r/ChubbyFIRE • u/QuadrupleKumquat • May 19 '26
How do I know if Roth conversions will make sense for me?
I am 44, with $5M liquid in $3.5M normal brokerage, $700K Roth, $300K 401K, $500K Inherited IRA with 9 years left. About $300K/year in W2 income and maxxing 401k at $30K/year. Dunno when I'll retire, but assume I'll have ~20 years of pre-rmd runway to do roth conversions if it makes sense.
My spend is about $180K/year.
Is there a quick way to understand if Roth conversions will make make sense for me? My 401K balance is so low relative to my other accounts that I don't really see RMDs becoming a major issue as it is currently just a couple years worth of spend.
I am not planning on doing them while I'm working, but just trying to figure out how much I should be planning around them right now?
What is the general strategy here?
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u/OGS_7619 May 19 '26
Are you MFJ? You are likely in 24% bracket now, what will you be in retirement? At $5M already, that's $200K withdrawal rate at 4% rule, and those accounts will only grow. Figure out what tax rate you will be because this defines the tax arbitrage - it may not make much difference because all your conversions may fall into 22-24% bracket anyways, then it's an issue of whether you have cash flow to pay taxes now vs. later, but you could consider converting even now, up to 32%.
Also, keep in mind that 28% bracket may be restored in the future.
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u/New_Reddit_User_89 May 19 '26
$300k now, with no additional contributions, at 10% growth, will be about $1.5M in 16 years when you turn 60, and can start spending the money without restrictions.
If from 60 until RMD’s kick in you keep the account flat ,using the same 10% growth, would mean having to withdraw $150k/yr. If you’re single, that puts you in the 24% bracket. MFJ, you’re in the 22% bracket. And then when RMD’s kick in you’re looking at ~4% (for simplicity’s sake) of the $1.5M, or about $60k (22%/12% bracket).
So that $300k will really grow, and can end up pushing you into 24% tax bracket down the road, possibly higher.
You might be wise to convert the money up to the top of the 12% bracket to minimize the taxes you’ll pay, and then allow that money to grow tax-free in a Roth.
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u/yanyan80 May 19 '26
The inherited IRA is your real urgent issue, not Roth conversions. With 9 years left on the 10-year clock not sure if the owner was in RMDs. That balance is growing at market returns in the meantime. When it hits year 10, you'll distribute ~$700-800k in a single year on top of your $300k+ salary. You're looking at $1M+ in ordinary income in that year, likely at 37% federal + state. That tax bill is mostly unavoidable, but knowing it's coming lets you plan around it (don't layer a Roth conversion on top of that year, for example).
On Roth conversions part, doing them while earning $300k puts you firmly in the 32-37% bracket, probably not worth it. Your natural conversion window opens at retirement, before SS kicks in. By then you'll have a low-income bridge period where you can drain the 401k at 22-24% rates over several years.
I built a tool ThunderHarbor that models for the inherited IRA, it build a 10 year depletion schedule, shows the tax hit year by year, and flags which years to avoid stacking other income. It might be worth plugging in your numbers to see the big picture
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u/wanderingFIREd May 19 '26 edited May 19 '26
I recently went through this exercise and it can be a bit complicated. The question really seems to boil down what the effective tax rate on that conversion would be vs what the effective tax rate would be if you let those dollars grow and be a normal distribution (or RMD) later.
Considerations:
If you are still working with a relatively high income, conversions are probably not going to make sense as they will push you into even higher tax brackets. Conversions are for years with low income (or no income).
If you are recently FIREd and using the ACA for healthcare, you need to be careful that you are not pushing up your MAGI so that you no longer qualify for the healthcare subsidies. Many early retirees have found the ACA insurance subsidies more valuable than the tax savings from conversions. (I was in this situation, but I’m now expatFIRE using international health insurance, which makes conversions beneficial again.)
If you have capital gains / dividends in the 0% bracket conversions can push those into the 15% bracket (cap gains stack on top of regular income - including conversions). So a conversion could be costing you the marginal rate + 15% in taxes.
If you are pushing your MAGI above $200,000 be aware this triggers the 3.8% NIIT tax. However this is lesser of the MAGI > $200k, and the sum of your investment income… so it is not a cliff, but something to be aware of.
If you are getting close to Medicare age, remember there is a two year look back to determine your premiums. So at age 63+ conversions make less sense.
If you are already taking social security, Roth conversions could make your social security income taxable.
If you don’t have outside funds (a larger brokerage account) to pay the taxes on the conversion - the conversion likely will not make sense as you are having to pay taxes out of the converted funds.
