Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

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Retiredron
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Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by Retiredron » Thu May 16, 2019 11:07 am

Hi All,

Vanguard just posted another "Joel/Maria" podcast today and there was an interesting discussion (by Maria) on considering accelerating IRA withdrawals vs. doing Roth conversions. Her comments seemed to suggest that when you are in the retirement sweet spot (favorable tax rate) years before 70 1/2 and after 59 1/2, and delaying SS to 70 and not needing RMDs for regular spending/living expenses it might make sense to not do Roth conversions but to simply draw down your IRA before SS and RMDs kick in.

I've been thinking more and more about this option since I just entered the retirement "sweet spot" and will be delaying SS until 70. While I can't predict the future there is a high probably I won't need RDMs for living expenses. I think I understand some of the pros and cons of accelerating IRA withdrawals in the pre-RMD years but would welcome input from BHs on what Maria had to say on the podcast. Here is a link:

https://investornews.vanguard/you-ask-w ... investing/

Thanks.

elainet7
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by elainet7 » Thu May 16, 2019 11:37 am

I have done that as we have 4.15 m in Ira’s and the tax rates now will never be lower
Effective tax rate on 300k for example is 18%
We have no statetax

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by marcopolo » Thu May 16, 2019 11:40 am

Retiredron wrote:
Thu May 16, 2019 11:07 am
Hi All,

Vanguard just posted another "Joel/Maria" podcast today and there was an interesting discussion (by Maria) on considering accelerating IRA withdrawals vs. doing Roth conversions. Her comments seemed to suggest that when you are in the retirement sweet spot (favorable tax rate) years before 70 1/2 and after 59 1/2, and delaying SS to 70 and not needing RMDs for regular spending/living expenses it might make sense to not do Roth conversions but to simply draw down your IRA before SS and RMDs kick in.

I've been thinking more and more about this option since I just entered the retirement "sweet spot" and will be delaying SS until 70. While I can't predict the future there is a high probably I won't need RDMs for living expenses. I think I understand some of the pros and cons of accelerating IRA withdrawals in the pre-RMD years but would welcome input from BHs on what Maria had to say on the podcast. Here is a link:

https://investornews.vanguard/you-ask-w ... investing/

Thanks.
I guess it depends on if you have outside funds in taxable account to pay the taxes due and your living expenses. If so, it is hard to see how withdrawing from tIRA and spending it would be better than doing the Roth conversions and spending form those taxable savings.

Here is my thinking. When you pull the money out of your tIRA, you owe some amount of taxes on that. That does not change whether you spend that money for living expenses, or put it into a Roth.

Now, you have a pile of money in a taxable account (what you had before plus what you pulled out of your tIRA). You have to spend some of that to live on and pay the taxers due. Again, that amount does not change based on whether you do the Roth Conversion or not.

After paying those expenses, you have a slightly smaller pile of money sitting in a taxable account. Up to this point both paths are identical. The only real decision now is whether or not to put some of it into a Roth IRA.

Normally, this would not even be an option for a retiree, but the act of having pulled out money from tIRA, now gives you the opportunity to put some money into a Roth IRA that would otherwise sit in a taxable account. Seems to me that is an easy decision, many advantages to a Roth vs a taxable account.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by TBillT » Thu May 16, 2019 11:43 am

Thanks for posting...I am perplexed monthly whether we should be spending down our life savings in taxable accounts, allowing for max Roth Conversion, or just going ahead and taking spending dollars from the retirement IRA. Maybe this will help decide.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by depressed » Thu May 16, 2019 11:49 am

I enjoyed the podcast; thanks for posting the link. Here is one key point:
Joel Dickson wrote:Yeah, the only thing I would say to that is, it’s not necessarily the case that you would want to set up taxable account assets just to be able to [adjust your] asset location [between taxable and tax-deferred].
I interpret this to mean that if you don't need the income, then it's better to convert an IRA to a Roth (while you are in the pre-70.5 sweet spot) than to simply withdraw from the IRA to set up some taxable investments.

The potential exception that Maria talks about is when you do need some income during those sweet years. In that case, she says that it *may* be better to take that needed income from a traditional IRA withdrawal rather than choosing to claim Social Security before 70 (because of the increased Social Security benefits you can receive if you delay until age 70). If you are reading the transcript of the podcast, you can see Maria and Joel discuss that at this point (around the 12:00 spot in the podcast):
Maria Bruno wrote:Okay, “We are in that sweet spot of pre-RMD retirement and are trying to take advantage of moving a traditional IRA to a Roth IRA. What do we need to think about?”

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by WoodSpinner » Thu May 16, 2019 11:55 am

Our plan is to do a series of Roth Conversions from 60 to 70 that balance out our average AGI from 60-70 with the AGI from 71-80. SS will be delayed for me till 70, my wife at 62 (strategy recommended by the OpenSocialsecuriy calculator).

Currently I am over 59 1/2 and my wife is 58

This will be in excess of our spending needs and we will keep very little in our Taxable accounts (spent Taxable down for the most part at the end of next year).

We will simply withdraw the funds we need for living expenses from the Roth (this will be less than Contributions or Conversions so no Tax worries).

Benefit in our mind is that everything grows Tax free in Roth no need to do Tax Gain/Loss harvesting any more.

I don’t see a downside to this approach—the money has to come out of the IRA for living expenses.(over 99% of our funds are in a TIRA or in Roth).

Am I missing anything?

WoodSpinner
Last edited by WoodSpinner on Mon May 20, 2019 9:50 am, edited 2 times in total.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by MnD » Thu May 16, 2019 11:59 am

Age 56 onward we are spending and enjoying the income from our tax deferred accounts at an SWR which won't be exceeded by RMD requirements for at least 23 years (5% of annual portfolio balance with a 3% inflation-adjusted floor). We expect no real portfolio growth, tax brackets are indexed, my pension drops 50% if I croak first, one of 2 SS's goes away with demise of one of us. So we're not Roth converting to pay more taxes sooner in favor of enjoying retirement to the fullest in the best earlier years. Conversions seem to be attractive to folks that oversaved, and/or are extremely frugal and/or have little or no use or plan for the portfolio they spent a lifetime amassing - other than keeping it big and growing till "check-out time" with often an inflated estimate of longevity.
Last edited by MnD on Thu May 16, 2019 12:02 pm, edited 1 time in total.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by jeffyscott » Thu May 16, 2019 12:02 pm

marcopolo wrote:
Thu May 16, 2019 11:40 am
Retiredron wrote:
Thu May 16, 2019 11:07 am
Her comments seemed to suggest that when you are in the retirement sweet spot (favorable tax rate) years before 70 1/2 and after 59 1/2, and delaying SS to 70 and not needing RMDs for regular spending/living expenses it might make sense to not do Roth conversions but to simply draw down your IRA before SS and RMDs kick in.
I guess it depends on if you have outside funds in taxable account to pay the taxes due and your living expenses. If so, it is hard to see how withdrawing from tIRA and spending it would be better than doing the Roth conversions and spending form those taxable savings.

Here is my thinking. When you pull the money out of your tIRA, you owe some amount of taxes on that. That does not change whether you spend that money for living expenses, or put it into a Roth.

Now, you have a pile of money in a taxable account (what you had before plus what you pulled out of your tIRA). You have to spend some of that to live on and pay the taxers due. Again, that amount does not change based on whether you do the Roth Conversion or not.

After paying those expenses, you have a slightly smaller pile of money sitting in a taxable account. Up to this point both paths are identical. The only real decision now is whether or not to put some of it into a Roth IRA.

