Best uses of a Roth

[Alex The Great]

I have no kids or close relatives and plan to spend earnings/dividends in Roth to manage ACA cost in early retirement years, and reduce the tax bomb impact once I'm on Medicare and file for SS. However Roth conversions looks tricky at this point as they push ACA cost up in pre-Medicare. My plan is to make aggressive Roth conversions between 65 and 70 once I'm on Medicare but no SS yet (of course if no changes to SS and Medicare age).
But the amount of pre-tax money in 401K & tIRA is a challenge as I do have 2.7 ratio pre-tax to Roth. Probably would need to make donations at some time.

 

[tulak]

I consider 401k/IRA (or 403b) as the same. I categorize accounts using three buckets: tax deferred, taxable, and tax free.

I’m still contributing to a 401k and will likely have over 70% in tax deferred if I retire at 55. It doesn’t make sense for me to stop contributing, since I’m in a high tax bracket, but realize it’s going to be a challenge to draw down the tax deferred accounts before RMDs. I figure it’ll be a nice problem to have.

As for Roths (tax free), I will spend those last, except for the HSA. If I’m lucky, that money may never be spent and my heirs will be happy. I plan to convert as much as possible, but will see how that works out once I stop working.

 

[NgineER]

I never thought to see what our percentage was.. may try that going forward.



Does one count the 401K in the IRA group, since it can convert to an IRA and is like an IRA once retired, or leave it out. ?

Maybe I should have stated tax deferred accounts tIRA and 401(k) vs tax free.

 

[FREE866]

Great thread as usual

Im 56 now and my plan is to start taking SS at 70. That will cover most of my expenses and I was actually planning on using the Roth account post 70 to cover any needed additional income above SS. This way everything would be tax free.

Is that not a good strategy?

 

[user5027]

That will cover most of my expenses and I was actually planning on using the Roth account post 70 to cover any needed additional income above SS. This way everything would be tax free.

Is that not a good strategy?

Up to 85% of SS is taxable depending on your amount of income.

 

[FREE866]

Up to 85% of SS is taxable depending on your amount of income.

Correct. And when I plug in up to 90k in ss income, as a nys resident and that is my only income my tax liability is zero.

This is calculator I used:


https://www.irscalculators.com/tax-calculator

 

[bada bing]

Always an interesting discussion.

Do you all have an end goal in your conversions with respect to Roth IRA/tIRA ratio?
50/50, 72/25, 90/10 or 100/0?

I see the benefit of being able to pay for medical expenses, QCD etc.

While working, I worked out for my situation that percentages aren't what is important. What is important is tax deferred balance. For my personal single filer situation, anything above a $1.1M-$1.2M balance in tax deferred defeats the tax arbitrage advantage. I saved too much in tax deferred because it looks unlikely I'll be able to efficiently whittle my tax deferred balance down prior to RMDs.

As far as best use of Roth, I likely won't use mine at all and it will end up in estate. I intend to leave Roth to family and remaining tIRA to charity. Most of my Roth balance came from backdoor and mega-backdoor conversions while working, so there wasn't much benefit. The money now in Roth would have ended up in regular taxable, which would have gotten the stepped up basis anyway to my estate.

 

[Sunset]

Great thread as usual

Im 56 now and my plan is to start taking SS at 70. That will cover most of my expenses and I was actually planning on using the Roth account post 70 to cover any needed additional income above SS. This way everything would be tax free.

Is that not a good strategy?

Once you are at RMD age (probably 75) you will have to take out IRA/401K money, unless you have converted all of it before then.

 

[FREE866]

Once you are at RMD age (probably 75) you will have to take out IRA/401K money, unless you have converted all of it before then.

Yeah, thought about that. Plan for now is to keep doing conversions every year to bring the trad IRA balance down.

 

[MarieIG]

Always an interesting discussion.

Do you all have an end goal in your conversions with respect to Roth IRA/tIRA ratio?
50/50, 72/25, 90/10 or 100/0?

I see the benefit of being able to pay for medical expenses, QCD etc.

The "plan" is very loose. It would be approximately 90/10 (for QCD of mine). We plan to empty DH's IRA before he turns 70 and triggers his SS but we'll see how that goes. DH has a 401k that allows conversions, and that is in the "we'll do what we can category" depending on tax rates.

 

[ImThinkin2019]

We are doing Roth conversions up to as much income tax as my DW is comfortable with, before we take SS at 70. We probably will do smaller conversions after we start SS.

Our plan is to leave the Roths to the kids, with the taxes already paid. So when they take out that money it will not be reduced by Uncle Sam.

We probably will also leave some tIRA money and some taxable to them, if our plans actually work out. We'll see on this. One thing we've learned in over 40 years of investing is that we are not good at predicting the future

 

[TheWizard]

Great thread as usual

Im 56 now and my plan is to start taking SS at 70. That will cover most of my expenses and I was actually planning on using the Roth account post 70 to cover any needed additional income above SS. This way everything would be tax free.

Is that not a good strategy?

Good but not optimal.
You pay taxes to do Roth conversions or Roth contributions instead of tax sheltered contributions during working years.

Optimal is lower, levelized AGI and taxes both pre-70 and post-70...

