Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 08-26-2021, 12:29 PM   #61
Full time employment: Posting here.
 
Join Date: May 2017
Posts: 772
My assumptions:
$2.2M Traditional, $100K Roth to start. I started converting as soon as I FIRE. I'll be 48, but wife will be 53, so I used 53 as the starting age. From 53-60, I have no income except for the conversions up to 22%, as I will be living off of taxable accounts. At 60, I start taking my income either from the ROTH or the Traditional. I ran both scenarios to compare. It seems at a 3%+ real return, all I'm doing is trading taxes for market gains. At 2% there is a benefit, which starts at age 72. I also have assumed tax rates do not change. And again, my income needs exceed the RMD. For instance, in the "do not convert" scenario with 4% average return at age 70, after withdrawals the value of the Traditional would be $2.032M. So, the RMD would be $2.032/27.4 or about $74K. I assume I need $125K income, net of taxes. So, if it's coming out of tIRA I have to withdraw roughly $150k.
brokrken is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-26-2021, 12:43 PM   #62
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
OK, I think I see what you are saying, though I haven't tried putting this in a spreadsheet to decide how market return rate affects this decision.

How does SS factor into this? My income will unavoidably increase at 70 or whatever age I start SS. So I'm doing conversions while my income is lower without SS. Once I start SS I think I run into your situation where there's probably no benefits to converting. Many people talk of converting between ER and when RMDs start, but really I think it is between ER and when SS & perhaps any pension starts.
RunningBum is offline   Reply With Quote
Old 08-26-2021, 01:08 PM   #63
Full time employment: Posting here.
 
Join Date: May 2017
Posts: 772
If I wait until 70 to start SS the estimate at that time is around $75K, so to meet my income needs of $150k I'd need another $75K, which is about equal to the RMD. I did this high level just to get an idea of how it would go. Looks like the next step is for me to split the IRAs into hers and mine to see how that impact the calculations. Again, if anyone sees a fatal flaw, please let me know.
brokrken is offline   Reply With Quote
Old 08-26-2021, 01:54 PM   #64
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 32,240
What is your assumed tax rate in retirement?

If you cash need exceeds your RMD why wouldn't you use tax-free Roth withdrawals for the excess rather than additional high tax cost tIRA withdwawals?
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 08-26-2021, 03:10 PM   #65
Full time employment: Posting here.
 
Join Date: May 2017
Posts: 772
Quote:
Originally Posted by pb4uski View Post
What is your assumed tax rate in retirement?

If you cash need exceeds your RMD why wouldn't you use tax-free Roth withdrawals for the excess rather than additional high tax cost tIRA withdwawals?
Sorry, I thought I mentioned, 22% and that's based on the amount I would need to pull out of the tIRA.

For your second question, I only start with $100k in Roth. In the convert case, I do take out of Roth first and there is very little left in the tIRA after all those years of converting when I'm 70 (only $229k) so the RMDs are miniscule. In the do not convert case, I also do, but the ROTH it's gone after the 1st year.
brokrken is offline   Reply With Quote
Old 08-31-2021, 11:41 AM   #66
Dryer sheet aficionado
 
Join Date: Aug 2013
Posts: 29
Quote:
Originally Posted by pb4uski View Post
If that $3.3m tIRA today when you are 65 grows at 4% real, then it would be worth $4.3m in today's dollars. [$3.3m*(1+4%)^72-65)] I use today's dollars because tax brackets are adjusted for inflation.

The RMD factor at age 72 is 25.6 so your RMD would be $168k... bringing your total income to $268k. If all is ordinary income the RMD would increase your federal income tax from ~$8k to ~$46k.... 23% of the RMD. MFJ both over 65.

Plus, tax rates are scheduled to increase in 2026 unless Congress intervenes which is unlikely and if one of you dies then the surviving spouse would likely be in an even higher income tax bracket.

I would take a hard look at doing Roth conversions to the top of the 22% or even 24% tax bracket. YMMV.

One point of confusion though... at one point you state that your income stream is $100k a year and at the end you say your gross income is $120k a year... can you elaborate on that?
Our numbers are almost the same as this OP, except weíre 66 this year. Thank you for this recommendation. While itís hard to swallow the amount of taxes we need to pay (from the t-IRAs since we donít have other source), this makes the most sense to us.
ERPRECY is offline   Reply With Quote
Old 08-31-2021, 02:55 PM   #67
Recycles dryer sheets
 
Join Date: May 2010
Posts: 62
What an insightful thread and comments!
Given RMD start age seems to be going up each decade, I wonder how that would play into calculations. E.g. 72 --> 75?

