Another Roth Conversion ? - into the weeds I go.

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AlaskaTeach
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Another Roth Conversion ? - into the weeds I go.

Post by AlaskaTeach »

I never thought I would get to the point of thinking Roth conversions so far from actual retirement...probably 5-6 years, but here it goes:

I got a job teaching in Texas, and am taking a large pay cut from Alaska, which leads me to possibly doing some conversions.

I have already contributed $26400 to my 457b. My paychecks in Texas start in late August. My Traditional IRA contributions do not finish until November.

Am I a candidate to do conversions or maybe the dw and our salaries are low enough? The number on the tax table is looking like 51k, if I stop 457b contributions.

For this year only, if our withholding is much lower than the 90% requirement, I conclude the whole process is worthless. Am I more or less correct? Or is there a way to pay estimated taxes on the conversions. I know I can change my W-4, but being a new employee I don't want to make too many changes. I am good at being the new kid on the block and I know that means don't make too many changes.

Should I seek to aggressively convert this year regardless of how much $ are in deferred accounts because the tax bracket is going from 12% to 15% on January 1, 2025?

My latest retirement plan has me working five years in Texas education, our deferred accounts could reasonably top $600k at my planned retirement in 2029, all but her 35k Roth is deferred. I project a pension of $60k. MFJ, her pension of 6k, her projected SS of 17k totals 83k, which is still in the 15% bracket, but then RMDs appear later.

If I needed to reduce my pension I could get a PLSO-partial lump sum, up to three years worth of pension to add to the deferred accounts, which would lower my pension to about 45k, which would allow plenty of room for conversions. A state retirement person told me the 75% factor if doing a 3 year lump sum. The math on that is 45 + 6+ 17 = 68. Over 7-8 years, I could easily convert maybe 25% of our accts.
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ichee_marone
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Re: Another Roth Conversion ? - into the weeds I go.

Post by ichee_marone »

There is a lot I don't understand in your post and certainly some vagaries that are understandable if you don't live and breathe this stuff. Still you need to study up and get terms and methods correct. This board will help...

It's prudent to answer your Roth question by recommending that you get retirement software to model Roth conversions, your pension, your expenses etc.

If you are in a low income/tax bracket this year, it may make sense to convert some of your traditional (i.e. before tax IRA/457B monies ) to Roth. On the 457B, your plan would have to allow a CONVERSION or a rollover to a Traditional IRA. If you do the latter, then a portion (or all) of rollover (Traditional) IRA could be converted. I don't think anyone would recommend you touching your pension to do a Roth conversion without a lot more facts. Please don't touch your pension!!

Retirement software can help you determine if you are on track for your retirement date. You need to start to know what you are spending and classify that spend it mandatory and discretionary.

If you just want to know how much to convert this year, you can model your taxes for this year using a 2024 tax calculator. I like the following: https://www.dinkytown.net/java/1040-tax-calculator.html. Still Roth conversions are best dealt with by modelling the remainder of your working life and retirement. You want to seek to lower your lifetime taxes and not just this year.

Using the 2024 tax calculator, you can model a 2024 conversion amount and see what it does to your 2024 federal taxes. If you convert a traditional to Roth IRA, your custodian should ask how much federal taxes you want to withhold. There are other things to know like IRS late payment fees for conversions, but let's not complicate things too much.
Lalamimi
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Re: Another Roth Conversion ? - into the weeds I go.

Post by Lalamimi »

I'm no help, I can't get past your coming to Texas in August from Alaska....
Topic Author
AlaskaTeach
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Re: Another Roth Conversion ? - into the weeds I go.

Post by AlaskaTeach »

Lalamimi wrote: Mon Jun 10, 2024 2:59 pm I'm no help, I can't get past your coming to Texas in August from Alaska....

Ha! I probably set some kind of record for highest differential in temperature. I left a rural village in late May at about 10:20 a.m. and the temp was 38 degrees. Late the next day, I arrived at 5:00 p.m. to a mind-melting 102 degrees. 64 degrees difference!. 8-)
tibbitts
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Re: Another Roth Conversion ? - into the weeds I go.

Post by tibbitts »

AlaskaTeach wrote: Mon Jun 10, 2024 1:49 pm For this year only, if our withholding is much lower than the 90% requirement, I conclude the whole process is worthless. Am I more or less correct? Or is there a way to pay estimated taxes on the conversions. I know I can change my W-4, but being a new employee I don't want to make too many changes. I am good at being the new kid on the block and I know that means don't make too many changes.
I don't know about the rest of your story but I seriously doubt anybody cares whether you change your withholding, unless maybe you do it every day. Everybody understands that a change in employment might necessitate making some adjustments.

Now, if like some Bogleheads you show up on the first day demanding to change 403b/457 providers and complaining about how your state pension fund is invested, that's a different story.
Uniballer
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Re: Another Roth Conversion ? - into the weeds I go.

