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

[lgb]

Can anyone explain concisely and briefly what I just read above and what we're trying to accomplish?

I've now heard this twice in discussions with other people that are closer to retirement than myself (I'm in 40's) - where they said their 'financial person' was suggesting they move as much of their IRA retirement accounts over to their ROTH retirement accounts so that there wouldn't be so much of a tax burden.

If this is true (the problem - whatever it is that I don't fully understand yet), why wasn't it solved on the front end? I assume because the employers retirement plan wasn't a ROTH, but if it can magically be solved now by doing something, why wouldn't it have been done earlier in your life?

Set me straight - please!

[Nate7out]

Roth conversions need to be done at a time when you have low income (e.g. early retirement), so you pay a lower tax rate. You will pay high taxes if you do them during your working years.

[lakpr]

Can anyone explain concisely and briefly what I just read above and what we're trying to accomplish?

If no Roth conversions are made and the money is left in Traditional accounts as is, come the RMD time (72 years of age), the required amounts to be withdrawn from such accounts are likely to be high. Along with any pension + SS, the total income can push the person into a higher tax bracket.

If Roth conversions are done prior to RMD time, it is possible to stay within a low tax bracket during retirement.

But as pointed out immediately above, such Roth conversions should be made only if you are reasonably sure that you are currently in a tax bracket that's lower than what you expect to be in retirement. If in retirement you will be in 15% bracket, but currently while you are working you are in a 22% bracket, then it's counter-productive to convert.

[smitcat]

Can anyone explain concisely and briefly what I just read above and what we're trying to accomplish?

I've now heard this twice in discussions with other people that are closer to retirement than myself (I'm in 40's) - where they said their 'financial person' was suggesting they move as much of their IRA retirement accounts over to their ROTH retirement accounts so that there wouldn't be so much of a tax burden.

If this is true (the problem - whatever it is that I don't fully understand yet), why wasn't it solved on the front end? I assume because the employers retirement plan wasn't a ROTH, but if it can magically be solved now by doing something, why wouldn't it have been done earlier in your life?

Set me straight - please!

"why wasn't it solved on the front end?
There are many reasons why this would or could not be solved on the front end , here are some that could be stand alone on in combination:
- no Roth available at the time
- did Roth to the max but still have other convertible funds
- you did it on purpose to convert at early retire maybe in a non tax state where earnings were in a high tax state
- income over the years were not predictable or flat enough
- portfolio earnings in pre tax accounts did very well
- and my favorite.... you could not predict the tax changes over time

[zhuyz05]

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 )

Distribution from tIRA tax-free? How large the medical expense has to be to qualify?

[retiredjg]

Can anyone explain concisely and briefly what I just read above and what we're trying to accomplish?

I've now heard this twice in discussions with other people that are closer to retirement than myself (I'm in 40's) - where they said their 'financial person' was suggesting they move as much of their IRA retirement accounts over to their ROTH retirement accounts so that there wouldn't be so much of a tax burden.

If this is true (the problem - whatever it is that I don't fully understand yet), why wasn't it solved on the front end? I assume because the employers retirement plan wasn't a ROTH, but if it can magically be solved now by doing something, why wouldn't it have been done earlier in your life?

Set me straight - please!

If a person saves a lot in tax-deferred accounts, starts early, works a long time, and has even a modest pension, when they retire they may have a very large tax-deferred account they don't need. The government eventually requires people to tap into this money they don't need at age 72 (RMDs or required minimum distributions).

The amount they have to take is taxable and gets larger each year. This can push some people into higher tax brackets, sometimes even higher than when they were working.

It can be solved on the front end if you know it will happen. Many people just didn't know. Many thought if putting something into a tax-deferred account was a good idea then putting more is even better. They enjoyed paying lower tax rates while working but may pay for it in the end. For example, a couple might use 4 tax-deferred accounts for 15 or 20 years...a choice that can come back to haunt them later on.

Another way to solve it may be to do Roth conversions (convert pre-tax 401k/IRA money to Roth) in early retirement. This does not work for people who don't retire early. And it does not work all that well for people who have a pension. They just can't convert enough before the tax bomb hits.

Without knowing the details, I would not put much credence in "financial people" who say to move money to Roth. There could be other reasons for that kind of suggestion.

Nevertheless, the problem can be real and it can show up in spite of the best intentions.

[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 )

Distribution from tIRA tax-free? How large the medical expense has to be to qualify?

