Roth Conversion Advice

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Topic Author
2pedals
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Roth Conversion Advice

Post by 2pedals » Thu Jan 10, 2019 11:14 am

I am an 59 yo in first year of retirement and plan on converting 401k and/or tIRA $$ to Roth this year. I would be appreciative criticism, comments suggestions for the best strategy for conversions.

I am not to sure much money to convert each year. The tax treatment of 401k to 401k Roth conversions versus tIRA to Roth.

Married with the following assets

550k taxable

650k (his 401k)
40k (his tIRA) form 8606 basis 11k
210k (her tIRA) form 8606 basis 8k

190k (his Roth)
20k (her Roth)

Pension at 65k/year

The pension fills most of the tax 12% bucket. This year I will get a 1 time bonus of about 5k to 10k. The Retiree Portfolio Model (thank you BigFoot48) shows that I only have about 6k to 11k in the 12% tax bucket to fill this year and about 20k after that. I would like to convert more but the conversion would trigger a 22% tax. Minor improvement in projected ending balances (< 1% :annoyed ) for conversions and additional conversions before social security.

I also ran the i-orp tool with and without conversions and results said about 30k conversion per year to age 65 is optimal but the projected annual disposable income did not change one iota. :annoyed

Notice that I do have a tax basis for part of the tIRA accounts. I would like to convert this first without touching the 401k account. I think 401k accounts are treated separately (the tIRA and 401k are not added together to form a percentage for 8606 basis) for Roth conversion is this correct? So leave the money in the 401k account until his tIRA is converted and then convert some of her’s tIRA, right?

I don’t think Roth conversions will amount to very much, do you agree? Does anybody else have similar experiences and results? I would like to leave about 500k for legacy reasons and minimize RMDs to reduce possible medicare premiums. Based I what I know, I am looking at the amounts and would like to do more conversions than the RPM and i-orp suggests, maybe 50k year for five years. I know 50k is not optimal but who knows what will be since this is a projection?

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One Ping
Posts: 594
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Re: Roth Conversion Advice

Post by One Ping » Thu Jan 10, 2019 12:10 pm

2pedals wrote:
Thu Jan 10, 2019 11:14 am
I am an 59 yo in first year of retirement and plan on converting 401k and/or tIRA $$ to Roth this year. I would be appreciative criticism, comments suggestions for the best strategy for conversions.

I am not to sure much money to convert each year. The tax treatment of 401k to 401k Roth conversions versus tIRA to Roth.

Married with the following assets

550k taxable

650k (his 401k)
40k (his tIRA) form 8606 basis 11k
210k (her tIRA) form 8606 basis 8k

190k (his Roth)
20k (her Roth)

Pension at 65k/year

The pension fills most of the tax 12% bucket. This year I will get a 1 time bonus of about 5k to 10k. The Retiree Portfolio Model (thank you BigFoot48) shows that I only have about 6k to 11k in the 12% tax bucket to fill this year and about 20k after that. I would like to convert more but the conversion would trigger a 22% tax. Minor improvement in projected ending balances (< 1% :annoyed ) for conversions and additional conversions before social security.

I also ran the i-orp tool with and without conversions and results said about 30k conversion per year to age 65 is optimal but the projected annual disposable income did not change one iota. :annoyed

Notice that I do have a tax basis for part of the tIRA accounts. I would like to convert this first without touching the 401k account. I think 401k accounts are treated separately (the tIRA and 401k are not added together to form a percentage for 8606 basis) for Roth conversion is this correct? So leave the money in the 401k account until his tIRA is converted and then convert some of her’s tIRA, right?
This is exactly what we are doing. Converting tIRAs, with after tax basis, to Roth IRA first. Then, rollover the 401k, with after tax basis, to a rollover tIRA, then convert the after tax basis to Roth IRA. Doing this for us reduces the RMDs significantly and provides a significant source of tax free funds available in retirement for whatever may come (e.g., LTC).
2pedals wrote:
Thu Jan 10, 2019 11:14 am
I don’t think Roth conversions will amount to very much, do you agree? Does anybody else have similar experiences and results? I would like to leave about 500k for legacy reasons and minimize RMDs to reduce possible medicare premiums. Based I what I know, I am looking at the amounts and would like to do more conversions than the RPM and i-orp suggests, maybe 50k year for five years. I know 50k is not optimal but who knows what will be since this is a projection?
One thing to keep in mind is the tax bracket the survivor will be in. While a 65K pension for a couple is in the 12% bracket, if the survivor pension is also 65K, that will likely put them in the 22% bracket, especially when considering any RMDs that will need to be taken. If that's the case, converting into the 22% bracket may not be as bad as it might seem at first blush.
"Re-verify our range to target ... one ping only."