Post by Uniballer »

If you can convert inside the 12% federal tax bracket (i.e. keep taxable income below 94,300) then it may make sense. Do you have already taxed money to pay the taxes? You might also be able to simply contribute to a Roth account outright if that is easier.

If you have non-tax-deferred money to pay the taxes then you could convert and have the taxes withheld, then put the taxable money back in a traditional IRA within 60 days to avoid having to make quarterly estimated tax payments, e.g. viewtopic.php?t=425147
Topic Author
AlaskaTeach
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Re: Another Roth Conversion ? - into the weeds I go.

Post by AlaskaTeach »

Uniballer wrote: Mon Jun 10, 2024 3:27 pm If you can convert inside the 12% federal tax bracket (i.e. keep taxable income below 94,300) then it may make sense. Do you have already taxed money to pay the taxes? You might also be able to simply contribute to a Roth account outright if that is easier.

If you have non-tax-deferred money to pay the taxes then you could convert and have the taxes withheld, then put the taxable money back in a traditional IRA within 60 days to avoid having to make quarterly estimated tax payments, e.g. viewtopic.php?t=425147
Thanks, yes I have sufficient non-tax deferred money to pay the taxes. I will look into this.
Topic Author
AlaskaTeach
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Re: Another Roth Conversion ? - into the weeds I go.

Post by AlaskaTeach »

tibbitts wrote: Mon Jun 10, 2024 3:19 pm
AlaskaTeach wrote: Mon Jun 10, 2024 1:49 pm For this year only, if our withholding is much lower than the 90% requirement, I conclude the whole process is worthless. Am I more or less correct? Or is there a way to pay estimated taxes on the conversions. I know I can change my W-4, but being a new employee I don't want to make too many changes. I am good at being the new kid on the block and I know that means don't make too many changes.
I don't know about the rest of your story but I seriously doubt anybody cares whether you change your withholding, unless maybe you do it every day. Everybody understands that a change in employment might necessitate making some adjustments.

Now, if like some Bogleheads you show up on the first day demanding to change 403b/457 providers and complaining about how your state pension fund is invested, that's a different story.
ah, I guess I should explain. I was changing the W-4 a bit too often in Alaska, in a very small district. I didn't exactly catch heat for it, but I learned my lesson. Our W-4 was on a computer and payroll didn't notice one time when I changed my W-4 and I learned from then on I needed to send a very gentle email to the payroll person to ask if she received the change. I probably changed the W-4 three times that year. Guarantee there will be no complaining about anything here in the great state of Texas. 8-)
Topic Author
AlaskaTeach
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Re: Another Roth Conversion ? - into the weeds I go.

Post by AlaskaTeach »

ichee_marone wrote: Mon Jun 10, 2024 2:55 pm There is a lot I don't understand in your post and certainly some vagaries that are understandable if you don't live and breathe this stuff. Still you need to study up and get terms and methods correct. This board will help...

It's prudent to answer your Roth question by recommending that you get retirement software to model Roth conversions, your pension, your expenses etc.

If you are in a low income/tax bracket this year, it may make sense to convert some of your traditional (i.e. before tax IRA/457B monies ) to Roth. On the 457B, your plan would have to allow a CONVERSION or a rollover to a Traditional IRA. If you do the latter, then a portion (or all) of rollover (Traditional) IRA could be converted. I don't think anyone would recommend you touching your pension to do a Roth conversion without a lot more facts. Please don't touch your pension!!

Retirement software can help you determine if you are on track for your retirement date. You need to start to know what you are spending and classify that spend it mandatory and discretionary.

If you just want to know how much to convert this year, you can model your taxes for this year using a 2024 tax calculator. I like the following: https://www.dinkytown.net/java/1040-tax-calculator.html. Still Roth conversions are best dealt with by modelling the remainder of your working life and retirement. You want to seek to lower your lifetime taxes and not just this year.

Using the 2024 tax calculator, you can model a 2024 conversion amount and see what it does to your 2024 federal taxes. If you convert a traditional to Roth IRA, your custodian should ask how much federal taxes you want to withhold. There are other things to know like IRS late payment fees for conversions, but let's not complicate things too much.
Thanks for the dinky town recommendation. Their calculator went right along with my numbers. I am not sure when, but I will probably check out New Retirement for longterm conversion strategies.
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FiveK
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Re: Another Roth Conversion ? - into the weeds I go.

Post by FiveK »

Unless you have good reason to believe that your marginal tax rate in retirement will be less than 12%, you don't need any calculation tool to support putting money into Roth at 12% now. See the one notable shortcut in the t vs. R wiki.
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LilyFleur
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Re: Another Roth Conversion ? - into the weeds I go.

Post by LilyFleur »

I don't know how old the two of you are, or when you would be required to do RMDs. And, let's remember, choosing to wait to withdraw from tax-deferred accounts until RMDs is a choice. If you have a low income year, and choose to withdraw (without age-related penalties), it would be easy to pull from tax-deferred and contribute to a Roth. For example, if you retired in May at the end of the school year, reducing your income for that year, you could contribute to your Roth because you would have unearned income for that year.

