Hi,
I'm currently looking at the option to start Roth Conversions next year with the idea of paying a (hopefully) smaller tax now to save on a bigger tax later (at RMD time).
Some facts about me:
Age: 50 (18 months FIRE'd)
Tax Status: Single, no dependents
Assets in taxable accounts: $2.3M (almost all in individual stocks) + $90k cash reserve
Assets in 401(k): $770k
Assets in traditional IRA: $0
Assets in Roth IRA: $160k
Projected annual expenses: ca. $60k-$65k (depending on medical costs)
Annual income (all from taxable accounts):
Qualified dividends: $43k
Non-qualified dividends (from REITs) and interest: $4k
LT capital gains: ca. $10k - $15k (to make up difference between expenses and dividend/interest income; in bad market years, I'll tap into my cash reserve instead).
State of Residence: California (9.3% marginal tax rate, no lower tax rate on qualified dividends or LT cap gains)
As you can see from the data above, I FIRE'd last year and luckily I have sufficient assets in taxable accounts, so I do not need to access any assets in my Roth to fund my living expenses.
However I was wondering, if it would make sense to roll my 401(k) over into an IRA and then start a Roth Conversion ladder in order to save on my total taxation in the long run. If I were to fill out the 0% tax bracket (exemption + standard deductible) I could convert about $6.5k ($10.5k - $4k non-qualified dividends and interest). That would cost me 15% of that in federal taxes (since some qualified dividends are getting pushed out of the 0% tax bracket and would be taxed at 15%) and 9.3% in state taxes for about 24.3% in total taxes.
Since I do not anticipate that I'll leave the state of California (my girl-friend has family here), I am assuming to be stuck with CA state taxes for the foreseeable future. The RMD at 70 1/2 comes to about $28k on a $770k retirement account (still in the 15% federal bracket and will stay in that bracket for at least another 10 years). However if I (conservatively) assume annual real portfolio growth of about 4% over the next 20 years and no Roth Conversions, my 401(k)/IRA portfolio would be about $1.7M, when I'm 70 1/2 and the RMD for that is about $62k, so an ever-increasing chunk of that money would be taxed at 25% federal + 9.3% state (assuming the same tax rate).
I realize that I never will be able to drain my 401(k)/IRA completely, so this is only an attempt of tax optimization at the margins.
So would it be worth it to pay 24.3% in taxes now and going forward in order to avoid a higher tax rate at RMD time in 20+ years?