Starting in 2020 (edit: 2021, unless rules change again), you can only deduct the portion exceeding 10% of AGI (used to be 7.5%), but since you'll be in retirement with little other income, this hurdle is easy to overcome. For example, (assuming you're 59.5 or over and have no other income) in one year you have $50K of medical expenses, you can take out $50K from your TIRA and deduct 45K. You'd only have to pay tax on the remaining $5K. (Of course most people in this situation probably have Social Security, which complicates the calculation a bit, but still the effective tax rate will be very low to 0.)

[zhuyz05]

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 )

I see what you mean — Thanks!
Distribution from tIRA tax-free? How large the medical expense has to be to qualify?

Starting in 2020, you can only deduct the portion exceeding 10% of AGI (used to be 7.5%), but since you'll be in retirement with little other income, this hurdle is easy to overcome. For example, (assuming you're 59.5 or over and have no other income) in one year you have $50K of medical expenses, you can take out $50K from your TIRA and deduct 45K. The remaining 5K of taxable income would fall under the standard deduction, so no federal income tax at all. (Of course most people in this situation probably have Social Security, which complicates the calculation a bit, but still the effective tax rate will be very low to 0.)

[02nz]

Another way to solve it may be to do Roth conversions (convert pre-tax 401k/IRA money to Roth) in early retirement. This does not work for people who don't retire early. And it does not work all that well for people who have a pension. They just can't convert enough before the tax bomb hits.

I would just add that "early retirement" here doesn't have to mean retiring in your 40s or 50s. Even someone retiring at 65 (Medicare age) has quite a bit of opportunity to do Roth conversions if they defer Social Security and doesn't have other income like a pension. A couple with no other income can withdraw from, or do Roth conversions on, a bit over $100K a year, and pay an average of just 9% federal income tax at current rates, so easily half a million between retirement and starting SS at 70.

This has many benefits, including reducing the exposure of SS benefits to income taxes; maximizing the benefit of SS as "longevity insurance" since it's COLA'd; reducing RMDs; and mitigating the risk that a surviving spouse pays higher tax rates later as a single filer. For many retirees, this is probably the single most powerful retirement tax planning opportunity available. But it does require some advance planning. We sometimes see posts from those who in their 70s are in a high bracket because of RMDs on a high traditional balance, SS, pensions, and maybe also widowed (so filing as a single and facing higher rates); by that time it's really too late.

[retiredjg]

I would just add that "early retirement" here doesn't have to mean retiring in your 40s or 50s.

I agree.

Each of these factors is independent. Retiring at 65 will work for some. It will not work well for others.

All the factors have to be considered together

• -amount of tax-deferred money,
  
  - amount of that you want to convert,
  
  -how many years you have to convert,
  
  -how much you can convert without triggering something else like IRMAA
  
  -how high a tax bracket you should convert in
  
  -amount of pension
  
  -amount of SS
  
  -whether you are single (or widowed) or married
  
  -other things I've not thought of?

[02nz]

-other things I've not thought of?

Another would be the intended use of the money - whether one intends to spend it down, leave some or most to heirs (in which case it makes sense to think about their tax rates), and/or donate/leave to charity.

[Beehave]

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.

I agree with this advice. You might as well work with the known present tax rates to convert funds to Roth to create more of a balance between the Roth and non-Roth holdings.

The future tax rates and tax policies are not really knowable. Even if rates go up, that's not a gimme that maximizing conversions to empty the pre-tax will be the best performer. Two conceivable reasons:

. 1 . If a value-add tax were imposed on all goods and services, then money withdrawn and spent from a Roth fund would be taxed again
. 2 . If you need to dip into funds to pay for significant healthcare then under current law as I understand it funds withdrawn to pay from a pre-tax could be all or mostly tax-free (qualifying long-term care or expensive treatments-type things).

Obviously, we do not know which policies will be in effect, so diversifying and not trying to get all eggs in one basket makes the most sense to me. But to be clear, given the current proportions of pre-tax to Roth in your current allocation, filling more Roth as suggested in the post above makes perfect sense to me.

[smitcat]

I would just add that "early retirement" here doesn't have to mean retiring in your 40s or 50s.

I agree.

Each of these factors is independent. Retiring at 65 will work for some. It will not work well for others.

All the factors have to be considered together

• -amount of tax-deferred money,
  
  - amount of that you want to convert,
  
  -how many years you have to convert,
  
  -how much you can convert without triggering something else like IRMAA
  
  -how high a tax bracket you should convert in
  
  -amount of pension
  
  -amount of SS
  
  -whether you are single (or widowed) or married
  
  -other things I've not thought of?

