Planning For Mega Roth Conversions

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jeffreys
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Planning For Mega Roth Conversions

Post by jeffreys »

A summary of our portfolio from a month ago and our retirement goals can be found here. Since creating this we changed his 401k allocation to 70/30 equities/bonds so about $606k equities and $260k bonds.

We've been playing with i-orp and it's recommending mega Roth conversions at the start of our early retirement and we agree and want to do that.

Some of the scenarios we've run have us converting 100% of our tax-deferred portfolio to Roth. The first question, is that a good idea or does it make sense to keep a small slice as tax-deferred? I'm thinking one might want that for charitable contributions. Is there anything else that can be paid with tax-deferred money where you wouldn't be taxed? For example, could that money be used for long-term care without paying taxes?

Second, i-orp just tells you how much to convert not which buckets of tax-deferred to convert. Our issue is most of his money (the older spouse) is in his employer's 401k due to having been with that same employer virtually his entire career. He's inquired with the 401k provider (T Rowe Price) if in-service conversions are available but have yet to receive an answer so we're running on the assumption they can not be done. Most of her tax-deferred money is in an IRA so that can be converted any time. We have not looked into in-service conversions for her tax-deferred 401k money.

Part of the reason we chose the retirement age of 55 for him is so we can take advantage of the "Rule of 55" if needed, but ideally, we won't have to do that with the amount we have in stock (albeit a little risky to count on that to not have a giant drop).

Our plan right now is to live off the stock money and to convert her IRA money first since we know we can do that. Perhaps we would take 2 years to do that then assess where we are at with the stocks and cash. Ideally, we would not have to use the Rule of 55 to pull any of his money and instead at that point, we could roll his 401k into his IRA and then finish our Roth conversions there.

Is that reasonable or are there any suggestions for how we approach the conversions?
is50xenough
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Joined: Sat Jul 28, 2018 1:37 pm

Re: Planning For Mega Roth Conversions

Post by is50xenough »

jeffreys wrote: Sun Nov 22, 2020 9:26 am A summary of our portfolio from a month ago and our retirement goals can be found here. Since creating this we changed his 401k allocation to 70/30 equities/bonds so about $606k equities and $260k bonds.

We've been playing with i-orp and it's recommending mega Roth conversions at the start of our early retirement and we agree and want to do that.

Some of the scenarios we've run have us converting 100% of our tax-deferred portfolio to Roth. The first question, is that a good idea or does it make sense to keep a small slice as tax-deferred? I'm thinking one might want that for charitable contributions. Is there anything else that can be paid with tax-deferred money where you wouldn't be taxed? For example, could that money be used for long-term care without paying taxes?

Second, i-orp just tells you how much to convert not which buckets of tax-deferred to convert. Our issue is most of his money (the older spouse) is in his employer's 401k due to having been with that same employer virtually his entire career. He's inquired with the 401k provider (T Rowe Price) if in-service conversions are available but have yet to receive an answer so we're running on the assumption they can not be done. Most of her tax-deferred money is in an IRA so that can be converted any time. We have not looked into in-service conversions for her tax-deferred 401k money.

Part of the reason we chose the retirement age of 55 for him is so we can take advantage of the "Rule of 55" if needed, but ideally, we won't have to do that with the amount we have in stock (albeit a little risky to count on that to not have a giant drop).

Our plan right now is to live off the stock money and to convert her IRA money first since we know we can do that. Perhaps we would take 2 years to do that then assess where we are at with the stocks and cash. Ideally, we would not have to use the Rule of 55 to pull any of his money and instead at that point, we could roll his 401k into his IRA and then finish our Roth conversions there.

Is that reasonable or are there any suggestions for how we approach the conversions?
Always love hearing about Roth conversions. Hope to see some answers. What exactly is iORP telling you?
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David Jay
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Re: Planning For Mega Roth Conversions

Post by David Jay »

Let me reply on a paragraph by paragraph basis:
jeffreys wrote: Sun Nov 22, 2020 9:26 am A summary of our portfolio from a month ago and our retirement goals can be found here. Since creating this we changed his 401k allocation to 70/30 equities/bonds so about $606k equities and $260k bonds.

We've been playing with i-orp and it's recommending mega Roth conversions at the start of our early retirement and we agree and want to do that.

In my experience, i-orp does seem to be very aggressive with conversions.

Some of the scenarios we've run have us converting 100% of our tax-deferred portfolio to Roth. The first question, is that a good idea or does it make sense to keep a small slice as tax-deferred? I'm thinking one might want that for charitable contributions. Is there anything else that can be paid with tax-deferred money where you wouldn't be taxed? For example, could that money be used for long-term care without paying taxes?

I agree that you should not convert “everything” if you have charitable giving goals.

