How massive of Roth conversions, given lopsided holdings post-retirement?

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JDCarpenter
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How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

Wanted to gather thoughts on how aggressive one might wish to be..... Have run multiple calculators and ballpark projections over the past few years, but still might benefit from some other sets of eyes.

Retired at 57/56 with 4 mill in TIRA (after direct transfers from 401k accounts, etc.) Minimal in Roths, due to high marginal rates after they became available to us. No pensions; will draw what are promised to be big socials at our respective age 70s. Healthy adventure travelers--the whole reason for somewhat early retirement.

For three years we lived off our relatively meager taxable accounts, whilst converting to to of 24% MFJ bracket. Taxes paid from taxable accounts those years. No state income taxes here.

As of now (61/60), we have slightly more in TIRAs than we started with, as well as a bit more than 2 mill in Roths (Roths are 100% equity, with all bond/cash investments constituting a part of the TIRA accounts). Withdrawing spending money from the TIRAs starting last year, and are continuing to convert monies in excess of spending to at least top of 24% bracket.

We will likely be looking at IRMAA forever if we convert only to the top of the 24% bracket, and even the 32 (which I am seriously considering now) is unlikely to make a big difference. But going higher than 32 seems to be counterproductive--even though DW is statistically likely to be a single taxpayer for a decent number of years with high RMDs.

Additional factors that might be relevant--likely inheritance of a couple years spending money before we draw social. Our own beneficiaries are likely to continue having household incomes ranging from high to Bay Area high.

__________________________________________
Additional factors in response to comments/questions below: Fairly unlikely that we would move our of our present state. We like it here and the kids are scattered to the winds. One grandchild in San Fran, another in Raleigh. Essentially equidistant (highway and plane both take 8-9 hours door to door).

i-Orp, under most scenarios, suggests a less aggressive conversion ladder than we've embraced.

And, no doubt, this is a first world "problem." No complaints here, just trying to optimize while remaining stunned to be in a situation that I was not capable of envisioning when I was young (DW, otoh, may have seen it!).
Last edited by JDCarpenter on Thu Jun 10, 2021 11:14 am, edited 1 time in total.
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celia
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by celia »

Sounds like you are on the right track and doing the right calculations. Have you considered leaving some of your tax-deferred assets to charities? Are you prepared to make huge Roth conversions if the market drops 20, 30 or 40%? In other words, spread your conversions out to be more towards the end of the year unless the stock markets drop during the year.

If you haven't yet done it, look at how much growth your tax-deferred accounts have made in the last 3 years (after adjustments are made to remove contributions made each year and withdrawals are added back in). Compare that yearly rate of growth to the percentage you withdraw each year. As long as the percentage withdrawn is less than the percentage of growth, the account(s) will continue to grow.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Fat Tails »

Congrats! You are experiencing the compounding wonder of the world. At your ages, you could get two more doubles or more of your accounts. I think you should seriously look at Roth conversions to the top of your next bracket, as you said you are doing.

With your account sizes, you may want to start looking at strategies to reduce potential estate tax which would likely include qualified charitable gifts in the TIRAs as Celia mentioned, and gifting to grandchildren if applicable.

Cheers
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by fyre4ce »

Right now you are benefitting from not having any state income tax on these Roth conversions. Any chance that could change? You mentioned you have beneficiaries (kids?) in high income jobs, maybe in VHCOL areas. Any chance you would choose to relocate to a high-tax state to be closer to grandchildren? If so that would be a reason to ramp up the Roth conversions now.

Otherwise, it seems like staying in the 24% bracket for now is the right move. $4M x 4% = $160,000 income, or about $130,000 after the standard deduction, which is only the 22% bracket. Account values can go up, maybe by a lot, in 10 years, but you have your lower-return assets located in the pre-tax accounts so I would not expect them to go nuts, especially if you're living off them. Trying to avoid IRMAA might be reasonable, but have you looked at the total marginal rate you'd be paying in retirement, compared to what you can convert at now?

Nice work on the $2M Roth account by the way!
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Johnsson »

A good problem to have.

Our tIRA is half of yours and we have a decent amount in after-tax (so a different situation than yours). We'll be converting to the top of 24% for two more years (we started last year), then down to 22 for a three more, then 10. I don't enjoy paying the taxes but feel it's the right medicine to fix my problem. I want to be able to minimize the effect of tax law changes to our portfolio (for the most part) as I age and for our bequests.

I'm a believer in i-ORP for balancing taxes/maximizing spending. Being able to simply adjust parameters (age of death, when to start SS, limit conversion to a %,...) makes it easy to trial many scenarios and find the sweet spot for your situation. I also believe I need to rerun the software before making the large conversions each year so I make the conversions based on current info.

I was an engineer and believe in numbers. While the answer may not be initially palatable, what does i-orp tell you to do (after you find your sweet spot)?
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chemocean
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by chemocean »

As said above, good problem to have.
It sounds like you may be running out of taxable income to pay for living expenses and taxes on Roth conversions in the next decade before hitting 70.
"It has been said" that paying taxes on Roth Conversions from the tIRA is less advantageous than paying out of taxable funds.
As suggested above, I would run the numbers again paying particular attention to where the funds from paying the taxes on the Roth conversions is coming from.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by KlangFool »

OP,

In summary, you need to convert/withdraw your T-IRA much more than the annual growth rate of your T-IRA.

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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Exchme »

My intuition is to go to the top of the 32% bracket for at least the next couple of years. You haven't even kept up with growth yet, let alone whittling it down. With the TCJA cuts scheduled to end at the end of 2025 and IRMAA looming, you need to get ahead of it and it's hard to see the 32% bracket for at least the years prior to IRMAA hurting you very much, you and your heirs are destined to be in high tax brackets.

Note also to optimize your asset location, put your bonds in tax deferred and stocks in Roth. Remember that things in tax deferred are smaller than they appear. So for instance if you wanted to hold $1.5 M in bonds and your average lifetime tax rate on tax deferred withdrawals was 30%, it would take 1/(1-0.30) * $1.5M = $2.14M in tax deferred to give you the asset allocation you want. That's often ignored in lower brackets where a lot of the money is going to come out cheaply, but you need to correct for it so you actually keep your asset allocation in line.

