Author Topic: Question on the Roth conversion ladder - when is this advisable?  (Read 963 times)

mistymoney

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Question on the Roth conversion ladder - when is this advisable?
« on: November 04, 2020, 09:24:36 AM »
Hi All,

I'm unsure if I should be considering/investigating this or not.

I'm 54, and not yet retired. So by 5 years forward, I would be 59, and likely at the magic 59.5 as I likely won't retire this year, and then I can withdraw from my 401k rollovers without penalty.

My current Roth accounts are about 10% of my stache. So lets say I retire in 2 years with 100k Roth and 900k IRA rollover/401k.

I draw exclusively from the current company 401k as I am over 55 and can access without penalty, and then the rollover for needed funds once at 59.5, and leave the Roth to grow.

I'm thinking that this obviates any need to Roth conversion ladder.

Am I missing something? Should I reconsider?

And any comments on the general overall strategy are appreciated!
« Last Edit: November 04, 2020, 01:31:35 PM by mistymoney »

EvenSteven

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Re: Question on the back door Roth - when is this advisable?
« Reply #1 on: November 04, 2020, 11:12:46 AM »
I would default to the investment order; I would rather have investments in a Roth account than taxable.

In your situation, do you see a benefit to having funds in taxable rather than Roth?

You mention having 401K rollovers, so if those are in traditional IRAs, and you don't have a 401k to roll them back into, then it is moot and you shouldn't be doing a back door Roth.

mistymoney

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Re: Question on the back door Roth - when is this advisable?
« Reply #2 on: November 04, 2020, 11:35:38 AM »
I would default to the investment order; I would rather have investments in a Roth account than taxable.

In your situation, do you see a benefit to having funds in taxable rather than Roth?

You mention having 401K rollovers, so if those are in traditional IRAs, and you don't have a 401k to roll them back into, then it is moot and you shouldn't be doing a back door Roth.

I am trying to do a taxable account. So far just 10k as EF. When I get to 20k, will put 10 into market. Maybe 50/50 stocks bonds?

I do want to increase the money in Roths, which is why I figured that leaving those alone and accessing the other accounts would do that over time.

What I read about back door - is you use taxable or seasoned roth money this year, and move money out of 401k, pay taxes, and put into roth for year six. But as long as I have no penalties or barriers to access the 401k money, I think this accomplishes the same thing? Eventually.

Since I am older.

EvenSteven

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Re: Question on the back door Roth - when is this advisable?
« Reply #3 on: November 04, 2020, 12:41:52 PM »
I would default to the investment order; I would rather have investments in a Roth account than taxable.

In your situation, do you see a benefit to having funds in taxable rather than Roth?

You mention having 401K rollovers, so if those are in traditional IRAs, and you don't have a 401k to roll them back into, then it is moot and you shouldn't be doing a back door Roth.

I am trying to do a taxable account. So far just 10k as EF. When I get to 20k, will put 10 into market. Maybe 50/50 stocks bonds?

I do want to increase the money in Roths, which is why I figured that leaving those alone and accessing the other accounts would do that over time.

What I read about back door - is you use taxable or seasoned roth money this year, and move money out of 401k, pay taxes, and put into roth for year six. But as long as I have no penalties or barriers to access the 401k money, I think this accomplishes the same thing? Eventually.

Since I am older.

Are you maybe thinking of a Roth conversion ladder?

A back door Roth is when you make too much money to contribute directly to a Roth so you make a non-deductible traditional IRA contribution, then convert it to a Roth. The purpose of this is to avoid the income limits on being eligible to contribute to a Roth IRA.

mistymoney

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Re: Question on the back door Roth - when is this advisable?
« Reply #4 on: November 04, 2020, 01:30:38 PM »
oh - yeah - I think that is what I meant!

EvenSteven

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Re: Question on the Roth conversion ladder - when is this advisable?
« Reply #5 on: November 04, 2020, 06:00:22 PM »
Then in your case, I donít think youíll need to do a Roth conversion ladder in order to access you tax deferred monies early.

secondcor521

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Re: Question on the Roth conversion ladder - when is this advisable?
« Reply #6 on: November 04, 2020, 06:13:36 PM »
Access is one thing.  Tax optimization is another.  You may not want or need to do a Roth conversion ladder for access, but you may want to for tax optimization.

