After 65 Roth Conversion and SS at 70

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Topic Author
oembogle
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After 65 Roth Conversion and SS at 70

Post by oembogle » Sat Aug 01, 2020 8:11 am

Hi Bogleheads
65 years old and plan to retire in 8 months, no pension, no annuity, 1.5M IRA, 2.0M non qualified Vanguard , 2 Rental properties clear.
Please consider the following scenario as i turn 66 this January.
Retire at 66 but do not take SS until 70. SS at 66=3010/mo, SS at 70=4000/mo
At 66 convert 100K from IRA into Roth each year for 5 years to lower RMDs at 72.
I will fund the Roth Conversions from a Money Market i have set aside for this .
I will take income from non qualified accounts and Rent until I turn 70.
Goal: defer SS until 70 and create a 500K Roth by 71.
I know the Roth will be mostly Legacy as i cannot touch for 5 years .
Is it even worth doing the Roth in my case ?
I see in current financial literature (Kiplinger, Morningstar) that the 66-71 period is the sweet spot for final Roth Tax planning .
Is this a viable scenario ? What am i missing ? Thanks for your guidance .

Man Plans, God Laughs

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David Jay
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Re: After 65 Roth Conversion and SS at 70

Post by David Jay » Sat Aug 01, 2020 8:40 am

oembogle wrote:
Sat Aug 01, 2020 8:11 am
I know the Roth will be mostly Legacy as i cannot touch for 5 years .
This is not correct. As you are over age 59.5, you can access all of the conversions without paying any taxes.

When your first (ever) Roth Account has been open for 5 years, then the earnings on the conversions are qualified (i.e. no taxes).

If you haven’t opened a Roth, do it before the end of the year to add one more year to the clock. [edit] If you are in a high tax bracket because you are still working, do a small - say $1000 - IRA conversion and pay the (high) taxes on that small amount in order to get the Roth open.
Last edited by David Jay on Sat Aug 01, 2020 9:12 am, edited 2 times in total.
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Pops1860
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Re: After 65 Roth Conversion and SS at 70

Post by Pops1860 » Sat Aug 01, 2020 8:52 am

The choice to do what you are considering is just that, your choice. Many do it, many do not. But not a bad idea, if that's what you're asking. Just a choice, based on your financial plans going forward.

The most compelling reason to do as you are considering, for me, is that there are various pros/cons to trad IRAs, Roth IRAs, and taxable type investments, involving taxes and estate planning aspects. Having $$ in all three type accounts gives you options.

There are many threads on this topic already, so suggest you do a search and see if previous posted threads give you some useful guidance.

One point - don't plan to 'just convert $xxxK' every year. You need to look closely at marginal tax brackets, IRMMA premium breakpoints for Medicare, etc. Again, existing threads discuss this, so that's a good place to start.
The power of accurate observation is often called cynicism by those who do not have it. ~George Bernard Shaw

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Rob54keep
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Re: After 65 Roth Conversion and SS at 70

Post by Rob54keep » Sat Aug 01, 2020 8:56 am

I agree with your planning and the recommendations to watch your marginal tax rate for Medicare IRMMA thresholds. You may also want to consider a HSA to reduce your AGI for tax purposes.

rkhusky
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Re: After 65 Roth Conversion and SS at 70

Post by rkhusky » Sat Aug 01, 2020 9:02 am

Single or Married?

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Flobes
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Re: After 65 Roth Conversion and SS at 70

Post by Flobes » Sat Aug 01, 2020 9:26 am

oembogle wrote:
Sat Aug 01, 2020 8:11 am
Retire at 66 but do not take SS until 70.
At 66 convert 100K from IRA into Roth each year for 5 years to lower RMDs at 72.
Goal: defer SS until 70 and create a 500K Roth by 71.
What am i missing ?
You may be able to have your "70" year more open for Roth conversion without Social Security income, while not ceding any of your "70" SS benefits, if your birthday is in the second half of the year.

When you start Social Security, you can receive 6 months retroactively. If your birthday is later than July, you can postpone SS until January of your "71" year, and then receive the (up to six months) of "70" SS that you delayed.

This SS income shifting is valuable and available for some.

Topic Author
oembogle
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Re: After 65 Roth Conversion and SS at 70

Post by oembogle » Sat Aug 01, 2020 10:36 am

hi , am married, so the deferral to 70 is also to give DW a higher SS on my statistical probable demise.
thanks for your insight .

