Retiring soon

[Mld3]

We have $600K+ in my husband's company 401k. My husband will be 59-1/2 this year and is planning to keep working. However, I am concerned about our tax liability. His income is low enough compared to maxing out retirement, that we have not owed much tax the last few years. We are not very literate compared to some people about finances but I am interested in rolling over to Roth's and was wondering if someone could help me with specifics. I read you cannot touch them until five years. That is fine but I am concerned with how much to do. I am not sure how much our tax liability will be for 2022 as we haven't done our taxes yet but the income is our highest so far and this year will probably match that.

[Mld3]

I also just read (since I posted this) that Medicare part B is contingent on your income. So this would also affect income/tax, etc.

[retired@50]

We have $600K+ in my husband's company 401k.

Welcome to the forum.

Whether or not to convert money from traditional to Roth can be dependent on a variety of details. Based on what you've shared, it may or may not be a good idea. It's possible that some partial Roth conversions between retirement (when income drops) and before Social Security or RMDs begin could be advantageous.

Maybe reading the Roth IRA conversion wiki page will help. Pay special attention to the "Whether to Convert" section.

Also, as far as Medicare goes, see the Income Related Monthly Adjustment Amount wiki page.

Regards,

[Mld3]

Thank you. We manage all our own money except my IRA is with a firm so we had an appointment with the advisor. He set up a retirement plan for us for when my husband turns 59-1/2 (That is another subject for another post). But I asked him this same thing about Roth conversions since our tax was so low in 2020 and 2021, and he told me twice that ALL our income was taxable. We not only contribute to 401K, but also catch up and HSA and HSA catch up. I knew this wasn't right. For him not to know this was a big red flag to me. This question was one of the reasons I went to him in the first place. He advised that most people have lower income in retirement as the reason not to convert, and I know that but our situation is a little different. The plan he set up for us has us bringing in over $60,000 a year. That includes social security. I am still researching all about the fees, etc. Our total federal tax for 2020 was $18. And our gross income from our jobs was around $60,000; taxable income was $10K something.

[Mld3]

I will know a little better after our taxes are filed this year. Also, I plan to compile a list of questions to ask our accountant. He has no conflict of interest.

[Mld3]

Also, we did not sign up for anything on the retirement plan yet.

[FiveK]

Whether or not to convert money from traditional to Roth can be dependent on a variety of details. Based on what you've shared, it may or may not be a good idea. It's possible that some partial Roth conversions between retirement (when income drops) and before Social Security or RMDs begin could be advantageous.

Maybe reading the Roth IRA conversion wiki page will help. Pay special attention to the "Whether to Convert" section.

Also, as far as Medicare goes, see the Income Related Monthly Adjustment Amount wiki page.

+1 to all that.

Mld3, if you can use Excel then it might be useful for you to generate something like this annotated chart for your situation.

The Using a spreadsheet section of the Roth IRA conversion wiki, and the Roth Conversion with Social Security and Medicare IRMAA article both have good "for example" instructions.

[peteyboy]

....The plan he set up for us has us bringing in over $60,000 a year. That includes social security. I am still researching all about the fees, etc. Our total federal tax for 2020 was $18. And our gross income from our jobs was around $60,000; taxable income was $10K something.

Based on the above details ($10K taxable income) and assuming you are filing married filing jointly (MFJ), you have space for about $12K of Roth conversion at the 10% US tax rate and another $67K of space at the 12% tax rate (all based on 2023 tax rates).

This does not include state tax, of course, which would also need to be figured.

So by way of example, if you have taxable income of $10K in 2023 and converted $79K ($12K + $67K) of the traditional 401k to a Roth IRA, the Fed tax owed for the conversion event would be $9,240. If you only converted $12K, that would result in $1,200 of Fed tax.(Assuming MFJ).

Calculation: $12,000(0.10) + $67,000(0.12) = $9,240

As to whether or not it makes sense to do this, you would need to look at what you anticipate your tax rate will be when you want to access these funds. If you expect a future annual income of $60K for the MFJ return you would be in the 12% tax bracket based on todays tax rates.

The general rule of thumb is:
If at the time (in the future) you plan to draw the funds you expect a higher tax rate than the tax rate at time of conversion ==> convert.
If at the time (in the future) you plan to draw the funds you expect a lower tax rate than the tax rate at time of conversion ==> don't convert.

Most people that do these conversions are doing so even if its tax-neutral at present because they believe taxes will go up in the future. The current tax rates are set to expire at the end of 2025. They will go back to the rates of 2017 if no action is taken to keep them at their current rates.

