Trad to Roth conversion - more or less

[Bird In Hand]

This thread is more or less on topic with something I was about to post over in the Taxes area.  If it's too hijack-y just LMK and I'll remove it.

I've been putting my ducks in a row to start MBR, and I'm pretty excited about that.  But my wife also has around $400k in old employer plans (403b and TSP) and traditional deductible IRAs.  We're on track for ye 'ole RMD tax bomb with about $2.1M in tax-deferred accounts and close to 30 years to go before RMDs start...while we continue to pump $50-$60k tax-deferred into our 401/3 and 457 plans every year, and we'll likely work until 50+.

We only have about $100k in taxable brokerage and $100k in Roth IRAs.  As you can see, we've prioritized the pre-tax accounts, hence the pending RMD tax bomb.

The mitigating strategies I've considered so far are: 1) converting the $400k in old employer accounts to Roth over the next N years while we're still working, or 2) quitting work way earlier than planned and starting to draw down pre-tax accounts via some combination of SEPP and Roth conversion laddering, or 3) both.

I'd be happy to convert some of that $400k to the top of the 22% bracket or into 24% ASAP before FAFSA/CSS come into play in a few years (oldest starts HS in a year).  Except this year, because I'm trying to capture $3,000 extra from the 2021 expanded child tax credit by going nuts with pre-tax contributions to get AGI below $150k.

In order to give a bunch more AGI breathing room for conversions (and possibly qualify for more need-based aid for college), I could also cut my hours at work substantially.  I'd probably have to cut back on pre-tax contributions as well in that case, but my marginal rate for conversions is going to be 22% regardless.

There is no silver bullet, and as tax laws and rates continue to change it all amounts to a game of whack-a-tax-mole anyway.

[tj]

It definitely makes sense to keep a decent amount in traditional in case of late-life medical expenses, as distributions will be tax free above the floor, also, if charitably inclined, the later-in-iife  QCD's will be tax free distributions, thus one would needlessly pay taxes if they fully converted and could have avoided taxes on certain types of expenses.

[Mr. Green]

So I made a second model that uses taxable funds only until our Roth principal is large enough to cover spending and then we convert to Roth funds until age 60. However, we stop conversions at age 55 and the 5-year rule carries us those last 5 years. During those 5 years, we generate our income from long-term capital gains since our taxable accounts are highly appreciated now that we haven't used those funds in almost 20 years.

Please explain the implementation of this. I'm getting confused about the wording.

Years 1-5: Spend from taxable and do Roth conversions large enough to cover future spending.
Year 6-age 55: Spend from the conversions as they mature; continue converting. Taxable continues growth and tax-advantaged accounts decrease.
55-59.5: Use the last of the Roth conversions. Or use taxable?
59.5+: Spend from tax-advantaged.

You got is right. 55-59.5 we'd use the last of the Roth conversions. However, during those 5 years we now have no taxable income. This would be a problem for ACA unless you wanted to be on Medicaid so we can harvest long-term capital gains to generate that income. There would be quite a bit of gains to harvest since we'd been drawing on Roth funds for the last 15 or so years so those taxable shares would likely be highly appreciated.

Wait you can use the 5 year rule even if you don't retire at 55?  I thought you had to end your employment associated with a 401k to start tapping it at 55

I'm not sure what the rules are around tapping a 401k before age 60. We've already quit working and have rolled our 401ks into IRAs so we wouldn't encounter any limitations there.

[Mr. Green]

This thread is more or less on topic with something I was about to post over in the Taxes area.  If it's too hijack-y just LMK and I'll remove it.

I've been putting my ducks in a row to start MBR, and I'm pretty excited about that.  But my wife also has around $400k in old employer plans (403b and TSP) and traditional deductible IRAs.  We're on track for ye 'ole RMD tax bomb with about $2.1M in tax-deferred accounts and close to 30 years to go before RMDs start...while we continue to pump $50-$60k tax-deferred into our 401/3 and 457 plans every year, and we'll likely work until 50+.

We only have about $100k in taxable brokerage and $100k in Roth IRAs.  As you can see, we've prioritized the pre-tax accounts, hence the pending RMD tax bomb.

The mitigating strategies I've considered so far are: 1) converting the $400k in old employer accounts to Roth over the next N years while we're still working, or 2) quitting work way earlier than planned and starting to draw down pre-tax accounts via some combination of SEPP and Roth conversion laddering, or 3) both.

I'd be happy to convert some of that $400k to the top of the 22% bracket or into 24% ASAP before FAFSA/CSS come into play in a few years (oldest starts HS in a year).  Except this year, because I'm trying to capture $3,000 extra from the 2021 expanded child tax credit by going nuts with pre-tax contributions to get AGI below $150k.

In order to give a bunch more AGI breathing room for conversions (and possibly qualify for more need-based aid for college), I could also cut my hours at work substantially.  I'd probably have to cut back on pre-tax contributions as well in that case, but my marginal rate for conversions is going to be 22% regardless.

There is no silver bullet, and as tax laws and rates continue to change it all amounts to a game of whack-a-tax-mole anyway.

You could just stop contributing to pre-tax accounts right now if that wouldn't put you in a significantly higher tax bracket. There is only so much tax smoothing you can do if you are in high tax brackets now, don't plan to stop working until later in life, and are also socking away a lot of money. You've basically created a self-imposed floor because your tax rates are naturally high for most years of your life. You need gaps (low/no income years to pull some of those higher tax years into to bring taxes down across multiple years.

If you need all that income and retirement saving then there's not much you can do with that. It is what it is and the tax man is going to get his bite. But if you don't need the extra money and are just having a hard time pulling the trigger, well that's certainly tick in the column for leaving work sooner. But if you like what you do then maybe you don't care. In that case you just optimize what you can and don't worry about the rest.

