Not enough Roth

[SJhawkins]

Reading the following thread below, one of the common points mention was/is the regret of not enough Roth

Linky Here

This type of conversation comes in many forms, more so on pre planing side. The above thread was a little bit of an eye opener looking at it from the other side.

Like many before me I'm getting to the point of wondering what is a good mix between taxable/tIRA/rIRA and how to make it happen.

Understand lot of this is Wizard of Oz stuff trying to out guess the future but we all need to start at someplace.

I also think it's small window to make any meaningful moves and or corrections. Early 50s, want to work a couple of more years, retire around mid to late 50's does not leave many years to button up the details before more moving parts come into the picture. Rather we like it or not I think planing for a loss of spouse should enter into the picture too.

To give this thread some meaning what would be your optimal mix between taxable/tIRA/Roth?

Portfolio size matters, I would like to keep this discussion in the context of not many options. Think the following portfolios covers many of us common folk, good chunk of Americans.

800k-Million
1-2 million
2-3 million

Anyone want to give some insight for the sweet spot.

 

[Kabowest]

The sweet spot would vary for each situation. I just turned 61 yesterday, have $2mil between tIRA, Roth, & brokerage. I am also in the midst of a multi-year Roth conversion plan, so despite the WoO stuff it's never too late to make informed adjustments.

With my retirement savings, paid off house, no debt, and annual spending needs, that's my sweet spot. YMMV

 

[Montecfo]

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.

And the farther you are from retirement, the tougher it is to know things you need to know in order to determine if a Roth makes sense.

So what did I do? I maxed out 401k and traditional IRA when I could per limits (such as when not covered by 401k).

When I had a low income year (took a pay cut to work for a startup, DW had stopped working so one of us could be home with our son) I did Roth conversion. That was I think in the jubilee years when they allowed you to pay the tax over three years.

Contributed to Roth when it made sense and rules allowed.

And now as retiree have done modest Roth conversions depending on my bracket and LTCG situation.

So I'm about 60% tax deferred, 20% taxable, 15% Roth and 5% HSA.

 

[Dtail]

It depends as they say.
I am foregoing some Roth conversions, as the savings on managing my MAGI for ACA purposes is worth more to me.
Currently have 7% Roth, 81% TIRA, 12% Taxable.
Maximized TIRA contributions while working in a higher tax bracket.
The plan is to do more Roth conversions from age 66 to RMD start age.

 

[RunningBum]

There is no such thing as a sweet spot for this. Ideally you would level out your taxes evenly throughout your life. This means deferring income in your high earning years, and taking more when you have less income. When you are working, a tIRA/401K is a haven to defer income. When you are retired, that deferred income is has a nasty deferred tax liability that you want to reduce and even get rid of if you can. However you can best balance it in your own situation is your personal sweet spot, along with consideration for having money to access before age 59.5.

If you're looking for an X%/Y%/Z% Deferred/Roth/Taxable sweet spot answer, there is no one size fits all. Not only does it depend on your situation, but it also depends on your age.

 

[corn18]

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.

 

[RunningBum]

Just for example, my own mix is 77% taxable, 3% tIRA, 20% Roth+HSA. Even if you throw out the taxable, the IRA mix is 13% tIRA, 87% Roth+HSA, and I'm still whittling away on that tIRA. I can't say I've executed conversions perfectly, but I'm fine with what I've done. Should that be the goal for someone else? Only by coincidence.

 

[pb4uski]

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.

And the farther you are from retirement, the tougher it is to know things you need to know in order to determine if a Roth makes sense.

So what did I do? I maxed out 401k and traditional IRA when I could per limits (such as when not covered by 401k).

When I had a low income year (took a pay cut to work for a startup, DW had stopped working so one of us could be home with our son) I did Roth conversion. That was I think in the jubilee years when they allowed you to pay the tax over three years.

Contributed to Roth when it made sense and rules allowed.

And now as retiree have done modest Roth conversions depending on my bracket and LTCG situation.

