ROTH target

[bada bing]

The benefits of Roth contributions are different than the benefits of pre-tax contributions and depend very much on individual circumstance.

The "no-brainer" is take full advantage of methods to make free Roth contributions above what you choose to use your qualified contribution limits on, pre-tax or Roth. Mega-Backdoor Roth, regular Backdoor Roth and conversions to use up any any unused standard deduction are no-downside no-brainers, if you have the money available or in savings. Anytime you have to pay additional tax to move money into a Roth, it becomes an arbitrage question where one half of the arbitrage (the future tax rate on withdrawal) will be a guess.

I have about 35% of savings currently in Roth, mostly from backdoor and mega-backdoor contributions. Going forward, I'll evaluate potential opportunities to Roth convert, but I won't be doing it based on some targeted percentage of assets. It will be entirely based on best guess of maximizing my after-tax proceeds.

 

[free2020]

I agree with much of what you said. Saying "you might be in a higher tax bracket" is true, but it is also hard to know, but you are making a bet and putting money down. To pay the tax before you have, maybe decades before, is also swimming upstream relative to time value of the cash. I would tend to not take that bet without compelling data, and you generally will not have that data unless you are already in retirement and know your assets and expected tax rates.

As far as the 2% difference between the brackets, yes, it is worth saving, but understand your payback period on that money will be decades. Why? Because if you do say a $50k Roth conversion, you save the taxes only over the RMD period. So it will take a while to get your "payback". For me the tax torpedo seems difficult to avoid, regardless.

I am aware there are advantages to my heirs to inherit a Roth. But my estate is reduced by the taxes I would have to pay to establish it. So again, it is a mixed bag.

I think you made a good point about single versus MSJ. That is something to consider. But i would not pay tax at my current rate to avoid that possibility, as it requires a certain cost today for an uncertain, and possible non-existent future benefit.

I too have thought about the time value of pre paying uncle Sam but that hurts my head to figure out. Besides I am not a big fan of leaving too much behind. My heirs can figure it out for themselves beyond a reasonable inheritance.

But the thought of a pot of money that no one can put a claim on is what makes me want to pile up the ROTH. It’s a very happy thought to have all of my wealth in my out years in it. Ultimate money under the pillow!

 

[target2019]

I too have thought about the time value of pre paying uncle Sam but that hurts my head to figure out. Besides I am not a big fan of leaving too much behind. My heirs can figure it out for themselves beyond a reasonable inheritance.

But the thought of a pot of money that no one can put a claim on is what makes me want to pile up the ROTH. It’s a very happy thought to have all of my wealth in my out years in it. Ultimate money under the pillow!

Contribute to 401k to get match. Max your Roth. Max 401k and or appropriate investments in taxable brokerage.

 

[free2020]

Contribute to 401k to get match. Max your Roth. Max 401k and or appropriate investments in taxable brokerage.

+1 my advice to those starting out today.

Additional opportunistic tips, when you quit jobs, roll over 401K and about every 7 years or so when a recession comes, convert to ROTH when doom and gloom prevails.

 

[mrfeh]

Don't have such a target, and I don't know why I would.

We max out 401Ks and Roth IRAs. Whatever happens, happens.

 

[Montecfo]

I think you are too concerned with "paying taxes now".

I am happy to pay taxes now. I just need an incentive to want to do so. I prefer not to overpay for things. I am funny that way.

That's not bad like you seem to think it is. Your Roth grows tax free after that, rather than having a tax liability waiting to hit you with that liability growing as your deferred account grows.

Whether it is "bad" depends on the rate. Cannot think of a single benefit to me of overpaying taxes.

Run a spreadsheet with and without the conversion for whatever length of time you want.

Yes. Am familar with those. But it actually is not really complicated in concept.

Related to this, this is why in my portfolio net worth statement I reduce my tIRA by my predicted tax liability. I think when people don't, they tend to look at $100K in a tIRA the same as $100K in a Roth. They aren't the same thing, and when you think they are, paying taxes on the conversion seems like you're reducing your net worth. In reality, you're reducing a liability as well as an asset.

No argument there. But did you ever want to go ahead and just prepay those taxes? Taxes that you might never ever have to pay? Because doing so is not "bad"?

The purpose of IRAs is to help people accumulate savings by reducing taxes. It is primarily tax rate arbitrage. But of course people are free to use them in any way they want.

 

[sengsational]

The target ratio doesn't really make sense to me.


