Results of my modeling out Roth conversions

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Results of my modeling out Roth conversions

Post by privateID »

I am 55 years old and married. I have been playing around with modeling out Roth conversions and income when I plan to retire in 5 1/2 years. Here is a summary my modeling using today dollars with alot of rounding.

Retire: age 61, assets: $2M 401K (around 80% invested in stable value returning around 3%), $1M Roth (all invested in stock)

Age 61-62: Withdraw/convert from 401K to top of 22% bracket
Age 63-69: Withdraw/convert from 401K to IRMAA limit
Age 70-71: SS starts at 70. Withdraw/convert from 401K to top of 10% bracket
Age 72-100: RMDs start at 72. No more withdraw/convert from 401K.

At age 72: assets: $600K 401K, $2.2M Roth

Total conversions/non-RMD 401K withdrawals are about $1.6M from age 61-71.

Assumptions: Inflation 2%, stock growth 4% real, bond growth 1% real, SS reduction of 24%

Taxable income never rises to more than $51K. If I die first, taxable income will decrease because a small pension annuity of mine will stop and SS will decrease. Still a concern here, but I think not too bad.

Questions:
1) Does all that seem reasonable (conversion amounts, etc)?
2) At age 70, with half a year of SS, I was thinking of converting to top of 12% bracket making 85% of SS taxable. Good idea?
3) Of course there are a number of variables that can change things: tax increase in a few years, inherit money. Others?
4) If returns are better than I expect, say 10% nominal for stock, the numbers still don't get crazy because of the small amount of stock in the 401K. Are there concerns with return that I I am not seeing?

Thanks for anyone who helped me get to this point.
smitcat
Posts: 7951
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

privateID wrote: Thu Jun 03, 2021 12:54 pm I am 55 years old and married. I have been playing around with modeling out Roth conversions and income when I plan to retire in 5 1/2 years. Here is a summary my modeling using today dollars with alot of rounding.

Retire: age 61, assets: $2M 401K (around 80% invested in stable value returning around 3%), $1M Roth (all invested in stock)

Age 61-62: Withdraw/convert from 401K to top of 22% bracket
Age 63-69: Withdraw/convert from 401K to IRMAA limit
Age 70-71: SS starts at 70. Withdraw/convert from 401K to top of 10% bracket
Age 72-100: RMDs start at 72. No more withdraw/convert from 401K.

At age 72: assets: $600K 401K, $2.2M Roth

Total conversions/non-RMD 401K withdrawals are about $1.6M from age 61-71.

Assumptions: Inflation 2%, stock growth 4% real, bond growth 1% real, SS reduction of 24%

Taxable income never rises to more than $51K. If I die first, taxable income will decrease because a small pension annuity of mine will stop and SS will decrease. Still a concern here, but I think not too bad.

Questions:
1) Does all that seem reasonable (conversion amounts, etc)?
2) At age 70, with half a year of SS, I was thinking of converting to top of 12% bracket making 85% of SS taxable. Good idea?
3) Of course there are a number of variables that can change things: tax increase in a few years, inherit money. Others?
4) If returns are better than I expect, say 10% nominal for stock, the numbers still don't get crazy because of the small amount of stock in the 401K. Are there concerns with return that I I am not seeing?

Thanks for anyone who helped me get to this point.
"Total conversions/non-RMD 401K withdrawals are about $1.6M from age 61-71.
Taxable income never rises to more than $51K."
I do not unsderstand how you convert $1.6M over 10 years and never have income over $51K.
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

smitcat wrote: Thu Jun 03, 2021 2:12 pm "Total conversions/non-RMD 401K withdrawals are about $1.6M from age 61-71.
Taxable income never rises to more than $51K."
I do not unsderstand how you convert $1.6M over 10 years and never have income over $51K.
I said it wrong. From age 70 on, the whole period I will be receiving SS, I never have income over $51K.
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

OP,

Given the amount of taxes that you will be paying, why is it worthwhile for you to work from now until age 61? What do you actually gain by working from now until age 61? Is it financially rewarding? That is the big picture question that you should ask instead.

KlangFool
Last edited by KlangFool on Thu Jun 03, 2021 3:00 pm, edited 1 time in total.
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
smitcat
Posts: 7951
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

privateID wrote: Thu Jun 03, 2021 2:24 pm
smitcat wrote: Thu Jun 03, 2021 2:12 pm "Total conversions/non-RMD 401K withdrawals are about $1.6M from age 61-71.
Taxable income never rises to more than $51K."
I do not unsderstand how you convert $1.6M over 10 years and never have income over $51K.
I said it wrong. From age 70 on, the whole period I will be receiving SS, I never have income over $51K.
Generally speaking your best overall results from Roth conversions come from balancing the taxes due as best you can over the entire time period.
Otherwise said - paying higher % taxes early or later is not preferred.
Have you modeled these conversions with the extended IORP, RPM and/or Pralana?
cas
Posts: 1352
Joined: Wed Apr 26, 2017 8:41 am

Re: Results of my modeling out Roth conversions

Post by cas »

privateID wrote: Thu Jun 03, 2021 12:54 pm
Age 70-71: SS starts at 70. Withdraw/convert from 401K to top of 10% bracket
2) At age 70, with half a year of SS, I was thinking of converting to top of 12% bracket making 85% of SS taxable. Good idea
Not enough information for us out here in cyberspace to know, but the SS tax hump may mean that you have limited (possibly no) 10% or 12% tax bracket ... and any 12% bracket may be accessible only after crossing a stretch of 22.2% marginal rates.

Similarly, your marginal tax rate after age 72 might (or might not) be higher than you think, due to the SS tax hump.

For more information see the wiki article on SS taxation in general and, specifically, look at the heat map, pick the column for your SS amount, and run your eye up it to see the marginal tax rates that apply to this year's SS tax hump. (I linked to the heat map for MFJ. There is one for filing Single in the wiki article as well.)
Last edited by cas on Thu Jun 03, 2021 2:38 pm, edited 2 times in total.
cas
Posts: 1352
Joined: Wed Apr 26, 2017 8:41 am

Re: Results of my modeling out Roth conversions

Post by cas »

privateID wrote: Thu Jun 03, 2021 12:54 pm Age 61-62: Withdraw/convert from 401K to top of 22% bracket
Age 63-69: Withdraw/convert from 401K to IRMAA limit
You are able to get health insurance via employer (or some such) pre-Medicare? (i.e. no ACA-related tax planning to take into account?)
User avatar
Meg77
Posts: 2705
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX

Re: Results of my modeling out Roth conversions

Post by Meg77 »

One thing to think about is whether it makes sense to convert more in early years before the account balance in traditional grows substantially. You project that it will be in a stable value fund, but is that because your target aa is really only 33% stocks? Seems low given the 30+ year time horizon. In any case, converting over a decade means you save in tax RATE but you may pay more in tax DOLLARS if the account grows even modestly over that time. You'd have to run exact figures, and if you don't care whether you convert the whole amount I suppose it doesn't matter, but just food for thought.

Also what tax bracket are you in now? Would it make sense to just go ahead and start investing into Roth instead of Traditional prior to getting to retirement? Maybe you're already doing this, but just throwing it out there. Again even at a higher tax bracket it may make sense given the decades of tax free growth you could have.

Also higher taxable income boosts your Medicare premiums which look back 2 years at income to set the premium. Don't forget to factor that in as part of the "tax." I ran the figures for my mom to convert her $280K IRA over 1, 2 or 3 years, and doing it in 2 years cost the least ($82K) compared to year 1 ($87K) or year 3 ($89K) all things considered, assuming an 8% rate of return. This means I'm converting into the 35% bracket for two years (AGI around $225K) which originally was higher than I'd planned, but I think it's her best option. Then her income will drop back down to the $85K range (dividends, interest, pension) for the remainder of her retirement, and her Medicare premiums will only be raised for 2 years.

