Tax Free Monthly Income

I owned some ETFs in my rollover traditional IRA that pay a monthly dividend. One of the ETFs is “iShares Preferred and Income Securities ETF” (PFF) and the other is “Global X U.S. Preferred ETF” (PFFD). In addition, I have shares of a REIT that also pays a monthly dividend: “STAG Industrial, Inc.” (STAG). Sadly, these dividends eventually will be taxed by Uncle Sam and by Wisconsin as income. However, starting today, I have freed these assets from that sad fate. Someday it is likely my heirs will pay inheritance taxes because death and taxes are certain.

Roth Conversions and Tax Implications

What I did Today

This morning I called Fidelity Investments and asked them to transfer my 500 shares of PFF from my traditional rollover IRA to my ROTH IRA. I also moved 200 shares of PFFD and 500 shares of STAG.  This means I will owe income taxes on around $42,500 of income. However, because of charitable giving, our net taxes on this transfer won’t be as painful as they might have been if we did not have deductions to lighten the tax burden.

Inheritance Taxes

Someone will wind up paying some taxes when I depart this life. Right now, for me to live is Christ, but to die is gain. (That is what the Apostle Paul said, and I have the same desire, hope, and future.) However, Roth IRA balances are not exempt from the federal estate tax (nor are traditional IRA balances). By paying the up-front Roth conversion tax bill, I effectively prepay my heir’s future income tax bills while reducing my taxable estate at the same time.

Annual Income from this Transfer

Because the yield on all three investments is quite good, this will add $1,882 in annual income to my ROTH IRA. That is almost $157 more income per month that won’t show up on my future Federal 1040 tax filing.