My FIRE Strategy -- Roth Conversion

[target2019]

And there it was, right in the common misconceptions section, "The second misconception is that 'it is better to pay tax on the seed than the harvest.' In other words, that it is better to pay a lesser tax amount now to make a Roth contribution, instead of a larger amount of tax later on a traditional withdrawal. This is not true because taking a percentage of the "seed" is the same as letting the full seed grow and then taking the same percentage of the "harvest." The result will be the same in either case."

I do understand the "commutative law of multiplication," it's just with a that compounding and other stuff it just starts to seem kind of abstract.

Nonetheless, I get it now. I suppose it'd make sense to max out the 12% bracket and maybe go as high as the $103, but never go high enough for IIRMA to kick in.

Thanks for straightening this out for me. I had typed this last night but somehow not posted. I could have saved people a lot of repetition.

Thanks

The repetition is expected. There are many ways to interpret previous posts and articles about Roth Conversion.

The consensus is probably, "Stay in the 12%." Another guideline is, "Have flexibility in your accounts." Maybe pay a little more tax now and make sure you max Roth each year.

Time is on your side.

 

[Out-to-Lunch]

And there it was, right in the common misconceptions section, "The second misconception is that 'it is better to pay tax on the seed than the harvest.' In other words, that it is better to pay a lesser tax amount now to make a Roth contribution, instead of a larger amount of tax later on a traditional withdrawal. This is not true because taking a percentage of the "seed" is the same as letting the full seed grow and then taking the same percentage of the "harvest." The result will be the same in either case."

I do understand the "commutative law of multiplication," it's just with a that compounding and other stuff it just starts to seem kind of abstract.

Nonetheless, I get it now. I suppose it'd make sense to max out the 12% bracket and maybe go as high as the $103, but never go high enough for IIRMA to kick in.

Thanks for straightening this out for me. I had typed this last night but somehow not posted. I could have saved people a lot of repetition.

Thanks

I know that you get it now and that I don't need to add anything, but perhaps here is another way (in addition to PB4's) to make it less abstract even when considering compounding:

[$945k * (1+r)^n] * 0.75 = [$945k * 0.75] * (1+r)^n

 

[glasswave]

Be aware at age 63 , the IRMAA penalty will exist if your income crosses the line.

My wild guess is that conversions to the top of the base IRMAA tier might be worthwhile, but that's about it.

I-orp always had quirky issues like basing IRMAA costs on the current year income instead of income from two years prior and not doing taxes on SS benefits.

My understanding is that if I apply for Medicare around April of 2028 (age 65) then my IRMAA bracket will be based upon my 2026 income tax returns.

Is that your "Wages, Salary and Tips," your "Total Income" or your "Adjusted Gross Income?"

Also, do they use that bracket based upon your "2-year-previous-income" at the time you applied for the rest of time or do they recalculate each year based on your updated "2-year-previous-income?"

Thanks


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[sakowitzm]

Google MAGI for IRMAA and poke around to find the formula for the IRMAA increase. To answer the second question, Medicare does NOT use the same MAGI every year (the one they used when you first joined Medicare.) They update every year based on your then-two-years-ago tax return.

 

[glasswave]

I think it's unnecessary to convert all your retirement money , as RMD's won't start until age 73. Even then having a $100K in an IRA will only require a withdrawal of less than $4K, which adds to income.

What will your income be when fully retired at age 67 in today's dollars ? How much in taxes if that was now will you pay ?

It sounds like 75 for RMDs for me.


If I take my social security at 67, my income should be about $36,000. I will have no other sources of income with the exception of what I take from my tax deferred retirement account.



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[pb4uski]

So if a single over 65 in 2024 had $36k of SS and withdraw or Roth converted $36.1k to the top of the 12% tax bracket their federal income tax would be 6.54% of your total income... not bad.

Federal Income Tax:

$4,716.20

12.00%

6.54%

 

[glasswave]

GlasswaVe - you don't mention whether you have a Roth IRA already in place. If not, why not open one up and fund 2023 while you still have a chance - and ponder your conversions . . .

I am planning on starting one up and maxing it for 2023 and 2024 using my liquid savings.


