Trad to Roth conversion - more or less

[Mr. Green]

Another interesting effect of the second model is that we end up with a much more even distribution of funds across taxable, tIRA, and Roth IRA buckets in the run-up to 60.

That does seem more robust. You can vary details as conditions become apparent. Maybe the best thing now is the action path that preserves the biggest variety of options.

Now that I've marinated on it a little bit, even more options are bubbling to the surface. I don't plan to borrow money on margin but if we had to for some reason, it's an option with a healthy taxable balance. Also, if we ever needed to do something with banking, we've already experienced how they poo-poo funds in retirement accounts with young people. Not that I'd expect 800k in taxable account to win the war alone there, but maybe as we get older there's some blend or whatever that might be the difference between being able to do something and not.

[boarder42]

It amazing how little time I have to spend on this now that I don't sit at a desk all day trying to fill the hours. I'll hopefully have time in a couple weeks to dig in here.

I like keeping a large taxable account for emergency margin and other reasons. But maybe I'll drain it.

[johnhenry]

I spent yesterday thinking about @ender's comment about Roth taxation changing, pondering how I might modify my FIRE spending strategy to mitigate that risk, or perhaps even just diversify a bit. In my model we spend down taxable accounts until they're exhausted while doing Roth conversions. Once that bucket is empty we transition to spending Roth IRA principal until age 60. After 60 we spend Roth principal and gains, with RMDs from our tIRAs at age 72 and beyond.

Mr. Green, thanks for the detailed commentary, it offered a helpful perspective on maintaining a "balanced" portfolio in terms of tax status and one that is both flexible and accessible.

We were not ultra high earners and therefore are fortunate to not be as lopsided at the onset of early retirement in terms of tIRA/taxable/Roth.  It's still in our plan to do as much Roth Converting as we can.

Our models are more rudimentary I'm sure, but my back of the napkin approach, along with an increasing willingness to sacrifice more than a sliver of efficiency for my desired flexibility, has led me to a similar conclusion about not letting taxable account balance fall to zero.

Our rough plan basically always calls for maintaining some minimum amount of "trigger money" in a taxable account.  Something that can be accessed at the drop of a hat if we get a wild hair (or get in a tight spot).  In the past it has funded buying new (to us) vehicles and buying an investment home for cash at auction.  We aren't in the market for a new home or a small recreational farm or investment property, but we regularly discuss what the max amount is that we would drop on something of that sort if the right deal came along.  We plan to try to keep at least 30% of that amount as a floor in our taxable account. 

What was the result of your encounter last spring when you thought you'd have to pay cash?  Did you wind up doing that? Or did the lender come thru?
 

[boarder42]

I think Max every year is what we'll do while we have kids on our aca plan. To me it leads to future flexibility. And we'll also just margin borrow the first 5 years vs selling taxable shares. We can always tap our Roth contributions if we get a margin call.

[Watchmaker]

I've been trying to work through our own Roth conversion strategy recently and I had settled on a plan that looked similar to Mr. Green's original proposal (spend from taxable while doing Roth conversions, then switch to spending seasoned Roth money after exhausting the taxable). But the points about flexibility and access in the last post make a lot of sense, so I'm now re-thinking the plan.

Mr. Green, could you share your updated spreadsheet if you're willing? 

[Mr. Green]

@Watchmaker give me a few days. We're camping out of the car in the mountains of Colorado right now. I can do this whenever we hit up a local library for wifi.

[Watchmaker]

@Watchmaker give me a few days. We're camping out of the car in the mountains of Colorado right now. I can do this whenever we hit up a local library for wifi.

No rush-- much appreciated!

[CoffeeR]

Fascinating discussion. It hits home how de-accumulation is harder then accumulation and how each person circumstances is different and unique. I am pondering the same questions. In my case, I'm nearly 56 and due to the rule-of-55 I have penalty free access to the bulk of my tIRA accounts (I can do partial distributions), but I do not need the money (yet). As with many here, the largest accounts are tIRA and I (think) I would like to increase the value Roth accounts. Also, in my case the ACA is irrelevant since I will be getting subsidized health-care through my former mega-org employer (same premium as employees). I also continue to work part time and make enough for all my spending needs so I do not need to access my funds. Question I have for myself:

• How aggressively do I roll tIRA funds into Roth while I have part-time income? If at all? Rolling over sufficient amounts to alleviate the RMD problems means I will have to pay marginal taxes @ 22% for roll-overs from tIRA to Roth. Yet, if I do not roll over, my tIRA will grow forcing quite large RMD when the time comes. So are roll-overs @ 22% marginal tax rates worth doing?
• How aggressively do I roll tIRA funds into Roth if I no longer have part time income? I could certainly roll-over and not having part-time income means I can take advantage of a marginal tax rate of 12% for the roll-over, but I also need to live either from 1) distributing tIRA funds or 2) brokerage account funds. If I do #1 I can roll-over less without hitting my higher marginal tax rates while #2 second means I deplete brokerage funds which reduces (in my mind) flexibility.

First world problems, still I do not (yet) see a clear path forward.

