Take Pension Now or Defer and Continue Roth Conversions for 5 years

[bpgdeg1234]

I posted the same question on the Bogleheads forum but am looking for the perspectives from the folks here on Early Retirement forum.

I hit the big 60 in September and DW is just turning 57. I can take my MEGAcorp pension now at 80% of the Full Retirement Amount I would get at 65, but it will take me to roughly age 88 to break even without considering anything I could make over the next 5 years on my payout stream. For every year I defer I gain 4% more payout. We are presently in the upper 2/3 tier of the 12% tax bracket due to taxable account interest/dividend income and a smaller company pension that I was required to take at 55.

We will be in the 22% tax bracket as soon as we start taking my full pension and then depending on how things go will at least stay in that bracket when beginning to collect SS targeted for 70 and could potentially go into the next bracket when starting RMDs at 72 as we still have roughly 1.3M in TIRA.

We presently also have $200K in Roth and evaluating whether it would be more advantageous to defer the pension until 65 and continue doing Roth conversions to a point we were roughly 50/50 TIRA/Roth. On the other hand, we're thinking maybe I should just start taking the pension now even though we don't need the money as we're not getting any younger and we will be in at least the 22% tax bracket when I do start taking the pension so figure the major advantages of Roth conversions is the differential the tax bracket may be in 5 years (assuming it remains at the lower amount and doesn't get changed back sooner than end of 2025), as well as IRMAA surcharge which I figure is 2024 income(?) and the typical concern of the Mrs. needing to potentially file as Single if I were to no longer be privy to seeing the green side of the lawn.

If we continued to defer the pension we would likely continue to do Roth conversions up to the top of the 22% tax bracket. We would pay the taxes out of our taxable account but we are very conservative at this point so it wouldn't all go into stock in the Roth account so would be a lot of low-yielding fixed income.

If we did take the pension now we would likely still do conversions over the next few years to the top of 22% but would have to go into the 24% tax bracket to look to get TIRA to Roth ratio of 50/50 by the time I need to be concerned with IRMAA surcharge.

We are not concerned with the viability of the MEGACorp at this point but do like the thought of gaining access to the pension sooner rather than later, in light of the reduced income we will be getting from our taxable savings in light of the current interest rate environment.

Appreciate any perspectives to help bring clarity to our thoughts. Thanks in advance.

 

[SecondCor521]

I'm fairly certain that IRMAA surcharges are two years prior, and if you start Medicare at 65 in 2025, then your first IRMAA in 2025 would be based on your 2023 return. For your DW, assuming she turns 57 this year, then her first IRMAA would of course be in 2028 based on your 2026 return.

I'd suggest looking at the Bogleheads resource for asset allocation. I follow it and keep my bonds in my traditional IRA. My Roth IRA is all stocks.

I don't see any particularly good reason to get the IRAs to 50/50. I understand the notion of tax flexibility, but I don't see why you can't have tax flexibility at 25/75 or 75/25 or any other ratio.

If I were in your shoes, I think as long as my cash flow were fine *and* I still had a ways to go to get to that 50/50 target *and* the tIRA were still big enough to require conversions to stay out of the 24% bracket at age 72, I'd probably defer the pension and do Roth conversions up to the top of the 22% bracket.

Does the Megacorp pension in question have a survivor benefit? If it didn't, I'd lean towards taking it sooner. If it did, I'd lean towards taking it later. I'd also consider your health status and if you think you'll be privvy to the green side for statistically less than average or more than average.

From my lowly station in the world, I'd also mention that 22% vs 24% doesn't really seem to be that much difference. I'd probably do whatever it took to stay out of the 32% bracket, but that sounds like it won't be much of an issue for you (?).

I guess the other thing I'd mention, which you probably know, is that the IRMAA surcharges are a series of mini-cliffs - go $1 over and you get to pay all of the next tier.

 

[bpgdeg1234]

I'm fairly certain that IRMAA surcharges are two years prior, and if you start Medicare at 65 in 2025, then your first IRMAA in 2025 would be based on your 2023 return. For your DW, assuming she turns 57 this year, then her first IRMAA would of course be in 2028 based on your 2026 return.