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[glasswave]

+1. I see no mention of an existing Roth IRA. If you don't have one already, you should make contributions for 2023 and 2024.
I agree with the others; converting to the 24% rate seems too much for someone with your assets. Since you have around $10K of interest and $18K of earned income in retirement, you should be able to convert around $30K at the 12% rate in addition to the annual Roth contributions. That seems reasonable.

Where are you getting the 10K in interest from? My liquid savings?

Thanks.


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[glasswave]

I know you dislike spreadsheets, but check out I-orp.com which helped guide me some with conversion planning.

That site seems to no longer be functional.

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[glasswave]

I’m reading on my phone so may have missed. Is there a pension in this picture? Is the $18k an annual “salary” for 5 years or a one-time payment?

I think the 18k annually would be paid in twice monthly installments for 5 years. 5% or my salary for five years .

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[glasswave]

All tax and IRA rules are subject to legislation. They could raise taxes, but at $48k withdrawal before standard deduction you are unlikely to hit a new 24%+ bracket. You may convert all your money to have Congress decide that "rich" Roth IRA holders have to pay a wealth tax, etc.

The only thing we know for sure is the current rule, and you should not convert at 24% today, as you would be reducing your wealth based on your plan and the current rules.

Thanks.

My 48K expense estimate is an after tax estimate.

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[isisdave]

The planning also depends on whether you're married, and what age the spouse is, and what would you like to have happen to the remainder of your estate when you die.

Also where do or will you live (that is, in an expensive, moderate, or lower cost area)?

Maybe what your crystal ball says about your health? Got LTC insurance?

I don't have the burden of having to plan for $1 million in a traditional IRA, but I've been converting $20k a year to take advantage of the nearly $30k standard deduction (for seniors). This is only guaranteed through 2025. We have little other income and live off SS mostly, so there is very little tax due, like 2%. I would suggest you do that after your regular work income ceases, and while you have that Really Cheap Great Deal on health insurance -- between 60 and 65, we paid more for health insurance than we did for the mortgage.

Also, that $18k -- if that's per year, I would inquire from your employer if you could have that paid differently. Maybe all at the end of five years, and delay SS start until after that? That would let you do more tax-free conversion in the meantime, probably avoid any IRMAA problems. Or alternatively, most of it up front in the year after your salary stops.

 

[indiajust]

Rolling is good, but as out-to-lunch points out... price matters.

If you can do the rollover cheaply, dive in. Set a tax price on conversion and don't go over. Convert what you can, keep the rest as IRA and spend appropriately. Converting almost a million is just too hard a lift.

 

[abergquist]

Annuity in Retire to help Roth Conversions

I have a crappy over-blown Annuity that is Qualified. Would never by another one....But...I will wait to 70 to start lifetime income and use the excess payments (5%) and use it to take make more room for the conversions. I am currently doing this but only to the top of 12% bracket. Any higher than that is really not going to help me avoid any tax consequences. Like I said I would not buy any annuities but if you could use this to your advantage, It could work.

 

[gauss]

I am okay with your strategy and am doing something similar.

If you get your Roth conversions done before you start drawing SS, you will likely avoid the "tax torpedo" that befalls many who delay in dealing with their tax-deferred accounts.

Additionally you may be better manage the Medicare IRMMA surtax that applies to those who have "high" incomes while on Medicare.

I have a spouse who would also be stuck in a much higher tax bracket than she would otherwise need to be if I were to put off converting and pass away earlier than her.

I am in the "convert early and convert often" camp.

Another thing that may drive this is personality style. If you like to get your pain over first and delay gratification you may wish to convert early for non-financial reasons.

YMMV

-gauss

 

[eyenitnoy]

Hi Glasswave:

Welcome to the forum.

I think your plan is sound. I wish to make two comments.

1. I am in full agreement with you about converting to a ROTH IRA, keeping in that 24% bracket. I agree with this so long as you have non IRA funds to pay the tax (you do) and it doesn't interfere with your lifestyle. Also, retiring young gives more time for tax free growth in the ROTH. Now, from a pure math perspective, you will probably (but not certainly) pay more in taxes this way but that number depends on lots of things, including future tax rates and the amount of growth your funds have over the years. Both of these factors are un-knowable.