Normally, this would not even be an option for a retiree, but the act of having pulled out money from tIRA, now gives you the opportunity to put some money into a Roth IRA that would otherwise sit in a taxable account. Seems to me that is an easy decision, many advantages to a Roth vs a taxable account.
I don't even see why being able to pay the taxes from a taxable account would matter? Whether you convert or withdraw, the current taxes will be the same. Future taxes will be $0 on the Roth, so the only way taxable wins is if future taxes on that are negative. Thus, the only way that I can see taxable being better is if you lose money on your taxable investment.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by Silk McCue » Thu May 16, 2019 12:12 pm

Retiredron wrote:
Thu May 16, 2019 11:07 am
Hi All,

Vanguard just posted another "Joel/Maria" podcast today and there was an interesting discussion (by Maria) on considering accelerating IRA withdrawals vs. doing Roth conversions. Her comments seemed to suggest that when you are in the retirement sweet spot (favorable tax rate) years before 70 1/2 and after 59 1/2, and delaying SS to 70 and not needing RMDs for regular spending/living expenses it might make sense to not do Roth conversions but to simply draw down your IRA before SS and RMDs kick in.

I've been thinking more and more about this option since I just entered the retirement "sweet spot" and will be delaying SS until 70. While I can't predict the future there is a high probably I won't need RDMs for living expenses. I think I understand some of the pros and cons of accelerating IRA withdrawals in the pre-RMD years but would welcome input from BHs on what Maria had to say on the podcast. Here is a link:

https://investornews.vanguard/you-ask-w ... investing/

Thanks.

I just listened to that segment of the podcast and read the text. It is a little unclear I'll admit but what she is saying is that if you DO need the money and are NOT wanting to convert to Roth that you can improve your situation by delaying SS and draw down your IRA's before RMD's kick in.

She certainly would have no reason to tell someone that didn't need the IRA funds to not move them into the MOST efficient bucket which is the ROTH.

She slides around a bit here but it is murky clear that she is trying to differentiate between the person that submitted the question about conversions and thus doesn't need the money and someone that does. Green text is person needing to spend the money and bold text is the one that doesn't.
Maria Bruno: So some of those interactions can be when to claim Social Security. If you think about this period where individuals might need to spend from their portfolio, number one, we’re talking about Roth conversions here. So that leads me to think that an individual isn’t necessarily spending. [i]If someone in that situation does, you could actually be accelerating those IRA withdrawals pre-RMD, not necessarily converting.



Cheers

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by jeffyscott » Thu May 16, 2019 12:17 pm

I, too, see from the transcript that she did not say what the OP thought she did, here:
Maria Bruno: So some of those interactions can be when to claim Social Security. If you think about this period where individuals might need to spend from their portfolio, number one, we’re talking about Roth conversions here. So that leads me to think that an individual isn’t necessarily spending. If someone in that situation does, you could actually be accelerating those IRA withdrawals pre-RMD, not necessarily converting.

I think the bolded part was misinterpreted, her "someone in that situation does" meant someone who does need the money for spending, thus they are withdrawing and not converting, because they are spending it.
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by GAAP » Thu May 16, 2019 12:26 pm

If you need $1000 next year for income from your IRA account, you can withdraw it, pay taxes on it, spend it. You can also convert it to Roth, pay taxes on the conversion, withdraw it from Roth, and spend it.

Those two options are mathematically the same, if you need all of the money immediately. If you don't need all of the money immediately, you can use some of it to continue do earn money -- doing this in the TIRA will be tax-deferred, while it would be tax-free in the Roth. Both choices reduce future RMDs, but the choice to keep the money in the TIRA will increase those RMDs.

You can probably guess at my strategy from this...
“Adapt what is useful, reject what is useless, and add what is specifically your own.” ― Bruce Lee

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by BL » Thu May 16, 2019 12:27 pm

Funny, I got the IRA draw-down advice, but not the "don't do Roth conversions" out of the conversation. Seems to me that there is no tax difference between putting the money into a Roth or putting it into taxable, and there are future tax advantages to putting it into a Roth, so why not? Not sure how the 5-year thing plays out, but that is the only disadvantage I can see, and I doubt it would kick in in most cases.

Edit: I only read the transcript.
Last edited by BL on Thu May 16, 2019 12:39 pm, edited 1 time in total.

TBillT
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by TBillT » Thu May 16, 2019 12:33 pm

After listening I heard no change for our siutation.
We have quite too much $$ in IRA due to 401K and pension lump rollovers.
So we need to take some $$ out probably to Roth conv to minimize RMDs.

If you just have a little $ in tIRA, then you may want to keep it to make contribs or generate taxes from which deductions can be claimed. For example, current electric vehicle credit assumes you actually owe some tax, if you do not owe tax, then you do not get the deduction. So taxes are not always bad, if you have credits to negate them.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by marcopolo » Thu May 16, 2019 12:46 pm

jeffyscott wrote:
Thu May 16, 2019 12:02 pm
marcopolo wrote:
Thu May 16, 2019 11:40 am
Retiredron wrote:
Thu May 16, 2019 11:07 am
Her comments seemed to suggest that when you are in the retirement sweet spot (favorable tax rate) years before 70 1/2 and after 59 1/2, and delaying SS to 70 and not needing RMDs for regular spending/living expenses it might make sense to not do Roth conversions but to simply draw down your IRA before SS and RMDs kick in.
I guess it depends on if you have outside funds in taxable account to pay the taxes due and your living expenses. If so, it is hard to see how withdrawing from tIRA and spending it would be better than doing the Roth conversions and spending form those taxable savings.

Here is my thinking. When you pull the money out of your tIRA, you owe some amount of taxes on that. That does not change whether you spend that money for living expenses, or put it into a Roth.

Now, you have a pile of money in a taxable account (what you had before plus what you pulled out of your tIRA). You have to spend some of that to live on and pay the taxers due. Again, that amount does not change based on whether you do the Roth Conversion or not.

After paying those expenses, you have a slightly smaller pile of money sitting in a taxable account. Up to this point both paths are identical. The only real decision now is whether or not to put some of it into a Roth IRA.

Normally, this would not even be an option for a retiree, but the act of having pulled out money from tIRA, now gives you the opportunity to put some money into a Roth IRA that would otherwise sit in a taxable account. Seems to me that is an easy decision, many advantages to a Roth vs a taxable account.
I don't even see why being able to pay the taxes from a taxable account would matter? Whether you convert or withdraw, the current taxes will be the same. Future taxes will be $0 on the Roth, so the only way taxable wins is if future taxes on that are negative. Thus, the only way that I can see taxable being better is if you lose money on your taxable investment.
Yes. I think you are right. Even more reason to favor the Roth conversion.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by The Wizard » Thu May 16, 2019 2:17 pm

It makes sense to do a COMBINATION of withdrawals from tax-deferred for spending along with Roth conversions.
The goal is to avoid a big jump in your AGI around age 70 or so.
With a proper spreadsheet and your personal numbers you can tune your plan to levelize your AGI...
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Retiredron
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by Retiredron » Thu May 16, 2019 3:03 pm

BL wrote:
Thu May 16, 2019 12:27 pm
Funny, I got the IRA draw-down advice, but not the "don't do Roth conversions" out of the conversation. Seems to me that there is no tax difference between putting the money into a Roth or putting it into taxable, and there are future tax advantages to putting it into a Roth, so why not? Not sure how the 5-year thing plays out, but that is the only disadvantage I can see, and I doubt it would kick in in most cases.

Edit: I only read the transcript.
Thanks for all the comments so far. I might have mis-read or failed to fully understand what Maria was saying but I did find the transcript a bit difficult to follow.