 

[Markola]

Like others, the plan is to use the Roths last. Therefore, the Roths hold the most volatile risk assets of our portfolio.

 

[FREE866]

Good but not optimal.
You pay taxes to do Roth conversions or Roth contributions instead of tax sheltered contributions during working years.

Optimal is lower, levelized AGI and taxes both pre-70 and post-70...

I'm retired now....I know I pay taxes to do Roth conversions...I do them up to the top of the 12% bracket.......

 

[mountainsoft]

Having bitten the tax bullet and converted a substantial sum from my tIRA to my Roth I’m wondering how folks utilize their Roth account.

The primary reason I converted all of my traditional IRA to a Roth was to reduce our taxable income in retirement. We should remain in the same 12% tax bracket after retiring, so that didn't really factor in to our decision.

1. Qualify for greater ACA healthcare subsidies.

2. Qualify for "low income" senior discounts on our property taxes.

3. Potentially reduce how much of our social security benefits will be taxed.

4. Avoid RMD's.

As others mentioned, our Roth accounts will be the last money we tap into.

 

[Family]

I'm thinking of keeping some $ in Traditional IRA for LTC care expenses (not Roth).

Reason is, if I or my wife need LTC at $100K/yr (private room/bath) our "medical" expense deductions (over 7.5% of our income) will very likely reduce our tax bill into lower brackets (perhaps zero).

Thus, TIRA will probably yield more money to use for LTC than converted RothIRA. Biggest negative is that RMDs will bleed it down as we age.

Thoughts?

 

[harley]

Only issue I see with this ^^^^ is that you might be required to take RMDs for many years, resulting in higher taxes, before (if ever) needing the LTC or medical deductions.

 

[orbops]

My wife and I use her Roth as a last resort, while I can't touch mine for 2.5 years. We would start using it if we're getting near the top of the 10% or 12% bracket.

I also had a inherited Roth IRA, and used all of it to make a down payment on a home so that we wouldn't have to pay PMI, and also used it to purchase a new car to avoid paying taxes.

We are doing Roth conversions each year to try and get to the top of the 10% or 12% brackets each year.

 

[Sunset]

We are doing Roth conversions well into the 22% bracket.

I only have to look at the single tax brackets to see how 12% brackets will become 22% upon death to reassure myself it's ok.

 

[Dash man]

We are doing Roth conversions well into the 22% bracket.

I only have to look at the single tax brackets to see how 12% brackets will become 22% upon death to reassure myself it's ok.

We’re going into the 24% bracket, but trying to drop to a lower IRMAA bracket than we’re in now.

 

[TheWizard]

We are doing Roth conversions well into the 22% bracket.

I only have to look at the single tax brackets to see how 12% brackets will become 22% upon death to reassure myself it's ok.

If you have large tax-deferred balances which will produce excess, unneeded income for the surviving spouse down the road, you can deal with that in your wills by NOT leaving 100% of tax-deferred to the survivor.
Donate a PORTION to charity or to the eventual non spousal beneficiaries. This also starts the ten year clock going for non spousal beneficiaries earlier and on a smaller amount...

 

[TheWizard]

We’re going into the 24% bracket, but trying to drop to a lower IRMAA bracket than we’re in now.

I'm in the 24% federal bracket (single) and just trying to remain in my present IRMAA tier for the indefinite future by doing modest Roth conversions...

 

[NW-Bound]

I am doing Roth conversion to the top of the 22% tax bracket for MFJ. I don't have enough years left until claiming SS and drawing RMD too.

Yet, the Roth accounts are still not quite 1/8 of the tax deferred. Hence, no thinking of spending money out of Roth at all, although I can see drawing money from it for unexpected large purchases of 6 figures, such as a new motorhome.

This would be for tax leveling from year to year compared to drawing a large extra amount from tax deferred accounts, although when the time comes, I will have to sit down and figure out if drawing from an after-tax account may not make more sense. For example, I have some I bonds that have been accumulating interest since the early 2000s. There's a lot of interest gain to pay taxes on, but that is still better than drawing off a tax-deferred.

PS. Same as earlier posters, I try to invest Roth accounts for max potential gain with 100% equity, while still trying to maintain an overall stock AA across all investable assets.

 

[Which Roger]

If you have large tax-deferred balances which will produce excess, unneeded income for the surviving spouse down the road, you can deal with that in your wills by NOT leaving 100% of tax-deferred to the survivor.
Donate a PORTION to charity or to the eventual non spousal beneficiaries. This also starts the ten year clock going for non spousal beneficiaries earlier and on a smaller amount...

Good points. For our tax-deferred accounts, DW and I have each other as primary beneficiary and our DAF as secondary. So when one of us passes, the survivor can decide how much they need and disclaim the rest, which will then go into the DAF.

 

[CRLLS]

Most of our retirement is in IRAs. We have been doing Roth conversions for the last few years to reduce the inevitable RMDs. We've kept the conversion to just under the IRMMA trigger. We paid off our mortgage from the Roth account. We also did a conversion that year so could paid it off from either the Roth or the tIRA. Dealing with the taxes made it simpler to pay from the Roth account and do the conversion later. In 2022 we did not do a Roth conversion due to a rather large dividend from a small C-corp. I guess that was a good problem to have. Not sure if I will get to make a Conversion this year or not.