Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

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reddison
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Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

My wife and I are thinking of retiring at the end of 2020. I don’t think the full format is necessary for purposes of my questions but let me know if something is missing. I will be 63 3mos and she will be 62. Home is paid for and we have no debt and kids are grown. By the end of 2020, I estimate our finances will be roughly:

Joint Taxable Accounts $834k
My 401k: $1.65m
My rollover IRA: $200k
Wife’s 401k: $306k
About 50/50 Cash & individual stocks: $210k
Total: $3.2m

We have no Roths and are in the 32% tax bracket currently (MFJ). After retiring we should be in the 22% bracket.

I will have a retirement benefit that will pay me around $100k a year for 5 years. In those first 5 years I believe we will need to withdraw $50,000 a year in order to live, pay taxes and health care costs (we currently pay 100% of our healthcare premiums so I know what rates are). Health care costs will decline considerably when we become eligible for Medicare. I believe we will be able to keep our income just below the amounts required to avoid IRMAA. After the 5 years run, I estimate our savings will have grown to $4m plus, and we will still want $150k or so to live on. Once we’re drawing SS, that should be in the 2.5% or less withdrawal rate. So here are the questions:

1. Withdrawals – should we plan to withdraw the initial $50k/year from the Vanguard taxable accounts? And if so, should we currently be putting that money into a VG money market account for safety purposes We are adding $120k a year to the taxable account so this would be easy to do?
2. Roth Conversions – I have read very little about these, but should we be converting an amount that brings us up to but just below the IRMAA limits each year until we get to RMDs? It’s hard to predict future tax brackets.
3. SS – I have looked at the opensocialsecurity link, and it says the optimal is for my wife to start drawing at 62, and me at 70. I am just not sure that is best and we won’t really need that money per se. So I am thinking that we could wait until 70 for both, or maybe just start drawing for both after the payout is over when I’ll be 68 3mos and she’ll be 67. My FRA is 66 ½ and hers is 66 10 mos. If we delay until 70 we’ll have to withdraw more from our savings for a couple of years. We are both in very good health, though only 1 of our parents lived past 80. Thoughts?

Let me know if more info is needed or if there is anything else I should be considering. Thanks!
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by mhalley »

Medicare is so much cheaper than aca insurance, I don’t know if it is worrying about reaching the first tier. Open social security doesn’t take into account doing Roth conversions, so certainly you need to think about them. In general, withdrawing from taxable first is best. Run some scenarios at I-.orp or the spreadsheet to determine optimum Roth conversions.

https://www.i-orp.com/CashAcc/extended.html

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Kitces talks about the tax equilibrium here:

https://www.kitces.com/blog/tax-rate-eq ... e-57204617
. the optimal strategy for managing tax-deferred growth, and the potentially substantial build-up of pre-tax assets (from unrealized capital gains to traditional IRAs and 401(k) plans), is to defer enough to avoid high tax rates now, but not so much as to cause much higher tax rates in the future. In essence, it’s about finding the equilibrium point – like the balancing point on a seesaw – where enough income is created or recognized now to avoid “too much” in the future, but not so much is drawn into the present that it would have been better to just defer the income and wait until later when tax rates might have been lower!
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David Jay
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by David Jay »

reddison wrote: Thu Jan 17, 2019 3:03 pm 3. SS – I have looked at the opensocialsecurity link, and it says the optimal is for my wife to start drawing at 62, and me at 70. I am just not sure that is best and we won’t really need that money per se. So I am thinking that we could wait until 70 for both, or maybe just start drawing for both after the payout is over when I’ll be 68 3mos and she’ll be 67. My FRA is 66 ½ and hers is 66 10 mos. If we delay until 70 we’ll have to withdraw more from our savings for a couple of years. We are both in very good health, though only 1 of our parents lived past 80. Thoughts?
Let me walk you through the logic behind the opensocialsecurity recommendation:
1. When a person files for SS benefits is loosely financially “fair”: filing early gets one more, smaller payments, filing late gets one fewer, bigger payments. For an individual, it doesn’t make a huge difference unless there is a known issue that makes one actuarially “unique” (major health problem, etc).
2. The big kicker for married people is that after one spouse passes, the survivor gets the bigger of the two benefits. So the higher earning spouse should delay as long as possible to maximize the survivor’s benefit. That is why OSS is recommending that you delay to age 70.
3. It is nice to get some payback of all those contributions, so taking the lower-earner’s benefit earlier creates some cash-flow and gives the couple some payback in the event that they both pass either spouse passes at an early age. That is why filing early is recommended for your wife.
Last edited by David Jay on Fri Jan 18, 2019 8:42 am, edited 1 time in total.
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SuzBanyan
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by SuzBanyan »

Whatever else you do, you should each set up a Roth soon to start the running of your initial 5 year ownership period. It looks like you wife could make a non-deductible contribution to a traditional IRA, then convert it to a Roth via the Backdoor. With your existing tIRA, your conversion will be ordinary income (unless you can first roll your tIRA into your 401k) but still may make sense for at least a small amount. Five years after the first day of the year in which you first fund any Roth by conversion, you can withdraw from any Roth without penalty or tax.
dink2win
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by dink2win »

If he is filing jointly, can you do the Roth conversion tax calculation separately? I thought it was all combined.
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reddison
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

mhalley - Thank you for the links. I hadn't seen the Kitces article before and it is helpful. I don't know what my problem is but I've tried to use the I-orp calculator several times before unsuccessfully. I'm not sure how I would input data that would help me find optimal Roth conversions, especially since we are talking about doing it in the future.

SuzBanyon - Is there any reason I'd want to start Roth conversions now and pay 32% tax versus waiting until I'll be in a much lower tax bracket? I think (hope) our savings will be increasing over time as our withdrawal rate is pretty low, so my thinking on Roths is to put money there that will just sit there and grow tax free until our children inherit it. I haven't done it up until now because of our tax bracket. I am not allowed to roll tIRAs into my 401k. When I retire I plan to roll our 401ks into IRAs at VG.

David - thx for the explanation. Makes sense.
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by SuzBanyan »

reddison wrote: Thu Jan 17, 2019 5:01 pm mhalley - Thank you for the links. I hadn't seen the Kitces article before and it is helpful. I don't know what my problem is but I've tried to use the I-orp calculator several times before unsuccessfully. I'm not sure how I would input data that would help me find optimal Roth conversions, especially since we are talking about doing it in the future.

SuzBanyon - Is there any reason I'd want to start Roth conversions now and pay 32% tax versus waiting until I'll be in a much lower tax bracket? I think (hope) our savings will be increasing over time as our withdrawal rate is pretty low, so my thinking on Roths is to put money there that will just sit there and grow tax free until our children inherit it. I haven't done it up until now because of our tax bracket. I am not allowed to roll tIRAs into my 401k. When I retire I plan to roll our 401ks into IRAs at VG.