That said, one of her primary goals with this conversion is to gift her kids a tax free inheritance. She will never use the IRA either way as her taxable portfolio is much bigger. According to the calculators I used though this conversion would still make sense for her individually as long as she lives until her mid/late 80s. I'm not sure how accurate those are but I googled around with them just to see.
Last edited by Meg77 on Thu Jun 03, 2021 3:00 pm, edited 1 time in total.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

KlangFool - Alot of things point to retiring at 61 (getting 35 years for SS, mortgage will paid off, last child graduates). I have thought about retiring a year or two earlier. So in a year or two will look into it.

smitcat - I have opened up some of those tools but, to be honest, I find them difficult to use. I use them more to give me ideas to use in my own spreadsheet. I am sure i will bite the bullet and get one loaded up with my info.

cas - Looking at the heat map, I will have around $40K of SS that first year.

I don't believe at any point in my modeling I am into the 40.7% hump. I do edge into the 22.2% bracket before the 40.7% hump.

Health insurance - I can get it through my employer so no ACA planning included.
Lee_WSP
Posts: 4779
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Results of my modeling out Roth conversions

Post by Lee_WSP »

Meg77 wrote: Thu Jun 03, 2021 2:51 pm One thing to think about is whether it makes sense to convert more in early years before the account balance in traditional grows substantially.
It would, but it would also be beneficial to convert at bottoms. With a less than ten year window it's hard to say with certainty or probability that the convert more sooner even at higher taxes is a superior strategy.

That said, I think filling up the 24 as opposed to just the 22 bracket in at least the first year is definitely worth a look.
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

privateID wrote: Thu Jun 03, 2021 2:53 pm KlangFool - Alot of things point to retiring at 61 (getting 35 years for SS, mortgage will paid off, last child graduates). I have thought about retiring a year or two earlier. So in a year or two will look into it.
privateID,

<< (getting 35 years for SS,>>

This does not matter at all. You probably cross the second bend point and your social security benefit will not be affected much by that additional 5 years.

<< mortgage will paid off,>>

This is probably insignificant too. You could pay off the mortgage earlier.

<< last child graduates).>>

It would be a lot better if you retire before your kid graduated. You could take long summer vacation with your kid. After your kid graduated, they have no time for you. They need to work and/or look for job.

In summary, you may have more to gain by retiring earlier than later. Your tax saving may make it worthwhile to retire earlier. And, you have more time to spend with your kids.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

Meg77 wrote: Thu Jun 03, 2021 2:51 pm One thing to think about is whether it makes sense to convert more in early years before the account balance in traditional grows substantially. You project that it will be in a stable value fund, but is that because your target aa is really only 33% stocks? Seems low given the 30+ year time horizon. In any case, converting over a decade means you save in tax RATE but you may pay more in tax DOLLARS if the account grows even modestly over that time. You'd have to run exact figures, and if you don't care whether you convert the whole amount I suppose it doesn't matter, but just food for thought.

Also what tax bracket are you in now? Would it make sense to just go ahead and start investing into Roth instead of Traditional prior to getting to retirement? Maybe you're already doing this, but just throwing it out there. Again even at a higher tax bracket it may make sense given the decades of tax free growth you could have.

Also higher taxable income boosts your Medicare premiums which look back 2 years at income to set the premium. Don't forget to factor that in as part of the "tax." I ran the figures for my mom to convert her $280K IRA over 1, 2 or 3 years, and doing it in 2 years cost the least ($82K) compared to year 1 ($87K) or year 3 ($89K) all things considered, assuming an 8% rate of return. This means I'm converting into the 35% bracket for two years (AGI around $225K) which originally was higher than I'd planned, but I think it's her best option. Then her income will drop back down to the $85K range (dividends, interest, pension) for the remainder of her retirement, and her Medicare premiums will only be raised for 2 years.

That said, one of her primary goals with this conversion is to gift her kids a tax free inheritance. She will never use the IRA either way as her taxable portfolio is much bigger. According to the calculators I used though this conversion would still make sense for her individually as long as she lives until her mid/late 80s. I'm not sure how accurate those are but I googled around with them just to see.
Thanks for the response.

I max out contributions to a Roth 401K and 2 Roth IRAs and do an additional 10% of my pay after-tax converted to Roth 401K. The only new money going into my regular 401K is my employer max (about $10K/yr). My AA is roughly 50-50 at the moment. All the Roth is (or will be shortly) in stock. The numbers I gave (about 20% stock in the 401K) are what I project it will be when I turn 61.

I am currently in the 22% bracket but do live in NY, so pay state taxes. That may change when I retire, but not sure.

I believe I handle the Medicare premiums by only converting to the IRMAA point.


Lee_WSP - Converting more those first couple of years is a possibility. But if I am on track to lower my 401K to the $600K-700K range, I don't think it is necessary and maybe not even desirable (thinking future medical deductions, donations).

Klang - Spending time with my kids has always been a priority. I do have some flexibility with my job to do that now. You make good points. I just don't think I am ready to retire. I don't love my job, but I don't hate it all. Good things to think about.
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

privateID wrote: Thu Jun 03, 2021 3:19 pm
Klang - Spending time with my kids has always been a priority. I do have some flexibility with my job to do that now. You make good points. I just don't think I am ready to retire. I don't love my job, but I don't hate it all. Good things to think about.
privateID,

The problem here is at a certain portfolio size and you are in NY, the additional year of working may not earn you additional money. They may all ended up in taxes. Or, it may cost you money instead.

Do you earn more than your portfolio growth last year? This year?

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

KlangFool wrote: Thu Jun 03, 2021 3:31 pm
privateID wrote: Thu Jun 03, 2021 3:19 pm
Klang - Spending time with my kids has always been a priority. I do have some flexibility with my job to do that now. You make good points. I just don't think I am ready to retire. I don't love my job, but I don't hate it all. Good things to think about.
privateID,

The problem here is at a certain portfolio size and you are in NY, the additional year of working may not earn you additional money. They may all ended up in taxes. Or, it may cost you money instead.

Do you earn more than your portfolio growth last year? This year?

KlangFool
I don't track my historical portfolio yearly growth. I make $140K/yr. My portfolio size is $2.3M. I have done some projections and was hoping to grow my assets to close to $3M. I think I will get there by age 59. It is possible I could retire now, but I think a few more years of maxing out 401K/IRAs/HSA puts me in a much better position.

Clarification from above: I plan to retire when I am 60. My first full year of retirement I turn 61.
Last edited by privateID on Thu Jun 03, 2021 3:59 pm, edited 1 time in total.
User avatar
Meg77
Posts: 2705
Joined: Fri May 22, 2009 1:09 pm
Location: Dallas, TX

Re: Results of my modeling out Roth conversions

Post by Meg77 »

privateID wrote: Thu Jun 03, 2021 3:19 pm
Meg77 wrote: Thu Jun 03, 2021 2:51 pm One thing to think about is whether it makes sense to convert more in early years before the account balance in traditional grows substantially. You project that it will be in a stable value fund, but is that because your target aa is really only 33% stocks? Seems low given the 30+ year time horizon. In any case, converting over a decade means you save in tax RATE but you may pay more in tax DOLLARS if the account grows even modestly over that time. You'd have to run exact figures, and if you don't care whether you convert the whole amount I suppose it doesn't matter, but just food for thought.

Also what tax bracket are you in now? Would it make sense to just go ahead and start investing into Roth instead of Traditional prior to getting to retirement? Maybe you're already doing this, but just throwing it out there. Again even at a higher tax bracket it may make sense given the decades of tax free growth you could have.

