Would Roth Conversions be worthwhile for me?

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LuigiLikesPizza
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Would Roth Conversions be worthwhile for me?

Post by LuigiLikesPizza » Sun Apr 29, 2018 4:10 pm

Planning to retire next year at 58.

I have a 401k (actually Fed. Govt TSP account) along with an existing Roth and taxable account. No Traditional IRA.

I expect my income to plummet in the years immediately following retirement, to about $20K/year, not counting withdrawals from accounts. A few years later, I will be eligible for Soc Sec (not sure yet when I will begin taking it).

I don't expect income to spike unless I hold off on Soc Sec until age 70.

All sources considered, my income should hover around $50K absent Social Security.

I am not sure yet where I will reside permanently in retirement, but do plan to take local tax rates into consideration.

Do I have the profile of someone who benefits from Roth conversions? please be respectful, this is a topic I am still trying to get my head around. thanks

ThriftyPhD
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Re: Would Roth Conversions be worthwhile for me?

Post by ThriftyPhD » Sun Apr 29, 2018 4:25 pm

How big are your TSP, Roth, and Taxable accounts? Conversions during early retirement when your tax rate is low can help lower pre-tax balances before RMDs start, but that depends on how much is in these accounts.

Do you have a federal pension?

retiredjg
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Re: Would Roth Conversions be worthwhile for me?

Post by retiredjg » Sun Apr 29, 2018 4:31 pm

Are you sure you are not getting the FERS supplement until you are eligible to take your SS at age 62?

There is not really enough information to answer your question. If you are single and have enough in the TSP that you will be pushed from one tax bracket to another when RMDs start, you definitely want to do Roth conversions to reduce the amount of money subject to the RMDs.

If you are married, you might want to do Roth conversions because when one of you dies, the survivor will almost certainly move up a tax bracket and then may move up another when RMDs start.

Do you expect most of your TSP to get used up over the years or left to your heirs?

Even with no other reasons to do Roth conversions, I'd sure plan to do some during this few years when taxes are reduced.

LuigiLikesPizza
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Re: Would Roth Conversions be worthwhile for me?

Post by LuigiLikesPizza » Sun Apr 29, 2018 5:29 pm

Thanks all.

How big are your TSP, Roth, and Taxable accounts?

TSP - $800K
Roth - $250K
Taxable - $300K

Do you have a federal pension? yes, but retiring early under special plan for employees who reach age 56 + 10 years of service, early retirement


Are you sure you are not getting the FERS supplement until you are eligible to take your SS at age 62? yes, retiring under early retirement plan see above, not eligible for supplement, retiring with 15% reduction of full pension, requires immediate annuity in order to leave with health insurance.

I am single and plan to remain single, for the forseeable anyway.

Do you expect most of your TSP to get used up over the years or left to your heirs? to get used up

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DR
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Re: Would Roth Conversions be worthwhile for me?

Post by DR » Sun Apr 29, 2018 6:14 pm

You just need to use the right planning calculator, one that is factoring in taxes--fed and state--and one that can benchmark your spending without the conversion and after the conversion and compare which model creates the highest annual, inflation-adjusted spending pattern.

Dan

LuigiLikesPizza
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Re: Would Roth Conversions be worthwhile for me?

Post by LuigiLikesPizza » Mon Apr 30, 2018 6:00 am

bumping with the additional information provided, thank you.


PS - Dan - what calculator are you referring to?

Thanks all again.

motorcyclesarecool
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Re: Would Roth Conversions be worthwhile for me?

Post by motorcyclesarecool » Mon Apr 30, 2018 6:16 am

LuigiLikesPizza wrote:
Sun Apr 29, 2018 5:29 pm
Thanks all.

How big are your TSP, Roth, and Taxable accounts?

TSP - $800K
Roth - $250K
Taxable - $300K

Do you have a federal pension? yes, but retiring early under special plan for employees who reach age 56 + 10 years of service, early retirement


Are you sure you are not getting the FERS supplement until you are eligible to take your SS at age 62? yes, retiring under early retirement plan see above, not eligible for supplement, retiring with 15% reduction of full pension, requires immediate annuity in order to leave with health insurance.

I am single and plan to remain single, for the forseeable anyway.
Look up “postponed FERS Annuity” and check OPM website for the exact process. You go out at MRA+10 like you were planning, but postpone filing to draw your annuity until you turn 60. At that point you get an un-reduced pension and you can resume health insurance coverage under FEHB. Use the years between your Minimum Retirement Age and Age 60 for aggressive conversions of your Traditional TSP balance to a Roth IRA to keep your RMDs from kicking you up a tax bracket. Live off your taxable balance for those “gap” years.

Edited to add: A POSTPONED FERS ANNUITY IS DIFFERENT FROM A DEFERRED ANNUITY. With a DEFERRED annuity, you never regain FEHB health insurance coverage. Make sure you understand the difference. The “long form” iORP can help you test out different FERS scenarios. I have a feeling a postponed annuity without the 15% reduction and with FEHB restored once you start your pension will work out very well for you. At least investigate it.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

craimund
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Re: Would Roth Conversions be worthwhile for me?