David - thx for the explanation. Makes sense.
For you, I might convert $100 just to get the 5-year clock ticking, even if you pay an additional $32 in taxes (versus about $22 in taxes if you wait). Even with the plan to hold any funds in your Roth for inheritance, you may appreciate the ability to withdraw from time to time for added flexibility to avoid such things as IRMAA.
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David Jay
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by David Jay »

reddison wrote: Thu Jan 17, 2019 5:01 pmSuzBanyon - Is there any reason I'd want to start Roth conversions now and pay 32% tax versus waiting until I'll be in a much lower tax bracket?
I am not Suz, but I understand what she said about the 5 year clock:

All withdrawals from Roth’s are tax free if you meet (2) criteria - that the owner is over age 59.5 and that the Roth (actually, the first Roth for each individual if that individual has more than one) has been open for 5 years.

So yes, each of you should open a Roth and contribute with a rollover of, say, $100 to get the clock going. Yes, you will pay 32% on the conversion but it is well worth it to get the 5 year clock going for each of you.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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reddison
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

David Jay wrote: Thu Jan 17, 2019 5:16 pm
reddison wrote: Thu Jan 17, 2019 5:01 pmSuzBanyon - Is there any reason I'd want to start Roth conversions now and pay 32% tax versus waiting until I'll be in a much lower tax bracket?
I am not Suz, but I understand what she said about the 5 year clock:

All withdrawals from Roth’s are tax free if you meet (2) criteria - that the owner is over age 59.5 and that the Roth (actually, the first Roth for each individual if that individual has more than one) has been open for 5 years.

So yes, each of you should open a Roth and contribute with a rollover of, say, $100 to get the clock going. Yes, you will pay 32% on the conversion but it is well worth it to get the 5 year clock going for each of you.
I think I get it now - Duh! It's a one time clock - not 5 years each time you convert. Right? Thanks.
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David Jay
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by David Jay »

reddison wrote: Thu Jan 17, 2019 5:33 pm I think I get it now - Duh! It's a one time clock - not 5 years each time you convert. Right?
Bingo!

per person, of course (the “I” in IRA is for “individual”)
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
SuzBanyan
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by SuzBanyan »

Ther are 2 different 5 year clocks. Now that you are over the age of 59 1/2, you only have to worry about the 5 year clock for your first Roth account. For a Roth funded by a conversion, it starts on Jan 1 of the year of the conversion. I believe it ends on 12/31 of the 5th tax year thereafter, so for funds converted in 2019, you could withdraw in 2024. You need to complete the conversion by 12/31/19.

Because your wife can do Backdoor Roth’s, she could still contribute to non-deductible tIRA for 2018 until 4/15/19. I don’t think this changes the start of the clock ticking on her Roth (which will still be converted in 2019), but allows you to build up her Roth with the 2018 contribution at no increase to your taxes.
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reddison
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

SuzBanyan wrote: Thu Jan 17, 2019 5:15 pm
reddison wrote: Thu Jan 17, 2019 5:01 pm mhalley - Thank you for the links. I hadn't seen the Kitces article before and it is helpful. I don't know what my problem is but I've tried to use the I-orp calculator several times before unsuccessfully. I'm not sure how I would input data that would help me find optimal Roth conversions, especially since we are talking about doing it in the future.

SuzBanyon - Is there any reason I'd want to start Roth conversions now and pay 32% tax versus waiting until I'll be in a much lower tax bracket? I think (hope) our savings will be increasing over time as our withdrawal rate is pretty low, so my thinking on Roths is to put money there that will just sit there and grow tax free until our children inherit it. I haven't done it up until now because of our tax bracket. I am not allowed to roll tIRAs into my 401k. When I retire I plan to roll our 401ks into IRAs at VG.

David - thx for the explanation. Makes sense.
For you, I might convert $100 just to get the 5-year clock ticking, even if you pay an additional $32 in taxes (versus about $22 in taxes if you wait). Even with the plan to hold any funds in your Roth for inheritance, you may appreciate the ability to withdraw from time to time for added flexibility to avoid such things as IRMAA.
So thanks for the suggestion on getting the Roths started. Now I just need to make sure we are eligible and could use help on how to do it from you or anyone who wants to chime in. We exceed the Roth IRA income limits. And I need to clarify the funds we have because I was too vague in my first post and it might matter.

I have my 401k at work. I will roll it into an IRA when I retire.
I have 2 rollover IRAs held at Vanguard. One is from a former employer, and the other is a (small) inherited IRA that I take RMDs on.
What I called 401k for my wife, is actually a small employer simple IRA with a match.

Can I do what you suggested - have my wife open a non-deductible IRA, then convert backdoor? Can I do this through Vanguard?
And for myself?

Thanks again
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by vtMaps »

reddison wrote: Thu Jan 17, 2019 5:50 pm Can I do what you suggested - have my wife open a non-deductible IRA, then convert backdoor? Can I do this through Vanguard?
And for myself?
Do you know about the pro-rate rule? It is messy to co-mingle pre and post tax contributions in an IRA. If you already have a traditional IRA, why not just convert all or part of it to a Roth IRA?

--vtMaps
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by SuzBanyan »

reddison wrote: Thu Jan 17, 2019 5:50 pm
So thanks for the suggestion on getting the Roths started. Now I just need to make sure we are eligible and could use help on how to do it from you or anyone who wants to chime in. We exceed the Roth IRA income limits. And I need to clarify the funds we have because I was too vague in my first post and it might matter.

I have my 401k at work. I will roll it into an IRA when I retire.
I have 2 rollover IRAs held at Vanguard. One is from a former employer, and the other is a (small) inherited IRA that I take RMDs on.
What I called 401k for my wife, is actually a small employer simple IRA with a match.

Can I do what you suggested - have my wife open a non-deductible IRA, then convert backdoor? Can I do this through Vanguard?
And for myself?

Thanks again
It looks like your wife is not eligible for a Backdoor Roth because a Simple IRA is considered to be a traditional IRA. As a result, a conversion from the Simple to a Roth is not tax free.

You best bet would be to open Roth’s at a bank such as Ally, which has no minimum deposit. Then take a distribution from your tIRA, and contribute it to your Roth within 60 days. You wife would do the same, but would take the distribution from her Simple. You want to complete the contribution to each Roth by 12/31/19. While a savings account at a bank is obviously not a great investment, the total investment is just a blip on your net worth and buys you that ticking clock on each account.
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by JoeRetire »

reddison wrote: Thu Jan 17, 2019 3:03 pm3. SS – I have looked at the opensocialsecurity link, and it says the optimal is for my wife to start drawing at 62, and me at 70. I am just not sure that is best and we won’t really need that money per se. So I am thinking that we could wait until 70 for both, or maybe just start drawing for both after the payout is over when I’ll be 68 3mos and she’ll be 67. My FRA is 66 ½ and hers is 66 10 mos. If we delay until 70 we’ll have to withdraw more from our savings for a couple of years. We are both in very good health, though only 1 of our parents lived past 80. Thoughts?
With your assets it seems unlikely that any choice would be fatal.

Why are you not sure the optimal solution output from opensocialsecurity is best? Have you tried the Advanced Options and played around with different Mortality Table choices? One that could be of particular interest is the "Assumed age at death" option.

You may find that with assumed age of mid 80s or more, you'll be better off both claiming at 70. It tends to depend on the difference in benefits between the higher earner and the lower earner.
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Watty
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by Watty »

reddison wrote: Thu Jan 17, 2019 3:03 pm I will be 63 3mos

....

