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Old 02-05-2024, 12:40 PM   #21
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Originally Posted by glasswave View Post
While I am guessing that income tax rates are likely to increase in the future, that is not why I am considering converting to Roth. The main reason for converting is so that in the future, I will not be paying tax on the interest that I earn.
All tax and IRA rules are subject to legislation. They could raise taxes, but at $48k withdrawal before standard deduction you are unlikely to hit a new 24%+ bracket. You may convert all your money to have Congress decide that "rich" Roth IRA holders have to pay a wealth tax, etc.

The only thing we know for sure is the current rule, and you should not convert at 24% today, as you would be reducing your wealth based on your plan and the current rules.
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Old 02-05-2024, 01:31 PM   #22
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Originally Posted by glasswave View Post
Hello all,
I fear that there is some blatantly stupid blind spot to this plan, so I am hoping the posters here can quickly point out the errors of my ways. Please forgive my newbie naivete, but when I finally landed my first good job that had a savings plan, a TIAA advisor said, "Stick your money in a growth fund and forget about it," so that's what I did. 15% of my gross year since 1994. I have only been looking at retirement for the last few years and seriously, only recently.

Hear goes:
67 is my full retirement age. (spring 2030).
I am hoping to take early retirement in June of 2025 at age 62, but I could work longer.
  • I should have about $190k in liquid savings by July of 2025.
  • I have about $945,000 in a (TIAA) tax deferred retirement savings account.
  • I can receive about $18k in salary for 5 years by taking early retirement at 62.
  • House is paid off, no other debt whatsoever.
  • I can stay on the employer health plan until Medicare kicks in at 65 for about $300/yr.
  • I’d like $4k/mo for expenses from 62 to 67. $3k monthly living & $1k/mo towards trips and large purchases.

Preliminary Plan:
  • I am thinking about living off of liquid savings and my early retirement income for the 5 years of early retirement. I am also are considering converting most of my retirement account to a Roth IRA over those 5 years, by converting about $170k a year so I can stay in the 24% marginal bracket.
  • At 67, I plan on accessing my SS which should pan out to $2500-$3000/mo, so I will need to start drawing at least $1000-$1500/mo from that Roth IRA at 67 so I can maintain my lifestyle. I will also have the added expense of Medicare Premiums.
  • I figure by converting it all to Roth asap, most of my taxes will be paid and I should be able to live mostly income tax free after that.

Is this a sound strategy or should I not worry so much about converting to Roth for the tax advantages?

What other strategies might you recommend?