Bottom line seems, its an absolute no Brainer to let any Roth conversion opportunity at or under 12% to be missed *any* year its possible.
patela6 is offline   Reply With Quote
Old 08-31-2021, 03:29 PM   #68
Recycles dryer sheets
 
Join Date: Oct 2013
Location: Chicago
Posts: 199
Quote:
Originally Posted by brokrken View Post
My assumptions:
$2.2M Traditional, $100K Roth to start. I started converting as soon as I FIRE. I'll be 48, but wife will be 53, so I used 53 as the starting age. From 53-60, I have no income except for the conversions up to 22%, as I will be living off of taxable accounts. At 60, I start taking my income either from the ROTH or the Traditional. I ran both scenarios to compare. It seems at a 3%+ real return, all I'm doing is trading taxes for market gains. At 2% there is a benefit, which starts at age 72. I also have assumed tax rates do not change. And again, my income needs exceed the RMD. For instance, in the "do not convert" scenario with 4% average return at age 70, after withdrawals the value of the Traditional would be $2.032M. So, the RMD would be $2.032/27.4 or about $74K. I assume I need $125K income, net of taxes. So, if it's coming out of tIRA I have to withdraw roughly $150k.
I find your post quite insightful. Especially the bolded line. Well said. I'll use that!
Also, "income needs" is the best approach to take as you are doing.

Irony is that careful chiseling as with the Roth conversion over a decade or longer only works with very mediocre returns. Our situation has mirrored yours, I was 52 (now 62) when I started thinking about all of this, RMD, Roth, after-tax savings etc. I did convert opportunisticaly in 2010. Ten years into it, my conclusion is similar to yours. I don't intend on converting to Roth anymore, except if the market tanks 10+%, I may do some again.
free2020 is offline   Reply With Quote
Old 08-31-2021, 03:53 PM   #69
Dryer sheet wannabe
 
Join Date: Sep 2010
Location: Weston Lakes
Posts: 11
Please let me ask an elementary question: What does it mean when it "works"? Seriously I am getting confused by this and wanted to re-focus on the goal... Maybe we aren't all on the same page.

Thank you.
Curmudgeon44 is offline   Reply With Quote
Old 08-31-2021, 04:07 PM   #70
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 6,768
Quote:
Originally Posted by Curmudgeon44 View Post
Please let me ask an elementary question: What does it mean when it "works"? Seriously I am getting confused by this and wanted to re-focus on the goal... Maybe we aren't all on the same page.

Thank you.
In context, I think @free2020 is saying that you can only reduce the size of your traditional IRA if the conversions you're doing by taking money out exceeds the growth inside the traditional IRA on average over time.

Some people have "runaway" traditional IRAs, where they're converting $50K a year to a Roth and the traditional IRA grows by $100K, then you're not gaining ground on the goal of reducing the size of the traditional IRA.

The reason some people try to reduce the size of their traditional IRAs is that with RMDs and SS, one can face very high tax rates. Better to convert some now and pay 22% of the conversion to the IRS, then take out the money as an RMD later and pay 35% of the conversion to the IRS.

(Of course, I'm not @free2020 and they're certainly more than welcome to correct me if I've misconstrued or misrepresented.)
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 08-31-2021, 04:17 PM   #71
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Location: St. Charles
Posts: 3,312
Quote:
Originally Posted by Curmudgeon44 View Post
Please let me ask an elementary question: What does it mean when it "works"? Seriously I am getting confused by this and wanted to re-focus on the goal... Maybe we aren't all on the same page.

Thank you.
I am by no means an expert on this, but I have been doing Roth conversions.

IT works when:

- you can convert at a tax rate much lower than you will pay when SS and RMD's kick in. In our case, we will be solidly in the current 22% bracket. So converting to the top of the 12% bracket is a no brainer. Last year we converted into the 22% bracket, but the effective tax rate on the conversion was about 16%. Still a benefit.

- when your conversions, even if they are the same as your future tax rate, lower your RMD's to keep you out of IRMAA, or at a lower bracket.

- when your conversions help the remaining spouse stay in a lower bracket upon the death of one.

The first one above is fairly easy to quantify. The other 2 are, at least in our case, hoped for benefits. While some folks have spreadsheets to calculate these, IMHO, there are too many moving parts for any kind of accuracy. I just look at them as potential upside.
__________________
If your not living on the edge, you're taking up too much space.
Never slow down, never grow old!
CardsFan is offline   Reply With Quote
A Working Plan
Old 08-31-2021, 04:36 PM   #72
Dryer sheet wannabe
 
Join Date: Sep 2010
Location: Weston Lakes
Posts: 11
A Working Plan

Thank you that is something I can get my mind around. Our family situation is one of those "runaway" pre-tax accounts, though I would have worded it "we deferred certainly enough, possibly too much". First world problems hahaha.

We were concerned about having enough for retirement, and the pre-tax 401K was just sitting there with an immediate tax benefit... in hindsight I would urge a young person to diversify between pre-tax and after-tax accounts, on the general principle you never know what the future will bring.

