403b strategy for first few retirement years

[Cat-tirement]

Even though I still have 2-5 years before ER, I am starting to ponder strategies for those first few years afterward. I have read several threads here about doing Roth conversions and/or realizing capital gains during the period after retirement but before beginning SS or pensions, when in a lower tax bracket, so as to minimize taxes on those transactions. This makes perfect sense to me, even more so since some time after retirement, we will move from a no income tax state to one with a fairly significant income tax.

DW expects to work for at least a couple of years longer than me. Is there any significant benefit to max'ing her 403b contributions during that period, in order to reduce taxable income, and doing more Roth conversion or capital gain sales? On the other end of the spectrum, is there any real benefit to stopping her 403b contributions during that period to cover living expenses, in order to avoid spending money from our savings or investments?

 

[Animorph]

If you need more taxable funds to support Roth conversions, that might be a reason to stop.

In my case, DW is 5 years younger, still working, and has a regular 401k and a Roth 401k option. I started Roth converting my IRA last year. My calculations show we should Roth convert up to the point where AMT kicks in, which is still possible with DW's income. DW continues to max her regular 401k. This has the advantage of lowering my IRA value early, avoiding my RMD's, which will always be higher in any given year than hers, and will start earlier. Continuing to contribute to her 401k allows me a little large Roth conversion and provides more to Roth convert or slip into the 15% tax bracket later. You may be in a similar situation, though you haven't stated your ages.

 

[Cat-tirement]

If you need more taxable funds to support Roth conversions, that might be a reason to stop.

In my case, DW is 5 years younger, still working, and has a regular 401k and a Roth 401k option. I started Roth converting my IRA last year. My calculations show we should Roth convert up to the point where AMT kicks in, which is still possible with DW's income. DW continues to max her regular 401k. This has the advantage of lowering my IRA value early, avoiding my RMD's, which will always be higher in any given year than hers, and will start earlier. Continuing to contribute to her 401k allows me a little large Roth conversion and provides more to Roth convert or slip into the 15% tax bracket later. You may be in a similar situation, though you haven't stated your ages.

Thanks, those are good points. I think we will be in a similar situation, including my RMDs being significantly higher than hers. I am 54 now, and DW is 2 years younger. How long have you been ER'd, and did you start converting immediately after doing so?

 

[Animorph]

Thanks, those are good points. I think we will be in a similar situation, including my RMDs being significantly higher than hers. I am 54 now, and DW is 2 years younger. How long have you been ER'd, and did you start converting immediately after doing so?

I ER'd in 2007, though with severance pay a little into 2008 due to a fortunate layoff. DW is now half time for the last half of this year and should be retired at the end of the year.

I probably should have started converting earlier, but 2012 was the first substantial Roth conversion for me. Last year I finally revised my retirement software to blindly optimize instead of having to guide it. That kind of blew my previous "convert to the top of the 15% tax bracket" strategy out of the water, and found an interesting new "convert until AMT kicks in" plan. We did have room under the AMT in previous years, but too late now. And really, I'm just finding a few hundred per year in extra spending compared with the more obvious plans. It's probably very dependent on the exact numbers with respect to taxes, though I find that moderate changes to my starting numbers changes only how many years I spend converting at the highest level before dropping back to the 15% tax bracket.