I've been doing a lot of thinking about how to deal my retirement accounts and future RMDs. I had considered doing Roth conversions again, which I have done in the past. For me, it seems like a no brainer to do a Roth conversion while in the 12% tax bracket. Lately, I've been considering doing Roth conversions even in the 22-24% tax bracket. However, I am leaning towards not executing a Roth conversion at the higher tax bracket.
Here's my thinking:
- It doesn't change the amount of money I will ultimately get. Doing a Roth conversion now at 22% tax bracket or keeping funds in traditional IRA and withdrawing later at 22% tax bracket give me the same amount of after tax money in the future, even though no taxes on Roth and federal taxes on traditional IRA.
- It may affect the taxes my heirs need to pay. Inherited IRAs need to be withdrawn within 10 years. However, the amount withdrawn may or may not put them above the 22% tax bracket and unlikely to put them over the 24% tax bracket. Both my kids are younger, not even graduated from college yet. I expect the inherited traditional IRA withdrawals keep them in the 22% bracket and may put them barely into the 24% tax bracket if they are single. It is highly unlikely to put them above the 24% tax bracket even if they are single. Net it likely be a wash whether I pay the taxes now or the heir pay them later.
- Doing a Roth conversion mainly will give my heirs flexibility not to manage how much is withdrawn each year, since no taxes are paid. With an inherited traditional IRA, they will need to do more advanced tax planning.
This is not financial, Roth conversion nor tax advice. Please consult a professional advisor.
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