$1.6M in traditional, $700K in Roth: How much to convert to Roth?

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privateID
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$1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

I estimate I will have the following at the start of retirement: $1.6M in traditional, $700K in Roth. It is possible I inherit some money at some point, but am not sure when/if that will be. No other taxable money other than bank accounts. I will have about 10 years to do Roth conversions. What should be my goal? To convert as much as possible? To get my traditional down to a certain amount? What amount? Some other points: I am married, currently in 22% tax bracket and understand that Social Security may be a factor.
mhalley
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by mhalley »

This is one of the most complex calculations to do, and there is no right answer. Are you ready to start the conversions now, or have you not retired yet? Will you want to use the ACA subsidy for health insurance? Being in the 22% bracket makes it tougher. Have you calculated what your tax bracket will be when you start rmds and social security? Try running some numbers at extended i-orp, that might help. To start you might due to the top of the 22% bracket, which is $171,050 this year for mfj. How much to go into the 24% bracket will depend on more factors than is in your post.
https://www.i-orp.com/Inflate/extended. ... %20thought.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

mhalley wrote: Wed Jun 10, 2020 10:49 am This is one of the most complex calculations to do, and there is no right answer. Are you ready to start the conversions now, or have you not retired yet? Being in the 22% bracket makes it tougher. Have you calculated what your tax bracket will be when you start rmds and social security? Try running some numbers at extended i-orp, that might help. To start you might due to the top of the 22% bracket, which is $171,050 this year for mfj. How much to go into the 24% bracket will depend on more factors than is in your post.
https://www.i-orp.com/Inflate/extended. ... %20thought.
Sorry, I was not clear. I plan to retire in a few years. In the 22% tax bracket while working. I expect to be close to the 22% bracket when I start RMDs/SS, but probably less than that.
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Stinky
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by Stinky »

mhalley wrote: Wed Jun 10, 2020 10:49 am This is one of the most complex calculations to do, and there is no right answer. Are you ready to start the conversions now, or have you not retired yet? Will you want to use the ACA subsidy for health insurance? Being in the 22% bracket makes it tougher. Have you calculated what your tax bracket will be when you start rmds and social security? Try running some numbers at extended i-orp, that might help. To start you might due to the top of the 22% bracket, which is $171,050 this year for mfj. How much to go into the 24% bracket will depend on more factors than is in your post.
https://www.i-orp.com/Inflate/extended. ... %20thought.
I agree with these thoughts. You need to do some modeling of your future income - while you're working, after you stop but before SS and RMD, and then when SS and RMD kick in.

If converting to the top of the 22% makes sense for you, then converting to the top of the 24% tax bracket might also make sense. I personally consider the 24% tax rate to be attractive historically, and it takes you up to $326,600 for MFJ.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

If I convert to the top of the 22% (or 24%) bracket, I can pretty much convert it all. But why so much? I understand to the top of the 12% bracket.
lakpr
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by lakpr »

You may want to play around with Retiree Portfolio Model spreadsheet.

Just thought I'd provide you with the link, I heard good things about it, but I have no experience with using it myself.

Given that you will be in 22% tax bracket when RMDs start, you might want to gradually convert to the top of the 22% tax bracket annually while you are working; make your future 401k and IRA contributions as only Roth contributions, etc. I think if you will be able to get the Traditional balance down to $1 million, that's a good place to be.
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CAsage
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by CAsage »

The goal is to minimize the taxes you pay overall on traditional withdrawals, over your lifespan. If married, then you need to look at what happens when the surviving spouse has less "tax space". If you die, then look at the tax bracket of your heirs, who will have to withdraw the whole pre-tax inheritance at their tax bracket in 10 years. It's a complex problem.... I would convert as much as possible, as soon as possible in the 24% bracket. Have you looked at your future tax bracket with SS and RMD? 12% is clearly better.... but these tax brackets expire in a few years. And there is a bit of a budget/deficit issue....
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Stinky
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by Stinky »

privateID wrote: Wed Jun 10, 2020 10:59 am If I convert to the top of the 22% (or 24%) bracket, I can pretty much convert it all. But why so much? I understand to the top of the 12% bracket.
Because your tax rate may be higher than you think.

First, the current tax law effectively expires at the end of 2025 ( I think). If we revert to the previous tax rate schedule, as is currently in the law, rates will be much higher. The tax rates for 2017, which was the last one under the old law, showed 10% up to $18,650, 15% up to $75,900, 25% up to $153,100, and 28% up to 233,350. I assume that the tax bracket breakpoionts will be a little higher in 2026 due to inflation.