Also higher taxable income boosts your Medicare premiums which look back 2 years at income to set the premium. Don't forget to factor that in as part of the "tax." I ran the figures for my mom to convert her $280K IRA over 1, 2 or 3 years, and doing it in 2 years cost the least ($82K) compared to year 1 ($87K) or year 3 ($89K) all things considered, assuming an 8% rate of return. This means I'm converting into the 35% bracket for two years (AGI around $225K) which originally was higher than I'd planned, but I think it's her best option. Then her income will drop back down to the $85K range (dividends, interest, pension) for the remainder of her retirement, and her Medicare premiums will only be raised for 2 years.

That said, one of her primary goals with this conversion is to gift her kids a tax free inheritance. She will never use the IRA either way as her taxable portfolio is much bigger. According to the calculators I used though this conversion would still make sense for her individually as long as she lives until her mid/late 80s. I'm not sure how accurate those are but I googled around with them just to see.
Thanks for the response.

I max out contributions to a Roth 401K and 2 Roth IRAs and do an additional 10% of my pay after-tax converted to Roth 401K. The only new money going into my regular 401K is my employer max (about $10K/yr). My AA is roughly 50-50 at the moment. All the Roth is (or will be shortly) in stock. The numbers I gave (about 20% stock in the 401K) are what I project it will be when I turn 61.

I am currently in the 22% bracket but do live in NY, so pay state taxes. That may change when I retire, but not sure.

I believe I handle the Medicare premiums by only converting to the IRMAA point.
Makes sense. Sounds like you've got a good plan in place! :beer
"An investment in knowledge pays the best interest." - Benjamin Franklin
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

privateID wrote: Thu Jun 03, 2021 3:50 pm
KlangFool wrote: Thu Jun 03, 2021 3:31 pm
privateID wrote: Thu Jun 03, 2021 3:19 pm
Klang - Spending time with my kids has always been a priority. I do have some flexibility with my job to do that now. You make good points. I just don't think I am ready to retire. I don't love my job, but I don't hate it all. Good things to think about.
privateID,

The problem here is at a certain portfolio size and you are in NY, the additional year of working may not earn you additional money. They may all ended up in taxes. Or, it may cost you money instead.

Do you earn more than your portfolio growth last year? This year?

KlangFool
I don't track my historical portfolio yearly growth. I make $140K/yr. My portfolio size is $2.3M. I have done some projections and was hoping to grow my assets to close to $3M. I think I will get there by age 59. It is possible I could retire now, but I think a few more years of maxing out 401K/IRAs/HSA puts me in a much better position.

Clarification from above: I plan to retire when I am 60. My first full year of retirement I turn 61.
privateID,

That may not be true. And, that is my point. You may achieve the same goal faster by retiring and move to Florida.

<<I make $140K/yr. My portfolio size is $2.3M. >>

A) That means your portfolio made more than your gross salary last year.

B) And, for the first 5 months of the 2021, your portfolio probably make more than 140K without counting contribution.

C) In summary, you may be at a point where your portfolio may reach 3 million at 61 years old even if you are not working.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
HeelaMonster
Posts: 191
Joined: Sat Aug 10, 2019 11:46 am

Re: Results of my modeling out Roth conversions

Post by HeelaMonster »

KlangFool wrote: Thu Jun 03, 2021 4:10 pm privateID,

That may not be true. And, that is my point. You may achieve the same goal faster by retiring and move to Florida.

<<I make $140K/yr. My portfolio size is $2.3M. >>

A) That means your portfolio made more than your gross salary last year.

B) And, for the first 5 months of the 2021, your portfolio probably make more than 140K without counting contribution.

C) In summary, you may be at a point where your portfolio may reach 3 million at 61 years old even if you are not working.

KlangFool
This is going to be one of those "duh" moments (for me!)... but I seem to have a mental block on this argument/analysis, so please humor me. Under what circumstances would his continuing to earn a salary not contribute to the "bottom line," even if his portfolio made more than gross salary? In the absence of salary, he would presumably start drawing down that portfolio to cover living expenses. OTOH, if salary covers those living expenses, portfolio remains untouched and continues to grow. Why would continuing to work and bring home salary result in a net negative on the overall picture, as I understand the above to be saying?
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

HeelaMonster wrote: Thu Jun 03, 2021 6:01 pm
KlangFool wrote: Thu Jun 03, 2021 4:10 pm privateID,

That may not be true. And, that is my point. You may achieve the same goal faster by retiring and move to Florida.

<<I make $140K/yr. My portfolio size is $2.3M. >>

A) That means your portfolio made more than your gross salary last year.

B) And, for the first 5 months of the 2021, your portfolio probably make more than 140K without counting contribution.

C) In summary, you may be at a point where your portfolio may reach 3 million at 61 years old even if you are not working.

KlangFool
This is going to be one of those "duh" moments (for me!)... but I seem to have a mental block on this argument/analysis, so please humor me. Under what circumstances would his continuing to earn a salary not contribute to the "bottom line," even if his portfolio made more than gross salary? In the absence of salary, he would presumably start drawing down that portfolio to cover living expenses. OTOH, if salary covers those living expenses, portfolio remains untouched and continues to grow. Why would continuing to work and bring home salary result in a net negative on the overall picture, as I understand the above to be saying?
HeelaMonster,

It is not necessary net negative but it could be insignificant. Let's assume that OP's annual saving is 50K.

1) If OP is working, the portfolio growth = annual portfolio growth plus annual contribution. But, when the portfolio is big enough (2.3 million = 46X), the annual contribution does not matter.

2) Ditto. OP's annual expense (let's assume 50K) is small as compared to portfolio size. Additional year of not working do not reduce the portfolio by much. In fact, the portfolio will grew bigger even while spending the annual expense.

3) Meanwhile, the 140K per year is paying a lot of taxes.

4) And, every year of working push more growth in tax-deferred account and pay a lot more taxes in retirement.

5) Versus not working for 5 years let's OP Roth convert the tax-deferred account and shelter the future growth.

KlangFool
Last edited by KlangFool on Thu Jun 03, 2021 8:21 pm, edited 1 time in total.
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
User avatar
Sandi_k
Posts: 1678
Joined: Sat May 16, 2015 11:55 am
Location: SF Bay Area

Re: Results of my modeling out Roth conversions

Post by Sandi_k »

privateID wrote: Thu Jun 03, 2021 12:54 pm I am 55 years old and married. I have been playing around with modeling out Roth conversions and income when I plan to retire in 5 1/2 years. Here is a summary my modeling using today dollars with alot of rounding.

Retire: age 61, assets: $2M 401K (around 80% invested in stable value returning around 3%), $1M Roth (all invested in stock)

Age 61-62: Withdraw/convert from 401K to top of 22% bracket
Age 63-69: Withdraw/convert from 401K to IRMAA limit
Age 70-71: SS starts at 70. Withdraw/convert from 401K to top of 10% bracket
Age 72-100: RMDs start at 72. No more withdraw/convert from 401K.

Questions:
1) Does all that seem reasonable (conversion amounts, etc)?
2) At age 70, with half a year of SS, I was thinking of converting to top of 12% bracket making 85% of SS taxable. Good idea?
3) Of course there are a number of variables that can change things: tax increase in a few years, inherit money. Others?
4) If returns are better than I expect, say 10% nominal for stock, the numbers still don't get crazy because of the small amount of stock in the 401K. Are there concerns with return that I I am not seeing?

Thanks for anyone who helped me get to this point.
The biggest error that I see is that you are not taking into account the reversion of federal tax rates in 2026. In six years, it will be 2027, and the federal brackets are supposed to be:

10%
15%
25%
28%
33%

There IS NO 22% bracket.