At any point in time, you're at a specific configuration. You use whatever information you have to make a move; you can only act in the "now". So you can have a guiding principle (pay less tax), but that must balance taxes now vs taxes later. i-orp codifies this principle using various assumptions about the future. Not everyone agrees about the future (to state the obvious), but if you want to optimize, you can not do it without considering all years until "plan sunset". The optimal plan will push as much into Roths as it can while making sure you don't pay "too much" or slip into a "too high" bracket of our progressive income tax scheme.

 

[Trawler]

We are doing Roth Conversions up to the point of being most efficient when looking at of ACA Subsidy and current tax rates. Found for us using ACA income around 300% of FPL which is about a 9.7% of Modified Adjusted Gross income and thru the 12% income tax bracket in conjunction with an HSA compatible bronze plan works best for us. Once on Medicare we will do more conversions and with drawls to the top of the 22% tax bracket and goal is to have our mix of Roth and IRAs where we will not have to pay more for Medicare due to mandatory IRA withdrawls.

 

[OldShooter]

In my thinking tax rates are more likely to shoot up for us in the future. Simple reasons, deficits growing, Retirement savings for the average Joe continues to be paltry and thus they’ll sock folks like myself who have bigger balances. Hopefully they don’t touch the Roth.

OK, but that doesn't explain to me why you are concerned about hitting some ratio. That line of thinking would lead to a 100% Roth goal, no?

 

[RunningBum]

I am happy to pay taxes now. I just need an incentive to want to do so. I prefer not to overpay for things. I am funny that way.

Increasing your wealth and estate by minimizing taxes isn't incentive enough? Then you are funny that way. I'm pretty much done here.

...
Yes. Am familar with those [spreadsheets]. But it actually is not really complicated in concept.

Well, when you start talking about time value of cash on deferred income, maybe it really is a little more complicated than you think. Someone above talked about getting a headache thinking about this. I can sympathize with that, but then I put together a pretty simple spreadsheet and it became much clearer.

No argument there. But did you ever want to go ahead and just prepay those taxes? Taxes that you might never ever have to pay? Because doing so is not "bad"?

Taxes I might never have to pay? What's your trick here? You or your heirs are going to pay the taxes eventually, you might as well minimize them over the long term.

Some here say they don't care about taxes they leave behind for heirs. There's a huge business in estate planning so it's clear most people don't feel that way. I'd rather my heirs get it than the government. If I'm worried about leaving too much, I'll increase my spending or charitable giving.

But it's funny that you ask if I want to go ahead and prepay the taxes. Yes, I really do. That tax liability looming really irks me. I'd love to eliminate it in one swoop. But my logical side fortunately takes over and I only convert to the point that it makes sense, at a tax rate at or lower than I expect to be paying when I'd be forced to take distributions. I don't give in to my emotional urges.

The purpose of IRAs is to help people accumulate savings by reducing taxes. It is primarily tax rate arbitrage. But of course people are free to use them in any way they want.

Correct. You defer taxes while income and tax rates are high, and take the income and pay the taxes when they are low. And many of us find that the lowest point is between the early retirement date and when you start getting social security, a pension, and required distributions. It's usually at least as low than as it will be later. Taking now at the same tax rate and paying the taxes out of pocket rather than out of the deferred fund works out better.

Plenty of exceptions, like ACA subsidy planning, heirs at lower tax rates, etc, which makes a case for making your own spreadsheet and your own best assumptions.

 

[pb4uski]

IMO Roth conversions are principally a tax rate play... if the tax rate is the same then the Roth has a minor benefit of earnings not being subject to tax.

Rory Retiree has $10,000 in a tIRA and $2,200 in a taxable account and is in the 22% tax bracket and expects to always be in the 22% tax bracket.

Base case.... convert and spend after 10 years

$2,200 taxable account funds are used to pay taxes... leaving $10,000 in the Roth... after 10 years at 7% he has $19,672 that can be spent ($10,000 * (1+7%)^10).

Alternative.... leave as is and cash out after 10 years and spend

tIRA grows to $19,672 ($10,000 * (1+7%)^10) and tax bill is $4,328 ($19,762 * 22%).
Taxable account grows over 10 years to $3,744 ($2,200 * (1 + (7% * (1-22%))^10))
Total that can be spent is $19,088.

Roth generates $584 more than not Roth converting.

Difference is the taxes paid on the taxable account for the 10 years:

FV of taxable account with 0% tax = $2,200 * (1 + 7%)^10 = $4,328
FV of taxable account with 22% tax = $2,200 * (1 + 7%*(1-22%))^10 = $3,744
Difference = $584

 

[Montecfo]

[OUOTE] Correct. You defer taxes while income and tax rates are high, and take the income and pay the taxes when they are low. And many of us find that the lowest point is between the early retirement date and when you start getting social security, a pension, and required distributions. It's usually at least as low than as it will be later. Taking now at the same tax rate and paying the taxes out of pocket rather than out of the deferred fund works out better.