I believe we will need to withdraw $50,000 a year in order to live, pay taxes and health care costs (we currently pay 100% of our healthcare premiums so I know what rates are). Health care costs will decline considerably when we become eligible for Medicare.
It does not sound like you will be eligible for COBRA but if you are then there are a couple of things to consider. If you delayed your retirement until you are 63.5 years old then 18 months of COBRA would get you to Medicare and you getting on Medicare while still on COBRA is also a special qualifying event that extends her eligibility for COBRA that could be long enough for your wife to be able to go directly from COBRA to Medicare. There are lots of details that would need to be looked into but if you will be using COBRA that would looking into.

A few states also allow more than 18 months of COBRA so be sure to check the rules for your state.

Working a few months into 2021 would also allow you to make retirement account contributions in 2021 which might be worthwhile especially if you have access to something like a Roth 401k that you could max out.
reddison wrote: Thu Jan 17, 2019 3:03 pm After the 5 years run, I estimate our savings will have grown to $4m plus....
You are well below the net worth were estate taxes kick in but those limits have gone up and down multiple times so that it is hard to guess what it will be when you die. If your money is invested and grows for 30+ years it could also grow to the point where estate taxes are a problem. There probably is not a lot you should do now but that would be good to watch as the laws change or your portfolio grows.
reddison wrote: Thu Jan 17, 2019 3:03 pm After the 5 years run, I estimate our savings will have grown to $4m plus, and we will still want $150k or so to live on.
Your income needs will be different at different ages. You would be 68 then.

I have seen relatives in their mid 70s and naturally slow down even though they were in relatively good health for their ages. At that point they didn't want to travel much or even going out for the evening became a rare event. They were typically more interested in downsizing than buying a lot of stuff. The end result was that for a long time their expenses were very low and there were some months when they did not even spend their entire Social Security check.

If only one of you is surviving when long term care is needed your expenses could actually be lower when long term care is needed.

I obviously don't know your details but I would suspect that your estimate is high.
reddison wrote: Thu Jan 17, 2019 3:03 pm 1. Withdrawals – should we plan to withdraw the initial $50k/year from the Vanguard taxable accounts? And if so, should we currently be putting that money into a VG money market account for safety purposes We are adding $120k a year to the taxable account so this would be easy to do?
You don't really need to worry about the safety and if you just filled up your taxable account with stocks that would be more tax efficient and your long term capital gains tax rate will likely be lower than your ordinary income tax rate. There is a wiki on tax efficient fund placement.

https://www.bogleheads.org/wiki/Tax-eff ... _placement
reddison wrote: Thu Jan 17, 2019 3:03 pm 2. Roth Conversions – I have read very little about these, but should we be converting an amount that brings us up to but just below the IRMAA limits each year until we get to RMDs? It’s hard to predict future tax brackets.
It is impossible to predict even on a short basis. I would just look at it each year in November or December when you will know what your numbers will be for the year.

Two thing to remember;
1) It is likely that one of you will survive the other and then be filing taxes in a higher single tax bracket.

2) It is very likely that you will leave a large estate some day so the likely tax bracket of your heirs is a very important factor to consider.
reddison wrote: Thu Jan 17, 2019 3:03 pm 3. SS – I have looked at the opensocialsecurity link, and it says the optimal is for my wife to start drawing at 62, and me at 70. I am just not sure that is best and we won’t really need that money per se. So I am thinking that we could wait until 70 for both, or maybe just start drawing for both after the payout is over when I’ll be 68 3mos and she’ll be 67. My FRA is 66 ½ and hers is 66 10 mos. If we delay until 70 we’ll have to withdraw more from our savings for a couple of years. We are both in very good health, though only 1 of our parents lived past 80. Thoughts?
Be sure to look at your after tax numbers, that website does not try to do that. Many states don't tax Social Security and at most only 85% of it is taxed on a federal return. In a high tax bracket a dollar in Social Security is worth more than a dollar from an IRA withdrawal.

I would assume that your Social Security is higher and that she is likely to live longer since she is younger and women typically live longer. I didn't crunch the numbers but if that is true you would have to both live a long time to reach a breakeven point.
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by ObliviousInvestor »

David Jay wrote: Thu Jan 17, 2019 4:09 pm Let me walk you through the logic behind the opensocialsecurity recommendation:
1. When a person files for SS benefits is loosely financially “fair”: filing early gets one more, smaller payments, filing late gets one fewer, bigger payments. For an individual, it doesn’t make a huge difference unless there is a known issue that makes one actuarially “unique” (major health problem, etc).
2. The big kicker for married people is that after one spouse passes, the survivor gets the bigger of the two benefits. So the higher earning spouse should delay as long as possible to maximize the survivor’s benefit. That is why OSS is recommending that you delay to age 70.
3. It is nice to get some payback of all those contributions, so taking the lower-earner’s benefit earlier creates some cash-flow and gives the couple some payback in the event that they both pass at an early age. That is why filing early is recommended for your wife.
This was a great explanation. :thumbsup :thumbsup

One quibble with regard to point #3: filing for the lower earner's benefit earlier works out well in the event that either person dies at an early age.
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David Jay
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by David Jay »

ObliviousInvestor wrote: Fri Jan 18, 2019 8:06 am This was a great explanation. :thumbsup :thumbsup
I’m honored...

(Oblivious Investor is Mike Piper, creator of opensocialsecurity.com)
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by livesoft »

reddison wrote: Thu Jan 17, 2019 3:03 pm 1. Withdrawals – should we plan to withdraw the initial $50k/year from the Vanguard taxable accounts? And if so, should we currently be putting that money into a VG money market account for safety purposes We are adding $120k a year to the taxable account so this would be easy to do?
We are about the same age. We do NOT have any money in a money market account, nor in a savings account, nor in CDs. There is no need for a false sense of safety. A largish taxable account like yours (and like ours) will pay out dividends at least quarterly and those are all the safety purposes that we need. Just have the dividends sent to your checking account to spend and do not reinvest them.

Then if you need more money just sell something. We choose to sell something that will not create any extra taxes for us and also simplify our portfolio and also help with rebalancing. In your case, I would be dumping the individual stocks or contributing them to a Donor-Advised Fund.
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reddison
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

To answer a few of the questions above...

I am in an Anthem group plan and will be eligible for Cobra. I have thought about working the first 3 months of 2021 so that it would carry me to Medicare. We'll still have to find an individual plan for my wife for 15 months.

On the opensocialsecurity, my only question is the large difference in my wife's monthly benefit in taking at 62 vs FRA or 70. The breakeven is in the late 70s, and the total $ payout difference isn't real high. I see the logic. And no offense to Mike Piper!

livesoft - I have all of my funds on reinvest now. Is this something to change now or upon retirement?

Just one more question on the Roths. I have a rollover IRA of $125k sitting at Vanguard. So am I able to rollover $5k of it to open a Roth and get the 5 year clock started? Suz mentioned I could do it with an Ally Bank account. I take it it's not possible to have a Roth with Vanguard - is that right?