02nz
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Re: After 65 Roth Conversion and SS at 70

Post by 02nz » Sat Aug 01, 2020 10:57 am

OP, withdrawing from your tax-deferred balance and/or converting to the top of the 12% bracket (around $107K for 2020, assuming no other income and accounting for standard deduction for MFJ, both age 65+) makes sense. This way you 1) take advantage of lower tax brackets every year, especially before tax rates are scheduled to go back up in 2026; 2) draw down your balance to reduce RMDs 3) help reduce the amount of SS benefits subject to income tax, and 4) mitigate the likelihood one of you passes (most likely your husband) and the other faces higher tax rates filing single.

Going to the top of the 12% bracket will not incur IRMAA surcharges.

I know some retirees like rental properties' income stream but I would not want to deal with rental properties in retirement. You can get an income stream from that chunk of money, too, and likely at significantly lower risk.
Rob54keep wrote:
Sat Aug 01, 2020 8:56 am
You may also want to consider a HSA to reduce your AGI for tax purposes.
In OP's case, it's not likely to be worthwhile even if an HDHP is offered. OP is likely to go on Medicare in the near future and thus will not be able to contribute much to an HSA.

sycamore
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Re: After 65 Roth Conversion and SS at 70

Post by sycamore » Sat Aug 01, 2020 12:10 pm

Pops1860 wrote:
Sat Aug 01, 2020 8:52 am
The choice to do what you are considering is just that, your choice. Many do it, many do not. But not a bad idea, if that's what you're asking. Just a choice, based on your financial plans going forward.

The most compelling reason to do as you are considering, for me, is that there are various pros/cons to trad IRAs, Roth IRAs, and taxable type investments, involving taxes and estate planning aspects. Having $$ in all three type accounts gives you options.

There are many threads on this topic already, so suggest you do a search and see if previous posted threads give you some useful guidance.

One point - don't plan to 'just convert $xxxK' every year. You need to look closely at marginal tax brackets, IRMMA premium breakpoints for Medicare, etc. Again, existing threads discuss this, so that's a good place to start.
+1 to the suggestion to look at the pros & cons.

Boglehead member "petulant" started a recent thread Kitces on Roth Conversions vs. Harvesting Capital Gains that discusses a blog post from Michael Kitces. There are some interesting points that petulant makes to consider regarding harvesting gains from taxable (like OP has) versus converting to Roth.

If uncertain about what to do, one could split the difference and harvest some gains in the 0% bracket and do some Roth conversion.

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Leif
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Re: After 65 Roth Conversion and SS at 70

Post by Leif » Sat Aug 01, 2020 12:24 pm

This is similar to my plan. I will be doing conversions until 72 (RMD time). When I start SS@70 I will still do some conversions, but for a lesser amount.

I keep a close eye on what I call tax speed bumps. Tax brackets are a set of speed bumps. Other points that increase taxes are extra medicare payments at $174K for a couple and $250K for NIIT.

I begin the year planning on 4 quarterly conversions. However, I'm also planning to accelerate my conversions at opportune times, such as back in March/April.

The amount I convert is based on my projected income once RMDs start. It is also based on the assumption that tax rates will eventually increase. So, I'm converting more now since I may need to dial back if tax rates increase. Taxes on my conversions are all paid for from CDs I have maturing. That way I get the full amount into the Roth.

Unfortunately, having clear rental income will slow this process for you due to your higher income pre-conversion.

rkhusky
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Re: After 65 Roth Conversion and SS at 70

Post by rkhusky » Sat Aug 01, 2020 1:20 pm

oembogle wrote:
Sat Aug 01, 2020 10:36 am
hi , am married, so the deferral to 70 is also to give DW a higher SS on my statistical probable demise.
thanks for your insight .
I like using the heat maps at https://www.bogleheads.org/wiki/Taxatio ... y_benefits to see what tax rates with SS would be.

With $1.6M in a Traditional account, the first year RMD would be about $60K, while with $1M, the first year RMD would be about $35K.

It appears that with SS at $50K/yr and with other income between $30K and $100K, you are paying a marginal rate of about 22%. So, it definitely makes sense to pay 12% (and 0% and 10%) now to get some money into a Roth.

Paying 22% now versus 22% later is a wash, it won't hurt or help. However, the 22% rate is scheduled to go back up to 25% in several years, so converting now at a 22% rate would help if that happens. In addition, if you could drop your Traditional account to $800K, you would drop down into a 18.5% marginal rate with $50K in SS.

So, definitely live off the taxable account and rental income and do Roth conversions up to the top of the 12% bracket ($100K+) before taking SS (also includes 0% and 10% brackets). You could also convert some Roth conversions for a couple years after taking SS, $30K would put you to the top of the 18.5% marginal tax rate (including 0% rate).

You could also convert some at a 22% rate, before and/or after taking SS, if you want to try and drop the Traditional accounts below $800K.