Second, there could be changes in future tax rates. It's beyond my ability (and the rules of this Forum) to speculate on that. As for me, I think it's more likely that future tax rates will be higher than lower.
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02nz
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by 02nz »

How old are you and your spouse? It probably makes sense to defer SS so that you can have as much space as possible to convert at lower tax rates, without subjecting the SS benefits to income taxes.

I think it makes sense to convert up to the top of the 12% bracket - that's a little over $100K a year if you have no other income. (You have at least 6 tax years before the rates are scheduled to go back up in 2026, e.g., 12% goes up to 15%; you can re-evaluate then depending on what happens then.)

It makes sense to do Roth conversions to smooth out (and reduce) tax rates, reduce RMDs, and minimize amount of SS benefits subject to income tax, but I would not aim to convert everything to Roth, and in your case I would not go into the 22% bracket. Having a traditional balance can be useful - for example, if you have very large medical expenses, you can make a large withdrawal from your tIRA and have most of it be tax-free, because of the medical expenses deduction. (I call this the poor man's - or maybe it should be rich man's - HSA :happy)
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by 02nz »

Stinky wrote: Wed Jun 10, 2020 11:05 am
privateID wrote: Wed Jun 10, 2020 10:59 am If I convert to the top of the 22% (or 24%) bracket, I can pretty much convert it all. But why so much? I understand to the top of the 12% bracket.
Because your tax rate may be higher than you think.

First, the current tax law effectively expires at the end of 2025 ( I think). If we revert to the previous tax rate schedule, as is currently in the law, rates will be much higher. The tax rates for 2017, which was the last one under the old law, showed 10% up to $18,650, 15% up to $75,900, 25% up to $153,100, and 28% up to 233,350. I assume that the tax bracket breakpoionts will be a little higher in 2026 due to inflation.

Second, there could be changes in future tax rates. It's beyond my ability (and the rules of this Forum) to speculate on that. As for me, I think it's more likely that future tax rates will be higher than lower.
All true, but OP's own income and traditional holdings matter much more than changes in the tax code (which are small in the big scheme of things. Assuming no other income, OP can convert $100K a year through 2025 (and pay an average of just 9% federal income tax), bringing the balance to about $1M. At that point, a 4% withdrawal rate produces just $40K of taxable income. Even with SS benefits, OP will not be anywhere near the 22% or 25% bracket. So there's no reason to pay 22% now.

Of course as time goes on the likelihood of OP or spouse having to file single goes up, which argues for converting a sizable chunk now, but I still wouldn't go into the 22% bracket with so much time and space available at 12 or 15%.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

We are in our 50s. I am expecting to have some income during the conversion time (I have an inherited IRA giving off about $5K/yr, perhaps another inherited IRA, SS for one of us and maybe a couple of other small things. So, I don't think I could convert up to the max of the 12% bracket for those 10 years. Perhaps closer to $70K/yr of conversions to stay in the 12% bracket. I also assumed an increase of 3% in my traditional account. If it does better, I could have more than $1.6M to start.
Nate7out
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by Nate7out »

The retiree portfolio model linked above is definitely the tool for this question. It will compare a case where you do no Roth conversions to your custom designed Roth conversion scenarios. It will tell you what total tax you will have paid and what total net worth will beat the end of the projection. These are all estimates based on your inputs and current tax code. It even has a chart that shows how much of each tax bracket you use up with your SS/RMDs/Roth Conversions. It is updated annually with tax code updates (SD, Brackets, etc.)

You would probably start by entering the base case without Roth Conv. and it would give you an idea of what tax bracket you will be in at early retirement and then with SS and RMDs. Then you can see where your opportunities are and customize your Roth conversion amounts to result in the best outcomes. It is complex and will take a little time to fully understand. If you played around with this sheet for a few hours setting up your projections and then refreshed it every year when the new release comes out(also to account for changing life circumstances), when the time comes you should have a really solid plan on what to do.
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David Jay
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by David Jay »

The two big factors that will push up your tax bracket in late retirement are the increasing RMD percentage and the likelihood that a surviving spouse will be filing single.

Current RMD percentages (rounded) in 5 year intervals:
75: 4.4%
80: 5.3%
85: 6.8%
90: 8.8%
95: 11.6%
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02nz
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by 02nz »

David Jay wrote: Wed Jun 10, 2020 11:41 am The two big factors that will push up your tax bracket in late retirement are the increasing RMD percentage and the likelihood that a surviving spouse will be filing single.

Current RMD percentages (rounded) in 5 year intervals:
75: 4.4%
80: 5.3%
85: 6.8%
90: 8.8%
95: 11.6%
The high returns over the past decade have meant some retirees have seen RMD amounts (and even their remaining balances) go up year after year, but this isn't always so. The whole point of RMDs is to draw down your balance, and so if you assume lower returns going forward, the amounts of the RMDs should be more constant (decreasing balance, increasing percentage), so less tendency to push tax rates up.

