Roth conversion amount needed in Retirement?

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Fierce Escape
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Roth conversion amount needed in Retirement?

Post by Fierce Escape »

Emergency funds: 20k, easily 12 months of expenses

Debt: None unless we get small loan for travel van purchase in couple months vs withdrawing from 457 or Roth. Purchase with taxes will be close, funds already set aside.

Tax Filing Status: Married Filing Jointly 2020, Single and HOH previously (taxes were higher)

Tax Rate: 12% Federal, 0% State on pension, 5% on remaining passive income

State of Residence: IL

Age: me 54, wife 57

Desired Asset allocation: Roth conversion only, no AA necessary

Me
63k 457
404k rollover IRA, 46k Roth IRA, combined 65/35 AA Vanguard PAS

Wife
90k rollover IRA, 60/40 AA Vanguard PAS

Retirement Income

53k pension, 46k passive farm rent, 99k total in 2022. 107k this year estimated ( yes we're at the 12% to 22% break). 3% COLA on pension starting 2023, recently retired.

Wife can get 10k pension in 3 years at 60, estimate 12k SS at 62, mine estimate 18k SS at 62. We have Health insurance (had a comment about that).

Any inheritance we'd get in the next couple decades would not put our income over the 22% tax rate.

We can live and travel well off Half our Current income. No reason to use tax deferred savings.

Would like to save/invest 20 to 30k annual for overseas trips if they're available in the future. I've withdrawn taxable funds the end of last year to purchase a travel van that'll be ready in a couple months. Don't really want to use or have debt, but purchase price with taxes will be tight.


Questions:
1. How much IRA should we convert to Roth each year? I believe we can take wife's pension later, and know SS can be deferred up to FRA

2. If we need 20k to finalize van purchase, any reason to use 457 vs current Roth, or is taking out a loan that advantageous? I strongly prefer no debt.

Thank you in advance.
Last edited by Fierce Escape on Fri May 14, 2021 3:12 pm, edited 1 time in total.
terran
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Re: Roth conversion amount needed in Retirement?

Post by terran »

It sounds like you're going to have a hard time staying the 12% bracket with any more income, so converting up to the top of the 22% bracket to get the money into Roth where it can grow tax free as soon as possible might be wise.

If you're currently getting health insurance through the ACA you might hold off for 2021 and 2022 since anyone can get subsidies for those years that cap their cost at 8.5% of income for a silver plan. Once the cliff comes back your income will be over that anyway, so it won't matter. Maybe only convert to the top of the 12% bracket for those two years.

Tax brackets are set to go up for the 2026 tax year, so the current 12%/22% brackets will go back to the 15%/25% brackets they were before 2018. I'm not actually sure what happens with the standard deduction or if personal exemptions come back. Getting your conversions wrapped up before then might be best if it works out give the other considerations I've pointed out.

You can probably finish converting before it's an issue, but if you still have money in tax deferred accounts by the year your wife turns 63 you might try to stay under the income level where medicare premiums are increased ($174,000 in 2021) since that's based on your income from 2 years before.
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Fierce Escape
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Re: Roth conversion amount needed in Retirement?

Post by Fierce Escape »

terran wrote: Fri May 14, 2021 2:50 pm It sounds like you're going to have a hard time staying the 12% bracket with any more income, so converting up to the top of the 22% bracket to get the money into Roth where it can grow tax free as soon as possible might be wise.

I'll have to decide how much each year, mostly at 22%, to save the 3% before 2026 tax rate bump

If you're currently getting health insurance through the ACA you might hold off for 2021 and 2022 since anyone can get subsidies for those years that cap their cost at 8.5% of income for a silver plan. Once the cliff comes back your income will be over that anyway, so it won't matter. Maybe only convert to the top of the 12% bracket for those two years.

We have health insurance

Tax brackets are set to go up for the 2026 tax year, so the current 12%/22% brackets will go back to the 15%/25% brackets they were before 2018. I'm not actually sure what happens with the standard deduction or if personal exemptions come back. Getting your conversions wrapped up before then might be best if it works out give the other considerations I've pointed out.