The Stone Wall
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Re: After 65 Roth Conversion and SS at 70

Post by The Stone Wall » Sat Aug 01, 2020 2:24 pm

You should model your situation with the I-ORP model to see what it shows you. Once you understand the various inputs, move to the Retiree Portfolio Model to really dial in the decisions. I think you will find that your tax situation will be greatly improved with Roth conversions. Your income streams in addition to the the larger RMDs as time progresses will become significant.

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FIREchief
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Re: After 65 Roth Conversion and SS at 70

Post by FIREchief » Sat Aug 01, 2020 2:39 pm

The Stone Wall wrote:
Sat Aug 01, 2020 2:24 pm
You should model your situation with the I-ORP model to see what it shows you. Once you understand the various inputs, move to the Retiree Portfolio Model to really dial in the decisions. I think you will find that your tax situation will be greatly improved with Roth conversions. Your income streams in addition to the the larger RMDs as time progresses will become significant.
I agree that modeling is the right approach to really compare alternatives for a specific situation.

I will add that for those who have already Roth converted a meaningful part of their portfolio by RMD age (72), that they may at that point only hold fixed income investments in remaining traditional IRAs. In that scenario, and with today's record low interest rates, there may be little or no concern with RMDs growing as time progresses. :annoyed
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

LeeMKE
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Re: After 65 Roth Conversion and SS at 70

Post by LeeMKE » Sat Aug 01, 2020 3:24 pm

+1 The Stone Wall and FIREchief

I use the I-ORP.com extended calculator and it made a huge difference for my long range taxes. My favorite price: free. And the accuracy has already proved itself in my situation.
The mightiest Oak is just a nut who stayed the course.

smitcat
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Re: After 65 Roth Conversion and SS at 70

Post by smitcat » Sat Aug 01, 2020 3:41 pm

The Stone Wall wrote:
Sat Aug 01, 2020 2:24 pm
You should model your situation with the I-ORP model to see what it shows you. Once you understand the various inputs, move to the Retiree Portfolio Model to really dial in the decisions. I think you will find that your tax situation will be greatly improved with Roth conversions. Your income streams in addition to the the larger RMDs as time progresses will become significant.
Yes - another strong vote for this process. It works.

heyyou
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Re: After 65 Roth Conversion and SS at 70

Post by heyyou » Sat Aug 01, 2020 5:04 pm

Did both and now glad of it.
Started early on the conversions with retiring early.
Like so much in life of doing the right things now, for some distant future benefit, the payoff is good when you do get that far along.

Sadly, the future taxes on a single filer after the passing of a spouse, makes those conversions even more advantageous, but that too is a subtle part of the planning.

Mando19
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Re: After 65 Roth Conversion and SS at 70

Post by Mando19 » Sat Aug 01, 2020 6:56 pm

I am about the same age, and have been converting to Roth’s for the last few years. I see it as tax deferral and estate planning, with minimal impact on my income stream. I would convert late in the year, so if you need some cash for health or unexpected reasons you don’t run up against Medicare IRMMA or other thresholds.

Topic Author
oembogle
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Re: After 65 Roth Conversion and SS at 70

Post by oembogle » Sun Aug 02, 2020 2:34 pm

All
Thanks for your responses and recommendations. You have given me several actionable items and things to consider .
The wisdom of the Boglehead community is incredible. Thanks.

WildBill
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Re: After 65 Roth Conversion and SS at 70

Post by WildBill » Sun Aug 02, 2020 4:40 pm

Howdy

Doing Roth conversions to the top of the 12% bracket sound pretty good, but there is a catch. If you have substantial income from qualified dividends or capital gains you can push capital income out of the 0% bracket and into the 15% bracket for an effective marginal rate of 27% on Roth conversions. Ask me how I know :shock:

Here is an example - say you have capital income of circa $50k from dividends and capital gains, along with 55k taxable income from pension or SS or whatever. Back out a tax deduction of 24k and you are at 80k,in the 12% bracket and the capital income is taxed at 0 and the 30k remaining of ordinary income is taxed at 12%. Pretty good.

Now add a 50k Roth conversion. Now you are at the top of the 12% bracket for ordinary income, with 80k taxed at 12%, and you have pushed the capital income into the 15% bracket. Your effective rate on that Roth conversion is now 27%. That is not so good.

Check your numbers carefully before going ahead.

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

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Re: After 65 Roth Conversion and SS at 70

Post by Vanguard Fan 1367 » Sun Aug 02, 2020 4:50 pm

There are a lot of possibilities for change over the next 20 or so years. I am in a similar situation and like the idea of converting to Roth to the 22% tax bracket to give me some options to deal with the changes.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."

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