[hand]

Conceptually, tax liability is mostly issue for people who will have more income in retirement than they do while they are working.
Roth conversion is mostly a decision to pay taxes now at today's marginal rate based on current income rather than pay taxes in the future at future rates based on retirement income (and future rates).

With 600k in retirement assets plus Social Security it seems likely your income today is greater than your expected retirement income which would suggest Roth conversion is not an obvious benefit to you.

[Mld3]

Thank you so much. Did you see my updated post where I mention our low tax liability for 2020. It was also low in 2021. This is why I have this question. This is my first post in bogleheads so I am not adequately describing everything in one post and have added onto it. We are continuing to work for at least another year so will have more income and we have other assets, such as my IRA, two small Roth's, cash, etc., probably equaling $750K?? and have relatively low expenses, house paid, no debt.

[221B_BakerStreet]

In your earlier posts, you did not mention at what ages you and and your husband plan to retire nor when you and your husband plan to claim Social Security. If you are both in good health, delaying Social Security would probably be to your advantage and if that is the case, you will need to withdraw from the 401k from the time you & your husband retire until you claim Social Security. This will reduce your 401k balance such that future RMDs and associated taxes upon withdrawal will be lower. Further, it would not make sense to convert a lot of money from the 401k to Roth IRA if you will be using money from the 401k to bridge the time between retirement and claiming Social Security.

I would recommend that you both obtain your most recent Social Security Statements and then run your numbers through Open Social Security https://opensocialsecurity.com/ to find your optimum claiming strategy. With that information as well as the age you each plan to retire, you should be able to see how much money per year you will need to pull from the 401k prior to claiming Social Security

[Jack FFR1846]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

With respect to Roth conversions, indeed, if your income is low, your Roth conversions will create tax at a low rate. Indeed, Medicare rates are based on income and their income limits are very low. They start by looking at the last 2 years of income but you can ask for a re-calculation when you're both retired.

Things to look at that can be eye opening are both of your social security income when you're both receiving and your required RMDs. Plotting out a year by year adding of these numbers for DW and myself were very eye opening. While during working years, we all seem to focus on "times spending" numbers, as DW and I will both be retired mid year, I shifted focus on Social Security and RMDs and it certainly whacked me in the forehead. Those alone are well above our spending, meaning that in those years, our Roths, savings bonds and cash really could be completely ignored or we can use them to splurge.

[retired@50]

Did you see my updated post where I mention our low tax liability for 2020.

You can also use the pencil icon (upper right corner) in any previous post to go back and edit or add information to an existing post.

See also: https://www.bogleheads.org/wiki/Posting ... 2%AE_forum

Regards,

[sailaway]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

Please check this. Tax liability is the total of federal taxes withheld plus any additional owed at filing (or minus any refund). Taxes owed and refunds just mean that withholdings weren't dialed in perfectly, which is hard to do anyway.

Does your husband have a Roth option at work? If not, then conversions are likely a moot point, as few plans allow you to make withdrawals while still employed. If so, it might be a better option to switch to Roth contributions, rather than doing conversions while employed. Not really much of a difference, but the contributions would be more straightforward.

[Mld3]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

With respect to Roth conversions, indeed, if your income is low, your Roth conversions will create tax at a low rate. Indeed, Medicare rates are based on income and their income limits are very low. They start by looking at the last 2 years of income but you can ask for a re-calculation when you're both retired.

Things to look at that can be eye opening are both of your social security income when you're both receiving and your required RMDs. Plotting out a year by year adding of these numbers for DW and myself were very eye opening. While during working years, we all seem to focus on "times spending" numbers, as DW and I will both be retired mid year, I shifted focus on Social Security and RMDs and it certainly whacked me in the forehead. Those alone are well above our spending, meaning that in those years, our Roths, savings bonds and cash really could be completely ignored or we can use them to splurge.

We paid in $1737 (federal tax withheld from our paycheck) and owed 1755 so our total tax bill was $18

[Mld3]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

Please check this. Tax liability is the total of federal taxes withheld plus any additional owed at filing (or minus any refund). Taxes owed and refunds just mean that withholdings weren't dialed in perfectly, which is hard to do anyway.

Does your husband have a Roth option at work? If not, then conversions are likely a moot point, as few plans allow you to make withdrawals while still employed. If so, it might be a better option to switch to Roth contributions, rather than doing conversions while employed. Not really much of a difference, but the contributions would be more straightforward.

Yes I do believe he has a Roth option, which we are going to look into soon because of these reasons. I think it only became available a few years ago.

[Mld3]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

Please check this. Tax liability is the total of federal taxes withheld plus any additional owed at filing (or minus any refund). Taxes owed and refunds just mean that withholdings weren't dialed in perfectly, which is hard to do anyway.

