Monster Roth Conversions - How big to go and for how long?

[Dash man]

With that much money, I'd be tempted to convert it all at 37% in one shot and be done. Then you can live the rest of your life giving the finger to the man. Seeing how much debt we're going into as a nation, you could find yourself getting taxed well over 50% in the future.

We are looking into that. We’re considering hiring a tax advisor after this tax season is over, to help us along with our own calculations to make sure it’s not a bad move.

 

[Whisper66]

With that much money, I'd be tempted to convert it all at 37% in one shot and be done.....Seeing how much debt we're going into as a nation, you could find yourself getting taxed well over 50% in the future.

I have had that same temptation. We currently convert to the top of the 24% tax bracket. If either the tax rates go up dramatically or one of us (spouse or I) dies too soon so that the one that remains is in the singles tax brackets .... then much more aggressive conversions would have been desireable. After running the numbers for our situation, I chose to spread out the conversions per ORP recommendations and take the benefit of filling up the lower tax brackets each year. That will likely change if taxes change too much or our health deteriorates quickly.

 

[Whisper66]

When you run ORP you are telling the computer model to determine your maximum disposable income. It gives the best case scenario results, and this is helpful to determine IRA conversion strategies because higher income is taxed at a greater percentage.

I think we are in agreement here. A single run of I-ORP gives an optimal answer (disposable income, recommended Roth Conversion) for the single set of conditions one has input. Results may be conservative or aggressive depending on the input provided by the user. Relying on results from a single run for an entire retirement is not prudent.

I run ORP yearly using what I consider "realistic" values for input to get reasonable guidance on how much my wife and I can spend and how much to convert to Roth during that specific year. If times change for the worse, future yearly ORP results will guide us to pull back on spending and limit conversions.

The second part we should use is the Montecarlo simulation to see what the likely disposable income will be. ORP doesn't suggest spending the maximum...

Monte Carlo is one method. Personally I prefer to use Firecalc's historical analysis to test how our assets are likely to perform over time with a specified yearly spend. Clearly I am ok assuming the future won't look all that much different than the past. If it does turn out much different, we will naturally cut spending as much as needed to adjust.

I recall most of the posts on the forum from people who use ORP do an annual run to guide how high a tax bracket to to convert up to. I think that is prudent, but with a large increasing traditional IRA balance you could be doing conversions for a while. I think you can model a specified large conversion and compare the result to smaller conversions over more years. In each case, the prudent comparison is the Montecarlo simulation output, not just the maximum disposable income (which will show an inflated difference).

For my own case, there is little difference between doing conversions or not, and I'm not in a higher tax bracket, so not planning to convert.

FWIW - Comparing converting or not under one set of input conditions will typically not show a large difference in disposable income. I-ORP's developer (J Welch) had a nice white paper on this (https://www.i-orp.com/ModelDescription/Conversions.pdf) and found only ~1.5% difference in the cases he studied. Several on this board have seen the same in their own analysis (me included). Welch's paper points out potentially stronger reasons to convert are (1) protection against future tax increases or (2) reducing tax burden to heirs. These are the two reasons my wife and I are converting.

 

[deserat]

With that much money, I'd be tempted to convert it all at 37% in one shot and be done. Then you can live the rest of your life giving the finger to the man. Seeing how much debt we're going into as a nation, you could find yourself getting taxed well over 50% in the future.

^^^^ Not to make it political, but this, for sure. I have thought about that as single. I did go to top of 24% bracket last year for my conversion, but might be pushing to next bracket to accelerate the conversions this year. i-ORP tells me to convert even faster than what I have calculated with RPM. I will have a pension that ensures I am in at least the 14% bracket - when SS hits, I will probably be permanently in a higher bracket due to both pensions. In my case, having no to minimal tax deferred is to my benefit.....

 

[street]

We are looking into that. We’re considering hiring a tax advisor after this tax season is over, to help us along with our own calculations to make sure it’s not a bad move.

It will be interesting to see what your tax advisor says. I have followed this thread and will need to be advised myself on what I need to do also.

 

[DawgMan]

I really appreciate everyone's insight here. As it relates to how IORP, works, using my year 1 numbers(default)...

Age RMD TaxDef AfterTax RothIRA IRA2Roth GuarInc Yield Taxes DI
057 0 516 565 0 516 0 130 224 471

If I only plan on spending after tax $250K, would I not adjust the above and do something like this (my guess)...