The amount to retain beyond QCD giving depends on the amount of taxable income (pensions, interest, dividends, etc) that you expect to receive. In our case, we have no pension and almost 100% of our portfolio is in tax advantaged, so we will have about $18,000 a year of withdrawal “headroom” before our taxable Social Security exceeds our standard deduction. We will be withdrawing (or if not needed for expenses, Roth converting) that amount each year, so we are planning to leave enough in tIRA for QCD plus $18,000 a year for a couple of decades. My goal is to leave only Roth accounts to the kids.

Second, i-orp just tells you how much to convert not which buckets of tax-deferred to convert. Our issue is most of his money (the older spouse) is in his employer's 401k due to having been with that same employer virtually his entire career. He's inquired with the 401k provider (T Rowe Price) if in-service conversions are available but have yet to receive an answer so we're running on the assumption they can not be done. Most of her tax-deferred money is in an IRA so that can be converted any time. We have not looked into in-service conversions for her tax-deferred 401k money.

Are you asking TRP about “in-plan” conversions? Those are a possible mechanism but I believe (?) that there is a 59.5 limitation on withdrawals.

It may be better to get started now on a Roth conversion ladder for funding living expenses before 59.5. Do a search for “Roth Conversion ladder”. If each of you do not have Roth opened, do that before the end of the year to start the Roth clocks in 2019. Even if one has to do a $1000 taxable conversion at your current tax rate, it is worth it to have the “clock” started.

If one’s 401k does not offer in-plan conversions, then one must do Roth conversions from a tIRA, in that case all 401k funds must be rolled-over to a tIRA at some point.


Part of the reason we chose the retirement age of 55 for him is so we can take advantage of the "Rule of 55" if needed, but ideally, we won't have to do that with the amount we have in stock (albeit a little risky to count on that to not have a giant drop).

I would not plan on stock sales for funding immediate retirement expenses. I would hold at least 2 years living expenses in cash at retirement and then have a plan for maintaining that buffer (i.e. convert a year to cash every year) before 59.5.

After 59.5 you can convert to cash or bond funds inside the tIRA.

Our plan right now is to live off the stock money and to convert her IRA money first since we know we can do that. Perhaps we would take 2 years to do that then assess where we are at with the stocks and cash. Ideally, we would not have to use the Rule of 55 to pull any of his money and instead at that point, we could roll his 401k into his IRA and then finish our Roth conversions there.

Is that reasonable or are there any suggestions for how we approach the conversions?
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius
Topic Author
jeffreys
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Re: Planning For Mega Roth Conversions

Post by jeffreys »

is50xenough wrote: Sun Nov 22, 2020 12:23 pm Always love hearing about Roth conversions. Hope to see some answers. What exactly is iORP telling you?
Since we set it for "Unlimited Conversions", it has us doing 4 years of conversions at the start of our early retirement (see linked thread in my original post). We are generally happy/in agreement with what iorp is proposing but are looking for advice/confirmation on the order of our funds we convert given our age difference and the fact she will be retiring before 55 (maybe not an issue) and the fact he has such a large 401k balance and we're assuming in-service conversions are not an option for him. Moving his money to his IRA means we won't have access to it until he is 59.5. Again, maybe not an issue with all the stock money available.

One more item to add. Her IRA is currently subject to the pro-rata rule due to a contributions recharacterization a couple years ago. We're carefully tracking that but are looking forward to completing the conversions on her tax-deferred to get rid of it. It's also a reason why we'll have to wait to move her 401k to her IRA.
retiredjg
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Re: Planning For Mega Roth Conversions

Post by retiredjg »

jeffreys wrote: Sun Nov 22, 2020 9:26 am The first question, is that a good idea or does it make sense to keep a small slice as tax-deferred?
Yes, it it may not need to be all that small. For example, if you kept $500k in tax-deferred, would that cause your RMDs to be too large?
How about $400k?
I'm thinking one might want that for charitable contributions. Is there anything else that can be paid with tax-deferred money where you wouldn't be taxed? For example, could that money be used for long-term care without paying taxes?
Yes. to the extent that long term care costs are enough to overcome the requirements to deduct medical costs from income.
is50xenough
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Re: Planning For Mega Roth Conversions

Post by is50xenough »

jeffreys wrote: Sun Nov 22, 2020 12:33 pm
is50xenough wrote: Sun Nov 22, 2020 12:23 pm Always love hearing about Roth conversions. Hope to see some answers. What exactly is iORP telling you?
Since we set it for "Unlimited Conversions", it has us doing 4 years of conversions at the start of our early retirement (see linked thread in my original post). We are generally happy/in agreement with what iorp is proposing but are looking for advice/confirmation on the order of our funds we convert given our age difference
Thx. Yes looked at that post and didn’t see actual numbers for what iORP proposing for you. Complete conversion in those years?
retiredjg
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Re: Planning For Mega Roth Conversions

Post by retiredjg »

jeffreys wrote: Sun Nov 22, 2020 9:26 am In an IRA so that can be converted any time. We have not looked into in-service conversions for her tax-deferred 401k money.
If you have not done it, find out how the plan handles this. Some do not make it easy. For example, some plans make you take a total distribution instead of some now and some later.