[secondcor521]

• How aggressively do I roll tIRA funds into Roth while I have part-time income? If at all? Rolling over sufficient amounts to alleviate the RMD problems means I will have to pay marginal taxes @ 22% for roll-overs from tIRA to Roth. Yet, if I do not roll over, my tIRA will grow forcing quite large RMD when the time comes. So are roll-overs @ 22% marginal tax rates worth doing?

If I were in your shoes, I'd figure out what my marginal bracket will be when I'm 72 or so and I have RMDs and SS.  If it's equal to or higher than 22%, most would say to convert.  You can rerun the analysis each year between now and then.

• How aggressively do I roll tIRA funds into Roth if I no longer have part time income? I could certainly roll-over and not-having part-time income means I can take advantage of a marginal tax rate of 12% for the roll-over, but I also need to live either from 1) distributing tIRA funds or 2) brokerage account funds. If I do #1 I can roll-over less without hitting my higher marginal tax rates while #2 second means I deplete brokerage funds which reduces (in my mind) flexibility.

First world problems, still I do not (yet) see a clear path forward.

You could Roth convert whatever makes sense tax-wise, spend brokerage until it is low or gone, then spend from Roth.  Spending from Roth in this case, if it's lower than your Roth conversion amounts, is essentially the same as distributing from the traditional IRA whatever you're spending, with the excess automatically being parked in the tax-free Roth until needed later.[/list]

[CoffeeR]

• How aggressively do I roll tIRA funds into Roth while I have part-time income? If at all? Rolling over sufficient amounts to alleviate the RMD problems means I will have to pay marginal taxes @ 22% for roll-overs from tIRA to Roth. Yet, if I do not roll over, my tIRA will grow forcing quite large RMD when the time comes. So are roll-overs @ 22% marginal tax rates worth doing?

If I were in your shoes, I'd figure out what my marginal bracket will be when I'm 72 or so and I have RMDs and SS.  If it's equal to or higher than 22%, most would say to convert.  You can rerun the analysis each year between now and then.

Well, back of the envelope calculations suggest converting at 22% might make sense for me which is the reason I am pondering the question in the first place. Still, a lot of assumptions about the future and projection into the future. I will have to a do a more rigorous analysis when the time comes.

• How aggressively do I roll tIRA funds into Roth if I no longer have part time income? I could certainly roll-over and not-having part-time income means I can take advantage of a marginal tax rate of 12% for the roll-over, but I also need to live either from 1) distributing tIRA funds or 2) brokerage account funds. If I do #1 I can roll-over less without hitting my higher marginal tax rates while #2 second means I deplete brokerage funds which reduces (in my mind) flexibility.

First world problems, still I do not (yet) see a clear path forward.

You could Roth convert whatever makes sense tax-wise, spend brokerage until it is low or gone, then spend from Roth.  Spending from Roth in this case, if it's lower than your Roth conversion amounts, is essentially the same as distributing from the traditional IRA whatever you're spending, with the excess automatically being parked in the tax-free Roth until needed later.[/list]

Yes, converting up to the max (whatever make sense tax-wise) and then living on brokerage and/or Roth distribution as need be will probably be what I do.

It is somewhat crazy that not having part-time income would in some ways help me. What a tangled web our politicians weave.

[Mr. Green]

@Watchmaker here's the updated model.

Changes from the previous version (which I'll remove upthread because it's inferior in every way):

• Eliminated the column for traveling abroad. The original purpose was to max Roth conversions in a year when there'd be no ACA insurance. This was no longer valuable as Roth conversions are manually entered at larger amounts.
• Added a column to dictate what bucket each year's expenses should be pulled from (tIRA, Roth, Taxable). Allows for finer control.
• Added columns to identify exact capital gain percentages of the Taxable account with growth so that this figure is always accurate, rather than an estimate based on averages.
• Added a column to harvest capital gains.
• Updated RMDs to the new 2021 values.

The model is still a bit crude in some ways. It will not do capital gain harvesting and spending taxable money in the same year since I have no plans to do that.  I am 97% sure the model handles all the buckets of money (tIRA, Roth, Taxable) correctly depending on what type of withdrawal is done each year. However, I cannot be sure that it will handle edge cases someone else might introduce through their own personal financial situation.

And of course, the carryover caveats:

• State tax and ACA premium values are based on North Carolina, the county of my residence, and the expected family size for my personal situation. The ACA spreadsheets I made are very easily updated to your local insurance premiums though.
• The ACA premium reflected in the model can be updated fairly easily. Just needs to point to different cells in the ACA silver/bronze plan spreadsheets.
• I have notes in place to help delineate where formulas may change with age, like when Social Security, Medicare, and RMDs start, in case someone would want to modify those (i.e. taking social security at a different age than I have specified).

That's all I can think of at the moment. I'll edit the post if I've forgotten something.

[Watchmaker]

@Watchmaker here's the updated model.

Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on how much I should spend from Taxable vs Roth.

[Mr. Green]

@Watchmaker here's the updated model.

Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on home much I should spend from Taxable vs Roth.

