Hello from Nebraska! Roth Conversions is my main interest!

[dc9husker]

I'm a 57 year old retired teacher and my wife is a 53 year old teacher and will retire in two years. We will both have teacher pensions of roughly $50,000. We have $650,000 in Roth IRAs, and about $850,000 in IRA/403b accounts. I feel like we should be converting the IRA/403b accounts to Roth IRAs over the next 10 years, but we have roughly $70,000 in our taxable accounts to pay for the taxes on the conversions. Any thoughts on best practices going forward??

Thanks!

 

[2017ish]

when do pensions start? Conversions are probably best done in low income years, like between your wife's retirement and the initiation of the pensions (if there is a gap).

Rule of thumb is to equalize tax rates over time--with an eye out for the years after one spouse (likely you) dies and the other faces RMDs for all IRAs and single tax rate.

(We aggressively convert, but are FAR more lopsided than you, and have no pensions. YMMV!)

 

[Out-to-Lunch]

I'm a 57 year old retired teacher and my wife is a 53 year old teacher and will retire in two years. We will both have teacher pensions of roughly $50,000. We have $650,000 in Roth IRAs, and about $850,000 in IRA/403b accounts. I feel like we should be converting the IRA/403b accounts to Roth IRAs over the next 10 years, but we have roughly $70,000 in our taxable accounts to pay for the taxes on the conversions. Any thoughts on best practices going forward??

Thanks!

Will you have two pensions of $50k each, or one?

A rule of thumb often espoused here is to figure out what your tax bracket would be once you are taking SS and subject to RMDs if you made no conversions. (You should probably also make that calculation assuming that one of you has died, and the survivor is filing single.) Then you could plan to convert up to the top of that bracket now.

Beyond that, I cannot tell you best practices, but I can tell you what we plan to do. We are in a somewhat comparable situation (but I have more in tIRA/403b, and less in Roth than you).

I plan to make fairly aggressive Roth conversions between now and 2025. Why 2025? I am assuming (for the time being) that the tax laws will not change, and so we will revert to higher rates in 2026, so I want to get my conversions done before then. ALSO, I am the same age as you. I will turn 63 in 2026; this is significant, due to the 2-year lookback for Medicare IRMAA rates. The upshot of that is you do not want income in 2026 that will put you into a high(er) IRMAA tier once you turn 65 (which is based on your income in the year you turn 63).

Another question to ask yourself is: How much (if any) money do I wish to leave unconverted in the tIRA/403b? I plan to leave ~$500k there for two possible purposes: large medical expenses (which are mostly offset in income by a tax deduction), and charitable contributions. In other words, there is no sense paying taxes to convert money that will later be used on tax-deductible expenses.

 

[Midpack]

Rule of thumb is to equalize tax rates over time--with an eye out for the years after one spouse (likely you) dies and the other faces RMDs for all IRAs and single tax rate.

A rule of thumb often espoused here is to figure out what your tax bracket would be once you are taking SS and subject to RMDs if you made no conversions. (You should probably also make that calculation assuming that one of you has died, and the survivor is filing single.) Then you could plan to convert up to the top of that bracket now.

After months of painstaking number crunching using Income Stategy software ($20/mo x 2 months for me) ***, that’s exactly what I proved to myself.

• I am in year 3 of 7 converting to the top the (TCJA) 22% marginal bracket, and expect to be in the (post TCJA) 15% marginal bracket thereafter (call it 23 years). The SECURE Act is helping further.
• Otherwise we were in the (TCJA) 12% bracket for about 7 years, and then in the 25% bracket (post TCJA) for 23 years - with no way out between Soc Sec, dividends, cap gains and huge RMDs (< the only thing I could change). Our income with RMDs would have been far more than we’ll likely need for spending - for 23 years!
• It will save us about $400K in lifetime taxes (mostly Fed but I did state too) assuming TCJA and then revert to 2017 brackets in 2025...
• ...Yes, I realize we can’t know that for sure - but IMO taxes can only become more confiscatory in the future, not less. You’ll have to decide what you believe yourself re: future tax rates, a pivotal factor. You have to assume something re: taxes.

There are some other considerations too e.g. heirs, surviving spouse, etc.

