Author Topic: I think of a Roth Conversion Ladder as a Consumption Tax  (Read 766 times)


  • 5 O'Clock Shadow
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I think of a Roth Conversion Ladder as a Consumption Tax
« on: June 04, 2019, 02:39:03 PM »
So I was thinking about my plans for retirement, which will involve a Roth Conversion Ladder. I'm mostly investing in traditional IRAs, and my 401k will rollover into said traditional IRAs. So I'll have a good amount of my assets in pretax accounts. Therefore after I retire, I'll likely be moving about 1 year of cash from the pretax accounts to a Roth, and pay income taxes on those funds as they transfer.

When I go to my retirement planning spreadsheet (we all have one, right? :p) and start fiddling with the knobs, it makes sense that the income taxes I will pay on those transfers are based on about how much money I'll need for the year. So if I want to spend 30k a year, I need to transfer ~30k, which will be taxed as income. However, if I can reduce spending to 20k, I'll only need to transfer ~20k, and so the taxes are much less.

So in the hypothetical case where your retirement funds are entirely in pretax IRAs, making use of a Roth Conversion Ladder would mean you are pretty much taxed based on how much you spend! Which is great because it's another incentive to reduce spending.

Of course most retirement accounts are a tad more complicated than "everything in my traditional IRA", but this hypothetical applies largely to me. I think higher income plans especially can't get a very high savings rate with IRA/401k contributions.

I'm sure this isn't a novel idea, but it's the first time I realized it. If you take into account the ability to avoid taxes in the earning years with pretax accounts, it seems like those with low-moderate incomes can be taxed at a rate more based on what they spend rather than what they make.


  • Magnum Stache
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Re: I think of a Roth Conversion Ladder as a Consumption Tax
« Reply #1 on: June 04, 2019, 02:44:20 PM »
You have to take it out eventually anyway for RMDs. So if you consume less, convert less, and hence are taxed less earlier you'll make up for it later with RMDs. How much you should run through the Roth conversion ladder probably depends more on how much you have in pre-tax accounts than how much you spend.


  • Stubble
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Re: I think of a Roth Conversion Ladder as a Consumption Tax
« Reply #2 on: June 04, 2019, 10:54:05 PM »
Minimizing consumption is the biggest factor in controlling the amount of income you'd need to recognize in retirement, but there are other levers you can pull to access money for spending without recognizing income, as long as you plan well.

Have you read Go Curry Cracker?

A lot of his posts touch on the concept you bring up here, and he goes into the math on minimizing taxes by controlling income recognition in the retirement years, harvesting capital gains, Roth conversions, and also taking RMDs into consideration. Really good stuff.

Abe Froman

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