FIRE Withdrawal/Conversion Strategy

[glancep]

So I started reading over this thread recently:
https://forum.mrmoneymustache.com/post-fire/trad-to-roth-conversion-more-or-less/

And my wife and I wanted to build a similar plan for ourselves.  We are fairly close to our FI number, and wanted to game-out how RE withdrawals / Roth conversions would work, paying special attention to ACA subsidies.

Our basic stats:
A income: 70k + ~5k bonus
G income: 120k + ~20k bonus

Portfolio: ~1.7MM today
Taxable: 186k
Roth: 358k
Traditional: 1,084k
Pension: 90k (this is accessible as a lump-sum at G's age 55)

Family:
DW ("A" in spreadsheet): 42yo
Me ("G" in spreadsheet): 40yo
Two kids - K1 11yo and K2 9yo.  Expecting both will attend college that we will help pay for (not expecting to cover completely--we do have a separate 529 started for that, but plan to mostly cash-flow out of our "budget"--which explains increased budget during those years)

We put together the following spreadsheet and would like some help validating our strategy:

https://docs.google.com/spreadsheets/d/19v3hxGUPvM3hMoHdI7ybowO4ye4zMyc6Q1d9jC9QuZY/edit?usp=sharing

Notes:

• We tried to keep the spreadsheet simple -- our "budget" amount is assumed to include both taxes and ACA premiums (in addition to our regular spending, obviously).
• We didn't calculate state taxes, but this money is also expected as part of the "budget" amount.
• The lower "variables" section defines the projected growth amount (set to a conservative 4% right now)
• To keep things in perspective, we assumed today's dollars--inflation is ignored
• These numbers assume no contributions in the next year, which will not be the case.
• Our best-case scenario is that we work full-time for one more year, then down shift at our current employer to part time, meaning we would continue to have employer-based insurance and access to 401k contributions (and a generous match).  In this scenario, the conversions wouldn't actually start until full FIRE when we leave our jobs.  This could potentially be another 5 years or so (we'd also want to look at FAFSA implications, which this spreadsheet doesn't touch)

What did we forget or oversimplify?  I know there isn't a single optimal solution to this problem, so it can be really difficult moving around conversion amounts and adjust budget amounts while keeping sight of the ACA thresholds we need to thread.

[secondcor521]

Various comments:

I was not very methodical, but I spot checked your spreadsheet and it all looks more or less OK to me.  I'd probably double-check your formula in terms of the 5 year Roth conversion ladder (implicit in cell M18 referring to H27 - I think that's right but I'd confirm that H27 is correct and not G27).

I don't think you can convert 401(k)s to Roth IRAs.  Of course, after you leave service, you can roll the 401(k) to a traditional IRA and then convert from there - maybe that's what you're really intending to do.  But if, for example, G is working part time in 2027,then cell G29 is problematic.  Maybe you addressed this item with your OP where you write "conversions wouldn't actually start".

You might take a look at advanced I-orp (www.i-orp.com or some such, use the advanced option).  It attempts to solve the same sort of problem, with different limitations.  Probably worth learning about it and plugging your situation in over there at least as a sanity check on your plan.

Your kids may qualify for AOTC during college ages.  Pay $4K out of pocket, get a $2500 tax credit (part refundable, part not).

You can only include your kids in household size for ACA purposes if they are your tax dependents, which they will probably be through college age, but maybe not during college, and probably not once they work full time.  Cell C44.

The child tax credit is going to be more generous than what you have listed for a year or two at least, maybe longer.  C34, D34.  Aside from that, your child tax credit numbers look wonky to me.  Under most of the time I've been familiar with the law, you lose the CTC when your kid turns 17, so at the very least your J34 and to the right should be $0.

You seem to not have a sanity check on withdrawing more than available from your Roths.  Note, for example, that H24 > H18.

Stylistically, I'd recommend writing the child tax credit row as a function of K1 and K2 ages.  So something like =if(C2<17,3000,0)+if(C3<17,3000,0) in C34 and then similar formulas in D34 and to the right.

