Roth Conversion Ladder while minimizing taxes

[felipepipe18]

My wife and I plan to retire in about ten years. We will probably have $500k in taxable accounts and $500k in 401Ks. Initially we will draw about $40k each year from our taxable accounts. Since withdrawals from taxable accounts don't count as income, both the income tax rate and our capital tax rate should be 0%. Therefore, I think we should also plan to do a Roth Conversion Ladder on $19,049 (less than the $19,050 to still be in the 0% income and capital gains tax bracket) to minimize taxes paid on some of the 401K money. Otherwise, when this money is withdrawn from the 401K we would end up being in the 12% tax rate.

The converted money would end up in a Roth IRA(https://www.madfientist.com/how-to-access-retirement-funds-early/) where it would grow tax free or could be withdrawn tax and penalty free. This is what it would look like:

$40,000 (Taxable account) $19,049 (Convert Roth IRA to Traditional IRA: this money can't be used in 5 years)

I would essentially repeat this over and over again and save tens of thousands of dollars in taxes.

Is there a flaw in my logic here? I would really appreciate any comments or insights.

[kpd905]

You could do a Roth conversion of $24,000 to have the income taxed at 0%, since that is the standard deduction.  Otherwise if you want to use up the 10% bracket, you can convert $43,049.  This would result in $1904 in federal tax, or 4.4% effective rate on the total converted.

You can then take enough from your taxable account to bring your taxable income up to $77,200 before paying capital gains.

[MDM]

If by "taxable accounts" you mean savings and checking accounts or similar, then yes withdrawals are not "income".  But if those are index funds or similar, any capital gain is income.  It may not be taxed due to the Long Term Capital Gain tax brackets, but it is income.

Do you expect to receive social security benefits? If so, consider Taxation of Social Security benefits - Bogleheads.  It might be worthwhile to convert more traditional to Roth each year prior to the start of SS.

[terran]

You could do a Roth conversion of $24,000 to have the income taxed at 0%, since that is the standard deduction.  Otherwise if you want to use up the 10% bracket, you can convert $43,049.  This would result in $1904 in federal tax, or 4.4% effective rate on the total converted.

You can then take enough from your taxable account to bring your taxable income up to $77,200 before paying capital gains.

One thing I want to point out about this comment as compared to your apparent understanding is that withdrawals from a taxable account (well, really the amount of those withdrawals that are gains) DO in fact count as income, that income is just in a 0% tax bracket up to the $77200 limit kpd905 mentions. Capital gains stack on top of regular income and IRA withdrawals (or Roth conversions), so if you convert $43,050 you'll still be able to realize $58150 of gains before paying tax on those gains. Above that you'll pay 15%. You'll also have some dividends in there too, so make sure you know what those are at the end of the year before going right up to the line.