A Roth In Plan conversion is now available to me.

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
PhrugalPhan
Posts: 19
Joined: Thu Apr 05, 2018 11:32 am

A Roth In Plan conversion is now available to me.

Post by PhrugalPhan »

I just found out my 457 plan will start offering In Plan Roth conversions this year. To say I am surprised is an understatement as I keep abreast of upcoming changes in the plan and didn't see anything related to this. I'd like to ask a question or two here about this possibility.

A little / lot of background: I will be retiring at 60 when my golden handcuffs come off (4 more years). I've been investing in a Roth IRA since 2007 and have a near $150k balance. My 457 plan balance is near $580k and of that 24% is of a Roth balance. I've been trying to up the Roth percentage ever since it was allowed (around 2011?) and as such I currently put in ~70% Roth / 30% traditional and max out yearly. The plan has good funds / good expense ratios so I am happy leaving my funds in the plan as long as needed.

While altogether that yearly Roth amount may seem like a too high percentage I have some reasons for this. In retirement I will have not only SSI but a nice pension too. If I can make it 4 more years to full retirement, and then wait until 70 to take SSI, those two combined will give me 80% of my current salary. If you take out the pension contributions and taxes I pay today, those two will be near 100% of today's remaining salary which I am great with (actually my expenses are maybe 25% of salary). So any RMDs will be taxed at similar if not much higher rates than I pay today.

And then on top of that I have a girlfriend that has just retired as a Fed, has a very large TSP (much larger than my 457) and it only has maybe 4% as Roth funds, meaning with her pension as a Fed, SS income, and RMDs, her taxes are going to be crazy high after she is 70. For various financial reasons we will marry after I retire, not now.

So our plans had been, and still are, to get her to do Roth conversions in the coming years, though she won't have a ton of room to do that given her pension. After we marry I planned on taking only a little out of my plan, use savings and brokerage money to live, as well as downsizing my house & moving out of this HCOL area for more funds. If that amount of money isn't enough, I will take out of my Roth IRA any needed money. That should give us the tax bracket headroom to convert / rollover a good chunk of her funds to Roth at a lower rate, leaving us at a low(er) tax rate even with a high amount of earnings in our elderly years.

So the questions are:

1) Given that I don't do 100% Roth contributions currently is there any reason to look into doing an In-Plan conversion until I max 100% Roth contributions? As a local Gov't employee my salary and continued job prospects look very solid, so I don't expect any years in the future before retirement with a very low income. (Though looking at the long term numbers above maybe I should go 100% Roth now - hmmmm... could I take that much of a tax hit today?)

2) To me, for the future I don't foresee the need to look into Roth rollovers if I can do an in-plan conversion at any time, but maybe I am missing something. The 457 plan has good funds & expenses, and age withdrawal restrictions shouldn't come into play, so why go through the extra steps of a rollover?
sawdust60
Posts: 339
Joined: Tue Jul 17, 2018 12:06 pm

Re: A Roth In Plan conversion is now available to me.

Post by sawdust60 »

One reason to do Roth conversions is if you can manage to avoid the Medicare IRMAA penalty, based on MAGI from age 63. Note the last table in this example which shows how the combined rate including IRMAA can be 28% and higher. viewtopic.php?f=2&t=265320#p4260280
User avatar
Watty
Posts: 21826
Joined: Wed Oct 10, 2007 3:55 pm

Re: A Roth In Plan conversion is now available to me.

Post by Watty »

A couple of things to consider;

1) Many states do not tax Social Security so your state tax bracket may be lower in retirement.

2) It sounded like you might eventually get married. If you do then you will be filing in the joint tax brackets which might be lower, but you would have higher combined income.

3) Tax brackets will eventually revert to the higher old tax brackets if there are not any law changes.

4) Your tax brackets matter. If you are around the 22% and 24% brackets then that is not a huge savings. I would be real cautious about paying a lot of taxes now in the hope of just saving 2% someday.

5) This may be the most important point. It sounds like you are very financially secure so you sound likely to leave a large estate some day. If that is the case then the estate planning aspects and the tax brackets of your heirs may be a lot more important than the taxes that you pay while you are living.