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Retiredron
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by Retiredron » Thu May 16, 2019 3:18 pm

MnD wrote:
Thu May 16, 2019 11:59 am
Age 56 onward we are spending and enjoying the income from our tax deferred accounts at an SWR which won't be exceeded by RMD requirements for at least 23 years (5% of annual portfolio balance with a 3% inflation-adjusted floor). We expect no real portfolio growth, tax brackets are indexed, my pension drops 50% if I croak first, one of 2 SS's goes away with demise of one of us. So we're not Roth converting to pay more taxes sooner in favor of enjoying retirement to the fullest in the best earlier years. Conversions seem to be attractive to folks that oversaved, and/or are extremely frugal and/or have little or no use or plan for the portfolio they spent a lifetime amassing - other than keeping it big and growing till "check-out time" with often an inflated estimate of longevity.
I love this reply! Someone once told me retirement is broken down into 3 phases: The GO GO years, the GO SLOW years, and the NO GO years (if you live that long). We know we have to pay the tax whether we accelerate (pre 70) IRA withdrawals or convert to Roth. You have made a decision to spend that IRA money during your GO GO years to enjoy life and that is hard to argue against. I guess the only issue is that you paid a penalty for withdrawals prior to age 59 1/2.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by SGM » Thu May 16, 2019 4:52 pm

We did not need the money from our tIRA prior to taking SS at 70. We had adequate amounts in our taxable account to pay the taxes and we converted over a 5 or 6 year period. The Roth has continued to grow tax free some of which started in 2010. The taxable account has grown too. We have several non-portfolio income streams, delayed SS, and a growing amount of taxable dividends so I am happy not to have to pay taxes on RMDs ever.


I did not read the Vanguard blog, but I studied James Lange's book on Roth conversions back in 2010. Boglehead Bsteiner has discussed Roth conversions with Lange on Lange's radio show.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by bsteiner » Thu May 16, 2019 5:06 pm

If you have enough other income or assets to live on, you can defer Social Security until 70 (ignoring planning for spouse benefits), and you can also do Roth conversions to fill up your lower brackets until then.

I think she was referring to situations where people don't have enough assets or income to be able to do this. They have to either take IRA distributions or begin Social Security before 70. In these cases, she's suggesting it may make sense to take IRA distributions in order to defer Social Security. I haven't analyzed this so I don't know which way is likely to be better.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by FIREchief » Thu May 16, 2019 5:23 pm

I haven't read the whole thread, but the original question makes no sense. If a person is past 59 1/2, and they withdraw money from a tIRA, then it costs no more to place it into a Roth (i.e. a conversion) then to place it into an after-tax account. Why on earth would anybody choose a dollar in an after-tax account rather than a dollar in a Roth account in this scenario?? One grows tax free and in many states has excellent asset protection. :confused
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by jj45 » Fri May 17, 2019 9:31 am

bsteiner wrote:
Thu May 16, 2019 5:06 pm
In these cases, she's suggesting it may make sense to take IRA distributions in order to defer Social Security. I haven't analyzed this so I don't know which way is likely to be better.
I ran a few simulations in cfiresim and found that delaying Social Security does give a small increase in the maximum spending rate. The actual amount depends on the details but for the numbers I ran the spending increase is a few percent. For example, with a $1M portfolio, $12K SS at FRA at 66, and using an inflation adjusted spending plan, delaying to 70 takes the maximum initial spending rate from $53,658 to $54,204, an increase of $546 or 1%. Increasing SS at FRA to $24K, delaying to 70 increases the spending rate from $65,659 to $67,545, an increase of $1886 or 2.9%. In terms of the portfolio value this is only a few basis points and is swamped by all the other uncertainties in planning a 30 year retirement.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by MnD » Sat May 18, 2019 6:40 pm

Retiredron wrote:
Thu May 16, 2019 3:18 pm
MnD wrote:
Thu May 16, 2019 11:59 am
Age 56 onward we are spending and enjoying the income from our tax deferred accounts at an SWR which won't be exceeded by RMD requirements for at least 23 years (5% of annual portfolio balance with a 3% inflation-adjusted floor). We expect no real portfolio growth, tax brackets are indexed, my pension drops 50% if I croak first, one of 2 SS's goes away with demise of one of us. So we're not Roth converting to pay more taxes sooner in favor of enjoying retirement to the fullest in the best earlier years. Conversions seem to be attractive to folks that oversaved, and/or are extremely frugal and/or have little or no use or plan for the portfolio they spent a lifetime amassing - other than keeping it big and growing till "check-out time" with often an inflated estimate of longevity.
I love this reply! Someone once told me retirement is broken down into 3 phases: The GO GO years, the GO SLOW years, and the NO GO years (if you live that long). We know we have to pay the tax whether we accelerate (pre 70) IRA withdrawals or convert to Roth. You have made a decision to spend that IRA money during your GO GO years to enjoy life and that is hard to argue against. I guess the only issue is that you paid a penalty for withdrawals prior to age 59 1/2.
We kept both of our 401-K's at the employers we retired from at age 56 so we both qualify for the "rule of 55" exemption to penalties on our withdrawals. https://www.thebalance.com/what-is-the- ... 55-2894280

That and taxable accounts is where portfolio spending is coming from. We also have IRA's but we can wait on those and just pull proportionally more from 401-K's until 59.5 and 0 from IRA's. I wouldn't say we are "accelerating" as opposed to using simply using a plan where no real growth in portfolio would be expected in a typical sequence of returns and variable SWR corresponds to an age 79 RMD which is 23 years out. As opposed to ultra-low SWR's where real portfolio growth is almost inevitable and the SWR is below even an age 70 RMD, hence people feel compelled to "do something" like pay additional taxes early in the retirement to age 70.5 window. Our idea of "do something" is to invest in experiences, ourselves and surroundings while we are in the best years of retirement.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by celia » Sat May 18, 2019 7:22 pm

MnD wrote:
Thu May 16, 2019 11:59 am
Age 56 onward ... We expect no real portfolio growth, tax brackets are indexed, my pension drops 50% if I croak first, one of 2 SS's goes away with demise of one of us. So we're not Roth converting to pay more taxes sooner in favor of enjoying retirement to the fullest in the best earlier years.
You don’t have to have oversaved or be frugal to benefit from converting. Have you considered that when you die, your pension will be cut in half and SS will be decreased by one person but the survivor will still have to take the same RMD (assuming you’re close in age), likely making the survivor left with more than half the income that you had while married? The survivor will start filing as Single, but the space in each tax bracket is half as much for Singles as it is for Marrieds. With more than half the ‘Married’ income and future tax rates likely to increase, the Survivor could taxed in a higher tax bracket.

Wouldn’t it be smart for early retirees who are married to ‘lock in’ today’s tax rate by doing some Roth conversions?
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.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by MnD » Sun May 19, 2019 9:05 am

celia wrote:
Sat May 18, 2019 7:22 pm
MnD wrote:
Thu May 16, 2019 11:59 am
Age 56 onward ... We expect no real portfolio growth, tax brackets are indexed, my pension drops 50% if I croak first, one of 2 SS's goes away with demise of one of us. So we're not Roth converting to pay more taxes sooner in favor of enjoying retirement to the fullest in the best earlier years.
You don’t have to have oversaved or be frugal to benefit from converting. Have you considered that when you die, your pension will be cut in half and SS will be decreased by one person but the survivor will still have to take the same RMD (assuming you’re close in age), likely making the survivor left with more than half the income that you had while married? The survivor will start filing as Single, but the space in each tax bracket is half as much for Singles as it is for Marrieds. With more than half the ‘Married’ income and future tax rates likely to increase, the Survivor could taxed in a higher tax bracket.

