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Roth Conversions for us?
Old 08-03-2020, 02:21 PM   #1
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Roth Conversions for us?

We didn't do any tax planning for retirement. None. We just saved in our TSP accounts and ignored any planning. Then we woke up financially after a close family member died and realized we weren't going to live forever and that retirement was a possibility. Luckily we managed to save a good amount of money and will have two pensions and two SS payments (at 62 and 67, retiring at 56).

We are currently in the 24% tax bracket and will be in the same tax bracket in retirement unless we cut our expenses a bit and then we can barely stay in the 22% bracket. But we don't want to cut expenses if we don't have to and Firecalc is giving us 100% with higher spending. We aren't worried about ACA because of having FEHB. We have enough cash to avoid any TSP withdrawals for a year after retirement and some real estate that one of us inherited that will cover another year of withdrawals once we sell it, hopefully next year. We do not have a any other accounts to pull from to pay taxes on any Roth conversions.


The things I've been told to consider is 1) Will tax rates be higher in the future? and 2) If one spouse dies, then the other spouse would most likely be in a higher tax bracket when filing single. What else do we need to consider about Roth conversions? Do they make sense given our financial situation?
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Old 08-03-2020, 02:37 PM   #2
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The real question to ask yourself is.... once your pensions and SS and any other non-discretionary income, what tax bracket will you be in? How about once RMDs start? Also, what tax bracket will you be in from ER at 56 until SS at 67? Will your tax bracket be lower in those years.

In most cases, it makes sense to do Roth conversions up to the tax bracket that you expect to be in once pensions and SS and RMDs start. If you don't have taxable account money to pay the tax then IMO it is still worthwhile.... you're just trading a lower tax rate today for a higher tax rate in the future.

One strategy to consider after you are 59 1/2 is to optimize your Roth conversions and then draw money from the Roth for spending as needed. Money withdrawn for spending is effectively the same as simple withdrawals for spending and any excess stays in the Roth.
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Old 08-03-2020, 03:04 PM   #3
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Originally Posted by pb4uski View Post
In most cases, it makes sense to do Roth conversions up to the tax bracket that you expect to be in once pensions and SS and RMDs start. If you don't have taxable account money to pay the tax then IMO it is still worthwhile.... you're just trading a lower tax rate today for a higher tax rate in the future.
I went through the same exercise in great detail (using Income Strategy software) late last year and came to exactly the same conclusion as above, so I began converting to the top of the 22% bracket last year and will continue until Soc Sec/RMD’s start. It came down to relatively low taxes (12% marginal) for the next 6-7 years (where I was) and then 22-25% for the rest of our lives (23 years?) OR doing Roth conversions and paying 22% for the next 6-7 years and 15% (after TCJA expires) thereafter instead. I don’t expect tax rates (or cap gains) to stay the same of course, but I believe they can only go up, no way they’ll come down for any meaningful period of time - which only makes conversions now more advantageous in the long run. FWIW
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Old 08-03-2020, 04:45 PM   #4
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This is probably way down on the list of considerations, but with the SECURE Act, now most beneficiaries have to drain IRAs within 10 years.

If you have a lot in your traditional IRAs, and your beneficiaries would not qualify for an exception to the 10 year rule, and the amount of additional income would add significantly to their taxes (they might be in their 40s or 50s and in peak earning years), then that adds a qualitative reason to do conversions.

The only other thing to mention is that you may be subject to IRMAA on your Medicare premiums. Note that IRMAA premiums for a single widow/widower can jump up because the brackets for singles are lower than for couples. Although if a pension goes away that may not be as much of an issue in your case.

(@Midpack, do you mean 25% after TCJA expires instead of 15%? I assume so, otherwise you may be overconverting and I wouldn't expect you to do that.)
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Old 08-03-2020, 05:17 PM   #5
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Originally Posted by goingtotravel View Post
The things I've been told to consider is 1) Will tax rates be higher in the future? and 2) If one spouse dies, then the other spouse would most likely be in a higher tax bracket when filing single. What else do we need to consider about Roth conversions? Do they make sense given our financial situation?
You have been told well on those items (with the answer to #1 being "maybe, maybe not").

Other consideration: if you can pay the conversion tax from cash on hand, "tie goes to the Roth." In other words, converting now is better than converting later, even for identical marginal rates, because you get to move taxable money to Roth.

See Traditional versus Roth - Bogleheads for details.
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Old 08-03-2020, 06:09 PM   #6
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This is probably way down on the list of considerations, but with the SECURE Act, now most beneficiaries have to drain IRAs within 10 years.

