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Age 65/$3.3M IRA - Deflate it before RMDs?
Old 08-15-2021, 10:24 AM   #1
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Age 65/$3.3M IRA - Deflate it before RMDs?

I'm 65 and almost all my liquid assets - $3.3M - are behind an IRA. I understand that not paying taxes on it eliminates the tax drag on compounding interest, but I'm getting scared about RMDs in six/seven years.

I'm guesstimating (in today's dollars) that at 72 the Feds will assume I'll have ~20 years life remaining, so my RMDs would equal $3.3M/20 years = $165,000/year. On top of that we have an income stream (pensions etc.) of ~$100,00/year so our total gross income would be ~$265,000. And four years later my wife will face RMDs of ~$20,000/year.

Right now the MFJ marginal tax rates are:
22% >$81,050
24% >$172,750
32% >$329,850
but who knows what they'll be in seven years? I don't mind going from 22% to 24% but 32% would be painful.

Given these rough parameters is my IRA's current lack of a tax drag worth being forced to declare so much more income in seven years? Do people think about this and purposely draw down their IRAs early to avoid the shock? Our gross income right now is about $120k/year.

Thank you for any insights/advice
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Old 08-15-2021, 10:36 AM   #2
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I do. I've hit it every year since I turned 60 like it was my first RMD.
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Old 08-15-2021, 10:40 AM   #3
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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?
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Old 08-15-2021, 11:01 AM   #4
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My wife works part time and I do withdraw ~10-20k a year as needed for home improvement etc. The $100k is strictly pensions/SS/trust.

I don't work; is the Roth conversion sketchy like a backdoor Roth? Can I easily do it without a lawyer/financial advisor?
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Old 08-15-2021, 11:13 AM   #5
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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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Old 08-15-2021, 11:28 AM   #6
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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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Old 08-15-2021, 11:51 AM   #7
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+1 nothing sketchy.... very common. In fact, with most brokerage firms you can do it all online in 5 minutes.
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Old 08-15-2021, 11:56 AM   #8
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First, you need to think about your goals - For instance, if your life goal is to give to charity, you can do QCDs up to $100,000/yr from your IRA that can count as part of your RMD without incurring taxes on the gifted portion and if you leave your IRA to charity in your estate, it is not taxed. Obviously Roth conversions are not so attractive in that case.

If you want to maximize the money passed to your heirs, then to complete your model, you have to think about their situation. They have 10 years to liquidate IRAs, so if they are high earners, your bequest may land on their high earning years and maybe taxed at an even higher rate than you. Or if they are in lower paid jobs than you, then maybe passing an IRA to them will lower your lifetime tax rate vs. pushing real hard to do Roth conversions.

You also need to think about the fact that you are older than your wife, so she may have several years at single tax rates and as others have pointed out, the stash may grow before RMDs.

You need to model the situation, my intuition is you should be targeting to get to the top of the 24% bracket for the next few years. Also, as you build up a Roth, put only stocks in the Roth and maintain your asset allocation by adding bonds to your IRA, that will also help slow the growth of your IRA.

A run through of some modeling options -

I recommend starting with i-orp.com (scroll down to Extended Input), its tax model has some gaps (last I checked it used the current year income instead of 2 years prior for IRMAA, no AMT, no NIIT, no deduction phaseout), but it gives a whole life plan from some simple inputs. You would then run various cases using the Partial Roth Conversion inputs. The program designed to tell you how much you can spend each year and end up at zero left at end of life. If you want to leave an estate, you enter your desired amount as Plan Surplus. When you do Roth conversion studies, you need to tell the program to use the same asset allocation in all your accounts or it will inherently mix the effects of doing a Roth conversion with the benefits of holding more of your bonds in tax deferred to slow its growth.

If you are spreadsheet savvy, you can use the Bogleheads.org Retiree Portfolio Model that is free at their wiki. It is more flexible in year by year entries, but everything is manual, so you would have work out your own plan. Personally, I find the input layout a little confusing and it still has some tax gaps like AMT (that can bite singles pretty easily), existing capital gains, HSAs, non-deductible contributions to t-IRAs. The new beta has a unique cool feature that allows you to see what happens if you put your bonds in your traditional IRA and your stocks in taxable and Roth - in general you don't need to convert as much to Roths when you do that.