Johnsson wrote: Thu Jun 10, 2021 6:16 am I'm a believer in i-ORP for balancing taxes/maximizing spending. Being able to simply adjust parameters (age of death, when to start SS, limit conversion to a %,...) makes it easy to trial many scenarios and find the sweet spot for your situation. I also believe I need to rerun the software before making the large conversions each year so I make the conversions based on current info.
I-orp is normally a good tool for these studies, but I'm not sure it's quite up to it here due to the high tax brackets. For instance, my recollection is i-orp does not try to do deduction phaseouts or AMT. Also, it doesn't understand the 2 year look back for IRMAA, so doesn't understand that earnings at 63 are the basis for IRMAA at age 65 and may miss the advantage in higher Roth conversions prior to age 63. It's still not a bad starting point for studies, but OP should understand that it is not going to see all his possible tax issues.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by ChrisC »

KlangFool wrote: Thu Jun 10, 2021 7:29 am OP,

In summary, you need to convert/withdraw your T-IRA much more than the annual growth rate of your T-IRA.

KlangFool
That’s easier said than done. Like the OP, I do conversions to the top of the 24% bracket. And if I converted to outpace annual growth in my T-Ira, I’d be in the 32% bracket, which would be the bracket we would be if one of us passes. For now, we’re content with converting as much as we can to stay at the top of the 24% bracket, MFJ. RMDs for us kick in 2025.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by SuzBanyan »

If you are charitably inclined, don’t forget that starting at age 70.5, each spouse can make Qualified Charitable Contributions of up to $100,000 per year. The $2,000,000 already in Roth (which will also continue to grow) may be a sufficient legacy for you to leave to the next generation.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by KlangFool »

ChrisC wrote: Thu Jun 10, 2021 8:01 am
KlangFool wrote: Thu Jun 10, 2021 7:29 am OP,

In summary, you need to convert/withdraw your T-IRA much more than the annual growth rate of your T-IRA.

KlangFool
That’s easier said than done. Like the OP, I do conversions to the top of the 24% bracket. And if I converted to outpace annual growth in my T-Ira, I’d be in the 32% bracket, which would be the bracket we would be if one of us passes. For now, we’re content with converting as much as we can to stay at the top of the 24% bracket, MFJ. RMDs for us kick in 2025.
ChrisC,

A) With 4 million in the tax-deferred space, the portfolio has to grow 10% per year in order for that to be true. That may be true now but it may not be true forever.

B) As to whether it is worthwhile to convert to 32% now, it is up to you.

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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by WyomingFIRE »

I just wanted to peek in here and thank you all very much. It is threads like this that make Bogleheads' invaluable. I learn so much from them. Thank you all. I feel as if I should be eligible for an honorary MBA in Finance or Financial Planning merely by reading them.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by ChrisC »

KlangFool wrote: Thu Jun 10, 2021 8:12 am
ChrisC wrote: Thu Jun 10, 2021 8:01 am
KlangFool wrote: Thu Jun 10, 2021 7:29 am OP,

In summary, you need to convert/withdraw your T-IRA much more than the annual growth rate of your T-IRA.

KlangFool
That’s easier said than done. Like the OP, I do conversions to the top of the 24% bracket. And if I converted to outpace annual growth in my T-Ira, I’d be in the 32% bracket, which would be the bracket we would be if one of us passes. For now, we’re content with converting as much as we can to stay at the top of the 24% bracket, MFJ. RMDs for us kick in 2025.
ChrisC,

A) With 4 million in the tax-deferred space, the portfolio has to grow 10% per year in order for that to be true. That may be true now but it may not be true forever.

B) As to whether it is worthwhile to convert to 32% now, it is up to you.

KlangFool
Klang Fool,

I have below $4 million in T-IRA space, but pensions, Social Security (when we draw on retirement benefits at age 70 for DW later this year), and modest dividend/interest income put us in the 24% bracket beginning in 2022. There might be a few years before RMDs kick in for me when I'll convert at the 32%. We'll likely still convert post RMD age. My intended heirs for our Roth IRAs are now at the 24, 35, and 37% brackets so there's that to do with as well.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by tibbitts »

I only realized after the drop and recovery last year that I was in a similar situation - totally my fault for letting deferred space get out of hand and not noticing. I still can't believe I did that. My dollar values are much lower than yours due to filing status, but the problems are the same and I converted into a higher marginal bracket (remember, state counts too) than you're even considering. I would have felt more comfortable doing more charitable contributions if I were older, but for now I was determined to get my deferred account "critical mass" problem under control before my first full-year of IRMAA (next year.) So I'll have this one last year of large (but not as large, quite) conversions, followed by converting only up to what I consider reasonable amounts of IRMAA (and no NIIT.) My "problems" (not really, after all) are compounded by maturing savings bonds taking away some of what might otherwise be more optimal conversion years. Obviously the objective isn't to get to low or no deferred balances; it's just to get them to where they won't grow with average investment performance despite whatever you consider reasonable charitable contributions, conversions, and spending.

This year I'm plodding along doing small daily conversions, but if there's no drop will dump in a larger amount at the end of this, my first partial IRMAA year.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by KlangFool »

ChrisC wrote: Thu Jun 10, 2021 10:36 am
KlangFool wrote: Thu Jun 10, 2021 8:12 am
ChrisC wrote: Thu Jun 10, 2021 8:01 am
KlangFool wrote: Thu Jun 10, 2021 7:29 am OP,

In summary, you need to convert/withdraw your T-IRA much more than the annual growth rate of your T-IRA.

KlangFool
That’s easier said than done. Like the OP, I do conversions to the top of the 24% bracket. And if I converted to outpace annual growth in my T-Ira, I’d be in the 32% bracket, which would be the bracket we would be if one of us passes. For now, we’re content with converting as much as we can to stay at the top of the 24% bracket, MFJ. RMDs for us kick in 2025.
ChrisC,

A) With 4 million in the tax-deferred space, the portfolio has to grow 10% per year in order for that to be true. That may be true now but it may not be true forever.

B) As to whether it is worthwhile to convert to 32% now, it is up to you.

KlangFool
Klang Fool,

I have below $4 million in T-IRA space, but pensions, Social Security (when we draw on retirement benefits at age 70 for DW later this year), and modest dividend/interest income put us in the 24% bracket beginning in 2022. There might be a few years before RMDs kick in for me when I'll convert at the 32%. We'll likely still convert post RMD age. My intended heirs for our Roth IRAs are now at the 24, 35, and 37% brackets so there's that to do with as well.
ChrisC,

You have your problem. I have mine too. In my case, I am 50+ years and I have 900K in my T-IRA. I have to think about the ACA cliff. I am in COBRA this year and there is no ACA cliff next year. So, I am converting as much as possible this year and next year up to 12% tax bracket.

With ACA cliff, my MAGI limit is up to 400% of FPL income (~ 69K). So, my ability to Roth convert will be severely limited starting 2023.

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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by anon_investor »

KlangFool wrote: Thu Jun 10, 2021 10:58 am
ChrisC wrote: Thu Jun 10, 2021 10:36 am
KlangFool wrote: Thu Jun 10, 2021 8:12 am
ChrisC wrote: Thu Jun 10, 2021 8:01 am
KlangFool wrote: Thu Jun 10, 2021 7:29 am OP,

In summary, you need to convert/withdraw your T-IRA much more than the annual growth rate of your T-IRA.

