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08-18-2021, 07:36 PM
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#41
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Confused about dryer sheets
Join Date: Jul 2019
Posts: 9
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As a mid 30s HI earner, this thread has been unbelievable to follow. It’s really engaging me in tIRA vs Roth as my assets start to accumulate. These discussions will also help set some conversations with pops to guide some of his retirement management. Thanks!
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08-19-2021, 09:01 AM
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#42
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Recycles dryer sheets
Join Date: May 2006
Location: Vienna
Posts: 226
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I'm in the process of doing this now. A bit limited in that my spouse's very generous pension gets in the way of going over my target limit which is typically at or near the IRMAA level 2 surcharge level. Plus once my SS and both RMD's kick in we'll be close to 24% marginal land. Mostly try to pay the conversion tax from money outside the conversion. But even worst case "break even" using the converted funds will eventually show a long term benefit it keeps us below the higher IRMAA rates later on.
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08-20-2021, 07:50 AM
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#43
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,917
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Quote:
Originally Posted by madsquopper
I'm in the process of doing this now. A bit limited in that my spouse's very generous pension gets in the way of going over my target limit which is typically at or near the IRMAA level 2 surcharge level. Plus once my SS and both RMD's kick in we'll be close to 24% marginal land. Mostly try to pay the conversion tax from money outside the conversion. But even worst case "break even" using the converted funds will eventually show a long term benefit it keeps us below the higher IRMAA rates later on.
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Not yet close to the limits for this year, but went and checked the limits again - just to keep my withdrawal levels where I want them. I had forgotten how steeply the "surcharges" rise. Still, lots of folks would gladly pay those premiums for the decent HC insurance that is MC.
Once again, we have that "first world" problem of keeping within income limits to prevent higher HC costs - and other things. What a great problem to have compared to living in say, Afghanistan. I give thanks daily that most of my problems fall into such "manageable" things as AGI and MAGI levels!
For the youn'uns coming up now, let this be a lesson to you to manage your qualified accounts NOW and be certain you understand the consequences of having "too much" in qualified money. A word to the wise from someone who perhaps mismanaged the qualified accounts. As usual, YMMV.
__________________
Ko'olau's Law -
Anything which can be used can be misused. Anything which can be misused will be.
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08-20-2021, 04:08 PM
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#44
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Full time employment: Posting here.
Join Date: Feb 2018
Posts: 557
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Definitely draw that down, especially now when the tax brackets are low. Work with a fee-only Certified Financial Planner do develop a multi-year plan. You also need to factor in Medicare premium surcharges (IRMAA).
A pre-tax retirement account is the worst thing for someone to inherit because they must liquidate the account within 10 years and pay income taxes on the full amount. So, also ensure that if you plan to give to charities in your will that this money is taken from the pre-tax accounts. the rest of your heirs will thank you.
If you have not reached 59 1/2, you can draw the pre-tax account down by converting the funds to Roth. Also, if you are between 55 and 59 1/2 and you retire from your current employer, you can withdraw from that 401K using the "Rule of 55". And when you reach 59 1/2, a good strategy would be to then roll it into your pretax retirement account to not only simplify your estate but also possibly lower your fees.
But if you also have company stock in that 401K (or any prior 401Ks that you would roll over), you can remove the company stock completely as a NUA. The great advantage is that you only pay income tax on the cost basis. You do not pay taxes on the appreciated value until you sell - and at the capital gains rate. in addition, if you still hold that stock when you die, your heirs get it as a stepped up basis and no tax is due (but if rolled over to your pre-tax IRA, they would pay taxes on the full amount)
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08-20-2021, 05:35 PM
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#45
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Recycles dryer sheets
Join Date: Dec 2018
Posts: 176
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I had a friend who was advised to do Roth conversion.
He later regretted how much his Medicare premium increased.
Watch the amounts….lots of moving parts….
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Diversification applied to retirement accounts
08-20-2021, 05:42 PM
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#46
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Dryer sheet wannabe
Join Date: Sep 2010
Location: Weston Lakes
Posts: 11
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Diversification applied to retirement accounts
I firmly believe you will be better by diversifying your retirement into different tax categories. I myself have a ton in pre-tax and am doing Roth conversions right up to the point where taxes make me gag. But there is every reason to believe taxes will be higher in the future, so unless I'm going to die early I should bite the bullet, now.
To simplify: diversify.
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08-20-2021, 05:45 PM
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#47
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,228
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Quote:
Originally Posted by a60dan
I had a friend who was advised to do Roth conversion.
He later regretted how much his Medicare premium increased.
Watch the amounts….lots of moving parts….