Of the programs I've used, Pralana Gold ($99 1st year, $49 renewal, requires Excel, no substitutes) has the best tax model and flexibility, comes with a good manual with screenshots. There is a free Bronze version that doesn't do too much but lets you get a feel for the layout and usage of the paid program. It includes tax nuances that you may be facing, particularly after one of you passes - things like NIIT, AMT, deduction phaseouts. The program is not as automated as i-orp, but much more automated than RPM. The program reports both the net worth and "effective $", where "effective $" has applied your lifetime average marginal tax bracket to the t-IRA left in the estate to approximate what your heirs have left.

In general in Pralana Gold, you would do Roth conversion studies similar to i-orp, where you keep the asset allocation in each account the same. If you love numbers and really want to fiddle with it, you can use the four asset allocation changes allowed during your lifespan to manually play with asset allocations in various accounts to approximate the stocks in Roth, bonds in t-IRA approach, but that is tedious.
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Old 08-15-2021, 12:02 PM   #9
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Quote:
Originally Posted by bob boag View Post
I'm 65 and almost all my liquid assets - $3.3M - are behind an IRA. I understand that not paying taxes on it eliminates the tax drag on compounding interest, but I'm getting scared about RMDs in six/seven years.

I'm guesstimating (in today's dollars) that at 72 the Feds will assume I'll have ~20 years life remaining, so my RMDs would equal $3.3M/20 years = $165,000/year. On top of that we have an income stream (pensions etc.) of ~$100,00/year so our total gross income would be ~$265,000. And four years later my wife will face RMDs of ~$20,000/year.

Right now the MFJ marginal tax rates are:
22% >$81,050
24% >$172,750
32% >$329,850
but who knows what they'll be in seven years? I don't mind going from 22% to 24% but 32% would be painful.

Given these rough parameters is my IRA's current lack of a tax drag worth being forced to declare so much more income in seven years? Do people think about this and purposely draw down their IRAs early to avoid the shock? Our gross income right now is about $120k/year.

Thank you for any insights/advice
It's not I who is providing the insight, but rather you to me. I am currently mid-40's, in accumulation mode, and I am already thinking about RMDs. Your post only crystalizes my need for Roth Conversions. I am currently about 33/66 Roth to tIRA, and 25 more years of growth will put me into a very large #. I'm keen to keep my grubby hands on as much as possible.

To address the concern about the process.. I have both my tIRA and Roth with FIDO. I have performed conversions in the past, and it's a straightforward process. Once I decide the amount of conversion (the more difficult part), the actual conversion is simple. I can do it all online with just a few clicks, I request them to NOT withhold tax, and Bob's your uncle.

Your conversion will be taxed as ordinary income for the year in which you perform the conversion.
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Old 08-15-2021, 02:23 PM   #10
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We are 62/60 and our pension/SS income alone puts us at the bottom of the 22% bracket. We are Roth converting to the top of the 22% bracket every year until forced to take RMDs. I've modeled it out in a spreadsheet of my own devising and found that the difference in present value is not large. However, one benefit I can see in addition to the small tax arbitrage is the accumulation of a larger after-tax stash that I can draw on if we have some unexpected large expense.
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Old 08-15-2021, 05:41 PM   #11
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I would take a hard look at doing Roth conversions to the top of the 22% or even 24% tax bracket. YMMV.
You're right to be concerned, I'd be seriously evaluating Roth conversions in your shoes. I'm in year 3 of 7 doing Roth conversions to the top of the 22% bracket and it will save us over $400K in taxes over our lifetimes if taxes don't go up (TCJA then revert to 2018 brackets). And I don't believe there's any chance Fed tax rates will stay the same for the next 20-30 years, in which case we'll save even more.
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Old 08-15-2021, 08:24 PM   #12
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Unclear how long the OP has been retired so far, but I guess that hardly matters.
Many of us have been doing Roth conversions from start of retirement up to start of RMDs.

I like the idea of levelizing your AGI to a degree in your pre-RMD years by using Roth conversions.
Done properly, there will then be no big jump in your AGI or your taxes once you get to age 72 and beyond.

