PSA - Roth conversion plan miscalculation

[wallygator69]

I'm just not sure what age for the youngest grandchild to plan on doing it while factoring in that we are now 70 and are not getting any younger.

Was listening to radio today. DJ still busts his daughters chops since she doesn't remember her first trip to Disney at 3 1/2. Remembers zilch. I Would think Plane, hotel, disney characters..... but Nothing...

 

[RetireBy90]

On the original post, I "managed" mom's accounts for about 15 years and for most of it I tried to manage as a time frame of her kids not hers. She had income to support her needs and a bit more, and never had to use any of her savings. She kept it to cover what ifs that really concerned her. So any way, longer term outlook was used with about 75-80% equity.
I'm trying to do the same with our accounts, manage with time frame of our kids and charities, so longer term and more equities. Worth thinking about ??

 

[Dtail]

On the original post, I "managed" mom's accounts for about 15 years and for most of it I tried to manage as a time frame of her kids not hers. She had income to support her needs and a bit more, and never had to use any of her savings. She kept it to cover what ifs that really concerned her. So any way, longer term outlook was used with about 75-80% equity.
I'm trying to do the same with our accounts, manage with time frame of our kids and charities, so longer term and more equities. Worth thinking about ??

I manage my mom's trust and other accounts. A little bid of a hybrid. I am now using aggressive Roth conversions with taking her into IRMAA, for the future. However, she has 3 years of full LTC coverage, so not aggressively investing the portfolio in equities just in case there is a need and a bad timing of a bear market.
Not to mention, would hear it from the other sibings.

 

[SecondCor521]

On the original post, I "managed" mom's accounts for about 15 years and for most of it I tried to manage as a time frame of her kids not hers. She had income to support her needs and a bit more, and never had to use any of her savings. She kept it to cover what ifs that really concerned her. So any way, longer term outlook was used with about 75-80% equity.

Be careful. POAs are required to manage the money according to the best interest and plans of the owner to the extent that those are known. If all the heirs / beneficiaries are on the same page, then practically speaking it may not be an issue. But one could open oneself up to a lawsuit if family financial dynamics go sideways.

I'm trying to do the same with our accounts, manage with time frame of our kids and charities, so longer term and more equities. Worth thinking about ??

I do similarly. I conceptually divide my assets into two piles - 25x which I plan to spend, and the rest which will go to my kids in hopefully 30 years or so. The former is allocated according to Firecalc, the latter is 100% stocks.

 

[pjigar]

What I overlooked was a substantial inheritance and the investment income that the inheritance would add to our taxable income. I guess my mind was in the old not counting chickens (inheritances) until they are hatched... which makes sense for overall retirement planning but as I've found out, doesn't make sense when planning Roth conversions.

If I had factored it in I'm not sure if we would have done anythnig differently since the 22% tax bracket is so wide, but nonetheless, something to consider.

Yes, after-tax income streams without much control have the most impact on Roth conversion strategy. I have been over-estimating the after-tax incomes and, for that matter, the growth of IRA accounts for our own conversion strategy.

 

[pjigar]

Was listening to radio today. DJ still busts his daughters chops since she doesn't remember her first trip to Disney at 3 1/2. Remembers zilch. I Would think Plane, hotel, disney characters..... but Nothing...

We waited till DD was about 7 to do a Disney cruise. She is an adult but still remembers everything vividly. The best BTD trip we ever did, by far. We have done several trips to Disney and Universal parks over the years but the Disney cruise was the best.

 

[ERD50]

... What I overlooked was a substantial inheritance and the investment income that the inheritance would add to our taxable income. ...

Depending on your approach to diversification, consider BRK, as they pay ZERO divs/cap gains. Helps with keeping the annual taxable income low. I'm over-weighted in BRK ( ~15% of total portfolio), but I think it's pretty diversified, and does well w/o too much volatility.

 

[pjigar]

Depending on your approach to diversification, consider BRK, as they pay ZERO divs/cap gains. Helps with keeping the annual taxable income low. I'm over-weighted in BRK ( ~15% of total portfolio), but I think it's pretty diversified, and does well w/o too much volatility.

Same here. All taxable accounts are in BRK. About 30% or portfolio.

