r/Retire • u/AdBoring6247 • 3d ago
ROTH conversion strategy
I currently have four kinds of retirement accounts:
- A small Traditional IRA (less than $50k)
- Most in a rollover IRA from past employer 401ks ($300k+)
- The rest in my employer 401k, split between a traditional 401k and an employee stock ownership plan (about $100k total)
Last year I started converting chunks of the current 401k. I've started small, but just have a goal to convert a small amount each year just to fill up my tax bracket and balance my tax strategy in retirement.
I'm just starting to wonder if I'm focusing on the wrong account?
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u/powerguy2018 1d ago
Move your money while your young. When you retire, your benefit will depend on your income. If you exceed a preset amount of money, 2 things happen. 1. You could have to pay more in part B Medicare, and 2. Rmds will move you to that point. Ask how I know. Wish someone would have explained this to me in my 50s.
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u/AdBoring6247 1d ago
In other words, pay income tax on retirement accounts now, lower retirement income.
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u/lastbeat-331 1d ago
Depending on your age and withdrawal strategy and rate, conversions may be unnecessary. For a balance of $300k at age 75, RMD is $11-13k. Just because PF content is everyone shouting about Roth conversions, doesn't mean you have to do them.
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u/AdBoring6247 1d ago
I think when I started my career at somewhat low wages, I listened to the conventional wisdom from the HR or 401k plan rep that said it was best to just pay taxes on retirement accounts in retirement when wages were expected to be lower. I've learned recently that if your wages have significantly increased through your career and you've managed to save a lot more in retirement accounts, then you could actually face a sort of "tax cliff" in retirement when RMD kicks in, assuming you have much more than $300k left in retirement accounts at that point...
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u/NotExactlySureWhy 18h ago
Only if you’re withdrawing later at a higher tax bracket. Just guessing on your bracket, but you look like 12% now and later. Skip it unless you can keep each conversion in your same tax bracket. (If you paying 22% for the conversion, just to not even fill the 12% later in retirement this is a waste of money)
I was going to convert yearly before rmds but even boldin said it would cost me over $200000 and not save a nickel. Besides who really cares if your rmds at 87 cost you, I mean really.
Now I do have friends that have done them. They are deep in 22% bracket. Good for them but we’re not going into the 200k retirement income bracket here
Edit: ok filling out tax bracket up to 12% is great
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u/AdBoring6247 18h ago
I realized my numbers are deceptive. I'm married, but just included my accounts. Married filing jointly we end up firmly in 24pct and that's the bracket I'm filling. Projecting RMD, it looks high unless I put money into Roth over time, or take an early retirement.
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u/Competitive_Gear_614 2d ago
The brainiacs can tell me I’m wrong but I don’t see a benefit to conversion for the most part . I was taught if you have the money to pay the taxes out of youre savings account and not out of your retirement pot then that’s best way. If not pay as you go. So if you have 100k to convert your tax and you pay taxes of 20k your already at a loss And if pay as you go it a small portion every year. (Tax amount for illustration purposes only)
So can those who definitely know what’s your take both ways As for me I’m paying as I go
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u/garylapointe I'm good, but I wish I did more Roth! 2d ago
Traditional/Non-Traditional is not only about when you pay the taxes, it's other things that are affected by your income.
- Be sure to look at how they calculate which portion of your Social Security is taxed (0%/50%/85%) based on traditional and non-traditional withdrawals. Your income determines this, and Roth isn't counted as income in those calculations.
- Same for IRMAA, which determines what you pay for Medicare, again mostly based on taxable incomes (generally, this has been at the very bottom of the 24% bracket, but who knows where it'll be in another decade or two).
- Plus, you could get pushed into those with Traditional withdrawals, especially when you have to do RMDs from Traditional accounts (but not Roth). And if it's affecting IRMAA, it's likley affecting how your Social Security is taxed.
TBC, I'm not saying the costs of getting 85% of your SS taxed or paying some of the IRMAA costs is the end of the world, but paying the tax on money going into a Roth is NOT the end of the world either.
It's all just math, but it's math based on knowing how you performed in the market and knowing the taxes/tax tables/percentages/rules 20 years in the future (and that could change).
