I am two years out from being eligible for a "full" pension where I work (local government), where "Full" means unreduced. I also have a moderately large 457b account and I have a goal of converting as much of my traditional 457 plan to Roth as makes sense. Due to my pension this will not be as easy as it might seem at lower rates, and while I have a plan of attack, I wanted to pass it by the readers and see if I am missing anything. (BTW, I did the analysis below with no accounting for inflation as this made the numbers work out easier. Since both accounts and brackets should increase similarly I figured this was safe for this early type of ballpark estimate.) Details are below.
Thanks for any thoughts on my plans (and sorry for the length - but trying to be thorough)
- Age: 58, will be 60+ when I retire.
- Single, though in a relationship.
- Accounts: 457: $860k (of which $250k is Roth)
- Roth IRA: $190k
- Taxable investments: $200k
- HSA: $22k
- Other savings: $45k
- Expected pension: It will start at $65k/year when I am 60.5 y.o. until I am 67 y.o., then will drop to $44k/year thereafter. It also has a COLA, starting immediately.
My Goal: My Goal is/was to contribute to Roth 457 / Convert existing Traditional 457 money to the top of the 22%-now / 25%-then tax bracket each year before RMDs kick in. However I do want to leave a large enough pile of traditional as money in traditional can come out tax free when there are years with high medical expenses. But I also want to keep the amount low enough so my RMDs don't kick in higher taxes.
My Plan: My job has a "DROP" retirement option, and I plan on entering "DROP" as soon as possible near the end of 2022, and then quit once I have maxed out Roth 457 contributions for 2023. At that time I should be ~60.5 years old. I will then commence Roth conversions the next year until I have RMDs at age 72 (I will have no room to convert in my first retirement year in the 22% bracket due to pension & earnings). (Also to note: I can do Roth conversions in-plan without rolling money out of the account. I did a small in-plan rollover this year, but the plan allows for this to be done only two times a year.)
My Problem: My traditional 457 account balance is currently at $610k ($860k total - $250k Roth). Assuming no unknown changes to the tax laws, my ultimate goal was to keep my Federal tax rates below 24%/28% if possible forever, as well as keeping myself in the lowest IRMAA bracket. Sounds nice, but this bull market is killing this plan (but in a good way) as the traditional total keeps growing.
My estimate for my planned-for income in retirement uses the top of the current 22% tax bracket ($98,000) or preferably a little less to make sure the first IRMAA cliff isn't crossed (Currently at $87,000 MAGI). I am also planning on holding off Social Security benefits until 70, and as I am already past the second bend point for SSI Income, I am figuring I should have a little over $3,000 of SS income per month, or $30,600 of SS income (85%) that will be taxed each year when I start taking it at 70. Also I am currently getting around $4,800 in dividends this year, so I will estimate $5,000 going forward.
This gives me the following timeline for known taxable income
Ages 61-67: Pension of $65,000 + $5,000 dividends = $70,000
Ages 68-70: Pension of $44,000 + $5,000 dividends = $49,000
Ages 71+: Pension of $44,000 + SS Income $30,600 (taxable) + $5,000 dividends = $79,600
This leaves the amount available for conversion in the 22%/25% bracket to be:
Ages 61-67: ~$28,000
Ages 68-70: ~$49,000
Age 71: ~$18,400
To keep my RMDs from forcing me into IRMAA penalty rates, I need at age 72 a starting balance of $460k or less in my traditional 457 plan ($460k * 4% = $18,400/year RMD). And of course this amount will most likely increase as the RMD percentages and 457 traditional account balance still grows for many years in the future.
With my account at $610k right now, and figuring an average 5% real growth yearly, I will be well above $700k when I turn 72 unless I do major Roth conversions.
Currently I am at the top of the 22% bracket, and if I assume in-plan roll overs each year to the top of the 22% bracket, I will still be pushed above the 22% bracket at 72 y.o.
If I do an extra $75k of Roth conversions in my two years before I am 63 my taxes at 72 will be at the top of the 22% bracket. Which is where I am at today. And of course future years will go higher anyway.
Question #1: I currently plan on doing these extra $150k of conversions after I retire (age 62 & 63) which I should be able to pay the taxes for from my savings & other taxable investments. However, in my case I can also do conversions before then (via in-plan conversions while working). Is there any reason to do the conversions this year or my last two future work years instead of waiting until 2024 when I turn 62?
Question #2: The above figures assume an average 5% growth of the account. Given the growth of my account in the past decade (10+% y.o.y.) I am thinking the assumption of 5% growth is too low, especially as this plan gives me no margin for error considering the IRMAA cliff. Also, tax rates are supposed to go up in the year I turn 64, so I am considering more conversions above what I already described. Is this a prudent strategy? (I am thinking I will convert an extra $25k for the next three years (beyond the $150k already mentioned) to bring the traditional down to a manageable level) I should be able to use some of the incoming pension income to pay for the taxes as needed.
Extra items in case there are questions:
Yes, our 457 plan allows for withdrawals from whichever bucket of money you indicate, but if I were to leave Roth money in the 457 it would count towards my RMDs. So I plan on leaving Roth money in until a few years before RMDs start, and then rolling over only the Roth portion of the account to the Roth IRA I currently have setup. I like the 457 fund expenses, so I want to keep the money there until needed to be pulled out.
The GF has a TSP that is well over $1Mil and 99% traditional, so I can't plan on marrying her to get more conversion space. While we don't plan on marrying, if we did my situation would only get worse, not better, with regard to this issue.
My state tax rate is 5.75%, and I do not know if I will move to another state in the future, so I am not including state taxes in this analysis. (though moving to a no income tax state is a possibility)
My work has health insurance I can get once I retire. There will be a subsidy, but staying on the HDHP after retirement will cost about $500/month. So I will not be looking to get onto any ACA or similar health plan, but will have access to one so my income level is not an issue for HI.