That ended up being the case for our circumstances as well. If we keep our income low enough to receive considerable ACA subsidies it leads to an obscene portfolio value later in life at the expense of reduced access to our money while young. We don't think we'll need more access while young but the future is unknown and if the default option leads to obscene balances we'll never dream of spending, why not pay a little more tax to increase access in case something unforeseen would require additional funds earlier in life. That's my current thought process anyway.

[boarder42]

@Watchmaker here's the updated model.

Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on home much I should spend from Taxable vs Roth.

That ended up being the case for our circumstances as well. If we keep our income low enough to receive considerable ACA subsidies it leads to an obscene portfolio value later in life at the expense of reduced access to our money while young. We don't think we'll need more access while young but the future is unknown and if the default option leads to obscene balances we'll never dream of spending, why not pay a little more tax to increase access in case something unforeseen would require additional funds earlier in life. That's my current thought process anyway.

I'm glad I started this thread and that we're all coming to the same conclusions. Thank you guys for all the mental gymnastics and banter. I'm sure this may all change again in 3 months when we know more about whatever the Dems pass with respect to making ACA changes permanent.

[Mr. Green]

@Watchmaker here's the updated model.

Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on home much I should spend from Taxable vs Roth.

That ended up being the case for our circumstances as well. If we keep our income low enough to receive considerable ACA subsidies it leads to an obscene portfolio value later in life at the expense of reduced access to our money while young. We don't think we'll need more access while young but the future is unknown and if the default option leads to obscene balances we'll never dream of spending, why not pay a little more tax to increase access in case something unforeseen would require additional funds earlier in life. That's my current thought process anyway.

I'm glad I started this thread and that we're all coming to the same conclusions. Thank you guys for all the mental gymnastics and banter. I'm sure this may all change again in 3 months when we know more about whatever the Dems pass with respect to making ACA changes permanent.

If anything, making the ACA changes permanent supports the ability to declare higher incomes because the subsidy cliff stays gone.

[boarder42]

@Watchmaker here's the updated model.

Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on home much I should spend from Taxable vs Roth.

That ended up being the case for our circumstances as well. If we keep our income low enough to receive considerable ACA subsidies it leads to an obscene portfolio value later in life at the expense of reduced access to our money while young. We don't think we'll need more access while young but the future is unknown and if the default option leads to obscene balances we'll never dream of spending, why not pay a little more tax to increase access in case something unforeseen would require additional funds earlier in life. That's my current thought process anyway.

I'm glad I started this thread and that we're all coming to the same conclusions. Thank you guys for all the mental gymnastics and banter. I'm sure this may all change again in 3 months when we know more about whatever the Dems pass with respect to making ACA changes permanent.

If anything, making the ACA changes permanent supports the ability to declare higher incomes because the subsidy cliff stays gone.

Correct. That's all we really need then you really just worry about your tax bracket and add your ACA cost on as a percent tax.

[zolotiyeruki]

I've nothing to add, except for a big THANK YOU to all the participants in this thread--I'm wrestling with many of the same questions, and you all have brought up a lot of good things to bear in mind as I plan.

[oneday]

I've nothing to add, except for a big THANK YOU to all the participants in this thread--I'm wrestling with many of the same questions, and you all have brought up a lot of good things to bear in mind as I plan.

+1

I *hope* I'm close to that time when I need to think about a Roth conversion pipeline (or not), so...thanks for the resources!

[Morning Glory]

Following so that I can dig into some of the more detailed posts later.

[OzzieandHarriet]

We are trying to figure this out now. Ages 63 and 62, no kids, living off of retirement accounts (tIRA) no need to take ACA into consideration. So do we pull out way more than we need and put the extra into our Roths? Should we even worry whether about our marginal tax rate is 12% or 22%?

[Mr. Green]

We are trying to figure this out now. Ages 63 and 62, no kids, living off of retirement accounts (tIRA) no need to take ACA into consideration. So do we pull out way more than we need and put the extra into our Roths? Should we even worry whether about our marginal tax rate is 12% or 22%?

Depends on a lot of things. How much of your stash are you spending each year? Will you get Social Security in a few years? Would you prefer to see your extra money used later in life, even if it's gifting/charitable donations or do you want It dispersed after death?

If I could afford everything I planned to do and still had extra, but had no intention of gifting money while alive, I'd just pay as little tax as possible so the pile is as large as possible upon my death. If I only had just enough, I also might be fairly choosy about paying any more tax than I had to. However, if I had extra and wanted access to it while alive, whether it was to spend more or gift it, I would probably elect to pay more tax to get at that money. Likewise, I would also elect to pay more tax now if my tIRAs were so large, that come RMDs my tax rate would jump into a higher bracket, causing me to pay a much larger amount of taxes in old age.

[OzzieandHarriet]

We are spending about 3%, and that is while being frugal but not skimping on anything. But it would be good to have access to more  in case we want or need to spend on something big.

I get the general principle but not sure how to work out the details of the various moving parts.

[boarder42]

We are spending about 3%, and that is while being frugal but not skimping on anything. But it would be good to have access to more  in case we want or need to spend on something big.

