Not enough Roth

[oldtimer]

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!

We are planning to use some excess RMDs, after QCDs, to buy I-bonds once we reach 72 to help maintain bond allocation of portfolio, that way taxable can stay 100% equities.

 

[SecondCor521]

Remember too, that when they changed the RMD beginning date from 70.5 to 72, they did not change the related QCD date.

So now one can start QCDs at age 70.5 and must start RMDs for the year one turns 72.

 

[RetiredHappy]

We are at 50-50 Traditional IRA to Taxable Brokerage. It was about 60-40 IRA-Taxable before we moved 10% IRA to annuities. We have 0 in Roth because we never had the window of opportunity to do so. When we were working, we made too much to contribute to Roth and we were at the max IRS rate, so stuffing money away to the max allowable in IRA was the only option as we saw it. We are and were at 22-24% tax rate after we retired and the hassle of doing Roth conversion is not attractive to us.

 

[Oakster]

The sweet spot depends on tax rates. Roth versus taxable is rate arbitrage.

And of course you can convert traditional IRAs to Roth. But if you have too much in Roth, you can't convert back to taxable and get a tax refund.

What would be wrong with having 100% Roth? Why does anyone need anything at all in a taxable account? Assuming that the owner was of the appropriate age to have complete access to the money without penalty etc. Seems like I would like to have all my money in a Roth. No RMD, easier to hand down to heirs, easy to withdraw from without creating income.

 

[Oakster]

The Bogleheads wiki helped me decide what to do:

https://www.bogleheads.org/wiki/Prioritizing_investments

Pretty simple. When I started saving, I was already in the top tax brackets so maxing tax deferred (401k) was a priority. Now that I am retired, I can convert the 401k to Roth @ 12%. That's a big tax arbitrage. I am 100% stable value fund in my 401k to minimize growth so I don't have to pay more tax.

I also did backdoor and mega backdoor Roth while working. That got a good chunk into our Roths that is now tax free. I kept the Roths in 100% stock so the significant earnings are tax free. That's another great tax arbitrage. And could help with minimizing income in retirement if I needed to do that.

Everyone's situation is different. Given a choice, I would want everything in a Roth. Good for heirs, too. But I didn't want to pay 40%+ in taxes to get there.

Fill me in on the situation a little more. In my mind, even if I was paying 50% tax, I would prefer to still earn some even if half of it went to tax. What I am missing?

 

[RunningBum]

Fill me in on the situation a little more. In my mind, even if I was paying 50% tax, I would prefer to still earn some even if half of it went to tax. What I am missing?

If you are going to have some invested in fixed income, the tIRA is the best place for it. Not only does it keep the tIRA from growing too much, but it is also the most tax efficient place for it. See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement for more.

 

[arch57]

Which is why I'm not doing Roth conversions. Those conversions are treated as income to reduce ACA subsidies.

I think a lot of people read threads like this and feel like they're missing out by not having a lot of Roth and think they need to play catch up with conversions. Everyone's situation is different. For a lot of us, investing in traditional during accumulation and doing no Roth conversions in retirement is the right choice. Don't blindly do conversions just because it works in other peoples' situations.

+1
ACA subsidies made Roth conversion not worth it for us but reading other threads always made me feel I was missing something.

 

[RunningBum]

+1
ACA subsidies made Roth conversion not worth it for us but reading other threads always made me feel I was missing something.

If you're considering all of the factors, namely current vs. future tax rate, ACA and IRMAA impacts, SS taxability, heir tax rates, and so on, you aren't missing anything. The other thread comments are possibly targeted at people afraid to pay taxes now even if it saves later and those who just don't get that deferred income has a deferred tax liability.

 

[Dash man]

+1

ACA subsidies made Roth conversion not worth it for us but reading other threads always made me feel I was missing something.

Look ahead at the RMD table in your 80s and even 90s in longevity runs in your family. That’s when the size of RMDs get very large if you have a sizable deferred tax account.

 

[corn18]

If you are going to have some invested in fixed income, the tIRA is the best place for it. Not only does it keep the tIRA from growing too much, but it is also the most tax efficient place for it. See https://www.bogleheads.org/wiki/Tax-efficient_fund_placement for more.

That's it. Any growth inside a 401k/tIRA is taxable, so I try to minimize it by keeping it all fixed income. My taxable and Roths are 100% stock.


I have enough cash for 2022. I'll have to look at what I want to do for my withdrawal for 2023. May just withdraw from the 401k vs. doing a Roth conversion. Depends on where my AA ends up closer to year end.