TBillT
Posts: 505
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Re: Roth Conversion Advice

Post by TBillT » Thu Jan 10, 2019 12:13 pm

You have to decide how aggressive you want to be, and how high tax bracket you want to bump into. Some states are tax free on withdrawals so that makes it attractive. I backed off to 12% tax bracket this year because the state was making even greater grab at my conversion this year. In Virginia, any less Fed tax (@22%) was nullified by much greater state tax for some itemizers, so even though Fed 22% bracket was tempting, it was unobtainium for me. Might have been short sighted on my part but there is always next year, and a saved a ton of tax dollars this year by keeping conservative. Unclear if we could move to more favorable tax state when we are 70 or what so it's a judgement call.

Topic Author
2pedals
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Joined: Wed Dec 31, 2014 12:31 pm

Re: Roth Conversion Advice

Post by 2pedals » Thu Jan 10, 2019 6:21 pm

One Ping wrote:
Thu Jan 10, 2019 12:10 pm
One thing to keep in mind is the tax bracket the survivor will be in. While a 65K pension for a couple is in the 12% bracket, if the survivor pension is also 65K, that will likely put them in the 22% bracket, especially when considering any RMDs that will need to be taken. If that's the case, converting into the 22% bracket may not be as bad as it might seem at first blush.
One Ping

Thank you for your perspective on this. Something to think about for sure. At this point hard to say what will happen. Odds of both being alive in 10 years (age 69) is 80% and in 20 years (age 79) is 47% based on a mortality table I have been using.

Topic Author
2pedals
Posts: 732
Joined: Wed Dec 31, 2014 12:31 pm

Re: Roth Conversion Advice

Post by 2pedals » Thu Jan 10, 2019 6:53 pm

TBillT wrote:
Thu Jan 10, 2019 12:13 pm
You have to decide how aggressive you want to be, and how high tax bracket you want to bump into. Some states are tax free on withdrawals so that makes it attractive. I backed off to 12% tax bracket this year because the state was making even greater grab at my conversion this year. In Virginia, any less Fed tax (@22%) was nullified by much greater state tax for some itemizers, so even though Fed 22% bracket was tempting, it was unobtainium for me. Might have been short sighted on my part but there is always next year, and a saved a ton of tax dollars this year by keeping conservative. Unclear if we could move to more favorable tax state when we are 70 or what so it's a judgement call.
I live in Washington State (currently no income taxes). I agree your statement that I have to decide how aggressive, that is why it is a somewhat difficult thing to decide. 30k thru 100k per year conversions does not make that much difference. Maybe that is enough reason "error" on the more aggressive side. Can't get the early retirement years back.

curmudgeon
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Joined: Thu Jun 20, 2013 11:00 pm

Re: Roth Conversion Advice

Post by curmudgeon » Thu Jan 10, 2019 7:30 pm

With a substantial pension, I suspect Roth conversions may not have much effect. You can speculate on future tax rates, but that is always fairly unknown. If there is a likelihood you may move to a state with income tax, that would argue for a bit more conversion.

I would probably estimate a baseline future income (like when you are 71-75). Take the total of your pension, SS, and estimated RMD (plus some taxable interest/dividends). See what the taxes would look like than. Use this as a potential target taxable income for the next few years, filling up with Roth conversions, LT cap gains harvesting, and maybe IRA withdrawals. You can adjust between the various forms of income according to your actual cash needs (cap gains in taxable frees up extra cash, Roth conversions use it).