Thanks.


~~~~
No, likely a poor strategy. It makes no sense to pay 24% now to pay 0% later. Living income tax free is not a good goal in many circumstances... paying low taxes is a-ok too.

Not enough info but I suspect that your best option is to convert to top of 12% tax bracket from ER until RMDs.

What you need to do is to model out your income sources for your first 16 or so years of retirement... it sounds like $18k salary a year for the first 5 years? Can you elaborate on that... a bit odd unless you are referring to deferred comp or something like that.

So between when you retire at 62 and RMDs start at 75 you only income will be the aforementioned $18k a year for the first 5 years and SS... so you shuld have plenty of headroom to do Roth conversions to the top of the 12% bracket and then live off of a combination of liquid savings and Roth withdrawals.

Also, if you are in good health and have good family longevity it might make sense to delay SS to 70 to give you more headroom to continue too low tax cost Roth conversions.

For example, if a single under 65 retired on 1/1/24 and only had $18k of earned income for 2024 then they could convert $43,750 and stay within the 12% tax bracket.

Don't worry about taxes on interest... at worst it is 12% and you can make it zero if you invest in tax-free municipal bonds.
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Old 02-05-2024, 08:53 PM   #23
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I know you dislike spreadsheets, but check out I-orp.com which helped guide me some with conversion planning.
I-orp always had quirky issues like basing IRMAA costs on the current year income instead of income from two years prior and not doing taxes on SS benefits. But the key issue is it hasn't had any maintenance since 2020, so it will think OP's RMDs start at 72 and we've had 20% inflation since then, but the tax brackets are frozen in time as of 2020.

I believe the developer has passed away and it didn't generate revenue, so it's hard to see how it will ever get future support. Time to move on to other tools.
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Old 02-05-2024, 09:49 PM   #24
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You need to look into the commutative law of multiplication. If the tax rate is the same, it makes no difference if you enjoy gains first, and then pay taxes; or if you pay taxes first, then enjoy tax-free gains. You should be instead focussing on getting your money out at the lowest possible tax rate. (I am using "tax rate" here broadly, including regular taxes, losses of subsidies, IRMAA surcharges, NIIT, etc.)

Here is a good resource for you: https://www.bogleheads.org/wiki/Traditional_versus_Roth
And there it was, right in the common misconceptions section, "The second misconception is that 'it is better to pay tax on the seed than the harvest.' In other words, that it is better to pay a lesser tax amount now to make a Roth contribution, instead of a larger amount of tax later on a traditional withdrawal. This is not true because taking a percentage of the "seed" is the same as letting the full seed grow and then taking the same percentage of the "harvest." The result will be the same in either case."

I do understand the "commutative law of multiplication," it's just with a that compounding and other stuff it just starts to seem kind of abstract.

Nonetheless, I get it now. I suppose it'd make sense to max out the 12% bracket and maybe go as high as the $103, but never go high enough for IIRMA to kick in.

Thanks for straightening this out for me. I had typed this last night but somehow not posted. I could have saved people a lot of repetition.

Thanks
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Old 02-05-2024, 10:38 PM   #25
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.... I do understand the "commutative law of multiplication," it's just with a that compounding and other stuff it just starts to seem kind of abstract. ...
A simple example can make it less abstract.

Let's say that you had $10k in a tax-deferred account and you could pay 15% in taxes now or 15% later and that with investment returns that your investment doubles over 10 years.

Option A is to convert now. You end up with $8.5k in the Roth and at the end of 10 years it is $17k avaiable to you tax free to spend.

Option B is to convert later. In 10 years your $10k doubles to $20k and you withdraw and pay the 15%/$3k in taxes and have $17k available to spend.

Either way you end up with $17k.

So the real play is to pay less in taxes now than later and that is a realistic possibility for many people. Let's say you could pay 15% now or once RMDs start it will be 25%.

Option A is still $17k, but option B is now only $15k [$20k*(1-25%)]. Option A is better.
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Old 02-06-2024, 07:49 AM   #26
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Originally Posted by glasswave View Post
And there it was, right in the common misconceptions section, "The second misconception is that 'it is better to pay tax on the seed than the harvest.' In other words, that it is better to pay a lesser tax amount now to make a Roth contribution, instead of a larger amount of tax later on a traditional withdrawal. This is not true because taking a percentage of the "seed" is the same as letting the full seed grow and then taking the same percentage of the "harvest." The result will be the same in either case."

I do understand the "commutative law of multiplication," it's just with a that compounding and other stuff it just starts to seem kind of abstract.

Nonetheless, I get it now. I suppose it'd make sense to max out the 12% bracket and maybe go as high as the $103, but never go high enough for IIRMA to kick in.

Thanks for straightening this out for me. I had typed this last night but somehow not posted. I could have saved people a lot of repetition.

Thanks
The repetition is expected. There are many ways to interpret previous posts and articles about Roth Conversion.

The consensus is probably, "Stay in the 12%." Another guideline is, "Have flexibility in your accounts." Maybe pay a little more tax now and make sure you max Roth each year.

Time is on your side.
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Old 02-06-2024, 08:44 AM   #27
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Originally Posted by glasswave View Post
And there it was, right in the common misconceptions section, "The second misconception is that 'it is better to pay tax on the seed than the harvest.' In other words, that it is better to pay a lesser tax amount now to make a Roth contribution, instead of a larger amount of tax later on a traditional withdrawal. This is not true because taking a percentage of the "seed" is the same as letting the full seed grow and then taking the same percentage of the "harvest." The result will be the same in either case."

I do understand the "commutative law of multiplication," it's just with a that compounding and other stuff it just starts to seem kind of abstract.

Nonetheless, I get it now. I suppose it'd make sense to max out the 12% bracket and maybe go as high as the $103, but never go high enough for IIRMA to kick in.

Thanks for straightening this out for me. I had typed this last night but somehow not posted. I could have saved people a lot of repetition.

Thanks


I know that you get it now and that I don't need to add anything, but perhaps here is another way (in addition to PB4's) to make it less abstract even when considering compounding:

[$945k * (1+r)^n] * 0.75 = [$945k * 0.75] * (1+r)^n
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Old 02-06-2024, 02:00 PM   #28
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Be aware at age 63 , the IRMAA penalty will exist if your income crosses the line.
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Originally Posted by Exchme View Post
