Roth Conversion Strategies to Protect Your Spouse's Future Tax Burden
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- Опубліковано 24 лип 2024
- A listener says, “Eventually, one spouse will pass before the other, which will often catapult the survivor into a significantly higher tax bracket. Shouldn’t a Roth strategy take this into account?”
James explores several factors that could positively and negatively impact a survivor’s tax liability and what to consider when creating a Roth conversion strategy.
Questions Answered:
How can Roth conversions benefit married couples beyond tax savings?
What factors should be considered when determining the optimal strategy for Roth conversions to protect a surviving spouse?
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⏱Timestamps:⏱
0:00 - Steve’s question
3:40 - An example
6:41 - 3 changes
12:32 - Positive impacts
15:22 - RMD calculations
16:45 - Widows tax penalty
19:46 - When to do Roth conversions
23:40 - Big age gap
28:45 - Start with a good reason
29:57 - The bottom line
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“Suddenly single” is an important issue. One quibble: Don’t say “if” one of you passes away. Go ahead and say “when.”
I literally should marry my neighbor (pass on my earrings)
I have seen this with surprised surviving spouse in the first few years after their spouse passed in our tax office! It is hard!
That was great, James. Thanks. Only thing you didn't touch on is IRMAA. IRMAA can cause the cost of medicare for 1 person to pay more for medicare than the cost of 2 people. In 2024, for a couple earning $250,000 (MAGI) each would pay $257.50/mth @ ($6,180/yr for BOTH husband and wife). That same income for the widow would cost $633.20/mth ($7,598.40/yr for just the wife).
ugh. that's insane. gotta love gov't
Perhaps another consideration should be to assess the market at the time of Roth conversions. If the market is down, then it is more beneficial to convert versus if the market is high.
… and a further reason to consider loading up on Roth conversions - if it is likely your heirs will be in their peak earning years (high tax brackets) when you expect to die, do you want to drive them up into even higher tax brackets when they inherit your tax deferred 401K/IRA? They will be required to withdraw and pay tax at their rates, 100% of those inherited funds within 10 years.
My father converted 100% of their tax deferred retirement funds to a Roth IRA. Not only did this simplify my (much less financially sophisticated) mother’s retirement financials and avoid the widow tax trap for her as discussed in this video, but he also eliminated the tax-hit to us “kids” when our mother dies.
Very good point. Tax planning must be for 3 life events 1) Married filing jointly 2) Surviving Spouse 3) Heirs.
Great video, James. You helped me validate my own reasons for Roth conversions. And wow! You even basically used our situation as your example at 14:15. We bought our San Diego house in 1994 for $250k. It's worth $1.8M. You nailed it!
This was a great discussion that went over multiple factors that I wouldn't have thought of but seem obvious after you discussed it.
So clear!
Thanks James, another great video packed with useful information.
Bizzarro comment: being a disney fan, whenever James' "root" shirt is halfway under the bottom of the screen, my brain "interprets" it as "epcot".
Some income will be reduced such as Social security and pension income. One can prepare for this by allocating asset classes with lower expected returns in tax-deferred income accounts and placing asset classes with higher expected returns in Roth and taxable accounts (i.e., Asset Location). The effect is to slow down the RMD amount due on the tax-deferred account.
Great topic I rarely see discussed in retirement videos. In the retirement projection software I use, for each retirement projection I run (different Social Security start dates, asset allocations and locations, rates of return, etc.) I simultaneously run 3 scenarios with different combinations of life expectancies for my wife (who's 10 years younger than me) and me. Exactly what is discussed in this video is what has become evident to me. You cannot figure out the different outcomes without some really good retirement projection software however.
What "retirement projection software" do you use and costs? Thank you.
Holy deep dive!
James, thank you for information-packed videos. I learn more and more with every video. Not to mention how easy you are on the eyes.
Great video James. Interested in your comments on step up valuations for home when one spouse dies. Does that assume home owned jointly? Is that best or should home be owned by trust?
James very impressed with your videos and your knowledge. I have a question on RMD's and changes that may have been made early 2024. I inherited some money last year from my sisters and transferred it into my IRA. I was told at the time that I was required to spend it within the next ten years and could take some each year or wait until the end or something in-between. Recently I was told a change was made that requires me to take out a percentage every year or I will be penalized. Do you know if this is true or not? I'm only 58 and would like to leave the money in as long as I can for obvious reasons.
Great information James!
Quick question; does the step up basis apply for “investment “ real estate similar to the primary residence situation…even if this property was purchased under a 1031 Exchange?
Thank you, James! I wanted to ask a related question.
My wife does not work and has a traditional (non-Roth) 'spousal' IRA (cash balance with no earnings) funded with my after-tax dollars.
I have my IRA funded with pre-tax dollars. We file jointly. Our income makes us ineligible for Roth IRA contributions.
Suppose my wife decides to use a backdoor conversion of her Traditional IRA (funded with after-tax dollars) to a Roth IRA. Will my IRA (funded with pre-tax dollars) be counted in pro-rata rule calculations for this conversion triggering the income tax liability?
What if you currently live in a tax-free income tax state? Wouldn’t conversions also mitigate a potential future state income tax liability, should one/both relocate then?
So someone like James should move to Florida, convert to Roth, miss the state tax, then move back to California. ;-)
sadly, no one knows when the spouse, or yourself, will pass away
I am so tired of FA’s telling clients not to convert b/c their taxes will be lower in the future. Everything, and I mean everything, should be in a Roth. Would you rather pay taxes on the seed or the tree? This IS financial advice.
Run the numbers. Order of multiplication says seed vs tree doesn’t matter.
I guess this space is not for a true conversation. Just a place for root self promotion. Sad...