Age RMD TaxDef AfterTax RothIRA IRA2Roth GuarInc Yield Taxes DI
057 0 737? 565? 0 737? 0 130 224? 250

I don't want to beat this into the ground, just trying to understand how the model thinks, but if I spend less than than default (net $471K), wouldn't the model effectively suggest filling the Roth conversion bucket up to the level of taxes ($224K), doing a higher level of conversions sooner vs later?

I have started using NewRetirement Planner Plus which allows you to manipulate year by year Roth conversions, illustrating the differences in lifetime taxes. On the surface, it seems like a pretty good tool that may be helpful here. Anyone use this or have an opinion as to how it compares to IORP relative to Roth conversions?

I have actually thought of doing 1 big conversion or break it down into 3 to 5 years and empty the 401K, but it just feels like a big nasty IRS check. I think I prefer a slower bleed...

 

[street]

I know there was a thread years ago on converting all tax deferred money in one shot or in two shots in a couple year span. I'm thinking if I remember right it worked out to be a good plan. I beleive someone smarter then I on ER did the scenario and it was not a bad way to go.

 

[DawgMan]

I know there was a thread years ago on converting all tax deferred money in one shot or in two shots in a couple year span. I'm thinking if I remember right it worked out to be a good plan. I beleive someone smarter then I on ER did the scenario and it was not a bad way to go.

I suppose where the analysis starts to get a little complicated is that outside of guessing where taxes will be in 15+ years (other than higher!), its not all about reducing lifetime taxes, but really includes comparing your after tax balances (Roth account) vs your guestimate of pretax balances (after some tax deduction) sometime in the future. To analyze even further, I would think you would apply some NPV to your different annual tax obligations to see how that weighs out (a $$ today is worth more than a $ tomorrow). Point being, maybe it does make sense to bite the big bullet year 1 if time is on your side to let the Roth grow.

 

[RunningBum]

I know there was a thread years ago on converting all tax deferred money in one shot or in two shots in a couple year span. I'm thinking if I remember right it worked out to be a good plan. I beleive someone smarter then I on ER did the scenario and it was not a bad way to go.

It works out if the market soars after the large conversion. Or maybe that person only had a couple years before SS + pensions kicked in.

 

[street]

DawgMan, you made some great points. In time I need to get it figured out what I need to do but more importantly is be comfortable with how I proceed with converting to ROTH, convert the lump or do just my yearly RMD when the time comes.
I'm most likely will never use the money that is in tax deferred money now. It will go to heirs unless the world ends first.

 

[RetireBy90]

Not completely on topic, but one possibility in the great number of unknowns is federal govt adding a national sales tax rather than increasing income tax rates. As many know this is in use in Europe now and prices all include the Value Added Tax (VAT) so you don't see the tax like you do with state and local sales taxes today being added to total purchase at the end. A VAT could also be increased by 1/4% or 1/2% and many wouldn't notice the increase in price at the register. Several years of this could add significant funds to the pool of money collected with a smaller push back from the great masses. While there are many other ways to generate additional tax revenue this would have impact of adding a tax to those Roth funds.

In other words, what if I do these conversions and then they move to tax on consumption side ? I'll end up paying tax 2 times and sure could impact the plan to get tax man off my back.

Jut something to think about. I'm still doing conversions but I understand I'm only making the best decisions with available information.

 

[Dash man]

Not completely on topic, but one possibility in the great number of unknowns is federal govt adding a national sales tax rather than increasing income tax rates. As many know this is in use in Europe now and prices all include the Value Added Tax (VAT) so you don't see the tax like you do with state and local sales taxes today being added to total purchase at the end. A VAT could also be increased by 1/4% or 1/2% and many wouldn't notice the increase in price at the register. Several years of this could add significant funds to the pool of money collected with a smaller push back from the great masses. While there are many other ways to generate additional tax revenue this would have impact of adding a tax to those Roth funds.

In other words, what if I do these conversions and then they move to tax on consumption side ? I'll end up paying tax 2 times and sure could impact the plan to get tax man off my back.

Jut something to think about. I'm still doing conversions but I understand I'm only making the best decisions with available information.

Our Estate Planning attorney gave us some great advice. Make your plans based on current law. Stay flexible for potential changes. I think this applies to tax planning and Roth conversions. The law today has today’s tax rates reverting to the previous rates in 2026. That gives us five tax years to take advantage of the lower rates we have today. If changes are made in the law, which is difficult but possible, adjust then. There is just so much discussion about proposed changes that few will be realized. Work with what you have now.

