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Too Late for Roth….?
Old 01-14-2022, 07:37 PM   #1
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Too Late for Roth….?

Unfortunately I never focused on Roth until now…here I sit at 60.

My situation: currently working; DW and I income puts us solid in 35% “racket” just in past 3 years due to RSU’s; assets are 45% 401K, 55% taxable. My employer of course offers a 401 K, but just noticed they have a Roth 401K. Given I’m so “late in game” is it feasible to even attempt the back door Roth…?

Im thinking of setting up RPM and/or I-orp model to play with the numbers. So far I’m using Fido model at 150+, I’m hoping they are doing my tax calculations right…
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Old 01-14-2022, 07:59 PM   #2
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If you are truly at 150+ in Fidelity, perhaps time to retire.
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Old 01-14-2022, 08:08 PM   #3
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Originally Posted by RetiriusMinimus View Post
Unfortunately I never focused on Roth until now…here I sit at 60.



My situation: currently working; DW and I income puts us solid in 35% “racket” just in past 3 years due to RSU’s; assets are 45% 401K, 55% taxable. My employer of course offers a 401 K, but just noticed they have a Roth 401K. Given I’m so “late in game” is it feasible to even attempt the back door Roth…?



Im thinking of setting up RPM and/or I-orp model to play with the numbers. So far I’m using Fido model at 150+, I’m hoping they are doing my tax calculations right…

Look at your balance in your 401k and any traditional IRAs and forecast it’s growth out to age 72. Compute what your first year RMD will be by dividing the balance by 27.4, then add that to other income to expect to have for that year, like social security, and pensions, annuities or other ordinary income. See what tax bracket you expect to be in and compare to see if it will be higher or not compared to what bracket you’re in now. Remember the TCJA sunsets in 2026.
Other considerations are if married, what will happen if one of you passes and the surviving spouse files as an individual.
You may want to consider putting your current contributions into a Roth now if your RMDs will put you into a high tax bracket.
High RMDs can also trigger IRMAA for Medicare and NIIT for capital gains and dividends.
So, no, it’s not too late to start a Roth. I also suggest you open a Roth IRA and do a backdoor contribution to start the five year clock.
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Old 01-15-2022, 06:41 AM   #4
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Good ideas from Dash man, optimizing Roth Conversions are quite complex. You can also try to slow the growth of your IRA by placing your bonds in the IRA and leaving taxable and future Roth for stocks.

Other factors to consider in thinking about Roth Conversions is what are your life goals and planning horizon. If you going to make large donations to charity, do those as QCDs from the IRA. If you are going to leave bequests to charity, then your planning horizon is for your (and your spouse's) life only. If you want to optimize the value your heirs get from your estate, then you need to include the taxes they are likely to pay on the withdrawal of funds from your IRA in the 10 year window they have to do that.

Since you are in the 35% bracket now, I'm guessing you've amassed quite a pile, so also consider that since the TCJA sunsets after 2025, that the estate tax exemption drops to $6.03M/person after that ($12.06M combined if married). Heirs will lose 40% of everything above that. That makes Roth Conversions more urgent as the last thing you want is your estate to owe taxes on the embedded tax liability in your IRA.
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Old 01-15-2022, 07:26 AM   #5
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I still don't trust that Roth's will be tax free for HNW individuals. The rules for some of those already nearly changed in the last few months. I expect that to eventually get through and expand from there as it always does. Given you are at 35% marginal (+state?), you'll need quite the income in retirement to have an effective fed tax rate of 35%+ (Over a $1m/yr), much less tip over that to come out behind. I'd still prefer the immediate and guaranteed tax advantage today and then use the tax savings to invest in post-tax investments.
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Old 01-15-2022, 07:58 AM   #6
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I made a post similar to this one a few weeks ago and got a lot of good responses as well as links to various worksheets so that you could do the math and see what works out best for your individual situation. In my case it comes down to basically paying tax that my heirs would have to pay and considering the five year rule, it doesn't make much sense. I would comment the sooner you start a Roth, the better off you will be with the understating our tax system is ever changing and what is true today, may not be the case tomorrow.
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Old 01-15-2022, 08:38 AM   #7
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OP is one of the people where a Roth probably doesn't make sense.

If they're MFJ and in the 35% bracket, that means a taxable income of around $432K per year or more.

Most people spend less than $432K in retirement. A lot less. If this is true of OP, their retirement income, at least until RMDs hit, will likely be lower than $432K.

Therefore, OP will probably be in a lower tax bracket for a while. If true, it would make more sense to me to contribute to a traditional 401(k) or even a taxable account instead of a Roth mechanism. Avoid the 35% now and maybe pay 32% or even 24% for a few years (after retiring, before RMD age). Top of 24% is about $340K.