What bracket does your SS + tIRA RMD minus your standard deduction put you into at age 72?  If it's (a lot) higher, then you may want to consider withdrawing from your tIRA earlier in order to even things out and pay less in taxes overall.

Since access wouldn't really be much of an issue, this could be accomplished either through a Roth conversion ladder or an SEPP.  Note that an SEPP must be done until both 5 years have passed and age 59.5 has been attained.  Through appropriate partitioning of your tIRA and the interest rate chosen you could probably get the SEPP tIRA withdrawals sized roughly correctly, especially since you'd only have to do it for five or maybe six tax years.

ericrugiero

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Re: Question on the Roth conversion ladder - when is this advisable?
« Reply #7 on: November 06, 2020, 07:07:37 AM »
Access is one thing.  Tax optimization is another.  You may not want or need to do a Roth conversion ladder for access, but you may want to for tax optimization.

This.  You don't need the conversion ladder where the money has to sit in your Roth for 5 years before access to avoid penalties before 59.5

But, you very likely should start rolling some money from your traditional 401K or IRA to a Roth each year once you retire.  The goal is to do it whenever your tax rate is lowest.  Someone (you or your heirs) is going to pay income taxes on that traditional IRA money when it's withdrawn.  If you do it yourself by rolling some to a Roth while at a relatively low income level you could pay less taxes in the end.  You need to look at what your RMD's will be when you get to that point.  If they put you in a higher tax bracket than you would be in while rolling money over now then you should be doing some now. 

EvenSteven

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Re: Question on the Roth conversion ladder - when is this advisable?
« Reply #8 on: November 06, 2020, 01:20:12 PM »
Access is one thing.  Tax optimization is another.  You may not want or need to do a Roth conversion ladder for access, but you may want to for tax optimization.

This.  You don't need the conversion ladder where the money has to sit in your Roth for 5 years before access to avoid penalties before 59.5

But, you very likely should start rolling some money from your traditional 401K or IRA to a Roth each year once you retire.  The goal is to do it whenever your tax rate is lowest.  Someone (you or your heirs) is going to pay income taxes on that traditional IRA money when it's withdrawn.  If you do it yourself by rolling some to a Roth while at a relatively low income level you could pay less taxes in the end.  You need to look at what your RMD's will be when you get to that point.  If they put you in a higher tax bracket than you would be in while rolling money over now then you should be doing some now.

If the OP is to consider this, it seems like the comparison to make would be between (1) taxes on 36k of income (4% of 900k) for the years between retirement and claiming social security and (2) taxes on 36k of income plus income from social security.

If your tax bracket is expected to jump when you claim SS, then it would be worthwhile to make some Roth conversions up to the top of your bracket after you retire but before claiming SS.

MDM

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Re: Question on the Roth conversion ladder - when is this advisable?
« Reply #9 on: November 06, 2020, 08:26:36 PM »
Access is one thing.  Tax optimization is another.  You may not want or need to do a Roth conversion ladder for access, but you may want to for tax optimization.

This.  You don't need the conversion ladder where the money has to sit in your Roth for 5 years before access to avoid penalties before 59.5

But, you very likely should start rolling some money from your traditional 401K or IRA to a Roth each year once you retire.  The goal is to do it whenever your tax rate is lowest.  Someone (you or your heirs) is going to pay income taxes on that traditional IRA money when it's withdrawn.  If you do it yourself by rolling some to a Roth while at a relatively low income level you could pay less taxes in the end.  You need to look at what your RMD's will be when you get to that point.  If they put you in a higher tax bracket than you would be in while rolling money over now then you should be doing some now.

If the OP is to consider this, it seems like the comparison to make would be between (1) taxes on 36k of income (4% of 900k) for the years between retirement and claiming social security and (2) taxes on 36k of income plus income from social security.

If your tax bracket is expected to jump when you claim SS, then it would be worthwhile to make some Roth conversions up to the top of your bracket after you retire but before claiming SS.
Yes to all.  Traditional versus Roth - Bogleheads and Roth IRA conversion - Bogleheads go into this in somewhat excruciating detail.