 

[Exchme]

While the input is slightly quirky, the Retiree Portfolio Manager spreadsheet is free at Bogleheads.org and has a section where you can test different amounts of Roth conversions. It's not fully rigorous on capital gains taxes, but does a good job and shows both the portfolio benefit and the benefit to your heirs since t-IRAs are not very tax friendly to them. It seems to be guiding me to avoid NIIT and at age 63, only go up one IRMAA tier. But that's based on my numbers, obviously it will vary for everyone as the goal is to have an equal tax rate on all income as that gives you the lowest lifetime tax burden.

I've heard that Pralana Gold (~$149) is very rigorous and maybe the best publicly available tool for tax planning, there are probably threads about it here and at Bogleheads. I should probably buy it as I have a lot more than that riding on the decision of how hard to push on Roth conversions.

If you have enough to be converting $300+K each year, your best strategy may actually be to hire a tax specialist to make a plan.

 

[Whisper66]

I really appreciate everyone's insight here. As it relates to how IORP, works, using my year 1 numbers(default)...

Age RMD TaxDef AfterTax RothIRA IRA2Roth GuarInc Yield Taxes DI
057 0 516 565 0 516 0 130 224 471

If I only plan on spending after tax $250K, would I not adjust the above and do something like this (my guess)...

Age RMD TaxDef AfterTax RothIRA IRA2Roth GuarInc Yield Taxes DI
057 0 737? 565? 0 737? 0 130 224? 250

My thoughts: I'd make the 2nd year run input be set to the the results of 1st yr run except for two changes. (1) "Age" incremented by 1 yr and (2) "After Tax" increased by whatever amount you didn't spend of the "max disposable income. For example, if you assumed you spent $250k of an allowable $471k .... $471k - $250k = $221k so "After Tax" would be $565k + $221k = $786k. (Edit: since you have such a large after tax account, you should include some earnings as well in the value for input to year 2.)

I don't want to beat this into the ground, just trying to understand how the model thinks, but if I spend less than than default (net $471K), wouldn't the model effectively suggest filling the Roth conversion bucket up to the level of taxes ($224K), doing a higher level of conversions sooner vs later?

Yes, I believe you are correct. In my yearly runs I've generally seen the program suggest maxing out a tax bracket (24% in my case) in the first year or couple years and then suggests decreasing conversions through future years until the "after tax" account balance is used up. No conversions are suggested after the "after tax" account is used up. Since we don't spend the entire Disposable Income (DI) each year, the next year's run will suggest more years of conversions since it takes longer to use up the "after tax" account assets than previous runs assumed.

I have started using NewRetirement Planner Plus which allows you to manipulate year by year Roth conversions, illustrating the differences in lifetime taxes. On the surface, it seems like a pretty good tool that may be helpful here. Anyone use this or have an opinion as to how it compares to IORP relative to Roth conversions?

I have no experience, hope others can assist. If you don't find help in this thread, you might need to start a new thread with the tool name in the title. That may pick up folks that may not be monitoring this thread.

I have actually thought of doing 1 big conversion or break it down into 3 to 5 years and empty the 401K, but it just feels like a big nasty IRS check. I think I prefer a slower bleed...

Will be interested in where you end up after you complete your studies. In our case, all our tax deferred $$ were in our 401k at retirement. We rolled them into a traditional tax deferred IRA account after retirement. Current plan is to convert to Roth whatever ORP recommends as optimum for our tax situation. That amounts to ~75% of our initial IRA balance. Due to the benefits to leaving some funds in a traditional IRA, we aren't planning on emptying the entire IRA account - https://www.investmentnews.com/5-re...aditional-iras-even-for-roth-ira-lovers-80918 .

 

[Animorph]

In other words, what if I do these conversions and then they move to tax on consumption side ? I'll end up paying tax 2 times and sure could impact the plan to get tax man off my back.

Jut something to think about. I'm still doing conversions but I understand I'm only making the best decisions with available information.

Your spending from a tIRA withdrawal will be taxed twice as well, so I think a VAT/sales tax is fairly neutral on tIRA vs. Roth.

Your normal income and taxable investment income is already taxed twice if you include income taxes and current sales taxes.

The tIRA is subject to normal income taxes, which seem to change pretty frequently. I think a regular income tax increase has the highest probability of happening. Heck, there is one scheduled for 2026 already! That would affect only the remaining tIRA balance, and not Roths. A good reason to Roth convert.