I'd suggest looking at the Bogleheads resource for asset allocation. I follow it and keep my bonds in my traditional IRA. My Roth IRA is all stocks.

I don't see any particularly good reason to get the IRAs to 50/50. I understand the notion of tax flexibility, but I don't see why you can't have tax flexibility at 25/75 or 75/25 or any other ratio.

If I were in your shoes, I think as long as my cash flow were fine *and* I still had a ways to go to get to that 50/50 target *and* the tIRA were still big enough to require conversions to stay out of the 24% bracket at age 72, I'd probably defer the pension and do Roth conversions up to the top of the 22% bracket.

Does the Megacorp pension in question have a survivor benefit? If it didn't, I'd lean towards taking it sooner. If it did, I'd lean towards taking it later. I'd also consider your health status and if you think you'll be privvy to the green side for statistically less than average or more than average.

From my lowly station in the world, I'd also mention that 22% vs 24% doesn't really seem to be that much difference. I'd probably do whatever it took to stay out of the 32% bracket, but that sounds like it won't be much of an issue for you (?).

I guess the other thing I'd mention, which you probably know, is that the IRMAA surcharges are a series of mini-cliffs - go $1 over and you get to pay all of the next tier.

Thanks SecondCor521 for your perspective. I wasn't sure with the IRMAA year as birthday is September and will be 65 in September 2025 so then if 2 years earlier it would be our 2023 tax return (ouch! as one less year for significant Roth conversion).

As for asset allocation, we do presently have stock in the Roth but as we continue to convert we will move the remaining TIRA stock allocation to Roth but we are conservative so after a year or so there will be only fixed income remaining in our TIRA and we don't plan to change it to a riskier stock allocation when we convert at that point to Roth.

Regarding requiring conversions to stay out of the 24% bracket at age 72, we most likely have the best chance by doing Roth conversions for the next 3 years while paying specific mind to the IRMAA threshold in 2023. We could be more aggressive this year and the next two years to see what TIRA/Roth ratio we can get to. I do think if we defer the pension and convert to top of 22% or go into the 24% for the next two years we may be able to stay out of that next tax bracket when we're 72 (whatever that bracket is at the time).

 

[bpgdeg1234]

The more we consider advice we have received to date, one potential keeps coming to mind: start the pension now and convert into the 24% tax bracket until IRMMA surcharge year which I believe is 2023 income since I will turn 65 near the end of 2025?

With this scenario we could convert another $120K this year as already did $80K and then say $200K for both 2021 and 2022 but would need to reduce conversion in 2023 to just below the IRMAA limit (likely another $50K or so). If we took this more aggressive approach we should bring our Roth balance up to over 50% of retirement accounts by the time IRMAA surcharges are established in 2023 and then every year thereafter until SS at 70 we could continue to convert additional dollars up to the IRMAA limit if deemed made sense.

Not sure this approach would provide the best overall tax savings since we're going into the 24% tax bracket for 3 years starting this year but it does put a nice dent into our tIRA balance getting it to roughly 50/50 and below the IRMAA surcharge cliff, while also providing us additional income now to help reduce the emotional impact of drawing down a significant chunk of our taxable savings for Roth conversions.

Thoughts or counter thoughts truly appreciated. Thanks in advance.

 

[SecondCor521]

Can you explain more specifically about why you have the roughly 50/50 target?

IRMAA surcharges are determined on a rolling basis with a 2 year lag, so your 2023 return will affect your 2025 IRMAA adjustment, and your 2024 return will affect your 2026 IRMAA adjustment, and so on. It is not a 2023-affects-your-IRMAA-adjustment-for-the-rest-of-your-life situation. It's something that people sometimes aren't aware of, and it could affect your planning, so I mention it here.

I think your 2025 IRMAA surcharge would only be for the months you're signed up for Medicare - so in 2025 since you turn 65 in September would only be a few months, so probably not something to be super focused on.

