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Living off of Roth & post-tax/cash accounts
Old 10-22-2016, 12:44 PM   #1
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Living off of Roth & post-tax/cash accounts

I keep seeing references to threads about, after FIREing, the desirablity of keeping below the 15% tax threshold (~$37k for me as a single filer) by living off of Roth & post-tax/cash accounts.

I don't think that is in order to do Roth conversions cheaply, because my understanding is that you need earned income to do a conversion, right?

My current pre-FIRE income now makes a Roth conversion very expensive (Fed 28% bracket). Right now 75% of my retirement investment is 401k and Rollover IRA (the rest is slightly more Roth than cash). My early retirement COL budget is most of $100k/year, of which 60% would come from my investments. So I'd expect it would be cheaper to pay income taxes when I need to rather than now (I assume status-quo tax policy).

Am I missing something?

Thanks,
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Old 10-22-2016, 01:10 PM   #2
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No, you don't need current income to do a Roth conversion. But you need the cash to pay the taxes that are due
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Old 10-22-2016, 01:46 PM   #3
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Take a look at what your taxes will look like at 70.5 years old. SS? Pension? Plus required minimum distributions from 401k's and IRA's. What is your likely marginal tax bracket then?

Then take a look at what your tax bracket will be for a full year of retirement. If it is lower than at 70.5, and you have taxable accounts with enough to live off of and pay Roth conversion taxes, consider Roth conversions up to the point where current marginal tax rate would just reach your 70.5 marginal tax rate. You should pay less total tax for your 401k/IRA withdrawals that way.

If Roth conversions aren't for you, or after they are all done, then you want to withdraw from your 401k/IRA up to the top of some tax bracket that works for you, and take the rest of the income you need from your Roth accounts. The idea is to keep all of your taxable withdrawals from 401k/IRA accounts at the lowest tax rate possible across your lifetime. Fill in with Roth withdrawals when it saves you from paying the highest marginal tax rates you might otherwise see. That should work better than paying high taxes while pulling all income from 401k's/IRA's until they are exhausted and then paying no taxes after that while pulling all income from the remaining Roth accounts.

Depending on how your income fits through the tax brackets, these strategies will have more or less benefit. But you have to do the tax planning to find out.
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Old 10-22-2016, 02:31 PM   #4
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OK, my bad . I conflated contribution and conversion limits. Per this URL:

https://www.tdameritrade.com/retail-...df/TDA5595.pdf

May I convert to a Roth IRA even if I do not have earned income?
Yes. You do not have to have earned income to be eligible to convert existing retirement plan savings to a Roth IRA.

So I CAN convert to a Roth, post FIRE!

Given that, I could live off of Roth and cash accounts without generating income tax and convert my pre-tax accounts up to the 15% tax bracket limit. I guess I now need to see if CA conforms to this rule. IMO it's a nice loop-hole (I would have expected an earned income requirement) that I hope lasts long enough (say 2020) until I can take advantage of it.

Why isn't this a FAQ? It seems like a no-brainer.
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Old 10-22-2016, 02:54 PM   #5
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when you do a roth conversion it starts another 5 year window that puts some limits on roth withdraws
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Old 10-22-2016, 03:02 PM   #6
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If you have a Roth account, you can by real estate in it. All profits, and capital gains, would be tax free.

You do not need income for this method of increasing your Roth balance.
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Old 10-22-2016, 03:15 PM   #7
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So we do plan to utilize Roth and Cash heavily between RE date and age 65 accompanied by dividends not exceeding 64k.

Reason is to keep MAGI under 64k so we will qualify for Obamacare subsidies. I had always preached here to be 100% equities but at this point we are building CD ladder to accomplish the above.

And the reason is simple. Such scenario leaves you with 0% Federal tax and tax payers help you with your medical insurance cost (capped for you at about 5400 a year) while you can enjoy living on maybe 10k a month.
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Old 10-22-2016, 04:43 PM   #8
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Quote:
Originally Posted by MikeyInMarin View Post

So I CAN convert to a Roth, post FIRE!

Given that, I could live off of Roth and cash accounts without generating income tax and convert my pre-tax accounts up to the 15% tax bracket limit.

If you are going to live off the Roth and do conversions, it's like putting cookies into the jar and then eating some.

You can more simply, take $$$ out of IRA (after age 59.5) for spending so you don't touch your Roth account.
Plus convert some IRA money to Roth for future tax savings effect.
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Old 10-22-2016, 09:32 PM   #9
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Yeah, you gain nothing by Roth converting and withdrawing from a Roth at the same time. Same taxes paid as if you simply withdrew the "Roth conversion" amount from the IRA and kept it, while reducing the Roth withdrawal by the same amount.

If your taxable non-retirement account funds cannot support you without Roth withdrawals then you pretty much just start the normal 401k/IRA base withdrawals and Roth withdrawals only as needed to meet expenses. Roth conversions are mostly good for effectively moving some of your currently taxable (non-retirement account) investments into a tax-free Roth.
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Old 10-23-2016, 03:07 AM   #10
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Originally Posted by euro View Post
No, you don't need current income to do a Roth conversion. But you need the cash to pay the taxes that are due

It's often said that you need funds outside of the tax-deferred accounts to pay the taxes on the conversion. But you really don't. Taxes can be withheld as a percentage of the conversion. If one's primary goal is shifting money away from the tax-deferred component, then he's successfully accomplished that. The only difference is that a somewhat lesser amount has moved into "tax-free growth" (Roth) territory.
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Old 10-23-2016, 06:08 AM   #11
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Quote:
Originally Posted by MikeyInMarin View Post
I keep seeing references to threads about, after FIREing, the desirablity of keeping below the 15% tax threshold (~$37k for me as a single filer) ...
The $37k figure you cited refers to taxable income, not total income. Your taxable income is determined by taking your total income subject to income tax and reducing it by the amount of your personal exemption and your deductions (either the standard deduction or itemized deductions). Everyone is entitled to take a personal exemption (4,050 for single filers in 2016) and the standard deduction (6,300 for single filers) for a total of $10,350. So the 15% tax threshold for income subject to income tax for a single filer in 2016 is actually at least $48,000 (37,650 + 10,350). It may be higher if you itemize deductions.
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