Wouldn’t it be smart for early retirees who are married to ‘lock in’ today’s tax rate by doing some Roth conversions?
If you want to voluntarily realize deferred compensation now as ordinary income with all taxed at your highest current marginal tax rate or higher on the basis of speculation about future tax rates and coupled 2-person disparate longevity scenarios - that's fine. Lots of things can happen and my crystal ball is not so good that I'd assign "likely" to anything you seem to willing to "lock in" more taxes now. A higher and variable SWR usually does a very nice job of dampening real portfolio growth so given that I'm not all-in for richest person in graveyard contest like ultra-low SWR adherents, I'm comfortable with letting the chips fall where they may.

Vehicles to provide illusion of control, be it worse than worst case inflation-adjusted SWR's, voluntarily realizing ordinary income and additional tax liability at current top marginal rates or higher, large cash bucket bolt-on's and other devices are all very expensive in terms of reducing the utility of wealth to produce income that is actually used and enjoyed by those who earned it.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by trueblueky » Sun May 19, 2019 11:52 am

celia wrote:
Sat May 18, 2019 7:22 pm
MnD wrote:
Thu May 16, 2019 11:59 am
Age 56 onward ... We expect no real portfolio growth, tax brackets are indexed, my pension drops 50% if I croak first, one of 2 SS's goes away with demise of one of us. So we're not Roth converting to pay more taxes sooner in favor of enjoying retirement to the fullest in the best earlier years.
You don’t have to have oversaved or be frugal to benefit from converting. Have you considered that when you die, your pension will be cut in half and SS will be decreased by one person but the survivor will still have to take the same RMD (assuming you’re close in age), likely making the survivor left with more than half the income that you had while married? The survivor will start filing as Single, but the space in each tax bracket is half as much for Singles as it is for Marrieds. With more than half the ‘Married’ income and future tax rates likely to increase, the Survivor could taxed in a higher tax bracket.

Wouldn’t it be smart for early retirees who are married to ‘lock in’ today’s tax rate by doing some Roth conversions?
^^^

This is my thinking. Taxes are on sale.

I have a COLA'd pension, no Social Security; DW will get SS, plus will get 55% of my pension when I pass; each has tIRA. Her start of SS, RMD by either, death by either -- any of these -- will permanently move us out of 12% bracket under current tax law. Therefore, I convert to Roth to the top of 12% each year. I do not expect I will be the one to spend the Roth funds.

Someone in different circumstances may reach a different solution.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by cherijoh » Sun May 19, 2019 12:12 pm

MnD wrote:
Sun May 19, 2019 9:05 am
celia wrote:
Sat May 18, 2019 7:22 pm
MnD wrote:
Thu May 16, 2019 11:59 am
Age 56 onward ... We expect no real portfolio growth, tax brackets are indexed, my pension drops 50% if I croak first, one of 2 SS's goes away with demise of one of us. So we're not Roth converting to pay more taxes sooner in favor of enjoying retirement to the fullest in the best earlier years.
You don’t have to have oversaved or be frugal to benefit from converting. Have you considered that when you die, your pension will be cut in half and SS will be decreased by one person but the survivor will still have to take the same RMD (assuming you’re close in age), likely making the survivor left with more than half the income that you had while married? The survivor will start filing as Single, but the space in each tax bracket is half as much for Singles as it is for Marrieds. With more than half the ‘Married’ income and future tax rates likely to increase, the Survivor could taxed in a higher tax bracket.

Wouldn’t it be smart for early retirees who are married to ‘lock in’ today’s tax rate by doing some Roth conversions?
If you want to voluntarily realize deferred compensation now as ordinary income with all taxed at your highest current marginal tax rate or higher on the basis of speculation about future tax rates and coupled 2-person disparate longevity scenarios - that's fine. Lots of things can happen and my crystal ball is not so good that I'd assign "likely" to anything you seem to willing to "lock in" more taxes now. A higher and variable SWR usually does a very nice job of dampening real portfolio growth so given that I'm not all-in for richest person in graveyard contest like ultra-low SWR adherents, I'm comfortable with letting the chips fall where they may.
My marginal tax bracket doing Roth Conversions is now lower than when I was working so your comment about Roth conversions "taxed at your highest current marginal tax rate or higher" seems like hyperbole to me. (By definition, one's marginal tax bracket is the rate on the last dollar earned which is always your highest tax bracket anyway). Nor is Celia's comment about a surviving spouse being left in a higher tax bracket due to an RMD on an IRA pure speculation - it is a very common scenario which IMO all married couples should consider. Especially in light of the way the new tax law changed how tax brackets are indexed to inflation.

You have made your decision to "enjoy retirement to the fullest in the best earlier years", so I hope that works out for you. But there is no need to be snarky about people who are more conservative - no one is trying to be "richest person in the graveyard". Worrying about longevity is a legitimate concern as is making it a high priority to ensure that you have adequate savings left to ensure that your surviving spouse doesn't get caught between a rock and a hard place should inflation rear its ugly head again or if saftey-net programs for the elderly become weakened by future legislation.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by MnD » Sun May 19, 2019 4:09 pm

cherijoh wrote:
Sun May 19, 2019 12:12 pm
MnD wrote:
Sun May 19, 2019 9:05 am
celia wrote:
Sat May 18, 2019 7:22 pm
MnD wrote:
Thu May 16, 2019 11:59 am
Age 56 onward ... We expect no real portfolio growth, tax brackets are indexed, my pension drops 50% if I croak first, one of 2 SS's goes away with demise of one of us. So we're not Roth converting to pay more taxes sooner in favor of enjoying retirement to the fullest in the best earlier years.
You don’t have to have oversaved or be frugal to benefit from converting. Have you considered that when you die, your pension will be cut in half and SS will be decreased by one person but the survivor will still have to take the same RMD (assuming you’re close in age), likely making the survivor left with more than half the income that you had while married? The survivor will start filing as Single, but the space in each tax bracket is half as much for Singles as it is for Marrieds. With more than half the ‘Married’ income and future tax rates likely to increase, the Survivor could taxed in a higher tax bracket.

Wouldn’t it be smart for early retirees who are married to ‘lock in’ today’s tax rate by doing some Roth conversions?
If you want to voluntarily realize deferred compensation now as ordinary income with all taxed at your highest current marginal tax rate or higher on the basis of speculation about future tax rates and coupled 2-person disparate longevity scenarios - that's fine. Lots of things can happen and my crystal ball is not so good that I'd assign "likely" to anything you seem to willing to "lock in" more taxes now. A higher and variable SWR usually does a very nice job of dampening real portfolio growth so given that I'm not all-in for richest person in graveyard contest like ultra-low SWR adherents, I'm comfortable with letting the chips fall where they may.
My marginal tax bracket doing Roth Conversions is now lower than when I was working so your comment about Roth conversions "taxed at your highest current marginal tax rate or higher" seems like hyperbole to me. (By definition, one's marginal tax bracket is the rate on the last dollar earned which is always your highest tax bracket anyway). Nor is Celia's comment about a surviving spouse being left in a higher tax bracket due to an RMD on an IRA pure speculation - it is a very common scenario which IMO all married couples should consider. Especially in light of the way the new tax law changed how tax brackets are indexed to inflation.

