Not enough Roth

[RunningBum]

My projections have me at the tail end of the SS tax hump, so the first few(?) thousand in RMDs each year would be taxed at 49.95%. That means I need to either fully convert my tIRA or do full QCDs to avoid it. That's using a pretty conservative growth projection on my taxable account though, so I might be fully through the hump. Yet another complexity in the Roth conversion calculations.

[SJhawkins]

Quote:

Originally Posted by punkinhead There are good reasons for wanting more Roth in retirement. The emotional side of me wishes I had more but the analytical side of me knows that pre-tax was mathematically better for me and that Roth conversions now are neutral at best and negative at worst. There are a lot of assumptions built into the decision of whether to convert or not. There are some situations where it's a slam dunk - for example someone retired in the 0% or 12% tax bracket who'll be pushed into the 22% or higher bracket with RMDs. But a lot of people just assume they're in a situation where Roth conversions make sense but haven't done the projections. Having a large Roth in retirement gives you the option of controlling AGI for IRMMA and ACA subsidies. It's also nice to avoid large RMDs if one spouse dies and the survivor is filing as single. Also, it's a whole lot more painful and "in your face" to write Uncle Sam a tax check every quarter or year vs having taxes automatically withheld while accumulating. I wonder how many people start out with plans to do big Roth conversions then cave when they see how big that tax check is going to be? I also wonder how many people have created a spreadsheet of RMDs and taxes paid per year to see how bad the RMD tax bill is really going to be. It might not be as bad as you think but the only way to know is to build a spreadsheet or use a tool like eMoney.

Lots to unpack here but do think you hit on a few points for most us common folk, including myself. I do think if I do it right I could end up in the 0% bracket for most of my ending years, a lot of that will depend on how long the 2 of us live.

[SJhawkins]

Quote:

Originally Posted by Dash man +1 Too many people also just look at the first few years of RMDs, not projecting out far enough to see the potential tax burden in their 80s.

This is such a great point and what has me thinking more about this. We had to help out with a family member who lost a spouse, ending up in long term care etc. Saw first hand some big butt tax bills, it was little crazy and could have been avoided I think.

[RunningBum]

Quote:

Originally Posted by SJhawkins This is such a great point and what has me thinking more about this. We had to help out with a family member who lost a spouse, ending up in long term care etc. Saw first hand some big butt tax bills, it was little crazy and could have been avoided I think.

LTC is one of the reasons often given here to NOT convert, because you can write off the medical expense against a large tIRA withdrawal. Maybe he didn't meet the requirements for it to be a deductible expense?

My plan is to take some LTCGs from taxable to help cover LTC, if I actually need it and if my tIRA is drained. It's better to write off regular income than LTCGs but I think it will work pretty well.

[SJhawkins]

Quote:

Originally Posted by RunningBum LTC is one of the reasons often given here to NOT convert, because you can write off the medical expense against a large tIRA withdrawal. Maybe he didn't meet the requirements for it to be a deductible expense? My plan is to take some LTCGs from taxable to help cover LTC, if I actually need it and if my tIRA is drained. It's better to write off regular income than LTCGs but I think it will work pretty well.

In this case they had a old LTC plan, that part worked out great. It gave us a insight to what can happen with the some of other "stuff" before and after LTC was needed.

[bada bing]

I did quite a bit of modelling and "what iffing" around Roth and tIRA balances. What I found for my situation is that there is an absolute dollar balance optimum for tIRA balances rather than a percentage split. That is because of the stair-step nature of tax brackets and various cliffs built into tax code. For my situation (single, no dependents, pension), it seems like I get/got no benefit from tax deferral that results in greater than $1.1m-$1.2m in tax deferred balance at RMD age. Lots of guesstimates & moving targets in my assumptions. I have 7 years until pension and SS and 9 years until RMDs. I'm right at my target $1.2M in tIRA now, so conversions will probably be targeted towards holding that balance with whatever the market returns. If the market meets historic averages and I did nothing, I could easily be in the highest bracket of my life at age 80. First world problems, but that doesn't mean it shouldn't be optimized.

One thing I lucked into was the ability to use backdoor and mega-backdoor conversions for the last 10 years of work. Roth balances are "more is always better", but you have to evaluate the cost to get the money in. With respect to my situation, all the money currently in my Roth is just money that would have been in my taxable savings if not for the backdoors.

I did quite a bit of my modelling using Right Capital software, which I found useful for the exercise. It is a subscription software package targeted at financial planners, but an individual can get access for a fee by going through some of the smaller financial planners that offer individual access for a set fee.

