Roth ladder post FIRE

[Gunny]

I'm 53 yo and currently in FIRE.  I'm receiving a Federal pension which covers all living expenses with a little wiggle room if I need to tighten the belt.  I have a substantial cash account which I pull from for travel and major home related expenses.  Additionally, my tax deferred stash is deposited between TSP (read 401 K) which is 75% of said stash and a Roth IRA, 25 %.  My pension is a little more than 40k, and with standard deductions I incur almost no state or federal taxes.  I would like to give myself a raise from my retirement stash to up the life style.  Question:  Is it advantageous for me to convert my TSP to an IRA then begin a Roth ladder?  My concern is that I will incur taxes which would off set the advantages of the conversion. If I incur taxes I may as well take SEPP from TSP, right?  I have ROTH money that's been deposited for more than five years which I could pull from tax free for a few years while I'm converting.  I guess I'm a little confused if a Roth ladder will work for me since I'm already retired and the best way to implement it as a retiree. 

[radram]

Not an accountant or financial planner.  Please correct if this is misguided information.

I think the answer to your question will be based on whether you need the money or want the money prior to the age of 70 1/2.  Your pension will keep you very near the upper end of the 15% marginal rate no matter what you do.

Proceed with caution regarding the SEPP (72T rule).  From what I know about it, once you start, there are very strict rules as to when you can stop and I do not believe it can be modified.

Roth conversion has some added benefits in that you can convert what you need (paying the tax), but you can adjust that amount annually as needed.  This allows you to maximize the amount you convert based on differing AGI limits through time. This will allow you to withdrawal more as years go on while not moving up to the next marginal rate.  You would also have the flexibility to make adjustments based on losses through stock sales and the like. The current 15% tax rate ends at $37,600 for single filers in 2016.  It was $34,000 in 2010.  That would be an extra $3,600 converted at the lower rate.  This assumes the rates increase with time.

There is an added benefit in that as your 401K decreases through conversion and your Roth increases, your required minimum distributions will be lower, since Roth Ira's do not have a RMD.

From a tax standpoint, you are probably best off doing the Roth conversion at least up to the 15% marginal limit.  If you need more money then that, it would then depend on the expected value of the 401k and therefore the amount of the RMD's that would give you your answer.  I know the later years of RMD's can be quite high with a large balance.

[boarder42]

you say you have a substantial cash account.  why not just use that and your Roth contributions to bridge you til normal withdrawal age.  if you stay in the 15% bracket all LTCG and QDs on gains in the taxable will be tax free.

[seattlecyclone]

Since you're 53, you really only have a two-year window where you would be able to make use of a Roth ladder. In five years when you can pull out this year's conversions penalty-free you'll be 58, and two years after that you'll be able to withdraw straight from the traditional account with no penalties. It sounds like you don't really need the money before age 60, so it's up to you whether you do these conversions.

You're right that you'll pay tax on any money you convert this year. Those taxes are inevitable. You can pay them this year or you can pay them when you're forced to take the money out with RMDs or if you pass away before you withdraw the money your heirs will pay the tax. The question is what rate of tax will you pay?

You have a pension so that sort of sets a floor on your income. Whatever bracket you're in now, it's reasonable to assume that you'll never go lower. Therefore you might consider converting enough each year to put yourself right at the top of that tax bracket; better to pay tax this year at the lower rate than have RMDs in the future that are large enough to push you into a higher bracket.

[Spork]

Another question/consideration:  Is your health insurance covered by your Federal pension?  What I mean is: when you increase your income (by doing tIRA->Roth conversions) will the addition to your AGI impact your ACA subsidies? 

[Gunny]

Great responses.  Thanks.  Health care is covered by federal pension.