If he can do some now and some later, roll some money to IRA and do Roth conversions as needed from that account.
Topic Author
jeffreys
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Re: Planning For Mega Roth Conversions

Post by jeffreys »

retiredjg wrote: Sun Nov 22, 2020 12:34 pm Yes. to the extent that long term care costs are enough to overcome the requirements to deduct medical costs from income.
Thanks that was something we weren't sure of -- are LTC costs considered medical expenses.
Topic Author
jeffreys
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Re: Planning For Mega Roth Conversions

Post by jeffreys »

retiredjg wrote: Sun Nov 22, 2020 12:42 pm
jeffreys wrote: Sun Nov 22, 2020 9:26 am In an IRA so that can be converted any time. We have not looked into in-service conversions for her tax-deferred 401k money.
If you have not done it, find out how the plan handles this. Some do not make it easy. For example, some plans make you take a total distribution instead of some now and some later.

If he can do some now and some later, roll some money to IRA and do Roth conversions as needed from that account.
I guess we're less concerned about the ability to do in-service conversions for her money since the plan is for us to retire before she is 55 and therefore no rule of 55 for her 401k. We'll have to keep it with the 401k provider until conversions are done on her IRA to clean-up the pro-rata calculation then we'll roll it over to the IRA and finish it up.
retiredjg
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Re: Planning For Mega Roth Conversions

Post by retiredjg »

jeffreys wrote: Sun Nov 22, 2020 12:43 pm
retiredjg wrote: Sun Nov 22, 2020 12:34 pm Yes. to the extent that long term care costs are enough to overcome the requirements to deduct medical costs from income.
Thanks that was something we weren't sure of -- are LTC costs considered medical expenses.
I suppose it depends on what you mean. But I can't see why a stay in a nursing home or memory care center would not be considered medical expenses.
Topic Author
jeffreys
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Re: Planning For Mega Roth Conversions

Post by jeffreys »

David Jay wrote: Sun Nov 22, 2020 12:31 pm The amount to retain beyond QCD giving depends on the amount of taxable income (pensions, interest, dividends, etc) that you expect to receive. In our case, we have no pension and almost 100% of our portfolio is in tax advantaged, so we will have about $18,000 a year of withdrawal “headroom” before our taxable Social Security exceeds our standard deduction. We will be withdrawing (or if not needed for expenses, Roth converting) that amount each year, so we are planning to leave enough in tIRA for QCD plus $18,000 a year for a couple of decades. My goal is to leave only Roth accounts to the kids.
Yes, I need to work on what our taxable income might be.

I was a little confused by those numbers in iorp. His SS benefit at age 70 will be $40k. We're thinking she'll take hers at age 67 and the SS site say that number is $28. Given the age difference, the first year we get SS will just be his. Iorp is giving us a value of $53k in the guaranteed income column for that first year. Is that because of cost of living increases and/or inflation making that $40k value actually $53k when he takes SS in 17 years?

Assuming $53k is about the right number, we need to understand how that will be taxed (likely Google can answer that) to determine if we have any room for tax-deferred money.

We also have a couple of small annuities but after looking at projections those really won't be throwing off much money (we should have never bought them) and we can choose just to turn off payments.

We'll also have dividend income from the ETF.
marcopolo
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Re: Planning For Mega Roth Conversions

Post by marcopolo »

jeffreys wrote: Sun Nov 22, 2020 9:26 am A summary of our portfolio from a month ago and our retirement goals can be found here. Since creating this we changed his 401k allocation to 70/30 equities/bonds so about $606k equities and $260k bonds.

We've been playing with i-orp and it's recommending mega Roth conversions at the start of our early retirement and we agree and want to do that.

Some of the scenarios we've run have us converting 100% of our tax-deferred portfolio to Roth. The first question, is that a good idea or does it make sense to keep a small slice as tax-deferred? I'm thinking one might want that for charitable contributions. Is there anything else that can be paid with tax-deferred money where you wouldn't be taxed? For example, could that money be used for long-term care without paying taxes?

Second, i-orp just tells you how much to convert not which buckets of tax-deferred to convert. Our issue is most of his money (the older spouse) is in his employer's 401k due to having been with that same employer virtually his entire career. He's inquired with the 401k provider (T Rowe Price) if in-service conversions are available but have yet to receive an answer so we're running on the assumption they can not be done. Most of her tax-deferred money is in an IRA so that can be converted any time. We have not looked into in-service conversions for her tax-deferred 401k money.