[qwerty3656]

Quote:

Originally Posted by SJhawkins Lots to unpack here but do think you hit on a few points for most us common folk, including myself. I do think if I do it right I could end up in the 0% bracket for most of my ending years, a lot of that will depend on how long the 2 of us live.

I've seen a few comments on this site about 0% tax bracket. How are people getting to a 0% tax bracket? Isn't anything over the standard deduction (25k for married people) taxable? Any reasonable social security and/or pension plus a de minimis other income (withdrawal from taxable IRA, earnings in taxable account, etc) and your over 25k.

[captain3d]

You can tax loss harvest your way to a negative income and then Roth convert back up to the top of zero %

For me this is normally achieved with rental property losses thanks to depreciation. Crypto crashes also help [emoji3]

[Fermion]

What about the opposite problem, too much Roth?

We use our IRA to Roth conversion to get our MAGI UP to a high enough level to qualify for ACA subsidies.

[captain3d]

No such thing as too much Roth [emoji106]

[punkinhead]

Quote:

Originally Posted by captain3d No such thing as too much Roth [emoji106]

There can be if you pre-paid too much taxes to get there.

[RunningBum]

Quote:

Originally Posted by qwerty3656 I've seen a few comments on this site about 0% tax bracket. How are people getting to a 0% tax bracket? Isn't anything over the standard deduction (25k for married people) taxable? Any reasonable social security and/or pension plus a de minimis other income (withdrawal from taxable IRA, earnings in taxable account, etc) and your over 25k.

I paid $0 taxes in 2016 and 2019. No SS yet, and no pension. Most of my income was qualified dividends. I did little or no Roth conversions those years to keep me off the ACA subsidy cliff. I had positioned myself in higher income years to have enough cash to not need to limit having to sell other investments for expenses. Without the ACA cliff in 2021 and 2022 I'm taking a little more income and paying some tax. I pulled my weight paying taxes when I exercised my stock options years ago, no avoiding those taxes back then but it sets me up well now.

[NW-Bound]

Quote:

Originally Posted by SJhawkins Reading the following thread below, one of the common points mention was/is the regret of not enough Roth Linky Here ...

Not enough Roth? The way I see it, the only way to have enough Roth is to have all of your investable assets in it. How to do it without paying a lot of taxes?

Back when I was still working, Roth contribution was not allowed above a certain income level. Nor was Roth conversion.

Then, when I stopped working and Roth conversion was allowed, I had to watch my taxes, and could not convert that much.

I am still doing it, but is it worthwhile to pay more taxes now than when I have to do RMD?

[Exchme]

Quote:

Originally Posted by bada bing I did quite a bit of modelling and "what iffing" around Roth and tIRA balances. What I found for my situation is that there is an absolute dollar balance optimum for tIRA balances rather than a percentage split. That is because of the stair-step nature of tax brackets and various cliffs built into tax code. For my situation (single, no dependents, pension), it seems like I get/got no benefit from tax deferral that results in greater than $1.1m-$1.2m in tax deferred balance at RMD age. Lots of guesstimates & moving targets in my assumptions. I have 7 years until pension and SS and 9 years until RMDs. I'm right at my target $1.2M in tIRA now, so conversions will probably be targeted towards holding that balance with whatever the market returns. If the market meets historic averages and I did nothing, I could easily be in the highest bracket of my life at age 80. First world problems, but that doesn't mean it shouldn't be optimized. One thing I lucked into was the ability to use backdoor and mega-backdoor conversions for the last 10 years of work. Roth balances are "more is always better", but you have to evaluate the cost to get the money in. With respect to my situation, all the money currently in my Roth is just money that would have been in my taxable savings if not for the backdoors. I did quite a bit of my modelling using Right Capital software, which I found useful for the exercise. It is a subscription software package targeted at financial planners, but an individual can get access for a fee by going through some of the smaller financial planners that offer individual access for a set fee.

As you say, you have to evaluate the tax costs. Of course, that's going to be different for each of us and we have to compare the tax brackets when making the IRA/401k contribution (or Roth conversion) vs. the time you are taking the money back out in retirement or for your heirs to take the money out after you're gone.

For me, contributing to a 401K was probably a wash for many years, so I only put in enough to get the company match - I wasn't going to turn down free money!

Then my income ramped up to higher brackets than I will likely have during retirement, so socking away as much as possible in the 401K in those years was definitely worthwhile and backdoor Roths would have been a bad deal, better for me to retire and do the Roth conversions then.

