tax free? Put another way, you can just buy the annuity inside your IRA/401(K) and get $7000 of taxable income, assuming you would otherwise meet the RMD.
The benefit here seems mostly to be in the form of complying with the RMD without increasing your AGI to a level that would create additional costs (eg for Medicare premiums).
If people are willing to share -
Who here is doing Roth conversions, and what was your rationale if you considered and then did or did not?
I’ve been waffling for years now, but so far have not done any conversion.
Between my Federal incremental rate, state rate, and phaseout of my health insurance subsidy due to increased income, I have a 35% incremental income tax rate.
So it’s not worth it for me
Plus, I can’t pay the taxes without using assets from the IRA to pay the taxes, so it’s a wash anyway.
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The common advise seems to be that it is not worthwhile if you need to withhold taxes (rather than paying the tax from other savings). However, if the rollover is being done to avoid future RMD pain that could be a factor too.
Depending on the amount you are considering for rollover, doing smaller rollover chunks in multiple years to minimize the tax bill could make sense.
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We’re doing smaller rollover chunks each year with the goal of having some of our retirement savings exempt from RMD requirements.
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I converted small amounts during years where income was low enough to allow.
The question I ponder is how to advise my recent college grads about Roth 401K vs. traditional 401K contributions. Roth seems to make sense to me at 24% Fed, but does it still make sense at 32%?
I feel like when they are pretty young Roth is the better way to go, even with high income. Just my opinion…
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The Roth income limits ($153K) can be somewhat constraining for a single person with very high income. Also important to think about rollovers of spare 529 funds starting next year for those who have them. Those are not income restricted so it can make sense to hold off on the conversion if your kid might exceed the income limits in a few years.
Edit: I see the original comment was about Roth 401Ks. Seems to me that at high levels of income a single person could have higher marginal tax rates than a couple with young kids, especially if they aren’t earning equally at that stage of life (and relative to retirement whether they get married or not).
An interesting corollary to this is whether it makes sense for your kid to put as much as possible in a retirement account or if it makes sense to save more for a house downpayment in their 20s.
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Good point. I forgot that the $5900 would be taxable but the $3500 would not (assuming it would not). Critical to compare everything in post-tax $$.
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Hoping my kid will do a Roth conversion for taxable year 2023 since he is currently in business school with a MUCH lower income.
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I have done the same calculation and have never been able to make transfers to a Roth make sense as my income is never low enough. First World problem.
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Don’t forget state taxes, if appropriate. IMO, Roth is not worth doing at 32% federal, unless the college grad is in a high income career, where 32% is a low point! Or, just split the difference: put ~half in a Roth and ~half in a pre-tax 401k.
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Two things:
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as mentioned above, generally only worth it unless you have cash on hand to pay the taxes. In other words, if you have to have the tax withheld, then not worth it.
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Depends on your current marginal tax bracket and your expected marginal tax bracket when you have to start taking RMD’s. For example, if you can make Roth conversions up to the top of the 12% bracket, and your expected bracket with RMD’s is 22%, then yes to them today.
Personally, I do Roth conversions up to the estimated IRMAA limit.
And don’t forget, when the first spouse passes, the income level per bracket gets cut in half, but RMD’s are still required.
As an aside, waiting to claim SS until age 70 gives more room to do Roth conversions at a lower income level.
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Living well below their means for a couple of years, my kid and his now wife were able to both save for down payment (SMALL townhome purchased late last year), and they max out their retirement accounts. Now their plans are to not save much except for retirement, and pay down their mortgage (over 7% rate, and he feels like it’s a sure thing, vs investing in the market). Full disclosure he did borrow from the bank of mom to avoid PMI for long term, but they have already paid back 3/4 of what they borrowed.
Edited to remove 529 comment after I re-read post.
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Thanks. All stuff I think about, and this topic literally keeps me up at night sometimes.
I would only convert what I can afford to pay taxes on, but we are and will always be above the 12% bracket, plus we live in a high tax state (and county). We both get pensions (not huge by any means), so we will never have a “poor” year. Especially if we go back to the old tax rates or worse, I will likely be very sorry I didn’t convert.
I know it’s a first world problem we are lucky to have.
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We bit the bullet and converted, all in one shot. The main reason was to avoid RMD. No idea if I should regret it or not. Nice to not to have RMD that will push us up to a higher tax and IRRMA brackets. On the other hand, it hurt to pay the huge tax. If we invested the amount instead, we could be ahead now. Who knows. We had a lengthy debate on this in previous thread.
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