ROTH target

[free2020]

Wanted to see what everyone’s target for Roth balance is? By age? Do you plan to have x% in Roth versus total retirement assets; or an absolute $ amount?

Ours is currently about 350k of a 2M retirement balance and I’m 60; DW is 55. Target is to have at least 50% in ROTH by age 70. Plan to get there by slow withdrawals from ROTH relative to other assets.

 

[steelyman]

My goal (achieved) is a 50/50 split of traditional/Roth in my retirement accounts. Expected higher-growth funds (stock) in Roth.

I’ve started withdrawals although IRS RMDs are still a way off. If current trends continue (big if), my 2019 withdrawal will be all Roth to keep that 50/50 split.

 

[OldShooter]

Why is the ratio important to you guys? I did all the Roth conversions that made sense, now I am not touching them as they are very advantageous in an estate vs TIRAs. So if I spend from them at all, they will be last.

Maybe I am missing something.

 

[bingybear]

Wanted to see what everyone’s target for Roth balance is? By age? Do you plan to have x% in Roth versus total retirement assets; or an absolute $ amount?

Ours is currently about 350k of a 2M retirement balance and I’m 60; DW is 55. Target is to have at least 50% in ROTH by age 70. Plan to get there by slow withdrawals from ROTH relative to other assets.

Clarification? are you considering after tax assets as part of retirement money? Or do you just not have any after tax assets?

after tax == taxable accounts.

 

[SecondCor521]

I'm with @OldShooter on this one.

When I was working, I contributed to my 401(k), traditional IRA, Roth IRA, and taxable accounts in the priority order and amounts that I expected to be most advantageous at the time. When I retired, I rolled my 401(k) to my traditional IRA for simplification, expense ratios, and control reasons. Now being retired, I make Roth conversions each year to the amount that I consider most advantageous. Later, I'll make IRA withdrawals and RMDs, again optimizing my situation each year with an eye on what impacts each year has on my likely tax future.

The amount in my Roth IRA is the result of all of those other decisions and I never had a particular target. I did have an overall target of having a FIRE stash that was 25x my expenses, and I wanted five years of expenses in after-tax sources so I could fund a Roth conversion ladder. So far, other than probably facing a tax torpedo at age 70, things seem to be working out pretty well and better than projected.

 

[GrayHare]

I figure the closer to 100% in the Retirees-Owe-Taxes-Hah account, the better, provided it gets there with minimal taxation.

 

[free2020]

Clarification? are you considering after tax assets as part of retirement money? Or do you just not have any after tax assets?

after tax == taxable accounts.

Yes we’ve little outside of retirement

 

[Sunset]

We do conversions, but keep an eye on the taxation level as for us there is not any (much) sense to convert in the 40% bracket.
Plus there are a host of other limits, such as once you are 62, if your income is over a certain amount, you will pay more for medicare.

So no % or amount target, just convert some, maybe withdraw from IRA, and live with whatever ROTH and IRA amounts are left.

We will not go 100% out of IRA, as it has some benefits, such as tax free withdrawals in certain circumstances.

 

[free2020]

Why is the ratio important to you guys? I did all the Roth conversions that made sense, now I am not touching them as they are very advantageous in an estate vs TIRAs. So if I spend from them at all, they will be last.

Maybe I am missing something.

In my thinking tax rates are more likely to shoot up for us in the future. Simple reasons, deficits growing, Retirement savings for the average Joe continues to be paltry and thus they’ll sock folks like myself who have bigger balances. Hopefully they don’t touch the Roth.

 

[RunningBum]

I've heard this before, people asking about the "sweet spot" of Roth/tIRA/taxable balance.

My opinion is that no such thing exists.

While working, it's great to defer income.

When retired, it's best to have funds that have already been taxed, and most preferably, in a place where gains will never be taxed.

The thing is, you have to pay tax at some point. The ideal is to do it when your marginal rate is lowest. For some that means going with all deferred savings (401K/tIRA) while working, but for others it may means a mix of deferred and Roth. Some may be able to do conversions between ER and collecting SS and pensions, but ACA subsidies are a factor.

Way too many moving pieces for a general strategy other than "try to minimize your taxes over your lifetime", as best you can. Asking for specific numbers of others makes no sense to me. Personally I hope to have my entire tIRA converted to a Roth by 70, but only if I can do it without losing ACA subsidies and without going into too high of a tax bracket. That may or may not be a good strategy for you.

 

[OldShooter]

... Way too many moving pieces for a general strategy other than "try to minimize your taxes over your lifetime", as best you can. ...

