Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

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wamom
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Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by wamom » Thu Nov 08, 2018 8:31 pm

Hello,

We plan to retire Fall 2019. Our current situation:
Me: 60 Husband 61. We will be retiring at ages 61 and 63

401K and IRAs: 2,500,600
Roth IRAs: 33,000
Cash and CD's: 330,000
taxable: 25,000 (total market MF)

Our overall allocation is 11% cash, 31% bonds, 40% US stock, 18% international stock. All in index funds. We want to stay between 50-60% stock.

House is paid for (650 to 700K) and if we sell would use proceeds for a down-sized house and RV. Capital gains on house sale is under 500K

We will be working part time in 2019 and will make approximately 150K.

I can get COBRA health insurance for 1400 / month vs. 250 for a bronze plan with ACA tax subsidies (2019 rates).

We plan to take SS at age 70 (or possibly him at 70 and me at 68). Our current PIAs at full retirement age are: Me: 34,100, Husband: 32,148

The last 2 years we have had between 75 to 80K in expenses. We would need to add health insurance to the budget in retirement and wish to travel.

We have built up the cash/CD amount in anticipation of retirement and the ACA subsidy cliff.

My questions:
1. Should we use our cash/cd's for living expenses and only withdraw from 401k/ira's up to the ACA cliff? We could do Roth conversions for money not spent for living expenses. Would it be better to use the COBRA coverage and do larger Roth conversions?

2. In 2019 I plan to use COBRA to the end of the year. Should we make a Roth conversion up to the top of the 22 or 24% tax bracket?

3. I have a Roth 401k option with my employer. Should I make the full 2019 401K contribution into the Roth 401K?

Thanks for any advice. I have learned so much from this group.

mhalley
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Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by mhalley » Thu Nov 08, 2018 10:07 pm

You have more money in your retirement accounts than I did when I retired and I decided to do the Roth conversions to minimize rmds. It’s a personal as well as a financial decision. You might run the various scenarios through I-orp.
https://www.i-orp.com/LumpSum/extended.html
With that much money in trad reirement I would lean toward Roth.

Gryphon
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Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by Gryphon » Thu Nov 08, 2018 10:25 pm

If you're planning to travel, make sure to check what sort of health care coverage you would have outside your home area when deciding between ACA or COBRA. In my case, I could have saved money going with an ACA plan for 2019, but none of them would provide any coverage outside the St Louis area. Since I plan on traveling with my RV for 5-6 months next year, I chose to go with a more expensive insurance plan from my former employer that will cover me when I'm away from home.

curmudgeon
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Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by curmudgeon » Thu Nov 08, 2018 10:54 pm

With that much in tIRA/401K, you will have quite large RMD upon hitting 70 and claiming SS. If tax laws stay the same, you will well past any of the odd higher effective marginal brackets that come with increased taxation of SS (and higher rates on qualified dividends), and back into the normal 22% (or maybe 24%) bracket. If that were the only consideration, I might not worry too much about Roth conversions now (though do what you can up to the ACA cliff). But, the potential for tax law changes with negative impact on you is quite real, along with higher brackets if one of you dies. These would make me consider doing more Roth conversions now.

I would do some model tax returns for various scenarios looking out years ahead. This is a decent tool:
https://www.mortgagecalculator.org/calc ... ulator.php

If you could get 90% of your tIRA/401k balance converted before you start RMD/SS (converting to the top of the 24% bracket), it would cost a lot (~$600K) in taxes paid over the next few years, but should leave you pretty "tax-proof" for the rest of your lives. It would be somewhat bold move, and to get that much converted you would probably have to give up the ACA subsidies and start doing large conversions next year.

State tax should also be considered if you currently have state income tax (or might move somewhere that has one in retirement).

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Watty
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Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by Watty » Thu Nov 08, 2018 11:06 pm

wamom wrote:
Thu Nov 08, 2018 8:31 pm
We will be working part time in 2019 and will make approximately 150K.

I can get COBRA health insurance for 1400 / month vs. 250 for a bronze plan with ACA tax subsidies (2019 rates).
There is no way you would get a subsidy if you make $150K.

Be sure to look at the details of the ACA plan. It may have a limited network and high deductibles and out of pocket amounts so you may be comparing apples to oranges.
wamom wrote:
Thu Nov 08, 2018 8:31 pm
We plan to take SS at age 70 (or possibly him at 70 and me at 68). Our current PIAs at full retirement age are: Me: 34,100, Husband: 32,148
You can check your strategy here.

https://opensocialsecurity.com/

Often it makes sense for one person to start earlier.

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Peter Foley
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Location: Lake Wobegon

Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by Peter Foley » Fri Nov 09, 2018 12:11 am

My advice would be along the lines of that of mhalley - you should be looking at Roth conversions based on the ratio of your assets in taxable, tax deferred and Roth. Because of the increase in Medicare B premiums based on income at at 63, I would look to do a couple substantial conversions before the oldest of you reaches that age. Once you are both age 63 you will have to watch your MAGI when you consider conversions and withdrawals.

As suggested, run the number through i-orp and also the Retiree Portfolio Model. (I have a slight preference for the later when Roth conversions are an essential element of your planning. In your case they should be.)

curmudgeon
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Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by curmudgeon » Fri Nov 09, 2018 1:27 am

A few more semi-random thoughts:

- While there are two of you on ACA, it may be worth staying under the cliff to claim the subsidy. Once the older hits 65, the subsidy will drop quite a bit, and it may be worth giving it up to do more Roth conversions.

