DB Pension and ROTH conversions?

[nun]

Does having a DB pension make ROTH conversions more attractive?

I'm in my early 60s and if I do nothing to my IRAs I anticipate RMDs at 75 will be more than $100/year. My retirement income needs are covered by rental income and an inflation linked DB pension (total $50k now) and eventually SS ($35k/year at age 70). So at 75 that would put me in the 24% tax bracket using the current tables, and it might be higher by then. I'm healthy and hope to live a long life. So I'm thinking do IRA to ROTH conversions now up to the top of the 24% tax bracket...I have money in a brokerage account to pay the taxes.

 

[Koolau]

I hope others will chime in if I'm wrong, but that's what I did. Otherwise, my RMDs would have been over 100K also - and would have gotten a lot worse every year.

I Roth covered every one of my tIRSs eventually and all I have left is my 401(k) which keeps yielding about $45K/year RMD because, even though I take more than my RMD from it, it is still growing. How awful!

So far, I've taken 90K from my 401(k) this year and it's grown enough that it's now worth 100K more than it was last year!

 

[Phroig]

Around $50-60K per year will get you into the 22% bracket, and still not expose you to IRMAA surcharges. That would be a good start.

 

[nun]

Around $50-60K per year will get you into the 22% bracket, and still not expose you to IRMAA surcharges. That would be a good start.

I have a couple of years before Medicare starts so IRMAA isn't a factor. I thought that converting enough to fill the 24% bracket looked good ie ~$150k.

 

[nun]

I hope others will chime in if I'm wrong, but that's what I did. Otherwise, my RMDs would have been over 100K also - and would have gotten a lot worse every year.

I Roth covered every one of my tIRSs eventually and all I have left is my 401(k) which keeps yielding about $45K/year RMD because, even though I take more than my RMD from it, it is still growing. How awful!

So far, I've taken 90K from my 401(k) this year and it's grown enough that it's now worth 100K more than it was last year!

Yes, with my DB pensions and SS I'll have a fairly high income, even if I end up selling the rental, and when RMDs start I won't have the option to arrange my marginal tax bracket as I can now with ROTH conversions. If I don't reduce my IRA balances I can see me in the 32% plus brackets within an average lifespan.

 

[bada bing]

I have a couple of years before Medicare starts so IRMAA isn't a factor. I thought that converting enough to fill the 24% bracket looked good ie ~$150k.

IRMAA is a 2 year look back. Your tax returns from 2 years ago set the current year's IRMAA. It's a gotcha that a lot of early retirees miss. It bit me when my NQDC distributed @ age 63.

 

[nun]

IRMAA is a 2 year look back. Your tax returns from 2 years ago set the current year's IRMAA. It's a gotcha that a lot of early retirees miss. It bit me when my NQDC distributed @ age 63.

OK thanks for the bad news ;-) Looking at the IRMAA surcharge I might moderate my conversions. Like all this it's a vast parameter space ie IRMAA surcharge vs future tax savings vs paying tax now etc.

 

[Koolau]

IRMAA is a 2 year look back. Your tax returns from 2 years ago set the current year's IRMAA. It's a gotcha that a lot of early retirees miss. It bit me when my NQDC distributed @ age 63.

Yeah, we wandered over the limit when we sold our first condo that had been a rental. We lived in it 2 years, sold and claimed the 500K deduction but the depreciation recapture from the rental days put us over the limit - just one year, though.

 

[Koolau]

OK thanks for the bad news ;-) Looking at the IRMAA surcharge I might moderate my conversions. Like all this it's a vast parameter space ie IRMAA surcharge vs future tax savings vs paying tax now etc.

Yes, it's sort of a 3 dimensional chess game - probably by some diabolical design.

 

[junkanoo]

Does having a DB pension make ROTH conversions more attractive?

I'm in my early 60s and if I do nothing to my IRAs I anticipate RMDs at 75 will be more than $100/year. My retirement income needs are covered by rental income and an inflation linked DB pension (total $50k now) and eventually SS ($35k/year at age 70). So at 75 that would put me in the 24% tax bracket using the current tables, and it might be higher by then. I'm healthy and hope to live a long life. So I'm thinking do IRA to ROTH conversions now up to the top of the 24% tax bracket...I have money in a brokerage account to pay the taxes.

" So at 75 that would put me in the 24% tax bracket using the current tables" ... but you shouldn't as those tables will increase significantly in those (guessing) 13 years until you're 75. Best to estimate those tables with inflation.

