Roth Conversion Complications

Comments on “Can a Roth IRA Conversion Save You Money?,” by Roger Young, CFP, in the September 2021 AAII Journal:

Another consideration for a Roth conversion is the expiration of the federal tax cut in 2026, which will raise income tax percentages. Taxable income after deductions of $100,000 would pay an additional $3,000 in federal tax, at $200,000 an additional $8,000 and at $300,000 an additional $12,000 (filing jointly).

Also, if you are married and file a joint return, sooner or later one spouse will die and the surviving spouse will file as a single taxpayer. The surviving spouse could easily go from an incremental federal tax bracket of 22% to 32% or higher.
—R.L. from Texas

One idea not mentioned is the advantage of converting when the market drops. You can shelter more stock as prices decline. Unfortunately, the option to reverse a conversion is no longer available, but on a drop in values, it still can make more sense.
—John M. from Virginia

Another thing not mentioned is the qualified charitable distribution (QCD). If you donate to qualified charities directly from an IRA, the money is not considered taxable income even though it is part of your required minimum distribution (RMD).
—El S. from Illinois

This analysis is overly simple, though it is illustrative. Why stop making Roth conversions at age 72? Age 72 seems arbitrary based on current RMD rules. Admittedly, the earlier you make Roth conversions the better, since that allows more money to be accumulated. You could tap your Roth later in life to manage your tax rate, in a medical or other emergency requiring funds that would normally raise your taxes coming out of a retirement account, such as an IRA or 401(k).

A previous AAII article pointed out that Roth conversions can lower future RMDs, thereby potentially lowering taxes in the future.
—Richard O. from California

I have been doing incremental Roth conversions for four years now, mostly being wary of the increased Medicare premiums that the RMDs would push us into. We have been doing these conversions without any tax withholding and making estimated payments with aftertax money.

The biggest headache I encountered is with the IRS assuming that your income is received evenly throughout the tax year, resulting in underpayment penalties for early quarters when a conversion was performed late in the year. Filing Form 2210 with Appendix A resolved the issue, but this form is no picnic to complete yourself.
—Martin V. from Connecticut

Handling Retirement Funds

Comments on “How to Score a Retirement Home Run,” by Paul Merriman, in the September 2021 AAII Journal:

I agree with taking flexible distributions to protect the portfolio from depletion. I retired five years ago with the idea that I would limit my withdrawals to 4% of the previous year-end portfolio value. So far, I’ve come nowhere near needing to withdraw 4% because I’m 100% invested in equities and intend to remain so, and the market has been good over the past five years. I can handle a 50% market crash with no difficulty.
—Robert A. from North Carolina

No one’s plan is that straight-forward. If you try to take Social Security into account, it gets messy in a hurry. I will consider steering my wife’s accounts in the four funds direction, but otherwise will be using the Level3 allocation (equity versus cash).

Let’s assume there are two sets of retirement funds, pretax and aftertax, where the aftertax funds are the sole source until RMDs kick in at 72 and are at less than 4%. Aftertax is also hit extra hard early to make up for waiting until age 70 to start Social Security. If you don’t wait until 70 to start, then you don’t expect to live to 85 and thus no need for your retirement funds to last 35 years.
—Mike V. from Maryland

Allocation is a risk versus “can I sleep at night” exercise. I think a 50/50 mix is too conservative until much later in retirement due to inflation risk, but that’s given my situation. I’m able to withdraw a little more than I need yet stay right at the 12%/22% federal income tax threshold. Get the money out before RMDs kick in. Regardless, flexible withdrawals seem to be, well, more flexible.
—Victor S. from North Carolina

Starting January 2019, I managed to average a 1% return per week. Easy enough in 2019, but I had to market time to do it with exchange-traded funds SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ), and their inverse ETFs. Starting in 2020, I dropped the inverse ETFs. So much better to make money than worry about savings. If the market turns to years of downtrend, then I just reverse the method—use decreases instead of increases.
—Charles H. from Washington