Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Roth conversions and tax brackets
Old 04-16-2018, 04:11 PM   #1
Recycles dryer sheets
Backpacker's Avatar
 
Join Date: Feb 2011
Location: On a dirt road
Posts: 228
Roth conversions and tax brackets

Hello all; looking for some verification / advice if I am on the right track with my thinking.

I am currently working PT (making $50k/yr) and am considering full retirement next year as I will be 55 and gives me the option of penalty free w/d from 401k. DW is retiring this summer at 51, but hopes to get hired back as a contract employee for a year or three. She will receive pension of $40k pretax (COLA'd), if she gets the contract job it will pay between around $70k a year.

we also net out about $15k a year in rental income

Even if I quit I think we'll be in the 22% bracket as she will not be able to contribute to employer 403b plan once she is contract employee, so no way to defer any comp to get to 12% bracket (77,400 MAGI).

40k pension
+ 70k contract pay
+ 14k rental income
- 24k personal deduction
= $100k

I have 50k in 457b non-governmental that I'd like to get out of employer sooner rather than later as non-governmental 457 is considered an asset of the employer. Not that I think there is much risk of them going under, but would feel better getting it off their balance sheet and on to mine.

One of my goals is to do some Roth conversions using my 457b money as a starting point - the crux of my problem (not that it's a bad problem to have) is that I don't see much advantage to doing Roth conversions at 22% or even possibly 24% bracket. To make it most advantageous seems like I'd want to do it at the 12% bracket.

My game plan unless any of you that are smarter than I have some wisdom to share - is to hold off on drawing my 457b money and also hold off on any Roth conversions until DW stops the contract job and try to stay under the 77,400 MAGI / 12% bracket. In the interim save $ in after tax accounts to stock up for taxes on Roth conversions.

I'm just not super jazzed about converting at the 22% bracket, our spending forecast in full retirement is $50k, and could be a bit lower if the SHTF. Hope this all makes sense. Sorry for the brain dump - I tried to just include the pertinent facts.
__________________

__________________
"Up sluggard and waste not the day, in the grave will be sleeping enough." Benjamin Franklin
Backpacker is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 04-16-2018, 05:20 PM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 6,657
You have provided only part of the equation. Impossible to answer without the full picture. What is your expected tax rate once you have to take MRDs on that tax deferred money? And is there going to be a gap before then where you won't have that contract income and will be able to convert most or all of the deferred at 12%?
__________________

RunningBum is offline   Reply With Quote
Old 04-16-2018, 05:20 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Sunset's Avatar
 
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 5,881
If she gets hired back as a self-employed contractor, then she is eligible to open a self-401K where she could make deductible contributions, and of course deduct self employment expenses.

She could also in the 401K have both a regular and a ROTH 401K.

https://investor.vanguard.com/what-w...ndividual-401k

Note: it takes about 30 days to open due to mailing back and forth and you have to open it within the actual year if you want to make deductible contributions after the year has passed for the previous year.
__________________
Fortune favors the prepared mind. ... Louis Pasteur
Sunset is offline   Reply With Quote
Old 04-16-2018, 05:48 PM   #4
Recycles dryer sheets
Backpacker's Avatar
 
Join Date: Feb 2011
Location: On a dirt road
Posts: 228
running bum;
RMD's should be in the $60k per year neighborhood for our personal tax deferred accounts, given current age / balance and assuming 6% return. I do expect to inherit a sizable ($300k+/-) IRA that will require RMD's on the inherited IRA schedule - no way to tell for sure when that would happen. As I am 54 and DW only plans on contract work for 3 years max still leaves lots of time between now and RMD's. So tax rate at RMD time using today's tax table would still be 22%.

The inherited IRA is one of the reasons i'd like to shift $ to Roth so i don't have to take large RMD's on personal IRA.

edit : inherited IRA should be $300k - total inheritance estimate is $1MM, i mistakenly said IRA was the full $1MM
__________________
"Up sluggard and waste not the day, in the grave will be sleeping enough." Benjamin Franklin
Backpacker is offline   Reply With Quote
Old 04-16-2018, 10:42 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 19,866
Can she leave her employer but not start taking pension benefits until later (IOW would her pension get larger later if she deferred starting it)? If so then between that and perhaps deferring some of her consulting income you might be able to Roth convert that $50k of 457b money over a couple years at 12%.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 04-17-2018, 09:55 AM   #6
Thinks s/he gets paid by the post
 
Join Date: Aug 2013
Location: North
Posts: 1,490
Quote:
Originally Posted by Sunset View Post
If she gets hired back as a self-employed contractor, then she is eligible to open a self-401K where she could make deductible contributions, and of course deduct self employment expenses.