I have a definition of the plan "working" that perhaps is idiosyncratic. From my point of view, a Roth Conversion Plan "works" if it can get me to RMD age with a pre-tax balance amount which does not jump me up into an unfamiliar tax bracket. That's the best I can hope for.

Good luck with whatever works for you.
Curmudgeon44 is offline   Reply With Quote
Old 08-31-2021, 04:39 PM   #73
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
Quote:
Originally Posted by Curmudgeon44 View Post
Please let me ask an elementary question: What does it mean when it "works"? Seriously I am getting confused by this and wanted to re-focus on the goal... Maybe we aren't all on the same page.
It's a good question. Ultimately, it comes down to how to make the most money available to you (and possibly your heirs or charities) in the end. You have to realize that your tIRA is not money available to you until you pay your taxes, except to make QCD donations. If you die with a balance, your heirs will be paying the taxes before they can use the money.

There's almost no way to know for certain that a Roth conversion will "work", so you make your best estimations and projections.

When does it work?
  • When you can pay lower taxes now than you expect to be paying when you are forced to take RMDs. Most of us have this opportunity if we retired and have years without that income and before SS starts.
  • When you project taxes will be even, but you can pay the taxes out of a taxable income source outside of the IRA.
  • If one spouse dies and would leave the other with a large RMD and filing at the higher Single tax rate.
  • If you find later that you need a large sum for a special expense, you can take it out of your Roth. If it came out of your tIRA would could be putting yourself in an even higher tax bracket for that year.
When does it not work? Meaning you should not convert at this point.

  • When you are paying higher taxes now than you expect in retirement. This is common if you are still working or have some other income coming in now but not later. Or perhaps you plan to move to a lower or no tax state and this will give you a lower overall tax rate later. Or if your heirs are in a lower tax bracket and you want to optimize for them. But remember you have to pay taxes on RMDs and if you live a long time you'll be paying most of the taxes. Also they have to withdraw the entire amount within 10 years so their tax situation might not work out as well as you'd think.
  • When you lose money. It would've been better to defer the conversion so you could convert a lower balance after losses. Of course you don't know you will lose money, and if you did, why wouldn't you invest in something else? It's also unlikely you will lose money in the long run.
  • When it's money you plan to donate. Instead of converting, hold that money out for QCDs or make the charity a definition. Neither you nor the charity pays taxes.
  • If you are under 59 1/2 and do not have enough money to pay the conversion tax from a taxable account. If you pay the tax out of the converted money, it is treated as an early withdrawal so you are penalized, 10% if I recall correctly.
I probably missed another factor or two.


Don't be misled by talk of a breakeven point. Someone is going to be paying the taxes. Always keep in mind that you can't touch that tax deferred money until you pay the taxes! People tend to focus on the sting of paying taxes now, but don't seem to grasp that the money isn't available until they pay the tax.
RunningBum is offline   Reply With Quote
Old 08-31-2021, 04:43 PM   #74
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
Quote:
Originally Posted by SecondCor521 View Post
Some people have "runaway" traditional IRAs, where they're converting $50K a year to a Roth and the traditional IRA grows by $100K, then you're not gaining ground on the goal of reducing the size of the traditional IRA.
I've read posts from people that get discouraged by this, but isn't it obvious that if you are not converting at all, your tIRA would be growing even more?
RunningBum is offline   Reply With Quote
Old 08-31-2021, 04:44 PM   #75
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Location: St. Charles
Posts: 3,312
^^ This.

RunningBum said it clearer than I, with more detail.

Edit to add: actually the one above.
__________________
If your not living on the edge, you're taking up too much space.
Never slow down, never grow old!
CardsFan is offline   Reply With Quote
Old 08-31-2021, 05:31 PM   #76
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 6,768
Quote:
Originally Posted by RunningBum View Post
I've read posts from people that get discouraged by this, but isn't it obvious that if you are not converting at all, your tIRA would be growing even more?
It is obvious to you and me.

I was just trying to explain the notion of what I thought @free2020 meant, which is what another poster was asking about, which is trying to reduce the size of the traditional IRA through conversions.

I've been Roth converting since age 46 and will probably convert every year for the rest of my life. Even so, my traditional IRA will probably continue to outgrow my conversions according to my projections and plan. Given the market returns over the last five years plus my conservative financial approach, plus a few other things, I probably - in retrospect - saved too much and deferred too much. First world problems of course.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 08-31-2021, 05:38 PM   #77
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 9,797
Quote:
Originally Posted by patela6 View Post
What an insightful thread and comments!
Given RMD start age seems to be going up each decade, I wonder how that would play into calculations. E.g. 72 --> 75?