Besides saving the 3%, I believe there's a benefit to us that there's no RMDs for Roths? And a benefit for heirs if Roths are remaining?

You can probably finish converting before it's an issue, but if you still have money in tax deferred accounts by the year your wife turns 63 you might try to stay under the income level where medicare premiums are increased ($174,000 in 2021) since that's based on your income from 2 years before.

Very unlikely we'd go over that threshold, thanks
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Re: Roth conversion amount needed in Retirement?

Post by LeeMKE »

Have you checked your situation on the EXTENDED calculator at I-ORP.com?

That would tell you whether/how much/when to do Roth conversions and calculate your best method for withdrawals to minimize taxes, medicare and RMDs as well as evaluate the best practices for the last man standing, when the tax rate will double and some income will disappear.
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Fierce Escape
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Re: Roth conversion amount needed in Retirement?

Post by Fierce Escape »

LeeMKE wrote: Fri May 14, 2021 10:38 pm Have you checked your situation on the EXTENDED calculator at I-ORP.com?

That would tell you whether/how much/when to do Roth conversions and calculate your best method for withdrawals to minimize taxes, medicare and RMDs as well as evaluate the best practices for the last man standing, when the tax rate will double and some income will disappear.
Thanks, wasn't aware of this. I've ran some scenarios, still learning but making progress. Most extended calculations show converting much of the tax deferred to Roth prior to age 59 and zero or single digit RMDs.
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Lee_WSP
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Re: Roth conversion amount needed in Retirement?

Post by Lee_WSP »

Unless you go off some tax cliffs or your tax deferred will not throw off much RMDs, filling up the 22% bracket is a relatively safe bet with no/low cost of being wrong. Filling up the 24% bracket may also be beneficial. But it is a relatively complex calculation inputting RMDs and tax cliffs and life expectancy.
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Re: Roth conversion amount needed in Retirement?

Post by Boatguy »

You might want to think about determining when it’s best to take Social Security. You mentioned the age 62 dollar figures for each of you, so it’s unclear if it’s your intent to take both then or not. Opensocialsecurity.com is a great tool.
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Re: Roth conversion amount needed in Retirement?

Post by Fierce Escape »

Lee_WSP wrote: Sat May 15, 2021 4:24 pm Unless you go off some tax cliffs or your tax deferred will not throw off much RMDs, filling up the 22% bracket is a relatively safe bet with no/low cost of being wrong. Filling up the 24% bracket may also be beneficial. But it is a relatively complex calculation inputting RMDs and tax cliffs and life expectancy.
I agree on the 22% bracket. I'm still not seeing a clear path on how much Roth to covert prior to 59. Changing the Roth minimum balance and plan surplus seem to have a big effect. Think I'm getting it dialed in for maximizing total plan value and discretionary spending adjusting SS age also.
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Re: Roth conversion amount needed in Retirement?

Post by retiredjg »

1. You probably should not convert any tIRA to Roth before age 59.5 unless you have money in savings or from income to pay the taxes. If you pay the taxes out of the tiRA, that would be an early withdrawal and that amount would be subject to a 10% penalty.

You didn't mention any large savings. You could also take from the 457, but that increases your income and would reduce the amount you can convert. I feel sure you could pay taxes with your excess income - it appears to me that the amount of extra income you have might be a limiting factor in your Roth conversions until age 59.5 is reached.


2. Some people actually need to do Roth conversions to prevent a tax bomb later. I'm not sure you fall into this category with $557k in tax-deferred accounts. If this balance doubles to $1 million before RMDs start, your first RMD will be in the neighborhood of $36k (I'm lumping both of you together for simplicity). Extra income of $36k is not necessarily going to be "tax bomb" for you.


Having said the above, I think doing modest conversions all along could be helpful. Once both pensions and both SS incomes are coming in, it appears you will be in what is now the 22% bracket/25% starting in 2026. Fo that reason, converting into the 22% bracket makes sense to me. However, converting to the top of the 22% bracket does not make sense to me.