Of course no one knows the future, but I would want to err on the side of optimizing for lower returns. If I'm wrong, then things turned out better than expected and I pay a little more in tax. Being wrong in the opposite situation means I have less than anticipated, and the money I already paid out in tax could've made a difference in quality of life.
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by retiredjg »

privateID wrote: Wed Jun 10, 2020 10:59 am If I convert to the top of the 22% (or 24%) bracket, I can pretty much convert it all. But why so much? I understand to the top of the 12% bracket.
I would not convert it all. For a couple I'd leave maybe $500k in tax-deferred accounts. This will not likely upset the future RMD apple cart and it gives you some untaxed money to pay medical bills for long term care, memory care, if either of you should need that later on.

A reason to convert to near the top of the 22% tax bracket is that when one of you dies, the survivor is not going to be in the 12% bracket any more. With taxes reverting to earlier rates, the survivor is likely to be in the 25% bracket so some converting in the 22% bracket makes a lot of sense. That does not mean you have to go all the way to the top of that bracket.

Stumbling blocks along the way.

1. When you reach age 63, that income will be used to determine your Medicare premiums when you are 65. Once you reach 63, do not go over into the first IRMAA tier unless it is intentional. Right now, that number is about $170k for a couple if I remember correctly. This number tends to be less than the top of the bracket so watch for it.

2. Roth conversions may make more of your SS taxable if you are taking SS while doing conversions.
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FiveK
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by FiveK »

privateID wrote: Wed Jun 10, 2020 11:21 am We are in our 50s. I am expecting to have some income....
Might be worth some time for you to start by estimating your future marginal tax rate. See that link for one approach.
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by aristotelian »

Being in the 22% bracket now, what was your thought process leading to so much in traditional?

One approach might be to frontload with a couple of withdrawals into the 22% bracket in the first few years of retirement, and then up to the top of the 12% bracket thereafter. Otherwise I would be worried that the account will continue to grow faster than your withdrawals.

Consider earlier retirement to get better bang for your buck. Also adjust your asset allocation in your 401k so that it doesn't grow so much. This would be a case where you would want to concentrate bonds in your 401k.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

I will look at all the links that were mentioned. Thank you.

My gut at this point is to convert as much as I can to the top of the 12% bracket and try to stay in the 12% bracket when I retire. I think that is possible. If I go over a little bit, no big deal. I haven't mentioned any Social Security intentions yet, but that would probably mean my wife and I both delaying to take SS to convert more. I was reading a little about longevity risk and I think that would be good for that too. I am not sure if I can afford the taxes on the conversions yet without it, but if possible.

aristotelian - I have so much in my traditional now because I always thought I would be in a lower bracket in retirement. I still think that is true, but it is possible I push a little into the 22% bracket. I also currently live in a state with an income tax. But that does bring up an issue of whether I should continue contributing to my traditional 401K or maybe I should switch to a Roth 401K.
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by smitcat »

privateID wrote: Wed Jun 10, 2020 1:33 pm I will look at all the links that were mentioned. Thank you.

My gut at this point is to convert as much as I can to the top of the 12% bracket and try to stay in the 12% bracket when I retire. I think that is possible. If I go over a little bit, no big deal. I haven't mentioned any Social Security intentions yet, but that would probably mean my wife and I both delaying to take SS to convert more. I was reading a little about longevity risk and I think that would be good for that too. I am not sure if I can afford the taxes on the conversions yet without it, but if possible.

aristotelian - I have so much in my traditional now because I always thought I would be in a lower bracket in retirement. I still think that is true, but it is possible I push a little into the 22% bracket. I also currently live in a state with an income tax. But that does bring up an issue of whether I should continue contributing to my traditional 401K or maybe I should switch to a Roth 401K.

"My gut at this point is to convert as much as I can to the top of the 12% bracket and try to stay in the 12% bracket when I retire. I think that is possible. If I go over a little bit, no big deal."
Curious as to how much you think you can convert while staying within these rules if you have $1.6M or more at time of first conversion and that same amount will grow each year (your estimate was 3% or $48K each year).

FWIW - we were never able to estimate these issues without the use of the RPM tool.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

smitcat wrote: Wed Jun 10, 2020 1:47 pm Curious as to how much you think you can convert while staying within these rules if you have $1.6M or more at time of first conversion and that same amount will grow each year (your estimate was 3% or $48K each year).