Congratulations on being another high-income retiree!
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Old 08-15-2021, 09:01 PM   #13
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OP here; it will take me a while to absorb all this. What a great site, thank you all
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Old 08-15-2021, 11:25 PM   #14
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I like the idea of levelizing your AGI to a degree in your pre-RMD years by using Roth conversions.
Done properly, there will then be no big jump in your AGI or your taxes once you get to age 72 and beyond.
That is a good idea, leveling AGI via conversions to the top of a bracket. One just has to get over the thought hump of minimizing taxes for the present. I was doing Roth conversions, fell off the wagon and stopped for a few years, then got back on the wagon and doing it for some years now. But I will run out of years to do conversions. I should have kept at it non-stop.
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Old 08-16-2021, 05:27 PM   #15
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A run through of some modeling options -

I recommend starting with i-orp.com (scroll down to Extended Input), its tax model has some gaps (last I checked it used the current year income instead of 2 years prior for IRMAA, no AMT, no NIIT, no deduction phaseout), but it gives a whole life plan from some simple inputs.


Of the programs I've used, Pralana Gold ($99 1st year, $49 renewal, requires Excel, no substitutes) has the best tax model and flexibility, comes with a good manual with screenshots.
These are the 2 models I've used thus far. I just started with Pralana Gold a week ago, but the result from both of them matched. I plan to try tuning things further with Pralana.

Later this year I want to take a month or 2 eval of Income Strategy and compare to i-orp and Pralana.

I think for many/most people, the conversion process is multi-year. This means that each year is another opportunity to find a better tool or increase one's understanding of the whole process and tune your personal model.
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Old 08-16-2021, 06:00 PM   #16
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I request them to NOT withhold tax
This jogged my memory. I recall when I was ERing ten years ago that the conventional wisdom claimed it was a bad idea (from a notional and mathematical point of view) to pay the taxes on a Roth conversion with money from inside my tIRA.

The thing is, I basically *have* no money outside my IRAs. I would have to pay it from my tax-deferred money.

In the scheme of things is this a significant consideration?
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Old 08-16-2021, 06:28 PM   #17
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This jogged my memory. I recall when I was ERing ten years ago that the conventional wisdom claimed it was a bad idea (from a notional and mathematical point of view) to pay the taxes on a Roth conversion with money from inside my tIRA.

The thing is, I basically *have* no money outside my IRAs. I would have to pay it from my tax-deferred money.

In the scheme of things is this a significant consideration?
If you're under 59.5 it's significant because the taxes are considered a withdrawal, so you get hit with the early withdrawal penalty.

Over 59.5 it just means that you aren't able to move the full amount to your Roth. So, say you pay $12K tax on a $100K conversion. If you could pay it from taxable you could have that $12K in your Roth instead of your taxable account. The earnings in side the Roth would be tax free. So the savings of paying taxes out of taxable instead of the tIRA is the tax on the earnings of the tax amount. Probably not significant, but it is something. If you don't have the money in taxable, you don't have a choice.
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Old 08-16-2021, 06:59 PM   #18
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We are also near the bottom of the 22% bracket, and I've begun a modest Roth conversion with a monthly transaction. Taxes are coming out of the IRA funds at our overall tax rates, rather than using the Federal marginal rate.

I may either increase my conversion, or have my wife start converting a similar amount, next year.
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Old 08-16-2021, 07:25 PM   #19
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These are the 2 models I've used thus far. I just started with Pralana Gold a week ago, but the result from both of them matched. I plan to try tuning things further with Pralana.

Later this year I want to take a month or 2 eval of Income Strategy and compare to i-orp and Pralana.

I think for many/most people, the conversion process is multi-year. This means that each year is another opportunity to find a better tool or increase one's understanding of the whole process and tune your personal model.
Agreed, plus of course we know how our health and portfolio did in the last year and may have indications about tax law changes, so can make adjustments.

Please give the forum feedback on how it goes with Income Strategy, I'm curious to know if there is value there.
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Old 08-16-2021, 08:17 PM   #20
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We are also near the bottom of the 22% bracket, and I've begun a modest Roth conversion with a monthly transaction. Taxes are coming out of the IRA funds at our overall tax rates, rather than using the Federal marginal rate.

I may either increase my conversion, or have my wife start converting a similar amount, next year.
I pay taxes on Roth conversions from my after tax account. It is like getting an extra Roth contribution even though I have no earned income.
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