Thanks to all for the helpful replies!
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by teen persuasion »

mhalley wrote: Thu Jan 17, 2019 3:25 pm Medicare is so much cheaper than aca insurance, I don’t know if it is worrying about reaching the first tier. Open social security doesn’t take into account doing Roth conversions, so certainly you need to think about them. In general, withdrawing from taxable first is best. Run some scenarios at I-.orp or the spreadsheet to determine optimum Roth conversions.

https://www.i-orp.com/CashAcc/extended.html

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Kitces talks about the tax equilibrium here:

https://www.kitces.com/blog/tax-rate-eq ... e-57204617
. the optimal strategy for managing tax-deferred growth, and the potentially substantial build-up of pre-tax assets (from unrealized capital gains to traditional IRAs and 401(k) plans), is to defer enough to avoid high tax rates now, but not so much as to cause much higher tax rates in the future. In essence, it’s about finding the equilibrium point – like the balancing point on a seesaw – where enough income is created or recognized now to avoid “too much” in the future, but not so much is drawn into the present that it would have been better to just defer the income and wait until later when tax rates might have been lower!
Why is withdrawing from taxable first considered best?
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by smitcat »

teen persuasion wrote: Fri Jan 18, 2019 9:42 am
mhalley wrote: Thu Jan 17, 2019 3:25 pm Medicare is so much cheaper than aca insurance, I don’t know if it is worrying about reaching the first tier. Open social security doesn’t take into account doing Roth conversions, so certainly you need to think about them. In general, withdrawing from taxable first is best. Run some scenarios at I-.orp or the spreadsheet to determine optimum Roth conversions.

https://www.i-orp.com/CashAcc/extended.html

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Kitces talks about the tax equilibrium here:

https://www.kitces.com/blog/tax-rate-eq ... e-57204617
. the optimal strategy for managing tax-deferred growth, and the potentially substantial build-up of pre-tax assets (from unrealized capital gains to traditional IRAs and 401(k) plans), is to defer enough to avoid high tax rates now, but not so much as to cause much higher tax rates in the future. In essence, it’s about finding the equilibrium point – like the balancing point on a seesaw – where enough income is created or recognized now to avoid “too much” in the future, but not so much is drawn into the present that it would have been better to just defer the income and wait until later when tax rates might have been lower!
Why is withdrawing from taxable first considered best?
Typically it is not, see this link for details....
https://www.kitces.com/blog/tax-efficie ... ing-needs/
SuzBanyan
Posts: 2015
Joined: Thu Jun 02, 2016 11:20 am

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by SuzBanyan »

reddison wrote: Fri Jan 18, 2019 9:03 am To answer a few of the questions above...

— snip—

Just one more question on the Roths. I have a rollover IRA of $125k sitting at Vanguard. So am I able to rollover $5k of it to open a Roth and get the 5 year clock started? Suz mentioned I could do it with an Ally Bank account. I take it it's not possible to have a Roth with Vanguard - is that right?

Thanks to all for the helpful replies!
The reason I suggested a bank instead of an investment company such as Vanguard is that banks often have much lower minimum amounts for an initial investment. If you are only converting $100 to each Roth just to start the 5 year clock, Vanguard won’t take that account. For simplicity, I would look at banks with which you already have a relationship which have no minimum for IRA accounts. Your $100 deposit X 2 might sit there for years earning minimal amounts until your income drops and additional Roth conversions make sense. Then you can consolidate your initial Roth investment with other conversions into a single investment eligible Roth account.
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Watty
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by Watty »

reddison wrote: Fri Jan 18, 2019 9:03 am I am in an Anthem group plan and will be eligible for Cobra. I have thought about working the first 3 months of 2021 so that it would carry me to Medicare. We'll still have to find an individual plan for my wife for 15 months.
I think that your wife would get an extension of how long she could stay on COBRA when you start Medicare if you are still on COBRA then. If your COBRA ended a few months before your start Medicare I don't think she would get this.

https://www.cms.gov/CCIIO/Programs-and- ... sheet.html

18 to 36-Month Period (Second Qualifying Event): A spouse and dependent children who already have COBRA coverage, and then experience a second qualifying event, may be entitled to a total of 36 months of COBRA coverage. Second qualifying events may include the death of the covered employee, divorce or legal separation from the covered employee, the covered employee becoming entitled to Medicare benefits (under Part A, Part B or both), or a dependent child ceasing to be eligible for coverage as a dependent under the group health plan. The following conditions must be met in order for a second event to extend a period of coverage:
...........
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teen persuasion
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by teen persuasion »

smitcat wrote: Fri Jan 18, 2019 10:48 am
teen persuasion wrote: Fri Jan 18, 2019 9:42 am
mhalley wrote: Thu Jan 17, 2019 3:25 pm Medicare is so much cheaper than aca insurance, I don’t know if it is worrying about reaching the first tier. Open social security doesn’t take into account doing Roth conversions, so certainly you need to think about them. In general, withdrawing from taxable first is best. Run some scenarios at I-.orp or the spreadsheet to determine optimum Roth conversions.

https://www.i-orp.com/CashAcc/extended.html

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Kitces talks about the tax equilibrium here:

https://www.kitces.com/blog/tax-rate-eq ... e-57204617
. the optimal strategy for managing tax-deferred growth, and the potentially substantial build-up of pre-tax assets (from unrealized capital gains to traditional IRAs and 401(k) plans), is to defer enough to avoid high tax rates now, but not so much as to cause much higher tax rates in the future. In essence, it’s about finding the equilibrium point – like the balancing point on a seesaw – where enough income is created or recognized now to avoid “too much” in the future, but not so much is drawn into the present that it would have been better to just defer the income and wait until later when tax rates might have been lower!
Why is withdrawing from taxable first considered best?
Typically it is not, see this link for details....
https://www.kitces.com/blog/tax-efficie ... ing-needs/
Thank you - very good points by Kitces.

Even that link starts with "The conventional view is that taxable investment accounts should be liquidated first, while tax-deferred accounts are allowed to continue to compound." My question should have been, why is this the conventional view, when it is obviously flawed? How did it first get promoted, and why did they believe it was best? Curious about the thought process behind the idea - did this make sense in some past era, and changes to tax advantaged account types and rules alter things, or could it be true in one scenario, or is it all about inheritance left to heirs, or...
btenny
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by btenny »

Can you take the $100K payout early? Say take $150K over three years? That should keep you below the IRMAA limits and still be in the 22% tax bracket. But make sure you stay below the $170K limit after adding dividends and other taxable investment income. And beware that muni bond interest is part of the IRMAA income.

Then after that payout you will have almost no taxable income from age 65 to 70 by not taking SS for either of you. During that period you can spend down your taxable account. That way you can do a lot of IRA conversions to a Roth for those five years. Probably up to $150K per year or $750K for 5 years. This will reduce your IRA value a lot and your RMDs a lot. Then you can live on SS and RMDs and IRA withdrawals after age 70 and not use your Roth at all. Do some math and run some spread sheets with all your income.

I think some Roth conversion of your IRA is really important. Your total IRA values are high and you and your wife both will have RMDs. So you need to convert some of that IRA $ to ROTH to prevent hitting the IRMAA $170K limits at age 70 when you start RMDs and SS. Do the math. I bet it is close. Other wise you will have to pay extra $$ for medicare insurance. But don't go crazy with all these calculations as the premium is only $54 extra per month or $1300 per couple per year. I bet you will still hit the IRMAA limits as your RMDs increase to 4% or more as you get older. Maybe 78 or so as the RMDs get to 5%.

