Author Topic: Checking thinking on Roth Conversions  (Read 869 times)

caracarn

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Checking thinking on Roth Conversions
« on: April 24, 2025, 06:42:10 AM »
So we are getting ready to move to what will be our home in early retirement in about 5 weeks.  I'm 54, 55 in three months and my wife is 51.   Our youngest child is turning 21 in three months so is five years away from the 26 age out of medical coverage on our dime and is a Type 1 diabetic so needs decent coverage.   As things sit right now we will be "renting" our current home to three of our adult children (one of which is the son in question) and just having them cover the utilities to give them a runway to save up money for down payments for places of their own.  You can follow the details of that in some of the other threads I regularly post in on the board.   The new home was paid in cash so no mortgage.   Once we sell this other house in a few years we'd be mortgage free so the longest that would go would coincide with the 5 years until the youngest is off our insurance and I no longer need to work as the carrier of the job which provides our insurance (wife is self employed).  We are right about our FIRE number now (we were comfortably above it until the self induced market collapse of stupidity) so I'm basically maintaining the job to have health insurance.   Yes we've checked ACA options and far more than what it costs from the job so it would not allow us to FIRE while we need family coverage.  I hope that provides enough background of the timing and such we are looking at to pull the trigger.

All this has led to me getting more familiar with what money we can access and how at our age now (in the event kids just decide they are really flying the nest and jump on their own insurance which they all do have access to through employers now etc.) to the ages we would be at "worst case" if we need to ride this tiger for the next five years just coasting to FIRE paying the mortgage on the existing home living our dream in the new one when we'd be 60 and 56.  Right now all my tax advantaged accounts are either current 401(k)  or traditional IRA.  It appears that converting to Roth makes sense.   If crap hits the fan with my job I'm at Rule of 55 with turning 55 this year that I could access the 401(k) at any point so I am aware of that.   But I can't touch IRAs without penalty until 59 1/2.   We currently with just about $30K in taxable accounts we could access as we used the rest to buy the new house free and clear, but when we sell the house we should clear $200K-$300K and kids are aware we may need to pull the ripcord if I lose my job in the economic shitstorm we are in and cannot find another one at 55+ in a much smaller job market we are moving to that is mainly industries that are heavily impacted by tariffs and therefore might not be hiring or even there.  So our Plan B would be telling kids we've got to sell in the next 6 months so they need to find apartments or whatever and getting our taxable accounts back to the levels they were.   I've been running scenarios on Boldin for Roth conversions and the one to give the lowest tax liability given all these other flow (which right now include everything I said above and selling the house in 2030) says we should do 9 conversions over time starting with a very small one of $1,800 at the end of 2026, then several sub $5K ones for the next 4 years and then in 2031 $78K and then several years of $200K a year until done in 2034.  This is where I am coming to the MMM community for help as my financial knowledge here is less comfortable.   Does this seem to make sense?   If I understand the rules correctly, I can always withdraw 100% of the amount I converted but cannot touch any earnings for 5 years, so by 2039 everything is fair game with a few earnings buckets opening up starting in 2031 if we were choosing to tap the earning from the $1,800.  We have a 99% success rate with Average assumptions in the Boldin model and only fall off the cliff with the Pessimistic model not making it to the end in our 90s if we got that far, so that seems reasonable as we would certainly make adjustments if needed as things went along over the next 35 years.  The model already is built spending 20% more than we think we really need to so I feel if we have to pull back on the 4% SWR we could.   I'm also not sure if anyone here has any opinion on Boldin.  I did a search for the a NewRetirement (their previous name and found nothing on MMM.   I'm in my 14 day trial before I need to up for the $120 annual cost but seemed far less than the $2,000-$5,000 quotes I had gotten for fiduciaries to give me a financial plan when all I really need is Roth conversion comfort.   Are there other tools people would recommend instead that run these models?  I feel confident in the other pieces or that the community here can more than answer.  I was just surprised at how aggressive the conversion path was and even running things with their other setting the timeline was very similar being done with conversations in the next 10ish years.   Should I open a Roth IRA account now for some reason?   Will I need each of these conversions in a separate account or do I just need to make sure I stay clear of withdrawals of earnings and if I can monitor that myself can just do it in a single Vanguard Roth IRA account rather than have 10?   Not even sure if there are questions I should be asking that I am not.   