[MattyP]

I am having a hard time following these posts.  I am retired now and my wife is retiring soon.  We were planning on converting about 50K per year from TIRA to ROTH.   But what I think I picked up, is that at that income level our child would have to go on Medicaid. Is that right? Is there a hard line where children can go onto ACA and not Medicaid or is it different from state to state?  And if you reach that line then you probably price out of subsidies???

[Mr. Green]

I am having a hard time following these posts.  I am retired now and my wife is retiring soon.  We were planning on converting about 50K per year from TIRA to ROTH.   But what I think I picked up, is that at that income level our child would have to go on Medicaid. Is that right? Is there a hard line where children can go onto ACA and not Medicaid or is it different from state to state?  And if you reach that line then you probably price out of subsidies???

I'm not sure if it's a required component of Medicaid in all states but the ones I'm familiar with have programs that will insure children at higher income limits than traditional medicaid. The idea is to make sure kids get healthcare. The programs change with age too. I think one program supports kids from birth through age 6 and another will cover them through to adulthood. Each of those programs has a different income threshold.

In the event you have a child that qualifies for those programs based on your income, that child will not be eligible for ACA insurance subsidies. The expectation is that the child would enroll in the state insurance program. Adults will still qualify for subsidies and your insurance premiums will be priced based on the number of household members who only have ACA insurance as an option, not the total number of household members.

[BicycleB]

I am having a hard time following these posts.  I am retired now and my wife is retiring soon.  We were planning on converting about 50K per year from TIRA to ROTH.   But what I think I picked up, is that at that income level our child would have to go on Medicaid. Is that right? Is there a hard line where children can go onto ACA and not Medicaid or is it different from state to state?  And if you reach that line then you probably price out of subsidies???

I'm not sure if it's a required component of Medicaid in all states but the ones I'm familiar with have programs that will insure children at higher income limits than traditional medicaid. The idea is to make sure kids get healthcare. The programs change with age too. I think one program supports kids from birth through age 6 and another will cover them through to adulthood. Each of those programs has a different income threshold.

In the event you have a child that qualifies for those programs based on your income, that child will not be eligible for ACA insurance subsidies. The expectation is that the child would enroll in the state insurance program. Adults will still qualify for subsidies and your insurance premiums will be priced based on the number of household members who only have ACA insurance as an option, not the total number of household members.

Supporting Mr. Green with additional details: @MattyP, fear not, it's going to work.

1. It's state to state where the line is between ACA and Medicaid, but within each state, it's a hard line in the sense that the "line" is a set of qualification rules related to income, family status, etc. If the child qualifies, the child qualifies.
2. Something to know is that there are 2 kinds of states: states with "Medicaid expansion" (most states; roughly, the liberal states and some of the others), and states without Medicaid expansion (some of the conservative states, like Texas, where I live). This will come into play below if you follow the links.
3. The result is summarized from a Medicaid viewpoint in this link (one of many consumer explanations, though not a complete one). https://www.verywellhealth.com/your-assets-magi-and-medicaid-eligibility-4144975
4. Above a certain income, you have to buy your own insurance instead of using ACA, but that income is more than 50k. Under the max parental income (this year $86,600 for a family of 3), each person in the family will individually either qualify for ACA or Medicaid, one or the other. I guess there are cases where parent has ACA and kid has Medicaid, but it still works. Medicaid will be subsidized for sure. ACA will have subsidies from the lowest eligible income up to the highest eligible income. The lower limit depends on Medicare expansion in your state but the upper limit is federal. See the table and calculators in the following links to verify that a household of 3 people qualifies for premium subsidy up to $86,600 income.
https://obamacarefacts.com/2021-obamacare-eligibility-chart-and-subsidy-calculator/
https://www.healthinsurance.org/obamacare/subsidy-calculator/
5. The details are particularly beneficial this year and next year because of the American Rescue Plan (ARP), the Biden stimulus bill that became law in March. Basically the underlying ACA had relatively few holes of the type you're worried about, so it's already much better than you'd think, but the ARP temporarily fills in the few gaps. Here is an article with detailed explanations of the regular long term ACA, and what the extra benefits of the ARP are. https://www.healthinsurance.org/obamacare/beware-obamacares-subsidy-cliff/

PS. Fwiw, I've been on ACA for over five years, using "income" from tIRA->Roth transfers while spending down other assets. Also I have repeatedly helped my ex-GF do her ACA paperwork for her and her child. The state always does a Medicaid determination for the child. So far they've always concluded child is ineligible for Medicaid, at which point instantly the child qualifies for ACA. Once the paperwork is finished, the policy activates on the first of the following month.

For me, next year might be when I finally start drawing from Roths instead of just transferring, but the ACA piece works great. My premiums net of subsidy are usually between $0/month and $54/month, depending on details that year.

[Mr. Green]

I'll give an example from my home state of North Carolina, which is not a Medicaid expansion state. For a family of 3, the income limit for a child age 0-5 to be on Medicaid is $46,116/year. Adults would still be on private ACA insurance plans unless income was drastically lower. For children age 6-18 the income limit drops to $29,208/year for Medicaid. However, there is a secondary program for kids over 5 called NC Health Choice, basically Medicaid-lite. Incomes ranging from $29,208-46,344 per year qualify for that. So income would need to get above $46,000 for a child to qualify for private ACA-subsidized insurance instead of a state-based plan.

[seattlecyclone]

And in Washington, kids up to age 19 qualify for free Medicaid coverage in a family of three up to $47k annual income. Between $47k-$69k, the kids would be charged $20-30/month premiums for the same coverage. Above that level they'd be on Marketplace coverage.