You have made your decision to "enjoy retirement to the fullest in the best earlier years", so I hope that works out for you. But there is no need to be snarky about people who are more conservative - no one is trying to be "richest person in the graveyard". Worrying about longevity is a legitimate concern as is making it a high priority to ensure that you have adequate savings left to ensure that your surviving spouse doesn't get caught between a rock and a hard place should inflation rear its ugly head again or if saftey-net programs for the elderly become weakened by future legislation.
Roth conversions, since they are voluntarily realizing additional untaxed deferred compensation as ordinary income are by definition "taxed at your highest current marginal tax rate or higher" depending on if the conversion is at you current marginal rate or bumps it into the next bracket. So no hyperbole that I'm aware of - just simple tax math.....

I expect an initial and overall significantly higher level of income in retirement with variability versus a low "worst than worst case" inflation-adjusted SWR which guarantees a poor conversion of wealth to income regardless of whether a poor sequence of returns requires it or not.
I am not front-loading retirement income, nor am I taking any on any more portfolio depletion risk than a 3.3% inflation-adjusted SWR does. What is very unlikely to happen with a higher % of portfolio SWR (on a % of annual portfolio variable basis) is a back-loaded retirement income situation with RMD problems and perhaps not much utility for this income in late retirement due to physical and mental decline and demise of one or both partners.

"Rock and hard place situations" in retirement often involve lack of any significant retirement planning/savings, morbidity, mortality, cognitive decline but rarely "oh my gosh I have all this wealth, income and some taxes to pay on it!". Seems like a problem that most retirees would love to have as opposed to it beingthe end of the world. And of course if one has oversaved and/or has little or no use or interest in spending the income from ones portfolio, Roth conversions seem like a great idea within reason.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by House Blend » Mon May 20, 2019 8:13 am

MnD wrote:
Sun May 19, 2019 4:09 pm
Roth conversions, since they are voluntarily realizing additional untaxed deferred compensation as ordinary income are by definition "taxed at your highest current marginal tax rate or higher" depending on if the conversion is at you current marginal rate or bumps it into the next bracket. So no hyperbole that I'm aware of - just simple tax math.....
Unfortunately tax math is not simple--it is possible for increased income to result in lower marginal tax rates.

Examples: The SS tax hump. Or AMT. Or the transition from 27% to 22% due to interactions between the taxation of QDI/LTCG and ordinary income.

And I'm not suggesting that you should Roth convert, or that you shouldn't. Folks who are the most certain about what Other People should do are usually the ones operating with the least amount of information.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by The Wizard » Mon May 20, 2019 8:45 am

trueblueky wrote:
Sun May 19, 2019 11:52 am
...I have a COLA'd pension, no Social Security; DW will get SS, plus will get 55% of my pension when I pass; each has tIRA. Her start of SS, RMD by either, death by either -- any of these -- will permanently move us out of 12% bracket under current tax law. Therefore, I convert to Roth to the top of 12% each year. I do not expect I will be the one to spend the Roth funds.

Someone in different circumstances may reach a different solution.
The 12% marginal Federal income tax bracket for MFJ goes up to taxable income of $78,950 this year.
I generally do not like the "convert to top of xx% bracket" concept for the following reason:
A couple with Taxable Income of $77,000 would then do just under $2000 of Roth conversion this year, which isn't likely to matter much once they hit age 70 and RMDs plus SS puts their Taxable Income over $90,000 most likely.

A better plan is to project your age 70 Taxable Income and then do Roth conversions to get up "close" to that level now, irrespective of tax brackets.
In your case, this would mean a portion of Roth conversions taxed at 22%, or maybe 25% after the 2026 reversion....
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by MnD » Mon May 20, 2019 8:46 am

One should run one's specific numbers thru i-ORP and/or other tools and make an informed decision versus the commonly communicated knee-jerk certainty expressed here that Roth conversions are a winning idea since marginal taxes are going up, various 2-person longevity scenarios will play out in the worst way and absent conversions, the "tax torpedo" of RMD's will sink one's retirement the morning that one turns 70.5. I'm not suggesting that opinion is universal but IMO it is a collective bias. Spending from ones portfolio in early retirement in a manner to mitigate real portfolio growth is another idea rarely discussed in this topic area.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by jeffyscott » Mon May 20, 2019 9:06 am

MnD wrote:
Sun May 19, 2019 4:09 pm
MnD wrote:
Thu May 16, 2019 11:59 am
Age 56 onward ... We expect no real portfolio growth, tax brackets are indexed, my pension drops 50% if I croak first, one of 2 SS's goes away with demise of one of us. So we're not Roth converting to pay more taxes sooner in favor of enjoying retirement to the fullest in the best earlier years.
And of course if one has oversaved and/or has little or no use or interest in spending the income from ones portfolio, Roth conversions seem like a great idea within reason.
Tax-wise, these are both really kinda the same. In both cases money is coming out of tax-deferred account by choice and you are paying taxes on it now. Once the money is out, if you have something to spend it, then of course, spend away in accordance with a reasonable long-term plan. But if you (or make that "I") don't, then diverting it to Roth makes more sense than piling it up in a taxable account.

We could look at what makes sense in terms of maximum/minimum withdrawals. Maximum could be something based on some sort of safe withdrawal rate, 4% or whatever. Minimum could be based on the expected tax rates.

In my case, pension with 100% survivor benefit ensures that withdrawals will always be subject to at least 12% Federal, under current law. With the addition of SS and RMDs someday, there is a good chance that doing nothing would result in some money being forced out at 22% at age 70 and over. Also as of right now, were my spouse and I to both croak, 3 kids would likely be at 10, 12, and 22% marginal, so their average marginal rate is above 12%. Based on this, for my unique circumstances, taking money out at 12% Federal seems like a pretty good bet. Setting a minimum withdrawal such that we fill the 12% bracket gives us a withdrawal rate of, coincidentally, about 4% for this year (I'd not done that calculation before).
Time is your friend; impulse is your enemy. - John C. Bogle

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by The Wizard » Mon May 20, 2019 9:39 am

MnD wrote:
Mon May 20, 2019 8:46 am
...absent conversions, the "tax torpedo" of RMD's will sink one's retirement the morning that one turns 70.5. I'm not suggesting that opinion is universal but IMO it is a collective bias. Spending from ones portfolio in early retirement in a manner to mitigate real portfolio growth is another idea rarely discussed in this topic area.
Actually, the tax torpedo enters your harbor on January 1st of the year you turn 70.5, but let's not sweat the small stuff.

And it's puzzled me also given all the discussion here on 3.5% or 4% SWR that some folks withdraw very little or nothing from tax-deferred before age 70.
I've been withdrawing from tax-deferred for both expenses and Roth conversions since start of retirement at age 63 in 2013...
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by smitcat » Mon May 20, 2019 9:52 am

MnD wrote:
Mon May 20, 2019 8:46 am
One should run one's specific numbers thru i-ORP and/or other tools and make an informed decision versus the commonly communicated knee-jerk certainty expressed here that Roth conversions are a winning idea since marginal taxes are going up, various 2-person longevity scenarios will play out in the worst way and absent conversions, the "tax torpedo" of RMD's will sink one's retirement the morning that one turns 70.5. I'm not suggesting that opinion is universal but IMO it is a collective bias. Spending from ones portfolio in early retirement in a manner to mitigate real portfolio growth is another idea rarely discussed in this topic area.
Running both the extended IORP and the RPM spreadsheet calculator will give you the ability to really see how Roth conversions (or not) will affect your 'spendable' funds vs your account values. You can run these numbers for various potential future outcomes and record them from the very most likely scenarios to the less likely scenarios and therefore view the potential upside and downsides to any condition that you control.
Each persons out come will differ based upon their inputs and goals.
FWIW - Roth conversions for us are very positive with little or no downsides compared to high upside potential.
We will not be "realizing voluntary income now at higher tax rates as a knee jerk reaction" and Roth conversions will most likely 'save' us $100,00"s of spendable funds.
YMMV

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by evofxdwg » Mon May 20, 2019 10:03 am

I have decided to convert some to keep RMD's down AND keep total tax $ paid down (RMDs start in 4 years). In my case, I will have some capital gains due to planned sale of two properties and we have taken SS (at FRA) ......for reasons. 95% of ours is in tIRA right now, 5% in Roths, 0% in taxable investments. And spouse and I have small pensions. Since we just took SS, we are transitioning this year from living mostly out of tIRA withdrawals to mostly SS and pension income.

