Why I must convert to Roth

[jerryo]

Sorry. Our pensions only put us in the 35% tax bracket, rather than the 37% bracket. But I don't think that makes any difference.

Getting back to the topic of the thread, I agree that you can overcomplicate things here with so many unknowns. It seems to come down to whether you can "predict" that your future tax bracket will be higher or lower than your present taxes, whether you expect to leave an estate, plan to give donations from taxable funds, whether you need current income or plan to leave an estate, and what the expected tax brackets of your heirs might be.... Sometimes it's crystal clear (if you're in the 10% bracket now but will be in the 30% when RMDs and SS kick in), but often it's ambiguous. In such cases, I'd opt for current benefits over possible future benefits.... In my wife and my case, for example, we still contribute to solo 401k's from our part-time consulting income to reduce current taxes...

 

[Koolau]

And he can spend every penny right up to his demise with a clear conscious.

Amen, brother!

 

[FD1000]

Everything is progressing according to plan. We are currently converting in the high $200,000 range instead of $80-100K two years ago. Since I am older than my wife, I began the big conversions last year and have already completed this year’s conversion. Next year will be the final large conversion on my account.
After that, I will begin converting my wife’s traditional IRA, which we expect will take approximately 5–6 years to complete.

Our total effective taxes went from about 13% two years ago to about 22% since last year.
Our taxable account will eventually be depleted in the next 5-6 years, which should eliminate ongoing taxes on investment income generated from taxable assets. That will lower taxes too.

By the time we reach age 73, our total TIRAs are expected to be reduced to approximately $400,000–$500,000 as a result of ongoing Roth conversions. RMD should be relatively modest at that stage, particularly if the conversions are nearly complete.
From that point forward, I plan to continue converting approximately $80,000–$100,000 annually, after satisfying any required minimum distributions, until the remaining balances are fully converted during our 80s. During the above years with lower conversion amounts, I expect our effective tax rate to fall in the 9–11% range.

Once all conversions are completed, our overall tax burden should be zero since it will only be our two SS.
If I'm gone in my early 80s, my wife's tax burden will be minimal, and that's very important to me.

Since retiring in 2018, our portfolio has grown at an average annual rate of 11.4%, and we have not experienced a drawdown of more than 1% from any prior peak using my investment model.

For planning purposes, I use a more conservative assumption of 7% annual growth. At that rate, the portfolio would double approximately every 10 years, reaching about $8 million over that period. But after the big conversions end prior to 10 years, taxes are going to be a lot lower, maybe just $10K. That means the portfolio can grow faster or at least keep the same rate

As a general approach, I rely on conservative assumptions and have historically exceeded them. For example, at the start of retirement, I projected a 6% annual return using only bond OEFs, but actual performance has been nearly double that using 97% bond OEFs.

I don’t plan to revisit or debate this in detail; my intention is simply to provide updates every few years. The full context is documented in my earlier posts, and historically my projections have been fairly accurate over long periods.
That said, one variable that could materially change the outlook is stronger-than-expected returns. If the portfolio grows at 8–10% annually, taxes will get a lot higher if I don't convert.

 

[TheWizard]

Quick question: I'm retired in my mid-70s and my spouse and I have already been in the top tax bracket for the past 10 years based on our pension incomes. Under the circumstances, I've presumed there was no advantage to us making Roth conversions. Is that correct?

Wow, nice pension incomes!

 

[Montecfo]

If one's goal is to fully drain tIRA's instead of to optimize one's tax situation and post tax assets, you will certainly arrive at a different strategy.

 

[junkanoo]

Sorry. Our pensions only put us in the 35% tax bracket, rather than the 37% bracket. But I don't think that makes any difference.

Getting back to the topic of the thread, I agree that you can overcomplicate things here with so many unknowns. It seems to come down to whether you can "predict" that your future tax bracket will be higher or lower than your present taxes, whether you expect to leave an estate, plan to give donations from taxable funds, whether you need current income or plan to leave an estate, and what the expected tax brackets of your heirs might be.... Sometimes it's crystal clear (if you're in the 10% bracket now but will be in the 30% when RMDs and SS kick in), but often it's ambiguous. In such cases, I'd opt for current benefits over possible future benefits.... In my wife and my case, for example, we still contribute to solo 401k's from our part-time consulting income to reduce current taxes...

Agreed. Just like in business, sometimes when things are unclear, defer that decision.

The beautiful thing about constant and repetitive retirement income is the huge safety net that income provides and its predictability. The downside is the tax treatment. My wife also used a Solo 401k last year quite effectively. It's the only thing that kept us out of the IRMMA penalty box.

 

[PaulR888]

If one's goal is to fully drain tIRA's instead of to optimize one's tax situation and post tax assets, you will certainly arrive at a different strategy.

The OP's goal is to minimize taxes over both the lifetimes of the spouses, a noble and smart goal. That requires significant Roth conversions. I think that is smart too. I am not afraid of paying taxes. I am not afraid of triggering IRMAA. I would keep my eye on the goal. The rest is noise. And I think the OP is smart doing this before RMDs kick in. (I also would lose zero sleep over the noise someone might raise, what if Roth IRAs are taxed in the future. I give this ZERO probability. Too many rich politicians have large Roth accounts I imagine from private investments. Years ago Romney had $20M in his Roth. And too many others who would revolt.) The OP and I have sparred in the past, but with respect to this thread I tip my cap to him. Good luck FD.