Plenty of exceptions, like ACA subsidy planning, heirs at lower tax rates, etc, which makes a case for making your own spreadsheet and your own best assumptions.[/QUOTE]

Runningbum, I agree with that. I think we are mostly in agreement, but the vagaries of written language seem to be causing us to miscommunicate. I have enjoyed your posts in the past and I expect I will in the future. I appreciate the exchange.

 

[Animorph]

Here's a "simple" example of why it doesn't matter when you pay tIRA withdrawal taxes, as long as your tax rate is constant:

tIRA = $100k
Tax rate = 10%, for simplicity it's a flat rate.
Your part of tIRA = $90k, IRS's part of tIRA = $10k

What I'm going to do is take all taxes from the IRS's part of the tIRA.

Year 1, withdraw $20k ($18k yours, $2k IRS's):
tIRA remaining = $80k ($72k yours, $8k IRS's)

Market gains of 10%:
tIRA value $88k ($79.2k yours, $8.8k IRS's)

Year 2, withdraw $40k ($36k yours, $4k IRS's)
tIRA = $48k ($43.2k yours, $4.8k IRS's)

Market gains of 50%:
tIRA value $72k ($64.8k yours, $7.2k IRS's)

Year 3, withdraw $40k ($36k yours, $4k IRS's)
tIRA = $32k ($28.8k yours, $3.2k IRS's)

Market gains of -50%:
tIRA value $16k ($14.4k yours, $1.6k IRS's)

Year 4, withdraw $16k ($14.4k yours, $1.6k IRS's)
tIRA = $0k ($0k yours, $0k IRS's)

All taxes were paid, exactly, from the IRS's 10% of your tIRA. That will hold for any withdrawal timing or market gains.

So basically if you're paying a flat X% tax rate, the IRS owns X% of your tIRA. It doesn't matter when you give it to them, now or 30 years later. You're simply investing the money for the IRS and never seeing any benefit from it.

Your benefit is the 100% - X% portion of the tIRA that is effectively tax free to you. Thus you can Roth convert the entire tIRA, pay X% to the IRS, and place your 100% - X% portion of the tIRA into a Roth with no real tax consequences. You have the same amount of tax-free money in either the tIRA or the Roth. It's a wash. But with the added benefit that you can also replace that X% lost to taxes with money from your taxable account and put that into the Roth as part of the conversion. Now you have more tax-free money than you had before, which can be beneficial.

Of course changing tax rates over time and different tax brackets will impact how this works, meaning you may actually have to give the IRS more (%) of your tIRA or you may be able to reclaim some of it. That does lead to extra complexity.

But with a simple constant tax rate there is no mathematical concern about paying taxes now or later. There's no difference.

 

[free2020]

OK, but that doesn't explain to me why you are concerned about hitting some ratio. That line of thinking would lead to a 100% Roth goal, no?

Yes, you are correct, my ideal Roth goal would be 100%. Of course 100% of a larger balance for it to mean something. ?

Everyone’s situation is different, so is mine. As I have posted here, virtually all my savings are in retirement. As I try to model my situation for the next 20+ years, the ratio of tIRA to Roth is somewhat relevant. Although it is too hard to predict that far out, factors for me are - Rate of return, RMD at 70(I make the WR decision, not Uncle Sam), not pre-pay (roth convert) more taxes than needed, income tax rates in the future, not leave too much behind etc. Besides if I do as well as I have done over the past 15 years, more charitable giving is part of the plan. All these mean more Roth or even all Roth. But I am not obsessing over taxes that much that I’ve the constant urge to Roth convert. At the end of the day, I feel fortunate to have this problem

 

[RunningBum]

As I try to model my situation for the next 20+ years, the ratio of tIRA to Roth is somewhat relevant.

You say that, and then list a number of factors, most of which are very real, but nowhere do you explain why that ratio is relevant. That's what is puzzling many of us. It just seems to me that you would want to convert as much as you can tax efficiently convert, whether that is 1% or 100% or anywhere in between.

 

[CardsFan]

Just curious. I hear very little discussion about Roth conversions AFTER RMD time. My thought is, when we get here, after RMD's, to convert to the top of the 22-24% bracket (yeah, I know it might be higher then). Yeah, I know IRMAA will tag us, but that would happen before RMD, if after MC.

My only justification would be to help keep the surviving single spouse out of a much higher bracket.

Just a thought for discussion.