Post by craimund » Mon Apr 30, 2018 7:07 am

motorcyclesarecool wrote:
Mon Apr 30, 2018 6:16 am
LuigiLikesPizza wrote:
Sun Apr 29, 2018 5:29 pm
Thanks all.

How big are your TSP, Roth, and Taxable accounts?

TSP - $800K
Roth - $250K
Taxable - $300K

Do you have a federal pension? yes, but retiring early under special plan for employees who reach age 56 + 10 years of service, early retirement


Are you sure you are not getting the FERS supplement until you are eligible to take your SS at age 62? yes, retiring under early retirement plan see above, not eligible for supplement, retiring with 15% reduction of full pension, requires immediate annuity in order to leave with health insurance.

I am single and plan to remain single, for the forseeable anyway.
Look up “postponed FERS Annuity” and check OPM website for the exact process. You go out at MRA+10 like you were planning, but postpone filing to draw your annuity until you turn 60. At that point you get an un-reduced pension and you can resume health insurance coverage under FEHB. Use the years between your Minimum Retirement Age and Age 60 for aggressive conversions of your Traditional TSP balance to a Roth IRA to keep your RMDs from kicking you up a tax bracket. Live off your taxable balance for those “gap” years.

Edited to add: A POSTPONED FERS ANNUITY IS DIFFERENT FROM A DEFERRED ANNUITY. With a DEFERRED annuity, you never regain FEHB health insurance coverage. Make sure you understand the difference. The “long form” iORP can help you test out different FERS scenarios. I have a feeling a postponed annuity without the 15% reduction and with FEHB restored once you start your pension will work out very well for you. At least investigate it.
Unreduced pension age is 62 unless you have 20+ years of service. Link below. Good plan. However, cannot get FEHB during period when annuity postponed. May be better to take reduced pension when factoring in health care costs - unless you can get coverage through a spouse.

https://www.opm.gov/retirement-services ... Retirement
"When you ain't got nothing, you got nothing to lose"-Bob Dylan 1965. "When you think that you've lost everything, you find out you can always lose a little more"-Dylan 1997

retiredjg
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Re: Would Roth Conversions be worthwhile for me?

Post by retiredjg » Mon Apr 30, 2018 7:32 am

LuigiLikesPizza wrote:
Sun Apr 29, 2018 5:29 pm
How big are your TSP, Roth, and Taxable accounts?

TSP - $800K
Roth - $250K
Taxable - $300K
Yes, Roth conversions certainly make sense for you in my opinion. The only question is how much?

It does not take a very big pension for a single person to arrive in the 22% bracket (which might revert to the 25% bracket in a few years) and it appears to me you might be just into that bracket or just under it, not sure.

If you are not using a lot of the TSP and/or converting it to Roth, the size of your RMDs (and your SS if you wait) will very likely push you into the a higher bracket when you reach 70.5 (which might be the 28% bracket if tax cuts revert as scheduled). Better to convert now at 22% than pay 28% later.

The way to reduce your RMDs is to convert what you can to Roth. You won't want to convert enough to push you into a much higher bracket though. And when you reach age 63, there is the IRMAA limit to watch out for. If you go over that limit, your Medicare Part B and D premiums will go up significantly. But you have a few years before needing to worry about that.

For your first year of retirement, I would wait till near end of the year to see how much you can convert without getting too high. After that, you'll have a better idea.

retiredjg
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Re: Would Roth Conversions be worthwhile for me?

Post by retiredjg » Mon Apr 30, 2018 7:36 am

The TSP does still have limited withdrawal options at this time. What I did is take my one time lump sum out of the TSP and put it in IRA after retirement. I do my conversions and take living expenses as needed from that IRA.

I have not touched the TSP in almost 10 years. I just cooks along happily in the F and G funds. When the withdrawal options get more flexible, I'll start taking from the TSP instead of the IRA.

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DR
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Re: Would Roth Conversions be worthwhile for me?

Post by DR » Mon Apr 30, 2018 8:28 am

LuigiLikesPizza wrote:
Mon Apr 30, 2018 6:00 am
bumping with the additional information provided, thank you.


PS - Dan - what calculator are you referring to?

Thanks all again.
MaxiFi Planner, $99 https://maxifiplanner.com You can create a base plan without the conversion and then compare available spending with an alternative plan that models the Roth conversion. It accounts for your specific tax brackets.

smitcat
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Re: Would Roth Conversions be worthwhile for me?

Post by smitcat » Mon Apr 30, 2018 8:47 am

DR wrote:
Mon Apr 30, 2018 8:28 am
LuigiLikesPizza wrote:
Mon Apr 30, 2018 6:00 am
bumping with the additional information provided, thank you.


PS - Dan - what calculator are you referring to?

Thanks all again.
MaxiFi Planner, $99 https://maxifiplanner.com You can create a base plan without the conversion and then compare available spending with an alternative plan that models the Roth conversion. It accounts for your specific tax brackets.
Or you can use the IORP long version for free which is quick and fairly easy to use.
Then is you want a deeper dive with more details you can use the RPM spreadsheet/calculator that I find to really help out base lining and comparing options for Roth conversions......also free.