Be happy that you have done so well. Now go enjoy it.

Good Luck.
bradpevans
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by bradpevans »

reddison wrote: Thu Jan 17, 2019 3:03 pm My wife and I are thinking of retiring at the end of 2020. I don’t think the full format is necessary for purposes of my questions but let me know if something is missing. I will be 63 3mos and she will be 62. Home is paid for and we have no debt and kids are grown. By the end of 2020, I estimate our finances will be roughly:

Joint Taxable Accounts $834k
My 401k: $1.65m
My rollover IRA: $200k
Wife’s 401k: $306k
About 50/50 Cash & individual stocks: $210k
Total: $3.2m

We have no Roths and are in the 32% tax bracket currently (MFJ). After retiring we should be in the 22% bracket.

I will have a retirement benefit that will pay me around $100k a year for 5 years. In those first 5 years I believe we will need to withdraw $50,000 a year in order to live, pay taxes and health care costs (we currently pay 100% of our healthcare premiums so I know what rates are). Health care costs will decline considerably when we become eligible for Medicare. I believe we will be able to keep our income just below the amounts required to avoid IRMAA. After the 5 years run, I estimate our savings will have grown to $4m plus, and we will still want $150k or so to live on. Once we’re drawing SS, that should be in the 2.5% or less withdrawal rate. So here are the questions:

1. Withdrawals – should we plan to withdraw the initial $50k/year from the Vanguard taxable accounts? And if so, should we currently be putting that money into a VG money market account for safety purposes We are adding $120k a year to the taxable account so this would be easy to do?
2. Roth Conversions – I have read very little about these, but should we be converting an amount that brings us up to but just below the IRMAA limits each year until we get to RMDs? It’s hard to predict future tax brackets.
3. SS – I have looked at the opensocialsecurity link, and it says the optimal is for my wife to start drawing at 62, and me at 70. I am just not sure that is best and we won’t really need that money per se. So I am thinking that we could wait until 70 for both, or maybe just start drawing for both after the payout is over when I’ll be 68 3mos and she’ll be 67. My FRA is 66 ½ and hers is 66 10 mos. If we delay until 70 we’ll have to withdraw more from our savings for a couple of years. We are both in very good health, though only 1 of our parents lived past 80. Thoughts?

Let me know if more info is needed or if there is anything else I should be considering. Thanks!
You are the classic case for delaying SS and doing Roth conversion while your income is still low-ish.
If you have holdings without huge gains, those can used to live on / to pay taxes on the conversion.
Eventually you will have SS x 2 plus RMDs (plus any pension/annuties + dividends in taxable),
so you may move up in tax bracket. Eventually filing status becomes single, which
again may worsen your tax burden.

Roth money (when withdrawn) will never bump you into the next tax bracket, so
it works well for new cars, luxury vacations, new roofs, etc.

If you wish to leave a large(r) inheritance, you might start one SS early,
to guarantee those funds can be accumulated / lessen the draw-down on taxable / tax-deferred.

If you wish the option of "spend more while alive" you would probably delay both SS,
do Roth conversions and draw-down your 401 at a higher % UNTIL 70, then slow down that rate after 70,
because you will have SS x 2 at the point. With your numbers, its most likely
that 85% of your SS will be taxed. But that's still 15% (of a large SS amount) untaxed,
which lessens the strain on taxable / tax defered at that point.
mhalley
Posts: 10432
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by mhalley »

For i-orp, be sure you are using the extended version, and that you are checking the appropriate tax bracket ceiling. It is the last field under retirement plans.
If you don’t mind spending 5 bucks on an android app, try the pro version of the Can I retire yet app. You can put in actual amounts of conversions and see how it affects your plan.
https://www.caniretireyet.com/launching ... nd-scenes/
02nz
Posts: 10508
Joined: Wed Feb 21, 2018 2:17 pm

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by 02nz »

teen persuasion wrote: Fri Jan 18, 2019 12:49 pm
smitcat wrote: Fri Jan 18, 2019 10:48 am
teen persuasion wrote: Fri Jan 18, 2019 9:42 am
mhalley wrote: Thu Jan 17, 2019 3:25 pm Medicare is so much cheaper than aca insurance, I don’t know if it is worrying about reaching the first tier. Open social security doesn’t take into account doing Roth conversions, so certainly you need to think about them. In general, withdrawing from taxable first is best. Run some scenarios at I-.orp or the spreadsheet to determine optimum Roth conversions.

https://www.i-orp.com/CashAcc/extended.html

https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Kitces talks about the tax equilibrium here:

https://www.kitces.com/blog/tax-rate-eq ... e-57204617
. the optimal strategy for managing tax-deferred growth, and the potentially substantial build-up of pre-tax assets (from unrealized capital gains to traditional IRAs and 401(k) plans), is to defer enough to avoid high tax rates now, but not so much as to cause much higher tax rates in the future. In essence, it’s about finding the equilibrium point – like the balancing point on a seesaw – where enough income is created or recognized now to avoid “too much” in the future, but not so much is drawn into the present that it would have been better to just defer the income and wait until later when tax rates might have been lower!
Why is withdrawing from taxable first considered best?
Typically it is not, see this link for details....
https://www.kitces.com/blog/tax-efficie ... ing-needs/
Thank you - very good points by Kitces.

Even that link starts with "The conventional view is that taxable investment accounts should be liquidated first, while tax-deferred accounts are allowed to continue to compound." My question should have been, why is this the conventional view, when it is obviously flawed? How did it first get promoted, and why did they believe it was best? Curious about the thought process behind the idea - did this make sense in some past era, and changes to tax advantaged account types and rules alter things, or could it be true in one scenario, or is it all about inheritance left to heirs, or...
I've wondered the same. I think the conventional wisdom has advocated liquidating taxable first partly because of tax drag, which is less of an issue now, thanks to tax-efficient investments, such as index funds and especially Vanguard ETFs. The other main reason, I think, is that the idea of using years of low/no income to "fill up" low income tax brackets with withdrawals/Roth conversions out of tax-deferred accounts is a relatively recent thing, made more common by a combination of factors: pre-Medicare health insurance becoming more available because of ACA; Social Security kicking in later; increasing exposure of Social Security benefits to income taxes if withdrawing from 401k/tIRA at same time (because of lack of inflation indexing); fewer people having pensions; and generally the idea of "early retirement" gaining popularity. So before this became common, and lots of people went from a full salary immediately to drawing a combination of Social Security and pension, it made more sense to liquidate investments with tax drag first and allow traditional 401k/IRA balances to continue to grow without taxes.

ETA: A good example of this conventional wisdom in this Christine Benz article, in which she recommends first drawing down taxable after taking any RMDs: https://www.morningstar.com/articles/84 ... awals.html
Last edited by 02nz on Fri Jan 18, 2019 4:29 pm, edited 2 times in total.
Topic Author
reddison
Posts: 175
Joined: Mon Jul 16, 2018 11:13 am

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

btenny wrote: Fri Jan 18, 2019 2:37 pm Can you take the $100K payout early? Say take $150K over three years? That should keep you below the IRMAA limits and still be in the 22% tax bracket. But make sure you stay below the $170K limit after adding dividends and other taxable investment income. And beware that muni bond interest is part of the IRMAA income.