*** I’m not suggesting you read it all, definitely skip the first 4 pages, but here’s my Roth conversion journey https://www.early-retirement.org/forums/f28/retirement-tax-planning-income-optimization-99854.html

 

[sengsational]

There's a free calculator called i-orp that can give you some ideas of how you could approach the problem. You need to set aside a few hours to understand the inputs and options, and get those right. Look for the advanced link, and use that, rather than the default. One case where you don't tell it the truth is on the asset allocation by tax buckets; it asks you what %stock by taxable, tIRA, and Roth. If you rebalance across all tax buckets, make the stock % the same in all 3. This will let taxes drive the optimization, not expected rate of return. It will probably tell you to do way more conversions that you thought was wise, but like I said, it's one possible way to execute on the problem and you take it, along with lots of other things to find your comfort point.

 

[dc9husker]

Will you have two pensions of $50k each, or one?

A rule of thumb often espoused here is to figure out what your tax bracket would be once you are taking SS and subject to RMDs if you made no conversions. (You should probably also make that calculation assuming that one of you has died, and the survivor is filing single.) Then you could plan to convert up to the top of that bracket now.

Beyond that, I cannot tell you best practices, but I can tell you what we plan to do. We are in a somewhat comparable situation (but I have more in tIRA/403b, and less in Roth than you).

I plan to make fairly aggressive Roth conversions between now and 2025. Why 2025? I am assuming (for the time being) that the tax laws will not change, and so we will revert to higher rates in 2026, so I want to get my conversions done before then. ALSO, I am the same age as you. I will turn 63 in 2026; this is significant, due to the 2-year lookback for Medicare IRMAA rates. The upshot of that is you do not want income in 2026 that will put you into a high(er) IRMAA tier once you turn 65 (which is based on your income in the year you turn 63).

Another question to ask yourself is: How much (if any) money do I wish to leave unconverted in the tIRA/403b? I plan to leave ~$500k there for two possible purposes: large medical expenses (which are mostly offset in income by a tax deduction), and charitable contributions. In other words, there is no sense paying taxes to convert money that will later be used on tax-deductible expenses.

Thanks for the info! We will have 2 pensions of roughly $50,000 each (actually, I'm already receiving mine). I was aware of IRMAA but not the 2-year lookback, so thanks for that information...Also, you have a good point about there being a case made for leaving some in the tIRA/403b. My gut feeling is about $100,000 each the next 5 years, which would leave some in the 403b. It would probably take us into the 24% bracket, but that is still lower than the brackets will be in 2026.

 

[dc9husker]

when do pensions start? Conversions are probably best done in low income years, like between your wife's retirement and the initiation of the pensions (if there is a gap).

Rule of thumb is to equalize tax rates over time--with an eye out for the years after one spouse (likely you) dies and the other faces RMDs for all IRAs and single tax rate.

(We aggressively convert, but are FAR more lopsided than you, and have no pensions. YMMV!)

My pension has already started, and my wife's will start in December of 2022 when she retires. There won't be any significant gap of lower income. Just the years we have before SS and RMDs kick in.

 

[dc9husker]

After months of painstaking number crunching using Income Stategy software ($20/mo x 2 months for me) ***, that’s exactly what I proved to myself.

• I am in year 3 of 7 converting to the top the (TCJA) 22% marginal bracket, and expect to be in the (post TCJA) 15% marginal bracket thereafter (call it 23 years). The SECURE Act is helping further.
• Otherwise we were in the (TCJA) 12% bracket for about 7 years, and then in the 25% bracket (post TCJA) for 23 years - with no way out between Soc Sec, dividends, cap gains and huge RMDs (< the only thing I could change). Our income with RMDs would have been far more than we’ll likely need for spending - for 23 years!
• It will save us about $400K in lifetime taxes (mostly Fed but I did state too) assuming TCJA and then revert to 2017 brackets in 2025...
• ...Yes, I realize we can’t know that for sure - but IMO taxes can only become more confiscatory in the future, not less. You’ll have to decide what you believe yourself re: future tax rates, a pivotal factor. You have to assume something re: taxes.

There are some other considerations too e.g. heirs, surviving spouse, etc.

*** I’m not suggesting you read it all, definitely skip the first 4 pages, but here’s my Roth conversion journey https://www.early-retirement.org/forums/f28/retirement-tax-planning-income-optimization-99854.html

Thanks for the link! I'm part way through reading your Roth Conversion journey, very informative. It looks like you went with the less aggressive conversion strategy? Filling up the 22% vs the 24% bracket? And would you recommend the Income Strategy software?

Never mind, after reading the rest of the thread, I found the answers to my questions!! Thanks again.

 

[nobody]

Lived in Kearney, while I was going to KSC/UNK, before I transferred to UNL to finish my degree. Always nice to see another Husker on here.

 

[dc9husker]

Lived in Kearney, while I was going to KSC/UNK, before I transferred to UNL to finish my degree. Always nice to see another Husker on here.

Go Big Red!