[boarder42]

Kids really help high spenders on the exchange is what I've gathered so far from this in my state with 4 kids I have to be at 81k to keep them off medicaid.

[seattlecyclone]

Oh man, if we had four kids in Washington they'd be on Medicaid as long as our income was less than $112,800.

[Bird In Hand]

It definitely makes sense to keep a decent amount in traditional in case of late-life medical expenses, as distributions will be tax free above the floor, also, if charitably inclined, the later-in-iife  QCD's will be tax free distributions, thus one would needlessly pay taxes if they fully converted and could have avoided taxes on certain types of expenses.

That's true!  My parents are doing QCD for about half their RMD's, and it's working well for them.

In our case, even if we manage to convert $400k to Roth at 22% or 24%, we'll still have another $1.7M (and growing) in tax deferred.  That could be around $3M by the time we might reasonably finish converting the $400k, hopefully by 2026 when the tax rates are scheduled to go up.

[ender]

Wait you can use the 5 year rule even if you don't retire at 55?  I thought you had to end your employment associated with a 401k to start tapping it at 55

I've thought about this before - wondering how long you have to be employed to do this.

Could you find a company where you're eligible for the 401k day 1, start at 55, initiate a rollover of a large IRA balance, then immediately retire after a day working and then start taking withdrawals?

[Bird In Hand]

You could just stop contributing to pre-tax accounts right now if that wouldn't put you in a significantly higher tax bracket.

It's funny -- the 'problem' I'm trying to solve is too much future taxes due to too much in pre-tax accounts.  Yet maxing out pre-tax accounts has been so much a part of my journey to FI for so long (>2 decades) that the thought of cutting back on those contributions gives me intense feelings of FOMO.  I think I need to spend some time resolving that conflict one way or the other.

If you need all that income and retirement saving then there's not much you can do with that. It is what it is and the tax man is going to get his bite. But if you don't need the extra money and are just having a hard time pulling the trigger, well that's certainly tick in the column for leaving work sooner. But if you like what you do then maybe you don't care. In that case you just optimize what you can and don't worry about the rest.

Well summarized!  This would be much easier if I didn't like my job.  Ah well, fingers crossed that my next boss is an intolerable nitwit...my troubles would be over! :D

[secondcor521]

Wait you can use the 5 year rule even if you don't retire at 55?  I thought you had to end your employment associated with a 401k to start tapping it at 55

I've thought about this before - wondering how long you have to be employed to do this.

Could you find a company where you're eligible for the 401k day 1, start at 55, initiate a rollover of a large IRA balance, then immediately retire after a day working and then start taking withdrawals?

Yes, but I think the company might not like you much.

And @boarder42, the rule in this case is separating from service  in the year in which you turn 55 (or after that date). So if your 55th birthday will be on December 29th this year, you could retire/quit/be fired this past January 1st and qualify.  Or you could retire two years from now and still use the rule.

[MasterStache]

This is a great discussion. It's a lot to take in.

I am wondering how a pension might affect everything. I'll use our case as an example. I am retired but my wife continues to work. We are thinking maybe about 5 more years for her, which puts us both at 50. The bulk of our retirement now is in tIRA and 403b. We even have a good chunk of money in an HSA.  We have maybe only 2 years worth of living expenses split between taxable and Roth accounts. We obviously won't start collecting the pension until age 65, but it's a decent amount of money.

Being likely 5 years away from full FIRE for both of us has me thinking more about where our income is going to come from the first 9.5 years or so. I am certain we'll need more money sooner than later as we have plans for some extensive travel.   

[ender]

This is a great discussion. It's a lot to take in.

I am wondering how a pension might affect everything. I'll use our case as an example. I am retired but my wife continues to work. We are thinking maybe about 5 more years for her, which puts us both at 50. The bulk of our retirement now is in tIRA and 403b. We even have a good chunk of money in an HSA.  We have maybe only 2 years worth of living expenses split between taxable and Roth accounts. We obviously won't start collecting the pension until age 65, but it's a decent amount of money.

Being likely 5 years away from full FIRE for both of us has me thinking more about where our income is going to come from the first 9.5 years or so. I am certain we'll need more money sooner than later as we have plans for some extensive travel.

Gotta figure out your "effective" rate on the IRA withdrawals after 65 with the pension (and SS) and see if it makes more sense to do Roth conversions before 59.5, basically.

Potentially do a cash out refinance if you have a lot of home equity right before retiring too.

[MasterStache]

This is a great discussion. It's a lot to take in.

I am wondering how a pension might affect everything. I'll use our case as an example. I am retired but my wife continues to work. We are thinking maybe about 5 more years for her, which puts us both at 50. The bulk of our retirement now is in tIRA and 403b. We even have a good chunk of money in an HSA.  We have maybe only 2 years worth of living expenses split between taxable and Roth accounts. We obviously won't start collecting the pension until age 65, but it's a decent amount of money.

Being likely 5 years away from full FIRE for both of us has me thinking more about where our income is going to come from the first 9.5 years or so. I am certain we'll need more money sooner than later as we have plans for some extensive travel.

Gotta figure out your "effective" rate on the IRA withdrawals after 65 with the pension (and SS) and see if it makes more sense to do Roth conversions before 59.5, basically.

Potentially do a cash out refinance if you have a lot of home equity right before retiring too.

Hmm, didn't think about the home equity. We do have a decent amount of equity. SS won't be much for me. I only worked for 10 years in an actual high paying job. My spouse, on the other hand, will be collecting a lot more than me. The pension will be north of 200K. If we let the tax deferred sit for another 15+ years it will be way more than we need to live on. The pension really is just an added bonus for our old people money.

FWIW my spouse is still funding her 403b quite extensively. I'm wondering if putting that on hold and throwing more in the taxable account is another option. It would still keep us in the 12% bracket.