 

[RunningBum]

Just curious. I hear very little discussion about Roth conversions AFTER RMD time. My thought is, when we get here, after RMD's, to convert to the top of the 22-24% bracket (yeah, I know it might be higher then). Yeah, I know IRMAA will tag us, but that would happen before RMD, if after MC.

My only justification would be to help keep the surviving single spouse out of a much higher bracket.

Just a thought for discussion.

Maybe if you see yourself passing the IRA to your heirs, and expect them to be in a higher bracket? Or if you're bumping up against the estate exemption limit you could reduce the amount they count without actually reducing the value by moving from pre-tax to post-tax.

 

[Perryinva]

One other advantage to a Roth vs tIRA is in the case of a required/needed/wanted large purchase. It is no longer a wash if say $150k is needed in a hurry. Taxes already paid to the Roth win big time in that scenario. Like many here, I’ll convert as much as I can before the 22% goes away, but it’s not possible to convert all my tIRA funds. Hope to have $700k in Roth by end of 2025.

 

[steelyman]

I’ve seen almost no mention in this thread of using qualified charitable distributions from a tIRA once RMD time arrives and the tax treatment in that situation.

Charitable organizations are one of the segments that were affected by the raise in standard deductions.

 

[Dog]

DH and I are 61. We currently have 4% in Roth, 14% after tax, and 82% in 401k and TIRA. We will try to convert as much as possible to Roth over the next 9 years being watchful of IRMAA. Also, watching some of the proposals floating around Congress regarding retirement savings, RMDs, and tax rates.

 

[googily]

A year ago I had nothing in Roth, at age 51. Now a widow with a very strong likelihood of a tax torpedo should the world and I last that long, I am not only contributing to a Roth, plus directing my above-match and catch-up 401k contributions to Roth, and maxing my mega backdoor, but I am also doing conversions into the 24% bracket while still working (I'm near the top of 22% with salary, dividends, and deductions) because I am also one who believes tax rates will only go up. Plus, even if I retire early (55 is my goal), I would start survivor benefits at 60, and already have a small pension from DH before starting my own at 65, and live in a HCOL area where I definitely want more of an opportunity to make withdrawals that wont be taxed as income. My taxable account will be taking a hit in all of this, but I still think it's a good play.

 

[free2020]

I’ve seen almost no mention in this thread of using qualified charitable distributions from a tIRA once RMD time arrives and the tax treatment in that situation.

Charitable organizations are one of the segments that were affected by the raise in standard deductions.

This is in my plan and I mentioned this but didn’t elaborate. If we’re doing well would rather help the needy causes and reap a tax avoidance benefit rather than pre-pay it.

 

[steelyman]

This is in my plan and I mentioned this but didn’t elaborate. If we’re doing well would rather help the needy causes and reap a tax avoidance benefit rather than pre-pay it.

Yes, your prior post is the reason I wrote “almost”. I’d guessed that might be your plan but didn’t know and didn’t want to call you out by name.

My estate documents have specific charitable gifts in them but don’t kick in until I kick the bucket. I think they’d be welcome if I’m (hopefully) still around for RMDs.

 

[bingybear]

Yes, your prior post is the reason I wrote “almost”. I’d guessed that might be your plan but didn’t know and didn’t want to call you out by name.

My estate documents have specific charitable gifts in them but don’t kick in until I kick the bucket. I think they’d be welcome if I’m (hopefully) still around for RMDs.

I guess I see charitable giving as really a side note to roth targets. Don't get me wrong -- I do charitable giving and plan to do QCD when we hit RMD time.

If you do a QCD this will remove money from from the TIRA allocation, so in that sense it does effect a roth target. But just pulling the QCD amount in RMD and paying the taxes leaves one with more money.
Personally I'm looking at a TIRA target for doing QCDs.

OK, I've talked myself into it. The QCDs are part of the target for TIRA spending plan which effects the Roth

 

[free2020]

You say that, and then list a number of factors, most of which are very real, but nowhere do you explain why that ratio is relevant. That's what is puzzling many of us. It just seems to me that you would want to convert as much as you can tax efficiently convert, whether that is 1% or 100% or anywhere in between.

I currently have no intention to convert any more to Roth. I fundamentally don’t want to pre pay Uncle Sam. My plan, currently, is to draw down the tIRA first to RMD date at 72; and keep the tIRA balance under RMD after that. I am hoping to take it down to zero. In the meantime allowing the magic of tax free compounding work the Roth account until then. Who knows what the compounding rate will be? If I do exceedingly well, may change the plan to convert a little but give away more. Depending on the compounding rate I may get to the target ratio of 100% Roth at age 70, 80 or in my after life. The “ target ratio” is more like “ a lot”. Too many variables between now and then.