Part of the reason we chose the retirement age of 55 for him is so we can take advantage of the "Rule of 55" if needed, but ideally, we won't have to do that with the amount we have in stock (albeit a little risky to count on that to not have a giant drop).

Our plan right now is to live off the stock money and to convert her IRA money first since we know we can do that. Perhaps we would take 2 years to do that then assess where we are at with the stocks and cash. Ideally, we would not have to use the Rule of 55 to pull any of his money and instead at that point, we could roll his 401k into his IRA and then finish our Roth conversions there.

Is that reasonable or are there any suggestions for how we approach the conversions?
Converting ALL your traditional to Roth rarely produces optimal outcomes.

Do you have a really large pension, or some other taxable income stream?

If not, it seems you would be paying 22% tax on much of the conversion now if you convert $1.1M over four years, when you could withdraw a good bit of that later in the 12% tax bracket.

I-ORP has a bit of a quirk in how it handles Roth Conversions based on asset allocation in Trad and Roth accounts. How did you set those settings?
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
jeffreys
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Re: Planning For Mega Roth Conversions

Post by jeffreys »

marcopolo wrote: Sun Nov 22, 2020 1:13 pm Converting ALL your traditional to Roth rarely produces optimal outcomes.

Do you have a really large pension, or some other taxable income stream?

If not, it seems you would be paying 22% tax on much of the conversion now if you convert $1.1M over four years, when you could withdraw a good bit of that later in the 12% tax bracket.

I-ORP has a bit of a quirk in how it handles Roth Conversions based on asset allocation in Trad and Roth accounts. How did you set those settings?
No pensions. The only taxable income streams will be very small annuities, dividends and social security.

What you advise makes good sense, but part of our motivation to convert all of it was simplifying future taxes. We want to deal with the tax complexities while we are young and have our minds since we don't know what the future will bring. We don't have kids and don't know if we can really rely on the nephews/nieces.
marcopolo
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Re: Planning For Mega Roth Conversions

Post by marcopolo »

jeffreys wrote: Sun Nov 22, 2020 1:49 pm
marcopolo wrote: Sun Nov 22, 2020 1:13 pm Converting ALL your traditional to Roth rarely produces optimal outcomes.

Do you have a really large pension, or some other taxable income stream?

If not, it seems you would be paying 22% tax on much of the conversion now if you convert $1.1M over four years, when you could withdraw a good bit of that later in the 12% tax bracket.

I-ORP has a bit of a quirk in how it handles Roth Conversions based on asset allocation in Trad and Roth accounts. How did you set those settings?
No pensions. The only taxable income streams will be very small annuities, dividends and social security.

What you advise makes good sense, but part of our motivation to convert all of it was simplifying future taxes. We want to deal with the tax complexities while we are young and have our minds since we don't know what the future will bring. We don't have kids and don't know if we can really rely on the nephews/nieces.
Ok. You might consider stretching the conversions over a longer number of years. You are still relatively young, and should have your mental faculties for a while.

For example, just stretching it over 8 years instead of 4 years, would allow 4 additional years of filling the 10% and 12% brackets with those conversions. That could potentially save $40k in taxes.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Topic Author
jeffreys
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Re: Planning For Mega Roth Conversions

Post by jeffreys »

marcopolo wrote: Sun Nov 22, 2020 2:05 pm Ok. You might consider stretching the conversions over a longer number of years. You are still relatively young, and should have your mental faculties for a while.

For example, just stretching it over 8 years instead of 4 years, would allow 4 additional years of filling the 10% and 12% brackets with those conversions. That could potentially save $40k in taxes.
Good idea. The other consideration is having our income down by the time he is 63 to avoid the IRMAA look back. Also, this kills any possibility of getting ACA subsidies during the conversion years. We'd have to weigh if rushing through them in 4 years just to get ACA subsidies for those years before medicare if worthwhile or not.

We can also run these scenarios through i-orp.
Topic Author
jeffreys
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Re: Planning For Mega Roth Conversions

Post by jeffreys »

marcopolo wrote: Sun Nov 22, 2020 2:05 pm Ok. You might consider stretching the conversions over a longer number of years. You are still relatively young, and should have your mental faculties for a while.

For example, just stretching it over 8 years instead of 4 years, would allow 4 additional years of filling the 10% and 12% brackets with those conversions. That could potentially save $40k in taxes.
We ran i-orp up to the 12% bracket and like the results much better. It still has us doing a bunch in the first 4 years and then oddly a small one after 70. We'll now have RMDs but they should be more manageable.
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