[AccidentalMiser]

You could just stop contributing to pre-tax accounts right now if that wouldn't put you in a significantly higher tax bracket. There is only so much tax smoothing you can do if you are in high tax brackets now, don't plan to stop working until later in life, and are also socking away a lot of money. You've basically created a self-imposed floor because your tax rates are naturally high for most years of your life. You need gaps (low/no income years to pull some of those higher tax years into to bring taxes down across multiple years.

I've done exactly this in response to this thread.  I am 53, soon to be 54.  We've been stuffing money into my t401k and tIRA for a decade and have about 750k in those accounts with about 200k in Roth and 100k in taxable accounts.  I'm planning to retire in three years, just before my 57th bday.  One thing I realize is that I simply have more money to pay taxes with now than I will in retirement. 

We'll have several years to spend out of the trad accounts before RMDs kick in but if I continue putting all my money in there, I'm going to wind up with a flood of money coming at me in my 70s.  I'd rather spread that out and try to get my trad balance down prior to 72 for all the reasons described in this thread.

One conundrum I have relates to health insurance choices and Roth conversions.  When I stop working, I will be eligible for retiree medical insurance from my employer but I have to pay full freight which will be $1000 per month.  In addition, I have to start it immediately and once I stop it, I can't ever go back on it.  I thought it might be a good idea to do massive trad conversions for the first couple of years while doing retiree medical, then flip to ACA once my traditional balances are much lower.

I think it would be better for me to just start out on ACA at the beginning of retirement and take out whatever we need from out traditional 401k accounts to control our income at an optimal level.  Spend what we need to live on  and convert the rest to Roth at that time.

Anyway, I wanted to thank all the posters on this thread for sharing your wisdom and hard work on this and so many topics. 

Best,
AM

[JJ-]

This thread is really pushing me to put more into ROTH IRA/401k while we are in the 12% bracket. We don't have the assets or timeline others do in this thread, but I think by the time we get to contemplating pulling the plug the traditional balances will be much higher than our ROTH balances. Somebody has mentioned already that it's just been brainless trad contributions since the start. Now, I'm revisiting.

As many others have mentioned, thanks to all those who put a ton of deep think into this thread.

[AccidentalMiser]

This thread is really pushing me to put more into ROTH IRA/401k while we are in the 12% bracket. We don't have the assets or timeline others do in this thread, but I think by the time we get to contemplating pulling the plug the traditional balances will be much higher than our ROTH balances. Somebody has mentioned already that it's just been brainless trad contributions since the start. Now, I'm revisiting.

As many others have mentioned, thanks to all those who put a ton of deep think into this thread.

If you're in the 12% bracket, you should definitely take advantage of that to pump up the Roth.

[JJ-]

This thread is really pushing me to put more into ROTH IRA/401k while we are in the 12% bracket. We don't have the assets or timeline others do in this thread, but I think by the time we get to contemplating pulling the plug the traditional balances will be much higher than our ROTH balances. Somebody has mentioned already that it's just been brainless trad contributions since the start. Now, I'm revisiting.

As many others have mentioned, thanks to all those who put a ton of deep think into this thread.

If you're in the 12% bracket, you should definitely take advantage of that to pump up the Roth.

It's new this year for us. Thanks for the advice. Seeing discussions like this really put into perspective the ramifications of large traditional balances.

[boarder42]

Well this news stinks. Hopefully it doesn't make it in as part of this plan.

The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans like 401(k) plans.

[tj]

Well this news stinks. Hopefully it doesn't make it in as part of this plan.

The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans like 401(k) plans.

What legislation?

[kpd905]

Sounds like it would only apply to those with income over $400,000.

https://www.cnbc.com/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html

[tj]

Sounds like it would only apply to those with income over $400,000.

https://www.cnbc.com/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html

^ I don't have any issues with anything in that proposal. Not sure who much revenue it will actually generate though.

There were a number of years after the Roth IRA was created where Backdoor was not possible. I guess the law that created them had "unintended consequences", and now they are correcting that.

[Bird In Hand]

Sounds like it would only apply to those with income over $400,000.

https://www.cnbc.com/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html

But it would completely end after-tax conversions to Roth (MBR) regardless of income level.  From the article:

Democrats’ legislation would end the mega-backdoor Roth by prohibiting all after-tax contributions in workplace plans and prohibiting after-tax IRA contributions from being converted to a Roth account.

This policy would apply for everyone, regardless of income level.

[Mr. Green]

I think some things are being confused. According to the article, Roth conversions would only be disallowed at income levels above $400,000.

The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.

The Mega-backdoor Roth would go away for everyone but that doesn't seem like a big deal for the FIRE crowd. As long as Roth conversions can still be done then we're still good. I doubt many FIREees have income levels above 400k per year.

[boarder42]

I think some things are being confused. According to the article, Roth conversions would only be disallowed at income levels above $400,000.

The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.

The Mega-backdoor Roth would go away for everyone but that doesn't seem like a big deal for the FIRE crowd. As long as Roth conversions can still be done then we're still good. I doubt many FIREees have income levels above 400k per year.

I agree. My quote was from the day it came out before the full text came out in a CNBC article

There's no doubt that converting I'll to the top on the 12% def makes sense over other measures though simply bc they can kill our loophole anytime

[Mr. Green]

I think some things are being confused. According to the article, Roth conversions would only be disallowed at income levels above $400,000.

The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.

The Mega-backdoor Roth would go away for everyone but that doesn't seem like a big deal for the FIRE crowd. As long as Roth conversions can still be done then we're still good. I doubt many FIREees have income levels above 400k per year.