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Did it prevent them from having Medicare increased (IRMAA) multiple years because of high RMDs?
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08-20-2021, 07:13 PM
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#48
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Administrator
Join Date: Apr 2006
Posts: 23,041
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I think the lesson for our younger members is to keep some money in after tax accounts. If I could do it all over again, I would only contribute to the 401k to: 1) get any match (I never had one) and 2) get us down to the next lower tax bracket, but not more. And I most certainly would not make non-deductible IRA contributions. What a tax preparation nightmare that is.
__________________
Living an analog life in the Digital Age.
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08-20-2021, 07:23 PM
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#49
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Recycles dryer sheets
Join Date: Jul 2008
Location: .
Posts: 398
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Quote:
Originally Posted by RunningBum
T
Unless there is something you have not disclosed about your situation, I would be converting up to top of the 24% tax bracket, or possibly to the top of one of the IRMAA tiers.
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This is what I did. I converted over three years and considered the IRMAA brackets. I wanted to complete the conversions before both my husband and my self were on Medicare. Paying the tax was painful but I happy it is done.
__________________
__________________________________________
"If things go wrong, don't go with them" -Roger Babson
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08-20-2021, 07:56 PM
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#50
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,228
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Quote:
Originally Posted by Doribe
T Paying the tax was painful...
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Not calling you out, especially since you understand and appreciate the benefit, but I find it funny how people feel so negatively about paying conversion taxes, which is really just a deferred liability. So many people are uber happy to pay off their mortgage, but hate paying off their deferred income taxes. They aren't that different. Both have to be paid off eventually, with the exception that you can avoid some or possibly all of the tIRA tax by giving it away to charity. Personally, I love seeing the tIRA shrink and my Roth grow after a conversion
Maybe my attitude is different because in my investment net worth spreadsheet I've always reduced my 401K/tIRA value by the taxes I estimate I'd have to pay. If I've estimated correctly, a Roth conversion has no impact on that investment net worth. I know some people do this, but it seems that many do not. But most people wouldn't consider their home value as part of their full net worth without reducing it by their mortgage balance.
I'm sure it helps that my taxable account holds the majority of my money, so paying conversion taxes don't come anywhere close to draining that account.
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08-20-2021, 11:03 PM
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#51
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Dryer sheet aficionado
Join Date: Mar 2012
Posts: 43
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Quote:
Originally Posted by RunningBum
There's nothing sketchy about doing a Roth conversion. The only reason you might get help is to try to come up with the right about to convert for best tax/wealth management. It's as simple as moving money from one account (your tIRA) to another (your Roth). I'd have both accounts with the same holding company to keep it that simple.
If you don't need the money, I would absolutely convert money to a Roth rather than just withdraw the money and keep it in taxable, for the simple reason that all growth in the Roth is tax-free.
Unless there is something you have not disclosed about your situation, I would be converting up to top of the 24% tax bracket, or possibly to the top of one of the IRMAA tiers.
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+1
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08-25-2021, 10:03 PM
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#52
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Confused about dryer sheets
Join Date: Jul 2019
Posts: 9
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Quote:
Originally Posted by Gumby
I think the lesson for our younger members is to keep some money in after tax accounts. If I could do it all over again, I would only contribute to the 401k to: 1) get any match (I never had one) and 2) get us down to the next lower tax bracket, but not more. And I most certainly would not make non-deductible IRA contributions. What a tax preparation nightmare that is.
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I was a bit foolish (in hindsight, brilliant) when I was fresh out of college as I just created a taxable account to fund all my investments, aside from 401k. I certainly missed out on 3-4 years of Roth contributions during those first few years being a young, dumb ‘finance’ major, but it’s funny coming back full circle now where my wife and I are almost phased out of any Roth contributions due to income limits.
My 401k has quickly accelerated to over 50% of my inv portfolio (less than 25% a year ago) due to some generous matching & profit sharing contributions, but I’m finding tax implications and reducing them in both current and future scenarios to be quite the arduous task. Roth 401k vs Trad401k? Contribute to a 457b or Backdoor Roth? Or just after tax investments, all have different outcomes on current and/or future tax liability. I suppose as I read in another thread that’s why it’s called ‘personal’ finance.
It’s probably worth a post to get some thoughts on structure, but again I just love the commentary on a thread like this as there is so much to learn and not one answer is correct, or at least different answers can be rationalized.
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08-26-2021, 12:23 AM
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#53
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Thinks s/he gets paid by the post
Join Date: Aug 2007
Posts: 2,873
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Quote:
Originally Posted by Gumby
I think the lesson for our younger members is to keep some money in after tax accounts. If I could do it all over again, I would only contribute to the 401k to: 1) get any match (I never had one) and 2) get us down to the next lower tax bracket, but not more. And I most certainly would not make non-deductible IRA contributions. What a tax preparation nightmare that is.