I get the general principle but not sure how to work out the details of the various moving parts.

If you're only spending 3% you're likely leaving a lot of money to heirs. Which means you really need to learn understand and optimize your money for future generations. Unless you're giving it all away.

It's all just a function of future tax implications your spending rate doesn't really matter in the trad to roth conversation it's more about account balances and marginal tax rates now vs when rmds hit. Also expected growth of traditional accounts as well

[OzzieandHarriet]

We don’t have any heirs that we’re hell-bent on leaving money to. So it’s spend it over the next 20-30 years and/or charity.

[OzzieandHarriet]

I guess my question is how to compare the costs of leaving the money in the tIRAs and possibly taking out lump sums occasionally vs. siphoning a chunk of it every year into the Roths. Whenever I run one of those Roth conversion calculators they say it's a wash, but I may not be entering the right numbers.

[Mr. Green]

I guess my question is how to compare the costs of leaving the money in the tIRAs and possibly taking out lump sums occasionally vs. siphoning a chunk of it every year into the Roths. Whenever I run one of those Roth conversion calculators they say it's a wash, but I may not be entering the right numbers.

For this specific question I would be looking at my tax rates. What tax bracket will you be in with all sources of money except Roth conversions? Then look at RMDs and you can project out some gains to your tIRA until 72 but it won't be perfect. This would still give you an idea of what your income will be once you hit RMDs. (There is some proposed legislation for raising the minimum age to 75. No idea if that will happen though.)

If your income now and over the years leading up to RMDs is significantly different than once you start drawing RMDs then you are quite possible being tax inefficient and it would behoove you to withdraw some of that tIRA money consistently leading up to RMDs. Do you use Excel at all? You could probably whip up a fairly simple illustration with some basic Excel skills.

[Roothy]

I used i-orp.com which seems to be a super powerful modeler of optimal withdrawal strategies.  An interesting finding is that for a "typical" retired couple, Roth conversions make virtually no difference in the end.  But for me, it showed that if I'm super aggressive with conversions early, like to the top of the 24% tax bracket even though my retirement marginal rate would otherwise be probably 12%, then my yearly disposible income can go up by well over 10% per year in perpetuity.  What makes me different than the typical situation?  I have a TON of money in my tIRA, a lot in my brokerage, and almost nothing right now in my Roth, for similar reasons as Mr. Greene.

But even with this prediction, I think i-orp understates the advantages of very aggressive Roth conversions early in (early) retirement:

1. State tax arbitrage.  You can move to a state with no state income tax and do all your conversions.  Then you are free to move wherever you like and not have to worry about state income tax on your tIRA (and similar) distributions, because now most of your withdrawals will be from Roths.

2.  If you are married, one of you is going to die before the other--possibly many years before.  And suddenly, the surviving spouse will be paying at the much higher single tax payer rate.  But if you've crammed as much of your tIRA as possible into your Roth (and probably shrunk your brokerage account down while doing it), then you don't have to worry about that tax bomb.

Anyway, I had considered only doing Roth conversions in a way that would not trigger capital gains taxes, nor a higher income tax bracket.  But after plugging numbers into i-orp, I'm convinced I should do very aggressive early conversions, even to the tune of tens of thousands of dollars "extra" in taxes paid right away. 

I'm still playing with i-orp, but it, and this thread which caused me to plug my info into it, has been *incredibly* eye opening.

[Mr. Green]

I used i-orp.com which seems to be a super powerful modeler of optimal withdrawal strategies.  An interesting finding is that for a "typical" retired couple, Roth conversions make virtually no difference in the end.  But for me, it showed that if I'm super aggressive with conversions early, like to the top of the 24% tax bracket even though my retirement marginal rate would otherwise be probably 12%, then my yearly disposible income can go up by well over 10% per year in perpetuity.  What makes me different than the typical situation?  I have a TON of money in my tIRA, a lot in my brokerage, and almost nothing right now in my Roth, for similar reasons as Mr. Greene.

But even with this prediction, I think i-orp understates the advantages of very aggressive Roth conversions early in (early) retirement:

1. State tax arbitrage.  You can move to a state with no state income tax and do all your conversions.  Then you are free to move wherever you like and not have to worry about state income tax on your tIRA (and similar) distributions, because now most of your withdrawals will be from Roths.

2.  If you are married, one of you is going to die before the other--possibly many years before.  And suddenly, the surviving spouse will be paying at the much higher single tax payer rate.  But if you've crammed as much of your tIRA as possible into your Roth (and probably shrunk your brokerage account down while doing it), then you don't have to worry about that tax bomb.

Anyway, I had considered only doing Roth conversions in a way that would not trigger capital gains taxes, nor a higher income tax bracket.  But after plugging numbers into i-orp, I'm convinced I should do very aggressive early conversions, even to the tune of tens of thousands of dollars "extra" in taxes paid right away. 

I'm still playing with i-orp, but it, and this thread which caused me to plug my info into it, has been *incredibly* eye opening.

It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.

[Roothy]

It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.

So.... I agree it's unorthodox.  Do you think it's wrong?  By calling it a "game" it makes me think you think this is risky. 