Then after that payout you will have almost no taxable income from age 65 to 70 by not taking SS for either of you. During that period you can spend down your taxable account. That way you can do a lot of IRA conversions to a Roth for those five years. Probably up to $150K per year or $750K for 5 years. This will reduce your IRA value a lot and your RMDs a lot. Then you can live on SS and RMDs and IRA withdrawals after age 70 and not use your Roth at all. Do some math and run some spread sheets with all your income.

I think some Roth conversion of your IRA is really important. Your total IRA values are high and you and your wife both will have RMDs. So you need to convert some of that IRA $ to ROTH to prevent hitting the IRMAA $170K limits at age 70 when you start RMDs and SS. Do the math. I bet it is close. Other wise you will have to pay extra $$ for medicare insurance. But don't go crazy with all these calculations as the premium is only $54 extra per month or $1300 per couple per year. I bet you will still hit the IRMAA limits as your RMDs increase to 4% or more as you get older. Maybe 78 or so as the RMDs get to 5%.

Be happy that you have done so well. Now go enjoy it.

Good Luck.
Thanks btenny. No I can't take the 5 year payout early. The payout clock starts when I officially retire from work. And it is taxable so I will be taxed on the full amount, plus on any SS (drawn by my wife), Roth rollovers, interest and dividends for the full 5 years. I intend to try to stay below the limit post retirement, and also try to do as much Roth rollover as possible. I have estimated that if I do nothing my wife and I would have combined RMDs of around $110k plus social security, dividends and interest. I also suppose the limit will grow by then, so we'll just have to see. But yes we will be close.
Topic Author
reddison
Posts: 175
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

[/quote]

The reason I suggested a bank instead of an investment company such as Vanguard is that banks often have much lower minimum amounts for an initial investment. If you are only converting $100 to each Roth just to start the 5 year clock, Vanguard won’t take that account. For simplicity, I would look at banks with which you already have a relationship which have no minimum for IRA accounts. Your $100 deposit X 2 might sit there for years earning minimal amounts until your income drops and additional Roth conversions make sense. Then you can consolidate your initial Roth investment with other conversions into a single investment eligible Roth account.
[/quote]

Thx Suz. I will think about this. I might go straight to VG and open it with a larger amount to avoid having to move it down the road. I am already in a position of having too many accounts to consolidate. I understand the tax consequences.
Topic Author
reddison
Posts: 175
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

mhalley wrote: Fri Jan 18, 2019 3:14 pm For i-orp, be sure you are using the extended version, and that you are checking the appropriate tax bracket ceiling. It is the last field under retirement plans.
If you don’t mind spending 5 bucks on an android app, try the pro version of the Can I retire yet app. You can put in actual amounts of conversions and see how it affects your plan.
https://www.caniretireyet.com/launching ... nd-scenes/
I'll try the extended version. Unfortunately I don't have an android phone because I'd like to play around with that. Thx
Topic Author
reddison
Posts: 175
Joined: Mon Jul 16, 2018 11:13 am

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

Watty wrote: Fri Jan 18, 2019 11:55 am
reddison wrote: Fri Jan 18, 2019 9:03 am I am in an Anthem group plan and will be eligible for Cobra. I have thought about working the first 3 months of 2021 so that it would carry me to Medicare. We'll still have to find an individual plan for my wife for 15 months.
I think that your wife would get an extension of how long she could stay on COBRA when you start Medicare if you are still on COBRA then. If your COBRA ended a few months before your start Medicare I don't think she would get this.

https://www.cms.gov/CCIIO/Programs-and- ... sheet.html

18 to 36-Month Period (Second Qualifying Event): A spouse and dependent children who already have COBRA coverage, and then experience a second qualifying event, may be entitled to a total of 36 months of COBRA coverage. Second qualifying events may include the death of the covered employee, divorce or legal separation from the covered employee, the covered employee becoming entitled to Medicare benefits (under Part A, Part B or both), or a dependent child ceasing to be eligible for coverage as a dependent under the group health plan. The following conditions must be met in order for a second event to extend a period of coverage:
...........
I never heard of this. Good to know. Thx
smitcat
Posts: 13300
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by smitcat »

reddison wrote: Fri Jan 18, 2019 4:33 pm
mhalley wrote: Fri Jan 18, 2019 3:14 pm For i-orp, be sure you are using the extended version, and that you are checking the appropriate tax bracket ceiling. It is the last field under retirement plans.
If you don’t mind spending 5 bucks on an android app, try the pro version of the Can I retire yet app. You can put in actual amounts of conversions and see how it affects your plan.
https://www.caniretireyet.com/launching ... nd-scenes/
I'll try the extended version. Unfortunately I don't have an android phone because I'd like to play around with that. Thx
You can do the same detailed Roth comparison with the free RPM calculator produced by our own Boglehead here.
I find it very valuable but it takes more time to load and understand then the extended IORP.
Well worth it for what we have learned.
mhalley
Posts: 10432
Joined: Tue Nov 20, 2007 5:02 am

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by mhalley »

You can run an emulator if you don’t have a phone. I have had good results with blue stacks. Here are some others:
https://www.androidauthority.com/best-a ... pc-655308/
Topic Author
reddison
Posts: 175
Joined: Mon Jul 16, 2018 11:13 am

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

mhalley wrote: Fri Jan 18, 2019 5:37 pm You can run an emulator if you don’t have a phone. I have had good results with blue stacks. Here are some others:
https://www.androidauthority.com/best-a ... pc-655308/
I have an iPhone if it runs on it...
livesoft
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by livesoft »

teen persuasion wrote: Fri Jan 18, 2019 12:49 pmWhy is withdrawing from taxable first considered best?
Tax laws have changed. In the old days, folks with moderate to high income could not make Roth conversions. Plus in the old days, people had problems understanding that one could withdraw from different types of accounts at the same time. They still do. I think that's mostly where the "taxable first" comes from because people always asked "Which account first?" instead of "Which accounts first?"
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livesoft
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by livesoft »

reddison wrote: Fri Jan 18, 2019 9:03 amlivesoft - I have all of my funds on reinvest now. Is this something to change now or upon retirement?
I'd change now and also set all taxable account assets to have a Cost Basis Method of Specific Identification.
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reddison
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

livesoft wrote: Sat Jan 19, 2019 9:26 am
reddison wrote: Fri Jan 18, 2019 9:03 amlivesoft - I have all of my funds on reinvest now. Is this something to change now or upon retirement?
I'd change now and also set all taxable account assets to have a Cost Basis Method of Specific Identification.
I have changed Cost Basis to Specific Id. December 2018 was the first time I ever tax loss harvested so I changed some then for the first time. Now I've set it for all funds.