Yes. But to do that requires a crystal ball that will reliably predict government behavior and future tax rates. Since I know no one with such a crystal ball, my answer to young people asking whether to go Roth or TIRA is "it's a crap shoot." I am slightly biased towards TIRA because this allows one to contribute more and to earn and keep a return on the government's money -- for a very long time.

But I'm still curious about why the OP and @steelyman are concerned about these ratios.

 

[Smitty700]

In my thinking tax rates are more likely to shoot up for us in the future. Simple reasons, deficits growing, Retirement savings for the average Joe continues to be paltry and thus they’ll sock folks like myself who have bigger balances. Hopefully they don’t touch the Roth.

Actually, it's not just you that think that tax rates will shoot up. Under current law, tax rates go back up on January 1, 2026. The current tax rates are written into law as temporary reductions ending on December 31, 2025.

 

[RunningBum]

Yes. But to do that requires a crystal ball that will reliably predict government behavior and future tax rates. Since I know no one with such a crystal ball, my answer to young people asking whether to go Roth or TIRA is "it's a crap shoot." I am slightly biased towards TIRA because this allows one to contribute more and to earn and keep a return on the government's money -- for a very long time.

But I'm still curious about why the OP and @steelyman are concerned about these ratios.

Well, you make your best guestimation. It didn't take much of a crystal ball when I was in the 39.6% bracket to defer all I could.

I am slightly biased towards the Roth if the income bracket looks to be the same later because I think tax rates are more likely to go up than down, and I want gains to be untaxed. Even if tax rates stay the same, deferred gains could push one into a higher tax bracket.

A simple spreadsheet shows that if rates stay the same and you don't jump brackets, letting larger deferred income grow comes out the same as taking the tax now and letting gains grow untaxed, no matter how many years you let it run.

I'm with you wondering what value it has to aim for or keep a ratio.

 

[Montecfo]

I do not have a Roth "target". Right now I am about 25% taxable, 65% tax deferred 10% Roth.

To me it makes little sense to "prepay" taxes to fund a Roth unless you are pretty sure you are in a lower tax rate than when you will withdraw, which is hard to know.

I can't really do backdoor Roth's because I have other tax-deferred IRA's, and over the Roth income limit, no Roth 401(k).

As far as rates going up in the future, that is possible. But for most folks your income falls in retirement so a lot of moving parts there.

I may do some conversions next few years, but there is little room for that in the 12% bracket. And preparing at 22% to avoid a tax at 24%, spread over 25 years, well, I am not sure that will make sense, but i have time to consider it.

 

[Dtail]

Current ratio for me is 85% TIRA, 2% Roth and 13% Taxable.
Will be able to do some Roth conversions with the DGF over the next few years, but I am limited by ACA income management.
Too much tax torpedo effect at RMD time a first world problem.

 

[N02L84ER]

I've heard this before, people asking about the "sweet spot" of Roth/tIRA/taxable balance.

My opinion is that no such thing exists.

While working, it's great to defer income.

When retired, it's best to have funds that have already been taxed, and most preferably, in a place where gains will never be taxed.

The thing is, you have to pay tax at some point. The ideal is to do it when your marginal rate is lowest. For some that means going with all deferred savings (401K/tIRA) while working, but for others it may means a mix of deferred and Roth. Some may be able to do conversions between ER and collecting SS and pensions, but ACA subsidies are a factor.

Way too many moving pieces for a general strategy other than "try to minimize your taxes over your lifetime", as best you can. Asking for specific numbers of others makes no sense to me. Personally I hope to have my entire tIRA converted to a Roth by 70, but only if I can do it without losing ACA subsidies and without going into too high of a tax bracket. That may or may not be a good strategy for you.

These are our thoughts also and exactly what we have done.

 

[RunningBum]

I do not have a Roth "target". Right now I am about 25% taxable, 65% tax deferred 10% Roth.

To me it makes little sense to "prepay" taxes to fund a Roth unless you are pretty sure you are in a lower tax rate than when you will withdraw, which is hard to know.

It doesn't have to be a lower tax rate. If you think you'll be in the same tax rate, it's a wash. You could argue that it doesn't make sense if it doesn't benefit you, but consider that:

- tax rates might go up
- deferred gains might push you in a higher bracket
- you might be able to avoid some or all of the SS torpedo by converting
- if you're married, it's likely one of you will be single and quite possibly in a higher tax bracket later
- if your heirs would be in a higher tax bracket, having them inherit a Roth is better than a tIRA. On the other hand, if they would be in a lower bracket, it'd come out better if they got the tIRA.
- if you convert or contribute early enough, some of the Roth is probably more accessible during ER before 59.5, if needed

As far as rates going up in the future, that is possible. But for most folks your income falls in retirement so a lot of moving parts there.