With all the Roth conversion discussion going on these days, people tend to not know or forget that it is not important to eliminate their tax-deferred accounts. Keeping some in tax-deferral is fine and can be a good thing during times of high medical bills or long term care bills (which are still tax-deductible if the bills are high enough).

If you wanted to keep something like $400k in tax-deferred for the foreseeable future, you could simply convert enough to get down to that balance (might take a few years) and then each year convert enough to stay near that balance. Of course, by the time you are in your 70s, $400k may not be enough to pay for even 12 months of long term care, so you would need to re-evaluate that balance every once in awhile.

You have done a good job of living below your means and saving money. It seems you should have a comfortable retirement. Enjoy your van and your travels. :happy
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Fierce Escape
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Re: Roth conversion amount needed in Retirement?

Post by Fierce Escape »

Boatguy wrote: Sat May 15, 2021 10:14 pm You might want to think about determining when it’s best to take Social Security. You mentioned the age 62 dollar figures for each of you, so it’s unclear if it’s your intent to take both then or not. Opensocialsecurity.com is a great tool.
Great,I used that. It seems in the past that my linear calculations showed that I'd receive the same amount of money up to the actuarial death age of probably 82. But using the ORP it shows a much different result with a larger plan value and discretionary spending, using later SS ages, which the open Social Security web page calculated it appears that converting most of my tax-deferred in the next 5 years, taking a later Social Security, will yield the best overall results.
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Re: Roth conversion amount needed in Retirement?

Post by Fierce Escape »

retiredjg wrote: Sun May 16, 2021 9:41 am 1. You probably should not convert any tIRA to Roth before age 59.5 unless you have money in savings or from income to pay the taxes. If you pay the taxes out of the tiRA, that would be an early withdrawal and that amount would be subject to a 10% penalty.

You didn't mention any large savings. You could also take from the 457, but that increases your income and would reduce the amount you can convert. I feel sure you could pay taxes with your excess income - it appears to me that the amount of extra income you have might be a limiting factor in your Roth conversions until age 59.5 is reached.


2. Some people actually need to do Roth conversions to prevent a tax bomb later. I'm not sure you fall into this category with $557k in tax-deferred accounts. If this balance doubles to $1 million before RMDs start, your first RMD will be in the neighborhood of $36k (I'm lumping both of you together for simplicity). Extra income of $36k is not necessarily going to be "tax bomb" for you.


Having said the above, I think doing modest conversions all along could be helpful. Once both pensions and both SS incomes are coming in, it appears you will be in what is now the 22% bracket/25% starting in 2026. Fo that reason, converting into the 22% bracket makes sense to me. However, converting to the top of the 22% bracket does not make sense to me.

With all the Roth conversion discussion going on these days, people tend to not know or forget that it is not important to eliminate their tax-deferred accounts. Keeping some in tax-deferral is fine and can be a good thing during times of high medical bills or long term care bills (which are still tax-deductible if the bills are high enough).

If you wanted to keep something like $400k in tax-deferred for the foreseeable future, you could simply convert enough to get down to that balance (might take a few years) and then each year convert enough to stay near that balance. Of course, by the time you are in your 70s, $400k may not be enough to pay for even 12 months of long term care, so you would need to re-evaluate that balance every once in awhile.

You have done a good job of living below your means and saving money. It seems you should have a comfortable retirement. Enjoy your van and your travels. :happy
1. I was waiting to hear what you thought, I've seen statistically how many people you've helped. I try to stay grounded in common sense and it's good to hear a voice of reason. It's easy to get wrapped up in the ORP calcs. Yes, I did transfer a lot to the roll over IRA, knowing that I shouldn't need the money, but Not knowing as much about conversions. The ORP indicated using Roth withdrawals over the next few years to convert/pay taxes(?) on large tax-deferred withdrawals, as the Roth account quickly built up in value from the initial 45k. That is something I really didn't want to do or even deal with.

