Spend Down Question

[rrs26ja]

I retired last July (2018). In Oct I turned 62 and decided to take social security, my wife turned 62 in Dec and she took social security as well. I worked for a major corporation and get a monthly pension. We have lived comfortable for the past year on my pension, social security and some savings. I have not touched my 401k yet.



My question is what people are doing with their 401k? Should I leave it alone or start to take money out and put the money into a Roth IRA before RMD starts?


What are some strategies people are using? The tax rate is very low and I can see it going up. Like everyone else, I would like to save as much in taxes as possible.


Thanks

 

[RunningBum]

The tax rate is very low and I can see it going up.

If that's the case, and it's logical that it would be, I'd be converting some to Roth now now. Since it sounds like you're already getting your pension and SS and the only extra would be the RMDs, maybe take a more or less equivalent amount of what your first RMD will be, perhaps stopping short of the top of a tax bracket.

 

[N02L84ER]

In order to advise you in your situation, I would need to know what % of your SS is currently taxable and what your marginal tax bracket is. If less than 85% of your combined SS is taxable, converting any IRA money will result in the "tax torpedo". If you are already at the 85% taxable level, I would calculate the expected RMD amount at age 70.5 and probably do tax smoothing by converting that amount from now until you are forced to put it in a taxable account. OTOH, if you are planning to donate it to a qualified charity, I would not do the conversions.
In our case, we have no pensions, we are not collecting SS, we are in the 15% tax bracket, and we are converting approximately $22K per year to Roth IRAs.

 

[RunningBum]

Good point. It may be that you don't want to add 8 or 9 more years of the tax torpedo. You could do a sample tax return with various levels of conversion (including 0) to see the impact (rate) of the conversion itself.