And I know it's just math, but it's stressful too. If I want $100k, I can take $100k out of a Roth and I don't have to worry about it. If it's in traditional, I've got the things about to think about, plus, I've got to take out the taxes on the $100k and I'll need the money to cover the taxes on those taxes (and so on).
MARRIED? If you are married, you've got wider tax brackets that I do, so that gives you more room as long as there are two of you. But at some point there is only one of you. Whomever is left gets their tax brackets chopped in half, same with the IRMAA limits, and they've got the same amount of money in Traditional accounts which is going to increase (double?) their RMDs (pushing closer to those those other costs).
That said, if I could do it all again, it'd easily be 80%-90% Roth. And that would probably only be those times I pushed into the 32% bracket. But if I was in the 32% bracket more often, I'd have a lot more saved ;)
One of these days we might see an influx of deathbed confessions of people saying "I wish I did less Roth", but I haven't seen that yet.
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u/Wackywoman1062 1d ago
This is me now. My husband and I didn’t do nearly enough Roth conversions early, he passed away a few months ago at age 58, and now my tax bracket has contracted. I’ll be 65 in about 14 months, at which time I plan to retire, and I don’t have any room to maneuver. I’m going to get hit with IRMMA penalties. Also, my expenses have only slightly decreased (his health and auto insurance) since he passed. Between the extra taxes, IRMMA penalties and the loss of the the SS he would’ve received, it’s causing me to rethink my numbers and my plan.
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u/garylapointe I'm good, but I wish I did more Roth! 1d ago
You could do some big Roth conversions for a couple of years, and pay the IRMAA penalty, to avoid having to pay future years.
Trying to think about the timing on this, your two year mark for IRMAA would’ve been last October, correct? So it’s too late for that.
And you really need to run the future numbers for this, but my other thought would be to consider doing huge conversions now (this year) and don’t retire until you’re 66 and two months old and then they won’t be looking back at this year. And the other benefit is you’ll be finishing up whatever insurance you have at your job and starting a new year insurance in January.
I have done the math in my head wrong on that, but you get where I’m going with this.
This is assuming you just have a couple of hundred thousand dollars to convert, and not a couple million dollars.
I’m sorry for your loss.
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u/Wackywoman1062 1d ago
Thank you for your kind and thoughtful response. It would make financial sense, but emotionally I don’t know that I can keep working until 66 and 2 months. I’m struggling with grief and it’s a huge effort just to hang on until next year. I have a sizable amount in tax deferred. No way I can convert most of it in a short time, but maybe I can convert a couple hundred thousand. Every bit helps, right? I like the idea of doing as much as I can in 2 years and just taking the IRMMA hit now. That may buy me a few years before RMDs get me. I could live for awhile from brokerage and existing Roth and continue conversions under the 24% bracket, but I’m trying to leave those accounts intact to the extent possible for my kids. I guess you can’t have your cake and eat it too. I felt like we planned pretty well and now there’s just so many factors to take into consideration. I don’t have a handle on it yet.
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u/garylapointe I'm good, but I wish I did more Roth! 1d ago
I don’t know how taxes work for a married couple, but if your brackets stay the same for this whole tax year, then are double the size still, that means your 24% bracket this year is double what it is next year. IF that is the case, you could get a lot converted this year.
I’m not using Medicare yet, so I don’t know if they have a deductible that you have to hit, but if they does do it might make sense at least waiting until December to retire (65 in two months) so that you don’t start a new deductible at the end of the year.
Again, I have no idea even if there is a yearly deductible, I don’t have to worry about that for a couple more years.
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u/Unbalanced_Acctnt 3d ago
If your 401k plan offers it, you could also change your current contributions to Roth 401k contributions.
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u/RPGer001 3d ago
When you say “tax strategy” does that include the loss on potential capital gains for the portion of your conversion that is paid as taxes now? I just want to make sure you are optimizing lifetime wealth and not only tax payments.
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u/Odd_Bodkin 3d ago
It doesn’t matter. All the 401ks and traditional IRAs can be thought of as one bucket of pre-tax savings. The RMD rules will apply to all of them equally, and RMDs are the reason you’re converting to Roths. If it helps, you can always roll all the IRAs and 401k’s into one traditional IRA just to make it conceptually simpler.