My wild guess is that conversions to the top of the base IRMAA tier might be worthwhile, but that's about it.
Quote:
Originally Posted by Exchme View Post
I-orp always had quirky issues like basing IRMAA costs on the current year income instead of income from two years prior and not doing taxes on SS benefits.
My understanding is that if I apply for Medicare around April of 2028 (age 65) then my IRMAA bracket will be based upon my 2026 income tax returns.

Is that your "Wages, Salary and Tips," your "Total Income" or your "Adjusted Gross Income?"

Also, do they use that bracket based upon your "2-year-previous-income" at the time you applied for the rest of time or do they recalculate each year based on your updated "2-year-previous-income?"

Thanks


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Old 02-06-2024, 02:10 PM   #29
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Google MAGI for IRMAA and poke around to find the formula for the IRMAA increase. To answer the second question, Medicare does NOT use the same MAGI every year (the one they used when you first joined Medicare.) They update every year based on your then-two-years-ago tax return.
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Old 02-07-2024, 06:45 AM   #30
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I think it's unnecessary to convert all your retirement money , as RMD's won't start until age 73. Even then having a $100K in an IRA will only require a withdrawal of less than $4K, which adds to income.

What will your income be when fully retired at age 67 in today's dollars ? How much in taxes if that was now will you pay ?
It sounds like 75 for RMDs for me.


If I take my social security at 67, my income should be about $36,000. I will have no other sources of income with the exception of what I take from my tax deferred retirement account.



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Old 02-07-2024, 07:48 AM   #31
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So if a single over 65 in 2024 had $36k of SS and withdraw or Roth converted $36.1k to the top of the 12% tax bracket their federal income tax would be 6.54% of your total income... not bad.

Federal Income Tax:
$4,716.20
12.00%
6.54%
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Old 02-07-2024, 02:28 PM   #32
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GlasswaVe - you don't mention whether you have a Roth IRA already in place. If not, why not open one up and fund 2023 while you still have a chance - and ponder your conversions . . .
I am planning on starting one up and maxing it for 2023 and 2024 using my liquid savings.


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Old 02-07-2024, 02:32 PM   #33
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+1. I see no mention of an existing Roth IRA. If you don't have one already, you should make contributions for 2023 and 2024.
I agree with the others; converting to the 24% rate seems too much for someone with your assets. Since you have around $10K of interest and $18K of earned income in retirement, you should be able to convert around $30K at the 12% rate in addition to the annual Roth contributions. That seems reasonable.
Where are you getting the 10K in interest from? My liquid savings?

Thanks.


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Old 02-07-2024, 02:35 PM   #34
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I know you dislike spreadsheets, but check out I-orp.com which helped guide me some with conversion planning.
That site seems to no longer be functional.

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Old 02-07-2024, 02:39 PM   #35
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I’m reading on my phone so may have missed. Is there a pension in this picture? Is the $18k an annual “salary” for 5 years or a one-time payment?
I think the 18k annually would be paid in twice monthly installments for 5 years. 5% or my salary for five years .

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Old 02-07-2024, 02:46 PM   #36
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All tax and IRA rules are subject to legislation. They could raise taxes, but at $48k withdrawal before standard deduction you are unlikely to hit a new 24%+ bracket. You may convert all your money to have Congress decide that "rich" Roth IRA holders have to pay a wealth tax, etc.

The only thing we know for sure is the current rule, and you should not convert at 24% today, as you would be reducing your wealth based on your plan and the current rules.
Thanks.

My 48K expense estimate is an after tax estimate.

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Old 02-09-2024, 03:49 PM   #37
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The planning also depends on whether you're married, and what age the spouse is, and what would you like to have happen to the remainder of your estate when you die.

Also where do or will you live (that is, in an expensive, moderate, or lower cost area)?

Maybe what your crystal ball says about your health? Got LTC insurance?

I don't have the burden of having to plan for $1 million in a traditional IRA, but I've been converting $20k a year to take advantage of the nearly $30k standard deduction (for seniors). This is only guaranteed through 2025. We have little other income and live off SS mostly, so there is very little tax due, like 2%. I would suggest you do that after your regular work income ceases, and while you have that Really Cheap Great Deal on health insurance -- between 60 and 65, we paid more for health insurance than we did for the mortgage.

Also, that $18k -- if that's per year, I would inquire from your employer if you could have that paid differently. Maybe all at the end of five years, and delay SS start until after that? That would let you do more tax-free conversion in the meantime, probably avoid any IRMAA problems. Or alternatively, most of it up front in the year after your salary stops.
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Old 02-09-2024, 04:07 PM   #38
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Rolling is good, but as out-to-lunch points out... price matters.

If you can do the rollover cheaply, dive in. Set a tax price on conversion and don't go over. Convert what you can, keep the rest as IRA and spend appropriately. Converting almost a million is just too hard a lift.
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Annuity in Retire to help Roth Conversions
Old 02-09-2024, 04:11 PM   #39
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Annuity in Retire to help Roth Conversions

I have a crappy over-blown Annuity that is Qualified. Would never by another one....But...I will wait to 70 to start lifetime income and use the excess payments (5%) and use it to take make more room for the conversions. I am currently doing this but only to the top of 12% bracket. Any higher than that is really not going to help me avoid any tax consequences. Like I said I would not buy any annuities but if you could use this to your advantage, It could work.
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Old 02-09-2024, 04:22 PM   #40
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I am okay with your strategy and am doing something similar.

If you get your Roth conversions done before you start drawing SS, you will likely avoid the "tax torpedo" that befalls many who delay in dealing with their tax-deferred accounts.

Additionally you may be better manage the Medicare IRMMA surtax that applies to those who have "high" incomes while on Medicare.

I have a spouse who would also be stuck in a much higher tax bracket than she would otherwise need to be if I were to put off converting and pass away earlier than her.

I am in the "convert early and convert often" camp.

Another thing that may drive this is personality style. If you like to get your pain over first and delay gratification you may wish to convert early for non-financial reasons.

YMMV

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