Carl53
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Joined: Sun Mar 07, 2010 8:26 pm

Re: Roth Conversion Advice

Post by Carl53 » Thu Jan 10, 2019 7:58 pm

We started conversions at about your age with similar asset levels and pension income that has averaged at a level similar to yours but is now smaller. A number of years in, generally converting to the top of the 15% (at least one year we went into the next bracket when we were doing the horse race conversions and the gains were too good to recharacterize) and now 12% bracket has left us with a increased balance in pretax as well as a Roth balance that now approaches half of the pretax. Not all bad! I have had to reconcile that 85% of our future sizeable SS will be taxed in the 12*1.85 bracket and our RMDs will push us into the 22% bracket beyond the point at which all of the SS is taxed.

Until 70, we will continue to convert $50+k per year filling up the 12% bracket. Depending on the market, this may or may not reduce pretax holdings. Last year it did. We plan to continue converting even after our non-retirement funds dry up, although it will be less beneficial to do so. Once we are taking SS at age 70 and RMDs kick in, we are planning to take advantage of QCDs (which we learned of on this forum), and intend to maintain some pretax holdings should we decide to move into a CCRC or need LTC and have excessive health care deductions.

We have been using up the non-retirement funds by withdrawing 2-3% of total assets per year to cover conversion taxes and supplement the pension to enjoy what to us has been a good life.

While my original goal was to greatly convert the pretax retirement funds to Roth funds, higher returns than expected thwarted those plans. I would suggest that you continue to convert to the top of the current bracket 12% bracket, or 22% bracket if you feel like it. If you go for the higher bracket, beware doing so after age 63 as it can cause your Medicare costs to go up. If you just go to the top of the 12%, you likely will pay 22% once SS and RMDs kick in (25% if the old brackets kick in).

Converting to the top of the 12% bracket ($103350 AGI) is the only sure thing that you should do. The rest of it, 22% now or later at 22 or 25% is in the noise. Uncertainty of the future is a much larger factor, whether or not one spouse dies early, we have good health or not, will tax rates change dramatically, SS viability, stock market performance, etc. So for this year, at least convert all of his TIRA of which $29K is taxable, then convert at least $9300 taxable of wife's TIRA (about $9700 total). If you want to be sure to convert every dollar you can and are sure that you will get some additional compensation, convert another $5k with the expectation that prior to filing your taxes for 2019, you make a TIRA contribution sufficient to get your income down to $103350.

Be sure to utilize your taxable funds for living a good life prior to age 70. Once SS (if you will receive it) and RMDs kick in you will likely have excess taxable funds accruing.

Topic Author
2pedals
Posts: 732
Joined: Wed Dec 31, 2014 12:31 pm

Re: Roth Conversion Advice

Post by 2pedals » Thu Jan 10, 2019 8:24 pm

curmudgeon wrote:
Thu Jan 10, 2019 7:30 pm
With a substantial pension, I suspect Roth conversions may not have much effect. You can speculate on future tax rates, but that is always fairly unknown. If there is a likelihood you may move to a state with income tax, that would argue for a bit more conversion.
Yes not much difference as far as the RPM and i-orp tools say. It is not very likely I would move to a state with income tax.
curmudgeon wrote:
Thu Jan 10, 2019 7:30 pm
I would probably estimate a baseline future income (like when you are 71-75). Take the total of your pension, SS, and estimated RMD (plus some taxable interest/dividends). See what the taxes would look like than. Use this as a potential target taxable income for the next few years, filling up with Roth conversions, LT cap gains harvesting, and maybe IRA withdrawals. You can adjust between the various forms of income according to your actual cash needs (cap gains in taxable frees up extra cash, Roth conversions use it).
Interesting, at this age move tax bucket for 22% is about 75% fill without conversions. With 100k conversions several years it drops but it is still hard to get under 40-50%. So it looks like I am just moving 22% tax buckets of money from one year to the next. Making Roth conversions above the 12% uninspiring.