[boarder42]

It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.

So.... I agree it's unorthodox.  Do you think it's wrong?  By calling it a "game" it makes me think you think this is risky.

No he's saying it's almost impossible to find real data and past experiences with what we're all trying to do here. Honestly this is the largest reason I came back to the forums was the mental gymnastics around all of this.

My current plan is to leverage low cost margin available today while converting to the top of the 12% tax bracket. Currently I live in a 6% income tax state. But even converting that much money I likely will have the traditional funds I have maintain or grow. But since I'm leveraging margin I want to have a large slush fund of tapable Roth conversions at my disposal in the even of a margin call. This allows a few things for me.

1. My money stays invested longer both the Roth contributions and my taxable funds.

2. It allows me the flexibility in the event of a margin call to pay it off   .  Or if the rates become incredibly unattractive on the margin. 

I'd say this falls into a mildly riskier strategy bc it may magnify an early downturn in RE. But at the end of the day it's likely extremely better long term. At current account balances I have over 2 years of spending available on margin and I have Roth contributions to back it all up til the 5 year bridge kicks in the really slushy funds

[Mr. Green]

It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.

So.... I agree it's unorthodox.  Do you think it's wrong?  By calling it a "game" it makes me think you think this is risky.

Sorry if that was misleading. I consider whole whole financial system a game. Everyone is trying to pay as little tax as possible, or work as little as possible, or something else that is game-y. By unorthodox, I meant who else out there has saved up seven figures by their 30s, stopped working, expects to live off of an income source that most only start thinking about in their 50s, while trying to optimize income and taxes over the remaining 40-60 years of one's life? Pretty much no one. So when you think you have something figured out or are questioning a strategy, there are very few people to use as a sounding board. I think the exercise is a lot of fun but when only a handful of people are doing it, the "validation of seeing others do it too" is harder to come by. As a novice, that's one of the most common ways that we learn so it's uncomfortable to find yourself in a bit of a vacuum. It is for me, anyway. I'm glad there are smarter people on here than me!

[Roothy]

Mr. Green, now that I'm digging in to this, I feel like there are more people doing this than you'd think.  And I'm now contemplating doing a big (like $100K) Roth conversion this year, while I'm still working.  Have you spent much time with i-orp?  I know your situtation is different because you have real estate, but I think it might be powerful enough to handle it.  And there are paid options, too, though consensus seems to be they aren't really better, and in some cases are worse, than i-orp.  The main problem with i-orp is that the brilliant, kind soul who runs it is in his/her 80s, and unless someone steps up with a succession plan and agrees to take it over, well...

I found several interesting threads by searching for "i-orp" in bogleneads.  A real rabbit hole!


ETA: the Bogleheads have already helped me a LOT.  One reason i-orp is so aggressive with conversions is because you tell it what your current asset allocation is in each account--and if you are already doing the tax efficient thing, your Roths have all equities and all your bonds are in your tax deferreds.  So to optimize, the program wants to get you out of the lower performing account (the tax deferred) and into the high growth one (Roth).  But that, obviously, completely screws up your asset allocation (unless you are 100% stocks or 100% bonds, but most of us aren't).  To "fix" the problem, you lie to i-orp and tell it that every account (Roth, tax deferred, and after tax) all have the same asset allocation.  Once I did that, it no longer recommended I do conversions up to the 24% bracket and do them fast, but just recommended up to the 12% and do them slow. 

So this "solution" isn't perfect--your Roths *should* be more aggressive, and will continue to be your whole life.  So i-orp's output will assume a (slightly?) worse outcome for you than you'd actually experience, following its advice.  But anyway, it's still an incredibly powerful tool.

Note, too, that the wisdom of aggressive conversions is a function of predicted returns of both equities and bonds.  It's *really* sensitive to even a percentage difference in prediction.  So I don't know what to make of this.  Possibly that I should just go somewhere between "super aggressive conversions" and "no conversions."  But man, this stuff is hard.

[Mr. Green]

Mr. Green, now that I'm digging in to this, I feel like there are more people doing this than you'd think.  And I'm now contemplating doing a big (like $100K) Roth conversion this year, while I'm still working.  Have you spent much time with i-orp?  I know your situtation is different because you have real estate, but I think it might be powerful enough to handle it.  And there are paid options, too, though consensus seems to be they aren't really better, and in some cases are worse, than i-orp.  The main problem with i-orp is that the brilliant, kind soul who runs it is in his/her 80s, and unless someone steps up with a succession plan and agrees to take it over, well...

I found several interesting threads by searching for "i-orp" in bogleneads.  A real rabbit hole!

Maybe there are more than I realize. That would be great!

I've been messing around with i-orp for about 10 minutes now and interestingly, it will not allow for a retirement age under 39. That's a challenge for us since we're already retired but I'm playing with it anyway.

It's nice to see i-orp essentially reaching a similar conclusion as I have, which is that aggressive Roth conversion and transitioning to spending Roth funds as quickly as possible is the best way to go, though there are some differences. Though I'm struggling to understand some of the specific calculations it is reaching. It does not appear to be calculating taxable gains correctly, even though I've input our cost basis. Trying to figure out why that is.