 

[Exchme]

What would be wrong with having 100% Roth? Why does anyone need anything at all in a taxable account? Assuming that the owner was of the appropriate age to have complete access to the money without penalty etc. Seems like I would like to have all my money in a Roth. No RMD, easier to hand down to heirs, easy to withdraw from without creating income.

It’s that the tax cost to get to 100% Roth may be more than it’s worth. For instance:
+If you/spouse need long term care, that is tax deductible after the threshold, so you could withdraw from the t-IRA to pay for that with a low tax cost.
+If you are charitably inclined, you can do QCDs from a t-IRA and the charity gets all the money as opposed to you paying taxes first and then gifting from the Roth.
+Same situation if you leave a charity money in your will, no reason to shrink it first by paying taxes.
+If your heirs will be at a lower tax rate than you are, then upping your tax rate to do the conversion may not make sense.

There may not be time to do conversions at reasonable tax costs if ACA premium credits can be had. The main window for conversions for many is from Medicare until SS starts as the increased taxation of SS is an extra hurdle for conversions to overcome.

There is a lot to consider and people need to build some models to see what makes sense for them or hire a planner to run some cases; there can be tens or hundreds of thousands of $ improvement, so if folks are winging it, that's likely a very expensive choice.

 

[EastWest Gal]

What would be wrong with having 100% Roth? Why does anyone need anything at all in a taxable account? Assuming that the owner was of the appropriate age to have complete access to the money without penalty etc. Seems like I would like to have all my money in a Roth. No RMD, easier to hand down to heirs, easy to withdraw from without creating income.

You can’t invest an unlimited amount in a Roth IRA, and even a Roth 401K, and there are income limits to allow contributions to a Roth IRA. I maxed out my 401K and we put $10K/year in a taxable account. In hindsight I should have put some of it in a Roth. But I always invested more than I could have with a Roth IRA. So I have a taxable account. It’s actually 3/5 of our investment portfolio. A good thing about taxable: We have to have income greater than $80K to pay any federal tax at all, so it functions partly like a Roth anyway.

 

[Gumby]

What would be wrong with having 100% Roth? Why does anyone need anything at all in a taxable account? Assuming that the owner was of the appropriate age to have complete access to the money without penalty etc. Seems like I would like to have all my money in a Roth. No RMD, easier to hand down to heirs, easy to withdraw from without creating income.

Many people had no choice. They made too much to contribute to a Roth. A first world problem, I know. But an important reminder that our own situation may not be universal, and we should take that into account when critiquing others.

 

[kgtest]

What would be wrong with having 100% Roth? Why does anyone need anything at all in a taxable account? Assuming that the owner was of the appropriate age to have complete access to the money without penalty etc. Seems like I would like to have all my money in a Roth. No RMD, easier to hand down to heirs, easy to withdraw from without creating income.

Nothing. My DFIL and DMIL have all there portfolio in 100% Roth. I'm assuming they did mega Roth Conversions during the low tax bracket years. They do not have any money in taxable and I believe they paid the tax on the conversions with cash that had been inherited.

 

[Koolau]

To answer the question about Roth vs. 401(k), the obvious starting places is what your company matches - if any. You can't turn that down, even if it ends up biting you later for taxes. I have no brilliant tax strategy beyond that and I'm one of the folks who wish they had more Roth and less 401(k).

The BIG thing to me has been brought up by several. What happens when one of us dies? Suddenly, RMDs will be a real threat to the other person's qualification limits for various "programs" - especially MC. I have no useful suggestion, but doing more conversion to Roths, even though I'll be hit with my top-limit taxes is making more sense. STILL thinking, so YMMV.

 

[Perryinva]

The responses here illustrate why there is no optimal ratio or amount depending on taxes & income. You have some people foregoing Roth conversions to qualify for ACA, and others reminding you that you can donate $200k/yr via QCDs! 0% to 38% FIT plus state IT or none! No pensions living off savings VS large pensions & SS that automatically make 25%+ FIT brackets.

The best thing about this thread was it made me feel better about not doing things as optimally as I could have because there is no way I would have predicted the future accurately enough.

 

[pb4uski]

What would be wrong with having 100% Roth? Why does anyone need anything at all in a taxable account? Assuming that the owner was of the appropriate age to have complete access to the money without penalty etc. Seems like I would like to have all my money in a Roth. No RMD, easier to hand down to heirs, easy to withdraw from without creating income.