Thanks for your replies.   Looking forward to hearing everyone's thoughts.
« Last Edit: April 24, 2025, 06:45:19 AM by caracarn »

reeshau

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Re: Checking thinking on Roth Conversions
« Reply #1 on: April 24, 2025, 07:04:09 AM »
It seems pretty absurd to rack up tax payments on $200k a year to avoid taxes.  The tax future is uncertain, but if you did that this year as MFJ, you would be in the 24% bracket.  You can withdraw $96k a year from your trad IRA, take the 12% bracket plus 10% penalty, and be better off.  (Hand-waving the standard deduction, which would apply to both, of course)

What spending level are you looking at?  Is your spouse continuing to work?  (You said you were just working for insurance)  Is the Roth plan more about RMD's on the back end, or tax management now?

caracarn

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Re: Checking thinking on Roth Conversions
« Reply #2 on: April 24, 2025, 07:46:44 AM »
It seems pretty absurd to rack up tax payments on $200k a year to avoid taxes.  The tax future is uncertain, but if you did that this year as MFJ, you would be in the 24% bracket.  You can withdraw $96k a year from your trad IRA, take the 12% bracket plus 10% penalty, and be better off.  (Hand-waving the standard deduction, which would apply to both, of course)

What spending level are you looking at?  Is your spouse continuing to work?  (You said you were just working for insurance)  Is the Roth plan more about RMD's on the back end, or tax management now?
This is exactly what I was wondering about, does it even make sense and if not do I even need to spend what is a trivial amount of $10/month on some fancy software to help me plan and manage? 

It said I would save about $300K in lifetime takes.   Again the $200K would not be until we were FIRE in 2032 - 2034 so would likely be lower taxes.   I did run some scenarios when I said fill the 22% tax bracket and it still was offering about $200K many years (we have about $800K - $1M  to convert if we moved it all). 

We are targeting $40K a year to FIRE number was $1M.   To give the cushion I've said $48K/year or $4K per month in case we are missing something.  We have no expensive hobbies, we like reading, hiking and are pretty simple so not expecting any real massive costs.   We already have LTC policies that we picked up in 2023 from Manhattan Life that should remove most if not all of the biggest possible unknowable expense of retirement.  Those cost us $173.98 a month for both of us and that cost is locked in and gets us each $200K in coverage which exceeds the typical shown need but LTC which is usually around $160K per individual that I found in my research.   And this expands with a 5% inflation increase per year for 20 years to $500K in year 25 when I'd be in my late 70s so with that planning we feel pretty comfortable with our spending levels as most other health care should be covered by the typical items of Medicare etc.   Even with this there are RMDs on the back end but with the plan they are about $25K where they are much much higher (near $200K as we get to end of the plan).   Hope that answers the questions adequately.

Sandi_k

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Re: Checking thinking on Roth Conversions
« Reply #3 on: April 24, 2025, 09:50:16 AM »
Another tactic would be to roll your pre-tax IRA into your company plan now.

Then all your funds would be available with the Rule of 55.

PS: Please make some paragraph breaks when you write - that wall o' words is not easy to parse.

lhamo

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Re: Checking thinking on Roth Conversions
« Reply #4 on: April 24, 2025, 11:15:35 AM »
No idea what the assumptions of their model is, but I really question the strategy of increasing your Roth conversion amounts that much at that point in your life. Remember that high income in the 2 years prior to age 65 will ramp up your Medicare costs.

I personally like the Bogleheads retirement planner spreadsheet, especially for playing around with Roth conversion strategies.  It is a complicated Excel file, and all the red ink warnings that are plugged in can be hard to look past while you are getting your info entered, but once you have all your data in there it is pretty easy/fun to play around with different Roth strategies.

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
https://www.bogleheads.org/forum/viewtopic.php?t=97352

It's free.

Another resource you might want to look into is PlanVision.  They charge about $300/year for basic planning support.  I haven't signed up with them yet, but have been thinking about it for awhile.  IIRC @Sandi_k has worked with them and may have more comments.

Another thing to consider:  If you have cash to live off of in other buckets, then doing Roth conversions at times when the market drops can work greatly in your favor.  I am hoping this will be the case for me -- make some lemonade out of the lemons getting smashed in the current markets.

caracarn

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Re: Checking thinking on Roth Conversions
« Reply #5 on: April 24, 2025, 12:32:10 PM »
No idea what the assumptions of their model is, but I really question the strategy of increasing your Roth conversion amounts that much at that point in your life. Remember that high income in the 2 years prior to age 65 will ramp up your Medicare costs.