Without knowing your current marginal tax bracket, I couldn't say. Did I understand correctly that your current income fully meets your spending needs? Are you fully retired?

These things aren't easy.

 

[bada bing]

Yeah, we wandered over the limit when we sold our first condo that had been a rental. We lived in it 2 years, sold and claimed the 500K deduction but the depreciation recapture from the rental days put us over the limit - just one year, though.

It's a bad surprise when you get a unexpected significant IRMAA bill two years after the fact. It was only that one year for me as well. I probably will get bumped back into a lower IRMAA tier when my RMDs start, but a lot can happen over the next 6 years.

 

[Koolau]

Yes. Full disclosure: DW and I went over the IRMAA limit once again ('24) when DW cashed her MYGA all it once - rather than let it roll over at a much lower rate (or seeking a 1034? exchange). We were close and I guess I miscalculated (even with Gumby's usual help with the numbers).

I think we've got it covered going forward now.

 

[nun]

" So at 75 that would put me in the 24% tax bracket using the current tables" ... but you shouldn't as those tables will increase significantly in those (guessing) 13 years until you're 75. Best to estimate those tables with inflation.

Without knowing your current marginal tax bracket, I couldn't say. Did I understand correctly that your current income fully meets your spending needs? Are you fully retired?

These things aren't easy.

Yes, I'm fully retired and DB pension and rental income cover my spending. I did some ROTH conversions about a decade ago and then got some part time consulting work and contributed to a ROTH solo 401k, but that work is winding down. I'm sure the brackets will change, but rates might also increase; it's just another set of variables. When SS, and the similar benefits I'll get from another country, start I'll be getting at least $75k maybe close to $100k income that I can't turn off. Taxes are inevitable and so I figure paying 24% marginal tax now isn't a bad deal. There's the wrinkle that some of my heirs are high earners and some live in another country with high taxes so taking money from an inherited IRA would lead to their marginal tax rates being far higher than 24%, but the ROTH inheritance would have zero tax impact on them.

 

[pb4uski]

What I ended up doing was a spreadsheet projecting my taxable, tax-deferred and tax-free belances, incoem sources, tax brackets, etc for 25 years to get a sense of what my RMDs would be to see what tax brackt I would be in when RMDs happen. Then I added in Roth conversions to the top of tax bracket before my RMD bracket. It gets complicated quickly, but I think I have the bugs worked out.

 

[nun]

What I ended up doing was a spreadsheet projecting my taxable, tax-deferred and tax-free belances, incoem sources, tax brackets, etc for 25 years to get a sense of what my RMDs would be to see what tax brackt I would be in when RMDs happen. Then I added in Roth conversions to the top of tax bracket before my RMD bracket. It gets complicated quickly, but I think I have the bugs worked out.

I did something similar and I figured out I'd be better off doing the conversions, but it wasn't a slam dunk and my spreadsheet got complicated quickly and of course there were the unknowns eg I didn't include the extra IRMMA costs and who knows about future tax rates and brackets. I think the deciding factor for me will be that 24% is a pretty good marginal rate IMO, that spreading it out over the years saves me from some very large withdrawals post 75 that will be on top off ~$100k in pensions and SS (right now those amounts are about $50k) and it makes the inheritance so much more convenient for my heirs.

 

[TheWizard]

What I ended up doing was a spreadsheet projecting my taxable, tax-deferred and tax-free belances, incoem sources, tax brackets, etc for 25 years to get a sense of what my RMDs would be to see what tax brackt I would be in when RMDs happen. Then I added in Roth conversions to the top of tax bracket before my RMD bracket. It gets complicated quickly, but I think I have the bugs worked out.

I've done something very similar, a spreadsheet projecting my AGI going forward.
At age 75, I have two variables I can control in future years: QCDs and smallish Roth conversions.
I'm hoping to stay in the 2.6 IRMAA tier and the 24% tax bracket in future years.
We'll see...

 

[PhrugalPhan]

Does having a DB pension make ROTH conversions more attractive?

Your situation is extremely close to mine.

ME: 63 y.o., single, a $70k inflation adjusted DB pension, and my SSI should be around $50k/year when I turn 70. My health is currently good and I work out daily.

So we're close. I've been Roth converting up into the 24% bracket, $100k the last two years, a total of $340k over the last five years. And the last five years of work were 100% Roth contributions. Even with all that my traditional balance is over $600k today and I'm still concerned about RMDs at 75 if I don't continue conversions.

All that to say I definitely recommend Roth conversions into 24% range for you. 2026 is the first year I'm worrying about IRMAA so I'm cutting back slightly and hope to stay within the IRMAA 1.4X zone.

