There are several ways you can reduce your RMDs over time. You have already identified the most obvious and effective (Roth and regular withdrawals). Some of the other advisors have accurately identified other minor strategies:
· Charitable giving – If you were already over 70 1/2, you could make QCDs from your IRA of up to $100k. But you have several years yet and this provision must be renewed. Currently, you could offset taxable distributions with charitable giving (assuming you itemize, don’t exceed the giving limit and aren’t subject to phase outs).
· Marry a younger spouse – If you spouse is 10 years or more younger you can reduce your RMD, but really, is this a practical strategy?
· Asset location – place slow growth tax in-efficient assets into accounts with RMDs. This way your RMDs will be lower since the assets didn’t grow as much and growth is in Roth or brokerage accounts where taxation is more favorable.
None of these minor solutions are as compelling as the Roth conversions you mentioned. You stare tgat you are 65 and currently in a 15% bracket. I am assuming you aren’t receiving Social Security yet, but when you are 70 you will have sizable (and increasing) RMDs, Social Security income (especially if you delay filing) and possible other sources of income you receive now. The key to minimizing your long-term tax burden is to “smooth” your annual income over time. I expect you to have several years of lower income before your tax bracket will jump. To figure out the best plan, you will need to do long-term tax projections. By seeing what tax brackets you may be in later, you can then decide what amount of tax pain today is worth avoiding it later.
When you do Roth conversions, you can maximize the tax savings by setting up multiple Roth accounts and funding them with different asset types early in the tax year. You then can file an extension for your personal return and undue (recharacterize) the Roth accounts which performed the worst over that particular conversion period. So as an example, you decide $100,000 conversion is your tax “sweet spot.” You convert $100,000 each into two Roth accounts ($200,000 total) in January 2013. One account you invest in equities, the other in bonds. In September of 2014, you look at the values. The equities could be $120,000 at that point and the bonds $95,000 or vice versa. You keep the one which has the highest value and only pay taxes on the converted amount, $100.000.
You can achieve significant tax savings through these various strategies, but it is important to consider your goals. What is the ultimate use for the $4 million you cited? What other assets do you have? What cash flows needs do you have? All of these questions can alter one’s strategy. You will need a competent planning CPA and investment manager who work together well to make this work effectively.