Seeking Optimal Roth Conversion/RMD Strategy

[jim584672]

Does a catastrophic plan count for Uncle Sam's minimum insurance requirements? Would the "Individual Mandate" apply?

From healthcare.gov it sounds like you must be under 30:
"Catastrophic coverage plans pay less than 60% of the total average cost of care on average. They’re available only to people who are under 30 years old or have a hardship exemption."

 

[MBSC]

How so? There are tables for various family situations at the site linked below, and it seems to indicate a sliding scale, though for single persons, the subsidies appear to reach 0 at an income of about $30K - which is lower than I thought. But, it's not a "cliff" as far as I can tell.

The subsidy cliff is a function of your Second Lowest Cost Silver Plan (SLCSP) premium as a percentage of your income. Once you reach your mid-50's, your SLCSP premium becomes a high enough percentage of your income that you hit the 400% FPL cutoff before the sliding scale "glide path" reaches zero subsidy.

 

[pb4uski]

Does a catastrophic plan count for Uncle Sam's minimum insurance requirements? Would the "Individual Mandate" apply?

From healthcare.gov it sounds like you must be under 30:
"Catastrophic coverage plans pay less than 60% of the total average cost of care on average. They’re available only to people who are under 30 years old or have a hardship exemption."

Yes, it counts. No we are not under 30. There is an exception that if the lowest cost bronze plan available to you exceeds 8% of your income then you can buy a cat policy even if you are over 30.

I suspect that some of the 35-40% premium difference is that we are riding 30 and under coattails in the way the insures priced these cat policies.

http://www.early-retirement.org/for...ive-to-a-more-costly-bronze-policy-69160.html

 

[jim584672]

So I looked up the numbers in my area...

Lowest cost unsubsidized bronze plan $284.50 per month in 2014.

$284.5 x 12 = $3,408
$3,408 /.08 = $42,600
So if my income is under $42,600 I can get an exemption and get a cat plan.

Catastrophic plans range from $157.85 to $279.72.

Interesting to know.

 

[Texas Proud]

The subsidy cliff is a function of your Second Lowest Cost Silver Plan (SLCSP) premium as a percentage of your income. Once you reach your mid-50's, your SLCSP premium becomes a high enough percentage of your income that you hit the 400% FPL cutoff before the sliding scale "glide path" reaches zero subsidy.

The thing that I hate is that BCBS offers two very low silver plans that are almost identical.... if they only offered one then subsidies would be much higher...

 

[free2020]

A thread about the terrors of RMDs on another forum prompted me to ask the board for proposed Roth conversion strategies in view of my age and distribution of assets among taxable, tax-deferred, and tax-free (Roth) investments.

My data:

Age 55 (possibly retiring at age 56 about six months from now).
Taxable: $730K (551K equities; 185 non-equity - mostly cash, some bonds).
Tax-def: $360K
Tax-free: $115K
SS: $30K at age 70.

Assuming that I retire at 56, my income in the following year would be about $10K a year from dividends and cap gains. I also expect to wait until age 70 to draw SS.

Q: Based on the above, how much would you recommend converting from Tax deferred to Roth each year between age 56 and 70?

Additional Info:
Single; no dependents;
No pension.
Will want to qualify for ACA subsidies (expect to live in WA state).
Expenses running at $30K a year.
Income: Expect to draw from the $185K in non-equity investments in Taxable. May do some part time work (Uber or Lyft). Not counting on it, but I might make $10K or so a year.

Since MRD applies to your tax-deferred account, using this account first until age 70 could make sense. Which happens to be my exact goal as well. I'm 56, have a large IRA relative to taxable account (somewhat different from yours).

To deplete the tax deferred first, have you run the numbers doing a 72t (SEPP) withdrawal and postponing Roth conversions for the mandatory 5-1/2 years withdrawal period of SEPP? www.72t.net has a SEPP calculator, which I quickly ran for someone your age and balance and the income generated could be between $10k to $20 K over the next 5 years. You can assess at that time how much to convert to Roth.

Also agree with other posters, why would you want to delay SS past 62? Either way, I would touch your taxable account later.

My 2 cents.

Congratulations on the D-day in 6 months.

 

[pb4uski]

Since MRD applies to your tax-deferred account, using this account first until age 70 could make sense. Which happens to be my exact goal as well. I'm 56, have a large IRA relative to taxable account (somewhat different from yours).....

I disagree if by using this account first you mean using that money to live on.

I think it makes more sense in those early years... ER to 70, to use taxable accounts to live on and do Roth conversions to deplete tax-deferred amounts to reduce RMDs. That way, the money ends up in tax-free and grows.

 

[Rothman]

+1 pb4uski is presenting the usual winning strategy, live off after tax, Roth convert to income limit for bracket or ACA subsidy, I-orp will show you best scenario


Sent from my iPad using Early Retirement Forum

 

[medelste]

Q: Based on the above, how much would you recommend converting from Tax deferred to Roth each year between age 56 and 70?