Topic Author
2pedals
Posts: 732
Joined: Wed Dec 31, 2014 12:31 pm

Re: Roth Conversion Advice

Post by 2pedals » Thu Jan 10, 2019 8:30 pm

Carl53 wrote:
Thu Jan 10, 2019 7:58 pm
We started conversions at about your age with similar asset levels and pension income that has averaged at a level similar to yours but is now smaller. A number of years in, generally converting to the top of the 15% (at least one year we went into the next bracket when we were doing the horse race conversions and the gains were too good to recharacterize) and now 12% bracket has left us with a increased balance in pretax as well as a Roth balance that now approaches half of the pretax. Not all bad! I have had to reconcile that 85% of our future sizeable SS will be taxed in the 12*1.85 bracket and our RMDs will push us into the 22% bracket beyond the point at which all of the SS is taxed.

Until 70, we will continue to convert $50+k per year filling up the 12% bracket. Depending on the market, this may or may not reduce pretax holdings. Last year it did. We plan to continue converting even after our non-retirement funds dry up, although it will be less beneficial to do so. Once we are taking SS at age 70 and RMDs kick in, we are planning to take advantage of QCDs (which we learned of on this forum), and intend to maintain some pretax holdings should we decide to move into a CCRC or need LTC and have excessive health care deductions.

We have been using up the non-retirement funds by withdrawing 2-3% of total assets per year to cover conversion taxes and supplement the pension to enjoy what to us has been a good life.

While my original goal was to greatly convert the pretax retirement funds to Roth funds, higher returns than expected thwarted those plans. I would suggest that you continue to convert to the top of the current bracket 12% bracket, or 22% bracket if you feel like it. If you go for the higher bracket, beware doing so after age 63 as it can cause your Medicare costs to go up. If you just go to the top of the 12%, you likely will pay 22% once SS and RMDs kick in (25% if the old brackets kick in).

Converting to the top of the 12% bracket ($103350 AGI) is the only sure thing that you should do. The rest of it, 22% now or later at 22 or 25% is in the noise. Uncertainty of the future is a much larger factor, whether or not one spouse dies early, we have good health or not, will tax rates change dramatically, SS viability, stock market performance, etc. So for this year, at least convert all of his TIRA of which $29K is taxable, then convert at least $9300 taxable of wife's TIRA (about $9700 total). If you want to be sure to convert every dollar you can and are sure that you will get some additional compensation, convert another $5k with the expectation that prior to filing your taxes for 2019, you make a TIRA contribution sufficient to get your income down to $103350.

Be sure to utilize your taxable funds for living a good life prior to age 70. Once SS (if you will receive it) and RMDs kick in you will likely have excess taxable funds accruing.

Thank you, Carl53

This is why I love bogleheads, I think you have summarized a plan for me that will work. :sharebeer

TBillT
Posts: 505
Joined: Sat Sep 17, 2011 1:43 pm

Re: Roth Conversion Advice

Post by TBillT » Fri Jan 11, 2019 1:44 pm

I gather the other reason for Roth Conversion is that a Roth IRA is more tax friendly to your heirs...so that is another consideration

Carl53
Posts: 1695
Joined: Sun Mar 07, 2010 8:26 pm

Re: Roth Conversion Advice

Post by Carl53 » Sat Jan 12, 2019 4:09 am

2pedals wrote:
Thu Jan 10, 2019 8:30 pm
Carl53 wrote:
Thu Jan 10, 2019 7:58 pm
...
If you want to be sure to convert every dollar you can and are sure that you will get some additional compensation, convert another $5k with the expectation that prior to filing your taxes for 2019, you make a TIRA contribution sufficient to get your income down to $103350.