 

[copyright1997reloaded]

12% - I'm jealous. Single here, trying to decide whether I should go beyond the 24% bracket for Roth conversions. I am waiting until move move from a high tax state to a tax-free state (for IRA distributions) "completes" (i.e. I file a tax return in the new state and the old state doesn't contest). Then I will go beyond 24 as I won't have a 6-7% state tax hit.

 

[FlaGator]

Off the OP's initial topic, but something mentioned down thread.

Regarding the deluxe WDW trip:
When the kids were young, we lived 3-ish hours away and were very frequent visitors. Oldest was there at one year old, youngest at 6 weeks . They remember little of any trip before they were about 5. Were it not for the photos and the stories I can tell from them, for them those trips may as well have not happened.

But for me and Mom, they were great! The most fun we had with them as parents. For the kids, everything was new, different from what they had known and made them smile. We did then, and I do every time I look at the photos from those trips.

Do the trip while you can and do it again if you can when both GKs are older. You'll enjoy seeing how they react and have great memories of the experience. And their parents will too and have stories to tell for years to come.

 

[RunningBum]

12% - I'm jealous. Single here, trying to decide whether I should go beyond the 24% bracket for Roth conversions. I am waiting until move move from a high tax state to a tax-free state (for IRA distributions) "completes" (i.e. I file a tax return in the new state and the old state doesn't contest). Then I will go beyond 24 as I won't have a 6-7% state tax hit.

Beyond 24%? I could see going to the end of 24%, but beyond takes you to 32%. Are you going to be higher than that with RMDs and SS? If so why not go to the end of 24% now? 24+7 = 31%.

 

[Koolau]

12% - I'm jealous. Single here, trying to decide whether I should go beyond the 24% bracket for Roth conversions. I am waiting until move move from a high tax state to a tax-free state (for IRA distributions) "completes" (i.e. I file a tax return in the new state and the old state doesn't contest). Then I will go beyond 24 as I won't have a 6-7% state tax hit.

Have you sat with a tax professional to plan a strategy? It's possible that a couple of hours of professional guidance could save you even more tax money in the long time.

Anyway, I guess it's not the worst problem to have.

Heh, heh, and then there's the possibility of marriage which would at least help with the taxes. Good luck.

 

[RetireBy90]

I converted aggressively to avoid the 2026 bump, and now it doesn't look to happen, at least not complete reversal to prior rates. For me, you can project and plan and then changes can interrupt the whole thing. At least I'm done with taxes on our TIRA. I converted so Roth is 73% right now and remaining TIRA is planned for QCDs. If rates stay like they are today I'd have paid more in taxes than I needed to but I'm happy that we don't have to worry about any RMD bumps and I can draw whatever I want (new Corvette anyone ) without a tax worry.

 

[jj]

Interesting @pjigar - 30% - our taxable too has exposure to BRK and it has grown, as we haven't touched it, to become more than 10% of our total assets.

I guess I shouldn't worry too much. It's certainly given us a good dividend-free return.

 

[Spock]

I'm "in the same boat" (minus the pontoon).
Spreadsheeted a Roth conversion plan to stay in the 12% bracket with social security and RMDs on the remaining tax deferred balances.
Dad passed away this past Feb. I've been scrambling to unwind his holdings (rental properties) prior to splitting the distribution to my brother and I.

For the immediate tax future, I'm putting the distribution into T's/CD's that pay at maturity after Jan 1 to push the additional interest income into next year (switch from ACA to Medicare next year so that kink in the hose comes out).

The one "benefit" in Dad's rental property-heavy estate is that we'll have significant capital losses after sale expenses are subtracted from the stepped up cost basis... but being primarily a bond investor it's going to take my remaining projected life time to consume those losses at $3K/year against interest income.

I've built dozens of spreadsheets to diddle with the various tax tradeoffs (when to start SS, Roth conversions, vs. RMDs, etc). Being an engineer, there is supposed to be a "right" answer. But there isn't one. While the extremes of the assumptions can make dramatic differences in the "answer", the middle of the road assumptions pretty much washout into the slop factors of long range future planning (changes to SS, tax rates, inflation). The various circles overlap. A lot.

As far as blowing the dough... Dad was frugal. I was pre-teen when Dad built the first rental unit back in the '70s. We shingled the roof (tied a rope around my younger brother in case he fell off), painted the exterior, stained all the wood work, etc. as sweat equity vs. paying the builder to do it all. My wife grew up eating pancakes for supper because there wasn't $ for food for 6 people.
Needless to say we pinch pennys until they cry.