So I'm about 60% tax deferred, 20% taxable, 15% Roth and 5% HSA.

(emphasis added)

+1 The amount of Roth is a function of tax rate arbitge opportunities that become available to you during your working career. When I was working, we were in a high tax bracket and it as very unlikely that we would be in a higher tax bracket in retirement, so maximizing tax-deferred savings to avoid those high marginal tax rates made sense.

We've definitely made good hay... deferred at 28% or more and currently converting at 0%, 10% and 12%... even once SS is all online and we're close to the 22% tax bracket before RMDs we'll be paying less in taxes on RMDs than what we saved by deferring. And that doesn't even begin to consider that we lived in an income tax state when we deferred that income and now live in a no income tax state, so there are some serious tax savings there too.

When we retired out taxable/tax-deferred/tax-free rations were 44%/53%/3% and now, 11 years later... between spending and assertive Roth conversions we are 12%/57%/31% even though the total $$$ is similar and doesn't count certain other assets (new garage, winter condo, travel trailer, etc) that the growth of those assets have funded.

 

[FLSUnFIRE]

During accumulation I maxed out traditional TSP and Roth IRA and never bothered with the Roth TSP option when it came online as I wanted some immediate tax break. I expect my tax bracket to look like a U with it being high working, fairly low my first decade of my retirement, and ramping back up. I will tap the ROTH last and likely start SEPPs from my traditional TSP in a couple years to maintain liquidity and not have HUGE RMDs in the future.


If anything, I'd say not enough "taxable" would be my response as it is the most liquid and usable at a young(ish) age. I would have had a lot more taxable if not for the marriage, marriage induced lifestyle creep associated with said marriage, and divorce.... live and learn.

 

[Gumby]

While we were working, all the money we put in tax deferred (tIRA,401k,403b,457) would have been taxed at rates of 28% or more, so almost any conversion we do will be money ahead.

At present, we are close to the top of the 12% bracket just with pensions and social security. Roth converting up to the top of the 12% bracket is a no brainer. As far as the rest goes, if Roth converting at 22% now will keep us from paying 24% or even 32% on RMDs in 10+ years, then we'll do that. Based on my own spreadsheet, I think I know where the Roth conversion sweet spot is for us to stay in the 22% bracket forever. I see no need to convert more than that, as we may never need the money in our tax deferred accounts.

I know tax laws can and will change, but I can only work with what I know now.

P.S. -- it makes a real difference if you can pay the Roth conversion tax from money in your taxable account rather than from the tIRA distribution itself.

 

[kgtest]

A bit of a Rich dad, poor dad analogy but in the context of a Heavily Taxed Dad, Heavily untaxed dad argument.

DF has about 75% of his investable portfolio subject to RMD. On the flip side, by DFIL has 0%. DF was an engineer, DFIL was a Dr. But that is not the whole picture because DFIL also owns RE investments that provide passive income, WITH a tax break for expenses.

Would you rather have a small pot of untaxed money, or a larger pot of money with some of it taxable? DF is doing mega backdoor conversions for the next 2 years before RMD does settle in, but its still a lot of taxable income. But he will also have a larger overall net worth than the DR FIL...if you can imagine that. Now if you looked at eachother's lives DF probably stuck more to the LBYM lifestyle, not at all suggesting DFIL did not, but just had a more expensive lifestyle. More expensive mortgage, more kids to put through college, more Dr bills battling cancer, and of course the higher tax bills with those conversions early on.

It seems, or appears that DFIL had the cash to pay the taxes earlier doing roth conversions sooner, but then he was also using his cash that could have been compounded into investment returns while DF was using his cash to compound the investment returns rather than paying taxes on conversions.

I think everyone's situation is unique and there is absolutely a sweet spot that looks a little different for every investor.