- Do be aware of the IRMAA increase in cost for Medicare premiums that may hit if you are doing large conversions and have higher income. It doesn't show up until a couple of years later. At the same time, don't freak out about it; if your income drops back in later years, so will that surcharge, and the amount, while significant, isn't that big on the general scale of income.

- Definitely consider whether a Bronze HSA plan could work for you. If you have one covering two of you, that would be another ~$9K that you can put into HSAs and take off of your AGI, giving that much more room for Roth conversions. There are other factors to the choice, but they still have a max out-of-pocket protection limit to protect against large medical bills.

- The general thought on Roth conversions is that they are more valuable if you can pay the taxes out of other funds (taxable accounts), not having to dip into the converted money. That may be an argument for not getting carried away with really large conversions in your case. Maybe you just do Roth conversions up close to the ACA cliff for now, and from 65-70 just draw your yearly budget from the IRAs.

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celia
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Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by celia » Fri Nov 09, 2018 1:40 am

wamom wrote:
Thu Nov 08, 2018 8:31 pm
401K and IRAs: 2,500,600
Just to show you what's on the horizon, if your tax-deferred accounts are valued at $3M when you retire, the RMD starts at $109K. If your tax-deferred accounts are valued at $4M when you retire, the RMD starts at $146K. The RMDs will increase each year until the rate of withdrawal is more than the rate of growth. That is usually in your 80s.

In addition, when one of you dies, the survivor will need to take the same RMDs (based on their age), but they will need to file taxes as Single. The tax bracket for Singles is half the size as it is for MFJ, so the survivor will jump to a higher tax bracket.

Another thing you need to know is that if you have a lot of taxable income in one year, be aware of how "High Income" impacts your Medicare premium two years later. This will impact you when your MAGI hits $170,000 (for Married).
https://www.ssa.gov/pubs/EN-05-10536.pdf
We have built up the cash/CD amount in anticipation of retirement and the ACA subsidy cliff.
If you want to take advantage of the ACA subsidies, you will need to keep your income for the year low. This is just the opposite of doing Roth conversions where your income for the year is high. With the goal of keeping a low income, you will probably not be able to convert more than $30K or $40K per year, which hardly makes a dent in your growing 401K/tIRAs.

Have you also built up a cash pile to pay the taxes on the Roth conversions or will you withhold the taxes from the distribution? The entire distribution (including withholdings) will be taxed as ordinary income in the year of withdrawal. And once you start RMDs, you can't convert until after you've taken your RMD for the year.

Now that you see most of the things that will impact your finances in retirement, I suggest you make two spreadsheets. One will be to show your sources of income and the income taxes you will incur each year if you choose to go the ACA route. The other will be to show your sources of income and the income taxes you will incur each year if you choose to go the Roth conversion route. For each year from this year until you are both over over 71, list your sources of incomes and how much you would withdraw from each source. These are some examples of income sources:
Interest
Dividends and Qualified Dividends
Long Term Capital gains
withdrawals from taxable accounts (including RMDs)
withdrawals from Roth accounts
withdrawals from tax-deferred accounts (including Roth conversions)
pensions
85% of your Social Security
other sources of income such as rental income or part time work
Then estimate your federal and state taxes for each year and what the Medicare surcharge is (from having high income 2 years previously)

Instead of having a few years of very low income taxes followed by many years of higher tax brackets, you may find it beneficial to have a level taxable income each year (and a level tax bracket). Here's the basic information on tax brackets:
https://taxfoundation.org/2018-tax-brackets/
My questions:
1. Should we use our cash/cd's for living expenses and only withdraw from 401k/ira's up to the ACA cliff? We could do Roth conversions for money not spent for living expenses. Would it be better to use the COBRA coverage and do larger Roth conversions?
COBRA is likely your best bet, but I think it can only last for 18 months after your separation. Check with your employer(s). Then you can later pay full price for your own insurance policies until Medicare starts.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

wamom
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Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by wamom » Fri Nov 09, 2018 10:22 am

Wow, Thank you for the thoughtful replies. I really appreciate the time and effort.

I will need to do more homework, but from a few calculations it seems obvious that trying to stay under the ACA subsidy cliff is not the best long term strategy. My husband will be 63 next Fall when we retire, so we will have the higher medicare premiums. COBRA will last until he is 64.5 and 62.5 for me.

We live in Washington with no state income tax. We started a charitable donor fund with Fidelity during a higher income year. I could put more in that early in retirement out of a 401K

My employer just started a roth 401K. I have already done the maximum contribution to my 401K for the current year. I will call my HR dept to see if I can do a partial 401K to roth 401K while I am still working (up to the 24% bracket).

If we stop working in September of 2019, we could do a Roth conversion out of 401Ks before the end of the year.

I have much more in 401K/IRA accounts than my husband. He has ~760,000. I have ~1,743,000 does it matter which accounts we convert first?

Thanks again for your time. This has been a real eye opener.

Dottie57
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Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by Dottie57 » Fri Nov 09, 2018 11:05 am

OP,

Next year, I will start Roth conversions using cash to pay taxes. I won’t get ACA subsidy, but think it will be worth it to convert the majority to Roth.

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FiveK
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Re: Retirement withdrawal plan Fall 2019, ACA vs Roth conversions

Post by FiveK » Fri Nov 09, 2018 11:46 am

If you want to look at ACA cliffs, IRMAA tiers, SS benefit taxation, and all the other "usual" items, the personal finance toolbox spreadsheet is the only tool I know of that will do all the above in one place. And you get a graph of those effects vs. the amount of traditional money you choose to withdraw/convert.

The limitation of that tool is that it does only a 1 year look, which is where i-orp and the RPM come in with their multi-year looks but less comprehensive tax analysis. You may wish to use all the above and learn different things from each.

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