Severe sticker shock and inflation are enough to keep us from spending big $.

Although I am going to go out and blow some "Dad money" (as we're calling it) this week. I took apart a grease gun last week and can't get it back together without growing two more hands so I threw it in the trash and am going to just buy another one.

 

[RxMan]

I’m 51 years old. I think there’s a good possibility that I can consider retiring in about 5 years. Buying a house could alter that timetable but for right now a 4-6 year retirement timeline seems quite reasonable and obtainable.

I’ve read a lot about Roth conversions here and elsewhere. It’s a popular topic. But it got me to wondering if there were investment/retirement strategies that I could implement now that would minimize or at the least lessen the need for Roth conversions of my retirement savings in the future.

My current job is only a contract position (full-time), but it does offer a 401k plan. Up until this month there was no match but one is about to be implemented. I won’t vest in the matching contributions until after 3 years so we’ll see if I ever see any of that money.

This current 401k plan, as well as the one offered at my last job, offer a Roth 401k option. I’m currently contributing 15% of my salary towards my 401k. I decided to contribute 5% to the traditional side and 10% to the Roth 401k.

My reasoning is to put my contributions towards the Roth 401K now to lessen my need to do Roth conversions in the future. My old employer’s 401k account sits at about $1.1 million of which approximately $88k is in the Roth 401k. It’s a low percentage of the total amount because I didn’t have access to a Roth 401k for very many years.

My current 401k plan is very tiny by comparison (less than $10K) because I just started contributing to it at the end of last year. But 2/3rds of this account is in the Roth 401k option. I plan to continue to favor Roth 401k over traditional 401k contributions for the foreseeable future.

I also separately contribute to a Roth IRA. Last I checked it was valued close to $200k. The traditional 401k still has the majority of my retirement savings even after shifting contributions towards the Roth 401k these last few years.

The point is that I’m trying to diversify my retirement contributions into tax deferred and non-tax deferred accounts now so there is less of a need for conversions in the future. I’m wondering if this strategy is a good idea.

Maybe what I am doing is wrong or not enough to prevent the need for Roth conversions in the future, but at least I am trying to make decisions now that will lessen the need for such conversion strategies in the future. That seems like a reasonable goal to me.

I wonder if anyone else has experience with retirement savings strategies that are geared towards minimizing the need for Roth conversions? Is what I’m doing sound reasonable or are there factors that I’m missing that make my current strategy less than optimal? I’d be curious to hear the thoughts of others.

 

[Koolau]

I’m 51 years old. I think there’s a good possibility that I can consider retiring in about 5 years. Buying a house could alter that timetable but for right now a 4-6 year retirement timeline seems quite reasonable and obtainable.

I’ve read a lot about Roth conversions here and elsewhere. It’s a popular topic. But it got me to wondering if there were investment/retirement strategies that I could implement now that would minimize or at the least lessen the need for Roth conversions of my retirement savings in the future.

My current job is only a contract position (full-time), but it does offer a 401k plan. Up until this month there was no match but one is about to be implemented. I won’t vest in the matching contributions until after 3 years so we’ll see if I ever see any of that money.

This current 401k plan, as well as the one offered at my last job, offer a Roth 401k option. I’m currently contributing 15% of my salary towards my 401k. I decided to contribute 5% to the traditional side and 10% to the Roth 401k.

My reasoning is to put my contributions towards the Roth 401K now to lessen my need to do Roth conversions in the future. My old employer’s 401k account sits at about $1.1 million of which approximately $88k is in the Roth 401k. It’s a low percentage of the total amount because I didn’t have access to a Roth 401k for very many years.

My current 401k plan is very tiny by comparison (less than $10K) because I just started contributing to it at the end of last year. But 2/3rds of this account is in the Roth 401k option. I plan to continue to favor Roth 401k over traditional 401k contributions for the foreseeable future.

I also separately contribute to a Roth IRA. Last I checked it was valued close to $200k. The traditional 401k still has the majority of my retirement savings even after shifting contributions towards the Roth 401k these last few years.

The point is that I’m trying to diversify my retirement contributions into tax deferred and non-tax deferred accounts now so there is less of a need for conversions in the future. I’m wondering if this strategy is a good idea.

Maybe what I am doing is wrong or not enough to prevent the need for Roth conversions in the future, but at least I am trying to make decisions now that will lessen the need for such conversion strategies in the future. That seems like a reasonable goal to me.