KlangFool
That’s easier said than done. Like the OP, I do conversions to the top of the 24% bracket. And if I converted to outpace annual growth in my T-Ira, I’d be in the 32% bracket, which would be the bracket we would be if one of us passes. For now, we’re content with converting as much as we can to stay at the top of the 24% bracket, MFJ. RMDs for us kick in 2025.
ChrisC,

A) With 4 million in the tax-deferred space, the portfolio has to grow 10% per year in order for that to be true. That may be true now but it may not be true forever.

B) As to whether it is worthwhile to convert to 32% now, it is up to you.

KlangFool
Klang Fool,

I have below $4 million in T-IRA space, but pensions, Social Security (when we draw on retirement benefits at age 70 for DW later this year), and modest dividend/interest income put us in the 24% bracket beginning in 2022. There might be a few years before RMDs kick in for me when I'll convert at the 32%. We'll likely still convert post RMD age. My intended heirs for our Roth IRAs are now at the 24, 35, and 37% brackets so there's that to do with as well.
ChrisC,

You have your problem. I have mine too. In my case, I am 50+ years and I have 900K in my T-IRA. I have to think about the ACA cliff. I am in COBRA this year and there is no ACA cliff next year. So, I am converting as much as possible this year and next year up to 12% tax bracket.

With ACA cliff, my MAGI limit is up to 400% of FPL income (~ 69K). So, my ability to Roth convert will be severely limited starting 2023.

KlangFool
Why not also convert up to the top of the next tax bracket too?
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by KlangFool »

anon_investor wrote: Thu Jun 10, 2021 11:12 am
KlangFool wrote: Thu Jun 10, 2021 10:58 am
ChrisC wrote: Thu Jun 10, 2021 10:36 am
KlangFool wrote: Thu Jun 10, 2021 8:12 am
ChrisC wrote: Thu Jun 10, 2021 8:01 am

That’s easier said than done. Like the OP, I do conversions to the top of the 24% bracket. And if I converted to outpace annual growth in my T-Ira, I’d be in the 32% bracket, which would be the bracket we would be if one of us passes. For now, we’re content with converting as much as we can to stay at the top of the 24% bracket, MFJ. RMDs for us kick in 2025.
ChrisC,

A) With 4 million in the tax-deferred space, the portfolio has to grow 10% per year in order for that to be true. That may be true now but it may not be true forever.

B) As to whether it is worthwhile to convert to 32% now, it is up to you.

KlangFool
Klang Fool,

I have below $4 million in T-IRA space, but pensions, Social Security (when we draw on retirement benefits at age 70 for DW later this year), and modest dividend/interest income put us in the 24% bracket beginning in 2022. There might be a few years before RMDs kick in for me when I'll convert at the 32%. We'll likely still convert post RMD age. My intended heirs for our Roth IRAs are now at the 24, 35, and 37% brackets so there's that to do with as well.
ChrisC,

You have your problem. I have mine too. In my case, I am 50+ years and I have 900K in my T-IRA. I have to think about the ACA cliff. I am in COBRA this year and there is no ACA cliff next year. So, I am converting as much as possible this year and next year up to 12% tax bracket.

With ACA cliff, my MAGI limit is up to 400% of FPL income (~ 69K). So, my ability to Roth convert will be severely limited starting 2023.

KlangFool
Why not also convert up to the top of the next tax bracket too?
anon_investor,

For this year, I am looking at the 27% tax cliff. I have about 30K of long-term capital gain. If I Roth convert too much, every dollar that I Roth convert, I pay 12% on that dollar plus one dollar that I need to pay 15% instead of 0% long-term capital tax rate. So, my marginal tax rate is 12% + 15% = 27%.

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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

celia wrote: Wed Jun 09, 2021 9:33 pm ... Have you considered leaving some of your tax-deferred assets to charities? Are you prepared to make huge Roth conversions if the market drops 20, 30 or 40%? In other words, spread your conversions out to be more towards the end of the year unless the stock markets drop during the year.

...
Charities will be an option, but given our present ages (61/60), they are not a priority in planning. We likely have a lot of market volatility to deal with in coming decades--and on pessimistic mornings, I continue to think of the Nikkei index in November 1989. :shock: (Hence, our international diversification.). And yes, we will make more aggressive conversions in the event of a market drop--unfortunately, our travel schedule and planning/rescheduling contributed to missing out on last year's opportunity. Now that we are living off the TIRAs, we convert 1/2 at the end of the year.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

Johnsson wrote: Thu Jun 10, 2021 6:16 am A good problem to have.

...

I'm a believer in i-ORP for balancing taxes/maximizing spending. Being able to simply adjust parameters (age of death, when to start SS, limit conversion to a %,...) makes it easy to trial many scenarios and find the sweet spot for your situation. I also believe I need to rerun the software before making the large conversions each year so I make the conversions based on current info.

I was an engineer and believe in numbers. While the answer may not be initially palatable, what does i-orp tell you to do (after you find your sweet spot)?
Indeed, a good "problem" to have. No dispute there.

As for i-ORP, under nearly all the different scenarios that I've run, it is less aggressive in converting than the path we've taken. (for example, assume no social, 25% social haircut, social as promised, inheritance or not, house sale at various ages, etc. etc.) It is a really good tool, but not one that I am comfortable relying solely on.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

Thanks for all the comments; I edited the initial post to put a few more facts in response. And, KlangFool, good luck on massaging your conversions. At least DW and I don't need to worry about ACA phaseouts. That would really increase complexity.
Exchme wrote: Thu Jun 10, 2021 7:52 am My intuition is to go to the top of the 32% bracket for at least the next couple of years. You haven't even kept up with growth yet, let alone whittling it down. With the TCJA cuts scheduled to end at the end of 2025 and IRMAA looming, you need to get ahead of it and it's hard to see the 32% bracket for at least the years prior to IRMAA hurting you very much, you and your heirs are destined to be in high tax brackets.

...
"luckily" the growth of past years won't continue forever. When it falters or reverses, our conversions will make more of a bite in the TIRA apple. Your thoughts/intuition are in line with mine. particularly with the scheduled 2026 bounceback in tax brackets.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Johnsson »

Johnsson wrote: Thu Jun 10, 2021 6:16 am A good problem to have....

I'm a believer in i-ORP for balancing taxes/maximizing spending. Being able to simply adjust parameters (age of death, when to start SS, limit conversion to a %,...) makes it easy to trial many scenarios and find the sweet spot for your situation. I also believe I need to rerun the software before making the large conversions each year so I make the conversions based on current info.

