Tax bucket Allocation At 35

[KRABE]

Hello again,

We have been aggressively doing Roth conversions with all of our retirement funds the last several years due to losses in our business (due to growth/investment/debt etc.) and we now sit without about 500k in Roth Funds, little to nothing in Traditional (qualified) retirement funds, and 550k in brokerage, and 300 acres of leveraged farm land, that will pay reasonable cash rent when we get the loans paid off at the time of retirement.

We are on the verge of a large income spike going forward and considering converting the rest this year before 2024 income increases significantly.

Is there a downfall to being this heavily allocated into Roth this early?

If income is going to put us into the top 2 brackets or so for the rest of our working years (hopefully without any derailments) and a considerable amount of rental income coming in retirement years are we wrong to try to trim some of that tax burden by using qualified deferrals for the remainder of our working years or should we still be trying to do roth conversions when available/ just putting the money into a brokerage fund vs Qualified (401k/Traditional IRA/SEP-IRA/Simple IRA)

What is the group consensus on how much should be in each bucket as a percentage of a whole?

 

[pb4uski]

No downfall to being highly concentrated in Roth. In fact, IMO the opposite, it is a huge benefit. Money in Roth grows tax-free.

And definitely use tax-deferred retirement contributions to the fullest extent possible when you are in a higher tax bracket than you expect to be in retirement.

 

[NgineER]

What is the group consensus on how much should be in each bucket as a percentage of a whole

I don't think there is a consensus in the group. Ideally you only have Roth, but then you've paid the taxes up front, so not the most efficient from a holistic point of view.

Your strategy of doing aggressive conversions while you have business losses look great. We did Roth conversions while in grad school as well as during low earning years. Now with higher incomes we do mainly traditional 401(k), but also non-deductible IRA contributions that are rolled over to Roth accounts. At this point we are 43/41/16 Roth/traditional/brokerage and despite much larger contributions in the traditional accounts (3x more) than Roth accounts, we will never catch up in the traditional accounts. You have to love the magic of compounding...

 

[jebmke]

No downfall to being highly concentrated in Roth. In fact, IMO the opposite, it is a huge benefit. Money in Roth grows tax-free.

And definitely use tax-deferred retirement contributions to the fullest extent possible when you are in a higher tax bracket than you expect to be in retirement.

Generally, not. But, as always, exceptions can occur. Once I reached the realization that all of our IRAs would go to charity I stopped Roth conversion entirely.

 

[Montecfo]

The goal is to minimize taxes. No way to know if you are doing so with so many years to go.

But approach seems reasonable.

In a perfect world it is good to have some balance between Roth, tax deferred and taxable. This allows you to manage taxes in drawdown and to have low cost funds to tap (taxable) in FIRE.

 

[latexman]

Is someone going to inherit your estate at the end of the day?

 

[38Chevy454]

I agree that it is generally a good thing to have a large tax-free growth for several decades. Wish I would have had more Roth and less pretax in my retirement savings. That RMD tax torpedo thing could throw a wrench in the works. But as stated, it is unknown on ultimate tax rates and therefore the comparison of taxes paid now vs later.

 

[pjigar]

What is the group consensus on how much should be in each bucket as a percentage of a whole?

As much as you can put at a "lower" tax rate. There is no ceiling to Roth balance so it is the best vehicle to hold tax-free money forever. How you define "lower" rate is a tricky question. I assume that the tax laws will remain the same in the future (unlikely but unknown) and I simply try to project my RMD income and see where I would fall when I reach RMD. If my future tax rate at RMD is projected to be higher than the current one then I contribute/convert to Roth IRA/401K bucket.

I have built a google spreadsheet a while back to model my projected RMD income.

 

[KRABE]

Is someone going to inherit your estate at the end of the day?

Yes, hopefully setup with generational skipping trusts to pass down as far as we can. My kids will inherit from my parents. We have/will be charitable during our lives.

 

[RunningBum]

In a perfect world I'd have everything in Roth, with enough in taxable to get me to 59.5. But there's a cost to that perfection, the tax on contributions and conversions. There's no target ratio of Roth:tIRA:taxable like there is stocks:bonds:cash. "Tax diversification" should not be a thing.

The ideal is to leave enough money (not % of total) in your tIRA for QCDs (if you plan to use them) and LTC (if you want to fund that possibility in a way that's probably most tax efficient, if it happens). Get the rest out of the tIRA if you can do so in a tax efficient way, paying lower taxes than you expect to pay when RMDs come, and if you can't get it all, try to get it down to at least where you'd be paying the same marginal tax rate (including IRMAA, NIIT, ACA subsidies and other such fees or tax breaks based on income). That's a general rule, and there may be other exceptions such as leaving money in a tIRA for heirs expected to be in a lower tax bracket.

OP has the right idea. Roth contributions and conversions in years of low/negative income due to their business. tIRA contributions in higher income years. Look at the possibility of more conversions if income drops again, especially if after retirement, before starting SS.

 

[teej1985]

You should keep enough in qualified accounts to use up the standard deduction at a minimum, I would think, unless you're getting a ton of taxable dividends.

 

[KRABE]

You should keep enough in qualified accounts to use up the standard deduction at a minimum, I would think, unless you're getting a ton of taxable dividends.

I should have at least 60-75 of rental income at retirement that I will have to deal with.

If we work for 15 more years and she contribute 64k a year and I 25 ish plus a year into qualified I am concerned about rmd issues and maybe would be easier to convert some every year in addition to back door roth conversions.