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ER Roth conversion plan
Old 07-26-2013, 01:02 PM   #1
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ER Roth conversion plan

I read Pb4uski's posts on Roth conversion with great interest and I formulated a similar plan which is also similar to I-Orp reports show. I could use more fine tuning, of course.

DW is about 6 years younger than I (I am 57 3/4, and DW is 52 now). We both started our IT career the same time in US, so our SS number is almost identical. We both plan to ER in 2014, and our plan to start Roth conversion is to begin in 2015.

Our tIRA and 401K right now totaled 960K. The plan is to convert up to 15% tax rate ($72,500), and below 400% FPL ($92,200). So, below $72,500 is my income target. We have Muni bond interest, dividends etc, so we plan to convert $55,000 each year, and live off of our after-tax accounts.

The fine tuning is around when I should take SS and when DW should take SS. Below are the 4 scenarios in my spreadsheet:

1. Me (66), DW (67)
2. Me (66), DW (70)
3. Me (70), DW (67)
4. Me (70), DW (70)

For all 4 scenarios, we will covert the full $55,000 between I am 59 and I begin SS. Then convert partial amount (between $11,000 and $28,000 depending on my begin age) till DW begins her SS.

Scenario 4 will covert the most amount, about $650K and leaves $310K in tIRA when I begin RMD at 70 1/2 of age. I am using half of that to calculate as my own: $155K.

By then, we will have exhausted all our after-tax funds, and will have started to consume Roth funds. So, the only income will be our 2 SS and RMD (we have no meaningful pension amount). We may go over 15% tax rate by the time DW starts her portion of RMD.

Does this sound like a sufficient plan? Would you change any of the detail?
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Old 07-26-2013, 02:36 PM   #2
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I'm certainly no expert, but it seems to me that the advantages of Roth conversions after retirement, hinge mostly on the idea that future tax rates will be higher. If that is true, then there is a similar chance that SS will be additionally taxed/means tested; so one might make a case that you should take SS as soon as possible while the it's taxation is relatively low.

Might be a little difficult to do both at once...
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Old 07-26-2013, 02:56 PM   #3
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The glitch that I see in your plan is IIRC 400% FPL for a family of two is ~$62k. I think the $92k you are using is probably for a family of four, so you'll need to recalibrate your plan to ~$62k a year of income (measured as O-MAGI) rather than $72k of taxable income (which is after deductions and exemptions).

For most people O-MAGI is tax return AGI + non-taxable muni bond interest + any untaxed SS. It would also include any foreigned earned income exempted, but that doesn't apply to most people.
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Old 07-26-2013, 03:04 PM   #4
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Originally Posted by pb4uski View Post
The glitch that I see in your plan is IIRC 400% FPL for a family of two is ~$62k. I think the $92k you are using is probably for a family of four, so you'll need to recalibrate your plan to ~$62k a year of income (measured as O-MAGI) rather than $72k of taxable income (which is after deductions and exemptions).
Thanks, I failed to include that I am indeed a family of 4. I have a 19 yr old and a 16 yr old right now. I see that I will provide HI for them until they finish college or 26 yr of age.
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Old 07-26-2013, 03:13 PM   #5
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Ah, got it.

You'll just need to recalibrate once each of them turns 26 but I think it gets complicated because you need to also include their income in calculating the income you need to stay under to remain eligible for subsidies. IOW, if oldest gets a great jobs and earns a lot it may foul up your plan.

DS will be 25 this October and is still living at home so I guess if we allow him to stay another year I might be able to do a bit more conversion but I suspect his earnings would absorb a good portion of the increase in 400% FPL for 3 vs 2 and would complicate our situation since he is eligible for employer provided health insurance. Besides, we've been trying to nudge him out of the nest for a while now so I think we'll stay the course.
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Old 07-26-2013, 03:21 PM   #6
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not sure what you did in the math but.......the 72.5K is taxable income which is lower than AGI by deductions and exemptions so possibly your allowable AGI is higher than that.
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Old 07-26-2013, 03:54 PM   #7
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not sure what you did in the math but.......the 72.5K is taxable income which is lower than AGI by deductions and exemptions so possibly your allowable AGI is higher than that.
That sounds right. If you limit AGI to 400% FPL of ~$92k after standard deduction of ~$12k and 4 exemptions of ~$15k your TI would be ~$65k - well under the top of the 15% bracket.

But, I think you would need to include the kids' AGI too since IIRC subsidies are based on household income so I think you may need to limit your O-MAGI to 400% FPL less the kids O-MAGI. Since I am planning on 2 assuming DS is booted from the nest before 2014 I haven't explored this complication.