FWIW - we were never able to estimate these issues without the use of the RPM tool.
Yeah, that's a really good point. Wasn't thinking about the growth after I start converting. Just ran some numbers. If I am able to convert $90K/yr and a growth rate of 3%, then I would end up with $1.1M. Probably more than I want. So, I may have to convert into the 22% bracket a bit more than I thought. I will need to use a tool eventually.

Edit: If my goal is to leave $1M in traditional, would need to convert $100K/yr. If my goal is to leave $500K in traditional, would need to convert a little over $140K/yr.
niagara_guy
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by niagara_guy »

Here is a hypothetical situation for federal taxes for 2019:

married filing jointly, both over 66

dividends 900 (mostly qualified)
pension 5k
roth conversation 19k
social security 15k, about 5k taxable
lt capital gains 9.5k

federal taxes: 358

I have run last year's tax software to model what I should convert to my Roth, keeping my taxes low. I do this every year and do a Roth conversion based upon the results.
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celia
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by celia »

I suggest you stop tax-deferring so much. Save it in taxable instead where you will only have to pay 22% tax on it. You will need the cash, if not for an emergency, to pay the Roth conversion taxes down the road. I think you should start looking for more tax diversity (amounts in taxable vs. tax-deferred vs. Roth).

See my byline at the bottom of this post.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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FiveK
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by FiveK »

niagara_guy wrote: Wed Jun 10, 2020 3:12 pm Here is a hypothetical situation for federal taxes for 2019:

married filing jointly, both over 66

dividends 900 (mostly qualified)
pension 5k
roth conversation 19k
social security 15k, about 5k taxable
lt capital gains 9.5k

federal taxes: 358

I have run last year's tax software to model what I should convert to my Roth, keeping my taxes low. I do this every year and do a Roth conversion based upon the results.
For 2020 (and assuming qualified dividends=800, non-qual=100), the first ~$18K conversion is tax free. As one might say, "a no-brainer" to do.

You could then convert another ~$61K for 13%. See the "cumulative" curve in the chart below: one has to "push through" the SS benefit taxation "hump" to reach the lower rates beyond, thus the need to look at the full amount to get the applicable marginal rate. Perhaps worth a consideration for doing this.
Image
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

celia wrote: Wed Jun 10, 2020 3:24 pm I suggest you stop tax-deferring so much. Save it in taxable instead where you will only have to pay 22% tax on it. You will need the cash, if not for an emergency, to pay the Roth conversion taxes down the road. I think you should start looking for more tax diversity (amounts in taxable vs. tax-deferred vs. Roth).

See my byline at the bottom of this post.
If I stop deferring so much through my traditional 401K, wouldn't it make more sense to put it in my Roth 401K? I can still use the cash if needed later on. I understand tax diversity between tax-deferred and Roth, but don't see any great advantage to doing taxable when I have Roth available.

I am highly considering switching my 401K contributions to Roth. My only hesitation is having a state tax now that may/may not be there later. I'm guessing I will move in retirement, but who knows. There is also the fact that tax rates may revert back to higher rates in 2026. So, that may hedge my bets a little if I Roth now by having a state tax, but slightly lower federal tax rates. My current marginal state tax rate is around 7%.
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celia
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by celia »

How do you plan to pay the future taxes on Roth conversions?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

celia wrote: Wed Jun 10, 2020 5:24 pm How do you plan to pay the future taxes on Roth conversions?
There's a whole issue of paying for those 10 years that include the taxes. To be honest, not sure yet. If it's coming from current money, then the conversions may just be withdrawals. Alternatively, I can pull any needed money from my current Roth IRAs. I also have an inherited IRA giving off about $5K/year. We may end up having one of us take SS early. There are another small couple things that mature around that time frame. And the big wild card is any inheritance.
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by LilyFleur »

privateID wrote: Wed Jun 10, 2020 10:40 am I estimate I will have the following at the start of retirement: $1.6M in traditional, $700K in Roth. It is possible I inherit some money at some point, but am not sure when/if that will be. No other taxable money other than bank accounts. I will have about 10 years to do Roth conversions. What should be my goal? To convert as much as possible? To get my traditional down to a certain amount? What amount? Some other points: I am married, currently in 22% tax bracket and understand that Social Security may be a factor.
How much will your wife have at the start of retirement?
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by retiredjg »

privateID wrote: Wed Jun 10, 2020 1:33 pm I haven't mentioned any Social Security intentions yet, but that would probably mean my wife and I both delaying to take SS to convert more. I was reading a little about longevity risk and I think that would be good for that too. I am not sure if I can afford the taxes on the conversions yet without it, but if possible.
Once you are past the 59.5 age limit, you can use money in the tax-deferred accounts to pay the taxes. You simply have some withheld as you make the conversion. It is actually easier than paying estimated taxes.