Of course, it does depend on what OP thinks will happen with TCJA sunset and tax rates in general, and perhaps whether they intend to move states during their planning horizon. My state's top rate is 6.5% currently, so that could be a significant factor when looking at the differences in federal rates between 24%/32%/35%/37%.

On the flip side, if they do a Roth option, they're paying taxes now at 35% so they can...avoid 35% later? avoid 37% later? Not much of a difference.

There are other tax cliffs up there that I'm not to familiar with that could be worth bothering over. NIIT might be one. Loss of QBI might be another. The top few IRMAA tiers.

The bigger tax saving move would probably be to just retire if OP has a lifestyle they're happy with now. Unless they really want a better lifestyle or want to run the numbers up for some competitive reason, at this point my guess would be that they're just creating bigger income tax and estate tax headaches for themselves and any (non charity) heirs they have.
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Old 01-15-2022, 08:44 AM   #8
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not sure what you mean by truly? i've entered in all detailed expenses, including estimates of LTC and gap insurances. assuming Fido's tool is good, the score is the score...

ill retire in 2 years as i've got quite a few RSU's vesting quarterly that peak through early 2024...


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If you are truly at 150+ in Fidelity, perhaps time to retire.
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Old 01-15-2022, 09:12 AM   #9
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guys thanks for all the input here. i really haven't a pile here. at 60 i'm south of 2.5ish in total (tax and non tax) and live in HCL area (Connecticut).so nowhere near a fortune by any means compared to others folks on these boards.

i was lucky last 3-4 years of getting into a role that beefed up me balances... we can live on 85-90K comfortably given our lifestyle.


. question for me is what actions i can reasonably take to minimize pain if at all possible. it is what it is...
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Old 01-15-2022, 09:26 AM   #10
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Originally Posted by RetiriusMinimus View Post
guys thanks for all the input here. i really haven't a pile here. at 60 i'm south of 2.5ish in total (tax and non tax) and live in HCL area (Connecticut).so nowhere near a fortune by any means compared to others folks on these boards.

i was lucky last 3-4 years of getting into a role that beefed up me balances... we can live on 85-90K comfortably given our lifestyle.


. question for me is what actions i can reasonably take to minimize pain if at all possible. it is what it is...
If you can live on that amount, then you are likely going to be in the 12% or 22% bracket between retirement and RMD time, depending on how you choose to fund your spending and how much in Roth conversions you do.

If you're still in the 35% bracket now due to high income, I think a Roth would be a really bad idea - you're paying 35% now when you could pay 12% or 22% when in early retirement. I'd be filling every tax-deductible option in sight if I were in your shoes and avoiding Roth options like the plague.
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Old 01-15-2022, 09:55 AM   #11
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that makes sense... wish i had deductions but i don't. house is paid off. no medical bills and stuff. very little in capital losses (maybe i should have listened to a friend and some one of those tax managed accounts...). guess we can make some donations but i can't think of any deductions...

thanks again!


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If you can live on that amount, then you are likely going to be in the 12% or 22% bracket between retirement and RMD time, depending on how you choose to fund your spending and how much in Roth conversions you do.

If you're still in the 35% bracket now due to high income, I think a Roth would be a really bad idea - you're paying 35% now when you could pay 12% or 22% when in early retirement. I'd be filling every tax-deductible option in sight if I were in your shoes and avoiding Roth options like the plague.
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Old 01-15-2022, 12:10 PM   #12
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Ok, OP is in peak earning years right now but tax brackets won't be this high later, so max out tax deferred contributions now and consider Roth Conversions when you retire in a couple of years.
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Old 01-15-2022, 01:12 PM   #13
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guys thanks for all the input here. i really haven't a pile here. at 60 i'm south of 2.5ish in total (tax and non tax) and live in HCL area (Connecticut).so nowhere near a fortune by any means compared to others folks on these boards.

i was lucky last 3-4 years of getting into a role that beefed up me balances... we can live on 85-90K comfortably given our lifestyle.


. question for me is what actions i can reasonably take to minimize pain if at all possible. it is what it is...
Your effective tax rate in retirement on $90k in income for a married couple will be 6-15% +- depending on state income, what your income is coming from and other deductions, you are better off with the tax savings now. (a lot of people also mistakenly compare marginal in both current and retirement - in retirement you are starting off with zero income so you use effective rate generally to compare to your marginal rate today on tax savings)
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Old 01-16-2022, 12:34 AM   #14
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that makes sense... wish i had deductions but i don't. house is paid off. no medical bills and stuff. very little in capital losses (maybe i should have listened to a friend and some one of those tax managed accounts...). guess we can make some donations but i can't think of any deductions...

thanks again!
You have your 401K.