If you have a lot in your traditional IRAs, and your beneficiaries would not qualify for an exception to the 10 year rule, and the amount of additional income would add significantly to their taxes (they might be in their 40s or 50s and in peak earning years), then that adds a qualitative reason to do conversions.

The only other thing to mention is that you may be subject to IRMAA on your Medicare premiums. Note that IRMAA premiums for a single widow/widower can jump up because the brackets for singles are lower than for couples. Although if a pension goes away that may not be as much of an issue in your case.

(@Midpack, do you mean 25% after TCJA expires instead of 15%? I assume so, otherwise you may be overconverting and I wouldn't expect you to do that.)
Roth conversion calculations are very complicated in assessing the "sweet spots" for making conversions. Luckily, the OP has plenty of time to carefully assess when, if at all, to begin conversions. When you add potential handoff of the tax deferred accounts to heirs and IRMAA triggers, the calculations become even more difficult.

For instance, I've done conversions since my wife and I turned 59.5 with the full knowledge that my adult children will likely be in the highest tax brackets during their earnings years -- two are now in the 35% bracket and the remaining child is in the 24% bracket, which is the bracket my wife and I will always be in during retirement with our pensions, SS benefits, and RMDs. So, it makes sense for us to do the conversions before and after the Secure Act, which eliminated stretch for IRAs for my non-spouse beneficiaries and threw a monkey wrench into our estate planning for our trusts. But, I know a couple who is similarly situated to us -- with lopsided tIRA funds, when compared to Roths, and yet it might not make any sense for them to do conversions at the upper end of the 24% bracket, when it's very doubtful that their adult children will ever escape the 12% bracket during their earnings years.

With IRMAA, the OP (and spouse) should decide whether they should even enroll in Medicare Part B, as their FEHB insurance is more than adequate from an insurance coverage standpoint. As a Federal annuitant, I opted out of Medicare Part B, but my wife isn't a Federal retiree and we decided to have her enroll in Part B (even though she is also covered by my FEHB insurance under Self plus 1 coverage). We pay over $4200 in Medicare Part B premiums for her Medicare coverage. Whether one should enroll in Medicare Part B should be assessed at 63 if OP is retired, as Medicare bases IRMAA calculations on tax returns filed 2 years before Medicare enrollment.

Finally, conversions take a hefty tax bite, both Federal and state income taxes. If the OP resides in a state income tax free state, that would be helpful. In my case, when we start doing conversions out of my TSP, I won't have any state income tax on those conversions under NC law, but my wife's conversions out of her 401K and IRA's have state income tax consequences.
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Old 08-03-2020, 10:42 PM   #7
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I think Roth conversions make sense for most folks right now given the expectation of higher future rates, either through tax law changes or death of a spouse leading to much higher brackets for same income,.or both.

Having said that, you need to run your numbers considering various scenarios to craft your own strategy.
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Old 08-04-2020, 06:29 AM   #8
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Thank you for your responses so far. To add another data point that was brought up several times. We do not have any heirs. Our plan is to leave our entire estate to charities. Not sure if that changes the Roth conversion analysis.

Quote:
As a Federal annuitant, I opted out of Medicare Part B, but my wife isn't a Federal retiree and we decided to have her enroll in Part B
We are putting that decision off for a while. DH and I both have FEHB coverage and DH will also probably be getting TRICARE too. I need to do more research on the benefits, if any, of taking Part B later.

Quote:
If the OP resides in a state income tax free state, that would be helpful.
We will have to pay taxes on our conversions where we live.

Quote:
The real question to ask yourself is.... once your pensions and SS and any other non-discretionary income, what tax bracket will you be in? How about once RMDs start? Also, what tax bracket will you be in from ER at 56 until SS at 67? Will your tax bracket be lower in those years.
Given our projected SWR we are going to be in the 24% bracket until we start to get to the slow-go and/or no-go stages and even then with SS and RMD's we will be in the top of the 22% bracket.

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See Traditional versus Roth - Bogleheads for details.
Thank you. I will read that link.
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Old 08-04-2020, 07:16 AM   #9
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And for the record, all the quick-n-dirty calculators (including Vanguard) online said Roth conversions would be a wash for us. It was only when I actually ran the numbers in detail, various scenarios, that it was apparent it was to our advantage to begin conversions. There are many other nuances as well, as noted above everyone with a substantial TIRA should probably run their specific numbers.
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Old 08-04-2020, 07:28 AM   #10
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It is not a big number, but to the top of the 12% bracket is a no-brainer.
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Old 08-04-2020, 07:48 AM   #11
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Hmmm, I'm not sure I'd go through with Roth conversions if the intended beneficiaries are charities, especially if the tIRAs (TSP or other non-Roth tax deferred accounts) are sizeable. My wife and I have done large conversions the last several years, delayed SS, and yet I'll still have a 2 comma TSP and 401K account going into my own schedule of conversions until I reach 72. The conversions will greatly benefit our children heirs. We'll do QCDs from a traditional IRA in the future, which should be a part of your tax planning.