For FAFSA, I'd start looking at it around 2024 when your oldest is 15 - you might need a year or more to position yourself.  Read about simplified needs tests, auto zero SAI, and automatic max Pell Grants.  Also google GEN-99-10 if you're doing Roth conversions during those years.

[DaTrill]

Tax torpedo is headed your way.  I am in the same boat and wish I would have recognized this issue far sooner than I did (2017 tax act really made it obvious).  Figuring out how to tax efficiently reduce your regular IRA will be the main source of planning one would recommend at this point.  Look at contributing to a ROTH or even an "in-plan" conversion at work if available may mitigate this issue.  Once an RMD starts, or worse an inherited IRA falls into your lap, all flexibility is out the window.   

[turtlefire]

This is a perfect question for a tax advisor. As well, it's generally beneficial to "fill out" your tax bracket to around 32%, so if you're lower then doing a ROTH conversion makes sense. This is also true when you start withdrawing if you have a specific bracket/effective rate you want to stick to.

[2sk22]

Tax torpedo is headed your way.  I am in the same boat and wish I would have recognized this issue far sooner than I did (2017 tax act really made it obvious).  Figuring out how to tax efficiently reduce your regular IRA will be the main source of planning one would recommend at this point.  Look at contributing to a ROTH or even an "in-plan" conversion at work if available may mitigate this issue.  Once an RMD starts, or worse an inherited IRA falls into your lap, all flexibility is out the window.   

Hmm - they have almost 30 years to go until RMDs kick in so that may not be their most pressing issue. What's in the the 2017 tax act creates the "torpedo" ?

[DaTrill]

Tax torpedo is headed your way.  I am in the same boat and wish I would have recognized this issue far sooner than I did (2017 tax act really made it obvious).  Figuring out how to tax efficiently reduce your regular IRA will be the main source of planning one would recommend at this point.  Look at contributing to a ROTH or even an "in-plan" conversion at work if available may mitigate this issue.  Once an RMD starts, or worse an inherited IRA falls into your lap, all flexibility is out the window.   

Hmm - they have almost 30 years to go until RMDs kick in so that may not be their most pressing issue. What's in the the 2017 tax act creates the "torpedo" ?

No stretch IRA.  All inherited IRA balances must be cleared in 10 years.  Any rule regarding Traditional IRAs can change at any time.  There are several proposals to force distributions for all balances over $5 mil, next step will be $2 mil, then $1 mil, then RMDs at 60, 50, anytime income is below $50k or other.   

[secondcor521]

Tax torpedo is headed your way.  I am in the same boat and wish I would have recognized this issue far sooner than I did (2017 tax act really made it obvious).  Figuring out how to tax efficiently reduce your regular IRA will be the main source of planning one would recommend at this point.  Look at contributing to a ROTH or even an "in-plan" conversion at work if available may mitigate this issue.  Once an RMD starts, or worse an inherited IRA falls into your lap, all flexibility is out the window.   

Hmm - they have almost 30 years to go until RMDs kick in so that may not be their most pressing issue. What's in the the 2017 tax act creates the "torpedo" ?

No stretch IRA.  All inherited IRA balances must be cleared in 10 years.  Any rule regarding Traditional IRAs can change at any time.  There are several proposals to force distributions for all balances over $5 mil, next step will be $2 mil, then $1 mil, then RMDs at 60, 50, anytime income is below $50k or other.   

The nearly complete elimination of the stretch IRA was part of the SECURE Act and signed into law in late 2019.  It was not part of the TCJA of 2017, which is the law I think you were alluding to.

[lhamo]

I've got minimal vision at the moment after eye surgery so not really up to looking at your spreadsheet but you might find the bogleheads retirement planner a useful cross check as well -- it is quite complex and confusing but IMO worth the time to work through, especially for planning Roth conversions and charitable giving.

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model