Thank you, Carl53

This is why I love bogleheads, I think you have summarized a plan for me that will work. :sharebeer
I believe I gave you faulty logic about considering converting the extra $5k in the above sentence. You will be at the 12% bracket top without it. Extra income, even if fully contributed to a TIRA, cannot wipe out the tax impact of the extra $5k. If you want to stay in the 12% bracket your total AGI needs to not exceed $103350. What I did this past year was to make a large conversion early then on 12/28 made a $4000 conversion that would take me to quite close to the 12% bracket top based on my tax spreadsheet after considering a small amount of interest, pension and a very minimal working income. The income was going to come in several thousand less than what I speculated at the beginning of the year. If when I do my taxes I find that I'm slightly over then I might consider doing a tiny TIRA contribution for last year, but very likely would not bother. With the balance of any working income after a possible TIRA contribution, a small Roth contribution may be made.

BTW if you are an ACA participant, take a look at this thread. viewtopic.php?f=2&t=269379&newpost=4315 ... ead#unread

Topic Author
2pedals
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Re: Roth Conversion Advice

Post by 2pedals » Sat Jan 12, 2019 7:52 pm

Based on this advice I plan on updating my IPS to include the following statement (what do you think?):

Roth conversions
Converting to the top of the 12% bracket is the only sure thing that should be done. The rest of it, 22% now or later at 22 or 25% is in the noise. Uncertainty of the future is a much larger factor for optimizing Roth conversions. Convert the tIRA for him first and then do conversions for her tIRA to capture the basis. After that his 401k conversions can be made if desired.

Based on current tax brackets (12%-22% and MAGI medicare limits) anything in the 22% bucket (30k to 90k) somewhere in the middle (~60k conversions) is the goal until taxable account is exhausted or before age 70 (before his social security and his required minimum distributions). Taxable account should also be used for discretionary spending if desired.

Notes:
For 2019 the taxable amount over $78,950 to $168,400 is in the 22% bracket (standard deduction $24,400, or income over $103,350 goes to 22% bracket). 2024 medicare premiums might be higher due to MAGI IRS records in year 2022. So when doing Roth conversions in year 2022 keep MAGI below higher premiums limits (currently at 170k).

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One Ping
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Re: Roth Conversion Advice

Post by One Ping » Sat Jan 12, 2019 9:39 pm

2pedals wrote:
Sat Jan 12, 2019 7:52 pm
Based on this advice I plan on updating my IPS to include the following statement (what do you think?):

Roth conversions
Converting to the top of the 12% bracket is the only sure thing that should be done. The rest of it, 22% now or later at 22 or 25% is in the noise. Uncertainty of the future is a much larger factor for optimizing Roth conversions. Convert the tIRA for him first and then do conversions for her tIRA to capture the basis. After that his 401k conversions can be made if desired.

...

Notes:
For 2019 the taxable amount over $78,950 to $168,400 is in the 22% bracket (standard deduction $24,400, or income over $103,350 goes to 22% bracket). 2024 medicare premiums might be higher due to MAGI IRS records in year 2022. So when doing Roth conversions in year 2022 keep MAGI below higher premiums limits (currently at 170k).
I'm not sure how you 'capture the basis' of a tIRA with basis without converting the whole thing. Any such tIRA --> Roth IRA conversion contains a pro-rated portion of the after-tax contributions (basis) and pre-tax contributions and earnings (see Form 8606 for the details).

Note that this treatment of a tIRA basis is different than the treatment of the basis within a 401k. My 401k allows conversion of the just after-tax basis to Roth 401k, as long as as the portion of the growth attributed to that basis is also converted. The 'basis + growth on the basis' is much less than my total 401k balance. This approach doesn't apply to tIRAs.

Also, I would not greatly fear breaking the 1st IRMAA tier limit. The MC premium difference is only about $66.50/person/month, or about $798/year/person. It's not chicken feed, but it's not fatal either. In our case breaking it for one year enabled us to accomplish complete conversion of our tIRA to Roth. If we felt constrained by the IRMAA limit we would not have been able to do that in the time allowed before having to start RMDs. Also, remember the $170K limit starts being adjusted for inflation in 2020.
"Re-verify our range to target ... one ping only."