It is nice if you have outside money for the tax, but not necessary at all. I would NOT take SS earlier than planned just to pay taxes on the conversions. The presence of SS reduces how much you can convert and and the conversion can increase the taxes on your SS. Could be sort of a downward spiral.
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by retiredjg »

privateID wrote: Wed Jun 10, 2020 6:04 pm
celia wrote: Wed Jun 10, 2020 5:24 pm How do you plan to pay the future taxes on Roth conversions?
There's a whole issue of paying for those 10 years that include the taxes. To be honest, not sure yet. If it's coming from current money, then the conversions may just be withdrawals. Alternatively, I can pull any needed money from my current Roth IRAs. I also have an inherited IRA giving off about $5K/year. We may end up having one of us take SS early. There are another small couple things that mature around that time frame. And the big wild card is any inheritance.
If you stop saving in tax-deferred accounts now and put that money into taxable (not Roth 401k) you will have more money to pay taxes with before you reach 59.5.

After 59.5 I suggest paying taxes out of the tax-deferred account. That helps you reduce the account size faster and you still end up with more than enough money to live on.
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by smitcat »

privateID wrote: Wed Jun 10, 2020 2:03 pm
smitcat wrote: Wed Jun 10, 2020 1:47 pm Curious as to how much you think you can convert while staying within these rules if you have $1.6M or more at time of first conversion and that same amount will grow each year (your estimate was 3% or $48K each year).

FWIW - we were never able to estimate these issues without the use of the RPM tool.
Yeah, that's a really good point. Wasn't thinking about the growth after I start converting. Just ran some numbers. If I am able to convert $90K/yr and a growth rate of 3%, then I would end up with $1.1M. Probably more than I want. So, I may have to convert into the 22% bracket a bit more than I thought. I will need to use a tool eventually.

Edit: If my goal is to leave $1M in traditional, would need to convert $100K/yr. If my goal is to leave $500K in traditional, would need to convert a little over $140K/yr.
You are too far out to 'worry' about these details but your earnings over all these years will likely exceed your current 3% plan as well.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

Some responses:
LilyFleur - I use terms like "I", "my", "we", "our" interchangeably here. All money belongs to all of us.

I understand the details will change. Just trying to get an approach at this point.
rkhusky
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by rkhusky »

I find the heat maps on this page to be very useful in seeing tax rates with SS: https://www.bogleheads.org/wiki/Taxatio ... y_benefits

First year RMD with $1.6M is about $60K. If you have SS of $50K, then you are in a broad 22% marginal tax range (with a few blips of 12%). You would have to reduce your Traditional in half to a see a reduction. That also means that paying 22% now will not hurt you either. If tax rates go back up in 6 years, then your marginal rate would go up to 25% and paying 22% now would help you a little.

If your SS is closer to $30K, then you would want to look more carefully at paying 22% for Roth, due to the much wider 12% band. If your SS is closer to $70K, then converting at the 22% or 24% rates might make sense due to the band of 41% marginal rates.
smitcat
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by smitcat »

rkhusky wrote: Thu Jun 11, 2020 10:18 am I find the heat maps on this page to be very useful in seeing tax rates with SS: https://www.bogleheads.org/wiki/Taxatio ... y_benefits

First year RMD with $1.6M is about $60K. If you have SS of $50K, then you are in a broad 22% marginal tax range (with a few blips of 12%). You would have to reduce your Traditional in half to a see a reduction. That also means that paying 22% now will not hurt you either. If tax rates go back up in 6 years, then your marginal rate would go up to 25% and paying 22% now would help you a little.

If your SS is closer to $30K, then you would want to look more carefully at paying 22% for Roth, due to the much wider 12% band. If your SS is closer to $70K, then converting at the 22% or 24% rates might make sense due to the band of 41% marginal rates.
"I find the heat maps on this page to be very useful in seeing tax rates with SS"
Really good link- thank you
aristotelian
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by aristotelian »

I would suggest editing the top post or starting a new thread following the posting guidelines. If you really want a specific gameplan, we need to know exact ages, years to retirement, current contributions, current balances, etc. It's hard to piece that all together from the back and forth responses.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

Those heat maps are interesting. I have seen them before.

As I am a few years (probably 7 years) from retirement, I really am not looking for any precise recommendations for the future. I have already learned a ton from this conversation. Think I have a general plan, but just to be sure:

1) I am interested in whether it makes sense for me to do a Roth right now instead of traditional. My answer is no because of the state tax. I don't think it would be a horrible move because of the lower current federal tax rates, but still think the state taxes are the deciding factor.