If you do the aggressive conversions (which is what I-ORP typically recommends, BTW), what does that do to your tax situation at 72 including RMDs? It is possible to "over convert" where you could drop, say back into the 22% bracket or even the 12% bracket in your 80's because you're depleting your traditional IRA too much.

What I try to do, for lack of any better ability to analyze on my part, is to maintain a consistent bracket between now and the end of my planning horizon and still have some left in my traditional IRA. Currently that has me doing to the top of the 12% bracket now and then the top of the 22% bracket starting when I'm 59. If I do that then I can maintain the top of 22% bracket onward and my IRA still has some funds left in it at the end. If I start converting to the top of the 22% bracket sooner than that, then I run out of funds to convert towards the end of my planning horizon. If I start converting later, then I sort of have a runaway traditional IRA problem.

All to say I'd suggest you:

1. Figure out why you want to get to 50/50.

2. Do your own spreadsheet and/or take a look at I-ORP to see what converting into the 24% bracket does to you later down the road. Maybe that's what you need to do, but it could be either too aggressive or not aggressive enough.

3. Try to even out your top marginal bracket over time. I'm not an expert but others here whom I respect seem to think that is the best way to maximize after-tax dollars over a lifetime.

4. I guess I'd also suggest calculating what the IRMAA adjustment would be in terms of an additional marginal tax rate. I'm single so I look at the single IRMAA adjustments, and those look to be 3 additional mini-cliffs throughout the 24% bracket. Married IRMAA could be different.

I guess I had one more thought. You have several different goals, and it might be useful to prioritize them, then optimize for each one in priority order. So you have:

1. Minimize taxes
2. Minimize IRMAA
3. Get IRAs to 50/50
4. Current income / emotional security
5. Survivor's situation

And maybe others. It sounds like you have tradeoffs to make, and prioritizing a list of your goals could help clarify those tradeoffs.

 

[bpgdeg1234]

Can you explain more specifically about why you have the roughly 50/50 target?

I just saw many recommendations for this as I would like the diversification and having some tIRA remaining for medical/LTC available makes sense so don't over commit either way so go only roughly 50% and commit paying the lower existing tax rates that are set to expire at the end of 2025 on the other 50%. I also don't want to commit too much of our taxable savings in the short term doing Roth conversions as like having the emotional cushion that provides and would hate to be completely wrong if things turn out different.

IRMAA surcharges are determined on a rolling basis with a 2 year lag, so your 2023 return will affect your 2025 IRMAA adjustment, and your 2024 return will affect your 2026 IRMAA adjustment, and so on. It is not a 2023-affects-your-IRMAA-adjustment-for-the-rest-of-your-life situation.

Yes I understand this which is why I indicate I could continue to do Roth conversions after 2023 up to the IRMAA limit.

If you do the aggressive conversions (which is what I-ORP typically recommends, BTW), what does that do to your tax situation at 72 including RMDs?

If we are aggressive into the 24% tax bracket we pay a short-term additional 2% but it significantly increases the probability that we will be in the 22% tax bracket (or whatever that becomes) as long as we're both alive. We will never be in a position to go down to the 12% bracket (or 15% in 2026 or whatever that becomes). When one of us passes that changes things but having more converted only helps that situation for the remaining single spouse.

What I try to do, for lack of any better ability to analyze on my part, is to maintain a consistent bracket between now and the end of my planning horizon and still have some left in my traditional IRA.

Yes that is our thought as well to be in the 22% or equivalent tax bracket going forward. We could defer pension for now and just convert up to the top of the 22% tax bracket each year until 65 as we don't have much room in the 12% bracket at this point. We could then reduce conversion amount by the pension income we start getting at that point but when tax brackets revert or if tax brackets were to go up sooner then it would have been better to be a bit more aggressive now.

2. Do your own spreadsheet and/or take a look at I-ORP to see what converting into the 24% bracket does to you later down the road. Maybe that's what you need to do, but it could be either too aggressive or not aggressive enough.

Did this and iOrp recommended being aggressive as you indicated it often does.

