FAT FIRE: How much to keep in Rollover account?

[newellcr]

Folks,

I could use some pointers or at least some links please...

We are nearing the end of Roth conversions. Just trying to figure out when to stop... Background; both mid 50's, both retired, FAT FIRE (wasn't the plan), his/her pension and healthcare, enough rental income just big enough to look like another pension, fully funded 529 plans (boy child at state U on ROTC scholarship and girl child in HS with eyes on other state U), his/her LTC $165/day COLAed policy, no life insurance, plenty of aged Roth contribution basis and more conversions chunks meeting the 5 year rule every year, already own the cool boat, no snowbird location/property yet, 80+ year old FIL is living on his own but may need some financial help eventually... Thankfully, we are blessed and seem to be all set.

We have two lumps that we have yet to pay tax on. The Rollovers for the conversion and an inherited IRA. If we add the two together the tax bill on the total is a little less than what's left in the inherited IRA. Not looking to do that specifically, but we can pay the tax with the inherited IRA...

Living below our means and happy. Slowly unwinding our position in some rental real estate. The capital gains and recapture should come in manageable chunks over 6 or 7 years. This unwinding will also fund the taxes due on the Roth conversions, at least, that's the preferred plan. iORP is a little clunky for these types of details, but generally, it likes the huge conversions now to lower the balance to just under $200k quickly and sets up growth to a $250k Rollover balance at age 64 ish... Mentally, that works for me. Generally, I'm happy to do that. I have manually calculated the taxes for a couple of glide paths to get the Rollovers to $200k and it's close enough to iORP numbers... I really think we are good with the "Get to $200k in the Rollover Plan". This plan gives us less than 10% rollover in the retirement portfolio. If someone thinks that we should poke iORP or the plan with a stick, I'm good with that but would prefer using a different thread. Please advise and I will start one. And yes, we will still need to tame the inherited IRA so as to not goof with the iORP numbers that help us avoid extra Medicare taxes...

We sort of got where we did because we had a 30 year plan. Over the years the plan has gotten shorter range. It's time for (hopefully) another 30+ year plan. When the Roth conversions are 'done', and the inherited IRA is 'done', and the real estate proceeds are gone, the Roth will have grown and we will look very (upper) middle class on the tax return and still be FAT FIRED...

So this is a huge lead into - just because it is tax efficient from iORP's point of view, is this really the 'best' solution? I know very little about aging with money. Not sure even how to discuss it or formulate a good set of questions. There seems like there is a lot of time to dial in on the right solution and in some cases that is correct, but having a better understanding of these will help me know how far to ~not go with the conversions this year. I guess this is were I really need some pointers or links, please.

Having Rollover money can be a good idea for late in life health expenses, but we do have the $165/day LTC policies and they do not have a lifetime limit... I have had the thought that we're kind of rich. Maybe the nurses should come to us for a while and we might be able to use IRA money for healthcare home upgrades...

I think the new RMD laws state that people with amounts below some limit ($100k) are no longer subject to RMDs. This makes bobbing along at the $200k (his and her total) mark seem like a no brainer, if I have it right. Does someone have a trustworthy link, pls?

Does someone have a good link for description of QCD's?

We did explore larger gifts to old State University. The trusts start at $100k but the benefit really isn't there until age 59.5. Not sure we even want to do it or if it makes sense, but it would start a few percent income stream trickle and offer a tax break that opens space for more roth conversions...

If I didn't mention it here, I just don't know about it. The Rollovers are under $500k and we fully expect to do another $50k in the short term. The market may help us decide to do more... So decision time might not be as far away as it seems.

Thank you,

Chris

 

[SecondCor521]

Chris,

There is no new law which exempts people with low account balances from RMDs, so you have that wrong.

RMDs were suspended for everyone for 2020. RMD start dates have been delayed to age 72 for people of your age. RMD divisors have been increased a bit by the IRS due to increased longevity, which means that the RMD amounts have been reduced a bit.

The proper place to look for the most accurate description of QCDs is the IRS website in Pub 590B. But the basics are that you and your wife can distribute funds directly from your traditional IRA to a 501(c)3 charity up to $100K per year per taxpayer and it will not be treated as taxable income (but neither can you take a deduction for the contribution on Schedule A). If you are subject to RMDs, then your QCD can count towards satisfying your RMDs.

It sounds like you're talking about a charitable annuity trust with State U. Those seem to make sense for older people and/or higher interest rates. I'd wait until interest rates rise or you're a lot older (like 70's / 80's).

Depending on your overall tax situation, some say that it may make sense to leave some funds in the traditional IRA so the RMD can count against your standard deduction (of ~$25K per year for MFJ). But I'm guessing your taxable SS and rental income and any other income will probably fill the SD anyway, so that's probably not an issue for you.