Agree, but for many of us in ER, there is a window where income is probably lower than while working or after starting SS, which makes for a good time for conversion. Also, some non-high wage earners are so efficient with deferring income that they actually do have more income in retirement.

I may do some conversions next few years, but there is little room for that in the 12% bracket. And preparing at 22% to avoid a tax at 24%, spread over 25 years, well, I am not sure that will make sense, but i have time to consider it.

2% is still 2%. It's something. I figure, why not try to be as efficient as possible with taxes? Say you'd go $10,000 over the 22% bracket into the 24% bracket. You could've saved $200 by staying out of 24%. $5000 over 25 years. Not game changing, but a nice little bonus. And you get all of those other little benefits I mentioned at the top of the post.

 

[pb4uski]

I don't have a target. When I was working I was in a high marginal tax bracket so it made sense to defer income and I did. Since I retired I have been doing substantial Roth conversions to the top of the 15%/12% tax bracket from 2013-2017.... in total about 13% of my retirement date nestegg.

At retirement I was 44/53/3 taxable/tax-deferred/tax-free vs 22/54/23. If I defer SS until age 70, for the next 7 years or so we will be mostly living off of tax-deferred... so I expect taxable and tax-free to grow with no additons or withdrawals and tax-deferred to decline due to withdrawals offset by growth.... to a projected 27/37/36 when I am age 70 and RMDs begin.

Above assumes annual withdrawals to the top of the 12% tax bracket. If we end up redomesticating to Florida in 2020 as i expect we might then I might be tempted to goose withdrawals to the top of the 22% tax bracket since I won't have any state income taxes on withdrawals.

 

[Animorph]

I never had much chance to contribute to a Roth. I'm fixing that now with Roth conversions. My goal is to minimize taxes. That means Roth converting now, before all our income streams are active. That gets some of the tIRA out at 0%, 12%, and 22%. When RMD's start, after our other income has already started, we'll pretty much be at 22% for all dollars withdrawn from the tIRA. And maybe worse. Otherwise it would be wise to maintain a smaller tIRA throughout retirement that could continue to fill the lower tax brackets. That won't be our case.

I'm willing to pay the 22% tax now instead of 22%+ later. There is a tax benefit for doing that. At that point 22% of your tIRA belongs to the IRS. When you Roth convert $100, you have to give the IRS their $22. But you get to add $22 of your after tax money to the Roth (for a total of $100 into the Roth). So you have the same $78 that was yours in the tIRA, plus $22 that was in your taxable account but is now tax free in the Roth. The tax savings on that $22 can make it worthwhile to Roth convert even though your tax rates aren't changing. Of course if you'll be in the 0% CG taxes bracket that might not be worth anything to you.

In our case I'd be happy to reach 100% Roth. I don't think I'll be able to Roth convert quite that much. Looks like another 2 years of maximum Roth conversions and then several years of filling only the 0% bracket with Roth conversions and taking 0% CG taxes as much as possible.

Lots of stuff to balance there. But I don't really see any way to give a general rule of thumb for percentage of tIRA vs. Roth IRA balances.

 

[Alan]

Different situation for me living in the UK as I will be in the UK 40% bracket so I have now converted 100% of IRA into Roth.

DW is currently still in the UK 0% bracket and will only move into the 20% bracket once her UK and US SS payments starts, and even her RMDs will only be in the 20% bracket. However, it is highly likely I will die ahead of her and my inherited pensions will immediately push her into the 40% bracket so the target for her is also 100% Roth to be achieved over the next 6 or 7 years.

 

[HI Bill]

Never had a set percent, but always invested up to the limits allowed by the IRS. For 7 years, I couldn't put anything at all into ROTH due to the sum of my 401(k) and my company's ESOP contributions being too high for a 'highly compensated employee' (HCE). One year, the company even refunded $4K in excess 401(k) contribution due to the HCE limitation.

The ROTH account ended up being a paltry 3% of my invested assets; however, nearly half of my invested assets are in taxable accounts; about 26% of the taxable account value is LTCG, so if I keep the taxable annual income below the current MFJ value of $78,750, none of the LTCGs will be taxable!

 

[Clone]

There were a lot of moving parts in our taxes this past year. We had pulled forward many things that would not be deductible in 2018 due to caps, and then went with the standard deduction for 2018. Along with that, I did not sell any grain in 2018, so income was way down. We used our best guess plus early release of TurboTax to get an idea of where our tax bill would end up. We had room for a big ROTH conversion, so we did that in the middle of December.


