Regular vs. Roth = No difference

[Focus]

I plan to retire this year at age 52. I'm debating whether I should begin my $60K/yr pension this year or wait until age 60 when it will be $100K/yr (plus COLA between now and then). This decision has a lot of variables/uncertainties such as health insurance. But one factor that favors waiting until age 60 is that I'd have 8 years to convert some of my traditional 401(k) funds to a Roth at a very low, possibly 0%, tax rate. Back of the envelope calculations suggest I could save $100K in taxes by doing this. This is not chump change.

Ah, to be in your shoes...

 

[Mulligan]

I plan to retire this year at age 52. I'm debating whether I should begin my $60K/yr pension this year or wait until age 60 when it will be $100K/yr (plus COLA between now and then). This decision has a lot of variables/uncertainties such as health insurance. But one factor that favors waiting until age 60 is that I'd have 8 years to convert some of my traditional 401(k) funds to a Roth at a very low, possibly 0%, tax rate. Back of the envelope calculations suggest I could save $100K in taxes by doing this. This is not chump change.

I am not recomending anything, I just like to play with numbers in my head. Disregarding taxes, immediate need of money, etc., I look at those numbers and think, wow wait 8 more years, you got 67% more starting pension pay and jump to $100k, no brainer to wait. But when you put the numbers together and add an assumed 3% cola at the 60 base with a 8 year head start, it still takes many many years in retirement to catch up in "total dollars received" by delaying and taking the larger pension. I know taxes and 401k distributions all come into play, but if the pension was one of those type that dies when you die, my greedy fingers would be wanting to grab " my pension money" no matter what my rational thinking brain had decided. Good problem to have though!

 

[justplainbll]

I plan to retire this year at age 52. I'm debating whether I should begin my $60K/yr pension this year or wait until age 60 when it will be $100K/yr (plus COLA between now and then). This decision has a lot of variables/uncertainties such as health insurance. But one factor that favors waiting until age 60 is that I'd have 8 years to convert some of my traditional 401(k) funds to a Roth at a very low, possibly 0%, tax rate. Back of the envelope calculations suggest I could save $100K in taxes by doing this. This is not chump change.

.......... Scenario ..........Total Payment Present Value

60K Age 52 – 95 Discounted @6% $2,640,000. $ 922,990.92
................Discounted @4% $2,640,000 $1,232,930.48
100K Age 60 –95 Discounted @6% $3,600,000. $ 917,338.82
................Discounted @4% $3,600,000.$1,381,609.64

Conclusion- based on present values, it's 6 of one and a half dozen of the other IF you expect to live for more than 40 years.

 

[Lancelot]

I have a tiny Roth IRA and never jumped through the hoops to convert my Traditional IRA. I will most likely defer SS and draw down my Traditional IRA first, maybe that will lower the tax bite when the RMD kick in. Sounds good any way

 

[Koolau]

I plan to retire this year at age 52. I'm debating whether I should begin my $60K/yr pension this year or wait until age 60 when it will be $100K/yr (plus COLA between now and then). This decision has a lot of variables/uncertainties such as health insurance. But one factor that favors waiting until age 60 is that I'd have 8 years to convert some of my traditional 401(k) funds to a Roth at a very low, possibly 0%, tax rate. Back of the envelope calculations suggest I could save $100K in taxes by doing this. This is not chump change.

Shawn, this does sound like an enviable situation. If I may be so nosey, what source of income will you draw upon to bridge the time from age 52 to 60 if you decide to wait for the pension? I found myself in sort of a "trap" when I decided to wait for SS until 70. To do so, I have to draw out some of my tIRA money or 401(k) money (which is taxable). If I also make Roth conversions now, I could push myself into a higher tax bracket. I essentially ran out of after-tax money (lived on that for 5 years, but now it's mostly gone). I'm currently cutting back on my Roth conversions as a result.

Just wondering how you will manage to "live" and also make Roth conversions if you are not receiving your pension. Again, just nosey.

 

[-Jackson-]

Can a person withdrawl funds from a Roth for living expenses and also convert funds from tIRA to Roth in the same year, as long as they stay 5 years ahead of their conversions?

 

[Shawn]

Shawn, this does sound like an enviable situation. If I may be so nosey, what source of income will you draw upon to bridge the time from age 52 to 60 if you decide to wait for the pension? I found myself in sort of a "trap" when I decided to wait for SS until 70. To do so, I have to draw out some of my tIRA money or 401(k) money (which is taxable). If I also make Roth conversions now, I could push myself into a higher tax bracket. I essentially ran out of after-tax money (lived on that for 5 years, but now it's mostly gone). I'm currently cutting back on my Roth conversions as a result.

Just wondering how you will manage to "live" and also make Roth conversions if you are not receiving your pension. Again, just nosey.

I have sufficient after-tax funds that could cover my expenses for 8 years. That includes cash equivalents (and principle in muni-bonds) that could be used without incurring much in the way of taxable income or capital gains tax (plus I have a good deal of harvested capital losses to offset any gains, although it's doubtful it would come to that).

It doesn't hurt that I am fairly frugal and wouldn't need more than $100K-$200K over those 8 years, depending on how I handled my existing mortgage and charitable contributions (e.g., I may make a significant contribution to a donor advised fund this year - my last significant income year - and use that to fund charities over the next 8 years).