Overall, I'd keep looking at the marginal rate on the Roth conversions and convert as long as it continued to be below my eventual age 75 marginal rate. That's my personal gold standard. If you're trying to doing too much, the numbers should tell you that. I should add that I've run I-ORP a bunch but never really got my head around it, and since I can't understand it's inner workings in detail I have a bit of trouble trusting it, although I have no solid reasoning behind that nervousness.

HTH.

 

[Sunset]

I personally will want to keep $300K in my IRA to cover potential medical expenses in the future.
I don't have LTC insurance so a couple of years in a nursing home type place would really eat into the money, and pulling it out of an IRA at that time would make it a tax free withdrawal.
No sense paying tax on it now, when it might be tax free later.

 

[RunningBum]

You can't convert an inherited IRA to a Roth, so that's out. If you inherited it since 1/1/2020, you have 10 years to finish withdrawals from it. If before then, you should be taking RMDs from it now, though I think you could skip 2020.

For the other IRA, it's generally a tax rate issue. If you can convert at a lower or same tax rate then you will be in when you have to take RMDs later, you should convert up to the top of that tax bracket. Otherwise, don't. There are other factors to consider:
- Will future tax rates change? They are scheduled to go back to the previous levels after 2025
- If one of you dies before the other, the other will be in the higher single tax brackets.
- Converting now may affect your ACA subsidies.
- Converting after 63 can trigger IRMAA, but so can RMDs
- Beware the SS tax hump, where additional regular income from conversions or RMDs can push more SS income to be taxed, as well as qualified dividends & LTCGs

There are probably more factors I'm not thinking of right now. I'm generally in favor of doing heavy conversions as long as you don't push to a higher tax rate than you'll likely be in retirement, so that you have access to that money and it can grow tax free. Not everyone feels that way.

QCDs are a way of donating your RMDs (and more, up to $100K/yr) to charity. https://www.fidelity.com/learning-center/personal-finance/retirement/qcds-the-basics

Another option available to you now is to open a Donor Advised Fund. It works well if you have highly appreciated investments and itemize deductions on your taxes. I don't think you can donate real estate. https://www.fidelitycharitable.org/ for more info.

I'm not aware of a rule that let's you skip RMDs if you have less than $100K in them. You said $200K for the two of you, but remember that the "I" stands for "Individual" so if there is such a rule, you would have to have separate IRAs in each of your names to spread that out like you want.

 

[Montecfo]

If the inherited IRA has a shorter RMD term than the rollover I would attack that first. You can't Roth convert it but you will increase your flexibility to pull those funds first.

As an aside, I'm not sure how long you have had the LTC insurance in place, but if your fire is fat enough to self insure that might make more sense in my view. You will get large increases over time on a product you may never use. I tend to self insure for such risks.

 

[newellcr]

Thank you all for the replies. I have some time before a bottle of wine and dinner at the dining room table. I will reply individually tomorrow and am very grateful for the input.

This site is so amazing. I was pretty sure I included all of the background, but you guys are good. The inherited IRA is 2017 grandfathered and I've been pulling the RMDs+. Most of it goes to covering taxes on the conversions, or mentally, that's what I tell myself. I don't have the thought of trying to convert the inherited IRA. Generally, it's just another welcomed bundle of money that I need to pay tax on. Dad knew about my Roth conversions and got caught in the trap of a higher bracket on RMDs when Mom passed. I did try to pre warn him about that. He thanked me for the advise and mentioned that his tax guy wasn't impressed with my suggestion (I paraphrase for brevity). Oh, well. I am certainly happy and grateful for the 'problem'.

There won't be a time when we aren't in at least the 22% current bracket or the 25% bracket when the current rates sunset. Ran to the top of the 24% bracket for 2020 and we are just about to enter the 35% bracket on the current glide path for this year. Itchy owie, NIIT, quarterly installments to the IRS will look like the 2020 glide path and we will deal with the rest of the tax pain in 2022... Thank you for the comments here. RunningBum and Montecfo chimed in last year to help with the conversion questions IIRC (Thank you again).

Yes, this falls outside most of the conventional wisdom for conversions, but our asset allocation is ~extremely aggressive currently. I'd tell you what it is, but I want to make sure my ER friends can sleep tonight... The preview is. We have $50k in VFSUX and our next least risky asset is PFFA. It is a preferred ETF fund with leverage that yields almost 8%. The growth rate is hard to model in iORP. I call it the "Running with Flaming Scissors Asset Allocation." There is also a small piece of tax arbitrage playing in here, but it isn't wagging the dog.

I appreciate all of the input and that folks took their valuable time to help. I will respond properly tomorrow.