I wonder if anyone else has experience with retirement savings strategies that are geared towards minimizing the need for Roth conversions? Is what I’m doing sound reasonable or are there factors that I’m missing that make my current strategy less than optimal? I’d be curious to hear the thoughts of others.

It sounds to me that you are doing some good things for your retirement. I would always contribute the maximum possible to your Roth IRA first (unless that would prevent you from getting a full match from your 401(k).

Whether or not you will need (or want) to convert to Roth later (during retirement) will become more obvious once you do retire. Still, I'm a big fan of Roth IRAs and, once again, I'd suggest emphasizing Roths as much as possible. Best luck in your decisions.

 

[SecondCor521]

@RxMan, why do you want to avoid Roth conversions?

Your strategy could easily be suboptimal, but it would depend on your marginal rate now compared to the marginal rate that you could Roth convert at later. These two things in turn depend on your entire tax picture now and later.

 

[pb4uski]

+1. You should probably contribute at least enough to get the match. Whether to contribute more than what is needed to get the match and whether it should be traditional or Roth depends on your tax savings and marginal tax rates (both federal and state) and what you expect your tax brackets to be in retirement. While the conventional wisdom is that your tax rates in retirement will be less than while working and that is generally the case, and if so a traditional 401k is preferable but if your current tax rate is the same or less that you expect when retired then a Roth os preferable.

 

[RetireBy90]

I was in your situation when my former employer offered the Roth 401K. I started with a portion of my contribution to Roth and portion to traditional, and moved a larger portion to the Roth over my last 5-6 years.

I didn't save on taxes as my tax rates now are less than when I contributed but it got me started with the Roth. I am almost 7 years into retirement and converted my 401K to IRA. I have been doing conversions and now about 2/3 in my Roth and 1/3 in traditional.

I'm very happy with the outcome. Saving on tax bill or not has been difficult for us to determine in advance. Many things I have learned about as the journey progresses and changes to tax policies over the years can turn your plans upside down. So many unknowns. Will your tax deferred accounts increase enough to push your eventual RMDs higher and to a higher tax rate ? Will changes to tax policy/law favor a choice that looks foolish today ?
I would continue to contribute to Roth and plan for a balance of some sort between Roth and traditional. It will give you some flexibility to react to future changes you can't foretell.

Forecasting is hard especially when it is about the future

 

[RunningBum]

Another +1 here. Your income is usually highest in your later working years. You want to be deferring income here, maybe as much as you can, depending on how much money you already have in deferred. You want to avoid paying an even higher tax rate when you start RMDs.

Your lowest income might be between the years you retire and before you start SS, RMDs and pensions. These are prime years to convert.

Look at your marginal rate now, what you expect it to be in ER, and what you expect it to be when you start SS, pension (if any) and RMDs. Try to level them out. Usually this is done by deferring income while working and doing conversions in ER.

 

[NomDeER]

Another +1 here. Your income is usually highest in your later working years. You want to be deferring income here, maybe as much as you can, depending on how much money you already have in deferred. You want to avoid paying an even higher tax rate when you start RMDs.

Deferring income definitely is not going to help me avoid paying a higher tax rate when I start RMDs. I wish I had not put so much in my tax-deferred accounts. Even with Roth conversions while delaying Social Security, I'm going to be bumping up my tax bracket with RMDs. Also, for some people, if they are intending to leave money to heirs, traditional IRAs and 401(k)s may not be that tax friendly for the heirs.

I wish Roth accounts had been available to me when I was younger because it is even more beneficial then due to the time that the money has to grow tax-free. I would be doing Roths as a youngster even if I were not in a higher tax bracket.

 

[SecondCor521]

Even with Roth conversions and delaying Social Security, I'm going to be bumping up my tax bracket with RMDs.

If this is true then you may want to do more aggressive Roth conversions.

 

[NomDeER]

If this is true then you may want to do more aggressive Roth conversions.

There are reasons that are pretty specific to me why this doesn't make sense at this stage. It could very well make sense for others.

 

[Slim11]

I am doing the same roth conversions at the 24 rate but crossed a bit into the 32 rate last year and this year because of an inheritance, and a mistake by my former employer. For me the Roth is a wash. But like you and others said its a good vehical to leave money to my kid. So, thats the only benifit I see. Unless I do live to 90, lol.