I was an engineer and believe in numbers. While the answer may not be initially palatable, what does i-orp tell you to do (after you find your sweet spot)?
Exchme wrote: Thu Jun 10, 2021 7:52 am I-orp is normally a good tool for these studies, but I'm not sure it's quite up to it here due to the high tax brackets. For instance, my recollection is i-orp does not try to do deduction phaseouts or AMT. Also, it doesn't understand the 2 year look back for IRMAA, so doesn't understand that earnings at 63 are the basis for IRMAA at age 65 and may miss the advantage in higher Roth conversions prior to age 63. It's still not a bad starting point for studies, but OP should understand that it is not going to see all his possible tax issues.
JDCarpenter wrote: Thu Jun 10, 2021 11:28 am Indeed, a good "problem" to have. No dispute there.

As for i-ORP, under nearly all the different scenarios that I've run, it is less aggressive in converting than the path we've taken. (for example, assume no social, 25% social haircut, social as promised, inheritance or not, house sale at various ages, etc. etc.) It is a really good tool, but not one that I am comfortable relying solely on.
I Agree with both of you. The nice part for is I-orp does the heavy lifting. When you find a scenario that feels right you still need to go back, check various limits, consider you personal crystal ball about future expectations and run scenarios through your favorite tax software to help ensure you haven't missed something (and this is also no guarantee). Just like you need to make sure you've captured all your various incomes accurately before converting to help ensure you haven't inched past one of those limits.
Last edited by Johnsson on Thu Jun 10, 2021 12:30 pm, edited 1 time in total.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by tibbitts »

Johnsson wrote: Thu Jun 10, 2021 6:16 am I was an engineer and believe in numbers. While the answer may not be initially palatable, what does i-orp tell you to do (after you find your sweet spot)?
I believe most Bogleheads believe in numbers, I also believe most of them would be better off if they had trouble calculating 2+3. Or at least if they had to think twice given the lack of parentheses in 2+3x4.

I appreciate i-orp, but you can make it say anything you want by even small tweaks to the assumptions. I've run it probably a hundred times now, and it's actually more aggressive in most scenarios than I've been willing to be (despite converting at higher marginal brackets than the OP is even considering), but always depending on my assumptions. And some things are approximate, for example I'm still not sure how to account for the evolving asset mix in deferred vs. Roth. You can (and should) set assumed rates of return, but as money migrates toward more equity in Roth and less in deferred over time, I'm not sure that's reflected as you'd want it to be. But the big factors - your lifespan, market performance, future tax policy, etc. - would be completely impossible to model with any accuracy.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Johnsson »

tibbitts wrote: Thu Jun 10, 2021 12:30 pm
Johnsson wrote: Thu Jun 10, 2021 6:16 am I was an engineer and believe in numbers. While the answer may not be initially palatable, what does i-orp tell you to do (after you find your sweet spot)?
I believe most Bogleheads believe in numbers, I also believe most of them would be better off if they had trouble calculating 2+3. Or at least if they had to think twice given the lack of parentheses in 2+3x4.

I appreciate i-orp, but you can make it say anything you want by even small tweaks to the assumptions. I've run it probably a hundred times now, and it's actually more aggressive in most scenarios than I've been willing to be (despite converting at higher marginal brackets than the OP is even considering), but always depending on my assumptions. And some things are approximate, for example I'm still not sure how to account for the evolving asset mix in deferred vs. Roth. You can (and should) set assumed rates of return, but as money migrates toward more equity in Roth and less in deferred over time, I'm not sure that's reflected as you'd want it to be. But the big factors - your lifespan, market performance, future tax policy, etc. - would be completely impossible to model with any accuracy.
I believe you capture the effect of the evolving asset mix by reanalyzing every year, right before you convert, with your fresh/updated numbers (still keeping asset allocation in the scenarios constant across account types).

For me the beauty of I-orp is it's ability to give and change direction based on all those small tweaks... providing you with the potential impact of changes and a general sense of direction to research further... with RPM, Turbotax,... I have not done exactly as it's told me, but my conversion (one so far) was within the ballpark of the various alternatives I-orp suggested for us. At the end of the day we all end up doing what 'feels' right to us (AFTER all the research).
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
Exchme
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Exchme »

tibbitts wrote: Thu Jun 10, 2021 12:30 pm I appreciate i-orp, but you can make it say anything you want by even small tweaks to the assumptions. I've run it probably a hundred times now, and it's actually more aggressive in most scenarios than I've been willing to be (despite converting at higher marginal brackets than the OP is even considering), but always depending on my assumptions. And some things are approximate, for example I'm still not sure how to account for the evolving asset mix in deferred vs. Roth. You can (and should) set assumed rates of return, but as money migrates toward more equity in Roth and less in deferred over time, I'm not sure that's reflected as you'd want it to be. But the big factors - your lifespan, market performance, future tax policy, etc. - would be completely impossible to model with any accuracy
I love that i-orp looks at the whole of life in the blink of an eye and is probably good for most people to use to learn about the subject and get a general idea of whether and how much to convert, what they can spend, etc. But the tax approximations it does have an effect in my situation and I really wanted to see the effect of the optimum asset location of stocks in Roth, bonds in tax deferred that you mentioned. That eventually drove me to buy Pralana Gold where you can make those asset location adjustments manually. Still a big pain to analyze that way. I've read comments from a couple other folks that "rolled their own" to address this, by hooking together multiple copies of RPM or building their own custom tool. Hopefully future generations of planning software will advance the state of the art on this point.
bsteiner
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by bsteiner »

tibbitts wrote: Thu Jun 10, 2021 12:30 pm
Johnsson wrote: Thu Jun 10, 2021 6:16 am I was an engineer and believe in numbers. While the answer may not be initially palatable, what does i-orp tell you to do (after you find your sweet spot)?
I believe most Bogleheads believe in numbers, I also believe most of them would be better off if they had trouble calculating 2+3. Or at least if they had to think twice given the lack of parentheses in 2+3x4.

I appreciate i-orp, but you can make it say anything you want by even small tweaks to the assumptions. I've run it probably a hundred times now, and it's actually more aggressive in most scenarios than I've been willing to be (despite converting at higher marginal brackets than the OP is even considering), but always depending on my assumptions. And some things are approximate, for example I'm still not sure how to account for the evolving asset mix in deferred vs. Roth. You can (and should) set assumed rates of return, but as money migrates toward more equity in Roth and less in deferred over time, I'm not sure that's reflected as you'd want it to be. But the big factors - your lifespan, market performance, future tax policy, etc. - would be completely impossible to model with any accuracy.
What is iorp?