I would go back to the spreadsheet and make sure you have a plan for either tax bracket setup.
Exchme
Posts: 466
Joined: Sun Sep 06, 2020 3:00 pm

Re: Results of my modeling out Roth conversions

Post by Exchme »

A couple of points not discussed. Per current law, the 22% bracket will expire at the end of 2025, so that'll be a 25% bracket and today's 24% becomes 28%. The tax bracket sizes get cut in half once one spouse passes away, make sure you model includes some years of singe filing status.

For retirement prior to Medicare, will you be on something from your employer or the ACA exchanges? While it's generally true that the minimum tax impact is to keep the average marginal tax rate on your Roth conversions equal from year to year, ACA subsidies may affect that conclusion. The best answer may actually be some kind of up and down income where you make big Roth conversions in some years and then drop down and get ACA subsidies in other years.

Similar to Meg77 I'm a little concerned that you have such a high fraction of your portfolio in something so low yielding. Make sure your modeling looks at a case with your wife living a long time (since your pension will disappear). Some pensions have an option that they can be based on the longest survivor (with a reduced payout throughout), that might be worth checking as longevity insurance.
smitcat
Posts: 7951
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

KlangFool wrote: Thu Jun 03, 2021 3:31 pm
privateID wrote: Thu Jun 03, 2021 3:19 pm
Klang - Spending time with my kids has always been a priority. I do have some flexibility with my job to do that now. You make good points. I just don't think I am ready to retire. I don't love my job, but I don't hate it all. Good things to think about.
privateID,

The problem here is at a certain portfolio size and you are in NY, the additional year of working may not earn you additional money. They may all ended up in taxes. Or, it may cost you money instead.

Do you earn more than your portfolio growth last year? This year?

KlangFool
"The problem here is at a certain portfolio size and you are in NY, the additional year of working may not earn you additional money. They may all ended up in taxes. Or, it may cost you money instead."
That is just not the way it works at all.
HeelaMonster
Posts: 191
Joined: Sat Aug 10, 2019 11:46 am

Re: Results of my modeling out Roth conversions

Post by HeelaMonster »

KlangFool wrote: Thu Jun 03, 2021 7:16 pm HeelaMonster,

It is not necessary net negative but it could be insignificant. Let's assume that OP's annual saving is 50K.

1) If OP is working, the portfolio growth .... [TRUNCATED]
Klang, thanks for elaborating. I better understand your point now.
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

KlangFool wrote: Thu Jun 03, 2021 4:10 pm In summary, you may be at a point where your portfolio may reach 3 million at 61 years old even if you are not working.
Or perhaps stock market returns over the next 5 1/2 years are horrible. I have always appreciated your posts because they have many times provided a unique perspective that I had not thought about. I have thought about stopping as early as 3 1/2 years, but I think it is the wrong move at this moment of time. The chance of bad stock market returns going forward seem like a possibility, which as we know can be really hurtful to a portfolio at the beginning of retirement. I am just more comfortable working for a few more years and, to be honest, it is more comfortable knowing that working may not be necessary.

Thanks
smitcat
Posts: 7951
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

HeelaMonster wrote: Thu Jun 03, 2021 6:01 pm
KlangFool wrote: Thu Jun 03, 2021 4:10 pm privateID,

That may not be true. And, that is my point. You may achieve the same goal faster by retiring and move to Florida.

<<I make $140K/yr. My portfolio size is $2.3M. >>

A) That means your portfolio made more than your gross salary last year.

B) And, for the first 5 months of the 2021, your portfolio probably make more than 140K without counting contribution.

C) In summary, you may be at a point where your portfolio may reach 3 million at 61 years old even if you are not working.

KlangFool
This is going to be one of those "duh" moments (for me!)... but I seem to have a mental block on this argument/analysis, so please humor me. Under what circumstances would his continuing to earn a salary not contribute to the "bottom line," even if his portfolio made more than gross salary? In the absence of salary, he would presumably start drawing down that portfolio to cover living expenses. OTOH, if salary covers those living expenses, portfolio remains untouched and continues to grow. Why would continuing to work and bring home salary result in a net negative on the overall picture, as I understand the above to be saying?
"Why would continuing to work and bring home salary result in a net negative on the overall picture, as I understand the above to be saying?"
It won't.

"OTOH, if salary covers those living expenses, portfolio remains untouched and continues to grow."
It will ...and there will be extra contributions , and there will be one less year to cover expenses with the portfolio.
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

privateID wrote: Thu Jun 03, 2021 8:48 pm
KlangFool wrote: Thu Jun 03, 2021 4:10 pm In summary, you may be at a point where your portfolio may reach 3 million at 61 years old even if you are not working.
Or perhaps stock market returns over the next 5 1/2 years are horrible. I have always appreciated your posts because they have many times provided a unique perspective that I had not thought about. I have thought about stopping as early as 3 1/2 years, but I think it is the wrong move at this moment of time. The chance of bad stock market returns going forward seem like a possibility, which as we know can be really hurtful to a portfolio at the beginning of retirement. I am just more comfortable working for a few more years and, to be honest, it is more comfortable knowing that working may not be necessary.

Thanks
privateID,

<<Or perhaps stock market returns over the next 5 1/2 years are horrible. >>

Will it really matters? Please calculate and find out.

By the way, if that is true, it may not matter whether you work for another 5 1/2 years or not.

What is your annual expense? 50K per year? 60K per year?

At 50K per year, your portfolio is at 46X. At 60K per year, it is 38X. It is big enough that lousy stock market return over 5 1/2 years does not matter.

Please do not assume. Just calculate and work out your details.

<< I am just more comfortable working for a few more years >>

You had did your Roth conversion calculation. You know how much it will cost you in taxes by working 5 1/2 more years. You might not be getting what you think you are getting by working more.

Do not be emotional. Calculate and work out the numbers.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
smitcat
Posts: 7951
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

privateID wrote: Thu Jun 03, 2021 2:53 pm KlangFool - Alot of things point to retiring at 61 (getting 35 years for SS, mortgage will paid off, last child graduates). I have thought about retiring a year or two earlier. So in a year or two will look into it.

smitcat - I have opened up some of those tools but, to be honest, I find them difficult to use. I use them more to give me ideas to use in my own spreadsheet. I am sure i will bite the bullet and get one loaded up with my info.

cas - Looking at the heat map, I will have around $40K of SS that first year.

I don't believe at any point in my modeling I am into the 40.7% hump. I do edge into the 22.2% bracket before the 40.7% hump.

Health insurance - I can get it through my employer so no ACA planning included.

"smitcat - I have opened up some of those tools but, to be honest, I find them difficult to use. I use them more to give me ideas to use in my own spreadsheet. I am sure i will bite the bullet and get one loaded up with my info."
FWIW - we initially modeled stuff like this ourselves, and my wife is very good at spreadsheets. We found that our attempts to collect and adjust for all the nuances of taxes, earnings, SS elctions etc paled compared to these other tools.
Choices...
- The extended IORP is free and very quick to learn - easy to run models with varied inputs(AA, portfolio performance, age of demise, SS eelcteion etc) and constuct a 'grid' of potential outcomes. The results are fairly easy to understand and after many runs you get a feel for what inputs will do before you even run it. Lacks some details, lacks some flexibility.
- RPM, is free and a great tool - much harder to load and understand the results, not so intuitive as to what inpust will vary results. We only load this with the most likely potential possibilities we are interested in from IORP. The results are in much greater detail the Roth conversion comparisons are really easy to see, the output charts and columnar numbers are so detailed they can be a bit overwhelming. We really like this tool but it is some work. FWIW - it will likely save us a pile of funds (after tax) from its use.
- Pralana , paid for program. We have less time on this Harder to use then IORP by a lot, more detailed then IORP and maybe about the same as RPM, more flexible than RPM but not so much so for our usage. We have yet to complete all of our modeling with the Pralana we bought but so far it appears to be supporting the results we have from the RPM.
- Tubotax , we test a couple of ourput runs with our tax software. So far the outputs of these programs are iether very close to or just slightly different than the turbotax outputs. There was an exception here with very low tax due outputs in some runs of IORP with very high Roth conversions $$ in some early years but it was an obviouse problem when we ran the IORP at that time.
Hope this helps
Escapevelocity
Posts: 597
Joined: Mon Feb 18, 2019 8:32 am

Re: Results of my modeling out Roth conversions

Post by Escapevelocity »

KlangFool wrote: Thu Jun 03, 2021 2:28 pm OP,

Given the amount of taxes that you will be paying, why is it worthwhile for you to work from now until age 61? What do you actually gain by working from now until age 61? Is it financially rewarding? That is the big picture question that you should ask instead.