Turns out market timing did not work out well for Mr. IRS! We converted at close to the bottom of the dip, and it has recovered quite nicely in the meantime.


So that is our plan for the future. Do ROTH conversions to get us into the 22% bracket. As long as we are at it, we will try to do the ROTH conversions at the market low for the year. I misplaced my calendar, does anybody have the market low dates for 2019 handy?


Once we get past 70, I will begin to draw social security, and we will be locked into the 22% tax brackets. I suppose that we could convert more aggressively towards the top of the 22% bracket if we felt that the tax rates were going to return to what they were a few years ago.

 

[Montecfo]

It doesn't have to be a lower tax rate. If you think you'll be in the same tax rate, it's a wash. You could argue that it doesn't make sense if it doesn't benefit you, but consider that:

- tax rates might go up
- deferred gains might push you in a higher bracket
- you might be able to avoid some or all of the SS torpedo by converting
- if you're married, it's likely one of you will be single and quite possibly in a higher tax bracket later
- if your heirs would be in a higher tax bracket, having them inherit a Roth is better than a tIRA. On the other hand, if they would be in a lower bracket, it'd come out better if they got the tIRA.
- if you convert or contribute early enough, some of the Roth is probably more accessible during ER before 59.5, if needed

Agree, but for many of us in ER, there is a window where income is probably lower than while working or after starting SS, which makes for a good time for conversion. Also, some non-high wage earners are so efficient with deferring income that they actually do have more income in retirement.
2% is still 2%. It's something. I figure, why not try to be as efficient as possible with taxes? Say you'd go $10,000 over the 22% bracket into the 24% bracket. You could've saved $200 by staying out of 24%. $5000 over 25 years. Not game changing, but a nice little bonus. And you get all of those other little benefits I mentioned at the top of the post.

I agree with much of what you said. Saying "you might be in a higher tax bracket" is true, but it is also hard to know, but you are making a bet and putting money down. To pay the tax before you have, maybe decades before, is also swimming upstream relative to time value of the cash. I would tend to not take that bet without compelling data, and you generally will not have that data unless you are already in retirement and know your assets and expected tax rates.

As far as the 2% difference between the brackets, yes, it is worth saving, but understand your payback period on that money will be decades. Why? Because if you do say a $50k Roth conversion, you save the taxes only over the RMD period. So it will take a while to get your "payback". For me the tax torpedo seems difficult to avoid, regardless.

I am aware there are advantages to my heirs to inherit a Roth. But my estate is reduced by the taxes I would have to pay to establish it. So again, it is a mixed bag.

I think you made a good point about single versus MSJ. That is something to consider. But i would not pay tax at my current rate to avoid that possibility, as it requires a certain cost today for an uncertain, and possible non-existent future benefit.

 

[SecondCor521]

I misplaced my calendar, does anybody have the market low dates for 2019 handy?

January 3rd.

 

[RunningBum]

I agree with much of what you said. Saying "you might be in a higher tax bracket" is true, but it is also hard to know, but you are making a bet and putting money down. To pay the tax before you have, maybe decades before, is also swimming upstream relative to time value of the cash. I would tend to not take that bet without compelling data, and you generally will not have that data unless you are already in retirement and know your assets and expected tax rates.

As far as the 2% difference between the brackets, yes, it is worth saving, but understand your payback period on that money will be decades. Why? Because if you do say a $50k Roth conversion, you save the taxes only over the RMD period. So it will take a while to get your "payback". For me the tax torpedo seems difficult to avoid, regardless.

I am aware there are advantages to my heirs to inherit a Roth. But my estate is reduced by the taxes I would have to pay to establish it. So again, it is a mixed bag.

I think you made a good point about single versus MSJ. That is something to consider. But i would not pay tax at my current rate to avoid that possibility, as it requires a certain cost today for an uncertain, and possible non-existent future benefit.

I think you are too concerned with "paying taxes now". That's not bad like you seem to think it is. Your Roth grows tax free after that, rather than having a tax liability waiting to hit you with that liability growing as your deferred account grows. Run a spreadsheet with and without the conversion for whatever length of time you want.

Related to this, this is why in my portfolio net worth statement I reduce my tIRA by my predicted tax liability. I think when people don't, they tend to look at $100K in a tIRA the same as $100K in a Roth. They aren't the same thing, and when you think they are, paying taxes on the conversion seems like you're reducing your net worth. In reality, you're reducing a liability as well as an asset.