2) When I do retire, I definitely will do some conversions/sell till years when SS/RMDs begin, at least the top of the 12% bracket. We will not take any SS during that time because the conversions will cause the largest amount of SS to be taxed. Depending upon what happens in 7 years from now (tax rates, other money coming in), I may convert/sell past the 12% bracket (or whatever the bracket will be).

If anyone thinks these plans are not good, I would be interested in hearing why.
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FiveK
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by FiveK »

privateID wrote: Thu Jun 11, 2020 2:55 pmDepending upon what happens....

If anyone thinks these plans are not good, I would be interested in hearing why.
Taking your best guess now, then updating as new information becomes available, is a good plan.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

FiveK wrote: Thu Jun 11, 2020 3:32 pm
privateID wrote: Thu Jun 11, 2020 2:55 pmDepending upon what happens....

If anyone thinks these plans are not good, I would be interested in hearing why.
Taking your best guess now, then updating as new information becomes available, is a good plan.
I played around with some FV formulas and the only way I'm going to get my tax-deferred amount to a manageable level (between $500K-$750K) will be to convert to the top of the 22% bracket, or maybe to the top of the point where IRMMA comes into play, for those 10 years. So, that is my best guess right now.

I do plan to look at those links from above as well.
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by smitcat »

privateID wrote: Fri Jun 12, 2020 8:16 am
FiveK wrote: Thu Jun 11, 2020 3:32 pm
privateID wrote: Thu Jun 11, 2020 2:55 pmDepending upon what happens....

If anyone thinks these plans are not good, I would be interested in hearing why.
Taking your best guess now, then updating as new information becomes available, is a good plan.
I played around with some FV formulas and the only way I'm going to get my tax-deferred amount to a manageable level (between $500K-$750K) will be to convert to the top of the 22% bracket, or maybe to the top of the point where IRMMA comes into play, for those 10 years. So, that is my best guess right now.

I do plan to look at those links from above as well.
A few thoughts on your last posts...
- the 12% tax bracket will get 'used' up quickly with your SS, spouse at 1/2 of SS , inherited IRA and portfolio income at age 71, (even as MFJ)
- converting to the top of the 22 or 24% brackets are not that unusual given these inputs
- the 22% bracket will not exist for 10 more years, for that matter neither will the 12% bracket, please use those changes in your planning
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

smitcat wrote: Fri Jun 12, 2020 11:28 am - the 22% bracket will not exist for 10 more years, for that matter neither will the 12% bracket, please use those changes in your planning
I would love to convert/contribute now to a Roth, but the 22% bracket + my state income tax is greater than the potential future 25% bracket. The wild card here is whether we actually do move and not have a state income tax and when it will happen. Another point is it is certainly possible the 12%/22% brackets become permanent. Although the law sun-setting without being changed is also possible, I don't think we should discount the possibility of a new law based on the current law.

Perhaps it may be best to hedge my bets and do a little of both today?
retiredjg
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by retiredjg »

privateID wrote: Fri Jun 12, 2020 11:49 am Another point is it is certainly possible the 12%/22% brackets become permanent. Although the law sun-setting without being changed is also possible, I don't think we should discount the possibility of a new law based on the current law.
Yes, it is possible. I don't think many people find that a reasonable expectation though. :D
Perhaps it may be best to hedge my bets and do a little of both today?
If this were my decision, I would not add anything else (voluntarily) to the tax-deferred accounts which may end up being too large. I'd use Roth (or taxable if you want to accumulate cash to pay taxes with later).

Doing some of both is better than not using Roth at all.

Remember, when one of you dies, the survivor WILL be in at least the 22% bracket. What you are trying to do is prevent that from being pushed up even higher.
uslee2004
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by uslee2004 »

Just want to point out and seeking confirm. Shouldn’t the comparison be between marginal bracket before with effective after retirement? Facing similar situation for pretax account, smaller Roth, but a few more years out. Feel like better keeping contributing to pretax 401k while converting pretax IRA to Roth May be slightly better than stopping pretax contribution altogether before retirement while still having income. Certainly needs modeling which I meant to explore as well.

Thanks to all the advice.
uslee
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by retiredjg »

uslee2004 wrote: Sat Jun 13, 2020 5:59 am Just want to point out and seeking confirm. Shouldn’t the comparison be between marginal bracket before with effective after retirement?
A lot of people say this, but that is not quite right either.

In reality, it is the effective rate of the money in question while saving vs the effective rate of your saved money as you spend it in retirement.