KlangFool
This. Retire now and give yourself more time to work on those Roth conversions.
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

Exchme wrote: Thu Jun 03, 2021 7:59 pm A couple of points not discussed. Per current law, the 22% bracket will expire at the end of 2025, so that'll be a 25% bracket and today's 24% becomes 28%. The tax bracket sizes get cut in half once one spouse passes away, make sure you model includes some years of singe filing status.

For retirement prior to Medicare, will you be on something from your employer or the ACA exchanges? While it's generally true that the minimum tax impact is to keep the average marginal tax rate on your Roth conversions equal from year to year, ACA subsidies may affect that conclusion. The best answer may actually be some kind of up and down income where you make big Roth conversions in some years and then drop down and get ACA subsidies in other years.

Similar to Meg77 I'm a little concerned that you have such a high fraction of your portfolio in something so low yielding. Make sure your modeling looks at a case with your wife living a long time (since your pension will disappear). Some pensions have an option that they can be based on the longest survivor (with a reduced payout throughout), that might be worth checking as longevity insurance.
Yes, I do realize the 22% bracket will expire in 2025. Of course, that doesn't necessarily mean it won't be extended. It is easy to change the spreadsheet to accommodate that. In fact, I think every year that tax brackets change, I need to make updates. I don't think it changes things too much. The biggest change is my need to pay more taxes goes up, so my expenses rise. I feel I do have enough of a buffer, but will play with that a bit more.

As I mentioned earlier, I have medical through my employer. In fact, they even chip in a bit.

As far as the low yielding asset, I view it a bit like the bond tent I have been reading about recently. As I move more and more into the Roth, I could slowly shift away from the stable value fund.
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

Escapevelocity wrote: Thu Jun 03, 2021 9:20 pm
KlangFool wrote: Thu Jun 03, 2021 2:28 pm OP,

Given the amount of taxes that you will be paying, why is it worthwhile for you to work from now until age 61? What do you actually gain by working from now until age 61? Is it financially rewarding? That is the big picture question that you should ask instead.

KlangFool
This. Retire now and give yourself more time to work on those Roth conversions.
So let's play this out a bit more. Is the goal to eliminate the 401K totally? There is always the potential future medical bill. There is future charity I expect to give. And I would think I would want to at least have some money to fill the lowest tax bracket going forward. Not sure how to determine an optimal amount to be left in the 401K when I retire?

I appreciate the advice to retire early. Maybe if I hated my job I would. But I don't hate my job, I don't believe I hit my number yet and although I am not predicting it, I do believe there is a decent chance we see very low stock market returns during the next decade.
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

smitcat wrote: Thu Jun 03, 2021 9:11 pm - The extended IORP is free and very quick to learn - easy to run models with varied inputs(AA, portfolio performance, age of demise, SS eelcteion etc) and constuct a 'grid' of potential outcomes. The results are fairly easy to understand and after many runs you get a feel for what inputs will do before you even run it. Lacks some details, lacks some flexibility.
- RPM, is free and a great tool - much harder to load and understand the results, not so intuitive as to what inpust will vary results. We only load this with the most likely potential possibilities we are interested in from IORP. The results are in much greater detail the Roth conversion comparisons are really easy to see, the output charts and columnar numbers are so detailed they can be a bit overwhelming. We really like this tool but it is some work. FWIW - it will likely save us a pile of funds (after tax) from its use.
- Pralana , paid for program. We have less time on this Harder to use then IORP by a lot, more detailed then IORP and maybe about the same as RPM, more flexible than RPM but not so much so for our usage. We have yet to complete all of our modeling with the Pralana we bought but so far it appears to be supporting the results we have from the RPM.
- Tubotax , we test a couple of ourput runs with our tax software. So far the outputs of these programs are iether very close to or just slightly different than the turbotax outputs. There was an exception here with very low tax due outputs in some runs of IORP with very high Roth conversions $$ in some early years but it was an obviouse problem when we ran the IORP at that time.
Thanks for the rundown. I have RPM downloaded and even started to populate it a bit. I think at the very least, it is worth it to use a tool to confirm my results. To me, it's those nuances that are the precise reason I like to do it myself. Understanding the nuances and tradeoffs are critical to understand the results.
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

privateID wrote: Thu Jun 03, 2021 9:29 pm

So let's play this out a bit more. Is the goal to eliminate the 401K totally? There is always the potential future medical bill. There is future charity I expect to give. And I would think I would want to at least have some money to fill the lowest tax bracket going forward. Not sure how to determine an optimal amount to be left in the 401K when I retire?

I appreciate the advice to retire early. Maybe if I hated my job I would. But I don't hate my job, I don't believe I hit my number yet and although I am not predicting it, I do believe there is a decent chance we see very low stock market returns during the next decade.
privateID ,

1) Why do you need to give up 401K? You could contribute to Roth 401K instead.

<<But I don't hate my job, I don't believe I hit my number yet and although I am not predicting it, >>

2) Don't assume. Please calculate.

<<I do believe there is a decent chance we see very low stock market returns during the next decade.>>

3) If there is low stock market return, why do you think working more years will help? Please calculate. It won't matter.

4) Do you love your job so much that you will work even if

A) it will cost you a lot of taxes and money by working more years?

B) After doing the calculation, you find that it does close to nothing for you in term of helping you to achieve 3 million at 61 years old?

You could calculate all the numbers and then make a decision. Please do not assume.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Escapevelocity
Posts: 597
Joined: Mon Feb 18, 2019 8:32 am

Re: Results of my modeling out Roth conversions

Post by Escapevelocity »

privateID wrote: Thu Jun 03, 2021 9:29 pm
Escapevelocity wrote: Thu Jun 03, 2021 9:20 pm
KlangFool wrote: Thu Jun 03, 2021 2:28 pm OP,

Given the amount of taxes that you will be paying, why is it worthwhile for you to work from now until age 61? What do you actually gain by working from now until age 61? Is it financially rewarding? That is the big picture question that you should ask instead.

KlangFool
This. Retire now and give yourself more time to work on those Roth conversions.
So let's play this out a bit more. Is the goal to eliminate the 401K totally? There is always the potential future medical bill. There is future charity I expect to give. And I would think I would want to at least have some money to fill the lowest tax bracket going forward. Not sure how to determine an optimal amount to be left in the 401K when I retire?

I appreciate the advice to retire early. Maybe if I hated my job I would. But I don't hate my job, I don't believe I hit my number yet and although I am not predicting it, I do believe there is a decent chance we see very low stock market returns during the next decade.
I think I read your OP too quickly. Regarding below, is the $2M 401K today's balance or what you expect to have at age 61? What is the 401K and Roth balance today and how is the current balance allocated between stock/bond? How much do you plan to spend in retirement? Btw, IMO social security is NOT being cut 24%.