I posted a similar question a few months back and Animorph attached a spreadsheet that he created that I expect to use when I RE.

http://www.early-retirement.org/for...ersions-vs-tax-on-rmds-76741.html#post1580319

 

[bpgdeg1234]

I disagree if by using this account first you mean using that money to live on.

I think it makes more sense in those early years... ER to 70, to use taxable accounts to live on and do Roth conversions to deplete tax-deferred amounts to reduce RMDs. That way, the money ends up in tax-free and grows.

So in thinking about this should you also place equities on taxable side and less risky, lower growth investments (e.g. bonds, CD, etc.) on tax-deferred IRA side to minimize growth there so account does not continue to grow potentially outpacing amount of annual ROTH conversions?

 

[pb4uski]

Yes, but not principally for that reason.

Equities go into taxable because qualified dividends and LTCG are tax-preferenced (0% if in 15% tax bracket, 15% if in higher tax bracket before any ACA taxes). Also for international equities and foreign tax credit can typically be used if in taxable but is lost in tax-deferred or tax-free.

Investments that generate current income go into tax-deferred or tax-free.

Also see bogleheads webpage on tax efficient placement.

 

[bpgdeg1234]

Yes, but not principally for that reason.

Equities go into taxable because qualified dividends and LTCG are tax-preferenced (0% if in 15% tax bracket, 15% if in higher tax bracket before any ACA taxes). Also for international equities and foreign tax credit can typically be used if in taxable but is lost in tax-deferred or tax-free.

Investments that generate current income go into tax-deferred or tax-free.

Also see bogleheads webpage on tax efficient placement.

Thanks pb4uski for response. Yes I have read the wiki on the bogleheads website and understand the principal rationale for placement of equities on taxable end but was thinking this may be another good reason for such a move, especially for someone who may not be able to tax-efficiently do enough annual ROTH conversions in light of size of TIRA account and will still have an RMD problem. So at least basically stop growing the tax-deferred account and making the growing RMD problem worse.

In considering this move though, one thing that maybe I'm overthinking after such a run up in stocks and TIRA account value over the past 5 years is whether you see any value in waiting to make such an asset location change if one thought the stock market was potentially in a downdraft mode?

Rationale being that the value of the overall TIRA account value would then decrease (versus on the taxable end) thereby reducing the associated RMDs that would be taxed at 25% or 28% compared to the lower tax-preferenced benefits presently realized if losses realized in the taxable account and 15% tax bracket?

 

[Trooper]

I have a related question that I haven't been able to find a clear answer for.

I am 57 now. There is a 5 year waiting rule on Roth conversions from 401(k)s and tIRAs regarding the 10% penalty.

If I do a Roth conversion today, I understand that I will be liable for taxes on the conversion at ordinary rates. But...do I have to wait until I am 62 (57+5) to withdraw the funds from the Roth, or am I free of the penalty at age 59 1/2?

 

[bingybear]

see link

Age 59½ to 70.
Withdrawals from a Roth IRA you've had less than five years.
If you haven’t met the five-year holding requirement, your earnings will be subject to taxes but not penalties.
Withdrawals from a Roth IRA you've had more than five years.
If you’ve met the five-year holding requirement, you can withdraw money from a Roth IRA with no taxes or penalties.

Looks like you may be liable for taxes on earnings. I need to look this up more completely for my own planning.

 

[Texas Proud]

see link


Looks like you may be liable for taxes on earnings. I need to look this up more completely for my own planning.

But you can withdraw the contributions at any time.... so as long as you do not take out as much as you put in you are good to go...

 

[misanman]

And I believe the 5-year timer starts with the first Roth conversion and it's a one time hurdle. This could be a reason to go ahead with a Roth early in order to start the timer running.

 

[Trooper]

And I believe the 5-year timer starts with the first Roth conversion and it's a one time hurdle. This could be a reason to go ahead with a Roth early in order to start the timer running.

Thanks misanman. I wanted to wait to do the conversion until I retire, in order to take advantage of the 15% bracket. It's the only time it would make sense for me.

In all likelihood I will probably end up satisfying the 5 year requirement, because conventional wisdom says to withdraw from Roths last anyway.

 

[hnzw_rui]

And I believe the 5-year timer starts with the first Roth conversion and it's a one time hurdle. This could be a reason to go ahead with a Roth early in order to start the timer running.

There's a 5-year timer for each conversion you do. Granted, once you reach 59 1/2, I don't think it matters as much. I believe the 5-year hold on conversions is mostly to prevent folks from dipping into rolled over funds right away.

e.g. At 30 years old, you convert $20K (50/50 contribution/earnings split) to Roth and at 33yo, you convert another $20K (50/50 split again). At 35yo, you can withdraw $10K (contrib from 1st conversion) without 10% penalty but you still have to wait until you're 38yo before you can withdraw an add'l $10K (contrib from 2nd conversion) without 10% penalty.