Can you explain the advantages/disadvantages of having funds on reinvest vs. having dividends going to a money market fund? Thx
livesoft
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by livesoft »

reddison wrote: Mon Jan 21, 2019 9:26 am Can you explain the advantages/disadvantages of having funds on reinvest vs. having dividends going to a money market fund? Thx
All questions are answered in the bogleheads.org wiki:
https://www.bogleheads.org/wiki/Reinves ... le_account
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Peter Foley
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by Peter Foley »

I liked David Jay's explanation of optimizing SS benefits as well. There is, however, at least one caveat. If a couple's income level is such that one person taking SS benefits early has a big impact on marginal tax rates or IRRMA, it may be advantageous to delay a bit. Roth conversions are a complicating factor here as well.

I ran a number of scenarios in i-orp and the Retiree Portfolio Model for Boglehead meeting seminar on retirement calculators. For individuals with significant retirement assets I found that the guidance from the RPM with respect to Roth conversions was more meaningful than that of i-orp. RPM's results are a little more difficult to interpret however.
Topic Author
reddison
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

Thanks livesoft and Peter.
sawdust60
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by sawdust60 »

Congratulations on success of having assets for retirement. It makes me wonder why you are waiting. And with no mortgage, etc., wonder about the need for 150k of annual income.

But to your question on Roth conversion:

Some level of Roth conversion is worthwhile. Heirs will appreciate it, and it will reduce RMD and can help avoid IRMAA.

Agree with plans on doing Roth conversions, being careful to stay below the IRMAA bracket, from age 63. (You may incur the penalty for 2020 earnings, it will be for the three months you were 65 in 2022.)

With RMD and 85% SS x 2, and other income, your marginal tax rate in retirement is likely to be 22% or higher. Don't pass up an opportunity to do Roth conversions at 22%.

And continue to do Roth conversions every year, after satisfying RMD.

(Model this along with your other income; returns, distributions, and conversions could result in a balance and RMD which could put you you in a lower tax bracket. Try various amounts, such as discontinuing conversions if the balance drops below 800k.)

Remember that taxes on the conversion can be paid with other funds, which enables shifting taxable funds into the Roth account. If you use a 0% withholding rate on the conversion, you might use a high rate on the RMD or do estimated tax payments.

You can model some various alternatives with RPM or others, to see if there is a need to further manage Medicare MAGI to avoid the IRMAA penalty. Remember that capital gains and dividends and tax exempt interest income are all included in this MAGI number.

Check out qualified charitable distributions, which will satisfy RMD and are excluded from MAGI.

Some years with high medical expenses (nursing home, etc.) can have lower taxable income -- tax rates less than 22%. A consideration before you get too aggressive with Roth conversions...

And a useful Roth conversion chart referenced in previous post by Peter Foley and others: viewtopic.php?t=236628#p4095896
...
OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified
Your question on SS: (agree with others)
-- not a purely economic approach --
One benefit of your wife starting SS early is if it helps her budget her spending. You can give her a credit card for groceries and gasoline, and you pay all the bills.
Topic Author
reddison
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Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

sawdust60 wrote: Mon Jan 21, 2019 5:50 pm Congratulations on success of having assets for retirement. It makes me wonder why you are waiting. And with no mortgage, etc., wonder about the need for 150k of annual income.

But to your question on Roth conversion:

Some level of Roth conversion is worthwhile. Heirs will appreciate it, and it will reduce RMD and can help avoid IRMAA.

Agree with plans on doing Roth conversions, being careful to stay below the IRMAA bracket, from age 63. (You may incur the penalty for 2020 earnings, it will be for the three months you were 65 in 2022.)

With RMD and 85% SS x 2, and other income, your marginal tax rate in retirement is likely to be 22% or higher. Don't pass up an opportunity to do Roth conversions at 22%.

And continue to do Roth conversions every year, after satisfying RMD.

(Model this along with your other income; returns, distributions, and conversions could result in a balance and RMD which could put you you in a lower tax bracket. Try various amounts, such as discontinuing conversions if the balance drops below 800k.)

Remember that taxes on the conversion can be paid with other funds, which enables shifting taxable funds into the Roth account. If you use a 0% withholding rate on the conversion, you might use a high rate on the RMD or do estimated tax payments.

You can model some various alternatives with RPM or others, to see if there is a need to further manage Medicare MAGI to avoid the IRMAA penalty. Remember that capital gains and dividends and tax exempt interest income are all included in this MAGI number.

Check out qualified charitable distributions, which will satisfy RMD and are excluded from MAGI.

Some years with high medical expenses (nursing home, etc.) can have lower taxable income -- tax rates less than 22%. A consideration before you get too aggressive with Roth conversions...

And a useful Roth conversion chart referenced in previous post by Peter Foley and others: viewtopic.php?t=236628#p4095896
...
OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified
Your question on SS: (agree with others)
-- not a purely economic approach --
One benefit of your wife starting SS early is if it helps her budget her spending. You can give her a credit card for groceries and gasoline, and you pay all the bills.
Thx for the pointers sawdust. I did a Roth IRA rollover today for me. Still have to find out if we are able to rollover a small amount out of her small employer Simple IRA that she is still participating in. One reason for the 150k estimate is that we currently pay $23k in premiums thru my employer for a high deductible Anthem plan. I figure the premiums will rise every year so that is nearly $30k a year. The rest would be to live on and to pay taxes, and we are heavy travelers with family and grandkids spread around the country. Fortunately with our income we haven't had to worry too much about budgeting - and neither of us likes to shop or are big spenders. That may change in retirement but we should be okay.
smitcat
Posts: 13300
Joined: Mon Nov 07, 2016 9:51 am

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by smitcat »

reddison wrote: Tue Jan 22, 2019 5:25 pm
sawdust60 wrote: Mon Jan 21, 2019 5:50 pm Congratulations on success of having assets for retirement. It makes me wonder why you are waiting. And with no mortgage, etc., wonder about the need for 150k of annual income.

But to your question on Roth conversion:

Some level of Roth conversion is worthwhile. Heirs will appreciate it, and it will reduce RMD and can help avoid IRMAA.

Agree with plans on doing Roth conversions, being careful to stay below the IRMAA bracket, from age 63. (You may incur the penalty for 2020 earnings, it will be for the three months you were 65 in 2022.)

With RMD and 85% SS x 2, and other income, your marginal tax rate in retirement is likely to be 22% or higher. Don't pass up an opportunity to do Roth conversions at 22%.

And continue to do Roth conversions every year, after satisfying RMD.

(Model this along with your other income; returns, distributions, and conversions could result in a balance and RMD which could put you you in a lower tax bracket. Try various amounts, such as discontinuing conversions if the balance drops below 800k.)

Remember that taxes on the conversion can be paid with other funds, which enables shifting taxable funds into the Roth account. If you use a 0% withholding rate on the conversion, you might use a high rate on the RMD or do estimated tax payments.

You can model some various alternatives with RPM or others, to see if there is a need to further manage Medicare MAGI to avoid the IRMAA penalty. Remember that capital gains and dividends and tax exempt interest income are all included in this MAGI number.

Check out qualified charitable distributions, which will satisfy RMD and are excluded from MAGI.

Some years with high medical expenses (nursing home, etc.) can have lower taxable income -- tax rates less than 22%. A consideration before you get too aggressive with Roth conversions...