"-other things I've not thought of?"
Account performance - If the tax deferred account is larger and performs well your ability to convert appreciably faster than the account grows also becomes a factor.

[FiveK]

Starting in 2020, you can only deduct the portion exceeding 10% of AGI (used to be 7.5%)....

In Dec. 2019 congress did extend the 7.5% AGI floor for 2020. See "(f) Temporary special rule" in 26 U.S. Code § 213 - Medical, dental, etc., expenses.

[02nz]

Account performance - If the tax deferred account is larger and performs well your ability to convert appreciably faster than the account grows also becomes a factor.

Which is one reason we typically recommend placing the investments with the highest expected returns in Roth accounts, e.g.: https://www.bogleheads.org/wiki/Tax-eff ... tock_funds

[lgb]

Can anyone explain concisely and briefly what I just read above and what we're trying to accomplish?

I've now heard this twice in discussions with other people that are closer to retirement than myself (I'm in 40's) - where they said their 'financial person' was suggesting they move as much of their IRA retirement accounts over to their ROTH retirement accounts so that there wouldn't be so much of a tax burden.

If this is true (the problem - whatever it is that I don't fully understand yet), why wasn't it solved on the front end? I assume because the employers retirement plan wasn't a ROTH, but if it can magically be solved now by doing something, why wouldn't it have been done earlier in your life?

Set me straight - please!

If a person saves a lot in tax-deferred accounts, starts early, works a long time, and has even a modest pension, when they retire they may have a very large tax-deferred account they don't need. The government eventually requires people to tap into this money they don't need at age 72 (RMDs or required minimum distributions).

The amount they have to take is taxable and gets larger each year. This can push some people into higher tax brackets, sometimes even higher than when they were working.

It can be solved on the front end if you know it will happen. Many people just didn't know. Many thought if putting something into a tax-deferred account was a good idea then putting more is even better. They enjoyed paying lower tax rates while working but may pay for it in the end. For example, a couple might use 4 tax-deferred accounts for 15 or 20 years...a choice that can come back to haunt them later on.

Another way to solve it may be to do Roth conversions (convert pre-tax 401k/IRA money to Roth) in early retirement. This does not work for people who don't retire early. And it does not work all that well for people who have a pension. They just can't convert enough before the tax bomb hits.

Without knowing the details, I would not put much credence in "financial people" who say to move money to Roth. There could be other reasons for that kind of suggestion.

Nevertheless, the problem can be real and it can show up in spite of the best intentions.

Excellent reply! That is exactly what I was seeking to understand further for my own benefit and the benefit of others! I think that explains how it comes to be, what the concern is, and how to contend with it.

Perfect!

[4nursebee]

For a sizable portfolio such as the OPs, given the irmma Medicare premiums, should the irrmma really impact decisions now? I read the difference in expenses as one or two grand a year.

[02nz]

Starting in 2020, you can only deduct the portion exceeding 10% of AGI (used to be 7.5%)....

In Dec. 2019 congress did extend the 7.5% AGI floor for 2020. See "(f) Temporary special rule" in 26 U.S. Code § 213 - Medical, dental, etc., expenses.

Thanks, edited the earlier post.

[smitcat]

Account performance - If the tax deferred account is larger and performs well your ability to convert appreciably faster than the account grows also becomes a factor.

Which is one reason we typically recommend placing the investments with the highest expected returns in Roth accounts, e.g.: https://www.bogleheads.org/wiki/Tax-eff ... tock_funds

Which is great if you have sufficient room for your AA with that strategy.

[FiveK]

Starting in 2020, you can only deduct the portion exceeding 10% of AGI (used to be 7.5%)....

In Dec. 2019 congress did extend the 7.5% AGI floor for 2020. See "(f) Temporary special rule" in 26 U.S. Code § 213 - Medical, dental, etc., expenses.

Thanks, edited the earlier post.

Apparently that change has gone unnoticed by many. Of what may be the three best tax estimation tools, mortgagecalculator web page, Excel1040, and the personal finance toolbox, only the toolbox has the 7.5%. And that is recent, perhaps prompted by a post in this forum.

[retiredjg]

Starting in 2020, you can only deduct the portion exceeding 10% of AGI (used to be 7.5%)....

In Dec. 2019 congress did extend the 7.5% AGI floor for 2020. See "(f) Temporary special rule" in 26 U.S. Code § 213 - Medical, dental, etc., expenses.

Thanks, edited the earlier post.