I agree. My quote was from the day it came out before the full text came out in a CNBC article

There's no doubt that converting I'll to the top on the 12% def makes sense over other measures though simply bc they can kill our loophole anytime

I don't feel like it's much of a loophole because conversions do get taxed. If they don't like the idea of gains not getting taxed then why did they create Roth's at all? As someone whose portfolio is 2/3s tIRA at the moment I hear you on wanting to convert some of that as quickly as possible. We'll be doing the same, though we're so far beyond our original FIRE number that at this point we could pay the 10% tIRA penalty without running short onmoney. It would still suck to give away 10% just because the rules change in the middle of the game.

[boarder42]

I think some things are being confused. According to the article, Roth conversions would only be disallowed at income levels above $400,000.

The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.

The Mega-backdoor Roth would go away for everyone but that doesn't seem like a big deal for the FIRE crowd. As long as Roth conversions can still be done then we're still good. I doubt many FIREees have income levels above 400k per year.

I agree. My quote was from the day it came out before the full text came out in a CNBC article

There's no doubt that converting I'll to the top on the 12% def makes sense over other measures though simply bc they can kill our loophole anytime

I don't feel like it's much of a loophole because conversions do get taxed. If they don't like the idea of gains not getting taxed then why did they create Roth's at all? As someone whose portfolio is 2/3s tIRA at the moment I hear you on wanting to convert some of that as quickly as possible. We'll be doing the same, though we're so far beyond our original FIRE number that at this point we could pay the 10% tIRA penalty without running short onmoney. It would still suck to give away 10% just because the rules change in the middle of the game.

Yeah I could see them changing the 5 year waiting to 3 years being more likely before it's closed simply bc they'd want to encourage conversions in the short term.  But there probably aren't enough people doing this for it to matter. 

We're still at the edge of our FI number hopefully that changes the next few years and we get to where 10% doesn't matter.

[soulpatchmike]

@Watchmaker here's the updated model.

Changes from the previous version (which I'll remove upthread because it's inferior in every way):

• Eliminated the column for traveling abroad. The original purpose was to max Roth conversions in a year when there'd be no ACA insurance. This was no longer valuable as Roth conversions are manually entered at larger amounts.
• Added a column to dictate what bucket each year's expenses should be pulled from (tIRA, Roth, Taxable). Allows for finer control.
• Added columns to identify exact capital gain percentages of the Taxable account with growth so that this figure is always accurate, rather than an estimate based on averages.
• Added a column to harvest capital gains.
• Updated RMDs to the new 2021 values.

The model is still a bit crude in some ways. It will not do capital gain harvesting and spending taxable money in the same year since I have no plans to do that.  I am 97% sure the model handles all the buckets of money (tIRA, Roth, Taxable) correctly depending on what type of withdrawal is done each year. However, I cannot be sure that it will handle edge cases someone else might introduce through their own personal financial situation.

And of course, the carryover caveats:

• State tax and ACA premium values are based on North Carolina, the county of my residence, and the expected family size for my personal situation. The ACA spreadsheets I made are very easily updated to your local insurance premiums though.
• The ACA premium reflected in the model can be updated fairly easily. Just needs to point to different cells in the ACA silver/bronze plan spreadsheets.
• I have notes in place to help delineate where formulas may change with age, like when Social Security, Medicare, and RMDs start, in case someone would want to modify those (i.e. taking social security at a different age than I have specified).

That's all I can think of at the moment. I'll edit the post if I've forgotten something.

@Mr. Green Thank you for posting this.  I had not spent any time actually looking at what my detailed spending with ACA and taxes would be when I retire because it is still projecting at 10 years away, but when I started reviewing your spreadsheet and reading about a Roth ladder and some other posts I might be reach FI in 5 years.  I am in the middle of converting the spreadsheet into the way my brain thinks(years left to right), but it sure does make FI potentially 5 years sooner than I expected and maybe RE.

[Mr. Green]

@soulpatchmike glad it spurred some new thought processes for you! I think anyone that knows a bit of excel should make a model like this for themselves because it really gives you understanding and command of all the variables. Knowing all that stuff now makes it so much easier for me to analyze how a change might impact us, vs. spending significant time thinking about it because it's new. I think that folks would find it also gives them a lot of confidence in their plan.

[boarder42]

I'm going to revisit this again as iIve been thinking about it - there are 3 major components I see at play here.

1. Current tax out lay - or SORR risk - spend more today to convert more - locks in cost today
2. Cost to convert later in life due to RMDs - could increase total lifetime tax outlay
3. Flexibility in retirement due to more Roth contributions available

Number 1 carries the most weight in my mind and its not close if look at my personal situation with 4% SWR on 2MM at 80k per year option to convert 106k vs 81k increases that withdrawal rate by a full 1% and we all know that greatly decreases safety in RE.  Now my AA should support that but what if we were more strategic with higher conversion years like choosing down markets. Could this maximize the returns better?

2 I don't think carries much weight to me at all b/c if this is really an issue you've won the game and you can gift alot of money to charity to offset

3. this sits on the same side of the fence as number 2 meaning converting more is better.  But I guess we have to weight the reason one would need more than what was converted.  For me planning to use margin to optimize max cash invested its important to have more flexibility, but whats the cost if i havent converted enough and need to withdraw.  It goes from 12% cost in taxes to 22% cost in taxes.  is this really that bad? we're talking a cost on an additional need that would have otherwise been available of 10% on 26k - or 2600 dollars.  i'm saving 8k today in tax and aca by converting the 81.5k vs the 106k.

Just some random thoughts here on SORR vs RMD risk

[Mr. Green]

@boarder42 if you're retiring younger and want to maximize the availability of money in the younger years of retirement, waiting for market downturns to make bigger Roth conversions would likely work against you since you only have access to the basis until 59.5.

