Join Early Retirement Today
Thread Tools Search this Thread Display Modes
Another decision to be made...
Old 10-10-2013, 04:07 PM   #1
Recycles dryer sheets
Join Date: Jun 2012
Posts: 87
Another decision to be made...

I've been a fanatic at saving for retirement over the years, and I've made good investment choices. I now have a large tIRA invested in a diversified portfolio of VG index funds.

I understand the advantages of a Roth vs tIRA. The funds are in a tIRA because Roth's didn't exist when I first started saving, and much of the money was saved in a pre-tax 401(k) and then rolled over when I left megacorp.

I'm 58 and plan to retire in about 5 years, with DW to retire a few years after that. Once retired, DW and I will only need to use a small part of these funds on a yearly basis because of available pensions and SS. Both firecalc and other retirement calculators predict that these funds will probably grow over time (even while I take yearly withdrawals).

Since these funds are in a tIRA, when I turn 70.5, I'll have to start taking required minimum withdrawals and paying much larger taxes because of those withdrawals. I don't want to touch the funds until I'm at least 59.5 to avoid early withdrawal penalties, but we'd prefer to save the money for emergencies or to pass on to our adult children.

I understand the various strategies like 72t withdrawals, gradual transfer of funds to a Roth, and limiting transfers so that they don't kick us into a higher tax bracket. Iím open to using any and all of these strategies. I also have heard that you should not convert tIRA funds unless you have money from another source to pay the resulting taxes. In our case, we do NOT have enough additional funds to pay those taxes.

So we find ourselves in a sort of a weird situation. Weíre thankful that we were able to save so much over the years, but I think we are looking at a very large tax bill in the future, and being forced to withdraw funds that we really donít need.

Any thoughts?
trapperjohn 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 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 10-10-2013, 04:44 PM   #2
Thinks s/he gets paid by the post
RetireAge50's Avatar
Join Date: Aug 2013
Posts: 1,505
Since you have excess, maybe retire now! That way you can spend the money and will not have to give it away in taxes.
RetireAge50 is online now   Reply With Quote
Old 10-10-2013, 07:20 PM   #3
Thinks s/he gets paid by the post
Join Date: Jan 2006
Posts: 4,172
Originally Posted by trapperjohn View Post
[ I also have heard that you should not convert tIRA funds unless you have money from another source to pay the resulting taxes. In our case, we do NOT have enough additional funds to pay those taxes.
This rule pertains mostly to the pre-59.5 case where a withdrawal from TIRA to pay taxes (and not the conversion) is subject to a 10% penalty. That penalty goes away after 59.5 so doing a Roth conversion at that point using TIRA funds to pay the tax is not worse that not doing a conversion (assuming the same tax rate applies). Of course, paying the tax w/ outside funds is even better.

Ex: pre-59.5, 15% tax rate

120 TIRA------>100 Roth; pay 15% tax on 120 withdrawal = 18 plus
10% penalty on 20 not converted = 2 for total tax of 20
Assume in N yrs, Roth doubles to 200

120 TIRA left alone. Assume in N yrs, TIRA doubles to 240; pay 15% tax on
that 240 = 36, leaving after tax 204 which is slightly better than the Roth.

Ex: post 59.5, 15% tax rate

117.647 TIRA ------> 100Roth which doubles in N yrs to 200

117.647 TIRA left alone ; in N yrs doubles to 235.294 and after 15% tax,
leaves 200.

EXERCISE of paying w/ outside funds left as exercise for OP but should result
in Roth better
kaneohe is offline   Reply With Quote
Old 10-10-2013, 10:09 PM   #4
Dryer sheet wannabe
Join Date: Jun 2012
Posts: 12
trapper, your situation reminds me of our own in many ways, except I retired at 50 and did use the 72(t) provision to make penalty-free withdrawals from my IRA prior to 59.5.

Unfortunately I kept putting off modeling the Roth conversion process until after I had started SS benefits for both of us at age 62. When I did the model a year later I found the SS income limited the amount I could convert and stay within the 15% bracket, effectively making it a break-even proposition. Since I liked paying zero Fed taxes anyway, I have opted not to make any conversions.

I recommend you start analyzing the Roth conversion well before your retirement so you can perhaps make a better decision on when to start SS (although there are many other factors that influence that choice). We also don't have children so didn't have to consider them in making a Roth conversion decision.

Although I didn't come here to post about my model, I'm attracted to posts on the Roth conversion topic so feel compelled to provide it. It's a great way to start the analysis process and is available and explained on the Bogleheads forum. The link to it is in an earlier post I made here today (#14):
Retired At 50
BigFoot48 is offline   Reply With Quote

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

» Quick Links

All times are GMT -6. The time now is 07:33 AM.
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2021, vBulletin Solutions, Inc.