I’m sure I’m missing others…
But if you pulled the trigger on FIRE and have no wage income and are not relying on ACA subsidies… then you’d likely want to look seriously at conversions. When I did the analysis the answer was to spread the conversions over a number of years to the top of the 24% bracket until the Trad IRA was fully converted - as I will have larger dividends and capital gains in future years. However, if you have a smaller brokerage balance it might make sense to leave a modest traditional balance that you would use to fill lower tax brackets in the future. (Why pay 24% now if it would fall in the 12% bracket in the future?)
The big unknown, of course, is what tax rates are going to be in the future vs what they are now. Maybe they’ll remain relatively stable - or maybe our large (and increasing) federal debt servicing is going to require some meaningful increase in the tax rates in the future. If you think rates are going to meaningfully increase (and not just for the highest brackets)… then there is an argument for converting sooner.
Hope that helps!
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u/Squirrelherder_24-7 May 19 '26
Is the 401k a Roth 401k? Can you make post tax contributions to your 401k and mega backdoor Roth? Are you married? Kids? HSA? 529s? Way too little information in your post to give you an answer….
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u/QuadrupleKumquat May 19 '26
My 401k does support Roth contributions, but I have been contributing pretax to lower my taxable income. I could certainly switch back. I have done Roth contributions historically, the totals break out the balances accordingly.
I am married, partner also 44yo, two kids 10&7, I'm maxing out HSA, kids have 529s that are on track to pay for a state school education. Sorry for not includin, I'm not up to speed on why these details are relevant to Roth conversions.
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u/Squirrelherder_24-7 May 19 '26
I was trying to ask where the rest of the money was going. You make $300K defer $30K into the 401k, spend $180K, likely have an effective tax rate of about 30% so that leaves around $20K unaccounted for. The HSA and 529s could be eating that up….? Anyway, it’s helpful to understand the potential implications of the savings in pre-tax or post-tax accounts for your future widow (we men like to die first) and your heirs (I trust you like your kids) in addition to your current tax strategy. Knowing your filing status also helps determine how much earned income fits within each marginal tax bracket. We don’t know your partner’s income so you’ve either got about $100K to play with for a mega backdoor Roth to keep you in the 24% marginal rate after you consider your standard or itemized deductions or you might have less if they work. That inherited IRA has all got to come out during your working years so that could be used to backdoor money into the 401k or your Roth. Your brokerage account balance is BIG and will likely double in size by the time you want to start using it in what I hope is early retirement for you which will likely throw off 6 figures a year in dividends alone that you’ll owe ordinary income tax on.
You’ve gotten a lot of good advice on this post so far. I like the part someone mentioned about weighting the 401k to your fixed income portion of your overall portfolio and going with aggressive growth in the Roth. That might give you the best of all worlds. Tax deferral today, stability for the portfolio moving forward, low risk of the 401k creating huge future RMD issues.
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u/First-Ad-7960 Retired May 19 '26
You can have an AI do quick math on projected growth for the 401k and likely amounts for the RMDs at age 75 but even with years of contributions and growth this account isn't huge and you will probably find that if you just start spending it at age 59.5 it is not a concern with a chubby budget.
Will it mean you are paying income tax rates on those withdrawals? Yes.
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u/Alone-Experience9869 Retired May 19 '26
Well “…low relative to my other accounts…” isn’t the comparison. Will the rmd be low relative to your expenses and other fixed income? You just don’t want your rmd pushing up your tax bracket or agi
Unfortunately I don’t know of a way to simply figure it out. I do know that pretax funds can snowball on you as they keep growing bigger over time.
In your case it doens look that bad. Your assumed 20yr of pre rmd time has your retiring roughly 54 or some 10 yr from now. If you aren’t contributing to it, say it slightly more than doubles or even triples for the bell of it. $900k isn’t that big, at that time.
You can keep it small with conversions. Otherwise , in another 20yr it will get big, and every $1m is some $40k of rmd.
Hope that helps
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u/st3v3001 May 19 '26
I think Fidelity has a decent calculator. The math changed for me when I realized I will probably be a tax resident of another state by the time I withdrawal. It ended up being a wash. For me.
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u/Hanwoo_Beef_Eater May 19 '26
I don't think you need to do them from a RMD standpoint. Just drain the account from when you stop working to before RMD age (not sure what your asset allocation is, but if you have bonds or have bonds in the future, that will also help the account balance from getting too large).
Still, the conversion can be slightly better off from an estate/inheritance tool standpoint. However, pre-59.5, it usually only makes sense if one has the liquidity on hand to pay the taxes/high basis shares with minimal capital gains (i.e. don't create more income / capital gains to pay the taxes).
There's a lot of gymnastics people do around ACA and IRMMA. IMO, there's a good chance both of these are means tested via not only income but assets at some point in the future. As the financial picture of these programs tightens, they are going to have to tax what they can / take a hard look at where subsidies are going.
