Roth Conversion?

[Star*Bucks]

Hello, I am helping my parents out with everything in their lives and I'm trying to do the best I can. I'm stumped right now with the question of should I convert part of my moms traditional IRA to a Roth IRA or not. She currently has 108k in a traditional IRA and I was thinking since she isn't working and my dad is only getting social security it may be a good time to move some of that money to a Roth. I did their taxes for 2013 and they paid zero because my father earned under 11k social security payments and my mom didn't earn anything. The only difference in 2014 will be my mother collecting social security payment for the last 4 months. After they take their deductions they should still be at or near paying zero tax. I tried using these Roth conversion calculators but they just don't seem suited for this. Starting 2015 both my parents will be getting social security payments and so 2014 will be the lowest earnings year for them going forward.

Any suggestions would be great!

[borisborisboris]

My impression is that you should NOT convert the whole thing at once - it will be recognized as income and result in a huge tax bill!

Convert only enough each year up to the point where they start paying taxes on it.

[IlliniDave]

There are generally two reasons to convert to a Roth. One is if it is a tax advantage. The second is there are advantages if the intent is to pass the money on as part of an inheritance. Anything you can convert that will come in under the 0% threshold she probably should. At the 15% bracket tax-wise it would depend on how much they would be getting in SS. If they're going to be close to the 15% bracket but far away from the 25%, there may not be much tax advantage to converting. If they're going to be close to the 25% it might be worthwhile to convert small amounts to stay just below the 25% threshold in the 15% range. That way if something comes up and she wants to use some amount of the money the Roth portion could be used rather than the IRA which could wind up being taxed at 25%. Two caveats...when she turns 70 she'll have to make RMDs, and I believe conversions do not count "against" the RMD. Second, there are some peculiar rules regarding taxing of SS that I'm not up to speed on. You would need to get familiar with that to make sure conversions don't somehow disturb things enough that any tax liability on SS is increased (or at least make sure there's an advantage to the conversion even if some of the SS is taxed).

That's probably not much help. I don't know of any simple rule-of-thumb that gives the answer. It might be worth investing in tax software to play multiple scenarios and see which works best for their situation.

[susswein]

I've been following this strategy and doing roth conversions ever since I ER'ed. One of the nice things about a roth conversion is thet even though you need to do the conversion by the end of the year you have until you file taxes (april 15 or oct. 15 if you file for an extension) to "undo" all or part of the conversion. Here's how I do it:

Using turbotax or other tax software go back to last year's taxes (2013) and add a roth conversion amount. turbotax will automatically recalculate your taxes on the fly, so keep increasing the roth conversion amount until it shows that you owe tax. Use this as a starting estimate. I'll typically add a few thousand onto this and convert that amount before the end of the 2014. Then when you do your 2014 taxes start with this amount of roth conversion and keep decreasing the amount until you reach the "no tax due" point. Reconvert the difference back to the traditional ira.

[RealPerson]

suuswein +1

Love this idea. You can maximize the conversion to roth and avoid paying income tax now or later. Essentially risk free and precise. Money they will never pay income tax on.

@bbb Correct. You only want to convert what keeps you just below the level where taxes are due. Repeat every year until done.

[George the original one]

Susswein's scheme can also be used to meet minimum income levels for Obamacare credit without paying excess taxes.

[susswein]

Susswein's scheme can also be used to meet minimum income levels for Obamacare credit without paying excess taxes.

Yes, I actually do that too.

[Star*Bucks]

suuswein, that was such excellent info that I copy/pasted it into a "Retirement" spreadsheet for quick reference anytime I need to rethink ideas. One more question which I think I have found the answer to but I would like confirmation. Currently the max contribution is 17.5k plus I can add 5500 in a IRA totalling 23k, right? or is it 17.5k "Total"? As you can tell this question is about me and not my mother, thanks

[susswein]

suuswein, that was such excellent info that I copy/pasted it into a "Retirement" spreadsheet for quick reference anytime I need to rethink ideas. One more question which I think I have found the answer to but I would like confirmation. Currently the max contribution is 17.5k plus I can add 5500 in a IRA totalling 23k, right? or is it 17.5k "Total"? As you can tell this question is about me and not my mother, thanks

The max contribution limit is for new money being added to an ira/roth. As far as I know there's no limit on how much you can roll over from a traditional ira into a roth.

[Star*Bucks]

suuswein, that was such excellent info that I copy/pasted it into a "Retirement" spreadsheet for quick reference anytime I need to rethink ideas. One more question which I think I have found the answer to but I would like confirmation. Currently the max contribution is 17.5k plus I can add 5500 in a IRA totalling 23k, right? or is it 17.5k "Total"? As you can tell this question is about me and not my mother, thanks

The max contribution limit is for new money being added to an ira/roth. As far as I know there's no limit on how much you can roll over from a traditional ira into a roth.

Yes the question was in regards to new money. I want to max my 401k contribution at 17.5k but wanted to know could I add 5500 to an IRA on top of that or is the 17.5 the absolute maximum contribution limit in 2014? I've googled this a lot and have found conflicting info