The Wizard
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Re: Would Roth Conversions be worthwhile for me?

Post by The Wizard » Mon Apr 30, 2018 9:03 am

I'm no expert on FERS pension details and it's a long way from age 56 to 70.
Nonetheless, I would try to estimate my income at age 70+, once SS and RMDs are active.
Then do Roth conversions over the next 14 years to boost your AGI up close to, but not over what it will be at age 70.

Best to use a spreadsheet for this, updated annually to incorporate changes in your numbers...
Attempted new signature...

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David Jay
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Re: Would Roth Conversions be worthwhile for me?

Post by David Jay » Mon Apr 30, 2018 9:09 am

retiredjg wrote:
Mon Apr 30, 2018 7:32 am
It does not take a very big pension for a single person to arrive in the 22% bracket (which might revert to the 25% bracket in a few years) and it appears to me you might be just into that bracket or just under it, not sure.
"Luigi" - I have a smaller portfolio (about 2/3 of yours) with a very low COL. I am targeting the top of the 12% bracket for Roth conversions in the years between age 63 (first full year of retirement) and 70.

I will be paying taxes out of my converted funds because my portfolio is nearly 100% tax advantaged (either tax-deferred or Roth), but with your taxable account you may want to consider paying taxes out of the taxable account. That has the effect of moving a portion taxable into Roth at no cost. All future gains are tax free and investment choices in the Roth are never dependent on tax treatment.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

motorcyclesarecool
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Re: Would Roth Conversions be worthwhile for me?

Post by motorcyclesarecool » Mon Apr 30, 2018 4:47 pm

craimund wrote:
Mon Apr 30, 2018 7:07 am
Unreduced pension age is 62 unless you have 20+ years of service. Link below. Good plan. However, cannot get FEHB during period when annuity postponed. May be better to take reduced pension when factoring in health care costs - unless you can get coverage through a spouse.

https://www.opm.gov/retirement-services ... Retirement
You’re absolutely right, thank you for catching my mistake.

OP will probably have to buy insurance on an exchange if he does a Postponed FERS Annuity. He could try packing an HSA full prior to separating, to help ease health care anxieties. Depending on how aggressive his Roth conversions, he might qualify for ACA subsidies. OP would need to choose between 4-6 years’ health insurance premiums outside of FEHB versus a 15% reduction in his pension for life and RMDs potentially causing a big increase in taxation.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

retiredjg
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Re: Would Roth Conversions be worthwhile for me?

Post by retiredjg » Mon Apr 30, 2018 4:50 pm

I know nothing about these newfangled retirement plans, but I can tell you that carrying over the health insurance is near priceless in this time of health insurance chaos. I would say this....do whatever you need to do to keep the health insurance.

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Peter Foley
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Re: Would Roth Conversions be worthwhile for me?

Post by Peter Foley » Mon Apr 30, 2018 10:42 pm

A couple of the calculators commonly used are i-orp and the Retiree Model Portfolio. I find the RPM to be a bit better for Roth conversion scenarios.

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Leif
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Re: Would Roth Conversions be worthwhile for me?

Post by Leif » Tue May 01, 2018 12:02 am

Based on what you posted I don't know the answer. However, I can describe the process I went through.

I took my current tax deferred assets and calculated their value by RMD time. I used a conservative 4% growth from now until 70 1/2.

I also estimated my income as closely as possible for each year up to 70. I added my expected income to my expected RMD withdrawal to determine my expected tax bracket at 70 1/2.

Then I made another calculation based on Roth Conversion until 70 1/2. The results were that I can pay more taxes now (pre RMD) or pay more later. Normally I would go with pay more later. BUT, later is 70 1/2 onward. Based on generally good health I decided pay more now is better.

Other benefits of the conversion for me:

1. Moving money from "always taxed" to "never taxed".
2. Moving my tIRA stocks funds to the Roth account leaving my bonds in the tIRA. I expect this will give slower growth of the RMDs and thus the income tax.
3. I expect to be in a lower bracket by converting based on current tax rates. If taxes pop up in 2024, as defined in the current tax law, then I definitely saved some taxes by doing the conversion.
4. I have a ladder of CDs between now and 70 1/2 to pay for my retirement expenses and the income tax of converting.
5. Delaying SS until 70 will help me convert more of my tIRA.

Good luck.

LuigiLikesPizza
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Re: Would Roth Conversions be worthwhile for me?

Post by LuigiLikesPizza » Tue May 01, 2018 10:51 am

Again, thanks to all. I got very excited for a hot second, thinking there was another fed employee early retirement program I was not aware of.

Since I'll only have 10 years in, I don't see any way of getting around the unreduced pension. Nice try thanks for the momentary excitement lol.

I have many issues to consider and to check off my list before pulling the plug on this career. Appears that Roth Conversion decisions can move to the bottom of the list since they won't matter until after I leave the job....and still many years before I hit RMDs.

Thanks again.

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