The effective rate while saving is often the same as the marginal rate while saving because the likelihood of that $19.5k in question straddling a tax bracket is somewhat small (although not zero). So "marginal rate while saving" is accurate or close to accurate a lot of the time.

The tax rate while spending can easily cross several tax brackets. So overall effective rate comes to mind and people often say just that.

But for people who have SS or a pension or some other kind of income filling up the lower tax bracket(s), the lower brackets cannot be considered in the cost of pulling from your nest egg. You can only consider the cost you are paying on the money you are pulling from your accounts and that will be the marginal tax rate maybe mixed in with some at the next lower bracket and occasionally even the next lower bracket under that. But it will not be the overall effective rate for people with any kind of income stream.

I hope that made sense. :happy
uslee2004
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by uslee2004 »

retiredjg wrote: Sat Jun 13, 2020 6:53 am
uslee2004 wrote: Sat Jun 13, 2020 5:59 am Just want to point out and seeking confirm. Shouldn’t the comparison be between marginal bracket before with effective after retirement?
A lot of people say this, but that is not quite right either.

In reality, it is the effective rate of the money in question while saving vs the effective rate of your saved money as you spend it in retirement.

The effective rate while saving is often the same as the marginal rate while saving because the likelihood of that $19.5k in question straddling a tax bracket is somewhat small (although not zero). So "marginal rate while saving" is accurate or close to accurate a lot of the time.

The tax rate while spending can easily cross several tax brackets. So overall effective rate comes to mind and people often say just that.

But for people who have SS or a pension or some other kind of income filling up the lower tax bracket(s), the lower brackets cannot be considered in the cost of pulling from your nest egg. You can only consider the cost you are paying on the money you are pulling from your accounts and that will be the marginal tax rate maybe mixed in with some at the next lower bracket and occasionally even the next lower bracket under that. But it will not be the overall effective rate for people with any kind of income stream.

I hope that made sense. :happy
Thanks retiredjg. Makes perfect sense! At the end, simple terms of marginal bracket and effective rate cannot adequately cover the full scenario. Modeling will give better pictures.
uslee
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

So I am in the 22% bracket now, but also pay a state income tax. I plugged it into Turbotax the last two years to see what an extra $1,000 would generate in extra state taxes. I live in NY and it showed around a 7%-8% increase. That puts me now around the 30% marginal total tax bracket. I am pretty sure I will be at or below that rate when I retire even considering SS/RMD given 10 years of converting to the top of the 22% bracket. The only question comes in to play when one of us dies. In that case as a single filer it is probable that the income tax rate will be higher (24% rate in today's numbers). As a single filer it will depend on whether a state tax is still in play. If it is not, the overall rate will be lower. Otherwise, it will probably jump one tax bracket.

Given all that, why not continue to fund the pre-tax 401K? In most cases make out better. And I am going to manage the single filer case as best I can doing the conversions?
smitcat
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by smitcat »

privateID wrote: Sat Jun 13, 2020 7:44 am So I am in the 22% bracket now, but also pay a state income tax. I plugged it into Turbotax the last two years to see what an extra $1,000 would generate in extra state taxes. I live in NY and it showed around a 7%-8% increase. That puts me now around the 30% marginal total tax bracket. I am pretty sure I will be at or below that rate when I retire even considering SS/RMD given 10 years of converting to the top of the 22% bracket. The only question comes in to play when one of us dies. In that case as a single filer it is probable that the income tax rate will be higher (24% rate in today's numbers). As a single filer it will depend on whether a state tax is still in play. If it is not, the overall rate will be lower. Otherwise, it will probably jump one tax bracket.

Given all that, why not continue to fund the pre-tax 401K? In most cases make out better. And I am going to manage the single filer case as best I can doing the conversions?
We live in NY as well and if the current temporary taxes are set back (2026) we will be challenged by a combined rate of at least 32% as a couple.
Of course if once one of us passes before the other these tax rates will skyrocket.
Our action plan(s):
- we have modeled the future with what we would call a baseline
- we have also modeled the future possibilities with the most likely variables
- some of those variables are: higher & lower portfolio returns, earlier and later SS, higher and lower Roth conversions, various ages of demise.
- with these variables used we get a spectrum of possible outcomes on both sides of the baseline
Here is what we learned from those possible outcomes for our data and Roth conversions:
- the number of downside possibilities with Roth conversions is low
- the 'range' of these downsides to the baseline are also very low
- the number of upsides to the Roth conversions are high
- the 'range' of these upsides to the baseline without Roth conversions are high
The measurements were based on 'spendable' dollars after taxes and/or best inheritable dollars considering taxes. The measurements were not against total portfolio value before taxes or for total draw downs not considering taxes.
Your mileage will vary based upon your personal data and goals.
retiredjg
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by retiredjg »

I assume that question is for me.