Apparently that change has gone unnoticed by many. Of what may be the three best tax estimation tools, mortgagecalculator web page, Excel1040, and the personal finance toolbox, only the toolbox has the 7.5%. And that is recent, perhaps prompted by a post in this forum.

I'm thinking the extender done in December 2019 was for 2019 taxes where the number was scheduled to be 10% and the 2018 number of 7.5% got extended at the last minute for 2019 income.

[randomguy]

Can anyone explain concisely and briefly what I just read above and what we're trying to accomplish?

I've now heard this twice in discussions with other people that are closer to retirement than myself (I'm in 40's) - where they said their 'financial person' was suggesting they move as much of their IRA retirement accounts over to their ROTH retirement accounts so that there wouldn't be so much of a tax burden.

If this is true (the problem - whatever it is that I don't fully understand yet), why wasn't it solved on the front end? I assume because the employers retirement plan wasn't a ROTH, but if it can magically be solved now by doing something, why wouldn't it have been done earlier in your life?

Set me straight - please!

Because it costs more to solve it on the front end in a lot of cases. On the front end I might be paying 30k/100k to in taxes while on the back end I am only paying 10k/100k. ROTH versus traditional is all about exploiting the implications of a tax code with graduated rates to figure out if you are better off paying now or later.

Now figuring out taxes in both cases is hard. Even with level income the effects of the source of the income (pay check, IRA distribution, SS, LTGC,...),tax situation (kids, mortgages, death of spouse, changing states, tax law changes, medicare and ACA,...), and luck (getting 10% for 30 years versus 5% results in a different optimum) makes it impossible to get an exact solution. But you can make some guess and get something reasonable. And there is some question about if paying taxes early introduces more risk of sequence of return issues.

[FiveK]

Starting in 2020, you can only deduct the portion exceeding 10% of AGI (used to be 7.5%)....

In Dec. 2019 congress did extend the 7.5% AGI floor for 2020. See "(f) Temporary special rule" in 26 U.S. Code § 213 - Medical, dental, etc., expenses.

Thanks, edited the earlier post.

Apparently that change has gone unnoticed by many. Of what may be the three best tax estimation tools, mortgagecalculator web page, Excel1040, and the personal finance toolbox, only the toolbox has the 7.5%. And that is recent, perhaps prompted by a post in this forum.

I'm thinking the extender done in December 2019 was for 2019 taxes where the number was scheduled to be 10% and the 2018 number of 7.5% got extended at the last minute for 2019 income.

The US Code text is "In the case of taxable years beginning before January 1, 2021, subsection (a) shall be applied with respect to a taxpayer by substituting “7.5 percent” for “10 percent”."

[retiredjg]

I see it!

Yes, it does say that (for those who did not find it, do a search on the above link for "in the case of" and you will find it at the very bottom. The extension was for 2 tax years, not just one.

[randomguy]

The goal is to minimize the taxes you pay overall on traditional withdrawals, over your lifespan.

Why would anyone have that as their goal? Isn't maximizing your income and account value far more important than minimizing taxes? Tax management is a way to achieve ones goals not the goal itself for most people.

[Katietsu]

Can anyone explain concisely and briefly what I just read above and what we're trying to accomplish?

I've now heard this twice in discussions with other people that are closer to retirement than myself (I'm in 40's) - where they said their 'financial person' was suggesting they move as much of their IRA retirement accounts over to their ROTH retirement accounts so that there wouldn't be so much of a tax burden.

If this is true (the problem - whatever it is that I don't fully understand yet), why wasn't it solved on the front end? I assume because the employers retirement plan wasn't a ROTH, but if it can magically be solved now by doing something, why wouldn't it have been done earlier in your life?

Set me straight - please!

If a person saves a lot in tax-deferred accounts, starts early, works a long time, and has even a modest pension, when they retire they may have a very large tax-deferred account they don't need. The government eventually requires people to tap into this money they don't need at age 72 (RMDs or required minimum distributions).

The amount they have to take is taxable and gets larger each year. This can push some people into higher tax brackets, sometimes even higher than when they were working.

It can be solved on the front end if you know it will happen. Many people just didn't know. Many thought if putting something into a tax-deferred account was a good idea then putting more is even better. They enjoyed paying lower tax rates while working but may pay for it in the end. For example, a couple might use 4 tax-deferred accounts for 15 or 20 years...a choice that can come back to haunt them later on.

Another way to solve it may be to do Roth conversions (convert pre-tax 401k/IRA money to Roth) in early retirement. This does not work for people who don't retire early. And it does not work all that well for people who have a pension. They just can't convert enough before the tax bomb hits.