Retire: age 61, assets: $2M 401K (around 80% invested in stable value returning around 3%), $1M Roth (all invested in stock)
Last edited by Escapevelocity on Thu Jun 03, 2021 9:54 pm, edited 3 times in total.
Lee_WSP
Posts: 4779
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Results of my modeling out Roth conversions

Post by Lee_WSP »

KlangFool wrote: Thu Jun 03, 2021 9:42 pm ....
What if OP wants to leave a large legacy?

I'm having trouble wrapping my head around your posts. I can only assume you're saying OP doesn't need any more money, he's won the game, so should stop playing.
RetiredCSProf
Posts: 634
Joined: Tue Feb 28, 2017 4:59 pm

Re: Results of my modeling out Roth conversions

Post by RetiredCSProf »

How will you pay the taxes on the Roth conversions? Will you sell investments in a taxable account? If so, you may receive additional taxable income from cap gains during the "conversion" years. Or will you withhold taxes from Roth conversions; thus, reducing the amount you can convert?

Will you adjust your AA as you transition from an expected 1/3 of your tax-advantaged investments in Roth at age 61 to an anticipated 79% in Roth at age 70? Or do you plan to keep Roth at 100% stocks?

I am impressed that you have planned this out well beyond the next decade. I plan to continue making Roth conversions for several more years, but I plan only one year at a time.
JBTX
Posts: 8211
Joined: Wed Jul 26, 2017 12:46 pm

Re: Results of my modeling out Roth conversions

Post by JBTX »

KlangFool wrote: Thu Jun 03, 2021 9:42 pm
privateID wrote: Thu Jun 03, 2021 9:29 pm

So let's play this out a bit more. Is the goal to eliminate the 401K totally? There is always the potential future medical bill. There is future charity I expect to give. And I would think I would want to at least have some money to fill the lowest tax bracket going forward. Not sure how to determine an optimal amount to be left in the 401K when I retire?

I appreciate the advice to retire early. Maybe if I hated my job I would. But I don't hate my job, I don't believe I hit my number yet and although I am not predicting it, I do believe there is a decent chance we see very low stock market returns during the next decade.
privateID ,

1) Why do you need to give up 401K? You could contribute to Roth 401K instead.

<<But I don't hate my job, I don't believe I hit my number yet and although I am not predicting it, >>

2) Don't assume. Please calculate.

<<I do believe there is a decent chance we see very low stock market returns during the next decade.>>

3) If there is low stock market return, why do you think working more years will help? Please calculate. It won't matter.

4) Do you love your job so much that you will work even if

A) it will cost you a lot of taxes and money by working more years?

B) After doing the calculation, you find that it does close to nothing for you in term of helping you to achieve 3 million at 61 years old?

You could calculate all the numbers and then make a decision. Please do not assume.

KlangFool
KF

You made your point. PrivateID made it clear he has his reasons for continuing to work. Why don't you respect that and just move on?

There seems to be an assumption among some that as soon as you can mathematically retire you should, because work is soul crushing torture. Not everybody feels that way. It's a more complicated trade off. Trust me, I'm going through the same mental process myself. "My number" is not set in stone, because any number is based upon certain assumptions.
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

KlangFool wrote: Thu Jun 03, 2021 9:42 pm You could calculate all the numbers and then make a decision. Please do not assume.
I calculated, taking SS into consideration and a 3.5% withdrawal rate, that I need $2,883,189 to have $140K/yr starting when I turn 61 (of course adjusted for inflation). I rounded that to an even $3M. Of course, depending upon if and by how much SS gets cut in the future, that number could change a bit. $3M gives a small buffer. I am comfortable starting with that number.

Before this year, I calculated I will hit that target in the year I hit 60. I will now hit that number in the year I hit 59 due to the stock market runup. If things keep going, I would not be surprised if I will hit that number when I hit 58. I will also not be surprised if the markets go south and my projections show I need to wait till 60 again.

These are projections. I am not under any illusion that I can predict the future.

EDIT: If I stop making contributions, I will hit $3M at age 63.

Stopping work now will flat out not let me sleep at night. I am considering a year earlier. Maybe even two years earlier. I understand your point about potentially saving taxes by doing more conversions now. I can spend some time calculating that out, but, for now at least, intuitively working a few more years will get me to where I want to go. I feel tax calculations down the road come with more risks anyway.
How will you pay the taxes on the Roth conversions? Will you sell investments in a taxable account? If so, you may receive additional taxable income from cap gains during the "conversion" years. Or will you withhold taxes from Roth conversions; thus, reducing the amount you can convert?

Will you adjust your AA as you transition from an expected 1/3 of your tax-advantaged investments in Roth at age 61 to an anticipated 79% in Roth at age 70? Or do you plan to keep Roth at 100% stocks?
I actually have very little in taxable. My whole taxable account is about $20K in the bank, $20K in an HSA and $60K in I-bonds. The whole first 11 years expenses I have been working on and will come from a variety of sources including an inherited IRA I plan to deplete, using some of the 401K redemptions to pay expenses including taxes, my small work pension and possibly even inheriting some money (that I don't want to count on).

As I transition to a larger Roth account, the rest of my stock will get shifted at that time. In addition, I will evaluate my AA along the way. As I mentioned a few posts ago, I've been reading about the bond tent concept and may actually increase my stock allocation a bit as more Roth room presents itself.
Last edited by privateID on Thu Jun 03, 2021 11:06 pm, edited 1 time in total.
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

Escapevelocity wrote: Thu Jun 03, 2021 9:44 pm Regarding below, is the $2M 401K today's balance or what you expect to have at age 61? What is the 401K and Roth balance today and how is the current balance allocated between stock/bond? How much do you plan to spend in retirement? Btw, IMO social security is NOT being cut 24%.
$2M in 401K is the balance I expect when I turn 61. I currently have close to $1.8M in the 401K and $560K in Roth. I view my AA on an after-tax basis and I am around 46% stock. I've been rounding numbers all over the place in this thread, so if something doesn't add up exactly, it is because I was trying to simplify talking about the numbers. I plan to spend $140K/yr starting at age 61 and then adjusted for inflation after that.

Can I quote you on SS not being cut? I'd rather plan as if it is being cut although I tend to agree it won't be cut. That doesn't mean the age of SS won't change or other solutions.
User avatar
celia
Posts: 12773
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Results of my modeling out Roth conversions

Post by celia »

You are married, but does your spouse have a tax-deferred account too or is it combined with your numbers? Same thing for having 2 Social Security incomes. If the spouse worked outside the home, (s)he can start their own SS at 62 and switch to half of yours when you file at 70 (assuming you have the larger benefit). This may change how much SS you were planning on.

Please take into account that either of you could die along the way (while still working, while converting, or after age 72). But once one of you dies, the survivor will then need to start filing as Single starting in the year after death. The space in each tax bracket for Singles is only half as much as for MFJ, which means the survivor can be pushed into higher tax brackets than you are considering.

To help things along in case earlier death happens, I suggest you front-load the conversions to be bigger earlier on and scale down later. That will also help get more growth growing in the Roth earlier. You can do this by retiring earlier. You can also stop contributing to the 401K while working and making it grow so much (although I like how you are getting the After-tax into the 401K). If the money goes into taxable instead, you can better build up the cash you will need for the withdrawal/conversion taxes while enabling more current 401K money to be converted (instead of going to taxes).

privateID wrote: Thu Jun 03, 2021 12:54 pm Age 70-71: SS starts at 70. Withdraw/convert from 401K to top of 10% bracket
The 10% bracket currently tops out at $20K of Taxable Income for MFJ (after standard or itemized deductions are subtracted out).
Age 72-100: RMDs start at 72. No more withdraw/convert from 401K.
Are you planning on the 401K turning into an annuity then? Will it be based on your joint ages? That will become taxable income, else you need to continue RMDs or QCDs. (The IRS and state want what is owed to them that was previously tax-deferred.)
Assumptions: Inflation 2%, stock growth 4% real, bond growth 1% real, SS reduction of 24%
What does “SS reduction of 24%” mean here?
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

Lee_WSP wrote: Thu Jun 03, 2021 9:47 pm
KlangFool wrote: Thu Jun 03, 2021 9:42 pm ....
What if OP wants to leave a large legacy?

