We love picking topics for articles from reader questions. Frequently, we offer to those who are interested in our Roth conversion service but are not yet a Comprehensive client that, if they feel they have a complex case that is not answered or addressed by articles previously written, they can try asking their questions of us and see if we respond.
I recently received such a question from a reader. Paraphrased, the individual asked:
I am a dual citizen of two countries. 90% of my net worth is in my traditional IRA and the remaining 10% of my net worth is in my taxable account. I don’t have a Roth IRA yet. I’m turning 72 in a few years but don’t anticipate needing to tap into my IRA balance for expenses until a few years after that. Would I benefit from a Roth conversion? I’m wondering if I should I do a total conversion.
While a total Roth conversion may be a very advantageous plan, a customized tax plan designed with your specific case in mind may add more after-tax value.
Because so much of your net worth is in a traditional IRA, how quickly you expect to withdraw from your retirement account assets will heavily influence how quickly or slowly the math would advise that you convert.
No general information I can provide here will be able to take the place of personalized financial planning. Our free advice is limited to the dissemination of general information only. To receive personalized investment advice or financial planning, you must enter into a formal relationship with a financial advisor.
That being said, here are some generic factors to consider regarding a Roth conversion plan.
IRA Withdrawals: Do you expect that you will withdraw to support your lifestyle from your IRA at some point during your retirement?
If so, you may benefit from leaving behind the right amount of IRA assets to support your withdrawal needs while remaining in a desired smaller tax bracket. Those IRA assets can then be withdrawn in that lower tax bracket or below a lower IRMAA surcharge while extra needs beyond that withdrawal target can be taken from your converted Roth IRA balance.
Charitable Intentions: Do you have charitable intentions?
If so, you may benefit from leaving some IRA assets behind when you convert. In this case, you’ll want to leave just enough IRA assets that your required minimum distributions (RMDs) match your charitable intentions so that you can give qualified charitable distributions (QCDs) out of your RMDs.
Social Security: Do Social Security, dividends, interest, and capital gains make up most of your retirement income?
If so, you may benefit from doing larger conversions now so that later in retirement you have less RMDs, less taxable investment income, and thus more of your Social Security is nontaxable.
Retirement Income: Do you have a fully funded retirement from your various income sources alone such that you anticipate no withdrawals from your portfolio?
If so, you may benefit from doing larger conversions now, even up to a total Roth conversion, to stash that future appreciation in the tax-shelter of a Roth IRA now.
Foreign Taxation: Will your IRA distributions or Roth conversions be taxed by any other countries?
Dual citizens should discuss with their tax preparer whether there are special considerations when pursuing U.S.-focused tax strategies. Knowing how Roth conversions or capital gains will be treated by other government’s taxation is an important step. For example, some foreign countries do not recognize the tax-free shelter of a Roth IRA and try to tax the annual dividends, interest, and gains in Roth IRAs. This possibility should be discussed at length with a knowledgeable tax preparer before deciding on a conversion plan.
I hope these general considerations help you decide either what Roth conversion target to use or whether you’d like to sign up for our Comprehensive service level so we can aid in creating a customized plan.
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