This is a great generic calculator, though I like the idea of my expanded model a little better because I can fine-tune for ACA inputs (choosing a bronze plan vs. silver plan) and I can fine-tune the income a little bit better. One thing that's nice about building your own model, even if it's just a recreation of something like i-orp, is that it gives you a much better understanding of the underlying data and why the numbers are what they are.

[boarder42]

Mr. Green, now that I'm digging in to this, I feel like there are more people doing this than you'd think.  And I'm now contemplating doing a big (like $100K) Roth conversion this year, while I'm still working.  Have you spent much time with i-orp?  I know your situtation is different because you have real estate, but I think it might be powerful enough to handle it.  And there are paid options, too, though consensus seems to be they aren't really better, and in some cases are worse, than i-orp.  The main problem with i-orp is that the brilliant, kind soul who runs it is in his/her 80s, and unless someone steps up with a succession plan and agrees to take it over, well...

I found several interesting threads by searching for "i-orp" in bogleneads.  A real rabbit hole!

Maybe there are more than I realize. That would be great!

I've been messing around with i-orp for about 10 minutes now and interestingly, it will not allow for a retirement age under 39. That's a challenge for us since we're already retired but I'm playing with it anyway.

It's nice to see i-orp essentially reaching a similar conclusion as I have, which is that aggressive Roth conversion and transitioning to spending Roth funds as quickly as possible is the best way to go, though there are some differences. Though I'm struggling to understand some of the specific calculations it is reaching. It does not appear to be calculating taxable gains correctly, even though I've input our cost basis. Trying to figure out why that is.

This is a great generic calculator, though I like the idea of my expanded model a little better because I can fine-tune for ACA inputs (choosing a bronze plan vs. silver plan) and I can fine-tune the income a little bit better. One thing that's nice about building your own model, even if it's just a recreation of something like i-orp, is that it gives you a much better understanding of the underlying data and why the numbers are what they are.

Yep it's fun but slightly limited.

I still can't understand why someone would choose a silver plan over a bronze plan.

[AccidentalMiser]

Excellent discussion.  I've been spreadsheeting this stuff myself lately.  I'll have to read through all of this thread and make adjustments.  Thanks so much for the input and insights!

[seattlecyclone]

I still can't understand why someone would choose a silver plan over a bronze plan.

If your income is over 200% of the poverty level, you'll probably find silver to be a worse deal than bronze or gold. This is due to the practice of "silver loading," where the cost of providing cost-sharing subsidies for low-income silver plan subscribers has been baked into the premium for silver plans ever since Republicans in Congress decided they didn't want to reimburse insurance companies for these subsidies anymore. If you're under 200% of the poverty level, silver is probably the way to go.

[boarder42]

I still can't understand why someone would choose a silver plan over a bronze plan.

If your income is over 200% of the poverty level, you'll probably find silver to be a worse deal than bronze or gold. This is due to the practice of "silver loading," where the cost of providing cost-sharing subsidies for low-income silver plan subscribers has been baked into the premium for silver plans ever since Republicans in Congress decided they didn't want to reimburse insurance companies for these subsidies anymore. If you're under 200% of the poverty level, silver is probably the way to go.

Gotcha. I think this was in bidens agenda to fix but as long as they keep the current plans moving as they are today per the last stimulus I'll be happy. I think he wanted to move that up to the gold level plans and base subsidies on them

[Mr. Green]

There was a little discussion in 2birds1stone's journal about the book "Die With Zero." I've been thinking about that a little bit and after playing around with i-orp, which also exhausts your funds by default, I wanted to make my model do the same. I was just curious to see what it would say. Well, that basically turned into a major modification project that took most of today. My last version allowed me to change each year's income source (after-tax, tIRA, Roth) but I couldn't combine multiple sources in the same year. So rather than use flags, I updated the model to allow for amounts from each bucket. There's a little bit more manual entry, but it also makes the formulas easier because there aren't all these if statements in the cells. While I was at it I added conditional formatting to some of the manual entry columns so it "alerts" if one of my values is a problem.

I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.

The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.

It took a lot of massaging to get our accounts under $1 million by 80+ years of age because of all the different failures involved. Exhausting Roth principal before 60 is a failure. Leaving too much in tIRAs where the RMDs run away in old age is a failure. Having choppy tax rates from one period to the next is a failure. And so on and so forth.

From a starting point of $1.75 million, spending after taxes and healthcare premiums looks like this:
Now through age 44: 80k
45-49: 100k
50-65: 120k
66-70: 100k
71-75: 80k
76+: 60k

I've really been digging the idea of that kind of spending arc through life because I think it more accurately reflects how people really spend money. A traditional 4% SWR on $1.75 million would be 70k across the board but that's just not going to happen once travel is curtailed.

The hilarious thing is this is already low, assuming the market doesn't crash before the end of the year because we're way beyond a 5% gain this year. So I guess we'll be donating a lot of money as we get older!