There are so many variables that it’s hard to quantify it precisely.

Many people simply convert nothing, to the top of the 12%, to the top of the 24%, or everything.

In terms of it being aggressive, I think Roth conversions are underused rather than overused.
tibbitts
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by tibbitts »

Johnsson wrote: Thu Jun 10, 2021 12:39 pm
tibbitts wrote: Thu Jun 10, 2021 12:30 pm
Johnsson wrote: Thu Jun 10, 2021 6:16 am I was an engineer and believe in numbers. While the answer may not be initially palatable, what does i-orp tell you to do (after you find your sweet spot)?
I believe most Bogleheads believe in numbers, I also believe most of them would be better off if they had trouble calculating 2+3. Or at least if they had to think twice given the lack of parentheses in 2+3x4.

I appreciate i-orp, but you can make it say anything you want by even small tweaks to the assumptions. I've run it probably a hundred times now, and it's actually more aggressive in most scenarios than I've been willing to be (despite converting at higher marginal brackets than the OP is even considering), but always depending on my assumptions. And some things are approximate, for example I'm still not sure how to account for the evolving asset mix in deferred vs. Roth. You can (and should) set assumed rates of return, but as money migrates toward more equity in Roth and less in deferred over time, I'm not sure that's reflected as you'd want it to be. But the big factors - your lifespan, market performance, future tax policy, etc. - would be completely impossible to model with any accuracy.
I believe you capture the effect of the evolving asset mix by reanalyzing every year, right before you convert, with your fresh/updated numbers (still keeping asset allocation in the scenarios constant across account types).

For me the beauty of I-orp is it's ability to give and change direction based on all those small tweaks... providing you with the potential impact of changes and a general sense of direction to research further... with RPM, Turbotax,... I have not done exactly as it's told me, but my conversion (one so far) was within the ballpark of the various alternatives I-orp suggested for us. At the end of the day we all end up doing what 'feels' right to us (AFTER all the research).
Yes, I do re-run it every year, and have converted within some range of what it's recommended based on my assumptions. In general it recommended very front-loaded conversions and that's what I would have come up with intuitively as well.
tibbitts
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by tibbitts »

bsteiner wrote: Thu Jun 10, 2021 1:13 pm What is iorp?
https://www.i-orp.com/Plans/index.html

Most people use the extended capabilities (in the corresponding tab.)

Edit: most Bogleheads; maybe not most people.
curmudgeon
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by curmudgeon »

Now that you are past the age 59.5 point, there is a more flexibility on how you draw from your accounts. I don't think there is any automatic answer on how you want to do conversions. You've gotten a good-sized chunk into your Roths now, which will give you a lot of flexibility.

At this point I might shift towards an "income smoothing" mindset. Look at what your RMD would be at, say, age 80. Add to that your estimated SS benefits. Maybe that is $300K or so. Use that as your baseline targeted taxable income now, probably in some combination of IRA withdrawal for living expenses, IRA tax withholding, and Roth conversions. You might adjust a bit for tax brackets and IRMAA considerations, but I would use that as a starting point. Depending on your expectations for future tax brackets, I might go a bit more aggressive.

My wife and I have started looking at inheritances as something to pass through to our kids at this point. If we can disclaim, that's what we will do, but that's not always feasible. If it has to pass through our hands, we'll probably gift it across a few years to keep it out of future estate tax considerations (the amount isn't likely to be especially large).
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by marcopolo »

KlangFool wrote: Thu Jun 10, 2021 11:20 am
anon_investor wrote: Thu Jun 10, 2021 11:12 am
KlangFool wrote: Thu Jun 10, 2021 10:58 am
ChrisC wrote: Thu Jun 10, 2021 10:36 am
KlangFool wrote: Thu Jun 10, 2021 8:12 am

ChrisC,

A) With 4 million in the tax-deferred space, the portfolio has to grow 10% per year in order for that to be true. That may be true now but it may not be true forever.

B) As to whether it is worthwhile to convert to 32% now, it is up to you.

KlangFool
Klang Fool,

I have below $4 million in T-IRA space, but pensions, Social Security (when we draw on retirement benefits at age 70 for DW later this year), and modest dividend/interest income put us in the 24% bracket beginning in 2022. There might be a few years before RMDs kick in for me when I'll convert at the 32%. We'll likely still convert post RMD age. My intended heirs for our Roth IRAs are now at the 24, 35, and 37% brackets so there's that to do with as well.
ChrisC,

You have your problem. I have mine too. In my case, I am 50+ years and I have 900K in my T-IRA. I have to think about the ACA cliff. I am in COBRA this year and there is no ACA cliff next year. So, I am converting as much as possible this year and next year up to 12% tax bracket.

With ACA cliff, my MAGI limit is up to 400% of FPL income (~ 69K). So, my ability to Roth convert will be severely limited starting 2023.

KlangFool
Why not also convert up to the top of the next tax bracket too?
anon_investor,

For this year, I am looking at the 27% tax cliff. I have about 30K of long-term capital gain. If I Roth convert too much, every dollar that I Roth convert, I pay 12% on that dollar plus one dollar that I need to pay 15% instead of 0% long-term capital tax rate. So, my marginal tax rate is 12% + 15% = 27%.

KlangFool
You also need to consider loss of ACA Tax credits.
Even though the steep cliff is gone for net two years, there is still a reduction in tax credits. So, your marginal rate is actually 12+15+8.5= 35.5%. Hard to see how you would come out ahead doing that.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Johnsson
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Johnsson »

Exchme wrote: Thu Jun 10, 2021 12:58 pm
tibbitts wrote: Thu Jun 10, 2021 12:30 pm I appreciate i-orp, but you can make it say anything you want by even small tweaks to the assumptions. I've run it probably a hundred times now, and it's actually more aggressive in most scenarios than I've been willing to be (despite converting at higher marginal brackets than the OP is even considering), but always depending on my assumptions. And some things are approximate, for example I'm still not sure how to account for the evolving asset mix in deferred vs. Roth. You can (and should) set assumed rates of return, but as money migrates toward more equity in Roth and less in deferred over time, I'm not sure that's reflected as you'd want it to be. But the big factors - your lifespan, market performance, future tax policy, etc. - would be completely impossible to model with any accuracy
I love that i-orp looks at the whole of life in the blink of an eye and is probably good for most people to use to learn about the subject and get a general idea of whether and how much to convert, what they can spend, etc. But the tax approximations it does have an effect in my situation and I really wanted to see the effect of the optimum asset location of stocks in Roth, bonds in tax deferred that you mentioned. That eventually drove me to buy Pralana Gold where you can make those asset location adjustments manually. Still a big pain to analyze that way. I've read comments from a couple other folks that "rolled their own" to address this, by hooking together multiple copies of RPM or building their own custom tool. Hopefully future generations of planning software will advance the state of the art on this point.
Have you found Pralana Gold to be worth the money, relatively easy to use and 'accurate'? I know i-orp's not precise, but it's free. I can see buying it once but an annual fee makes me wonder if it's worth it.