This is really only a consideration for those whose portfolios have vastly outgrown their planned spending, though statistically that will become most of us at some point as gains outgrow our spending. For some this will happen closer to 59.5 and maybe it's not an issue then. Our original goal was living on 40k. Our portfolio has grown to where a 4% WR is 80k. I could just let all that extra sit in tax deferred accounts but I don't like that idea because the future is unknown. So I want more access to that money before 59.5. I have no idea if I'll use it but I want it available with no restrictions or caveats to work around. At least that's my current thought process.

[boarder42]

@boarder42 if you're retiring younger and want to maximize the availability of money in the younger years of retirement, waiting for market downturns to make bigger Roth conversions would likely work against you since you only have access to the basis until 59.5.

This is really only a consideration for those whose portfolios have vastly outgrown their planned spending, though statistically that will become most of us at some point as gains outgrow our spending. For some this will happen closer to 59.5 and maybe it's not an issue then. Our original goal was living on 40k. Our portfolio has grown to where a 4% WR is 80k. I could just let all that extra sit in tax deferred accounts but I don't like that idea because the future is unknown. So I want more access to that money before 59.5. I have no idea if I'll use it but I want it available with no restrictions or caveats to work around. At least that's my current thought process.

I have thought of the issue with conversion in down years affecting the fact that gains can only be withdrawn at 59.5.  In your case with having an effective 2% SWR it makes perfect sense to go to the max always.  You've basically won the SORR issue.  As someone just starting out who hasnt seen what the first few years may bring I have to think the locked in spend early on is a larger negative than either of the other two issues. 

Even picking a terrible starting year like 1973 when my asset allocation lost 50% the first 2 years I still recovered to my starting balance in 5 years converting more during down years.  assuming I just oscillate between CHIP cliff on ACA and top of the 12% bracket for MFJ.  I think long term most people will end up at max convert to top of 12% bracket.  And possibly even going into the 22% bracket on really bad years later in the portfolio life.

[sol]

Threads like this are the reason why the MMM forums exist.  This is all of my favorite smart people in one place, solving relevant problems with solid mathematical analyses, and then sharing it freely for constructive criticism.  You folks make my day.

For the record, running the numbers of my family's personal financial situation has suggested that we only convert about $25k from trad to Roth each year (while subsidizing the rest of our spending out of taxable accounts or other income).  Yes, that is likely to result in higher RMD tax liability many years down the line, but it also comes with immediate monetary benefits beyond a lower current tax rate, such as free healthcare and college tuition.  I have paid exorbitant tax rates in the past, and I am happy to pay them again in the future, in exchange for guaranteeing the success of my financial plan during the uncertainties of an early retirement.

And honestly, what's the gripe about getting dinged for big RMDs?  "Oh noes I'm too rich, whatever will I do with all this money?!" is not exactly a position that garners much sympathy with me.  You got the benefit of avoiding all of that early SORR, and your only downside is the off chance that you'll end up with too much money when you're old?  Yea, that sounds like a win-win to me.

If you're really worried about paying higher taxes from your dragon-hoard-style mountain of money when you're old, consider the utility of large charitable donations to people or causes you believe in.  Build a homeless shelter, or donate it to a medical research fund.  Even the most selfish of rich bastards is probably okay with giving every person in their immediate family the gift-tax maximum of $15k, from you and your spouse, every year, for the last 10 years of your lives just to "spend down" their wealth while keeping it all in the family. 

[sol]

there is a 50% chance my wife and I die billionaires.

This part, though, is icky.  Please don't do that.  In a world where we embraced any vague semblance of morality, billionaires should not exist.  At least not anytime before a LOT more inflation.

[soulpatchmike]

there is a 50% chance my wife and I die billionaires.

This part, though, is icky.  Please don't do that.  In a world where we embraced any vague semblance of morality, billionaires should not exist.  At least not anytime before a LOT more inflation.

FYI, in case anyone is wondering what the difference is between a millionaire, a billionaire and Musk or Bezos(~$180B or so) is:

SWR on $1M with zero investment return = $1000/week = 1000 weeks = 19.23 years.  I could spend $1000 per week for 19.23 years without making any return on my money before I run out.

SWR on $1B with zero investment return = $1M/week = 1000 weeks = 19.23 years.  I could spend $1M per week for 19.23 years without making any return on my money before I run out.

SWR on $180B(Musk, Bezos) with zero investment return = $180M per week = 1000 weeks = 19.23 years.  Elon Musk and Jeff Bezos each could spend $180M per week for 19.23 years without making any return on their money before running out.

Hopefully, this gives a reality check to anyone who thinks there is a point when everyone is so rich that the numbers don't matter.  A billionaire is crazy rich, but Bezos and Musk can each spend $1M a week for nearly 500 years before running out of money.

Now regarding the possibility of becoming a billionaire by savings rate and investing alone:

~10% of American Households(~12M households out of 125M total households) are at Millionaire status or higher. 
~10% of millionaire households(~1.4M) are decamillionaires $10M or higher
~10% of decamillionaire households(~100k) are centimillionaires $100M or higher.
~1% of centamillionaire households(~1000) are Billionaires

Now if we extrapolate to 30 years ago data for the next 30 years, there were roughly 60 American billionaires in 1991, which could mean there was roughly 6000 centiM, 60kdecaM and 600k millionaire households. 

Today we have about ~20x > $M households than in 1991 so it bears a reasonable assumption that we will also have ~20x > $M households in 30 more years.  With that said, statistically it is unlikely that a millionaire today will end up being one of the estimated 20,000 billionaire households in 30 years by savings and investment returns alone, but it is certainly reasonable to believe that ~10% or more of American households will be decamillionaires in 30 years and the median household NW should be > $1M.