My numbers are in line with what i-orp tells me so that helps me feel good that I don't have any glaring problems with my model. I may try to sanitize this newest version and toss it up here. I think I cut out almost as many columns as I added so it's not really any more complex. It just allows the data to be controlled a bit differently.

[boarder42]

There was a little discussion in 2birds1stone's journal about the book "Die With Zero." I've been thinking about that a little bit and after playing around with i-orp, which also exhausts your funds by default, I wanted to make my model do the same. I was just curious to see what it would say. Well, that basically turned into a major modification project that took most of today. My last version allowed me to change each year's income source (after-tax, tIRA, Roth) but I couldn't combine multiple sources in the same year. So rather than use flags, I updated the model to allow for amounts from each bucket. There's a little bit more manual entry, but it also makes the formulas easier because there aren't all these if statements in the cells. While I was at it I added conditional formatting to some of the manual entry columns so it "alerts" if one of my values is a problem.

I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.

The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.

It took a lot of massaging to get our accounts under $1 million by 80+ years of age because of all the different failures involved. Exhausting Roth principal before 60 is a failure. Leaving too much in tIRAs where the RMDs run away in old age is a failure. Having choppy tax rates from one period to the next is a failure. And so on and so forth.

From a starting point of $1.75 million, spending after taxes and healthcare premiums looks like this:
Now through age 44: 80k
45-49: 100k
50-65: 120k
66-70: 100k
71-75: 80k
76+: 60k

I've really been digging the idea of that kind of spending arc through life because I think it more accurately reflects how people really spend money. A traditional 4% SWR on $1.75 million would be 70k across the board but that's just not going to happen once travel is curtailed.

The hilarious thing is this is already low, assuming the market doesn't crash before the end of the year because we're way beyond a 5% gain this year. So I guess we'll be donating a lot of money as we get older!

My numbers are in line with what i-orp tells me so that helps me feel good that I don't have any glaring problems with my model. I may try to sanitize this newest version and toss it up here. I think I cut out almost as many columns as I added so it's not really any more complex. It just allows the data to be controlled a bit differently.

I mean that's the most likely thing 4% is worst case. We likely all die with lots of money. Like there is a 50% chance my wife and I die billionaires. Can't wait

[ender]

It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.

So.... I agree it's unorthodox.  Do you think it's wrong?  By calling it a "game" it makes me think you think this is risky.

No he's saying it's almost impossible to find real data and past experiences with what we're all trying to do here. Honestly this is the largest reason I came back to the forums was the mental gymnastics around all of this.

My current plan is to leverage low cost margin available today while converting to the top of the 12% tax bracket. Currently I live in a 6% income tax state. But even converting that much money I likely will have the traditional funds I have maintain or grow. But since I'm leveraging margin I want to have a large slush fund of tapable Roth conversions at my disposal in the even of a margin call. This allows a few things for me.

1. My money stays invested longer both the Roth contributions and my taxable funds.

2. It allows me the flexibility in the event of a margin call to pay it off   .  Or if the rates become incredibly unattractive on the margin. 

I'd say this falls into a mildly riskier strategy bc it may magnify an early downturn in RE. But at the end of the day it's likely extremely better long term. At current account balances I have over 2 years of spending available on margin and I have Roth contributions to back it all up til the 5 year bridge kicks in the really slushy funds

Something else I've thought about is whether or not it makes sense to convert more in Roth conversions so you can end up with more taxable, letting you do more loans against your investments, similar to what you are saying.

The more Roth principal you have as a result of conversions means you have a ton more flexibility for these types of things because you can at any time after the 5 year holding period convert those to taxable and thus have more options for these pretty quickly.

[woody51285]

This is a complicated problem. I have spent lots of energy considering it and what could be the best path forward, as we are now in the beginning stages of this process.

If you are simply looking to pay as little tax as possible now, a blend of income from taxable accounts (long-term capital gains) and Roth IRA conversions is best. In 2021, married folks can convert $25,100 from tIRA to Roth tax-free. If you have children, that really juices the amount you can convert by allowing you to offset your federal taxes with the child tax credit. If planned for correctly, in 2021 a married couple could have an income of $106,150 consisting solely of Roth conversions and long-term capital gains and pay zero federal tax. If you have enough kids I suppose it could be even more, especially with the newly expanded child tax credit.

However, there's a long-term angle to consider as well. If your tIRA balances are high enough (ours are), solely focusing on minimizing tax burden now may lead to tIRA balances that are so large by the time you hit Required Minimum Distributions that you're paying significantly higher taxes on an income in old age that is so large you likely can't spend it all because your mobility and health are declining. This aspect is especially worth considering if you knew balancing current and future taxes would result in a larger income now that you could enjoy while younger and healthier. The obvious caveat here is that we don't know exactly what future taxes will be so this optimization won't be perfect.

The ACA "tax" will happen no matter what. The only way you can limit that is by either choosing a cheaper bronze plan so that the loss of premium tax credits is less or relocating to another place where health insurance premiums are lower overall. There are potential drawbacks to both of these though. You may not want to move, or someone in your family may have health problems that make a bronze plan more expensive than a silver plan after considering the cost of care in addition to insurance premiums.