I assume you input current numbers into Pralana, convert based output from something like i-orp (or your own intuition) and it projects into the future with accuracy (at least related to taxes)?
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
KlangFool
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by KlangFool »

marcopolo wrote: Thu Jun 10, 2021 1:29 pm
KlangFool wrote: Thu Jun 10, 2021 11:20 am
anon_investor wrote: Thu Jun 10, 2021 11:12 am
KlangFool wrote: Thu Jun 10, 2021 10:58 am
ChrisC wrote: Thu Jun 10, 2021 10:36 am

Klang Fool,

I have below $4 million in T-IRA space, but pensions, Social Security (when we draw on retirement benefits at age 70 for DW later this year), and modest dividend/interest income put us in the 24% bracket beginning in 2022. There might be a few years before RMDs kick in for me when I'll convert at the 32%. We'll likely still convert post RMD age. My intended heirs for our Roth IRAs are now at the 24, 35, and 37% brackets so there's that to do with as well.
ChrisC,

You have your problem. I have mine too. In my case, I am 50+ years and I have 900K in my T-IRA. I have to think about the ACA cliff. I am in COBRA this year and there is no ACA cliff next year. So, I am converting as much as possible this year and next year up to 12% tax bracket.

With ACA cliff, my MAGI limit is up to 400% of FPL income (~ 69K). So, my ability to Roth convert will be severely limited starting 2023.

KlangFool
Why not also convert up to the top of the next tax bracket too?
anon_investor,

For this year, I am looking at the 27% tax cliff. I have about 30K of long-term capital gain. If I Roth convert too much, every dollar that I Roth convert, I pay 12% on that dollar plus one dollar that I need to pay 15% instead of 0% long-term capital tax rate. So, my marginal tax rate is 12% + 15% = 27%.

KlangFool
You also need to consider loss of ACA Tax credits.
Even though the steep cliff is gone for net two years, there is still a reduction in tax credits. So, your marginal rate is actually 12+15+8.5= 35.5%. Hard to see how you would come out ahead doing that.
marcopolo,

1) For this year, I am on COBRA. No ACA Tax credit concern.

<<You also need to consider loss of ACA Tax credits.>>

2) For next year, the answer is maybe. Within a certain range, I have enough ACA Tax credit to pay for the full bronze plan premium. So, the additional ACA tax credit does not help me. It is too early to tell at this moment. I may need to stay at below 400% FPL or it is useful to go slightly above and stay below the 12%/15%.

3) There is a gap between 400% FPL and 12%/15%.

KlangFool
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by marcopolo »

KlangFool wrote: Thu Jun 10, 2021 1:39 pm
marcopolo wrote: Thu Jun 10, 2021 1:29 pm
KlangFool wrote: Thu Jun 10, 2021 11:20 am
anon_investor wrote: Thu Jun 10, 2021 11:12 am
KlangFool wrote: Thu Jun 10, 2021 10:58 am

ChrisC,

You have your problem. I have mine too. In my case, I am 50+ years and I have 900K in my T-IRA. I have to think about the ACA cliff. I am in COBRA this year and there is no ACA cliff next year. So, I am converting as much as possible this year and next year up to 12% tax bracket.

With ACA cliff, my MAGI limit is up to 400% of FPL income (~ 69K). So, my ability to Roth convert will be severely limited starting 2023.

KlangFool
Why not also convert up to the top of the next tax bracket too?
anon_investor,

For this year, I am looking at the 27% tax cliff. I have about 30K of long-term capital gain. If I Roth convert too much, every dollar that I Roth convert, I pay 12% on that dollar plus one dollar that I need to pay 15% instead of 0% long-term capital tax rate. So, my marginal tax rate is 12% + 15% = 27%.

KlangFool
You also need to consider loss of ACA Tax credits.
Even though the steep cliff is gone for net two years, there is still a reduction in tax credits. So, your marginal rate is actually 12+15+8.5= 35.5%. Hard to see how you would come out ahead doing that.
marcopolo,

1) For this year, I am on COBRA. No ACA Tax credit concern.

<<You also need to consider loss of ACA Tax credits.>>

2) For next year, the answer is maybe. Within a certain range, I have enough ACA Tax credit to pay for the full bronze plan premium. So, the additional ACA tax credit does not help me. It is too early to tell at this moment. I may need to stay at below 400% FPL or it is useful to go slightly above and stay below the 12%/15%.

3) There is a gap between 400% FPL and 12%/15%.

KlangFool
For next year, there is no significance to the 400% FPL threshold.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Lee_WSP
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Lee_WSP »

With a starting RMD of nearly $300,000, I do not believe it is going to matter much. You'd have to reduce your trad by nearly half to start getting your RMD's into a lower bracket.

The real question though is how much per year you plan to spend when RMDs kick in. Anything over that amount would be better in Roth, but only marginally better. I know it's trite, but honestly, I would just convert up to 24% and forget it. The reasoning being that the other brackets will remain more or less the same, but 24% is going to go away unless something changes.
retiredjg
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by retiredjg »

JDCarpenter wrote: Wed Jun 09, 2021 9:11 pm As of now (61/60), we have slightly more in TIRAs than we started with, as well as a bit more than 2 mill in Roths (Roths are 100% equity, with all bond/cash investments constituting a part of the TIRA accounts).
I know this will not be a popular suggestion, but you could slow down the growth of the tIRAs by filling them almost entirely with bond/cash investments. That might give you a very different AA from what you are willing to hold, but I don't see a downside in this situation. Once the money is converted to Roth, you can put it back in stock funds again.

If you do not trim down your tIRAs, your first RMD will be about $144,000. (Is that wrong? Why did Lee_WSP get $300k?) Combined with the large SS income, will that be overly burdensome? If not, other than being married to IRMAA the rest of your life, you may not have too big a problem to solve. Maybe you can get that tiRA down to $2 million with your large conversions.
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Watty
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Watty »

While the taxes you pay each year are important you may be looking at the wrong problem.

I would think that the estate planning issues could be a lot more important over the long term. If your IRA, Roth, and taxable accounts grow for another 25+ years before the last of you dies they could grow to be way above the current estate tax exemption, and the estate tax exemption could be a LOT lower then too. It has changed many times and it was not that long ago that the estate tax exemption was as low as $2 million dollars.

It would be good to meet with an estate tax planning lawyer since what they suggest will impact your Roth conversion plans.