Other deductions are often simply a reduction of losses by a bit.
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Old 01-16-2022, 06:39 AM   #15
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There are many YouTube videos discussing Roth Conversions that are useful in making your decision. Some point out good reasons for systematic Roth conversions up into the 24% bracket or higher for a few years to significantly lessen taxes in later years while enjoying tax free growth.
One video I saw illustrated the drag holding money in taxable accounts has on your overall portfolio, when that money can be used to pay taxes on tIRA funds to move them into a Roth. Having to pay annual tax on interest, dividends and capital gains is compared to paying fees to a money manager taking about a third of your gains.
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Old 01-16-2022, 08:30 AM   #16
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Your effective tax rate in retirement on $90k in income for a married couple will be 6-15% +- depending on state income, what your income is coming from and other deductions, you are better off with the tax savings now. (a lot of people also mistakenly compare marginal in both current and retirement - in retirement you are starting off with zero income so you use effective rate generally to compare to your marginal rate today on tax savings)
That Effective Rate thing is only partially accurate and only for certain retirees.
In my case, for example, pension/annuities + SS fill up my lower tax brackets such that all withdrawals from tax-deferred are in the 24% Federal tax bracket. These withdrawals were Roth conversions the past few years and RMDs from this year on.
Cheers...
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Old 01-16-2022, 11:11 AM   #17
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That Effective Rate thing is only partially accurate and only for certain retirees.
In my case, for example, pension/annuities + SS fill up my lower tax brackets such that all withdrawals from tax-deferred are in the 24% Federal tax bracket. These withdrawals were Roth conversions the past few years and RMDs from this year on.
Cheers...
True, but the % of folks making more than $200k married (The amount needed to have any taxable income at 24%, and way over that to have any significant amount at 24%) or $100K single in retirement even with those things is quite small. Assuming a 3.5% withdrawal rate and $50k coming in from SS, you'd need around $4.25 million as a married couple to hit $200k in income. And a lot more than that to pay a lot of income tax at 24%.

Further, every year fewer and fewer retirees will have a pension at all, much less one of any size that again would make a dent towards the #s discussing so for vast majority of workers today, they only have their own savings, and hopefully SS.

There are exceptions where a Roth > 401k Regular (eg: you will inherit a lot or you made a fortune from stock from a start up you worked at), but they are few and far between for workers in their prime. Plus, Roth's always risk being taxed later for folks where the math actually would make sense for a Roth while the 401k tax savings today is guaranteed. IMO Roth's are extremely overvalued. Overwhelmingly people have a lower highest marginal tax bracket in retirement, much less effective on their retirement income vs the marginal highest while working.

When giving advice online to folks with a limited view of their situation, I generally strongly prefer to go with a typical situation, especially when in this case its overwhelmingly so for most folks.
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Old 01-16-2022, 11:22 AM   #18
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Originally Posted by Dash man View Post
Look at your balance in your 401k and any traditional IRAs and forecast it’s growth out to age 72. Compute what your first year RMD will be by dividing the balance by 27.4, then add that to other income to expect to have for that year, like social security, and pensions, annuities or other ordinary income. See what tax bracket you expect to be in and compare to see if it will be higher or not compared to what bracket you’re in now. Remember the TCJA sunsets in 2026.
Other considerations are if married, what will happen if one of you passes and the surviving spouse files as an individual.
You may want to consider putting your current contributions into a Roth now if your RMDs will put you into a high tax bracket.
High RMDs can also trigger IRMAA for Medicare and NIIT for capital gains and dividends.
So, no, it’s not too late to start a Roth. I also suggest you open a Roth IRA and do a backdoor contribution to start the five year clock.
+1, bold is the bottom line. It's never too late to improve your situation.
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Old 01-16-2022, 12:26 PM   #19
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+1, bold is the bottom line. It's never too late to improve your situation.
One other thing to do with the above advice - you also need to forecast out the tax tables out the same # of years to compare as well. 2.5% inflation out 15 years would mean you need to add ~45% to each tax bracket and the standard deduction. 3% inflation would be adding ~55% to each tax bracket and standard deduction. Plus always add some risk that Roth's may not actually be tax free. 2021 was the first year politicians touched on doing just that and I expect that calls for "fairness" around Roths to grow in the coming years, especially among those considered HNW individuals.

(Personally, I think the risk of the TCJA actually sunsetting tax rates for everyone except maybe the top bracket is extremely low - it has been a very, very long time since tax rates for the bottom 90% actually increased)
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