She could also in the 401K have both a regular and a ROTH 401K.

https://investor.vanguard.com/what-w...ndividual-401k

Note: it takes about 30 days to open due to mailing back and forth and you have to open it within the actual year if you want to make deductible contributions after the year has passed for the previous year.
I opened and contribute to SEP-IRA when contracting. Opened one with VG. I would advise you look into that, and understand $55k is the contribution limit.
__________________
AA (Stock/Bond/Cash ): 99/0/1% MIX (Small/Mid/Large): 50/25/25% BLEND(US/Foreign): 100/0%, REIT (Real Estate Equity): 50% of Assets

FIRE in 2031 @ 50yrs old (+/- 2yrs) w/ a hypothetical $2.5mil portfolio, 3 appreciated homes worth $1.0mil and rental income to fund my gap years until RMD. Assets will go to an inherited IRA where I plan on watching the investments grow until I die or the trust gets executed.
kgtest is offline   Reply With Quote
Old 04-17-2018, 10:05 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 6,657
Seems to me if you are looking at deferring compensation than it makes no sense to also convert. I still don't have the whole picture, but it sounds like there will be quite a few years where you can convert at 12%. If you don't think you can get it all then, I'd probably convert up to the top of 22% now. There may be other reasons to limit income later, like ACA subsidies or the medicare income test as you get within a couple of years. I don't think that 22% rate is going to get any better, and it's scheduled to revert back to 25% unless the new tax brackets are extended.
RunningBum is offline   Reply With Quote
Old 04-17-2018, 10:14 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 19,866
Quote:
Originally Posted by RunningBum View Post
Seems to me if you are looking at deferring compensation than it makes no sense to also convert. .....
I tend to agree since it nets out to nothing, but in this case the OP would be able to get out of that 457b plan that has credit risk associated with it.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...60/35/5 AA
pb4uski is online now   Reply With Quote
Old 04-17-2018, 10:23 AM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 6,657
Quote:
Originally Posted by pb4uski View Post
I tend to agree since it nets out to nothing, but in this case the OP would be able to get out of that 457b plan that has credit risk associated with it.
I was going to make some comment about whether one account is better, but I don't know much about 457b plans. Can they not be rolled over to a tIRA?
RunningBum is offline   Reply With Quote
Old 04-17-2018, 05:40 PM   #10
Dryer sheet aficionado
 
Join Date: Oct 2013
Location: Chicago
Posts: 40
Quote:
Originally Posted by RunningBum View Post
Seems to me if you are looking at deferring compensation than it makes no sense to also convert. I still don't have the whole picture, but it sounds like there will be quite a few years where you can convert at 12%. If you don't think you can get it all then, I'd probably convert up to the top of 22% now. There may be other reasons to limit income later, like ACA subsidies or the medicare income test as you get within a couple of years. I don't think that 22% rate is going to get any better, and it's scheduled to revert back to 25% unless the new tax brackets are extended.
While converting at lower tax tiers makes sense, waiting for many years for that may not, should there be an opportunity to convert during a market meltdown. 2009/10 was a great year, our situation today and into the future is better because of opportunistic conversions. Probably do a combination, some now, a lot more opportunistically and some more at a lower tax rate.
free2020 is offline   Reply With Quote
Old 04-17-2018, 05:45 PM   #11
Recycles dryer sheets
Backpacker's Avatar
 
Join Date: Feb 2011
Location: On a dirt road
Posts: 228
Thank you for the responses thus far. I do know her pension formula is such that deferring it will not increase the payment

I will have to look into the self-employed Ira option that may have some great potential.

I also like the idea of watching for Market meltdown and buying then rather than worrying about tax implications, may be more advantageous.
__________________
"Up sluggard and waste not the day, in the grave will be sleeping enough." Benjamin Franklin
Backpacker is offline   Reply With Quote
Old 04-17-2018, 05:51 PM   #12
Recycles dryer sheets
Backpacker's Avatar
 
Join Date: Feb 2011
Location: On a dirt road
Posts: 228
Also missed the question on rolling 457 into traditional IRA. Yes it can be done.
__________________
"Up sluggard and waste not the day, in the grave will be sleeping enough." Benjamin Franklin
Backpacker is offline   Reply With Quote
Old 04-17-2018, 05:54 PM   #13
Thinks s/he gets paid by the post
mpeirce's Avatar
 
Join Date: Feb 2012
Location: Columbus area
Posts: 1,913
Quote:
Originally Posted by free2020 View Post
While converting at lower tax tiers makes sense, waiting for many years for that may not, should there be an opportunity to convert during a market meltdown.
A good point and one I hadn't considered.

Even after years of ROTH converting - and a number of years to go - there is always something new to consider.

THANKS
__________________

mpeirce is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Tax brackets and Roth Scuba FIRE and Money 23 11-28-2017 11:18 PM
Will 0% cap. g. in the two lowest tax brackets be going away under the new tax plan? FANOFJESUS FIRE and Money 5 11-07-2017 08:19 AM
Tax on Roth Conversions vs Tax on RMDs medelste FIRE and Money 44 07-27-2015 08:27 AM
Roth IRA conversions and tax rates Nords FIRE and Money 4 03-14-2010 12:34 PM
Cost of working, tax brackets, and living off income jIMOh FIRE and Money 4 05-13-2007 09:56 PM

» Quick Links

 
All times are GMT -6. The time now is 09:36 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2018, vBulletin Solutions, Inc.