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One Ping
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Re: Roth Conversion Advice

Post by One Ping » Sat Jan 12, 2019 9:53 pm

2pedals wrote:
Thu Jan 10, 2019 6:21 pm
One Ping wrote:
Thu Jan 10, 2019 12:10 pm
One thing to keep in mind is the tax bracket the survivor will be in. While a 65K pension for a couple is in the 12% bracket, if the survivor pension is also 65K, that will likely put them in the 22% bracket, especially when considering any RMDs that will need to be taken. If that's the case, converting into the 22% bracket may not be as bad as it might seem at first blush.
One Ping

Thank you for your perspective on this. Something to think about for sure. At this point hard to say what will happen. Odds of both being alive in 10 years (age 69) is 80% and in 20 years (age 79) is 47% based on a mortality table I have been using.
It's not really what the joint life expectancy is, but the differential actually experienced between you and she. You don't say how old your wife is but if she is, say 5 years younger than you, that combined with the longer life expectancy for women, lets say it's 3 years (... I'm sure someone will correct me if that is wrong), means that your wife could likely spend many years (say ~8) dealing with a potentially large income (pension survivor benefit + survivor SS + multiple tIRA RMDs) and beng in a higher single tax bracket than when you both were alive and filing MFJ.
"Re-verify our range to target ... one ping only."

Topic Author
2pedals
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Re: Roth Conversion Advice

Post by 2pedals » Sat Jan 12, 2019 11:31 pm

One Ping wrote:
Sat Jan 12, 2019 9:39 pm
I'm not sure how you 'capture the basis' of a tIRA with basis without converting the whole thing. Any such tIRA --> Roth IRA conversion contains a pro-rated portion of the after-tax contributions (basis) and pre-tax contributions and earnings (see Form 8606 for the details).

Note that this treatment of a tIRA basis is different than the treatment of the basis within a 401k. My 401k allows conversion of the just after-tax basis to Roth 401k, as long as as the portion of the growth attributed to that basis is also converted. The 'basis + growth on the basis' is much less than my total 401k balance. This approach doesn't apply to tIRAs.
Yes I agree.
My IPS plan is to convert all his tIRA and can be done all this year (40k, 29k taxable) and the basis all will captured.
Next convert tIRA 210k split between years 2019, 2020, 2021, 2022 (basis is pro-rated each year) and eventually all of the basis will be captured. Convert more from his 401k if more is desired.
One Ping wrote:
Sat Jan 12, 2019 9:39 pm
Also, I would not greatly fear breaking the 1st IRMAA tier limit. The MC premium difference is only about $66.50/person/month, or about $798/year/person. It's not chicken feed, but it's not fatal either. In our case breaking it for one year enabled us to accomplish complete conversion of our tIRA to Roth. If we felt constrained by the IRMAA limit we would not have been able to do that in the time allowed before having to start RMDs. Also, remember the $170K limit starts being adjusted for inflation in 2020.
Yes okay sounds reasonable, I just don't think I will need to break the limit since I don't see the advantage to moving into a higher tax bracket. For example I can move 60k x 9 years = 540k tIRA into Roth (900 tax-deferred ---> 360tIRA, 540k Roth, -110k taxable) and should be reasonable since converting at 22% is uncertain to be optimal.
One Ping wrote:
Sat Jan 12, 2019 9:53 pm
It's not really what the joint life expectancy is, but the differential actually experienced between you and she. You don't say how old your wife is but if she is, say 5 years younger than you, that combined with the longer life expectancy for women, lets say it's 3 years (... I'm sure someone will correct me if that is wrong), means that your wife could likely spend many years (say ~8) dealing with a potentially large income (pension survivor benefit + survivor SS + multiple tIRA RMDs) and beng in a higher single tax bracket than when you both were alive and filing MFJ.
DW is 2 years younger. Yes you have a very good point. At age of 83 odds of only one being alive is about 50%. In about 24 years the odds are even that either I or my wife at (81) will be filling as a single tax payer, unless.... :shock: .

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