[boarder42]

there is a 50% chance my wife and I die billionaires.

This part, though, is icky.  Please don't do that.  In a world where we embraced any vague semblance of morality, billionaires should not exist.  At least not anytime before a LOT more inflation.

Glad we got you out of retirement from the forums!  It will be given away for the must part of it gets that big. We haven't over saved much. It's just a possible outcome.

[boarder42]

Threads like this are the reason why the MMM forums exist.  This is all of my favorite smart people in one place, solving relevant problems with solid mathematical analyses, and then sharing it freely for constructive criticism.  You folks make my day.

For the record, running the numbers of my family's personal financial situation has suggested that we only convert about $25k from trad to Roth each year (while subsidizing the rest of our spending out of taxable accounts or other income).  Yes, that is likely to result in higher RMD tax liability many years down the line, but it also comes with immediate monetary benefits beyond a lower current tax rate, such as free healthcare and college tuition.  I have paid exorbitant tax rates in the past, and I am happy to pay them again in the future, in exchange for guaranteeing the success of my financial plan during the uncertainties of an early retirement.

And honestly, what's the gripe about getting dinged for big RMDs?  "Oh noes I'm too rich, whatever will I do with all this money?!" is not exactly a position that garners much sympathy with me.  You got the benefit of avoiding all of that early SORR, and your only downside is the off chance that you'll end up with too much money when you're old?  Yea, that sounds like a win-win to me.

If you're really worried about paying higher taxes from your dragon-hoard-style mountain of money when you're old, consider the utility of large charitable donations to people or causes you believe in.  Build a homeless shelter, or donate it to a medical research fund.  Even the most selfish of rich bastards is probably okay with giving every person in their immediate family the gift-tax maximum of $15k, from you and your spouse, every year, for the last 10 years of your lives just to "spend down" their wealth while keeping it all in the family.

Yeah this is the conclusion I've come to. It's too early to plan for RMD risk when sorr risk is far greater and more immediate. If we have high RMDs lots of money can be given away.  No reason to give more money to the give today to solve a risk 40 years in the future. Holy shit that's longer than I've lived to date. Also we live in a state with 5.4% income tax and we might relocate to a no income tax state at some point who knows.

[sol]

Glad we got you out of retirement from the forums! 

I came looking for tax planning advice, and I found some.  Thank you, to you and everyone else who has contributed here.

As much as I enjoy hardly thinking about money at all anymore now that I'm retired, at least once a year I have to sit up and pay attention just to make sure I'm still sort of on top of things.  Most of my financial life is on autopilot as I coast through my 40s as an early retiree, but even autopilots need occasional supervision.  And I'm glad to see you guys are still an invaluable resource.

[boarder42]

Threads like this are the reason why the MMM forums exist.  This is all of my favorite smart people in one place, solving relevant problems with solid mathematical analyses, and then sharing it freely for constructive criticism.  You folks make my day.

For the record, running the numbers of my family's personal financial situation has suggested that we only convert about $25k from trad to Roth each year (while subsidizing the rest of our spending out of taxable accounts or other income).  Yes, that is likely to result in higher RMD tax liability many years down the line, but it also comes with immediate monetary benefits beyond a lower current tax rate, such as free healthcare and college tuition.  I have paid exorbitant tax rates in the past, and I am happy to pay them again in the future, in exchange for guaranteeing the success of my financial plan during the uncertainties of an early retirement.

And honestly, what's the gripe about getting dinged for big RMDs?  "Oh noes I'm too rich, whatever will I do with all this money?!" is not exactly a position that garners much sympathy with me.  You got the benefit of avoiding all of that early SORR, and your only downside is the off chance that you'll end up with too much money when you're old?  Yea, that sounds like a win-win to me.

If you're really worried about paying higher taxes from your dragon-hoard-style mountain of money when you're old, consider the utility of large charitable donations to people or causes you believe in.  Build a homeless shelter, or donate it to a medical research fund.  Even the most selfish of rich bastards is probably okay with giving every person in their immediate family the gift-tax maximum of $15k, from you and your spouse, every year, for the last 10 years of your lives just to "spend down" their wealth while keeping it all in the family.

Thank you for further confirming my new pivot in this space.  It's insane to plan for a future so far away and unknown, but the current state of things is pretty well known barring some tax changes that may go into effect in 2022(most of which should help me anyway).  Protection today and less money to the govt today will keep us more secure short term.  And longer term we can open up our pockets to help more people should we decide to continue. 

If you're spending taxable - why not spend margin today if your pockets are that deep?  It keeps more money invested therefore leaving more money available later to do more good?

[zolotiyeruki]

@boarder42 I think there are a couple of things you're missing in your analysis. 
1) If you convert the extra $25k, you're not actually increasing your withdrawal rate.  Your assets have not decreased by another $25k.  You've simply shifted some of those assets from one bucket to another.
2) Taxes need to be considered as part of your spending.  If you're converting some assets now, it means that you'll pay less in taxes later, which in turn means that you'll need to withdraw less money.  In other words, compare withdrawing $80k from your traditional IRA and pay $10k in taxes, versus withdrawing $35k from a Roth and $40k from a traditional IRA, and paying $5k in taxes.  Your overall withdrawal would only be $75k, not $80k, buying back some of that safety margin

Threads like this are the reason why the MMM forums exist.  This is all of my favorite smart people in one place, solving relevant problems with solid mathematical analyses, and then sharing it freely for constructive criticism.  You folks make my day.