We do have 115k set aside to purchase the van I didn't list as extra, but not a lot of additional cash on hand, yet good income flow and low COL. I suppose that could play into an alternative strategy, but we want to own the van.

2. Really really like all this info, it's good to know more about the big picture and not having to worry about the tax bomb or a high tax rate scenario. We will definitely follow this template. And yes, thank you, we are looking forward to traveling a lot more with the van and enjoying our active lifestyle at a young retirement age. We've travelled together a lot the last few years in a Jeep, so the van should be a huge upgrade.

The medical LTC sound ominous and I've heard about that listening to Dave R. Good thing I did so 12 years ago or we would not be retired right now. We have great low cost health insurance right now, but I know once Medicare kicks in it's probably a different ball game.
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Re: Roth conversion amount needed in Retirement?

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New member SoCalSemiRetired has a question which I've moved into a new thread. See: [Form 8606 - What do I enter for the post-withholding amount?]

(Thanks to the member who reported the post and explained what's wrong.)
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Re: Roth conversion amount needed in Retirement?

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retiredjg wrote: Sun May 16, 2021 9:41 am 1. You probably should not convert any tIRA to Roth before age 59.5 unless you have money in savings or from income to pay the taxes. If you pay the taxes out of the tiRA, that would be an early withdrawal and that amount would be subject to a 10% penalty.
If he has 5 years+ history and a good balance in Roth isn't this a not a big issue?
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Re: Roth conversion amount needed in Retirement?

Post by terran »

Lee_WSP wrote: Sun May 16, 2021 5:43 pm
retiredjg wrote: Sun May 16, 2021 9:41 am 1. You probably should not convert any tIRA to Roth before age 59.5 unless you have money in savings or from income to pay the taxes. If you pay the taxes out of the tiRA, that would be an early withdrawal and that amount would be subject to a 10% penalty.
If he has 5 years+ history and a good balance in Roth isn't this a not a big issue?
Taxes withheld from the traditional IRA to pay for the conversion would be considered a withdrawal, which before age 59.5 would incur a 10% penalty.
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Re: Roth conversion amount needed in Retirement?

Post by Lee_WSP »

terran wrote: Sun May 16, 2021 9:21 pm
Lee_WSP wrote: Sun May 16, 2021 5:43 pm
retiredjg wrote: Sun May 16, 2021 9:41 am 1. You probably should not convert any tIRA to Roth before age 59.5 unless you have money in savings or from income to pay the taxes. If you pay the taxes out of the tiRA, that would be an early withdrawal and that amount would be subject to a 10% penalty.
If he has 5 years+ history and a good balance in Roth isn't this a not a big issue?
Taxes withheld from the traditional IRA to pay for the conversion would be considered a withdrawal, which before age 59.5 would incur a 10% penalty.
You take out of the existing Roth funds that are in past the five years.
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Re: Roth conversion amount needed in Retirement?

Post by Fierce Escape »

Lee_WSP wrote: Sun May 16, 2021 10:05 pm
terran wrote: Sun May 16, 2021 9:21 pm
Lee_WSP wrote: Sun May 16, 2021 5:43 pm
retiredjg wrote: Sun May 16, 2021 9:41 am 1. You probably should not convert any tIRA to Roth before age 59.5 unless you have money in savings or from income to pay the taxes. If you pay the taxes out of the tiRA, that would be an early withdrawal and that amount would be subject to a 10% penalty.
If he has 5 years+ history and a good balance in Roth isn't this a not a big issue?
Taxes withheld from the traditional IRA to pay for the conversion would be considered a withdrawal, which before age 59.5 would incur a 10% penalty.
You take out of the existing Roth funds that are in past the five years.
That's what the ORP calculator I thought was showing, this clears it up. The ORP shows converting a large amount become age 59, so I will work with it some more to look at slightly larger RMDs.
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Re: Roth conversion amount needed in Retirement?