Thank you ,

Chris

 

[newellcr]

SecondCor521,



Thanks again for the detailed reply and pointing out my RMD error. Not sure where my thinking came from. I try to check in when I hear about major legislation discussions, maybe it was a discussion point the last time. Maybe it was simply a dream/fantasy. Either way, it's pretty far away and I do understand the basics and life expectancy associated tables.



The info on the QCDs and description of the trust is helpful. I see them as (pleasant) pressure release options for taming the IRA tax situation. At some future point, I will see them as nice ways to make a donation. When taxes are applied in an orderly fashion, I get it. Sometimes taxes are cliffs, like the health care subsidy. I see the medicare steps as a mini cliff. Having the ability to avoid current, and the seemingly inevitable future cliffs, is good. The discussion that I had with the school was low key. It was interesting. She is a lawyer with a background in trusts. She said they get people basically coming in the door ready to write checks and wanting to know about how the money could be used and some people like me that are trying to learn and may take decades to hatch a plan, and lots of other people in between. You echoed her statements of the discussion of the trust begins in earnest as people get closer to 70 and the current rates are horrible.



I appreciate your time and please chime back in if you think of anything else.


Kind Regards,



Chris

 

[newellcr]

Sunset,

I am searching for that number. Having plenty of time before RMDs force a solution gives me time to dial it in and correct by either converting more or letting the Rollover grow. It's interesting. Over the years, I paid attention to what the plans were doing and the growth seemed painfully slow. Then the markets either surprised with a bang or lulled me to sleep with slow steady growth that kind of woke me back up again when I saw it accumulate.

The surprise growth generated the FAT FIRE (and the fully funded 529 plans) and I am simply extrapolating the experience to what might happen with $200k+ hanging out in a Rollover. What a nice thing to worry about.

I appreciate your response and time.

Thank you,
Chris

 

[newellcr]

RunningBum,

Thank you for your detailed reply and the links. It amazes me how you can so quickly slice thru to the important, overlooked details and how active you are on this site. Kudos.

The simplistic answer to your bullet point list of things to be aware of is - that I generally trust iORP numbers from approximately age 62 to the 'end'. I think it targets the optimal projected version of the assets and tries really hard to avoid IRMAA, SS tax hump, and RMD errors based on the model inputs and the sun setting tax rates. What I don't know is how close it takes you to you to the cliffs and it so easy to get pushed off of them by a special dividend or other outside event. My guess is that it does what the name says - 'optimize'. So my goal was, and may still be, to overshoot with too much Roth conversion and to treat it as a known inefficiency to hedge against unknown inefficiency... Yes, I know that I am over thinking this at my age.

Please know that a lot of what you mention really hits home. Mom passed and Dad got the RMD headache. 'I' in IRA. His and her is important. Currently, my Rollover is tiny compared to hers. Hers was in an employer plan and unavailable for conversions until recently. Mine is also more aggressively invested and volatility makes for juicy conversion opportunities Rollover...

I am looking forward to digging into the charity stuff.

Kind Regards,
Chris

 

[newellcr]

Montecfo,

I've always seen the inherited IRA as a bill payer because it couldn't be converted and access wasn't age restricted or penalized. The inherited IRA gets the least volatile assets. It has paid some big bills and is about 20% larger than when I inherited it. It benefited amazingly from some really beaten up closed end, income funds purchased last summer. Depending on the real estate sales and how big the tax bill is, the inherited IRA may do some heavy lifting in the near term.

The LTC policies are interesting for us. We've had them for some time. MIL had memory issues and a long stay in assisted living and even longer problems with 'what's going on with your mom'. The trade off for LTC policies was early purchase with low premiums or later purchase with higher premiums or self insure... The early purchase was a great deal at less than $500/yr premiums each. It was such a great deal that we got class wide increase of more than 50% in 2017... We plan on purchasing the COLAs on the three year offering for the near term. Currently, the combined total premium is about $1800 yearly.

At the time the plan was to cover the average local cost of care with one anticipated pension and one SS, first. The LTC coverage amount was purchased to cover the rest. We had an idea that the FIRE would be nice, but no real concept of it being FAT.

I mentioned that MIL had issues before we knew what was going on. FIL sort of knew but didn't say anything. He had a miserable life experience once the memory problems started until they finally relented and placed her in a facility. It nearly killed him. This is no exaggeration, it took him years to get healthy again. I wish I had a more sensitive way of saying that entire paragraph...

Our LTC plans cover home care. I believe it is at full face value. I pay the bill annually and will check that detail next January. We traded off guaranteed premium for the no lifetime cap feature at the time of purchase. I mentioned above that maybe the nurses will come to us. We'll see what happens to the LTC classes as age. Currently, I think they are still a great value and could help ease that hard decision to get care. Having a little 'extra' Rollover might have good value...

Thank you for your thoughtful reply,
Chris