For the record, running the numbers of my family's personal financial situation has suggested that we only convert about $25k from trad to Roth each year (while subsidizing the rest of our spending out of taxable accounts or other income).  Yes, that is likely to result in higher RMD tax liability many years down the line, but it also comes with immediate monetary benefits beyond a lower current tax rate, such as free healthcare and college tuition.  I have paid exorbitant tax rates in the past, and I am happy to pay them again in the future, in exchange for guaranteeing the success of my financial plan during the uncertainties of an early retirement.

And honestly, what's the gripe about getting dinged for big RMDs?  "Oh noes I'm too rich, whatever will I do with all this money?!" is not exactly a position that garners much sympathy with me.  You got the benefit of avoiding all of that early SORR, and your only downside is the off chance that you'll end up with too much money when you're old?  Yea, that sounds like a win-win to me.

If you're really worried about paying higher taxes from your dragon-hoard-style mountain of money when you're old, consider the utility of large charitable donations to people or causes you believe in.  Build a homeless shelter, or donate it to a medical research fund.  Even the most selfish of rich bastards is probably okay with giving every person in their immediate family the gift-tax maximum of $15k, from you and your spouse, every year, for the last 10 years of your lives just to "spend down" their wealth while keeping it all in the family.

Welcome back!  And you're 100% on point here.  In the context of the MMM forums and ER, performing Roth conversions is only partly about optimizing taxes paid.  The bigger issue for many mustachians is making sure that sufficient funds are available to cover living expenses before age 59.5.  If you can do both (optimize taxes *and* access your money), *and* find yourself staring down the barrel of an RMD, then congrats, you've won the game.  You're rich.  Go start a DAF.

[boarder42]

@zolotiyeruki maybe you misunderstood my post. There is an increased cost of taxes and the ACA cost today. When I change my conversion to 106k from 81k that additional cost in ACA and taxes today out of my pocket is 8k. Long term we don't know what the ACA will cost or not cost or what taxes or RMDs will be or what market returns will be. So it's prudent with my 4-5% wr today to be conservative with cash outflows. The down side of this strategy is it is likely to be tax inefficient long term due to RMDs and the size of my traditional accounts. But it's shortsighted to look 40 years into the future today when the bigger risk today is the additional 8k in withdrawals to pay taxes and the ACA today. Worst case short term is I didn't convert enough for some large spending changes and I've exhausted our Roth conversions at which point we'd have to start paying a 10% penalty to tap our traditional funds. Then there are possible future state income tax savings if we were to relocate later in life. Not much reason to lock up more tax on top of more federal and aca taxes today when that too could change.

[zolotiyeruki]

@zolotiyeruki maybe you misunderstood my post. There is an increased cost of taxes and the ACA cost today. When I change my conversion to 106k from 81k that additional cost in ACA and taxes today out of my pocket is 8k. Long term we don't know what the ACA will cost or not cost or what taxes or RMDs will be or what market returns will be. So it's prudent with my 4-5% wr today to be conservative with cash outflows. The down side of this strategy is it is likely to be tax inefficient long term due to RMDs and the size of my traditional accounts. But it's shortsighted to look 40 years into the future today when the bigger risk today is the additional 8k in withdrawals to pay taxes and the ACA today. Worst case short term is I didn't convert enough for some large spending changes and I've exhausted our Roth conversions at which point we'd have to start paying a 10% penalty to tap our traditional funds. Then there are possible future state income tax savings if we were to relocate later in life. Not much reason to lock up more tax on top of more federal and aca taxes today when that too could change.

Ah, I see now what you meant.  Thanks for the clarification!

[boarder42]

@zolotiyeruki maybe you misunderstood my post. There is an increased cost of taxes and the ACA cost today. When I change my conversion to 106k from 81k that additional cost in ACA and taxes today out of my pocket is 8k. Long term we don't know what the ACA will cost or not cost or what taxes or RMDs will be or what market returns will be. So it's prudent with my 4-5% wr today to be conservative with cash outflows. The down side of this strategy is it is likely to be tax inefficient long term due to RMDs and the size of my traditional accounts. But it's shortsighted to look 40 years into the future today when the bigger risk today is the additional 8k in withdrawals to pay taxes and the ACA today. Worst case short term is I didn't convert enough for some large spending changes and I've exhausted our Roth conversions at which point we'd have to start paying a 10% penalty to tap our traditional funds. Then there are possible future state income tax savings if we were to relocate later in life. Not much reason to lock up more tax on top of more federal and aca taxes today when that too could change.

Ah, I see now what you meant.  Thanks for the clarification!

Yeah gotta take care of the big barking dog standing outside the door the first 5-10 years of RE starting at 35(SORR) before i start to look at the long term risk of possibly paying more tax due to over saving 40 years in the future - which is likely the case for everyone on these forums b/c 4% is by design incredibly conservative. 

[sol]

Yeah gotta take care of the big barking dog standing outside the door the first 5-10 years of RE starting at 35(SORR) before i start to look at the long term risk of possibly paying more tax due to over saving 40 years in the future - which is likely the case for everyone on these forums b/c 4% is by design incredibly conservative.

Fortunately, charitable donations can completely alleviate the problem of having to pay higher taxes in your old age.  I'd like to believe that a higher-than-average percentage of people on this website, being smarter than the average bear, will want to use their future wealth to make the world a better place instead of a worse one.

[dandarc]

holy crap - sol's back too?

[Mr. Green]

From my position, the choice to raise Roth conversions higher than needed now to reduce RMDs later is only about the unknown. Most people probably aren't starting families as they're pushing 40. So for us, maximizing the unpenalized dollars available to us through 60 is mostly about edge cases. A kid with special needs. An accident that requires permanently elevated levels of spending. Those kinds of things. I suppose the nice thing about already having "won the game" is that I get to consider these things, which people aren't going to focus on as much if they've just hit their number. At that point, SORR is still the predominant variable one is planning for.