Post by terran »

Lee_WSP wrote: Sun May 16, 2021 10:05 pm
terran wrote: Sun May 16, 2021 9:21 pm
Lee_WSP wrote: Sun May 16, 2021 5:43 pm
retiredjg wrote: Sun May 16, 2021 9:41 am 1. You probably should not convert any tIRA to Roth before age 59.5 unless you have money in savings or from income to pay the taxes. If you pay the taxes out of the tiRA, that would be an early withdrawal and that amount would be subject to a 10% penalty.
If he has 5 years+ history and a good balance in Roth isn't this a not a big issue?
Taxes withheld from the traditional IRA to pay for the conversion would be considered a withdrawal, which before age 59.5 would incur a 10% penalty.
You take out of the existing Roth funds that are in past the five years.
Yeah, that would work, although taking from taxable would be preferable if available to keep the money in Roth as long as possible.
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Re: Roth conversion amount needed in Retirement?

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Fierce Escape wrote: Sun May 16, 2021 10:44 pm That's what the ORP calculator I thought was showing, this clears it up. The ORP shows converting a large amount become age 59, so I will work with it some more to look at slightly larger RMDs.
I-ORP is a good tool, but there are some oh-by-the-ways one should know. Perhaps the most significant is "don't assign a higher stock/bond asset allocation to the Roth account, along with a higher annual return for stocks vs. bonds, than to the traditional account."

If one does that, I-ORP (and any other good mathematical optimization software) will "discover" that the higher returns in a Roth account are so good that it will move money there rapidly, more or less regardless of the tax consequences.
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Re: Roth conversion amount needed in Retirement?

Post by retiredjg »

Fierce Escape wrote: Sun May 16, 2021 11:35 am 1. I was waiting to hear what you thought, I've seen statistically how many people you've helped. I try to stay grounded in common sense and it's good to hear a voice of reason. It's easy to get wrapped up in the ORP calcs. Yes, I did transfer a lot to the roll over IRA, knowing that I shouldn't need the money, but Not knowing as much about conversions. The ORP indicated using Roth withdrawals over the next few years to convert/pay taxes(?) on large tax-deferred withdrawals, as the Roth account quickly built up in value from the initial 45k. That is something I really didn't want to do or even deal with.
This plan does not make good sense to me.

If you were facing a known and certain tax bomb, it would make sense to take money out of Roth to pay taxes in order to reduce an overly large tax-deferred account. However, I do not believe you are facing a tax bomb. Your tax-deferred account is not too large at the present time. Modest Roth conversions most years should keep it manageable. You could have enough unused income to pay these taxes until you reach 59.5 (at which point you can withhold from the conversion if you want).

2. Really really like all this info, it's good to know more about the big picture and not having to worry about the tax bomb or a high tax rate scenario. We will definitely follow this template.
Please note that $400k was an example, not a suggestion. You should look into what long term care costs in your community and pick a number based on that. Or just pick any number you like as long as it is not so large as to create high RMDs.

The medical LTC sound ominous and I've heard about that listening to Dave R. Good thing I did so 12 years ago or we would not be retired right now. We have great low cost health insurance right now, but I know once Medicare kicks in it's probably a different ball game.
Keep in mind that health insurance covers medical costs. There are many costs associated with long term care that are not covered by health insurance.
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Re: Roth conversion amount needed in Retirement?

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Just curious....does i-ORP assume you want to convert all of your tax-deferred assets? Or do you tell it how much you want to get converted?
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Re: Roth conversion amount needed in Retirement?

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retiredjg wrote: Mon May 17, 2021 7:24 am Just curious....does i-ORP assume you want to convert all of your tax-deferred assets? Or do you tell it how much you want to get converted?
Neither. See Optimal Retirement Planner - Articles, in particular the "Working Papers" section, for more details but in short the Optimal Retirement Planner - Extended Parameter Form includes whatever Roth conversion amounts it thinks provide "a cash flow schedule that maximizes [after tax] retirement income."
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Re: Roth conversion amount needed in Retirement?

