Edward Jones

[scagnt83]

It is actually much worse than that I believe. Those last dollars of $125k will cause those dollars to be taxed at much higher than 16% & really cause about $140-$145k to be taxed based on 85% of SS being added to taxable amount. Your 16% estimate is on her entire income which currently most isnt taxed at all.| 2005 -- 2021 (irscalculators.com)

You are correct, the actual RMD funds that make her income over $40k would all be taxed at 22%+

 

[RunnerDude]

I also see that the conversion idea is a lot more complicated than I thought- as it relates to taxes and the tools that EJ has at their disposal. I appreciate the input. I will use this information when I discuss the Roth idea with my CPA.

 

[scagnt83]

Under 2021 rules, RMD's will effectively deplete her retirement account by 50% in 10 years- which will place her in a higher tax bracket anyway (over her entire life- not just for the period of the conversion).

That is not accurate at all.

1. You are not taking into account earnings. That IRA is getting $35k in gains per year minimum. Probably more like $70k per year in the current market.

At a 5% rate of return, she would still have $500k+ still in her IRA at age 90. And a ton in her NQ account.

Use an RMD calculator to see for yourself:
https://www.voya.com/tool/rmd-calculator


2. RMDs will not put her in a higher tax bracket for some time. At least 10 years if not longer.

And since they increase the income levels for tax brackets to follow inflation, IF she sees an increase it would be very small.

50% of her SS income is currently excluded. Then $12k is excluded under the Standard Deduction.

If her total income is $48,000 ($24k SS & $24k RMDs).... only $24k of it is taxable. Even RMDs of $36k will not put her in a different bracket.

 

[Allen Trent]

would not have to take RMD's,

but you would, you would just be choosing to take all the future RMDs now at a higher known tax rate

all future earnings will be tax-free

But the earnings will be less because you chose to send 25-30% of the account value now to the IRS in optional early tax payments & no longer make interest on those funds you pre-paid the taxes at an accelerated rate

I have counseled some friends that were high income that left the work force for a few years on Roth Conversions (1 couple were missionairies & another single person went back to get her masters full time, another left work to stay home with kids after husband passed away. In each of those cases, they chose to do the Roth Conversion because they were going from decent or high incomes to zero income (other than Roth conversions) during their leaves from employment. They got to pay a way lower rate because of their temporary situation. but your client would knowingly be doing the complete opposite if they converted too much too soon. She would be choosing to go from paying no federal income taxes to paying 20% plus. I still think a 10 -15 year conversion period would be a much, much better math plan

RMD's will effectively deplete her retirement account by 50% in 10 years

this isnt true. the Traditional IRA will continue to make interest/earnings or if she doesnt need the RMDs, she would reinvest them in an after tax account or some life insurance or some life/LTC hybrid. doing the conversion right now also depletes the account initially. based on what you have stated, this client receiving RMDs will not be paying higher taxes. Based on your information, unless massive tax changes occur to target single seniors with taxable incomes under $40k per year, this client will pay 0% on part of her income & 10% or so on some

Again, not trying to talk you out of Roth conversion, just suggesting the math may make more sense over a longer period of time, but I believe her current EJ rep will talk her out of it once you try to move it all.

 

[scagnt83]

The Roth annuity would also provide excellent LTC coverage- and guaranteed income if I chose to take it.

Not exactly. It provides LTC coverage IF you choose to take Guaranteed Income.

If the Income Rider has not been activated and started paying income, there is no LTC protection in force.

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And here is the issue with this situation. She only needs $1k per month from that money. An income rider will give her $3k-$4k per month... which she doesnt need, especially in the ROTH situation since there are no RMDs.

She could activate the Rider and have it just pay $1k per month. But then she only has $2k per month in LTC protection. She can increase the Rider payout... but LTC benefits will not increase if already on claim.

 

[scagnt83]

I would personally do the Roth conversion if it was my money- simply because I would not have to take RMD's,

Currently your account is growing at $25k per year.

After conversion, your account is growing at $18k per year.

It will take a 25% increase in taxes just to break even. When taxes for that bracket have not increased in 100 years.

Even if your tax rate increases by 100%.... you still would not break even.

 

[RunnerDude]

I stand corrected- I wasn't taking her gains into account (nice calculator). The account value would stay essentially the same over time (assuming a 5% overall gain).
This lady is 68 years old and four years away from RMD's. She is concerned about stock market losses, LTC coverage and legacy. From the conversation, it sounds like there are a few choices:
1. Use part of her qualified IRA funds to create an FIA that would protect her investment, provide guaranteed money for her heirs.
2. Use her RMD money to invest in a GUL for wealth accumulation to pass on to heirs
3. Convert part of her qualified IRA funds to a Roth annuity (over about 8 years) to avoid taking RMD's and allow funds to grow uninterrupted within the account tax-free.

 

[Allen Trent]

I stand corrected- I wasn't taking her gains into account (nice calculator). The account value would stay essentially the same over time (assuming a 5% overall gain).
This lady is 68 years old and four years away from RMD's. She is concerned about stock market losses, LTC coverage and legacy. From the conversation, it sounds like there are a few choices:
1. Use part of her qualified IRA funds to create an FIA that would protect her investment, provide guaranteed money for her heirs.
2. Use her RMD money to invest in a GUL for wealth accumulation to pass on to heirs
3. Convert part of her qualified IRA funds to a Roth annuity (over about 8 years) to avoid taking RMD's and allow funds to grow uninterrupted within the account tax-free.

Now I think you are on to some solid options. Note on your option #3. RMDs from a traditional IRA are still required in years you do Roth conversions as Roth conversions don't satisfy the Traditional RMD, but if she starts now, the RMDs by age 72 forward would be shrinking as the traditional converts to Roth

 

[scagnt83]

I stand corrected- I wasn't taking her gains into account (nice calculator). The account value would stay essentially the same over time (assuming a 5% overall gain).
This lady is 68 years old and four years away from RMD's. She is concerned about stock market losses, LTC coverage and legacy. From the conversation, it sounds like there are a few choices:
1. Use part of her qualified IRA funds to create an FIA that would protect her investment, provide guaranteed money for her heirs.
2. Use her RMD money to invest in a GUL for wealth accumulation to pass on to heirs
3. Convert part of her qualified IRA funds to a Roth annuity (over about 8 years) to avoid taking RMD's and allow funds to grow uninterrupted within the account tax-free.

I agree with Allen. Now you are on the right path.

Here is an idea of how to frame it:
Calculate her estimated RMDs using the calculator. Then find the amount needed in a FIA w/ Rider to create that RMD amount in income.

Example:
$700k IRA = $30k RMD age 75.

Since the FIA will be decreasing in balance (max income rider payments deplete the balance in 12-15 years), the RMDs are not going to increase very much, just a bit at first. They will stay relatively level over the first 10-15 years since one account is increasing and the other is decreasing.

So you take $400k - $500k to create a $30k per year lifetime income stream to cover RMDs, provide guaranteed lifetime income, & LTC protection. Excess income can go to a GUL or to the NQ EJ account.

The $300k or $400k IRA left with EJ grows unencumbered from RMDs since the annuity income rider takes care of the needed withdrawals.

The 2 accounts left with EJ grow and get passed to heirs. The annuity gets depleted, but provides lifetime income, lifetime tax payments on the other 2 accounts, & even lifetime premiums on a GUL. Run the numbers, it should work.

 

[RunnerDude]

Great idea- I like it