Does your husband have a Roth option at work? If not, then conversions are likely a moot point, as few plans allow you to make withdrawals while still employed. If so, it might be a better option to switch to Roth contributions, rather than doing conversions while employed. Not really much of a difference, but the contributions would be more straightforward.

I'm sorry my first response to you was wrong. Our total payments were 1755 and we overpaid by 1737 so we owed 18 total. Our taxable income was $10,702.

[sailaway]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

With respect to Roth conversions, indeed, if your income is low, your Roth conversions will create tax at a low rate. Indeed, Medicare rates are based on income and their income limits are very low. They start by looking at the last 2 years of income but you can ask for a re-calculation when you're both retired.

Things to look at that can be eye opening are both of your social security income when you're both receiving and your required RMDs. Plotting out a year by year adding of these numbers for DW and myself were very eye opening. While during working years, we all seem to focus on "times spending" numbers, as DW and I will both be retired mid year, I shifted focus on Social Security and RMDs and it certainly whacked me in the forehead. Those alone are well above our spending, meaning that in those years, our Roths, savings bonds and cash really could be completely ignored or we can use them to splurge.

We paid in $1737 (federal tax withheld from our paycheck) and owed 1755 so our total tax bill was $18

Your tax liability was $1755 and you owed $18 when you filed, it sounds like.

[Mld3]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

With respect to Roth conversions, indeed, if your income is low, your Roth conversions will create tax at a low rate. Indeed, Medicare rates are based on income and their income limits are very low. They start by looking at the last 2 years of income but you can ask for a re-calculation when you're both retired.

Things to look at that can be eye opening are both of your social security income when you're both receiving and your required RMDs. Plotting out a year by year adding of these numbers for DW and myself were very eye opening. While during working years, we all seem to focus on "times spending" numbers, as DW and I will both be retired mid year, I shifted focus on Social Security and RMDs and it certainly whacked me in the forehead. Those alone are well above our spending, meaning that in those years, our Roths, savings bonds and cash really could be completely ignored or we can use them to splurge.

Our total payments were 1755 and we overpaid by 1737 so we owed 18 total. Our taxable income was $10,702. 2022 was and 2023 will be higher as my husband was allowed to work a lot of overtime. He works at WM and that is where his 401k is. I started back working part time this year also, as I had gotten laid off from COVID in 2020.

This was my first question to this forum. I have more to ask later but I feel like I don't understand things enough. We went to a financial advisor and I am very leery and don't like all the fees but I feel I don't know enough. My husband knows even less. We manage our own assets except my IRA is with his company so we had a free meeting with him. I will post more about this later but it looks like the fees alone will be over $8,000 a year (1%) with what he wants to do. I feel that is too steep. I have read personal finance blogs for years and that is what got me started trying to max out 401ks and start HSA and do some other little things.

[Mld3]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

With respect to Roth conversions, indeed, if your income is low, your Roth conversions will create tax at a low rate. Indeed, Medicare rates are based on income and their income limits are very low. They start by looking at the last 2 years of income but you can ask for a re-calculation when you're both retired.

Things to look at that can be eye opening are both of your social security income when you're both receiving and your required RMDs. Plotting out a year by year adding of these numbers for DW and myself were very eye opening. While during working years, we all seem to focus on "times spending" numbers, as DW and I will both be retired mid year, I shifted focus on Social Security and RMDs and it certainly whacked me in the forehead. Those alone are well above our spending, meaning that in those years, our Roths, savings bonds and cash really could be completely ignored or we can use them to splurge.

We paid in $1737 (federal tax withheld from our paycheck) and owed 1755 so our total tax bill was $18

Your tax liability was $1755 and you owed $18 when you filed, it sounds like.

I am looking at my tax return as I type this. We paid 1755 (line 33) and received a refund of 1737. (line 34)
PS I had at first typed the wrong thing and then posted again saying I had made a mistake. This is my first time posting and I'm not doing so well. But I want to thank everyone who is responding to my posts!

[sailaway]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

With respect to Roth conversions, indeed, if your income is low, your Roth conversions will create tax at a low rate. Indeed, Medicare rates are based on income and their income limits are very low. They start by looking at the last 2 years of income but you can ask for a re-calculation when you're both retired.

Things to look at that can be eye opening are both of your social security income when you're both receiving and your required RMDs. Plotting out a year by year adding of these numbers for DW and myself were very eye opening. While during working years, we all seem to focus on "times spending" numbers, as DW and I will both be retired mid year, I shifted focus on Social Security and RMDs and it certainly whacked me in the forehead. Those alone are well above our spending, meaning that in those years, our Roths, savings bonds and cash really could be completely ignored or we can use them to splurge.