It is complex. I am currently entering 2018 federal and state tax forms in a spreadsheet to enter my 2019 and future years particular situation to help decide how much I want to convert. I can then "what if" various scenarios, including adjusting "up-to" a tax bracket, and also help decide how I will pay the tax (take out of existing Roth, tIRA, or proceeds from property sales).

I downloaded and tried to use one spreadsheet mentioned here (Retiree Portfolio Model 19.1) but it was difficult to use to the point I didn't trust it. And it didn't incorporate my particular state tax laws.

Just typing this I realize I need to look at just selling both properties in the same year and seeing what the cap gains tax rate is, and using proceeds to pay off a low interest mortgage loan with rest invested in taxable, and NOT doing Roth conversion that year. Decisions....Decisions!

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by House Blend » Mon May 20, 2019 10:17 am

The Wizard wrote:
Mon May 20, 2019 8:45 am
The 12% marginal Federal income tax bracket for MFJ goes up to taxable income of $78,950 this year.
I generally do not like the "convert to top of xx% bracket" concept for the following reason:
A couple with Taxable Income of $77,000 would then do just under $2000 of Roth conversion this year, which isn't likely to matter much once they hit age 70 and RMDs plus SS puts their Taxable Income over $90,000 most likely.

A better plan is to project your age 70 Taxable Income and then do Roth conversions to get up "close" to that level now, irrespective of tax brackets.
In your case, this would mean a portion of Roth conversions taxed at 22%, or maybe 25% after the 2026 reversion....
Or 27% (30% after 2026), if you have significant taxable investments.

A Roth conversion beyond the 12% bracket becomes less compelling if the next (say) $20K of conversions beyond that will be tax taxed at the rate of 27%, and future RMDs will be taxed at the rate of 22% or 25%.

And folks with income in this range are more likely to have the tax costs of their RMDs affected by the peculiar rules for SS income taxation.

Relying only on AGI or Taxable Income for Roth conversion decisions is not a universally good idea.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by jeffyscott » Mon May 20, 2019 11:13 am

House Blend wrote:
Mon May 20, 2019 10:17 am
The Wizard wrote:
Mon May 20, 2019 8:45 am
The 12% marginal Federal income tax bracket for MFJ goes up to taxable income of $78,950 this year.
I generally do not like the "convert to top of xx% bracket" concept for the following reason:
A couple with Taxable Income of $77,000 would then do just under $2000 of Roth conversion this year, which isn't likely to matter much once they hit age 70 and RMDs plus SS puts their Taxable Income over $90,000 most likely.

A better plan is to project your age 70 Taxable Income and then do Roth conversions to get up "close" to that level now, irrespective of tax brackets.
In your case, this would mean a portion of Roth conversions taxed at 22%, or maybe 25% after the 2026 reversion....
Or 27% (30% after 2026), if you have significant taxable investments.

A Roth conversion beyond the 12% bracket becomes less compelling if the next (say) $20K of conversions beyond that will be tax taxed at the rate of 27%, and future RMDs will be taxed at the rate of 22% or 25%.

And folks with income in this range are more likely to have the tax costs of their RMDs affected by the peculiar rules for SS income taxation.

Relying only on AGI or Taxable Income for Roth conversion decisions is not a universally good idea.
Is your reference to 27% related to the issue with capital gains and dividends at the transition of CG rate from 0% to 15%? I kinda forget about that, but it is my actual target...converting to the top of the 0% CG bracket, so $200 below the 12%, IIRC.

I think these income levels are well beyond any issue with SS, it's 85% taxable at $44K for joint filing. A couple with income that is already near the transition from 12% to 22% tax rate is not affected by that issue.
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by Chip » Mon May 20, 2019 11:42 am

House Blend wrote:
Mon May 20, 2019 10:17 am
Or 27% (30% after 2026), if you have significant taxable investments.

A Roth conversion beyond the 12% bracket becomes less compelling if the next (say) $20K of conversions beyond that will be tax taxed at the rate of 27%, and future RMDs will be taxed at the rate of 22% or 25%.

And folks with income in this range are more likely to have the tax costs of their RMDs affected by the peculiar rules for SS income taxation.

Relying only on AGI or Taxable Income for Roth conversion decisions is not a universally good idea.
Exactly. If I try to match AGI (via Roth conversions) with expected post 70.5 taxable income or AGI I will pay 27% now vs. 22%/25% then. Further, we've converted enough to Roths (at 15% and 12%) that we may never spend them down completely. So converting now would likely mean paying taxes that would NEVER be paid otherwise.

Each situation is different and needs to be examined carefully. Rules of thumb like matching AGI or converting to the top of a bracket are starting points for analysis, not well-defined strategies.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by House Blend » Mon May 20, 2019 11:47 am

jeffyscott wrote:
Mon May 20, 2019 11:13 am
House Blend wrote:
Mon May 20, 2019 10:17 am
Or 27% (30% after 2026), if you have significant taxable investments.

A Roth conversion beyond the 12% bracket becomes less compelling if the next (say) $20K of conversions beyond that will be tax taxed at the rate of 27%, and future RMDs will be taxed at the rate of 22% or 25%.

And folks with income in this range are more likely to have the tax costs of their RMDs affected by the peculiar rules for SS income taxation.

Relying only on AGI or Taxable Income for Roth conversion decisions is not a universally good idea.
Is your reference to 27% related to the issue with capital gains and dividends at the transition of CG rate from 0% to 15%? I kinda forget about that, but it is my actual target...converting to the top of the 0% CG bracket, so $200 below the 12%, IIRC.

I think these income levels are well beyond any issue with SS, it's 85% taxable at $44K for joint filing. A couple with income that is already near the transition from 12% to 22% tax rate is not affected by that issue.
Yes on where the 27% is coming from.

You may be right on the "well beyond" comment, but it depends on the numbers you have in mind and what you mean by "not affected".

Let's take an MFJ couple with a combined $48K SS benefit (that's $2K per person per month).

For them, the SS tax hump begins at $8K of "other" (non-SS) income, and ends at $60,941 of non-SS income. That's a pretty wide range. The top end, if there are no "interesting" features on their tax return (in particular, no tax-exempt interest), would be an AGI of 60941 + 0.85 * 48000 = $101,741. With a $26K standard deduction, that's a Taxable Income of $75741. That puts the top of their personal tax hump inside the 12% bracket but their marginal rate below that hump would be 85% larger: 22.2%. Or 27.75% if you want it to be a post-2026 15% bracket.