Post by retiredjg »

It's magic. :D

I have no doubt that iORP knows stuff that I don't know. However, I cannot figure out why it would want this couple to convert almost all of their tax-deferred balance to Roth in just a two or three years...even taking money out of Roth to pay the taxes.

Another mystery. :happy
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Re: Roth conversion amount needed in Retirement?

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retiredjg wrote: Mon May 17, 2021 12:54 pm It's magic. :D

I have no doubt that iORP knows stuff that I don't know. However, I cannot figure out why it would want this couple to convert almost all of their tax-deferred balance to Roth in just a two or three years...even taking money out of Roth to pay the taxes.

Another mystery. :happy
The last few posts cleared things up for me about The ORP results. Yes, the program is aggressive in maximizing income when that may not be necessary, as you stated. I think there will be a great balance that you mentioned between Roth conversions and keeping the tax-deferred amount, which won't be a tax burden when RMDs begin. I'm not going to convert crazy amounts. The program is a great foundation to help users think about what they'd like to do, using different inputs. I've learned a great deal that I wasn't aware of in this thread. It will greatly benefit us in the future. :happy
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Re: Roth conversion amount needed in Retirement?

Post by retiredjg »

I suppose one thing that ORP does not consider is keeping a certain amount in tax-deferred just in case it could be used later on tax free for nursing home/long term care.

The idea of keeping some aside makes sense to me. It may affect how much my heirs get in tax-deferred vs Roth, but that ratio is not of great concern to me.
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Re: Roth conversion amount needed in Retirement?

Post by FiveK »

retiredjg wrote: Mon May 17, 2021 12:54 pm However, I cannot figure out why it would want this couple to convert almost all of their tax-deferred balance to Roth in just a two or three years...even taking money out of Roth to pay the taxes.
Anthropomorphizing linear programming software such as I-ORP, they would "sell their families for a penny." In other words, if I-ORP sees the slightest mathematical benefit to a particular strategy it will use it.

That's not unreasonable, and working backwards from mathematical optimums to understand "why" can be a useful exercise.

But I-ORP does make some simplifying assumptions that perhaps should come with a "user beware" warning. Two that come to mind:
1) Assuming 85% of all SS benefits are taxable. This means I-ORP doesn't recognize the high marginal rates on Roth conversions someone with low to moderate income would incur when also taking SS.
2) Ignoring the NIIT and various phaseouts. This means I-ORP doesn't recognize the higher marginal rates on Roth conversions someone with very high income and subject to those things would incur.

In other words, I-ORP may think it could save a penny but in reality it might cost two pennies when one has either low or high income. In between, all I-ORP's assumptions may hold and the results, for the inputs given, should be correct. The issue of maintaining an overall asset allocation (AA) but having different AAs in different accounts remains.
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Re: Roth conversion amount needed in Retirement?

Post by retiredjg »

Very helpful. Thanks.
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Re: Roth conversion amount needed in Retirement?

Post by Fierce Escape »

retiredjg wrote: Mon May 17, 2021 1:37 pm I suppose one thing that ORP does not consider is keeping a certain amount in tax-deferred just in case it could be used later on tax free for nursing home/long term care.

The idea of keeping some aside makes sense to me. It may affect how much my heirs get in tax-deferred vs Roth, but that ratio is not of great concern to me.
What is the advantage of tax deferred for LTC?
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Re: Roth conversion amount needed in Retirement?

Post by Lee_WSP »

Fierce Escape wrote: Tue May 18, 2021 4:25 pm
retiredjg wrote: Mon May 17, 2021 1:37 pm I suppose one thing that ORP does not consider is keeping a certain amount in tax-deferred just in case it could be used later on tax free for nursing home/long term care.

The idea of keeping some aside makes sense to me. It may affect how much my heirs get in tax-deferred vs Roth, but that ratio is not of great concern to me.
What is the advantage of tax deferred for LTC?
It may be deductible.

https://www.irs.gov/faqs/itemized-deduc ... e-expenses
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