Our total payments were 1755 and we overpaid by 1737 so we owed 18 total. Our taxable income was $10,702.

So you actually got a refund?

This is just to help you clarify your terms. The actual numbers are irrelevant if your income is changing. However, if it hasn't changed much, then Roth is probably the best choice for you. But if your income has doubled, all of the additional income is taxable, and you may even phase out of certain credits, like the savers credit.

When will your 2022 taxes be finished? It sounds like that will give you a better picture.

[MattB]

I have more to ask later but I feel like I don't understand things enough.

I'm sorry about this but there is no problem with not understanding enough. The more important issue, I think, is whether you can or will slow down a post the information here, in the necessary format, so people can help you work through this.

You can edit your first post using the pencil icon in the top right corner. I suggest you do that, and post your situation in the formate outlined here: viewtopic.php?t=6212 in the asking portfolio questions section.

Then people can help you work through your questions.

[Mld3]

You mention $18 in tax liability. Do you mean that after your with holdings have been credited, you still owe $18?

With respect to Roth conversions, indeed, if your income is low, your Roth conversions will create tax at a low rate. Indeed, Medicare rates are based on income and their income limits are very low. They start by looking at the last 2 years of income but you can ask for a re-calculation when you're both retired.

Things to look at that can be eye opening are both of your social security income when you're both receiving and your required RMDs. Plotting out a year by year adding of these numbers for DW and myself were very eye opening. While during working years, we all seem to focus on "times spending" numbers, as DW and I will both be retired mid year, I shifted focus on Social Security and RMDs and it certainly whacked me in the forehead. Those alone are well above our spending, meaning that in those years, our Roths, savings bonds and cash really could be completely ignored or we can use them to splurge.

Our total payments were 1755 and we overpaid by 1737 so we owed 18 total. Our taxable income was $10,702.

So you actually got a refund?

This is just to help you clarify your terms. The actual numbers are irrelevant if your income is changing. However, if it hasn't changed much, then Roth is probably the best choice for you. But if your income has doubled, all of the additional income is taxable, and you may even phase out of certain credits, like the savers credit.

When will your 2022 taxes be finished? It sounds like that will give you a better picture.

Yes we got a refund of 1737 (after paying in 1755) The IRS received $18. I do not know yet what we will owe for 2022

[Mld3]

I have more to ask later but I feel like I don't understand things enough.

I'm sorry about this but there is no problem with not understanding enough. The more important issue, I think, is whether you can or will slow down a post the information here, in the necessary format, so people can help you work through this.

You can edit your first post using the pencil icon in the top right corner. I suggest you do that, and post your situation in the formate outlined here: viewtopic.php?t=6212 in the asking portfolio questions section.

Then people can help you work through your questions.

Thank you so much. I will take your advice when I post my next question. Everyone here has been so helpful to me and have answered my question.

[Eagle33]

Yes we got a refund of 1737 (after paying in 1755) The IRS received $18. I do not know yet what we will owe for 2022

Look at line 24 - TOTAL TAX. That line had your total tax liability for tax year 2021. From what you describe line 24 should be $18.

[Mld3]

Thank you. Line 24 is $18.

[rgs92]

From your info, I don't see any particular tax problem. Are you thinking the $600K IRA will cause a tax problem? It won't. You can just leave in right in the 401K or roll it over into an IRA rollover at Fidelity, Vanguard, or the like with no tax consequences.
You will only pay (income) taxes on any part of it you withdraw at any time. This is normal.

Usually, you just take out a little at a time for expenses. You don't want to take big lump as that can move you into a higher bracket, but it doesn't look like you need that.

I you are not expecting to have a really high income, there is really no need to convert a lot to a Roth. If you do, just convert a little each year. There is really no huge benefit to Roth conversions, as you are just choosing to pay some taxes now or later down the road.

The Medicare thing you are mentioning is IRMAA, which is if you are on Medicare with an income around $200K ($185K now but it goes up each year).
So don't go over that in any year with Roth conversions.

But I would just do nothing; there seems to be no emergency. And of course avoid 1% fee advisor. Just ask here for how to allocate your retirement funds (unless there is some real issue in managing it yourselves). If so, there are much cheaper alternatives than a 1% annual fee.

Again, it doesn't seem like you have a big tax liability issue. Did someone say you had a tax problem and should be focusing on that? On a moderate or even higher income, taxes on retirement income are normal and not particularly egregious, and are easily handled just like when you are working.

[hand]

Again, it doesn't seem like you have a big tax liability issue. Did someone say you had a tax problem and should be focusing on that? On a moderate or even higher income, taxes on retirement income are normal and not particularly egregious, and are easily handled just like when you are working.

