Should a 60 yr-old guy convert a traditional IRA to Roth IRA?

[Mel]

I am semi-retired.

USAF pension (28,000 yearly). Part-time employment (15,000
yearly)

800,000 in mutual funds of which 160,000 is in a traditional
IRA, 33,000 in 401k.

I plan on getting SS payments ASAP.

Is there any tax advantage to converting my traditional IRA
to a Roth IRA?

thanks for any info,

mel

 

[Bill]

(e-mail address removed) (Mel) posted:

I am semi-retired.
USAF pension (28,000 yearly). Part-time
employment (15,000 yearly)
800,000 in mutual funds of which 160,000 is in
a traditional IRA, 33,000 in 401k.

I plan on getting SS payments ASAP.

Is there any tax advantage to converting my
traditional IRA to a Roth IRA?

Conversion is going to be a taxable event. That means
you'll pay taxes on the amount converted annually at your
then current marginal rate. Doing it before starting SS may
spare you some taxes (on the SS income) -- though with the
probable additional income thrown off by that amount of
mutual fund dividends and CGD, that's doubtful.

The advantage would come in the future:

First, everything moved into a Roth would continue to
compound, without future tax liability (unless, of course,
Congress changes the law <g>).

Second, you will not have to take Required Minimum
Distributions beginning at age 70 1/2 from a Roth.

Third, since withdrawals from a Roth are non-taxable, they
won't add income which might expose more of your Social
Security to taxes.

Bill

 

[Harlan Lunsford]

I am semi-retired.

USAF pension (28,000 yearly). Part-time employment (15,000
yearly)

800,000 in mutual funds of which 160,000 is in a traditional
IRA, 33,000 in 401k.

I plan on getting SS payments ASAP.

Is there any tax advantage to converting my traditional IRA
to a Roth IRA?

First off, last time a client asked this question (and he
was in similar situation to you, btw, army retired instead),
I set up a spreadsheet and plugged in the numbers, assuming
a certain rate of return on the IRA's. Didn't take too
long, and charged him about 95$ for my time as I remember.

One important factor to consider is your time horizon, i.e.
how long to you expect to live and work and draw
distributions on traditional IRA's?

In essence, there is no easy answer. But the general
principle is to delay taxes as long as possible.

ChEAr$,
Harlan Lunsford, EA n LA

 

[Mel]

Harlan Lunsford says:

Mel wrote:

First off, last time a client asked this question (and he
was in similar situation to you, btw, army retired instead),
I set up a spreadsheet and plugged in the numbers, assuming
a certain rate of return on the IRA's. Didn't take too
long, and charged him about 95$ for my time as I remember.

One important factor to consider is your time horizon, i.e.
how long to you expect to live and work and draw
distributions on traditional IRA's?

In essence, there is no easy answer. But the general
principle is to delay taxes as long as possible.

Harlan, you hit the nail on the head. Your spreadsheet
sounds marvelous.

I'll work part-time (15,000 yearly) for 5 more years, and
plan on drawing from IRAs/401k for 30 more years. In five
years I'll need about 30,000 yearly as supplemental income
drawn from the IRAs/401k and the rest of it.

When you say, "the general principle is to delay taxes as
long as possible," what does that mean to the current mix?
(800,000 in mutual funds of which 160,000 is in a
traditional IRA, 33,000 in 401k)

One of my main concerns is how to handle the 600,000 in
plain ol' mutual funds. Should I move that money to
laddered CDs, tax exempt funds, zero coupon bonds, etc.,
etc,...., or just leave it, pay tax on the
dividends/capgains, and draw from those funds as necessary?

Thanks,

Mel

 

[Harlan Lunsford]

Harlan Lunsford says:

Harlan, you hit the nail on the head. Your spreadsheet
sounds marvelous.

I'll work part-time (15,000 yearly) for 5 more years, and
plan on drawing from IRAs/401k for 30 more years. In five
years I'll need about 30,000 yearly as supplemental income
drawn from the IRAs/401k and the rest of it.

When you say, "the general principle is to delay taxes as
long as possible," what does that mean to the current mix?
(800,000 in mutual funds of which 160,000 is in a
traditional IRA, 33,000 in 401k)

One of my main concerns is how to handle the 600,000 in
plain ol' mutual funds. Should I move that money to
laddered CDs, tax exempt funds, zero coupon bonds, etc.,
etc,...., or just leave it, pay tax on the
dividends/capgains, and draw from those funds as necessary?

I pretty much think you don't expect me to analyze
everything and then say 1. do this, 2. do that... 3..
divorce your wife.... 4... do nothing.....

Here are some thoughts however. Since you're still working
and plan to for a while, by all means fund a ROTH IRA to
the hilt - 5,000 for yourself and if married and spouse
qualifies for spousal IRA, assuming she's not a young thang,
5000 a year for her. Postpone and resist the temptation to
draw social security. (general principle; your mileage and
taxability may vary)

Work longer than 5 years if you can, cause it keeps the mind
and body young. Take a multi vitamin and an extra vitamin
e every day also.. (grin)

Don't move mutual fund money unless you find a place where
you can make more on it. I'd rather have taxable dividends
instead of munis IF after paying the tax I have more left
over than a city bond would pay.

Find a good local Enrolled Agent (EA) or CPA to help you
figure out how to smooth out your income.

Oh, a wee dram of Scotch every afternoon helps, too.

ChEAr$,
Harlan Lunsford, EA n LA