The one profound question I have in all of this is why isn't the distribution strategy as easy as the accumulation strategy lol

 

[SecondCor521]

If you think you'll be in the 22% bracket for the long term, what happens if you convert to the top of the 22% bracket starting now and continuing at that level indefinitely? Maybe that only gets you to 65/35 or something, or you have a runaway t-IRA?

For single IRMAA brackets, the top of the base adjustment coincides pretty closely with the top of the 22% bracket. So for my planning that's what I do - convert to 12% now, then convert to top of 22% bracket at 58/59 and beyond, paying no IRMAA surcharges ever. It looks like MFJ IRMAA is similar - top of 22% bracket is $171,050 and top of base IRMAA is $174,000.

As far as pension now or later, I would be inclined to decide on that based on how much of a survivor benefit it has. I mentioned that earlier but you didn't respond as far as I saw.

And you're right, distribution is way more complex than accumulation. Maybe accumulation is just the problem-solving warm-up question for later.

 

[bpgdeg1234]

If you think you'll be in the 22% bracket for the long term, what happens if you convert to the top of the 22% bracket starting now and continuing at that level indefinitely? Maybe that only gets you to 65/35 or something, or you have a runaway t-IRA?

If took pension now and converted up to top of 22% bracket it would just take a lot longer to get it to like 75 Roth/25 tIRA by SS time at age 70 as would likely only be able to do ~$80K per year but also risk brackets reverting and paying more in 2026.

As far as pension now or later, I would be inclined to decide on that based on how much of a survivor benefit it has. I mentioned that earlier but you didn't

Apologize, I missed the survivor benefit question earlier but yes it does include one.
Can choose from a multitude of potentials like 50% joint and survivor annuity (default), 75% J&S annuity, 100% J&S annuity, and others. My DW should be well off if I take pension now or defer to later so that hasn't really factored into our thinking.

 

[RetireBy90]

I would second many of the recommendations from SecondCor521. Wanted you to know the advice is not from one person only.

I'm also converting tIRA. We are currently in 22% bracket and will have a more or less stable income until I start SS at 72. I'm converting into 24% bracket by about $35K each year so I can get most of the conversions done by end of 2025. I'll have RMDs of about $13K according to projections. I'll use that for QCDs.

There are other reasons to convert besides a simple computation.

- I have no idea what taxes will be in the future but I know what they are today.
- I want DW to have the most flexibility possible if I go before she does.
- I will have peace of mind knowing tax for funds in the Roth are paid.
- I know others that have lost some memory as they age and those things we all know of. I can make decisions today that may be more difficult as time goes along.



Just an answer to your original post asking what others think.

 

[stephenson]

I'm gonna take a different angle ...

It sounds like the OP has a solid financial situation and secure future.

Given this, to me the questions would be:
1. Do I enjoy working?
2. Will I miss my work friends?
3. If I travel for work, will I miss traveling?
4. If I engage in engineering/financial/technical discussions, will I miss those interactions?

Snacks for thought ...

 

[bpgdeg1234]

I'm gonna take a different angle ...

It sounds like the OP has a solid financial situation and secure future.

Given this, to me the questions would be:
1. Do I enjoy working?
2. Will I miss my work friends?
3. If I travel for work, will I miss traveling?
4. If I engage in engineering/financial/technical discussions, will I miss those interactions?

Snacks for thought ...

I just had to comment on this as it no longer applies because of this forum as I FIRED nearly 10 years ago! To answer your questions though as they are good ones:
1.) Did enjoy working but got burnt out so no longer at this time
2.) Yes miss some but not all of my work friends
3.) Travel was fun for many years but got old after a while so don't miss very much
4.) Do miss the engineering and technical discussions/interactions but 3 of us who all left at a similar time do have semi-monthly video calls to discuss how retirement life is and have some of those discussions but not as indepth as they once were lol.

 

[bpgdeg1234]

Interesting iORP data point. I put our financial info in the extended version to compare the different scenarios - pension/age/Roth conversion tax bracket and left all other info consistent within the model.