IF I take this into a generational lens, our situation looks a bit different. Likely I will have a large taxable IRA account, and DW will inherit a large tax free Roth IRA from our beloved parents...which is probably a little bit of luck, but certainly not as lucky as someone who would inherit 2 sizable Roths. Right now, when I come upon RMD it will be both inherited RMD with some taxable, some tax free and then our own RMD. IF I can accomplish roth conversions in the lower tax brackets of our ER (which is highly unlikely with the inheritance of DF sizable IRA triggering the 10yr RMD counter counting towards income) then it appears I could target no better than 30% of our own invested portfolio as taxable with 70% of it being tax free. Then you add in the inherited IRA, and Roth post taxes paid and that number is even smaller, but cuts into my own Roth Conversion strategy.

Indeed, a complicated and complex projection to do. And who knows, maybe I die tomorrow and none of it matters. YMMV.

 

[Dash man]

After two years of heavy Roth conversions, we’re now approximately 1/3 taxable, 1/3 401k, 1/3 Roth. Now at 65, we plan to continue significant Roth conversions through 2025 wanting to complete them before the TCJA sunsets and DW begins her SS. This will be in time before RMDs begin. We will likely have some left in the 401k/tIRA for charitable giving, but most of it will be in our Roths with conversion taxes paid out of taxable funds.

 

[conversationalphrase]

One additional point, Roth withdrawals don't count against MAGI for ACA subsidies. tIRAand 401k withdrawals do count.

 

[punkinhead]

One additional point, Roth withdrawals don't count against MAGI for ACA subsidies. tIRAand 401k withdrawals do count.

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.

 

[TwoBitsCA]

I'll just echo that everyone's situation is different. For us, it's basically 80% deferred and 20% Roth. We will retire this year at 55/54 with good sized pensions (one is military) that will cover most/all daily expenses and put us towards the middle/top of the 22% bracket...we will see how close to the 24% bracket we get after VA disability is determined. We'll have Tricare so no need to worry about ACA. We'll also be moving to a no income tax state. I will convert to at least top of 22% and probably well into 24% since that looks like what we'll be in once SS and RMDs kick in. I think our goal is to get to at least 50/50 and probably 25/75. I've heard it is good to not drain all of the deferred as you can use it for medical/LTC expenses.

 

[Montecfo]

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.

This is so true. I think we (early retirees) have had to play catch-up in some cases spreading the word about Roth conversions. It is a good word. Roth conversions are something we should all understand at a high level, similar to understanding debt, insurance and investing basics. Roth conversions are an important tool to utilize whenever it is right for the job.

And forecasting how useful it is can bring a surprisingly large number of variables into play and over a very long period of time.

It is an investment in lower future tax payments, which has a long payback period. It should be evaluated as such.

Run your personal numbers and invest wisely.

 

[SJhawkins]

Op here,

My data point, as of today we are at 10% Roth, 35% Deferred, 55% Taxable (better term would be "maybe taxable").

While we continue to work will keep maxing tax deferred plan and fill up the roth. It works out just about perfect for us, by filling up the deferred accounts that just puts us back mostly into the 12% bracket, then we max the Roths. If we retire early (planning on it) then my guess will have a few years to some conversion. I can see knocking on the deferred accounts with about million in the next few years (lot of this will depend when we decide to give up working).

I still find it interesting in the other thread the number of people responded to they wish they had more Roth.

 

[punkinhead]

I still find it interesting in the other thread the number of people responded to they wish they had more Roth.

There are good reasons for wanting more Roth in retirement. The emotional side of me wishes I had more but the analytical side of me knows that pre-tax was mathematically better for me and that Roth conversions now are neutral at best and negative at worst. There are a lot of assumptions built into the decision of whether to convert or not. There are some situations where it's a slam dunk - for example someone retired in the 0% or 12% tax bracket who'll be pushed into the 22% or higher bracket with RMDs. But a lot of people just assume they're in a situation where Roth conversions make sense but haven't done the projections.

Having a large Roth in retirement gives you the option of controlling AGI for IRMMA and ACA subsidies. It's also nice to avoid large RMDs if one spouse dies and the survivor is filing as single. Also, it's a whole lot more painful and "in your face" to write Uncle Sam a tax check every quarter or year vs having taxes automatically withheld while accumulating.