Is converting from one account type to another really income?   I'm lost here.

caracarn

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Re: Checking thinking on Roth Conversions
« Reply #6 on: April 24, 2025, 12:35:53 PM »
Another tactic would be to roll your pre-tax IRA into your company plan now.

Then all your funds would be available with the Rule of 55.

PS: Please make some paragraph breaks when you write - that wall o' words is not easy to parse.
Like any 401(k) investment options are limited so I'd rather have my VTSAX and such at Vanguard which is where I'd rather have the money.   That also does not change that I have to pay taxes on the massive gains from two decades already and then beyond which I understand to be a key point of the Roth conversion no?   I'm not paying taxes on the gains since it was post tax money?

caracarn

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Re: Checking thinking on Roth Conversions
« Reply #7 on: April 24, 2025, 01:10:27 PM »
No idea what the assumptions of their model is, but I really question the strategy of increasing your Roth conversion amounts that much at that point in your life. Remember that high income in the 2 years prior to age 65 will ramp up your Medicare costs.

I personally like the Bogleheads retirement planner spreadsheet, especially for playing around with Roth conversion strategies.  It is a complicated Excel file, and all the red ink warnings that are plugged in can be hard to look past while you are getting your info entered, but once you have all your data in there it is pretty easy/fun to play around with different Roth strategies.

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
https://www.bogleheads.org/forum/viewtopic.php?t=97352

It's free.

Another resource you might want to look into is PlanVision.  They charge about $300/year for basic planning support.  I haven't signed up with them yet, but have been thinking about it for awhile.  IIRC @Sandi_k has worked with them and may have more comments.

Another thing to consider:  If you have cash to live off of in other buckets, then doing Roth conversions at times when the market drops can work greatly in your favor.  I am hoping this will be the case for me -- make some lemonade out of the lemons getting smashed in the current markets.
So looked at PlanVision and watched about their eMoney tool.   Boldin looks to do the same thing for less cost.   I have seen several fiduciary advisors suggest Boldin as a wonderful tool so I assume any "assumptions" as robust.   If you mean what growth rates or other things that the Boggle spredsheet has, yes those can all be set in Boldin.   I entered the roth conversions Boldin suggested in the Boggleheads spreadsheet and yes it does what I expected taking things into the 24% tax bracket in the big conversion years but where the rate shows at 17-18% in the Fed Tax rate column.   It appears any of these tools do the same thing.

The Bogleheads sheet just appears valuable if you want to see the formulas but otherwise behaves the same, as one would expect. 

Basically I can spend money with a CFP fee only and get my questions answered but was hopeful the community here might have enough expertise but perhaps not. 

It appears the point would be to be exempt from RMDs as Roth does not have them.   Without it is looks like I start having RMDs of 200-300K in my 80s.  This is where I am not certain of my choice so looking to see how I decide that.     Also unclear on this impact of income on Medicare so I guess I need to google that.  Is that the IRMAA thing?   If so Boldin looks at that and there would be no impact converting that much it seems, but if I do not convert I do get hit with IRMAA in the back half of my retirement.
« Last Edit: April 24, 2025, 01:27:56 PM by caracarn »

terran

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Re: Checking thinking on Roth Conversions
« Reply #8 on: April 24, 2025, 02:00:53 PM »
You can withdraw $96k a year from your trad IRA, take the 12% bracket plus 10% penalty, and be better off.

Careful with that thinking if you plan to use ACA insurance, which can put you at marginal bracket in the 20-30% range pretty quick when combined with income taxes (basically at anything over the standard deduction). One of the seattles (@seattlecylone maybe?) has a good blog post that shows this.

caracarn

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Re: Checking thinking on Roth Conversions
« Reply #9 on: April 24, 2025, 03:07:08 PM »
I found a few CFPs that walked through this and I think this is what I am learning:

RMDs are definitely a factor and in our situation targeting about $4,000 per month in income SS itself can cover that for us.   As such we would have little need for the savings at that time and therefore be susceptible to RMD's which is what the model I am seeing seems to show and.  We have just pulled out estimates from ssa.gov and my regular payment at 67 is 3,888 and my wife's would be 2,699.   Even if they truly messed up SS and reduced payments to 75% or even 70% we'd be meeting the needs.   As such it seems to lean to the conversion for that as things will be far most costly is I have lots of RMDs.   Agreed?