Fear of taxes is a common sales pitch - but much more likely a scare tactic than a real issue in this case.

[Jovby]

We have $600K+ in my husband's company 401k. My husband will be 59-1/2 this year and is planning to keep working. However, I am concerned about our tax liability. His income is low enough compared to maxing out retirement, that we have not owed much tax the last few years. We are not very literate compared to some people about finances but I am interested in rolling over to Roth's and was wondering if someone could help me with specifics. I read you cannot touch them until five years. That is fine but I am concerned with how much to do. I am not sure how much our tax liability will be for 2022 as we haven't done our taxes yet but the income is our highest so far and this year will probably match that.

You will not owe taxes on the 600k 401k until you spend it. At that point it will be considered taxable income. The taxes will be spread out over the years as you spend it, so it won’t be a tax bomb.

The standard deduction ($27,700) plus 10% bracket ($22,000) & 12% bracket ($89,450 - $22,000) = $117,150. Which means if your spending in retirement is less then 117k per year you will not be above the 12% bracket.

With a taxable income of $10,702 you are currently in the 10% bracket. You could convert $11,298 (22,000 – 10,702) at 10% tax rates and potentially save yourself from paying 12% taxes in retirement. That 2% is a modest benefit at best. Worth considering, but not something that will break your retirement. If you do convert too much and pay 12% taxes you really haven’t lost anything so don’t worry too much about getting the exact dollar amount right.

The 401k may not allow your husband to take money out while still working, so Roth conversions may not be possible.

Roth 401k is likely beneficial as you are paying 10% taxes now, and likely saving more than 10% taxes in retirement.

There are multiple 5 year rules for Roth 401ks and Roth IRAs.

- You can not take earnings (interest) from the Roth 401k if THAT Roth 401K account is less than 5 years old without paying taxes.
- You can not take earnings (interest) from a Roth IRA if ALL Roth IRA accounts you own are less than 5 years old without paying taxes.
- You can take contributions from a Roth 401k (age 59.5+ if the plan allows) AND a Roth IRA (any age) without penalty or taxes (you already paid taxes on the Roth contributions).
- Each ROTH conversion has its OWN 5 year rule. You can not take the conversion out before 5 years without paying the 10% penalty. You can not take the earnings (interest) out before 5 years without paying the 10% penalty and taxes.

I suggest you start the Roth 401k, and open Roth IRAs (one for each of you) this year even if only $1, to start the clock.

IRMAA penalty is based on income and not assets, so your 401k will not effect IRMAA unless your income is above certain limits. The first limit is $194,000. If your retirement income is less then 194,000 you can ignore IRMAA.

What may be more impactful for you are the ACA (Affordable Care Act) premium subsidies. If you retire before 65 (Medicare eligibility) and need health insurance, then you may be eligible for ACA subsidies to reduce the cost of insurance. The income limit for ACA subsidies for a family of 2 is $78,880. This only maters if you need healthcare before age 65.

I agree that 1% fee is unnecessary. You can easily invest it for (likely) better returns on your own.

Please be careful of any “retirement plan” that includes whole life, annuities, or claiming both SS early.

[Mld3]

From your info, I don't see any particular tax problem. Are you thinking the $600K IRA will cause a tax problem? It won't. You can just leave in right in the 401K or roll it over into an IRA rollover at Fidelity, Vanguard, or the like with no tax consequences.
You will only pay (income) taxes on any part of it you withdraw at any time. This is normal.

Usually, you just take out a little at a time for expenses. You don't want to take big lump as that can move you into a higher bracket, but it doesn't look like you need that.

I you are not expecting to have a really high income, there is really no need to convert a lot to a Roth. If you do, just convert a little each year. There is really no huge benefit to Roth conversions, as you are just choosing to pay some taxes now or later down the road.

The Medicare thing you are mentioning is IRMAA, which is if you are on Medicare with an income around $200K ($185K now but it goes up each year).
So don't go over that in any year with Roth conversions.

But I would just do nothing; there seems to be no emergency. And of course avoid 1% fee advisor. Just ask here for how to allocate your retirement funds (unless there is some real issue in managing it yourselves). If so, there are much cheaper alternatives than a 1% annual fee.

Again, it doesn't seem like you have a big tax liability issue. Did someone say you had a tax problem and should be focusing on that? On a moderate or even higher income, taxes on retirement income are normal and not particularly egregious, and are easily handled just like when you are working.

I didn't know if it would cause a problem or not. Thank you everyone for your responses. I am planning on typing up some questions with the format MattB suggested but it may be a few weeks.