As to @boarder42's comment about leaving money untaxed to lessen the impact of SORR, this really depends on whether you need all those dollars, which is what @seattlecyclone was getting at. If you need to spend 80k per year it doesn't matter whether your portfolio is 1 million or 500k. However, if you can spend less than 80k (belt-tightening), or if you were simply creating an 80k income in the name of tax efficiency and aren't actually spending all that money each year, then having a larger portfolio balance is going to be better for SORR.

However, if your portfolio balance is high enough that you're not concerned about running out of money, and your long-term plan is to create a certain level of income yearly no matter what because that brings down your tIRA balance over time to make RMDs more equitable to current taxation, then performing a Roth conversion in the midst of a crash is a nice little bonus since you get to convert more shares for the same dollar amount.

Even after FIRE, I propose that someone with a huge tIRA balance should consider being more aggressive with Roth conversions, rather than conservative. Over time your portfolio will grow faster than the income tax bracket thresholds are increased. That means the current tax year allows you to convert the largest percentage of your portfolio for the same tax cost. There are caveats with this as well since tax rates can change and markets can crash, but considering the overall long-term trend of markets going up, delaying will only lead to converting smaller and smaller percentages of your portfolio if your intention is to convert up to a certain tax bracket threshold for tax efficiency.

I have gone so far as to create an Excel spreadsheet that calculates our overall tax rate (federal + state + ACA premiums) each year so that I can model tax efficiency over our lifetimes. At a 40-45k annual spend, being the most tax-efficient now (paying $0 federal tax) leads to ridiculous RMDs later in life, assuming average historical returns continue into the future. Like 200k in RMDs ridiculous (in today's dollars). So it would actually behoove us to perform larger Roth conversions now to make that tax rate more even across our lifetimes.

Hi Mr. Green- Just a quick question as I am not as up to speed as most people on here but trying to educate myself.
In your post  it is stated that In 2021, married folks can convert $25,100 from tIRA to Roth tax-free
I tried to google this but could not find any info on this. Is there somewhere I could get more info on this as it would be perfect in my situation.
Thank you all very much for such great discussions- much appreciated for someone just learning!

[boarder42]

https://arstechnica.com/cars/2021/08/senate-votes-to-restrict-ev-tax-credits-despite-climate-crisis/?amp=1

Well this could dictate some choices in a given year. If the 100k cap stays in place and you buy a new ev. So many variables at play in this game. Really wish they'd simplify the tax code. Info find the game fun but the avg person has no chance understanding all this

[boarder42]

@woody51285  that's the non itemized standard deduction level 25100 the first 25100 any couple earns isn't taxed federally and increases annually.

[woody51285]

Ah- OK. Now i get it. Thanks for helping out someone just learning!
I appreciate it!

[boarder42]

Ah- OK. Now i get it. Thanks for helping out someone just learning!
I appreciate it!

That's why we're all here.

[ender]

https://arstechnica.com/cars/2021/08/senate-votes-to-restrict-ev-tax-credits-despite-climate-crisis/?amp=1

Well this could dictate some choices in a given year. If the 100k cap stays in place and you buy a new ev. So many variables at play in this game. Really wish they'd simplify the tax code. Info find the game fun but the avg person has no chance understanding all this

Wow, this seems super stupid.

I wonder what percentage of electric vehicle purchases are going to qualify. Hopefully it's $100k single/$200k household at least.

[secondcor521]

@woody51285  that's the non itemized standard deduction level 25100 the first 25100 any couple earns isn't taxed federally and increases annually.

Of course you still may owe state or local income taxes.  And there are other impacts as well - reduced ACA subsidies and potentially effects on financial aid (FAFSA or CSS profile).

[Mr. Green]

@woody51285  that's the non itemized standard deduction level 25100 the first 25100 any couple earns isn't taxed federally and increases annually.

Of course you still may owe state or local income taxes.  And there are other impacts as well - reduced ACA subsidies and potentially effects on financial aid (FAFSA or CSS profile).

+1. Sometimes when we get to talking about taxes we tend to ignore state level taxes because it's different for everyone. I think there's an implied "plus whatever your state will hit you with."

[bacchi]

So I made a second model that uses taxable funds only until our Roth principal is large enough to cover spending and then we convert to Roth funds until age 60. However, we stop conversions at age 55 and the 5-year rule carries us those last 5 years. During those 5 years, we generate our income from long-term capital gains since our taxable accounts are highly appreciated now that we haven't used those funds in almost 20 years.

Please explain the implementation of this. I'm getting confused about the wording.

Years 1-5: Spend from taxable and do Roth conversions large enough to cover future spending.
Year 6-age 55: Spend from the conversions as they mature; continue converting. Taxable continues growth and tax-advantaged accounts decrease.
55-59.5: Use the last of the Roth conversions. Or use taxable?
59.5+: Spend from tax-advantaged.

[boarder42]

Wait you can use the 5 year rule even if you don't retire at 55?  I thought you had to end your employment associated with a 401k to start tapping it at 55