Handling lumpy expenses in retirement Roth conversions?

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MathWizard
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Handling lumpy expenses in retirement Roth conversions?

Post by MathWizard »

I am nearing retirement, and planning withdrawals.

I have a spreadsheet showing how much to withdraw yearly from each account under fairly conservative assumptions. In that, I have Roth conversions up to age 70.

In my expenses, I have averaged out some lumpy expenses , mostly $10K per year for car replacement and major house maintenance.
During accumulation, I have just saved us for these, and I could just continue to do so, moving a set amount from tax advantaged to savings to build up.
Leaving the money in tax advantaged has appeal for growing the money in tax advantaged . However, if I leave it in tax deferred, I face a jump to a higher tax bracket when the lumpy expenses arrives.
My thought would be to convert the $10K into Roth each year, and then withdraw from Roth when the lumpy expenses hits.
This then keeps me from jumping tax brackets and put the extra growth in tax advantaged into Roth, not tax deferred.

Does this make sense ?

Do you see a downside?
crefwatch
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by crefwatch »

I recommend that you read this entire, excellent thread:
viewtopic.php?f=10&t=320854
[Kitces on Roth Conversions vs. Harvesting Capital Gains]

It will help you to understand the interaction of ordinary income, Social Security, Qualified Dividends, and Capital Gains.

I trust you already know that Roth Conversions are most beneficial when you use money already in taxable accounts to pay the tax due, rather than reducing your amount "reinvested", in the Roth, by the value of the taxes.
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samsoes
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by samsoes »

That makes perfect sense, actually it's a great idea. :beer

(Do you receive health insurance from an ACA exchange? If so, be sure to account for the increased income resulting from the conversions.)
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FiveK
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by FiveK »

MathWizard wrote: Sun Aug 02, 2020 3:38 pm My thought would be to convert the $10K into Roth each year, and then withdraw from Roth when the lumpy expenses hits.
If that doesn't increase the marginal tax rate for the Roth conversion, it's probably a good idea. Converting even more each year at that marginal rate might be an even better idea, but that depends on your specific situation.
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David Jay
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by David Jay »

Assuming that you are over 59.5 and are making Roth conversions to the top of a specific tax bracket, then your plan is a good one.

If you take more out of tIRA For a lumpy expense you bump up a tax bracket. If you save elsewhere and don’t use those funds for an expense (because of lumpy-ness) then you have “wasted” some of the targeted tax bracket.
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retiredjg
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by retiredjg »

MathWizard wrote: Sun Aug 02, 2020 3:38 pm Does this make sense ?
Makes a lot of sense to me. There is no point in taking money out of tIRA and putting it in taxable (to be ready when expenses arise) when you can put it in Roth for the same tax cost.

The caution would be if you are less than age 59.5....the Roth conversion would have a 10% penalty if you need to use it before the 5 tax year clock has run. Of course, if you need a new furnace in November, who cares about the 10% penalty?
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MathWizard
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by MathWizard »

retiredjg wrote: Sun Aug 02, 2020 4:30 pm
MathWizard wrote: Sun Aug 02, 2020 3:38 pm Does this make sense ?
Makes a lot of sense to me. There is no point in taking money out of tIRA and putting it in taxable (to be ready when expenses arise) when you can put it in Roth for the same tax cost.

The caution would be if you are less than age 59.5....the Roth conversion would have a 10% penalty if you need to use it before the 5 tax year clock has run. Of course, if you need a new furnace in November, who cares about the 10% penalty?
Thanks, I had not heard about anyone doing this, so I was wondering if I missed something.

Yes,under 59.5 would present problems, I should have said that I was already over 60.
Once retired, will do conversions up to top of 12/15% bracket up to age 70.
After age 70 taxation of SS benefits complicates the tax situation.
02nz
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by 02nz »

I don't think anything is wrong with it per se, but seems like mental accounting to me. Determine first where to take the money you need (regular or lumpy), whether taxable, traditional or Roth. Then, determine how much Roth conversion to do. If you decide to take the lumpy expense partially or all out of tax-deferred,, you'll do less Roth conversions that year, to avoid a spike in your taxable income. Why have a bucket of Roth conversions for lumpy expenses and another bucket of Roth conversions for whatever else?
MathIsMyWayr
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by MathIsMyWayr »

Roth IRA has many well known advantages. I view Roth IRA as a holding tank for moving pre-tax retirement account (Roth conversion) to whenever the tax situation is favorable for the move. Simple, there is no "should" or "should not".
Last edited by MathIsMyWayr on Mon Aug 03, 2020 7:08 am, edited 1 time in total.
Emilyjane
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by Emilyjane »

I’m retired and do this. Most of my Roth is Vanguard Lifestyle Growth. The smaller part saved for “lumpy” expenses is half Balanced Fund and half short term bond, for more stability, and to keep track of which part Is the “lumpy expense fund”. I plan to use that part of the Roth for vehicle replacement and more expensive trips (which aren’t happening in the Covid era, so that bucket is growing). I am using VPW (Variable Percent Withdrawal) for my overall withdrawal plan. Transfer to Roth “lumpy expense fund “ part of monthly withdrawal I don’t need for current expenses. Also doing other Roth conversions during that retirement till 70 yo opportunity. The “lumpy expense fund” part is less than 10% of the Roth.
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reddison
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by reddison »

I am retiring early next year at 63 and also have prepared a spreadsheet to estimate income, taxes and Roth conversions. I have large 401(k) holdings and am wanting to convert as much as possible until age 72. I have decided to get a HELOC as a safeguard for making large purchases, in order to have a handy source of cash without adversely affecting IRMAA brackets and tax brackets. I will be in the 20% LTCG bracket and either the 22 or 24% tax bracket (& higher when it changes) for the next 6 years so I think the HELOC makes sense. Rates right now are good - prime minus X.
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FiveK
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by FiveK »

reddison wrote: Mon Aug 03, 2020 1:25 pm I will be in the 20% LTCG bracket and either the 22 or 24% tax bracket....
Perhaps a lower LTCG or higher ordinary bracket? E.g., 20% LTCG bracket starts at $441,450 for a single filer....
reddison
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Re: Handling lumpy expenses in retirement Roth conversions?

Post by reddison »

FiveK wrote: Mon Aug 03, 2020 1:56 pm
reddison wrote: Mon Aug 03, 2020 1:25 pm I will be in the 20% LTCG bracket and either the 22 or 24% tax bracket....
Perhaps a lower LTCG or higher ordinary bracket? E.g., 20% LTCG bracket starts at $441,450 for a single filer....
My mistake - 15% LTCG bracket
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