Here are some things to also keep in mind.

1) You will not need to actually start drawing down your IRA until the RMD exceeds your investment growth rate. If your investment growth rate is 7% then you will not need to actually start drawing down the IRA until you are 86.

https://www.bogleheads.org/wiki/Require ... stribution

2) People often focus on the tax rate they are paying on the Roth conversion or the RMD. There is a third tax rate that people often forget to consider. That is the taxes you would pay on the money that would be invested in your taxable account if you choose not to do the Roth conversion. For example if you have an extra $100K in a taxable account to pay for the Roth conversion but you decide to not do it, then that $100K would likely be invested in something like a total stock market index fund. That might grow for 25+ years until it goes to your estate and under the current tax laws it would get a stepped up cost basis which would be a huge tax savings for your heirs.

3) Don't feel like you did bad planning. The stock market has doubled in the last few years and even compared to this time last year it is way up. That could not have been planned for. The fact that you have so much in the IRA is mostly because you have gotten lucky with the sequence of returns risk and had a big stock market runup right before you retired.
Exchme
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Exchme »

Johnsson wrote: Thu Jun 10, 2021 1:37 pm Have you found Pralana Gold to be worth the money, relatively easy to use and 'accurate'? I know i-orp's not precise, but it's free. I can see buying it once but an annual fee makes me wonder if it's worth it.

I assume you input current numbers into Pralana, convert based output from something like i-orp (or your own intuition) and it projects into the future with accuracy (at least related to taxes)?
Yes I found Pralana Gold to be well worth the money. It's very comprehensive, doing all phases of retirement planning from various withdrawal strategies, studies with historical and Monte Carlo returns, social security claim optimization customized for your tax situation. It includes everything for taxes I can think of, whereas there are gaps in i-orp and RPM. For Roth planning, it has its own Optimizer that tries to set up the ideal plan. Other alternatives for Roth conversion planning include what % of the initial tax deferred account to convert along with what tax brackets and IRMAA tiers to respect and then it will convert that in the most advantageous timing.

Because the program is thorough, you have to look at the results to see if they make sense and it does take time to learn. But the menus are well labeled and the manual is good, so it was reasonably easy to learn. Not everyone has the patience or need to learn that or desire to pay for software, so I-orp may be fine for them and RPM has its place too as a solid if manual tool. But my conclusion was that nothing else I've seen in the consumer market was really in the same league as Pralana Gold and I have no plans to go back to the free tools.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by KlangFool »

marcopolo wrote: Thu Jun 10, 2021 1:45 pm
KlangFool wrote: Thu Jun 10, 2021 1:39 pm
marcopolo wrote: Thu Jun 10, 2021 1:29 pm
KlangFool wrote: Thu Jun 10, 2021 11:20 am
anon_investor wrote: Thu Jun 10, 2021 11:12 am

Why not also convert up to the top of the next tax bracket too?
anon_investor,

For this year, I am looking at the 27% tax cliff. I have about 30K of long-term capital gain. If I Roth convert too much, every dollar that I Roth convert, I pay 12% on that dollar plus one dollar that I need to pay 15% instead of 0% long-term capital tax rate. So, my marginal tax rate is 12% + 15% = 27%.

KlangFool
You also need to consider loss of ACA Tax credits.
Even though the steep cliff is gone for net two years, there is still a reduction in tax credits. So, your marginal rate is actually 12+15+8.5= 35.5%. Hard to see how you would come out ahead doing that.
marcopolo,

1) For this year, I am on COBRA. No ACA Tax credit concern.

<<You also need to consider loss of ACA Tax credits.>>

2) For next year, the answer is maybe. Within a certain range, I have enough ACA Tax credit to pay for the full bronze plan premium. So, the additional ACA tax credit does not help me. It is too early to tell at this moment. I may need to stay at below 400% FPL or it is useful to go slightly above and stay below the 12%/15%.

3) There is a gap between 400% FPL and 12%/15%.

KlangFool
For next year, there is no significance to the 400% FPL threshold.
I know. But, the subsidy would be reduced for the higher income beyond the 400% FPL.

KlangFool
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JDCarpenter
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

Watty wrote: Thu Jun 10, 2021 2:22 pm While the taxes you pay each year are important you may be looking at the wrong problem.

I would think that the estate planning issues could be a lot more important over the long term. .....
DW is healthy, highly educated, and of long-lived stock; planning includes her going past 100. Plus, our spend rate is relatively high--not including the roth conversions, I've set it at 4.25% of the end of year account balance, with Retiree Portfolio Model and iOrp as reality checks. Also, DW is really good about spending and is quite willing to increase (and decrease) as "needed"--we have spent more annually on travel in retirement than our total post-tax spending when working.... I'd say extremely unlikely that we'll even come close to exhausting the present estate tax exemption given portability for married couples.. When the law changes, we'll adjust (but leaving big $$ to kids is not a priority to either of us).
Watty wrote: Thu Jun 10, 2021 2:22 pm Here are some things to also keep in mind.

1) You will not need to actually start drawing down your IRA until the RMD exceeds your investment growth rate. If your investment growth rate is 7% then you will not need to actually start drawing down the IRA until you are 86.

https://www.bogleheads.org/wiki/Require ... stribution

...
In our case, it'll be a while before our RMDs will exceed our spending--and since we have no taxable accounts, that'll help to draw it down--especially in down market years.
Watty wrote: Thu Jun 10, 2021 2:22 pm

3) Don't feel like you did bad planning. ...
Oh, that's not a problem. Just focusing on relatively minor clean up of what we still see as having been the proper course of action in our particular situation.

Thanks for your time and input.
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opus360
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by opus360 »

JDCarpenter wrote: Thu Jun 10, 2021 3:15 pm Also, DW is really good about spending and is quite willing to increase (and decrease) as "needed"--
That is great. I thought you were going to say quite willing to increase ONLY. :mrgreen:
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JDCarpenter
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

opus360 wrote: Thu Jun 10, 2021 3:30 pm
JDCarpenter wrote: Thu Jun 10, 2021 3:15 pm Also, DW is really good about spending and is quite willing to increase (and decrease) as "needed"--
That is great. I thought you were going to say quite willing to increase ONLY. :mrgreen:
hah! That would be a problem. (And we've all seen far too many threads of incompatible spousal spending from both sides of the bed.) She made the money (or easily most of it), so it isn't as if she can't take the lead oar on disposing of it. :happy
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Tattarrattat
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Tattarrattat »

With TIRAs at these levels, are IRMAA and ACA considerations not an issue? ie: do the income levels generated by conversions and RMDs mean one will be paying full fare on ACA plans and be above all IRMAA levels, so no need to plan for them?
ChrisC
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by ChrisC »

tibbitts wrote: Thu Jun 10, 2021 1:16 pm
bsteiner wrote: Thu Jun 10, 2021 1:13 pm What is iorp?
https://www.i-orp.com/Plans/index.html

Most people use the extended capabilities (in the corresponding tab.)

