Not enough Roth

[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]

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]

No such thing as too much Roth [emoji106]

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

 

[RunningBum]

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]

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]

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]

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]

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]

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]

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.

 

[NW-Bound]

... 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.

Yes. If you have a lot in taxable accounts, you can live well without having to pay any tax. Unfortunately, I spent down my taxable accounts while waiting till 59-1/2 to draw from retirement accounts.


However, having a lot in Roth, which I don't, would help me even more. I generate a lot of money from option selling ($300k/year), which would be taxed as ordinary income if done in a taxable account. I am doing this option selling in an IRA, which will all be taxed as ordinary income. In a Roth, all that money would be tax-free. It's so unreal, it does not feel right.

 

[Niuatoputapu]

Thanks everyone, lot of interesting comments.

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.

As many people have said, everyone's situation is a little different and the answer depends on your "tax/IRMAA/ACA/Legacy" situation. I like the "how much in tax-deferred accounts do I want - everything else in a Roth" approach rather than any Deferred/Roth/Taxable allocation target.

I do a lot of modelling, and here are my general findings for DW and me.
1) Our Roth conversions have minimal arbitrage benefits while DW and I both survive, unless markets do very well, or laws change.
2) The more significant benefits are for the surviving spouse and especially if IRMAA cliffs can be avoided.
3) Our portfolio is 70% tax deferred. We plan to convert up to the first IRMAA threshold (MFJ) every year for the next 15 or so years (includes RMD years.) (First threshold MFJ, 2020, was $182,000)
4) We will stop converting to Roth when the deferred portfolio gets down to $1.2 million (nominal). We hope to reach that level by 2037 (year I turn 80).
5) RMDs in our 80's on a declining $1.2 million balance would put surviving spouse in an okay tax situation. And, $1.2 million in 2037 or later dollars, assuming there is still a tax benefit to use deferred dollars for LTC, would be useful for LTC, if needed.
6) Plan is more complicated if one of us passes early.

So, I like your concept of a deferred account dollar target. $1 million (your number) in today dollars would be $1.3-$1.6 million in 2037 dollars, so that's not far from our plan.

 

[NgineER]

We were fortunate enough to do do some early roll overs while in graduate school and also roth 401k contributions in 2009. We are now at 52% Roth and 46% t-IRA and 2% taxable. Rental properties and additional contributions from W@rk over the final 8 years of work, if all goes as planned, should place us at 44% tIRA, 42% Roth and 14% taxable.

Man plans and God laughs...

 

[Gumby]

We are at:

67% deferred (tIRA, 401k, 403b, 457)
21% taxable
12% Roth IRA

I'd say not enough Roth.

 

[Exchme]

As many people have said, everyone's situation is a little different and the answer depends on your "tax/IRMAA/ACA/Legacy" situation. I like the "how much in tax-deferred accounts do I want - everything else in a Roth" approach rather than any Deferred/Roth/Taxable allocation target.

I do a lot of modelling, and here are my general findings for DW and me.
1) Our Roth conversions have minimal arbitrage benefits while DW and I both survive, unless markets do very well, or laws change.
2) The more significant benefits are for the surviving spouse and especially if IRMAA cliffs can be avoided.
3) Our portfolio is 70% tax deferred. We plan to convert up to the first IRMAA threshold (MFJ) every year for the next 15 or so years (includes RMD years.) (First threshold MFJ, 2020, was $182,000)
4) We will stop converting to Roth when the deferred portfolio gets down to $1.2 million (nominal). We hope to reach that level by 2037 (year I turn 80).
5) RMDs in our 80's on a declining $1.2 million balance would put surviving spouse in an okay tax situation. And, $1.2 million in 2037 or later dollars, assuming there is still a tax benefit to use deferred dollars for LTC, would be useful for LTC, if needed.
6) Plan is more complicated if one of us passes early.

So, I like your concept of a deferred account dollar target. $1 million (your number) in today dollars would be $1.3-$1.6 million in 2037 dollars, so that's not far from our plan.

You hit on an important point that is often overlooked - even after RMDs start, Roth Conversions to fill the tax bracket/IRMAA tier while you are both around may still be advisable, at least as insurance against one spouse living a lot longer than the other.

We find a slightly different pattern than going to the same IRMAA tier/tax bracket each year. We find ages 65-67 at the 2nd IRMAA tier (or the $250K NIIT AGI threshold, whichever is lower). For ages 68-71, the best for us is to convert to the top of the 0% LTCG bracket. That minimizes SS taxation prior to RMDs and gets some dividends and capital gains taxed at 0%, instead of having to push through the tax humps associated with the phase-ins of SS and LTCG taxation.

I didn't see any postings in this thread mention that it can be useful to load the IRA with your bonds. Slowing the growth of tax deferred by doing putting your bonds there preferentially will reduce RMDs by redirecting growth to the other accounts. The benefit can be similar in size to doing Roth conversions.

 

[free2020]

0/72/28% in Taxable/Tax deferred/Tax free; Age 62/57

Hope to see this go to
0/30/70 by RMD age.

Plan no further Roth conversions.

First world problem; unlikely to run out of money.

 

[harllee]

The vast majority of our assets are in traditional IRAs, small minority in Roths. Our SS payments are over $5000 per month. We will have fairly large RMDs in two years when we turn age 72. We plan to do fairly substantial charitable gifts from our IRAs (QCDs up to a max of $100,000 per year) which will reduce our RMDs. If you plan to do charitable gifts from your IRAs you do not really need to do much in the way of Roth conversions.

 

[MRG]

16% Roth, 2% post tax and the rest is taxable. After 9 years of keeping our income lower its time for some conversions between 65-72. DW gets 1k monthly SS and I'm supposed to get 4k at age 70 I'd like to get 50% in our Roth by RMD time.

Good suggestions in here thanks.

 

[SJhawkins]

I didn't see any postings in this thread mention that it can be useful to load the IRA with your bonds. Slowing the growth of tax deferred by doing putting your bonds there preferentially will reduce RMDs by redirecting growth to the other accounts. The benefit can be similar in size to doing Roth conversions.

Very good point. We have all taxed deferred accounts in bonds with exception to the largest IRA used for mostly rebranding. For now all Roths and taxable are equites. We also been making bond space with the use of Ibonds, takes a few years but it does start adding up!

 

[oldtimer]

The vast majority of our assets are in traditional IRAs, small minority in Roths. Our SS payments are over $5000 per month. We will have fairly large RMDs in two years when we turn age 72. We plan to do fairly substantial charitable gifts from our IRAs (QCDs up to a max of $100,000 per year) which will reduce our RMDs. If you plan to do charitable gifts from your IRAs you do not really need to do much in the way of Roth conversions.

If "we" is a married couple, then do QCDs up to a maximum of $200k/year ($100k/yr per individual).