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Would you... (Roth conversion)
Old 03-01-2018, 10:30 AM   #1
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Would you... (Roth conversion)

The question is: "Would you convert 401K/tIRA over to Roth, using after-tax money from mutual funds to pay the taxes, if doing so would leave you with almost zero after-tax money left?"

Here is why I'm asking:

Pension + his & hers SS will hit around the $65-68k mark. That doesn't leave much room for DIV/CG before being tossed into the next bracket and having to pay on on DIV/CG. RMDs, when it's time for those, will most likely just go into MFs, as the pension & SS should cover our needs. By converting and spending down after tax money, the bulk of our money would then be in ROTH, so we could withdraw as needed without tax implications.

At first glance, this would most likely be an 8-10 year process. Conversions of some magnitude will be happening no matter what, so we don't have large RMDs, but I was curious about this strategy and everyone's thoughts.

Also, if it makes a difference, retirement will be at ages 58/51 and conversions would begin at that time, so we're looking at a long time for tax-free growth in the Roth.

(I did search the forum but didn't see anything that resembled this question, so pardon me if this has already been discussed)

Thoughts?
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Old 03-01-2018, 11:53 AM   #2
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For me, it would depend on your age. If you plan to retire before the optimal time to take pension and/or SS, then after tax funds are useful for spending (although, depending on your age you can take early distributions from retirement accounts).

Personally, I try to look at the whole picture rather than focusing on tax avoidance.
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Old 03-01-2018, 01:15 PM   #3
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I mentioned in the other thread that I plan to smoothly convert a portion up until 2025 given the new tax brackets. I do not plan to fully fill my bracket, otherwise I would fully convert everything. I only want to convert about half so that I have tax diversity across my asset base to give me flexibility in the future to respond to tax law changes/opportunities.

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Old 03-01-2018, 01:32 PM   #4
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Quote:
Originally Posted by always_learning View Post
The question is: "Would you convert 401K/tIRA over to Roth, using after-tax money from mutual funds to pay the taxes, if doing so would leave you with almost zero after-tax money left?"....
Yes, as long as I had penalty free access to the tax-deferred accounts before the taxable funds ran out (which you obviously would in your case since you are also SS eligible).
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Old 03-01-2018, 01:44 PM   #5
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Quote:
Originally Posted by MBAustin View Post
For me, it would depend on your age. If you plan to retire before the optimal time to take pension and/or SS, then after tax funds are useful for spending (although, depending on your age you can take early distributions from retirement accounts).

Personally, I try to look at the whole picture rather than focusing on tax avoidance.
I'm not so much looking at minimizing tax (although that would be a nice side benefit), as I am "the better plan for us". I just wasn't sure if there would be a downside to having one's money in Roths as opposed to "savings", to put it loosely.

By time it was "all said and done", the pension and two SS checks should cover all expenses, so any RMDs would just be placed into mutual funds. I was thinking that the Roth's tax advantage would be better for us at that point and was looking for the cons to doing this.


Quote:
Originally Posted by gauss View Post
I mentioned in the other thread that I plan to smoothly convert a portion up until 2025 given the new tax brackets. I do not plan to fully fill my bracket, otherwise I would fully convert everything. I only want to convert about half so that I have tax diversity across my asset base to give me flexibility in the future to respond to tax law changes/opportunities.

-gauss
Thanks for commenting on both threads. I hated to make two, but the topics were just different enough to warrant separate space in my brain.

In your ideal plan, would you look for a 50/50 spread between Roth & Traditional or would you like to be heavier in Roth? On the one hand, I would love to convert as much as I could using the tax cuts while we have them, but on the other hand, it bothers me to completely divest the pre-tax accounts. I can't articulate why, though, other than it seems like we should have some in both.
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Old 03-01-2018, 03:37 PM   #6
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Quote:
Originally Posted by always_learning View Post
I'm not so much looking at minimizing tax (although that would be a nice side benefit), as I am "the better plan for us". I just wasn't sure if there would be a downside to having one's money in Roths as opposed to "savings", to put it loosely.

By time it was "all said and done", the pension and two SS checks should cover all expenses, so any RMDs would just be placed into mutual funds. I was thinking that the Roth's tax advantage would be better for us at that point and was looking for the cons to doing this.




Thanks for commenting on both threads. I hated to make two, but the topics were just different enough to warrant separate space in my brain.