Without knowing the details, I would not put much credence in "financial people" who say to move money to Roth. There could be other reasons for that kind of suggestion.

Nevertheless, the problem can be real and it can show up in spite of the best intentions.

I keep thinking I must be missing something with many of these Roth conversion topics. When I consider a simple example of a couple who is currently in a marginal tax bracket of 22%, I have trouble seeing how using traditional is going to hurt them without an unusually high traditional balance generally unattainable. Top of 22% tax bracket is $171,050 with a standard deduction of $27,400 or a total of $198,450. Assume that they have taxable social security of $55,000. So, assuming no other income but social security and RMD’s, they would have $143,450 available before reaching the next higher tax bracket. With an RMD factor of 25, that would mean a starting traditional balance of over $3.5 million which seems to be less than the balance that many currently in the 22% tax bracket are worrying about. If you do the analysis for those in the 24% or higher brackets, concern about traditional leading to a much higher tax rate in retirement would seem to be even less of a concern.

I understand that there are many other factors like a significant pension or the expectation of one partner filing single for many years that can change the analysis to favor Roth or Roth conversions. Similarly, the expectation of large medical bills or charitable gifts would skew towards never converting.

I am not suggesting that if one has low income years after retirement and before RMDs and SS that one should not take advantage of that time period and do Roth conversions, assuming ACA considerations and such do not interfere. But, the concern of a huge increase in effective tax rate with RMD’s vs the effective tax rate while working is the thing that I am having trouble understanding for an “average” person, if there is such a thing.

[CAsage]

The goal is to minimize the taxes you pay overall on traditional withdrawals, over your lifespan.

Why would anyone have that as their goal? Isn't maximizing your income and account value far more important than minimizing taxes? Tax management is a way to achieve ones goals not the goal itself for most people.

Sort of. Zero income would result in zero taxes, but that is not what I meant or my goal! My intent was that, given the same IRA assets, minimize the total tax hit for withdrawal. Example - draw it out over your life at 12 or 22% (better) or convert it all in one year and pay the top tax rate, wasting the lower tax brackets of the future... Maximizing the withdrawal is good, maximizing the pre-tax account balance just defers the pain (aka taxes).

[JBTX]

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.

This recommendstion is definitely a case of the tail wagging the dog. Why would you quit work just because you are in the 22% tax rate?

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.

There may be merit in doing this - I do it - but doing so is effectively increasing your after tax stock allocation.

The goal is to minimize the taxes you pay overall on traditional withdrawals, over your lifespan.

Why would anyone have that as their goal? Isn't maximizing your income and account value far more important than minimizing taxes? Tax management is a way to achieve ones goals not the goal itself for most people.

+1. See above, tail wagging dog

[randomguy]

I am not suggesting that if one has low income years after retirement and before RMDs and SS that one should not take advantage of that time period and do Roth conversions, assuming ACA considerations and such do not interfere. But, the concern of a huge increase in effective tax rate with RMD’s vs the effective tax rate while working is the thing that I am having trouble understanding for an “average” person, if there is such a thing.

Most of the time there isn't a tax bomb. Given the choices between paying taxes earlier and later, the difference is really small. It is just that for some people having 4 million and owing 1 million feels worse than having 3 million and owing 0 dollars. People forget that a big reason their account balances are so large is that they didn't pay taxes for 40 years. Some people save enough (or have a spouse die soon) so that they do jump up brackets but I think that is a very small niche.

[randomguy]

The goal is to minimize the taxes you pay overall on traditional withdrawals, over your lifespan.

Why would anyone have that as their goal? Isn't maximizing your income and account value far more important than minimizing taxes? Tax management is a way to achieve ones goals not the goal itself for most people.

Sort of. Zero income would result in zero taxes, but that is not what I meant or my goal! My intent was that, given the same IRA assets, minimize the total tax hit for withdrawal. Example - draw it out over your life at 12 or 22% (better) or convert it all in one year and pay the top tax rate, wasting the lower tax brackets of the future... Maximizing the withdrawal is good, maximizing the pre-tax account balance just defers the pain (aka taxes).

Even then is that really what your goal should be? If you save 3k/year by minimizing your taxes on traditional and it costs you 5k/year in taxes on your SS income, is that really what you want to be doing? I know when I ran my math, it favored paying a more in traditional early to avoid other taxes later. Again the point is simply to remember what your goal is. And unless you have some moral opposition to paying taxes, minimizing them is rarely the goal. Tax planning is often a tool to achieve your other goals though.