Bottom line seems, its an absolute no Brainer to let any Roth conversion opportunity at or under 12% to be missed *any* year its possible.
That is where my DGF is at right now. None for me coz of heavy ACA tax subsidies.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 08-31-2021, 05:44 PM   #78
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jan 2018
Location: Tampa
Posts: 9,797
Quote:
Originally Posted by RunningBum View Post
It's a good question. Ultimately, it comes down to how to make the most money available to you (and possibly your heirs or charities) in the end. You have to realize that your tIRA is not money available to you until you pay your taxes, except to make QCD donations. If you die with a balance, your heirs will be paying the taxes before they can use the money.

There's almost no way to know for certain that a Roth conversion will "work", so you make your best estimations and projections.

When does it work?
  • When you can pay lower taxes now than you expect to be paying when you are forced to take RMDs. Most of us have this opportunity if we retired and have years without that income and before SS starts.
  • When you project taxes will be even, but you can pay the taxes out of a taxable income source outside of the IRA.
  • If one spouse dies and would leave the other with a large RMD and filing at the higher Single tax rate.
  • If you find later that you need a large sum for a special expense, you can take it out of your Roth. If it came out of your tIRA would could be putting yourself in an even higher tax bracket for that year.
When does it not work? Meaning you should not convert at this point.

  • When you are paying higher taxes now than you expect in retirement. This is common if you are still working or have some other income coming in now but not later. Or perhaps you plan to move to a lower or no tax state and this will give you a lower overall tax rate later. Or if your heirs are in a lower tax bracket and you want to optimize for them. But remember you have to pay taxes on RMDs and if you live a long time you'll be paying most of the taxes. Also they have to withdraw the entire amount within 10 years so their tax situation might not work out as well as you'd think.
  • When you lose money. It would've been better to defer the conversion so you could convert a lower balance after losses. Of course you don't know you will lose money, and if you did, why wouldn't you invest in something else? It's also unlikely you will lose money in the long run.
  • When it's money you plan to donate. Instead of converting, hold that money out for QCDs or make the charity a definition. Neither you nor the charity pays taxes.
  • If you are under 59 1/2 and do not have enough money to pay the conversion tax from a taxable account. If you pay the tax out of the converted money, it is treated as an early withdrawal so you are penalized, 10% if I recall correctly.
I probably missed another factor or two.


Don't be misled by talk of a breakeven point. Someone is going to be paying the taxes. Always keep in mind that you can't touch that tax deferred money until you pay the taxes! People tend to focus on the sting of paying taxes now, but don't seem to grasp that the money isn't available until they pay the tax.
2 other factors when not to convert could be:
1) The ACA tax subsidies generated by limiting one's MAGI can be larger than any Roth conversion benefit.
2) If one wishes to keep some monies in a TIRA to use against potential large unreimbursed long term care type medical expenses.
__________________
TGIM
Dtail is offline   Reply With Quote
Old 08-31-2021, 06:42 PM   #79
Thinks s/he gets paid by the post
 
Join Date: Feb 2007
Posts: 3,401
I love the term "runaway" traditional IRA. I have a small one of these. It just keeps growing. I haven't done any conversions yet because in 2020 we had a few months of ACA subsidies before we started Medicare. 2021 will be the first year where I will convert to Roth and I will take 2-3 years depending on the tax impact. My goal is to leave this to my kids and have it all in Roth so they have no taxes on it.

The impact on ACA subsidies would have been larger than our Fed tax rate. We are solidly in the 12% bracket and nowhere near IRMAA.

I also have an Inherited IRA. That cannot be converted to Roth, unfortunately. I do the RMDs and the growth is more every year. Nice problem to have! This one is old enough where it's stretched out over my lifetime so the RMDS are small.
__________________
Married, both 67. DH retired June, 2010. I have a pleasant little part time job.
Sue J is offline   Reply With Quote
Old 08-31-2021, 06:46 PM   #80
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 19,487
I think a factor that few incorporate in their calculations is the tax arbitrage that has already occurred. For example, most of the money I put in my 401k was put there when my marginal tax rate was 35% or more. Some years, it was 39%. So for every $1000 I contributed, I saved $350 in taxes. So now, many years later, I take out my $1000 contribution. If I am now in the 22% marginal bracket, I pay $220 in taxes. That's $130 in free money right there, not even counting the compounded gains on the extra $350 that was in my after tax account that whole time.
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Inherited IRA and turbo tax question on RMDs DFW_M5 FIRE and Money 12 02-08-2016 07:26 AM
IRA RMDs bobbee25 FIRE and Money 16 11-21-2014 04:19 PM
SPIA within an IRA and RMDs Richard4444 FIRE and Money 11 04-03-2014 04:51 AM
Roth IRA RMDs, what! veremchuka FIRE and Money 11 11-24-2013 07:17 AM
The Education Bubble starting to deflate? dex Other topics 2 09-05-2010 03:51 PM

» Quick Links

 
All times are GMT -6. The time now is 02:44 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2022, vBulletin Solutions, Inc.