So basically I had taking pension at age 60 with associated annual pension amount and Roth conversions either at 22% versus 24% and then deferring pension to age 65 with associated annual pension amount and conversions at either 22% versus 24%. iOrp indicated taking pension now and doing Roth conversions within 24% tax bracket ceiling as most optimal between all the choices. I even did the other higher choices, including Unlimited Conversions, and taking now and 24% was better which sort of surprised me.

The one thing though, unless I'm missing something, not sure if it takes into account IRMAA in 3 years as it has me doing Roth conversions straight from now through 65? I'm not sure if IRMAA is accounted for in the model or just not that important so just get conversions over before turning 66 and be done with? Thanks once again in advance for any perspectives on this.

 

[RetireBy90]

IRMAA is enough for me to take into account but not enough to plan just for that. This is what I found and am using for planning. If real world follows my plan and projections, I'll revert back to under the $174K after 6 years. Otherwise I would be in $3,500 for ever. Remember that $217,999 vs $218,000 would cost another $1,076 for one dollar in MAGI.

2020 Married Filing Joint
Magi - Annual IRMAA
$174,000 - $1,735
$218,000 - $2,811
$289,000 - $4,087

I'm keeping under the $218K with conversions. The figures above are per person, so $3,500 or $5600 for a couple both on Medicare.

 

[bpgdeg1234]

IRMAA is enough for me to take into account but not enough to plan just for that. This is what I found and am using for planning. If real world follows my plan and projections, I'll revert back to under the $174K after 6 years. Otherwise I would be in $3,500 for ever. Remember that $217,999 vs $218,000 would cost another $1,076 for one dollar in MAGI.

2020 Married Filing Joint
Magi - Annual IRMAA
$174,000 - $1,735
$218,000 - $2,811
$289,000 - $4,087

I'm keeping under the $218K with conversions. The figures above are per person, so $3,500 or $5600 for a couple both on Medicare.

Thanks for your perspective RetireBy90. You indicate keeping under the $218K so you will pay IRMAA Tier 1 surcharge of $1,735 for a period of time?

Also, correct me if I'm wrong but if you did have to pay IRMAA surcharge for a couple years since doing Roth conversions and based on income two years prior don't you avoid the IRMAA surcharge two years after your income went back down under the Tier 1 threshold so $174K at this point?

As an example if I went over in 2024 due to Roth conversion my 2026 Medicare would be increased based on what surcharge tier my income fell into as you outlined but if in 2025 I went back down under the $174K and stayed that way going forward since no more Roth conversions then my 2027 and future year Medicare would not be subjected to IRMAA surcharges?

 

[RetireBy90]

Thanks for your perspective RetireBy90. You indicate keeping under the $218K so you will pay IRMAA Tier 1 surcharge of $1,735 for a period of time?

Also, correct me if I'm wrong but if you did have to pay IRMAA surcharge for a couple years since doing Roth conversions and based on income two years prior don't you avoid the IRMAA surcharge two years after your income went back down under the Tier 1 threshold so $174K at this point?

As an example if I went over in 2024 due to Roth conversion my 2026 Medicare would be increased based on what surcharge tier my income fell into as you outlined but if in 2025 I went back down under the $174K and stayed that way going forward since no more Roth conversions then my 2027 and future year Medicare would not be subjected to IRMAA surcharges?

That is the way I understand it. You can file an appeal say in 2026 saying you are not doing conversions that year and govt can use your new income to calculate the IRMAA. So MAGI 2 years back is the default but you can appeal. I did for DW and they agreed. I’m not sure If there is a lower bracket for IRMAA but these were the levels I’m working with.

 

[deserat]

To OP,

Since you are Boglehead, did you model your situation in the free Retiree Portfolio Model (RPM) spreadsheet tool available there? I've found it gives you a lot of variables to tweak for your model so you can make a fairly well informed decision. I-ORP is known for being very aggressive in Roth conversion scenarios. The RPM allows you to moderate that if you wish and see the impact. IRRMA is loaded into the model as well. You can also compare no Roth conversion and load in your pension particulars as well as portfolio specifics and performance assumptions.

It does have a learning curve but us a great tool that rivals what a financial advisor would use or possibly you might build yourself. The guy who wrote it answers posts and PMs.