Having some traditional is a good thing. If I had my druthers I would have my traditional balance between $300k & $400k. Not sure I can get there economically, but I'm going to try.

 

[nun]

Previous year's income will put me in the 2x IRMMA zone, but $100k conversions each year from now until 70 will also put me in the 1.4x zone. The annoying thing is with my DB pension, rent and part time income I've kept my IRA aggressively invested and with double digit returns I can't keep up with the growth...of course that's not really a problem to complain about, it's nice to have.

 

[Coaster4Now]

..................... There's the wrinkle that some of my heirs are high earners and some live in another country with high taxes so taking money from an inherited IRA would lead to their marginal tax rates being far higher than 24%, but the ROTH inheritance would have zero tax impact on them...........

Are you sure that the other country treats roth inheritance as tax free?
Just thought I'd mention it, as it's something new that I've just learned.

Roth IRA Recognition Abroad: US Expat Tax Guide

Discover which countries recognize Roth IRAs, understand international tax implications, and learn strategies for managing your retirement as a US expat.

fatfire.com

 

[RetireBy90]

Around $50-60K per year will get you into the 22% bracket, and still not expose you to IRMAA surcharges. That would be a good start.

I went through the Roth conversion exercise a few years ago and have 2/3 in Roth now. Between pensions, one SS and rental income we have most of what we spend. Come Jan I'll start SS and we will be good without IRAs.
I did some conversions into 24% but most in 22%. I'm about done now and remaining TIRA will go to QCDs and charity after we depart.
I found a combination of after tax, TIRA and Roth is best. Roth for lumpy expenses that don't impact our income and others for regular expenses (including budget for travel from IRAs). All our pile is in IRAs now and some after tax would be good, again no tax hit for spending.
My advice, follow advice from pb4uski to attempt to level out tax hit over remaining years. Don't forget IRMAA, although it isn't as big hit as I thought, and don't worry about future tax increase or decrease. No way to know what will happen. I expect tax rates to go up and down.
One last, if you like playing with the numbers, make it a bit of fun and don't make it into a chore you HAVE to do. I hate paying more tax than necessary but life is too short to spend too much time on it. Too many other things to enjoy.

 

[Gumby]

When I have done spreadsheets regarding the relative value of Roth conversions, I use current account values, with the assumption that my spending, tax brackets, deductions, IRMAA tiers, etc. will all increase by the same rate of inflation. For my investments, I assume a certain return above and beyond inflation. It is probably too simplistic, but it gives me a general idea of how things will go.

One fly in the ointment is the 3.8% NIIT, which kicks in at $250,000 (MFJ) and is not inflation adjusted. I would guess that the start of the 24% tax bracket will be higher than the NIIT in 6-7 years.

 

[nun]

Are you sure that the other country treats roth inheritance as tax free?
Just thought I'd mention it, as it's something new that I've just learned.

Roth IRA Recognition Abroad: US Expat Tax Guide

Discover which countries recognize Roth IRAs, understand international tax implications, and learn strategies for managing your retirement as a US expat.

fatfire.com

Thanks! Yes I'm sure, I know the Tax Treaty well.

 

[old medic]

Does having a DB pension make ROTH conversions more attractive?

Defiantly for us. We have always been in the 12% arena but SS and RMDs will push us into 22% and will be in 24% when one passes. With everything moved to Roth we will stay in the 12 until one passes, then just barely cross into 22%.

 

[RetireBy90]

Defiantly for us. We have always been in the 12% arena but SS and RMDs will push us into 22% and will be in 24% when one passes. With everything moved to Roth we will stay in the 12 until one passes, then just barely cross into 22%.

I'll admit I haven't studded all the responses on this thread, I forget all the gotchas out there. This is one to also be aware of, the impact RMDs when one passes. Thanks for reminder.

 

[PhrugalPhan]

Previous year's income will put me in the 2x IRMMA zone, but $100k conversions each year from now until 70 will also put me in the 1.4x zone. The annoying thing is with my DB pension, rent and part time income I've kept my IRA aggressively invested and with double digit returns I can't keep up with the growth...of course that's not really a problem to complain about, it's nice to have.

Are you filing as single? I ask as if so I would check again your calculations for IRMAA going forward. For a single filer you will need to keep your AGI not too much higher than $130k to stay in the 1.4x IRMAA zone in 2026 (this is my situation). Given your pension of $50k, and a $100k Roth conversion I don't see how you're going to stay in the 1.4x zone, especially with rent and other income. Now if you're married this is a different story.