Roth conversions, taxes, SORR

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corn18
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Roth conversions, taxes, SORR

Post by corn18 » Fri Nov 15, 2019 8:57 pm

I've developed a spreadsheet that allows me to model my withdrawals throughout retirement. One of the variables is if/when to do Roth conversions from my 401k. The best approach from a tax standpoint is to convert to the top of the 12%/15% tax bracket until age 70. If I do that, I can probably get everything converted before RMD's. This keeps me from getting hit by the tax torpedo @ 70. Taxes are fairly flat @ $9500k / year.

But, I also have the option of not converting anything and paying lower taxes until age 70 and paying higher taxes when RMD's hit. This seemed stupid to me. But when I ran both scenarios through firecalc, I got a higher probability of success if I do no conversions. This piqued my interesest. If I do no conversions before 70, my taxes are $2700 / year until I hit 70 and RMDs kick in. Then taxes jump to $15k / year. The total additional taxes through age 90 are only about $10k vs. 100% conversion before 70.

The conclusion I drew from this was that SORR was reduced with the reduced spending from 56-69. I kindof like that. If I want/need to, I can control my taxes early in retirement to minimize SORR. The higher taxes later suck, but that's when SS kicks in and I really don't need any savings at that point as my COLA pension + SS covers all my expenses. Just need a little savings to cover the higher taxes.

Am I interpreting this correctly?

Corn
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lakpr
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Re: Roth conversions, taxes, SORR

Post by lakpr » Sat Nov 16, 2019 8:56 am

I think you are interpreting it correctly. Not sure how old you are, but if you are intent on leaving any money to your heirs, you might want to convert up to the top of 12% bracket while the bracket lasts (until 2025), and do NOT convert while you are in the 15% bracket (2026 and beyond).

GrowthSeeker
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Re: Roth conversions, taxes, SORR

Post by GrowthSeeker » Sat Nov 16, 2019 9:37 am

I know we're not supposed to predict the future about tax law, but current law has the cut in tax rates 'expiring' in half a dozen years or so. Did your model look at what if the tax rates go back to their previous higher levels?
Just because you're paranoid doesn't mean they're NOT out to get you.

HomeStretch
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Re: Roth conversions, taxes, SORR

Post by HomeStretch » Sat Nov 16, 2019 10:07 am

Did you run a sole survivor scenario? Not doing Roth conversions may not significantly impact your joint taxes but may be significant to you or spouse filing alone.

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corn18
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Re: Roth conversions, taxes, SORR

Post by corn18 » Sat Nov 16, 2019 10:33 am

HomeStretch wrote:
Sat Nov 16, 2019 10:07 am
Did you run a sole survivor scenario? Not doing Roth conversions may not significantly impact your joint taxes but may be significant to you or spouse filing alone.
Great point. I hadn't thought about that.

I just had a look. Seems to be a wash. Pension and SS go down quite a bit. That offsets the lower std deduction and keeps her in the same tax brackets for the most part.

My intention is to do conversion to the top of the 12%/15% bracket. But if the market tanks early on, I can make adjustments. This is just one tool in my tool box.
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FiveK
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Re: Roth conversions, taxes, SORR

Post by FiveK » Sun Nov 17, 2019 2:14 am

corn18 wrote:
Sat Nov 16, 2019 10:33 am
I just had a look. Seems to be a wash. Pension and SS go down quite a bit. That offsets the lower std deduction and keeps her in the same tax brackets for the most part.
Sorry to mention this - but what if she isn't the surviving spouse?

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corn18
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Re: Roth conversions, taxes, SORR

Post by corn18 » Sun Nov 17, 2019 8:03 am

FiveK wrote:
Sun Nov 17, 2019 2:14 am
corn18 wrote:
Sat Nov 16, 2019 10:33 am
I just had a look. Seems to be a wash. Pension and SS go down quite a bit. That offsets the lower std deduction and keeps her in the same tax brackets for the most part.
Sorry to mention this - but what if she isn't the surviving spouse?
Dang it, you know I have never thought about that scenario. always figured I would go first. Have to take a look at that.
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retiredjg
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Re: Roth conversions, taxes, SORR

Post by retiredjg » Sun Nov 17, 2019 2:25 pm

I don't know what SORR is so maybe I don't understand all you are asking.

Here's something to consider. You are looking at taxes paid, but that may be the wrong thing to look at. There are situations where you can pay higher taxes later but end up with more money in spite of paying higher taxes later. So you really need to look at money left after taxes, not just at the taxes paid.

Agree that when one of you dies, the whole scenario changes and the survivor is likely to go up a tax bracket.

I agree that converting what you can in the 12% bracket is almost a no-brainer. I think that converting even in the 15% bracket should be considered because the survivor may never be in a bracket that low and it is a big jump from 15% to 25% (where a lot of single/widowed retirees end up).

I see no need to convert all of one's tax-deferred accounts. The benefit is converting enough to keep the RMDs from being too large.

Blender
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Re: Roth conversions, taxes, SORR

Post by Blender » Sun Nov 17, 2019 2:31 pm

retiredjg wrote:
Sun Nov 17, 2019 2:25 pm
I don't know what SORR is so maybe I don't understand all you are asking.
Sequence of return risk.

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