I'm having trouble wrapping my head around your posts. I can only assume you're saying OP doesn't need any more money, he's won the game, so should stop playing.
What if working more do not achieve that?

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

JBTX wrote: Thu Jun 03, 2021 10:03 pm
KlangFool wrote: Thu Jun 03, 2021 9:42 pm
privateID wrote: Thu Jun 03, 2021 9:29 pm

So let's play this out a bit more. Is the goal to eliminate the 401K totally? There is always the potential future medical bill. There is future charity I expect to give. And I would think I would want to at least have some money to fill the lowest tax bracket going forward. Not sure how to determine an optimal amount to be left in the 401K when I retire?

I appreciate the advice to retire early. Maybe if I hated my job I would. But I don't hate my job, I don't believe I hit my number yet and although I am not predicting it, I do believe there is a decent chance we see very low stock market returns during the next decade.
privateID ,

1) Why do you need to give up 401K? You could contribute to Roth 401K instead.

<<But I don't hate my job, I don't believe I hit my number yet and although I am not predicting it, >>

2) Don't assume. Please calculate.

<<I do believe there is a decent chance we see very low stock market returns during the next decade.>>

3) If there is low stock market return, why do you think working more years will help? Please calculate. It won't matter.

4) Do you love your job so much that you will work even if

A) it will cost you a lot of taxes and money by working more years?

B) After doing the calculation, you find that it does close to nothing for you in term of helping you to achieve 3 million at 61 years old?

You could calculate all the numbers and then make a decision. Please do not assume.

KlangFool
KF

You made your point. PrivateID made it clear he has his reasons for continuing to work. Why don't you respect that and just move on?

There seems to be an assumption among some that as soon as you can mathematically retire you should, because work is soul crushing torture. Not everybody feels that way. It's a more complicated trade off. Trust me, I'm going through the same mental process myself. "My number" is not set in stone, because any number is based upon certain assumptions.
I am not disputing his reason. I am challenging his assumptions. It is obvious to me that he have not done the calculations.

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Lee_WSP
Posts: 4779
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Results of my modeling out Roth conversions

Post by Lee_WSP »

KlangFool wrote: Thu Jun 03, 2021 11:14 pm
Lee_WSP wrote: Thu Jun 03, 2021 9:47 pm
KlangFool wrote: Thu Jun 03, 2021 9:42 pm ....
What if OP wants to leave a large legacy?

I'm having trouble wrapping my head around your posts. I can only assume you're saying OP doesn't need any more money, he's won the game, so should stop playing.
What if working more do not achieve that?

KlangFool
Well, in no universe of realistic and reasonable possibilities given the current tax code and assumptions on returns does a tax on additional income lead to less overall wealth than not working and spending down one's accumulated wealth.
KlangFool
Posts: 20965
Joined: Sat Oct 11, 2008 12:35 pm

Re: Results of my modeling out Roth conversions

Post by KlangFool »

Lee_WSP wrote: Thu Jun 03, 2021 11:24 pm
KlangFool wrote: Thu Jun 03, 2021 11:14 pm
Lee_WSP wrote: Thu Jun 03, 2021 9:47 pm
KlangFool wrote: Thu Jun 03, 2021 9:42 pm ....
What if OP wants to leave a large legacy?

I'm having trouble wrapping my head around your posts. I can only assume you're saying OP doesn't need any more money, he's won the game, so should stop playing.
What if working more do not achieve that?

KlangFool
Well, in no universe of realistic and reasonable possibilities given the current tax code and assumptions on returns does a tax on additional income lead to less overall wealth than not working and spending down one's accumulated wealth.
Does your thinking take into account of OP has 1.8 million in his 401K at this moment?

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
Topic Author
privateID
Posts: 273
Joined: Sat Oct 18, 2014 4:59 pm

Re: Results of my modeling out Roth conversions

Post by privateID »

celia wrote: Thu Jun 03, 2021 10:56 pm You are married, but does your spouse have a tax-deferred account too or is it combined with your numbers? Same thing for having 2 Social Security incomes. If the spouse worked outside the home, (s)he can start their own SS at 62 and switch to half of yours when you file at 70 (assuming you have the larger benefit). This may change how much SS you were planning on.

Please take into account that either of you could die along the way (while still working, while converting, or after age 72). But once one of you dies, the survivor will then need to start filing as Single starting in the year after death. The space in each tax bracket for Singles is only half as much as for MFJ, which means the survivor can be pushed into higher tax brackets than you are considering.

To help things along in case earlier death happens, I suggest you front-load the conversions to be bigger earlier on and scale down later. That will also help get more growth growing in the Roth earlier. You can do this by retiring earlier. You can also stop contributing to the 401K while working and making it grow so much (although I like how you are getting the After-tax into the 401K). If the money goes into taxable instead, you can better build up the cash you will need for the withdrawal/conversion taxes while enabling more current 401K money to be converted (instead of going to taxes).

privateID wrote: Thu Jun 03, 2021 12:54 pm Age 70-71: SS starts at 70. Withdraw/convert from 401K to top of 10% bracket
The 10% bracket currently tops out at $20K of Taxable Income for MFJ (after standard or itemized deductions are subtracted out).
Age 72-100: RMDs start at 72. No more withdraw/convert from 401K.
Are you planning on the 401K turning into an annuity then? Will it be based on your joint ages? That will become taxable income, else you need to continue RMDs or QCDs. (The IRS and state want what is owed to them that was previously tax-deferred.)
Assumptions: Inflation 2%, stock growth 4% real, bond growth 1% real, SS reduction of 24%
What does “SS reduction of 24%” mean here?
My wife had a lousy 403B plan with very high fees. We did not use it. My SS estimates are both are with both of us starting SS as late as possible.

The surviving spouse is probably the biggest consideration as a few people have mentioned. I had another thread where I talked about my pension a bit. To me, one way to help mitigate this risk is to convert my pension into a non-inflation adjusted non-joint annuity. It works out to a modest $9K/year that way. If I die first, that will help lower the income with my wife as a widow. SS will also obviously get lowered as well. I don't think my projected numbers make the widow case too horrible.

As I said, I am considering retiring a year or two earlier. I also have a note to consider larger conversions at age 61 and 62. Some of that depends on where I live as well.

I am no longer contributing anything to tax-deferred accounts. I max out a Roth 401K, 2 Roth IRAs and an after-tax 401K converted to Roth 401k immediately. My employer matches, however, are about $10K/year into my regular 401K.

I realize the 10% bucket is small. I do have no other income at that point other than the annuity. I am sure I will re-evaluate that conversion when the time comes.

I was not planning on turning the 401K into an annuity. I modeled it out with RMDs. maybe worth looking into an annuity for that as it may produce a more steady stream.

“SS reduction of 24%” means I reduced my SS benefits by 24% in my projections.
Lee_WSP
Posts: 4779
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Results of my modeling out Roth conversions

Post by Lee_WSP »

KlangFool wrote: Thu Jun 03, 2021 11:27 pm
Lee_WSP wrote: Thu Jun 03, 2021 11:24 pm
KlangFool wrote: Thu Jun 03, 2021 11:14 pm
Lee_WSP wrote: Thu Jun 03, 2021 9:47 pm
KlangFool wrote: Thu Jun 03, 2021 9:42 pm ....
What if OP wants to leave a large legacy?