1. Once you reach 63 years old, you cannot do conversions up to the top of the 22% bracket without triggering IRMAA costs. The IRMAA tier starts below the top of that bracket. I'm not sure you are taking that into consideration.

2. You seem to be comparing your current situation of 7% state tax to 0% state tax in the future. You are not even sure you will move. Are you sure if you do move that it will be a place with no state tax? You should give consideration to moving to a place with some tax but lower than 7%.

3. I think you may be forgetting that tax-deferred account is going to grow. :happy

4. I'm not saying you are wrong to follow your plan. I'm only saying what I would probably do.

I do believe in the "tax now vs tax later" decision based on expected tax rates. But I also believe there comes a point where an overly large tax-deferred account outweighs the "tax now vs tax later" question. My feeling (yes, it is only that) is you are nearing that territory. If I were in your shoes, I would start putting less into tax-deferral.

This does not mean your plan is a bad one.
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WoodSpinner
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by WoodSpinner »

OP,

This is a subject near and dear to my journey as well. You have had lots of good advice up-thread and thought I would highlight a few key elements.

- Establish a clear set of prioritized goals for your Retirement. Let this be a guide for helping you evaluate trade-offs and risks with different solutions.

- You need to model your future Portfolio Growth, Tax Situation and Cashflow to be able to get a better handle on finding the best answer for your situation. A tool like RPM or your own custom model is well worth the investment of your time and energy.

- The answer your your question can change based on life circumstances, external events, changes in taxes etc. My best advice is to revisit your plan at least yearly to see if anything needs to be tweaked.

- Make sure you understand how your state handles taxes on SS, pensions, and withdrawals from a Tax Deferred account. There are subtle but important differences between states that will affect your answer.

FWIW, you are spot-on for thinking about Roth Conversion planning now while you have time to plan and implement changes. If you go back through my old posts in 2017 when I first started planning my Retirement, you will see considerable angst over the idea of voluntarily paying taxes now by converting, versus deferring taxes to the future. Fortunately Celia was kind and patient enough to help me work through my model and planning logic.

Best of Luck!

WoodSpinner
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FiveK
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by FiveK »

uslee2004 wrote: Sat Jun 13, 2020 5:59 am Just want to point out and seeking confirm. Shouldn’t the comparison be between marginal bracket before with effective after retirement?
No. As retiredjg noted, that's a common misconception. It's the first of two Common misconceptions described in that wiki section.

Also, the words "effective" and "marginal" often need clarification, and just to spice things up sometimes the phrase "effective marginal" is used. :wink:

In short, the "effective" rate defined by (total tax)/(total income) should never be used for any traditional vs. Roth decision. See the Traditional versus Roth wiki article for details.
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FiveK
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by FiveK »

privateID wrote: Sat Jun 13, 2020 7:44 am That puts me now around the 30% marginal total tax bracket. I am pretty sure I will be at or below that rate when I retire even considering SS/RMD given 10 years of converting to the top of the 22% bracket.
...
Given all that, why not continue to fund the pre-tax 401K? In most cases make out better. And I am going to manage the single filer case as best I can doing the conversions?
Given all that, your conclusion is reasonable.

You can (and should) revisit the decision each year, considering new information on general tax law and your personal specifics, and adjust as needed.
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privateID
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Re: $1.6M in traditional, $700K in Roth: How much to convert to Roth?

Post by privateID »

ok...I spent some time today putting some numbers down and hashing things out. Conversions would look like this:
1) Convert 2 years to top of 22% bracket (ages 61-62)
2) Convert next 7 years to beginning of IRMAA levels (ages 63-69)
3) Convert for 2 last years while starting SS before RMDs to top of 12% bracket (ages 70-71)
By the end of the conversions, all traditional money would be in my 401k's Stable-Value fund that has payed around 3% the last 10 years.

- At $1.6M in traditional at my start of retirement, I will end up with $200K assuming a growth rate of 3%. Given my current AA of 50-50 and the use of the Stable-Value fund, I think I would be fine.

- At $2.0M in traditional at my start of retirement, assuming market does better then I expect, I will end up with $800K. Probably a little more than I want in here, but not horrible.

Other options to keep traditional lower would be to contribute to Roth/convert now. I have discussed why that is not a great idea given where I live. That may change as my future living area and tax rates change in the future. Another possibility would be to make sure my traditional does not grow as much by changing my AA to be more conservative now. I will certainly revisit that and all this annually. I still plan to do more extensive modeling using some of the links above, but this is a great start.

Thanks to all who had input here. This forum really is awesome.
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