OP has muni bond interest so that will need to be adjusted for as well in OP's calculations.

My, what a tangled web we weave.
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Old 07-26-2013, 04:25 PM   #8
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If you do not have time to convert all, remember that having some taxable income in retirement can provide something against which to deduct, making that income low- or even no-tax.
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Old 10-02-2013, 01:17 PM   #9
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Originally Posted by fh2000 View Post
The fine tuning is around when I should take SS and when DW should take SS. Below are the 4 scenarios in my spreadsheet:

1. Me (66), DW (67)
2. Me (66), DW (70)
3. Me (70), DW (67)
4. Me (70), DW (70)
I just saw this thread. Have you considered the one-early one late scheme? My DH is 9 years older than I am, so we are planning for him to take his SS at 70 and me to take mine at 62. (Our base SS is similar.) That way you are preserving a larger SS for the survivor to take. I ran multiple scenarios through Fidelity RIP and this SS strategy gaved us the highest portfolio at the end.
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Old 10-02-2013, 01:48 PM   #10
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"Our tIRA and 401K right now totaled 960K. The plan is to convert up to 15% tax rate..."

Great topic. Not yet retired and have a similar plan and concerns re. Roth conversions and ACA. Some 401ks apparently will allow partial Roth conversions over time and some will not. I don't think anyone is interested in converting a medium or large 401k to a Roth in a single year. TIRA's can't be partial converted unless you do the pro rata which seems like a pain in the gluteus. Any thoughts on this?
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Old 10-02-2013, 02:10 PM   #11
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Oh man....I've been sitting on my butt putting off doing the conversion to Roth....I really need to get my butt in gear.
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Old 10-02-2013, 02:29 PM   #12
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" TIRA's can't be partial converted unless you do the pro rata which seems like a pain in the gluteus. Any thoughts on this?
Not sure what that problem is, but I have only one tIRA with $0 basis from which I'm making partial conversions. Nothing complex about it. If all you have is deductible contributions than it should be just as easy, with a $0 basis. Turbo Tax will track the basis if you have non-deductible contributions. If you have a non-$0 tax basis and no Turbo Tax, well, it's probably still worth it to brave the work sooner rather than later.
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Old 10-03-2013, 11:53 AM   #13
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TIRA's can't be partial converted unless you do the pro rata which seems like a pain in the gluteus. Any thoughts on this?
If you have basis, can read and understand, and keep records, I would bet $$$
that you could do it by hand using F8606 and instructions
https://www.google.com/#q=form+8606
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Old 10-10-2013, 08:36 PM   #14
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I created a Retiree Roth Conversion calculator a couple of years ago, and it's available through the Bogleheads thread on the topic. I think anyone planning for Roth conversions will find it of use. Check it out at: Bogleheads • View topic - Retiree Roth Conversion Decision Model

I don't promote it very much, but welcome any comments and suggestions for changes and improvements.
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Old 10-11-2013, 01:30 AM   #15
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I created a Retiree Roth Conversion calculator a couple of years ago, and it's available through the Bogleheads thread on the topic. I think anyone planning for Roth conversions will find it of use. Check it out at: Bogleheads • View topic - Retiree Roth Conversion Decision Model

I don't promote it very much, but welcome any comments and suggestions for changes and improvements.
Hey BigFoot, thanks for posting this (and the ton of the work you did to develop it). I started reading the string of posts on Bogleheads but haven't had time to download the spreadsheet and try it out yet...but I will.

Thanks, again.

omni
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Old 10-11-2013, 07:29 AM   #16
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You bet. I hope people will find it useful as a starting point in evaluating the Roth conversion decision and process. I know I wasted years putting off the suggestion of "just do a model" whenever the topic came up at Bogleheads and so when I finally did it I decided to put in the extra (a lot of extra as it turned out) effort to make it public and easily useable by anyone, and modifiable, and update-able for tax rate changes and other things.

I'm just sorry I haven't been a more active participant here over the years as I'm seeing a lot of discussions about this issue.
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Old 10-11-2013, 02:32 PM   #17
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I've found these two calcualtors helpful when trying to sort out IRA to Roth conversions and Social Security claiming options.

Retirement Calculator - Parameter Form

http://ssanalyze.bedrockcapital.com/
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Old 10-11-2013, 08:05 PM   #18
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Don't forget the spousal SS benefit...
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Old 10-12-2013, 10:34 AM   #19
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Don't forget the spousal SS benefit...
My model handles spousal SS benefit or separate spouse benefit. Although it's intended to analyze the Roth conversion situation, I noticed that it also could analyze the SS benefit start date decision so I added that as a bonus feature, but it's not the main intent of the model.

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