I found the IRMAA info and yes 2 year look back for Part B and Part D but the no impact level for MFJ is $212K so it allows for sizeable conversion and since working to 60 it was trying to lower that and taking a bit of a hit for the first year or two but the rate appears to be less than the future taxes.  Another option would be to spread the conversions out and if I limit them to the 12% bracket that require 14 conversions which means I'd still be doing them at age 70 but if I'm not needing to touch any or most of that money I guess the 5 year rule would not matter on touching earnings tax free and it would certainly keep us below any IRMAA limit.

The other thing would be any ACA subsidies from 60 to 65 for us which also would be an issue so need to look at those which would impact us as even the conservative route had us doing $158K conversions during those years and your ACA silver cost per the Kasier calculator would be about $1,100 a month which is not really in out $48K per year cost and is $1,000 per month higher than the cost with just $48K in income. 

The other choice appears to be if tax bracket will be same or lower in retirement also not really helpful and we are going from over $200K in income now to $50-$100K if we went nuts and still far less, so in that case that would say just take the RMDs, pay the taxes and you still come out ahead, right?   

I think that's where I understand things.   Let me know if I got it correct.

reeshau

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Re: Checking thinking on Roth Conversions
« Reply #10 on: April 24, 2025, 03:25:03 PM »
You can withdraw $96k a year from your trad IRA, take the 12% bracket plus 10% penalty, and be better off.

Careful with that thinking if you plan to use ACA insurance, which can put you at marginal bracket in the 20-30% range pretty quick when combined with income taxes (basically at anything over the standard deduction). One of the seattles (@seattlecylone maybe?) has a good blog post that shows this.

If the other option was $200k Roth conversions over those years, you hit the same problem, plus some.

reeshau

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Re: Checking thinking on Roth Conversions
« Reply #11 on: April 24, 2025, 03:28:32 PM »
so in that case that would say just take the RMDs, pay the taxes and you still come out ahead, right?   

...or, take qualified charitable distributions in lieu of RMD's, and share the bounty.

We are a community of optimizers.  But yes, if you are 80 and have more money than you know what to do with, then you have definitely won.

Sandi_k

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Re: Checking thinking on Roth Conversions
« Reply #12 on: April 24, 2025, 10:21:06 PM »
No idea what the assumptions of their model is, but I really question the strategy of increasing your Roth conversion amounts that much at that point in your life. Remember that high income in the 2 years prior to age 65 will ramp up your Medicare costs.

Is converting from one account type to another really income?   I'm lost here.

Yes. Distributions OR conversions from a traditional IRA or 401(k) plan is recorded as taxable income, and taxed at ordinary income tax rates.

So if you need to control your income - for IRMAA, for ACA, for child tax credits, whatever - make sure to know the thresholds where the income is penalized.

MDM

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Re: Checking thinking on Roth Conversions
« Reply #13 on: April 25, 2025, 10:32:20 AM »
Aiming to keep your marginal tax rate about the same every year will be a good guess at what gives you the most spendable money after tax.  Is that what you are seeing?

See Whether, when, and how much to convert for further discussion.

caracarn

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Re: Checking thinking on Roth Conversions
« Reply #14 on: April 25, 2025, 11:05:50 AM »
Aiming to keep your marginal tax rate about the same every year will be a good guess at what gives you the most spendable money after tax.  Is that what you are seeing?

See Whether, when, and how much to convert for further discussion.
Yes rates will be lower most likely as we are expecting to have far lower expenses than we have given it will be just two of us instead of eight of us.

MDM

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Re: Checking thinking on Roth Conversions
« Reply #15 on: April 25, 2025, 11:08:42 AM »
Aiming to keep your marginal tax rate about the same every year will be a good guess at what gives you the most spendable money after tax.  Is that what you are seeing?

See Whether, when, and how much to convert for further discussion.
Yes rates will be lower most likely as we are expecting to have far lower expenses than we have given it will be just two of us instead of eight of us.
In other words, don't convert now but do convert later in order to keep your marginal tax rate ~constant.

caracarn

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Re: Checking thinking on Roth Conversions
« Reply #16 on: April 30, 2025, 08:23:10 AM »
Aiming to keep your marginal tax rate about the same every year will be a good guess at what gives you the most spendable money after tax.  Is that what you are seeing?

See Whether, when, and how much to convert for further discussion.
Yes rates will be lower most likely as we are expecting to have far lower expenses than we have given it will be just two of us instead of eight of us.
In other words, don't convert now but do convert later in order to keep your marginal tax rate ~constant.
I think what I am seeing is no need to convert ever.   I think we will still be at a lower rate at that point and if not taking money to pay taxes to save them for growth near the end of life is likely a losing proposition as well.  We basically would barely be above the 12% bracket for a long time.