+1. If I could wave a magic wand and have everything in my Roth at the ~9% tax cost of my recent Roth conversions, I'd do it in a heartbeat.

 

[pb4uski]

... So I have a taxable account. It’s actually 3/5 of our investment portfolio. A good thing about taxable: We have to have income greater than $80K to pay any federal tax at all, so it functions partly like a Roth anyway.

I agree with the thought, but a couple qualifers are in order.

First, only qualified dividends and long-term capital gains are tax free, not interest, unqualified dividends and short-term capital gains.

Second, it's actually better than $80k because the $80k is taxable income... add in the standard deduction and you are over $109k of income for a married couple.

 

[SecondCor521]

I agree with the thought, but a couple qualifers are in order.

First, only qualified dividends and long-term capital gains are tax free, not interest, unqualified dividends and short-term capital gains.

Second, it's actually better than $80k because the $80k is taxable income... add in the standard deduction and you are over $109k of income for a married couple.

Another qualifier is this works as long as the 0% LTCG bracket remains the law. That's true of the entire tax code, of course, but I'm not optimistic about this particular part remaining in the law in the intermediate term.

 

[Animorph]

What would be wrong with having 100% Roth? Why does anyone need anything at all in a taxable account? Assuming that the owner was of the appropriate age to have complete access to the money without penalty etc. Seems like I would like to have all my money in a Roth. No RMD, easier to hand down to heirs, easy to withdraw from without creating income.

Nothing wrong if you have continuing income sources that keep you in a moderate to high tax bracket. If instead you had no regular income, you'd be wasting the 0% tax bracket. You could be Roth converting at 0% (or taking 0% capital gains and dividends in a normal taxable investment account) instead of whatever the tax rate was when the money originally went into the Roth.

For us it was better to Roth convert enough to limit likely future RMD's to stay within a reasonable tax bracket. Then we withdraw from the Roth as needed to meet expenses. Pretty much just leveling our income throughout retirement in order to stay away from unnecessarily high marginal tax rates, with some additional considerations for surviving spouse single tax rates.

 

[Koolau]

Nothing wrong if you have continuing income sources that keep you in a moderate to high tax bracket. If instead you had no regular income, you'd be wasting the 0% tax bracket. You could be Roth converting at 0% (or taking 0% capital gains and dividends in a normal taxable investment account) instead of whatever the tax rate was when the money originally went into the Roth.

For us it was better to Roth convert enough to limit likely future RMD's to stay within a reasonable tax bracket. Then we withdraw from the Roth as needed to meet expenses. Pretty much just leveling our income throughout retirement in order to stay away from unnecessarily high marginal tax rates, with some additional considerations for surviving spouse single tax rates.

So far I've been just taking extra at RMD time. It accomplishes the same thing as Rothing the money and I don't have to invade a Roth later. YMMV

 

[Out-to-Lunch]

So far I've been just taking extra at RMD time. It accomplishes the same thing as Rothing the money and I don't have to invade a Roth later. YMMV

Why do you say that "it accomplishes the same thing"? In your case, you are forgoing the opportunity to shield taxation on growth of these assets. Perhaps not a big deal, but clearly NOT the same thing.

 

[Montecfo]

What would be wrong with having 100% Roth? Why does anyone need anything at all in a taxable account? Assuming that the owner was of the appropriate age to have complete access to the money without penalty etc. Seems like I would like to have all my money in a Roth. No RMD, easier to hand down to heirs, easy to withdraw from without creating income.

It's desirable except for the cost. That's the big issue.

 

[Koolau]

Why do you say that "it accomplishes the same thing"? In your case, you are forgoing the opportunity to shield taxation on growth of these assets. Perhaps not a big deal, but clearly NOT the same thing.

I agree with your statement but what I was referring to was lowering future RMD amounts. By not Rothing, I miss the tax shielding of growth - just as you say - but I don't need to break into a Roth to get money for BTD or emergencies, etc. SO, yes, I only get half the advantage, but it's the half I want to get which is why YMMV.

 

[Badger]

What would be wrong with having 100% Roth? Why does anyone need anything at all in a taxable account? Assuming that the owner was of the appropriate age to have complete access to the money without penalty etc. Seems like I would like to have all my money in a Roth. No RMD, easier to hand down to heirs, easy to withdraw from without creating income.

+1 Wish we had been able to convert much more in a Roth. We take a big hit on our RMDs now.


Cheers!