 

[RetireBy90]

Just in case you didn’t see this thread before
https://www.early-retirement.org/forums/f28/the-important-trigger-income-levels-2020-a-101090.html

Important trigger levels thread

 

[bpgdeg1234]

To OP,

Since you are Boglehead, did you model your situation in the free Retiree Portfolio Model (RPM) spreadsheet tool available there? I've found it gives you a lot of variables to tweak for your model so you can make a fairly well informed decision. I-ORP is known for being very aggressive in Roth conversion scenarios. The RPM allows you to moderate that if you wish and see the impact. IRRMA is loaded into the model as well. You can also compare no Roth conversion and load in your pension particulars as well as portfolio specifics and performance assumptions.

It does have a learning curve but us a great tool that rivals what a financial advisor would use or possibly you might build yourself. The guy who wrote it answers posts and PMs.

Thanks deserat. I started to do but there are a lot of variables and like you indicate a learning curve so need to spend more time.

 

[bpgdeg1234]

Just in case you didn’t see this thread before
https://www.early-retirement.org/forums/f28/the-important-trigger-income-levels-2020-a-101090.html

Important trigger levels thread

Thanks once again RetireBy90. Much appreciated. Yes I have this trigger list from earlier in the year.

 

[Exchme]

With the pension only increasing 4% per year at age 60, I think you are better off to take it now. Seems like the value of Roth conversions, staying below IIRMA thresholds, etc. are secondary issues. Face it, you are going to be wealthy and going to be taxed like it!

 

[gauss]

Getting back to the original question (tax/IRMMA issues aside), I offer the following:

#1) The actuarial fair age-reduction is about 7% for each year a pension is drawn earlier than age 65

#2) Therefore if there was no employer subsidy, you pension would be reduced by about 35% if taken at age 60.

#3) Given that the reduction is only 20%, there is a significant employer subsidy that is being offered on the table for starting to draw the pension early.

Be sure to take this into account with along with the other issues.

-gauss

p.s.
Note also that we currently have a fairly wide 24% tax bracket that sits atop the 22% bracket until 2025. This is a a fairly small marginal increase of 2%. You may wish to use this to manage your long term IRMMA and tax-diversification goals while simultaneously drawing the pension early to take advantage of the employer subsidy. (That is basically what I am doing until TCJA expires).

 

[bpgdeg1234]

With the pension only increasing 4% per year at age 60, I think you are better off to take it now. Seems like the value of Roth conversions, staying below IIRMA thresholds, etc. are secondary issues. Face it, you are going to be wealthy and going to be taxed like it!

Thanks Exchme for your take. Our analysis has led us to this conclusion as well in taking the pension now but are still working through the secondary Roth conversion issues. As for your last statement, still ugh!

 

[bpgdeg1234]

Getting back to the original question (tax/IRMMA issues aside), I offer the following:

#1) The actuarial fair age-reduction is about 7% for each year a pension is drawn earlier than age 65

#2) Therefore if there was no employer subsidy, you pension would be reduced by about 35% if taken at age 60.

#3) Given that the reduction is only 20%, there is a significant employer subsidy that is being offered on the table for starting to draw the pension early.

Be sure to take this into account with along with the other issues.

-gauss

p.s.
Note also that we currently have a fairly wide 24% tax bracket that sits atop the 22% bracket until 2025. This is a a fairly small marginal increase of 2%. You may wish to use this to manage your long term IRMMA and tax-diversification goals while simultaneously drawing the pension early to take advantage of the employer subsidy. (That is basically what I am doing until TCJA expires).

Thanks gauss, our analysis has led us to this conclusion. We are planning on doing Roth conversions to the top of the 24% tax bracket for 4 years and then we'll likely relook at where we're at and then decide whether to continue doing the same until the end of 2025 and just live with the IRMAA surcharges for a few years when I turn 65 near end of 2025.

If plan goes well we will have the vast majority of the tIRA converted by then where we should then remain in the 22% tax bracket (or to the reverted 25% tax bracket if current brackets aren't extended).