 

[kaneohe]

Can a person withdrawl funds from a Roth for living expenses and also convert funds from tIRA to Roth in the same year, as long as they stay 5 years ahead of their conversions?

from a thread at fairmark.com , a table by KAWill
Assuming you are < 59.5yrs old and you allow each conversion to age 5 yrs , you can withdraw contributions and conversions (but not earnings)
w/o tax or penalty.

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM



Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

 

[obgyn65]

I have been advised not to take a ROTH (not sure why), so I just have a traditional 401(k) plan.

 

[RetireBy90]

Can a person withdrawl funds from a Roth for living expenses and also convert funds from tIRA to Roth in the same year, as long as they stay 5 years ahead of their conversions?

I tried to come a reason to do this, as I will need some income from retirement funds for 5-6 years. But try as I might, if you withdraw from a Roth then put some back in via conversion, it is the same as just taking what you need from the tIRA, tax wise.

I'm curious, why would you withdeaw then convert in the same year?

 

[justplainbll]

I tried to come a reason to do this, as I will need some income from retirement funds for 5-6 years. But try as I might, if you withdraw from a Roth then put some back in via conversion, it is the same as just taking what you need from the tIRA, tax wise.

I'm curious, why would you withdeaw then convert in the same year?

If one is converting less than is being withdrawn from the ROTH?

 

[-Jackson-]

I tried to come a reason to do this, as I will need some income from retirement funds for 5-6 years. But try as I might, if you withdraw from a Roth then put some back in via conversion, it is the same as just taking what you need from the tIRA, tax wise.

I'm curious, why would you withdeaw then convert in the same year?

I didn't have any particular reason in mind when I asked. The one thing that comes to mind is that you could basically withdrawl from the tIRA before 59 1/2 without setting up substantially equal periodic payments. As long as you could keep your rollovers 5 years ahead of your withdrawls. I don't know that it would necessarily be worth the effort, though.

 

[ejman]

I like the premise of this thread "Regular vs Roth = No Difference" because I decided not to convert my regular IRA to Roth for the dumbest reason. I'm so reluctant to spend from my IRA nest egg and so dedicated to the LBYM philosophy that I think the only way I'll take money out of it and actually do something with it is if I'm forced to do it.

 

[Alan]

I have been advised not to take a ROTH (not sure why), so I just have a traditional 401(k) plan.

Maybe you were told you earn too much to contribute. Single filers have to earn less than $125,000 in 2012 to be eligible to make any contributions. (that is modified AGI)

 

[bobbee25]

Because of the required minimum withdrawal a regular ira can put you into a higher tax bracket during retirement, likewise if you need an additional amount due to a large purchase. This is especially true if you have a pension.

With the Roth this isn't an issue.

There is also a benefit for your beneficiaries, instead of adding the inherited IRA onto their income resulting in a large tax byte, with the Roth they can just keep the Roth as their own.

Seems that the best course is a split with some in a standard IRA and the rest in a Roth.

 

[rescueme]

I have a tiny Roth IRA and never jumped through the hoops to convert my Traditional IRA. I will most likely defer SS and draw down my Traditional IRA first, maybe that will lower the tax bite when the RMD kick in. Sounds good any way

I hope your plan works (I'm doing the same )...

 

[Bogie]

Hi, First post here.
Check me on this but I believe about the only income that doesn't affect the taxable amount of Soc Sec is Roth income. If someone else has already posted this I apologize for being redundant. All other income sources can increase the tax on Soc Sec income at least that's my take on it.

 

[Alan]

Hi, First post here.
Check me on this but I believe about the only income that doesn't affect the taxable amount of Soc Sec is Roth income. If someone else has already posted this I apologize for being redundant. All other income sources can increase the tax on Soc Sec income at least that's my take on it.

You are correct that Roth distributions do not count as taxable income and therefore do not come into play when calculating txaes on SS income. Any income that is not taxable is excluded from that calculation.

For more details see here:
Benefits Planner: Taxes and your Social Security benefits

Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.

 

[LOL!]

I think Bogie meant that even tax-exempt muni bond interest affects the taxation of Social Security income. I believe that is true.

 

[justplainbll]

Muni bond interest income can negatively affect the taxability of FICA retirement benefits as well as increasing the cost of medicare premiums. We have not taken any distributions from our ROTH but wouldn't be surprised if we get dinged when we do.

 

[Alan]

I think Bogie meant that even tax-exempt muni bond interest affects the taxation of Social Security income. I believe that is true.

Correct.

 

[kaneohe]

I think Bogie meant that even tax-exempt muni bond interest affects the taxation of Social Security income. I believe that is true.

It's even in the link that Alan provided: the Nontaxable interest is the muni interest.
*****************************************************
Note:

Your adjusted gross income
+ Nontaxable interest
+ ½ of your Social Security benefits
= Your "combined income"

 

[Bogie]

I was pretty surprised to see that tax-free munis could make some of the Soc Sec taxable. As far as I can tell, Roth is the only source of money, except principle under your mattress, that doesn't make Soc Sec subject to Federal Tax. Thanks all that replied.

 

[Alan]

I was pretty surprised to see that tax-free munis could make some of the Soc Sec taxable. As far as I can tell, Roth is the only source of money, except principle under your mattress, that doesn't make Soc Sec subject to Federal Tax. Thanks all that replied.

Yep, not even Suzie O. with all her Munis can escape.