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Delay pension for better Roth conversion?
Old 06-02-2014, 12:37 PM   #1
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Delay pension for better Roth conversion?

I know this is the sort of topic that must have been bandied about in these forums many times over the years, but please have patience as I appear to be search-impaired.

I will retire (semi-voluntarily) in a couple of months at age 54. I can start taking my non-COLA'd Megacorp pension at age 55, but if I delay starting the pension the monthly payout will increase around 5.7%/year (but then remain constant once I start). I had been assuming that the break even point was far enough in the future that I would start immediately on my 55th birthday, but I realize now that I hadn't been considering the potential tax advantages of delaying it for a few years.

My income source in retirement is about $900K about equally split between tax free muni bonds and stock mutual funds. I also have tIRA/401K assets of a bit over $1M and would like to convert as much as possible to a Roth without incurring excessive tax. If I don't take the pension my taxable income will be low enough that I can do significant Roth conversions in the 15% bracket while once I take the pension I'll be bumped up at least into the 25% bracket. My projected expenses in retirement are low enough so that, whenever I start my pension, it plus the income from my taxable portfolio will cover everything. However, if I delay the pension I will have to cut into my taxable principle by $25-30K/yr.

So my question is whether to delay the start of my pension and, if so, for how long.

I realize the answer is to do a detailed model of my income, tax and assets over time and determine the optimum strategy - and I intend to do this. I was just wondering if there is some standard received wisdom on this topic (i.e. always better to take the pension sooner, or....).

Any advice welcome.

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Old 06-02-2014, 12:55 PM   #2
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The detailed calc is pretty much required. The 5.7% bump per year is pretty nice, and I think that will make it quite reasonable to delay. My DW's pension increases by 3%, so there's not much value in delaying. In our case, taking the pension at 55, which only covers about 15% of our expenses, was our optimum strategy. We'll still do the Roth conversions, up to the point where the 25% tax rate runs into additional tax bumps or the AMT. That will avoid taxes of 25% or more after age 70.5 when RMD's kick in. In our case, the pension fills in some of our living expenses and actually allows us to Roth convert a little longer. We'll run out of taxable funds before we can convert everything.

If your pension is larger, has the nice 5.7% growth when delayed, and you already have sufficient taxable funds to convert all you can, then you may indeed want to delay.
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