So I think OP's hope that it can be distilled down is too optimistic. You have to do some modeling (or hire it done) and accept that the future will make you wrong in some ways, so you have to keep doing course corrections as best you can.

[RunningBum]

Quote:

Originally Posted by NW-Bound Not enough Roth? The way I see it, the only way to have enough Roth is to have all of your investable assets in it. How to do it without paying a lot of taxes? Back when I was still working, Roth contribution was not allowed above a certain income level. Nor was Roth conversion. Then, when I stopped working and Roth conversion was allowed, I had to watch my taxes, and could not convert that much. I am still doing it, but is it worthwhile to pay more taxes now than when I have to do RMD?

Of course not. But why are you paying more in taxes now, in retirement, before you start RMDs? Most people don't. Do you have a hobby job or some kind of deferred income coming in?

[Jackietime]

Quote:

Originally Posted by qwerty3656 I've seen a few comments on this site about 0% tax bracket. How are people getting to a 0% tax bracket? Isn't anything over the standard deduction (25k for married people) taxable? Any reasonable social security and/or pension plus a de minimis other income (withdrawal from taxable IRA, earnings in taxable account, etc) and your over 25k.

Only a portion (if any) of SS is taxable depending on income and filing status. In our case, we are in the 0% federal tax bracket. I did not realize this in planning for retirement, so it's been like a surprise gift that happened when we decided to live debt free in a LCOL area. We live very well.

We will continue to do small Roth conversions and withdraw only dividends from our tIRAs to qualify for the ACA tax credit for DH until he is 65. He is 63 and I am 64. We both took SS at 62 and have no regrets. We have a cash cushion for things like a new electric car when the time comes. My retirement health insurance qualifies me to contribute to our HSA until I am on Medicare. This is his 1st year on ACA insurance so previously we could contribute more. The megacorp dramatically increased the premium for spouses for 2022. After we are both on Medicare, we may increase our Roth conversions and/or withdraw more from our tIRAs to BTD! Our 0% tax bracket journey will end then.

[SJhawkins]

Thanks everyone, lot of interesting comments.

From where I sit today with my crystal ball, trying to best guess the next 10-40 years is mostly cloudy. If I have learned one thing during the past 30 years of investing is what you think will happen the next 30 years is at best a WAG and you need to be open to make some corrections as it moves along.

With that said, for us I think about 1 million (in today's dollars) in deferred accounts is sane with as much as we can swing over to the Roths to fill up the lower couple brackets after the working income slows down.

Should count ourselves lucky, been able to max out 2 Roths for a good number of years, all in TSM, it's starting to look like something, until the Bear shows up!

I do feel we are on track on the Roth front but after I read that other thread from my OP it did make me think, hence this post!

Again, I thank you all

[NW-Bound]

Quote:

Originally Posted by RunningBum Of course not. But why are you paying more in taxes now, in retirement, before you start RMDs? Most people don't. Do you have a hobby job or some kind of deferred income coming in?

No, I am not paying more taxes now before RMD.

I said I would, if I wanted to convert a lot more to Roth.

[pb4uski]

Quote:

Originally Posted by qwerty3656 I've seen a few comments on this site about 0% tax bracket. How are people getting to a 0% tax bracket? Isn't anything over the standard deduction (25k for married people) taxable? Any reasonable social security and/or pension plus a de minimis other income (withdrawal from taxable IRA, earnings in taxable account, etc) and your over 25k.

There are two 0% tax brackets. One is not an offical 0% tax bracket but effectively 0% and that is for income under the standard deduction (or I guess itemized deductions) in that since that income is offset by a deduction the tax on that income is nil... effectively 0%. The other 0% tax bracket is on qualified dividends and long-term capital gains for lower-to-middle income taxpayers.

For example, my pension and our interest income and DW's taxable SS are less than our standard deduction... so we have some headway for additional income that utilizes standard deductions that would otherwise be unused... effectively a 0% effective tax rate for that incremental income. I fill that with Roth conversions and pay no tax on those conversions.

On the second part, in 2022 if you were MFJ both over 65 with standard deductions and all your income was qualified dividends or LTCG and you had no ordinary income, you could have as much as $111,850 of qualified income and pay $0 in tax.

[SecondCor521]

One can also have an effective 0% tax rate if one has refundable credits.

Probably a bit of a corner case, but I think muni bond in your state of residence are federal and state tax free.