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Good advice.
I’m still contributing max to 401k to stay out of the next tax bracket. Same as your advice, but from a different perspective.
I’m hoping I can convert a majority - or all - of tax sheltered accounts before RMDs. This is an area I haven’t modeled yet. I have time, but should do this soon to make sure I won’t have any unexpected surprises in the future.
__________________
Eat, Drink and Be Merry.
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08-26-2021, 01:15 AM
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#54
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,917
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Quote:
Originally Posted by tulak
Good advice.
I’m still contributing max to 401k to stay out of the next tax bracket. Same as your advice, but from a different perspective.
I’m hoping I can convert a majority - or all - of tax sheltered accounts before RMDs. This is an area I haven’t modeled yet. I have time, but should do this soon to make sure I won’t have any unexpected surprises in the future.
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Yeah, I started too late. Still a bunch in the 401(k) and RMDs are out of my control. Convert early and often!
__________________
Ko'olau's Law -
Anything which can be used can be misused. Anything which can be misused will be.
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08-26-2021, 07:54 AM
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#55
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Administrator
Join Date: Jul 2005
Location: N. Yorkshire
Posts: 34,130
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I started Roth conversions for myself and my wife from the first year after retiring and one bit of advice I would give, that I may have missed in this particular thread is as follows. My wife and I each had non-deductible IRAs which, as Gumby points out above, are a pain to track the basis, so I what I did was not to rollover my zero-basis 401k into an IRA until I had done a Roth conversion of my IRA. Reason being that a Roth conversion takes into account all the non-deductible contributions from one's IRAs but 401ks are not included. My IRA had a lot more basis than taxable gain so in a single year I converted the lot and then had zero basis going forward.
__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Enough private pension and SS income to cover all needs
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08-26-2021, 12:09 PM
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#56
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Full time employment: Posting here.
Join Date: May 2017
Posts: 802
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Maybe I'm missing something, but I did some math and if your income need at 70 is more than the RMD there is no benefit to doing the early conversions unless the return on the IRA is super low (like 2% or less). Not stating this as fact, perhaps I did a calculation wrong, just throwing it out there for discussion.
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08-26-2021, 12:16 PM
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#57
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Thinks s/he gets paid by the post
Join Date: Jan 2020
Location: Milwaukee
Posts: 4,051
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Quote:
Originally Posted by brokrken
Maybe I'm missing something, but I did some math and if your income need at 70 is more than the RMD there is no benefit to doing the early conversions unless the return on the IRA is super low (like 2% or less). Not stating this as fact, perhaps I did a calculation wrong, just throwing it out there for discussion.
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I may be missing something in your calculation. I agree that the impetus for doing conversions is blunted if your withdrawal is greater than the RMD. However, it is still conceivable that your tax rate at that time would be greater than the tax rate on conversions now.
__________________
The closing years of life are like the end of a masquerade party, when the masks are dropped. -Arthur Schopenhauer, philosopher (1788-1860)
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08-26-2021, 12:20 PM
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#58
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2018
Location: Tampa
Posts: 11,299
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Quote:
Originally Posted by Out-to-Lunch
I may be missing something in your calculation. I agree that the impetus for doing conversions is blunted if you withdrawal is greater than the RMD. However, it is still conceivable that your tax rate at that time would be greater than the tax rate on conversions now.
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Agree that this aspect is also a piece of the decision making process.
__________________
TGIM
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08-26-2021, 12:22 PM
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#59
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Thinks s/he gets paid by the post
Join Date: Mar 2017
Posts: 1,659
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Quote:
Originally Posted by Gumby
I think the lesson for our younger members is to keep some money in after tax accounts.
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Agree with this one; in our first two years of retirement, lack of funds outside of retirement accounts has proven to be at least an annoyance.
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08-26-2021, 12:29 PM
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#60
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,228
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Quote:
Originally Posted by brokrken
Maybe I'm missing something, but I did some math and if your income need at 70 is more than the RMD there is no benefit to doing the early conversions unless the return on the IRA is super low (like 2% or less). Not stating this as fact, perhaps I did a calculation wrong, just throwing it out there for discussion.
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Might you be conflating income with spending? I don't ever have an "income need". I have a need for cash available to spend, which might come from a tIRA (which would be 100% income), or a taxable account (only the capital gains are income) or a Roth (0% income).
With that in mind, if you still think you are onto something, please show your math calculations.
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