There is lots of complexity so it is hard to recommend what to do.
fposte
Posts: 1794
Joined: Mon Sep 02, 2013 1:32 pm

Re: A Roth In Plan conversion is now available to me.

Post by fposte »

I’m your age and I did an in-plan Roth rollover last year and this year (the January dip meant I was able to roll over all my pretax 457 over only two years rather than three as I initially planned). My calculations indicated it was slightly advantageous financially—like you my pension means I’ll probably be in the same tax bracket after retirement—and my portfolio is a little scattered, so I really wanted to get started on simplifying it and I didn’t want to be converting in the IRMAA run up. I also will have the liquidity to pay the taxes this year and next year.

As I said, the calculations didn’t make it an obvious thing and I could easily have left it pretax. But most of my 403b is in TIAA Traditional, which I plan to keep post-retirement, and a lot of it is pretax and staying that way, since rolling it into an IRA will lose me the vintage. So the 457 is the flexible account, and I opted to flex it; I’ll just roll it into my Roth IRA at Vanguard when I retire and have one fewer account to worry about.
User avatar
House Blend
Posts: 4811
Joined: Fri May 04, 2007 1:02 pm

Re: A Roth In Plan conversion is now available to me.

Post by House Blend »

PhrugalPhan wrote: Sat Jan 19, 2019 7:36 pm 2) To me, for the future I don't foresee the need to look into Roth rollovers if I can do an in-plan conversion at any time, but maybe I am missing something. The 457 plan has good funds & expenses, and age withdrawal restrictions shouldn't come into play, so why go through the extra steps of a rollover?
I'm surprised no one has mentioned this yet:

Roth employer plans (457, 401k,...) have RMDS. Roth IRAs do not.

Seems to me that's a huge reason to do a Roth rollover before RMDs begin, unless you are planning to spend at least that much annually from your Roth accounts.
Topic Author
PhrugalPhan
Posts: 19
Joined: Thu Apr 05, 2018 11:32 am

Re: A Roth In Plan conversion is now available to me.

Post by PhrugalPhan »

Thanks for the replies (and sorry about not responding sooner).

Re. IRMAA: I knew about this tax and certainly will be taking this into account. I will be eligible to retire in 4 years at 60 y.o., so I won't have much time to convert without that penalty. This may be the biggest reason to increase my Roth conversions now.

Re. @Watty: My only child, and probable only heir, is not in college yet, so trying to figure his tax bracket is a useless exercise - unfortunately. I do agree tax brackets will probably go up at some time, so I am definitely considering that possibility. And for now I am in a moderate tax state though we plan on likely moving to a tax free state though we don't know which at this point. As for tax brackets I am in the 22% now, though it wouldn't be hard for me in retirement to be pushed into 24% once RMDs kick in (see numbers below). If I wanted to push all my chips in for Roth today, I think I have ~$10k of headroom before I hit 24%. Doing that would help, but not that much overall.

Re. @fposte: Good point about the drop in plan values allowing more conversions. Last fall's drop didn't help me as I didn't have that option yet in my account (will be available in a few weeks). I should keep that in mind when we have another down draft.

Re. RMDs: Yes, that's what has me concerned - big time. The specter of both of our accounts getting large enough that RMDs really bump our Pensions(2) + SSIs (she'll be well past the 2nd bend point, me I had a number of moderate years of earnings so I won't be quite so high though past the 2nd bend point) + RMDs (could easily hit $100k combined for our first year over 70) to crazy tax numbers. Just ballparking here but we could easily be looking at ($30k + $40k + $60k(combined SSI) + $100k RMD) = $230k income starting at 70 y.o., so the tax implications are starting to get downright scary.

My hope for now is to delay SSI for both of us to allow for some years where we may be able to roll out some money from our accounts into Roth IRAs without a big tax hit. Unfortunately for now I am still working, and she has a son that will be in college for 2 more years, so we don't want to pull money out of her accounts as that will show as income for her and cause financial aid issues for her son.

Thanks all...

I guess the big take away from going over this again is that perhaps this year I should bite the bullet and start maxing out Roth contributions so I come close to the 22/24% tax rate cross over for 2019.
Post Reply