Edit: most Bogleheads; maybe not most people.
I used my gut, then I used RPM, and now I'm back to my gut. Seriously, I've thought of paying someone to figure out the optimal level of conversions, but I think the gut approach is all I need. I can only think of one person I would trust to run the numbers for me, with accuracy and precision, and he frequently posts here.
chazas
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by chazas »

Tattarrattat wrote: Thu Jun 10, 2021 3:35 pm With TIRAs at these levels, are IRMAA and ACA considerations not an issue? ie: do the income levels generated by conversions and RMDs mean one will be paying full fare on ACA plans and be above all IRMAA levels, so no need to plan for them?
Watching this thread with interest - I will likely have close to $4mm in pre-tax 401k on retirement with minimal Roth/after tax. There was no Roth option when I started saving and when they were introduced I was in a high tax bracket and have remained so ever since.

Starting to plan on retiring in a couple years at 62. Tried i-orp and it only recommended some modest conversions the first two years, which was interesting - maybe because I will actually need it to live on after exhausting other sources. I've been assuming that if I use ACA at 62-65 and given my income I will never get ACA subsidies and will likely be above all IRMA levels. There are so many moving parts, for those of us who are, um, spreadsheet challenged, it's a bit difficult to conceptualize.
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telemark
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by telemark »

One other thing: if you can get into an HSA-eligible health plan, contributions to that will reduce your AGI, thereby allowing you to convert more to Roth. Not likely to make a big difference, but every little bit helps.
Last edited by telemark on Thu Jun 10, 2021 4:21 pm, edited 1 time in total.
tibbitts
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by tibbitts »

Tattarrattat wrote: Thu Jun 10, 2021 3:35 pm With TIRAs at these levels, are IRMAA and ACA considerations not an issue? ie: do the income levels generated by conversions and RMDs mean one will be paying full fare on ACA plans and be above all IRMAA levels, so no need to plan for them?
Well, not saying it would be a good idea, but if the problem is almost the entirely tIRA balance (vs. taxable), then you obviously have the choice to just pay IRMAA for one year, ever. ACA has no application for me currently so I don't know anything about it. So you have to balance the pain of the hefty income tax for one year vs. IRMAA beating you over the head every year for the rest of your life. I can't imagine totally getting rid of IRMAA would be a good idea, but at that level maybe it depends more on what makes you feel better. Since IRMAA has a cap, it's likely that you'd pay less overall just putting up with IRMAA every year, but you do get to pick your poison.
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FIREchief
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by FIREchief »

JDCarpenter wrote: Wed Jun 09, 2021 9:11 pm For three years we lived off our relatively meager taxable accounts, whilst converting to to of 24% MFJ bracket. Taxes paid from taxable accounts those years. No state income taxes here.

As of now (61/60), we have slightly more in TIRAs than we started with, as well as a bit more than 2 mill in Roths (Roths are 100% equity, with all bond/cash investments constituting a part of the TIRA accounts). Withdrawing spending money from the TIRAs starting last year, and are continuing to convert monies in excess of spending to at least top of 24% bracket.

But going higher than 32 seems to be counterproductive--even though DW is statistically likely to be a single taxpayer for a decent number of years with high RMDs.
You may wish to look beyond you and DW and at your heirs' potential situations. If they inherit Roth money, they have no tax issues. You can even leave it in a trust to provide long term asset protections. If they inherit tIRA money, they'll pay taxes on all funds within ten years, which could push them into the 32% (or higher) bracket. I would bite the bullet and go to the top of the 32. You at least want to convert the portion of tIRA invested in equities, as that is what will grow future tax liabilities (on a real basis). See my signature.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
ChrisC
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by ChrisC »

retiredjg wrote: Thu Jun 10, 2021 2:02 pm
JDCarpenter wrote: Wed Jun 09, 2021 9:11 pm As of now (61/60), we have slightly more in TIRAs than we started with, as well as a bit more than 2 mill in Roths (Roths are 100% equity, with all bond/cash investments constituting a part of the TIRA accounts).
I know this will not be a popular suggestion, but you could slow down the growth of the tIRAs by filling them almost entirely with bond/cash investments. That might give you a very different AA from what you are willing to hold, but I don't see a downside in this situation. Once the money is converted to Roth, you can put it back in stock funds again.

If you do not trim down your tIRAs, your first RMD will be about $144,000. (Is that wrong? Why did Lee_WSP get $300k?) Combined with the large SS income, will that be overly burdensome? If not, other than being married to IRMAA the rest of your life, you may not have too big a problem to solve. Maybe you can get that tiRA down to $2 million with your large conversions.
Yeah, looks like you're wrong and Lee WSP is correct, if you use an RMD calculators, and assume that the OP's $4 million account balance will mushroom with growth, then OP's first RMD is likely to be around $300K. https://www.schwab.com/ira/understand-i ... lators/rmd
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by retiredjg »

I see. I was talking about the account staying at $4 million through spending and converting.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Lee_WSP »

retiredjg wrote: Thu Jun 10, 2021 4:45 pm I see. I was talking about the account staying at $4 million through spending and converting.
He's already at the top of the 24% bracket and barely making a dent in it. Basically barely moving the balance assuming a very very low growth rate of 4%.

My advice to OP is convert up to the tax bracket your expected RMDs are going to be taxed at. It's a safe play. You are very very unlikely to regret anything as the worst case scenario is your investments grew more than planned and you lost the opportunity to convert at the higher tax bracket, but the next bracket is very large, I doubt much of your RMD's will actually be taxed at that rate.

Ie I don't think there's a strong possibility of having to withdraw more than 414k per year as RMDs.
Last edited by Lee_WSP on Thu Jun 10, 2021 4:56 pm, edited 2 times in total.
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JDCarpenter
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

Tattarrattat wrote: Thu Jun 10, 2021 3:35 pm With TIRAs at these levels, are IRMAA and ACA considerations not an issue? ie: do the income levels generated by conversions and RMDs mean one will be paying full fare on ACA plans and be above all IRMAA levels, so no need to plan for them?
Yes. IMO, IRMAA is just a tax; thus, I include it in projecting future rates when SWAGging Roth conversions. As for ACA, for those on such plans, it is a big consideration with high marginal rates, even now that the cliff is gone for a bit (see posts to and from KlanFool on this thread). We are not on ACA plan, however--Tennessee Farm Bureau provides nice "insurance" policies for the buck, which are not ACA qualified.
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