I'm having trouble wrapping my head around your posts. I can only assume you're saying OP doesn't need any more money, he's won the game, so should stop playing.
What if working more do not achieve that?

KlangFool
Well, in no universe of realistic and reasonable possibilities given the current tax code and assumptions on returns does a tax on additional income lead to less overall wealth than not working and spending down one's accumulated wealth.
Does your thinking take into account of OP has 1.8 million in his 401K at this moment?

KlangFool
Doesn't matter. Income is called an accession to wealth for a reason. Whether or not the marginal gains are worth it is up for debate though.
FlamePoint
Posts: 59
Joined: Wed Nov 11, 2020 10:45 pm

Re: Results of my modeling out Roth conversions

Post by FlamePoint »

Sandi_k wrote: Thu Jun 03, 2021 7:38 pm
privateID wrote: Thu Jun 03, 2021 12:54 pm I am 55 years old and married. I have been playing around with modeling out Roth conversions and income when I plan to retire in 5 1/2 years. Here is a summary my modeling using today dollars with alot of rounding.

Retire: age 61, assets: $2M 401K (around 80% invested in stable value returning around 3%), $1M Roth (all invested in stock)

Age 61-62: Withdraw/convert from 401K to top of 22% bracket
Age 63-69: Withdraw/convert from 401K to IRMAA limit
Age 70-71: SS starts at 70. Withdraw/convert from 401K to top of 10% bracket
Age 72-100: RMDs start at 72. No more withdraw/convert from 401K.

Questions:
1) Does all that seem reasonable (conversion amounts, etc)?
2) At age 70, with half a year of SS, I was thinking of converting to top of 12% bracket making 85% of SS taxable. Good idea?
3) Of course there are a number of variables that can change things: tax increase in a few years, inherit money. Others?
4) If returns are better than I expect, say 10% nominal for stock, the numbers still don't get crazy because of the small amount of stock in the 401K. Are there concerns with return that I I am not seeing?

Thanks for anyone who helped me get to this point.
The biggest error that I see is that you are not taking into account the reversion of federal tax rates in 2026. In six years, it will be 2027, and the federal brackets are supposed to be:

10%
15%
25%
28%
33%

There IS NO 22% bracket.

I would go back to the spreadsheet and make sure you have a plan for either tax bracket setup.
This.

I did a similar exercise about a year ago and made sure to adjust the tax brackets back to the prior version starting in 2026. Unfortunately it removes a lot of headroom that currently exists. I’m being more aggressive with my conversions right now (to the top of the 24% tax bracket) for this reason.
N.Y.Cab
Posts: 116
Joined: Wed Feb 07, 2018 8:46 pm

Re: Results of my modeling out Roth conversions

Post by N.Y.Cab »

Plan to withdraw/convert from 401K to IRMAA limit well beyond age 69. I think the pretax 401k balance may not decrease by much if assuming a healthy rate of growth of over 6%.
User avatar
celia
Posts: 12773
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Results of my modeling out Roth conversions

Post by celia »

privateID wrote: Thu Jun 03, 2021 11:27 pm I realize the 10% bucket is small. I do have no other income at that point other than the annuity. I am sure I will re-evaluate that conversion when the time comes.
You seem to plan for the 10% bracket for ages 70, 71. By then, both SS will have started. I’m not sure you will have finished enough Roth conversions by then, especially if a new Inherited TIRA comes your way before then.
“SS reduction of 24%” means I reduced my SS benefits by 24% in my projections.
Those of us past 72 have been hearing similar ideas for 30 or 40 years. But it hasn’t happened (yet). In fact, if there are just yearly SS benefits each year with inflation increases, that alone will use up more than the $20K Taxable income plus standard deductions.
User avatar
beyou
Posts: 3841
Joined: Sat Feb 27, 2010 3:57 pm
Location: Northeastern US

Re: Results of my modeling out Roth conversions

Post by beyou »

KlangFool wrote: Thu Jun 03, 2021 4:10 pm
privateID wrote: Thu Jun 03, 2021 3:50 pm
KlangFool wrote: Thu Jun 03, 2021 3:31 pm
privateID wrote: Thu Jun 03, 2021 3:19 pm
Klang - Spending time with my kids has always been a priority. I do have some flexibility with my job to do that now. You make good points. I just don't think I am ready to retire. I don't love my job, but I don't hate it all. Good things to think about.
privateID,

The problem here is at a certain portfolio size and you are in NY, the additional year of working may not earn you additional money. They may all ended up in taxes. Or, it may cost you money instead.

Do you earn more than your portfolio growth last year? This year?

KlangFool
I don't track my historical portfolio yearly growth. I make $140K/yr. My portfolio size is $2.3M. I have done some projections and was hoping to grow my assets to close to $3M. I think I will get there by age 59. It is possible I could retire now, but I think a few more years of maxing out 401K/IRAs/HSA puts me in a much better position.

Clarification from above: I plan to retire when I am 60. My first full year of retirement I turn 61.
privateID,

That may not be true. And, that is my point. You may achieve the same goal faster by retiring and move to Florida.
But then one would need to live in Florida.
The point of life is to live, not just minimize taxes.
Fat Tails
Posts: 222
Joined: Wed Oct 30, 2019 12:47 am
Location: New Mexico

Re: Results of my modeling out Roth conversions

Post by Fat Tails »

At first blush it looks like a good plan. You will want to update it every year with the tax brackets, account balances, and other items that could affect the results before you do your Roth conversions for that year so you can tweak your plan if necessary. I would err on on the side of doing larger conversions earlier rather than later. You can always back off later if you want to. You dont need to empty the tax deferred. You only need to get the balances down so that your Required Minimum Distributions aren’t pushing you into high tax brackets,

Nice job! :beer
“If you would be wealthy, think of saving as well as getting.” ― Benjamin Franklin
smitcat
Posts: 7951
Joined: Mon Nov 07, 2016 10:51 am

Re: Results of my modeling out Roth conversions

Post by smitcat »

beyou wrote: Fri Jun 04, 2021 1:03 am
KlangFool wrote: Thu Jun 03, 2021 4:10 pm
privateID wrote: Thu Jun 03, 2021 3:50 pm
KlangFool wrote: Thu Jun 03, 2021 3:31 pm
privateID wrote: Thu Jun 03, 2021 3:19 pm
Klang - Spending time with my kids has always been a priority. I do have some flexibility with my job to do that now. You make good points. I just don't think I am ready to retire. I don't love my job, but I don't hate it all. Good things to think about.
privateID,

The problem here is at a certain portfolio size and you are in NY, the additional year of working may not earn you additional money. They may all ended up in taxes. Or, it may cost you money instead.

Do you earn more than your portfolio growth last year? This year?

KlangFool
I don't track my historical portfolio yearly growth. I make $140K/yr. My portfolio size is $2.3M. I have done some projections and was hoping to grow my assets to close to $3M. I think I will get there by age 59. It is possible I could retire now, but I think a few more years of maxing out 401K/IRAs/HSA puts me in a much better position.

Clarification from above: I plan to retire when I am 60. My first full year of retirement I turn 61.
privateID,

That may not be true. And, that is my point. You may achieve the same goal faster by retiring and move to Florida.
But then one would need to live in Florida.
The point of life is to live, not just minimize taxes.
We have a place to live in Florida and New York - moving to Florida does not solve a financial situation like this at all.
Maybe Klang can chime in and let us know any math that may exist to the contrary.
Post Reply