For Singles, it is easy to come up with numbers that put the top of SS tax hump inside the 22% bracket, with a marginal rate of 40.7%.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by The Wizard » Mon May 20, 2019 12:08 pm

House Blend wrote:
Mon May 20, 2019 10:17 am
...A Roth conversion beyond the 12% bracket becomes less compelling if the next (say) $20K of conversions beyond that will be tax taxed at the rate of 27%, and future RMDs will be taxed at the rate of 22% or 25%.
My general recommendation on levelizing AGI looks at your projected age 70/70.5 AGI as a sort of target.
If a $20k Roth conversion at age 69 gives me just about the same AGI as I'll be getting the following year with RMDs but no Roth conversions, then that 27% rate will be in effect on those RMDs as well...
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by jeffyscott » Mon May 20, 2019 12:20 pm

House Blend wrote:
Mon May 20, 2019 11:47 am
Let's take an MFJ couple with a combined $48K SS benefit (that's $2K per person per month).

For them, the SS tax hump begins at $8K of "other" (non-SS) income, and ends at $60,941 of non-SS income.
Perhaps I don't understand this tax hump. I thought if you had $44K of other income, this meant that 85% of the entire SS benefit is taxable?

I understand your starting point, $8K other income plus 1/2 of the $48K SS would put them at $32K where SS taxation starts. I thought that after another $12K they are done and no longer affected by the hump, because at that point $20K other income plus 1/2 of SS is $44K and so 85% of SS is now taxable. :?:
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by House Blend » Mon May 20, 2019 12:38 pm

The Wizard wrote:
Mon May 20, 2019 12:08 pm
House Blend wrote:
Mon May 20, 2019 10:17 am
...A Roth conversion beyond the 12% bracket becomes less compelling if the next (say) $20K of conversions beyond that will be tax taxed at the rate of 27%, and future RMDs will be taxed at the rate of 22% or 25%.
My general recommendation on levelizing AGI looks at your projected age 70/70.5 AGI as a sort of target.
If a $20k Roth conversion at age 69 gives me just about the same AGI as I'll be getting the following year with RMDs but no Roth conversions, then that 27% rate will be in effect on those RMDs as well...
What your example illustrates is that if you want to levelize something when making Roth conversion decisions, focus on levelizing the tax rates paid on your distributions from tax-deferred. (But even then,
do leave out any portion earmarked for QCDs.)

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by House Blend » Mon May 20, 2019 12:54 pm

jeffyscott wrote:
Mon May 20, 2019 12:20 pm
House Blend wrote:
Mon May 20, 2019 11:47 am
Let's take an MFJ couple with a combined $48K SS benefit (that's $2K per person per month).

For them, the SS tax hump begins at $8K of "other" (non-SS) income, and ends at $60,941 of non-SS income.
Perhaps I don't understand this tax hump. I thought if you had $44K of other income, this meant that 85% of the entire SS benefit is taxable?

I understand your starting point, $8K other income plus 1/2 of the $48K SS would put them at $32K where SS taxation starts. I thought that after another $12K they are done and no longer affected by the hump, because at that point $20K other income plus 1/2 of SS is $44K and so 85% of SS is now taxable. :?:
The wiki article is here:
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Short version: There are two humps, one where each additional $1 of non-SS income exposes another $0.50 of SS benefits to tax, and a second that exposes $0.85. The $44K you mentioned in your post is a parameter that determines where the second hump begins, the onset being when 0.5 * SS + (non-SS) > $44K.

So in my example, with $20,000 of non-SS income, you are exactly at the transition between the $0.50
hump and the $0.85 hump. At this point, 0.50 * (20000-8000) = $6K of your SS benefit is taxable. Add one more non-SS dollar, and your AGI increases by $1.85. It continues this way dollar for dollar until 100% of your SS income is 85% taxable.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by changingtimes » Mon May 20, 2019 1:12 pm

I continue to struggle with this, since tax-deferred is about 80% of my holdings, at age 52, and I only opened my first Roth last year. Given that I can withdraw from the IRA I inherited from DH without penalty, part of me feels like I should be taking advantage of that now, even while I'm still working for probably three more years. Even if I withdraw and/or convert* to the top of the 24% bracket, it's unlikely my income will ever really be that much lower than that, since I live in a HCOL area and don't skimp, and will start survivor SS at 60, pension at 65, and my own SS at 70, then RMDs from that inherited IRA and my own 401k. And if I'm going to withdraw from it and pay taxes anyway, why not send it to Roth space?

I'm also maxing out my mega backdoor at work, so I'm having to replace that paycheck cash from my taxable account.

So I think my approach is more of the "evening out" of my future tax brackets after 60, which will probably be 28% or whatever it becomes.

* No, you can't directly convert from an inherited IRA, but I am using my one rollover a year to move a portion to my own IRA, and I can convert from there.

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jeffyscott
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by jeffyscott » Mon May 20, 2019 1:59 pm

House Blend wrote:
Mon May 20, 2019 12:54 pm
jeffyscott wrote:
Mon May 20, 2019 12:20 pm
House Blend wrote:
Mon May 20, 2019 11:47 am
Let's take an MFJ couple with a combined $48K SS benefit (that's $2K per person per month).

For them, the SS tax hump begins at $8K of "other" (non-SS) income, and ends at $60,941 of non-SS income.
Perhaps I don't understand this tax hump. I thought if you had $44K of other income, this meant that 85% of the entire SS benefit is taxable?

I understand your starting point, $8K other income plus 1/2 of the $48K SS would put them at $32K where SS taxation starts. I thought that after another $12K they are done and no longer affected by the hump, because at that point $20K other income plus 1/2 of SS is $44K and so 85% of SS is now taxable. :?:
The wiki article is here:
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

Short version: There are two humps, one where each additional $1 of non-SS income exposes another $0.50 of SS benefits to tax, and a second that exposes $0.85. The $44K you mentioned in your post is a parameter that determines where the second hump begins, the onset being when 0.5 * SS + (non-SS) > $44K.

So in my example, with $20,000 of non-SS income, you are exactly at the transition between the $0.50
hump and the $0.85 hump. At this point, 0.50 * (20000-8000) = $6K of your SS benefit is taxable. Add one more non-SS dollar, and your AGI increases by $1.85. It continues this way dollar for dollar until 100% of your SS income is 85% taxable.
Thanks, I was mis-remembering how that works.
Time is your friend; impulse is your enemy. - John C. Bogle

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celia
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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by celia » Tue May 21, 2019 6:09 am

MnD wrote:
Sun May 19, 2019 9:05 am
If you want to voluntarily realize deferred compensation now as ordinary income with all taxed at your highest current marginal tax rate or higher on the basis of speculation about future tax rates and coupled 2-person disparate longevity scenarios - that's fine. Lots of things can happen and my crystal ball is not so good that I'd assign "likely" to anything you seem to willing to "lock in" more taxes now.
You don't need a crystal ball if you are aware that the tax rates we currently have are at historic lows. They are also "temporary" in that they will revert to 2017 rates after 2025 unless Congress moves to make them "permanent". Even if they do become permanent, tax rates seem to change every 10 years or so, on average. Given our current lower tax rates, it just seems to me that the odds are that they are more likely to increase in the future than decrease.