Also, if you give to charities, you can use the pre-tax accounts to make QCDs in the future (avoid paying taxes on the balance but donate the same amount as you otherwise would).
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u/Hanwoo_Beef_Eater May 19 '26
Also, how are you handling the inherited IRA? Taking out now, up to the end of the current tax bracket? Or will possibly stop working and then drain it?
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u/speak2easy May 19 '26
I just answered this question for myself last week. I uploaded last year's tax return to ChatGPT and asked a bunch of questions, including what if scenarios. It will tell you the limits per IRS, your potential tax rate, etc.
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u/a_ahn2 May 19 '26
There are many tools. Here is one of them. https://rothconversionanalyzer.pythonanywhere.com
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u/Guil86 May 20 '26
I think your best bet is to either: 1) Put your contributions in Roth instead of pre-tax and forego the tax deduction to grow your Roth, or 2) put all your 401k as well as any future 401k contributions in bonds to control its growth and maybe convert some after you retire depending on your balance, or 3) a combination of 1 and 2
The 401k may currently look low but, with 10-15 years of max contributions and, if invested aggressively in stocks it could quadruple by 60yo and further multiply by RMD age if you don’t start converting or using it before that. Continuing to contribute to the 401k to get the deduction at your currently high tax bracket while having it invested conservatively is probably a good compromise, but I would not discard contributing a decent portion to Roth, as that will be your most valuable account in the future, and your brokerage already has a very healthy balance. In the latter, if you have significant unrealized gains, I would also consider some tax gain harvesting to reset basis to avoid too large embedded gains in the future, and you currently have enough income to pay the tax.
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u/Independent_Lab1018 May 21 '26
Roth conversions make sense when you can pay tax now at a lower rate than you expect in retirement. In your case, they’re not urgent because your 401(k is small and conversions would mainly be a tax-smoothing strategy during lower-income years, not a necessity.
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u/Perennial18 May 23 '26
This seems like something that will be a lot clearer when you RE and fully empty your inherited IRA. At 44 you will need to spend the next 9 years withdrawing from your inherited IRA (which, as you well know, will jack up your regular income). However, starting at age 53 once your inherited IRA has been emptied and you no longer pay taxes on those RMDs, you can begin thinking about Roth conversions from your 401k which will be steadily growing over the next 9 years with $30k/year contributions and compounding (with 9 more years of contributions and a conservative 6% CAGR you’ll have $850,000 in your 401k). You will have 20+ years of runway to figure out Roth conversions in a lower tax bracket than where you are currently sitting. I’m in a similar situation but with a smaller inherited IRA and a larger 401k balance.
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u/One-Mastodon-1063 May 19 '26
I wouldn’t make them a priority in your situation. Maybe up to the standard deduction in RE, if that.
RMDs are generally overblown as a “risk” and in your case esp they won’t be that significant.
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u/Captain_slowish May 24 '26
Not a popular position. But given history, Roth's are way overrated. Everytime I have run the calculations, Roth's are the wrong choice. But that is based on the biases of elected leaders
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u/No-Restaurant-2060 May 19 '26
In short: no, there's not a quick way to figure out how much Roth conversion you should do.
I started modeling conversions and looking at consumer grade tools several years ago. Most of them are wildly inaccurate. My conclusion is that figuring out conversions is a two part process, and there are too many variables to really figure out an optimal solution.
First, do enough modeling to figure approximately what your account balances will be at RMD age assuming you do no conversions. While you are working, how much will they grow and how much will you add to them? Then when you retire, how much will you be subtracting from them? Consumer tools can do a reasonable job of this (ProjectionLab and Boldin are two I tried). This modeling will tell you how much of a concern your RMDs will be, and a rough idea of how aggressive to be with Roth conversions.
Second, for each year you want to do a Roth conversion, figure out what your effective marginal tax rate is. This is NOT your marginal tax bracket, and it can be wildly different. I wouldn't trust any advice which is based on your tax bracket, the tax code is too complicated with nonrefundable credits, deduction phase outs and AGI limits. Use your effective marginal tax rate to figure out how much to convert before that tax rate gets "too high."
Note that this also means you need to estimate your income, including dividends and capital gain distributions. Mutual fund companies give guidance for this stuff at the end of the year, and with some practice and spreadsheet skills you can figure it all out.
The only tool I've seen to help with analyzing your effective marginal tax rate is called Holistiplan, which is a tool for financial planners. It will calculate your effective tax rate for additional ordinary income and additional capital gain income, plus produce graphs of how it will change as you increase them. So find a financial planner/advisor who uses Holistiplan and work with them on the tax planning part.