But consider this. What if, at some future point, you needed to take a large chunk of money for some reason? Having a pool of tax free money allows you to do this without the many tax ramifications withdrawing a large chunk of money from a taxable account would have. If you had to, for some unknown future reason, pull a couple hundred thousand from a taxable account, the taxes that year would be high. Furthermore, it would change the amount you would have to pay for Medicare as "high income" folks pay more.

From a risk management standpoint, I like getting that money out of the taxable account and into the ROTH, even if it is true that you (might) end up paying more in taxes.


2. Why are you set on taking Social Security at age 67? Have you considered and done the math on waiting three more short years until age 70? The math on this is pretty clear. Unless you have some health condition or family history, waiting until 70 gives you the highest lifetime payout. Think about it.


But overall I think you plan is great. Good Luck!

 

[pc95]

Hello all,
I fear that there is some blatantly stupid blind spot to this plan, so I am hoping the posters here can quickly point out the errors of my ways. Please forgive my newbie naivete, but when I finally landed my first good job that had a savings plan, a TIAA advisor said, "Stick your money in a growth fund and forget about it," so that's what I did. 15% of my gross year since 1994. I have only been looking at retirement for the last few years and seriously, only recently.

Hear goes:
67 is my full retirement age. (spring 2030).
I am hoping to take early retirement in June of 2025 at age 62, but I could work longer.

• I should have about $190k in liquid savings by July of 2025.
• I have about $945,000 in a (TIAA) tax deferred retirement savings account.
• I can receive about $18k in salary for 5 years by taking early retirement at 62.
• House is paid off, no other debt whatsoever.
• I can stay on the employer health plan until Medicare kicks in at 65 for about $300/yr.
• I’d like $4k/mo for expenses from 62 to 67. $3k monthly living & $1k/mo towards trips and large purchases.

Preliminary Plan:

• I am thinking about living off of liquid savings and my early retirement income for the 5 years of early retirement. I am also are considering converting most of my retirement account to a Roth IRA over those 5 years, by converting about $170k a year so I can stay in the 24% marginal bracket.
• At 67, I plan on accessing my SS which should pan out to $2500-$3000/mo, so I will need to start drawing at least $1000-$1500/mo from that Roth IRA at 67 so I can maintain my lifestyle. I will also have the added expense of Medicare Premiums.
• I figure by converting it all to Roth asap, most of my taxes will be paid and I should be able to live mostly income tax free after that.

Is this a sound strategy or should I not worry so much about converting to Roth for the tax advantages?

What other strategies might you recommend?

Thanks.


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If you've gotten to ROTH conversions as a 'problem' you're pretty far ahead in the race already. When Roth was first offered where I work, I went in full, mostly for tax bracket quasi 'insurance' in the farther term future, in case the Government decides (or is compelled) to greatly increase tax rates. Of course they could also mess with the rules of ROTH itself, but that seems less likely comparatively. There's no getting out of paying taxes in our country.

 

[glasswave]

The planning also depends on whether you're married, and what age the spouse is, and what would you like to have happen to the remainder of your estate when you die.

Single. As I don't have a gaggle of kids waiting on me to croak, I can use my estate to help those in need or promote good causes.

Also where do or will you live (that is, in an expensive, moderate, or lower cost area)?

I live in Salt Lake. If I move, it will be to somewhere somewhat rural (town of 3000 or more) and cheaper.

Maybe what your crystal ball says about your health? Got LTC insurance?

I am still on my work plan, no LTC.

nearly $30k standard deduction (for seniors).

What is this $30k deduction for seniors?

Also, that $18k -- if that's per year, I would inquire from your employer if you could have that paid differently. Maybe all at the end of five years, and delay SS start until after that? That would let you do more tax-free conversion in the meantime, probably avoid any IRMAA problems. Or alternatively, most of it up front in the year after your salary stops.

I assume it's paid as salary, twice monthly. My liquid savings likely will not last 5 years, unless I really scrimp.



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[SecondCor521]

What is this $30k deduction for seniors?

They're probably talking about the standard deduction for a MFJ couple where both are over 65 and not blind. See Form 1040 line 12; I think it's $30,700 in 2023.