Personally, I would rather take advantage of something I know for sure for this year (historically low tax rates) rather than have my tax-deferred accounts grow even larger along with future withdrawals taxed at unknown tax rates).
Vehicles to provide illusion of control, be it worse than worst case inflation-adjusted SWR's, voluntarily realizing ordinary income and additional tax liability at current top marginal rates or higher, large cash bucket bolt-on's and other devices are all very expensive in terms of reducing the utility of wealth to produce income that is actually used and enjoyed by those who earned it.
If I understand you correctly, instead of paying taxes on Roth conversions/withdrawals now, you would prefer to wait for RMDs and SS after age 70.5 while paying taxes at a likely higher rate on a bigger RMD. To me, this means you may have less of your withdrawal left to spend since you have to pay more in taxes on the withdrawal. If you had converted early, you would be able to spend the money in the Roth instead for your enjoyment without paying any taxes and it likely would have grown since the Roth conversion(s) were done. THAT sounds more enjoyable to me (and my heirs).
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.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by Dottie57 » Tue May 21, 2019 9:14 am

marcopolo wrote:
Thu May 16, 2019 11:40 am
Retiredron wrote:
Thu May 16, 2019 11:07 am
Hi All,

Vanguard just posted another "Joel/Maria" podcast today and there was an interesting discussion (by Maria) on considering accelerating IRA withdrawals vs. doing Roth conversions. Her comments seemed to suggest that when you are in the retirement sweet spot (favorable tax rate) years before 70 1/2 and after 59 1/2, and delaying SS to 70 and not needing RMDs for regular spending/living expenses it might make sense to not do Roth conversions but to simply draw down your IRA before SS and RMDs kick in.

I've been thinking more and more about this option since I just entered the retirement "sweet spot" and will be delaying SS until 70. While I can't predict the future there is a high probably I won't need RDMs for living expenses. I think I understand some of the pros and cons of accelerating IRA withdrawals in the pre-RMD years but would welcome input from BHs on what Maria had to say on the podcast. Here is a link:

https://investornews.vanguard/you-ask-w ... investing/

Thanks.
I guess it depends on if you have outside funds in taxable account to pay the taxes due and your living expenses. If so, it is hard to see how withdrawing from tIRA and spending it would be better than doing the Roth conversions and spending form those taxable savings.

Here is my thinking. When you pull the money out of your tIRA, you owe some amount of taxes on that. That does not change whether you spend that money for living expenses, or put it into a Roth.

Now, you have a pile of money in a taxable account (what you had before plus what you pulled out of your tIRA). You have to spend some of that to live on and pay the taxers due. Again, that amount does not change based on whether you do the Roth Conversion or not.

After paying those expenses, you have a slightly smaller pile of money sitting in a taxable account. Up to this point both paths are identical. The only real decision now is whether or not to put some of it into a Roth IRA.

Normally, this would not even be an option for a retiree, but the act of having pulled out money from tIRA, now gives you the opportunity to put some money into a Roth IRA that would otherwise sit in a taxable account. Seems to me that is an easy decision, many advantages to a Roth vs a taxable account.
This is my thought process too.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by SGM » Tue May 21, 2019 3:08 pm

We delayed SS until 70 and made Roth conversions over a period of 5 years. These were two excellent decisions for us. All taxes were paid out of a taxable account. So far both taxable and Roth accounts have grown a lot since I started conversions.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by MnD » Wed May 22, 2019 9:18 am

celia wrote:
Tue May 21, 2019 6:09 am
MnD wrote:
Sun May 19, 2019 9:05 am
If you want to voluntarily realize deferred compensation now as ordinary income with all taxed at your highest current marginal tax rate or higher on the basis of speculation about future tax rates and coupled 2-person disparate longevity scenarios - that's fine. Lots of things can happen and my crystal ball is not so good that I'd assign "likely" to anything you seem to willing to "lock in" more taxes now.
You don't need a crystal ball if you are aware that the tax rates we currently have are at historic lows. They are also "temporary" in that they will revert to 2017 rates after 2025 unless Congress moves to make them "permanent". Even if they do become permanent, tax rates seem to change every 10 years or so, on average. Given our current lower tax rates, it just seems to me that the odds are that they are more likely to increase in the future than decrease.

Personally, I would rather take advantage of something I know for sure for this year (historically low tax rates) rather than have my tax-deferred accounts grow even larger along with future withdrawals taxed at unknown tax rates).
Vehicles to provide illusion of control, be it worse than worst case inflation-adjusted SWR's, voluntarily realizing ordinary income and additional tax liability at current top marginal rates or higher, large cash bucket bolt-on's and other devices are all very expensive in terms of reducing the utility of wealth to produce income that is actually used and enjoyed by those who earned it.
If I understand you correctly, instead of paying taxes on Roth conversions/withdrawals now, you would prefer to wait for RMDs and SS after age 70.5 while paying taxes at a likely higher rate on a bigger RMD. To me, this means you may have less of your withdrawal left to spend since you have to pay more in taxes on the withdrawal. If you had converted early, you would be able to spend the money in the Roth instead for your enjoyment without paying any taxes and it likely would have grown since the Roth conversion(s) were done. THAT sounds more enjoyable to me (and my heirs).
I notice people here make hard financial decisions, even ones that involve paying higher taxes voluntarily on the basis of speculation shaded by things like "taxes are at historic lows", "interest rates are at historic lows", "markets are at all-time highs" ect. I learned a long time ago that "low" interest and tax rates rates can go lower, record market heights can go higher ect. Or any number of alternative things might happen contrary or quite different than simplistic assumptions about marginal rates on ordinary income. Like payroll tax changes, VAT, changes in deductions, preferences for dividends and cap gains ect. Under my base case I'll have lots of room in the future in the bracket where any Roth conversions and tax liabilities would be incurred now. So I'm fine waiting under old sage that one should defer/avoid taxes to the greatest extent possible. Your post reminds me of advice I received here quite a long time ago from several Roth advocates to do Roth conversions to the top of the 28% bracket because the temporary tax rates are of course going higher when they expire. My base case is also premised on the assumption of no real portfolio growth per a variable and higher SWR, so enjoying a significantly higher standard of living in retirement is another way to mitigate the RMD boogeyman some folks are so very concerned about.

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by The Wizard » Wed May 22, 2019 9:45 am

MnD wrote:
Wed May 22, 2019 9:18 am
...So I'm fine waiting under old sage that one should defer/avoid taxes to the greatest extent possible...
I like the basic concept of deferring taxes, which is why I accumulated lots of assets in my 403(b).
But not to the Greatest Extent Possible.

If I'm cruising along in retirement in my late 60's with an AGI around $100k and looking for that to jump to around $150k for the year I turn 70.5 and beyond, then that's not so optimal, taxwise.
There are things I can do in my 60s, Without Going Overboard, that can reduce my age 70.5 AGI down to $140k or lower, depending on Mr. Market.
Your mileage may vary...
Attempted new signature...

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Re: Pre-RMD Retirement Sweet Spot - Accelerating IRA Withdrawals vs. Roth Conversion

Post by jeffyscott » Wed May 22, 2019 10:21 am

The Wizard wrote:
Wed May 22, 2019 9:45 am
If I'm cruising along in retirement in my late 60's with an AGI around $100k and looking for that to jump to around $150k for the year I turn 70.5 and beyond, then that's not so optimal, taxwise.
There are things I can do in my 60s, Without Going Overboard, that can reduce my age 70.5 AGI down to $140k or lower, depending on Mr. Market.
Your mileage may vary...
Maybe I am missing something, but your scenario actually seems to be one where conversions would not be worth doing to any significant extent?

AGI of $100K means taxable would be about $76K for joint return with standard deduction, so near the top of the 12% bracket. Any significant conversions there would quickly move into the 22% bracket. $150K, would be $126 taxable also in the 22% bracket. I don't see a whole lot that can be done there that makes sense, of course conversions at 12% do, but that's only going to be $2000-$3000 per year. I would not do conversions at 22%, for example, especially since the next bracket is just 2% higher and goes all the way to about $350K gross.

For single, the $100K would be $88K taxable and in the 24% bracket, while $150K gross would be in the 24% bracket. Again, doesn't seem to be much point to conversions for this scenario. Maybe do enough to be sure not to move into the 32% bracket, but that doesn't start until about $173K gross.
Time is your friend; impulse is your enemy. - John C. Bogle

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