And a useful Roth conversion chart referenced in previous post by Peter Foley and others: viewtopic.php?t=236628#p4095896
...
OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified
Your question on SS: (agree with others)
-- not a purely economic approach --
One benefit of your wife starting SS early is if it helps her budget her spending. You can give her a credit card for groceries and gasoline, and you pay all the bills.
Thx for the pointers sawdust. I did a Roth IRA rollover today for me. Still have to find out if we are able to rollover a small amount out of her small employer Simple IRA that she is still participating in. One reason for the 150k estimate is that we currently pay $23k in premiums thru my employer for a high deductible Anthem plan. I figure the premiums will rise every year so that is nearly $30k a year. The rest would be to live on and to pay taxes, and we are heavy travelers with family and grandkids spread around the country. Fortunately with our income we haven't had to worry too much about budgeting - and neither of us likes to shop or are big spenders. That may change in retirement but we should be okay.
"One reason for the 150k estimate is that we currently pay $23k in premiums thru my employer for a high deductible Anthem plan. I figure the premiums will rise every year so that is nearly $30k a year."
Based on your initial post is it true that you will be leaving private health insurance in 2 years and your wife in 3?
Topic Author
reddison
Posts: 175
Joined: Mon Jul 16, 2018 11:13 am

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by reddison »

Thx for the pointers sawdust. I did a Roth IRA rollover today for me. Still have to find out if we are able to rollover a small amount out of her small employer Simple IRA that she is still participating in. One reason for the 150k estimate is that we currently pay $23k in premiums thru my employer for a high deductible Anthem plan. I figure the premiums will rise every year so that is nearly $30k a year. The rest would be to live on and to pay taxes, and we are heavy travelers with family and grandkids spread around the country. Fortunately with our income we haven't had to worry too much about budgeting - and neither of us likes to shop or are big spenders. That may change in retirement but we should be okay.
[/quote]

"One reason for the 150k estimate is that we currently pay $23k in premiums thru my employer for a high deductible Anthem plan. I figure the premiums will rise every year so that is nearly $30k a year."
Based on your initial post is it true that you will be leaving private health insurance in 2 years and your wife in 3?
[/quote]

If I were to retire on 12/31/20 I would be 63 3mos and would have COBRA until 6/22 when I would be 64 9mos. I would need a short term policy for 3mos to get to Medicare.

My wife would be 63 5mos when COBRA would run out and we would have to buy her a private policy then for 17 months. We would not be eligible for any subsidy under current ACA type plans. Presumably our costs would come down some when I'm on Medicare and only she is on a private policy.

I plan to look into the COBRA extension for my wife if I were to work another 6 or 7 months that was suggested above.
smitcat
Posts: 13300
Joined: Mon Nov 07, 2016 9:51 am

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by smitcat »

reddison wrote: Wed Jan 23, 2019 9:24 am Thx for the pointers sawdust. I did a Roth IRA rollover today for me. Still have to find out if we are able to rollover a small amount out of her small employer Simple IRA that she is still participating in. One reason for the 150k estimate is that we currently pay $23k in premiums thru my employer for a high deductible Anthem plan. I figure the premiums will rise every year so that is nearly $30k a year. The rest would be to live on and to pay taxes, and we are heavy travelers with family and grandkids spread around the country. Fortunately with our income we haven't had to worry too much about budgeting - and neither of us likes to shop or are big spenders. That may change in retirement but we should be okay.
"One reason for the 150k estimate is that we currently pay $23k in premiums thru my employer for a high deductible Anthem plan. I figure the premiums will rise every year so that is nearly $30k a year."
Based on your initial post is it true that you will be leaving private health insurance in 2 years and your wife in 3?
[/quote]

If I were to retire on 12/31/20 I would be 63 3mos and would have COBRA until 6/22 when I would be 64 9mos. I would need a short term policy for 3mos to get to Medicare.

My wife would be 63 5mos when COBRA would run out and we would have to buy her a private policy then for 17 months. We would not be eligible for any subsidy under current ACA type plans. Presumably our costs would come down some when I'm on Medicare and only she is on a private policy.

I plan to look into the COBRA extension for my wife if I were to work another 6 or 7 months that was suggested above.
[/quote]

"Presumably our costs would come down some when I'm on Medicare and only she is on a private policy."
Of course - that was my thought. So you only need the $150K per year for 2 years then it will drop for your HC and drop again at 3 years for DW HC.
The Wizard
Posts: 13356
Joined: Tue Mar 23, 2010 1:45 pm
Location: Reading, MA

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by The Wizard »

sawdust60 wrote: Mon Jan 21, 2019 5:50 pm
...And continue to do Roth conversions every year, after satisfying RMD...
I don't think this is generally a good recommendation, especially for single people.
I've been doing moderate Roth conversions in my mid/late 60s, but this year will be my last, since I start both age 70 SS and RMDs in 2020.

For married couples, it *might* make sense to do modest Roth conversions after RMDs for one of them starts, depending on the income scenario for the eventual surviving spouse...
Attempted new signature...
SuzBanyan
Posts: 2015
Joined: Thu Jun 02, 2016 11:20 am

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by SuzBanyan »

With regard to your wife’s Simple IRA, if 2 years have passed since her first contribution, she can roll it tax free into a tIRA or another Simple IRA. (Less than 2 years means she can only roll it into a Simple IRA). This is true even if she is still employed and still making regular contributions to the Simple.

Vanguard (other brokerage firm) can help with the trustee to trustee transfer from the current Simple to the new account. Once that is completed, she can convert some or all of it to the Roth.
vtMaps
Posts: 1031
Joined: Tue Oct 14, 2008 12:05 pm
Location: central Vermont

Re: Retire in 2 years. Advice for plan for withdrawals, Roth conversions & SS

Post by vtMaps »

The Wizard wrote: Wed Jan 23, 2019 2:22 pm
sawdust60 wrote: Mon Jan 21, 2019 5:50 pm
...And continue to do Roth conversions every year, after satisfying RMD...
I don't think this is generally a good recommendation, especially for single people.
I've been doing moderate Roth conversions in my mid/late 60s, but this year will be my last, since I start both age 70 SS and RMDs in 2020.

For married couples, it *might* make sense to do modest Roth conversions after RMDs for one of them starts, depending on the income scenario for the eventual surviving spouse...
And it *might* make sense for them to do Roth conversions after BOTH of them start RMDs.
example (using 2018 tax numbers):
couple files married jointly with a combined SS income of $30k. If they have other ordinary income (including RMD) of $23k, they owe no income tax. As their other income (including RMD) goes above $23k, they enter the SS tax hump with marginal rates of up to 22.2%.

Once their other income (including RMD) goes above $51,940 (but less than $78,500), they fall back into the 12% marginal bracket.

Therefore, if this couple has RMDs that push them into the SS tax hump, they may benefit by doing enough Roth conversion to blast through the SS tax hump and capture more of the 12% bracket. By doing this for a year or two, they will decrease their future RMDs, and possibly be free of future income tax liability.

—vtMaps
"Truly, whoever can make you believe absurdities can make you commit atrocities" --Voltaire, as translated by Norman Lewis Torrey
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