[LilyFleur]

I would just add that "early retirement" here doesn't have to mean retiring in your 40s or 50s.

I agree.

Each of these factors is independent. Retiring at 65 will work for some. It will not work well for others.

All the factors have to be considered together

• -amount of tax-deferred money,
  
  - amount of that you want to convert,
  
  -how many years you have to convert,
  
  -how much you can convert without triggering something else like IRMAA
  
  -how high a tax bracket you should convert in
  
  -amount of pension
  
  -amount of SS
  
  -whether you are single (or widowed) or married
  
  -other things I've not thought of?

"-other things I've not thought of?"
Account performance - If the tax deferred account is larger and performs well your ability to convert appreciably faster than the account grows also becomes a factor.

Additionally, in your 50s and 60s, many very long-term marriages end in divorce, and people start to become widowers. So lots of folks end up filing single and paying higher taxes than had been anticipated during the years they were saving. A Roth in my 401k was not available to me during the years I was contributing, and the portfolio exponentially increased in value in the 20+ years after that.

[LeeMKE]

One more vote to check out I-ORP extended analysis.

I had a tax bomb waiting for me, which Fidelity pointed out. Fidelity RIP showed my budget having to accommodate large taxes coming in my mid-80s because I had too much in IRA. I-ORP extended, gave me specific techniques to wipe this out during those precious years you are about to enter.

I've just completed my conversions and now will glide through the rest of retirement at a tax rate I can manage, and no surprises in old age.

Very worthwhile investment of your time. And it is a free tool.

[retiredjg]

I keep thinking I must be missing something with many of these Roth conversion topics. When I consider a simple example of a couple who is currently in a marginal tax bracket of 22%, I have trouble seeing how using traditional is going to hurt them without an unusually high traditional balance generally unattainable.

I agree with this. Most ordinary savers are not going to have a tax bomb problem because they do not save too much in tax-deferred accounts.

But, you do have to keep the other factors in mind. Inheriting large IRA could change the scenario completely. Or if your two average savers both start at age 24 and work till 68....that would change things as well. Having even a modest pension could make tax-deferred accounts surplus for low spenders. And so on.

It is usually not one thing that causes the problem. It is usually a combination of things.

But, the concern of a huge increase in effective tax rate with RMD’s vs the effective tax rate while working is the thing that I am having trouble understanding for an “average” person, if there is such a thing.

I don't disagree with your thinking, but it is not the effective tax rate while working that is key. Money put into tax-deferral is being deferred at their marginal rate, not the lower effective rate.

[Jack FFR1846]

privateID

I am in nearly the same boat as you are. Around a million and a half in tIRA and same tax bracket. I have done the math and figured out that a "normal" backdoor Roth does me no good. Here are the 2 options I've figured out:

1) Do nothing and just pull money out of the tIRA when I stop working.

2) Roll the tIRAs into my 401k. Since all of my IRA money came from rolling out of old 401k's, this can legally be done. Whether your 401k provider WILL do it is another story. But they may. If they do, then you can do non-deductible tIRA contributions and backdoor Roth conversions going forward. Personally, I find this an awful lot of work for nearly no advantage.

I plan to do #1. When I'm into RMD-land, I'll pay taxes on this. I can certainly control a lot of my other income at that point. If the free money coming from social security pushes me into higher medicare rates, well, that's only fair because I'll be in great financial shape.

[Johnsson]

One more vote to check out I-ORP extended analysis.

I had a tax bomb waiting for me, which Fidelity pointed out. Fidelity RIP showed my budget having to accommodate large taxes coming in my mid-80s because I had too much in IRA. I-ORP extended, gave me specific techniques to wipe this out during those precious years you are about to enter.

I've just completed my conversions and now will glide through the rest of retirement at a tax rate I can manage, and no surprises in old age.

Very worthwhile investment of your time. And it is a free tool.

I know this has been mentioned many times, but, I want to reinforce the use of I-ORP. Not at all cumbersome to use, it provides a plan for conversions that maximizes overall spending.

We have numbers within the ballpark of yours. By looking at many options it's convinced me to forego ACA subsidies for larger, earlier conversions. (viewtopic.php?f=1&t=316291&p=5283479#p5283479)

Disclaimer... Even though we don't need to, AND it still makes sense without this, DW and I MAY work a little (2 days a month?) to generate the $18k needed to offset the ACA subsidies (if we do this for 2 years it will equal 4 years of subsidies). Not everyone have the ability to do this.