I wonder how many people start out with plans to do big Roth conversions then cave when they see how big that tax check is going to be? I also wonder how many people have created a spreadsheet of RMDs and taxes paid per year to see how bad the RMD tax bill is really going to be. It might not be as bad as you think but the only way to know is to build a spreadsheet or use a tool like eMoney.

 

[Dash man]

It might not be as bad as you think but the only way to know is to build a spreadsheet or use a tool like eMoney.

+1
Too many people also just look at the first few years of RMDs, not projecting out far enough to see the potential tax burden in their 80s.

 

[steelyman]

+1
Too many people also just look at the first few years of RMDs, not projecting out far enough to see the potential tax burden in their 80s.

I’m not sure I’ll make it that far (rock ‘n roll lifestyle) but I maintain an even split in tIRA/Roth in my retirement portfolio.

 

[RunningBum]

My projections have me at the tail end of the SS tax hump, so the first few(?) thousand in RMDs each year would be taxed at 49.95%. That means I need to either fully convert my tIRA or do full QCDs to avoid it. That's using a pretty conservative growth projection on my taxable account though, so I might be fully through the hump. Yet another complexity in the Roth conversion calculations.

 

[SJhawkins]

There are good reasons for wanting more Roth in retirement. The emotional side of me wishes I had more but the analytical side of me knows that pre-tax was mathematically better for me and that Roth conversions now are neutral at best and negative at worst. There are a lot of assumptions built into the decision of whether to convert or not. There are some situations where it's a slam dunk - for example someone retired in the 0% or 12% tax bracket who'll be pushed into the 22% or higher bracket with RMDs. But a lot of people just assume they're in a situation where Roth conversions make sense but haven't done the projections.

Having a large Roth in retirement gives you the option of controlling AGI for IRMMA and ACA subsidies. It's also nice to avoid large RMDs if one spouse dies and the survivor is filing as single. Also, it's a whole lot more painful and "in your face" to write Uncle Sam a tax check every quarter or year vs having taxes automatically withheld while accumulating.

I wonder how many people start out with plans to do big Roth conversions then cave when they see how big that tax check is going to be? I also wonder how many people have created a spreadsheet of RMDs and taxes paid per year to see how bad the RMD tax bill is really going to be. It might not be as bad as you think but the only way to know is to build a spreadsheet or use a tool like eMoney.

Lots to unpack here but do think you hit on a few points for most us common folk, including myself. I do think if I do it right I could end up in the 0% bracket for most of my ending years, a lot of that will depend on how long the 2 of us live.

 

[SJhawkins]

+1
Too many people also just look at the first few years of RMDs, not projecting out far enough to see the potential tax burden in their 80s.

This is such a great point and what has me thinking more about this. We had to help out with a family member who lost a spouse, ending up in long term care etc. Saw first hand some big butt tax bills, it was little crazy and could have been avoided I think.

 

[RunningBum]

This is such a great point and what has me thinking more about this. We had to help out with a family member who lost a spouse, ending up in long term care etc. Saw first hand some big butt tax bills, it was little crazy and could have been avoided I think.

LTC is one of the reasons often given here to NOT convert, because you can write off the medical expense against a large tIRA withdrawal. Maybe he didn't meet the requirements for it to be a deductible expense?

My plan is to take some LTCGs from taxable to help cover LTC, if I actually need it and if my tIRA is drained. It's better to write off regular income than LTCGs but I think it will work pretty well.

 

[SJhawkins]

LTC is one of the reasons often given here to NOT convert, because you can write off the medical expense against a large tIRA withdrawal. Maybe he didn't meet the requirements for it to be a deductible expense?

My plan is to take some LTCGs from taxable to help cover LTC, if I actually need it and if my tIRA is drained. It's better to write off regular income than LTCGs but I think it will work pretty well.

In this case they had a old LTC plan, that part worked out great. It gave us a insight to what can happen with the some of other "stuff" before and after LTC was needed.