Also, if you don't have Federal LTC coverage, you should think about not converting all your traditional tax deferred accounts into Roth IRAs -- large medical expenses in the "no-go" years might offset tax liabilities from RMDs or draw downs from these accounts.

There are online tools to make these calculations. You can follow the numerous iterations of one oneline tool here: https://www.bogleheads.org/forum/vie...hp?f=2&t=97352
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Old 08-04-2020, 08:07 AM   #12
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Tax now or tax later seems to be people's main consideration when evaluating Roth conversions. Including the possibility of a spouse passing in the evaluation seems to be a secondary consideration. In our case we considered both and are doing Roth conversions. One other part we evaluated is, since we are currently living below our SWR, when RMDs hit us, we will be moving $ from a pre-tax account into a taxable account. All future dividends etc in that taxable account will be taxed annually. Any $ you can move today in a Roth conversion lowers the RMD amount and those taxes .
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Old 08-04-2020, 09:19 AM   #13
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The i-orp linear programming calculator usually recommends some pretty high Roth conversions because it has an eye on RMD's. I wouldn't take the result as gospel, but provides a good data point. It takes hours of fiddling for the uninitiated to get comfortable with the workings of it.


The best news is that the difference between making every one of the chess moves perfectly and ignoring the whole thing is pretty small. i-orp can demonstrate that because you can flip converting on and off and look at the $/year change.
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Old 08-04-2020, 11:57 AM   #14
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Hmmm, I'm not sure I'd go through with Roth conversions if the intended beneficiaries are charities....
+1

If the expected future marginal tax rate is 0%, there is no reason to pay any tax rate now, not even 10% or 12%.

It gets a little trickier when estimating what fraction of the balance RMDs will consume, and the tax rates on those. The usual assumption in "when to do Roth conversions," however, is that all the traditional money will be taxed at some point and that assumption is invalid if charities are the expected beneficiaries.
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Old 08-05-2020, 02:17 AM   #15
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I have found the Retiree Portfolio Model at Bogleheads spreadsheet excellent for determine Roth conversion decisions and seeing how tweaking the timing of the conversions affects your cash flow, taxation and heir benefit. Th spreadsheet is a beast, but the developer does answer questions privately and the extensive wiki helps with questions as well. It takes a bit of time to set up, but once you do that there are many choices and the information is very granular on many levels....

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
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Old 08-05-2020, 05:04 AM   #16
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I have found the Retiree Portfolio Model at Bogleheads spreadsheet excellent for determine Roth conversion decisions and seeing how tweaking the timing of the conversions affects your cash flow, taxation and heir benefit. Th spreadsheet is a beast, but the developer does answer questions privately and the extensive wiki helps with questions as well. It takes a bit of time to set up, but once you do that there are many choices and the information is very granular on many levels....

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
I concur ; This is an excellent tool. It takes a while to sift though it but does a very thorough job of laying things out.
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Old 08-05-2020, 07:00 AM   #17
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Odd - I received an email telling me there was a response regarding the RPM at Bogleheads; it was question about the macros in that spreadsheet.

They are massive - a beast as I said above. I think one has to have some more modern versions of excel (I use Excel 2010) and they also offer a Libre Version with people who use OpenOffice.

I had some issues to begin with filling out the sheet - there are a few buttons in the setup sheet that need to be toggled on to get the flows to properly work - read the directions and wiki carefully. There is a section near the end of the set up tab that allows Roth conversions to be taken into account. One option is a calculated approach, i.e., 'slam it in as fast as possible based on future tax rates and RMDs ala i-Orp" or a manual approach where you can fill up the conversions up to a specific income tax bracket. Moreover, if you go to the Results tab, the spreadsheet compares a baseline approach without Roth conversions and an approach with Roth conversions if you checked that as an option on the setup page. The author of the spreadsheet has three separate 'tests' used to recommend whether or not one should convert to Roth.

I find it an amazing tool; and used in conjunction with FireCalc and i-Orp one can get a fairly good idea of how their portfolio will extend over time based on your conditions.

There is another spreadsheet that is actuarily based https://howmuchcaniaffordtospendinre...eadsheets.html. This spreadsheet does not make Roth conversion recommendations.

For DIY, the best current tools available online for assistance with Roth conversion decisions are i-ORP and the RPM above. Otherwise, you would need to build your own spreadsheet or go non-DIY for assistance.
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