In your ideal plan, would you look for a 50/50 spread between Roth & Traditional or would you like to be heavier in Roth? On the one hand, I would love to convert as much as I could using the tax cuts while we have them, but on the other hand, it bothers me to completely divest the pre-tax accounts. I can't articulate why, though, other than it seems like we should have some in both.
Prior to the new tax law the reason to keep some in Traditional would be to take advantage of the standard deduction and personal exemptions to off set the RMD at that level. Therefore you would keep the amount equal to these standard deductions in Traditional. per "The Power of Zero" by David McKnight.
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Old 03-01-2018, 07:37 PM   #7
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Quote:
Originally Posted by always_learning View Post
The question is: "Would you convert 401K/tIRA over to Roth, using after-tax money from mutual funds to pay the taxes, if doing so would leave you with almost zero after-tax money left?"

Thoughts?
The key is to use after tax money to pay the conversion tax.

That way - assuming returns are the same in after-tax/ira/roth & tax rate is the same now & in the future - you'll come out ahead. Obviously, if your tax bracket at RMD time are higher, you'll feel really smart.

So what if you don't have any money in an after tax account? You still have that money in the ROTH. You can pull it out and put it in an after tax account any time you want if that floats your boat.
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Old 03-02-2018, 09:35 AM   #8
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Certainly open a Roth today with a small amount, if you don't have one yet.

For one plan, try i-orp. It takes a while to get all the inputs correct and to understand the output, but it generates a good plan. But I'd suggest putting the same equity percentage in all account types (after tax, tax deferred, Roth), otherwise it it "try harder" to spend the type that has less equities.

You can start with unlimited Roth conversions, and then experiment with limiting conversations.
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Old 03-02-2018, 11:03 AM   #9
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Quote:
Originally Posted by always_learning View Post
The question is: "Would you convert 401K/tIRA over to Roth, using after-tax money from mutual funds to pay the taxes, if doing so would leave you with almost zero after-tax money left?"

Here is why I'm asking:

Pension + his & hers SS will hit around the $65-68k mark. That doesn't leave much room for DIV/CG before being tossed into the next bracket and having to pay on on DIV/CG. RMDs, when it's time for those, will most likely just go into MFs, as the pension & SS should cover our needs. By converting and spending down after tax money, the bulk of our money would then be in ROTH, so we could withdraw as needed without tax implications.

At first glance, this would most likely be an 8-10 year process. Conversions of some magnitude will be happening no matter what, so we don't have large RMDs, but I was curious about this strategy and everyone's thoughts.

Also, if it makes a difference, retirement will be at ages 58/51 and conversions would begin at that time, so we're looking at a long time for tax-free growth in the Roth.

(I did search the forum but didn't see anything that resembled this question, so pardon me if this has already been discussed)

Thoughts?
This is what I plan on doing starting at 57. I plan on converting what I can up to the top of the 12% bracket ($101,400). Just remember that each year's conversion comes with its own 5 year waiting period. I think that requirement stops at 59.5.

Found this:
Climbing The Roth IRA Conversion Ladder To Fund Early Retirement | Root of Good
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Old 03-02-2018, 01:14 PM   #10
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I am in the same boat, pension wise. All calculators I have run, do not give a clear answer.
One calculator shows 6 different answers. Using a 55/45 portfolio, after 30 years, final portfolio is -0.1% difference, earnings and -4.5% difference and a larger portfolio over 30 years, suggesting no conversion. The pro-convert reasons are $307,900 more in federal and taxes paid over 30 years, $600,600 more in RMD distributions, and $117,000 more in marginal taxes because of bigger RMDs. These numbers are for converting $50,000/year over next 10 years, but yield similar percentages.

With pensions, rental income, SS after FRA or at 70 6-10 years, and currently 2.8%WR.
I hate that tax number, but for a 0.1% end difference in portfolio balance?
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Old 03-02-2018, 04:23 PM   #11
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I plan on exhausting my after-tax accounts on living expenses and Roth conversions. I see no disadvantage to me in essentially transferring some of my taxable funds into my Roth. The Roth account(s) will grow tax free and I can withdraw whatever I need from them without tax consequences. Sounds better than paying capitol gains in a taxable account.

But I don't want to put all of my tIRA into the Roth. Aside from the fact that my taxable accounts won't stretch that far, I should be able to take advantage of the lower tax brackets with tIRA withdrawals before all income streams are active.
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