Some kind of wealth (net worth) tax would affect tIRA and Roth equally, I'd think.

There could always be some tax specifically targeting Roth accounts, but I don't think that's as likely as any of the above. It would be something completely new and sort of retroactively taxing money that's already been taxed. Kind of like paying capital gains tax on an entire stock sale instead of just the gains. I'm not going to worry about that.

 

[free2020]

Do conversions into the 32% make any sense? It still feels like I am not moving the needle much. In some ways, I go back to my earlier point... if the math works w/o Roth conversions as a couple and single, despite the higher taxes, how much gymnastics should I do year after year to "maximize"? Again, want to be prudent, but where does it stop moving the needle?

First, congratulations for making it! As you noted in the OP, it's a first world problem, not too many people have this!

You are correct, if I had done as well as you have, it is not worth the gymnastics year-after-year. The chiseling is needed, IMO, when you have the sense that you may not have enough. Paying taxes as late as possible would be my approach if I were in your shoes.

 

[RetireBy90]

I recently read a post on another thread, the summary was to have amounts in after tax, tIRA, and Roth accounts to provide the max flexibility. Might make sense in your situation. Not trying to move the entire tIRA but move say to top of 24% so you have some in all 3.

 

[imnontrad]

You might consider sitting down with a fee only Certified Financial Planner who is a fiduciary in all respects and specializes in retirement. You want to develop a multi-year plan of action.

In addition to taxes, you also need to look at the effect on Medicare premiums starting the year you turn 63 (a 2 year delay so your modified AGI at 63 determines your premium at age 65).

You also need to look at worst case on taxes/ Medicare premiums when one spouse dies. Plus look at structuring your estate so your heirs will not face a tax burden. This may mean that your heirs get part of pre-tax retirement accounts rather than going to your souse to stretch the effect of the SECURE Act for your heirs. Also, any distributions to charities should come from the pre-tax account to lessen tax burdens.

As far as SS, the strategy should be that the spouse with the lower SS benefit file early and the higher earner file at 70. This will ensure that whichever spouse survives the other, they will have the highest SS income for life.

Also, you might consider funding 529s for the grandchildren initially and as they get older, offer to reimburse for part of their contribution to a Roth.

For your own children, you might consider starting to pass on money that will be part of their inheritance anyway. But you could do this by establishing a "Crummey trust". your children will have a "window" to withdraw your gift to the trust every year - but you could let them know that if they do that, there will be no further contributions. This will reduce your estate and you can set the terms for any distribution of the trust (when both of you die, that their spouse signs a document stating that the proceeds are not joint property (protection in case of a divorce), if there is a disability or serious illness, etc.).

 

[I am He]

If your AA is around 50/50, would it make sense to move all IRAs into bonds so that they don't grow any faster than you'd like to convert? Then taxable being the invested portion.

If you're charitable, there're some options, direct from the IRA. Leaving a chunk and using the RMDs as QCDs, etc. which means leaving some unconverted.

Since your income will always be on the high side, the biggest nightmare is if you ever became widowed and needed to file as a single. That's why we did some hedging now(one-time larger conversion) and laddering to follow.

 

[I am He]

Also, I've been told the I-OPR guy is available to chat if you have questions.

 

[jayanu]

You are young 57 years old. Very likely that you will live to be 90.
Suppose you keep the 6 M under matters and spend $300K/year the 6 M will last for 20 years.

Using the money in an investment, with the rule of 72 your assets can easily be 8 times more than you have now. It will be a large amount overshooting the current federal estate tax limitation of ~$22M for a couple (which will go lower since the Govt needs money). So, a good chunk of the money will go to Estate tax. You can take good insurance (since you are young and healthy) to pay for the Estate Tax.

And if you leave the IRA/401K tax-deferred to your heirs then they will have to pay tax and will have to empty the nest in 10 years.

1) Yes, you should convert to Roth and make it easy for the heirs.
2) You should think of a Charitable trust which will pay and then at the end whatever is left (has to be a minimum 10%) goes to the Charity.
3) Various (legal) tax shelters should be looked into.

It will be worthwhile to spend money on a top-notch tax and trust attorney.

Don't forget that health will slow you down later on and will be a tax on your wealth. Plan for a top-notch CCRC to protect your health care cost and be full of activities to enjoy life.

Best of luck.