It is worth considering what would happen if one of you dies, because then one of you would enter the more challenging single tax brackets.

It would be great if you revise your original post to be a bit more precise, for example, is your wife's $6,000 pension a monthly amount or a yearly amount? Will you be getting Social Security?

What would your income be as a single if your wife pre-deceases you? What would her income be?

(if the survivor loses income when one spouse dies, RMDs might not be a huge problem.)

Also, what is the time table on the RMD's? Do both of you have RMDs, and what are the projected amounts for both of you, and how far out are you on those? It would be helpful if we knew your ages, because doing Roth conversions (at age 63 and later) can cause your Medicare premiums to rise due to the income-based IRMAA tiers. Here's a handy calculator:

https://www.schwab.com/ira/ira-calculators/rmd

I calculated a balance of $600,000 as of 12/31/23, and if you were 73 this year, your RMD would be $22,641.

How are you planning to pay for long-term care, if needed? Many Bogleheads leave a good-sized balance in tax-deferred, because long-term care is almost 100% tax deductible, so it is a waste of money to pay taxes on Roth conversions if you would spend it on care, tax-free, anyway.

Your projected tax-deferred amount at age 73, $600,000, would hopefully be sufficient to cover nursing home care for both of you. It's really important to have enough to hold onto the house for the one in good health while funds are needed for the care of the one in long-term care. When the last one of you remaining goes into care, the house could then be sold to help cover their expenses.
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AlaskaTeach
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Re: Another Roth Conversion ? - into the weeds I go.

Post by AlaskaTeach »

LilyFleur wrote: Mon Jun 10, 2024 5:33 pm I don't know how old the two of you are, or when you would be required to do RMDs. And, let's remember, choosing to wait to withdraw from tax-deferred accounts until RMDs is a choice. If you have a low income year, and choose to withdraw (without age-related penalties), it would be easy to pull from tax-deferred and contribute to a Roth. For example, if you retired in May at the end of the school year, reducing your income for that year, you could contribute to your Roth.

It is worth considering what would happen if one of you dies, because then one of you would enter the more challenging single tax brackets.

It would be great if you revise your original post to be a bit more precise, for example, is your wife's $6,000 pension a monthly amount or a yearly amount? Will you be getting Social Security?

What would your income be as a single if your wife pre-deceases you? What would her income be?

(if the survivor loses income when one spouse dies, RMDs might not be a huge problem.)

Also, what is the time table on the RMD's? Do both of you have RMDs, and what are the projected amounts for both of you, and how far out are you on those? It would be helpful if we knew your ages, because doing Roth conversions (at age 63 and later) can cause your Medicare premiums to rise due to the income-based IRMAA tiers. Here's a handy calculator:

https://www.schwab.com/ira/ira-calculators/rmd

I calculated a balance of $600,000 as of 12/31/23, and if you were 73 this year, your RMD would be $22,641.

How are you planning to pay for long-term care, if needed? Many Bogleheads leave a good-sized balance in tax-deferred, because long-term care is almost 100% tax deductible, so it is a waste of money to pay taxes on Roth conversions if you would spend it on care, tax-free, anyway.

Your projected tax-deferred amount at age 73, $600,000, would hopefully be sufficient to cover nursing home care for both of you. It's really important to have enough to hold onto the house for the one in good health while funds are needed for the care of the one in long-term care. When the last one of you remaining goes into care, the house could then be sold to help cover their expenses.
Thanks for the questions. I am 59 and she is 61.

Her pension is an annual pension. It appears I may not be getting SS. I only have 15 years of minimum substantial earnings from SS, but my pension projects to be 60k annually.

If my wife dies first, my income projects to be 60k pension, and both deferred accounts, unless she spends hers before death.

If I die first, she has her 6k pension, her Roth IRA of about 34k currently, other deferred accounts about 50k, and her 17k SS.

The plan for long-term care is to buy a SPIA...single premium immediate annuity, but not anytime soon. I would need to know how much we actually have total and by the time that happens, we will be in our early 70s.

I did not know "long term care is almost 100% tax deductible." Would this be an itemized deduction situation every year?
That could change everything.

No house, but an inheritance is very likely, probably 300k in today's dollars. If I need a nursing home, she will probably move in with her sister. If she needs LTC, I will probably do something similar with relatives who live nearby.
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LilyFleur
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Re: Another Roth Conversion ? - into the weeds I go.

Post by LilyFleur »

AlaskaTeach wrote: Mon Jun 10, 2024 6:11 pm
LilyFleur wrote: Mon Jun 10, 2024 5:33 pm I don't know how old the two of you are, or when you would be required to do RMDs. And, let's remember, choosing to wait to withdraw from tax-deferred accounts until RMDs is a choice. If you have a low income year, and choose to withdraw (without age-related penalties), it would be easy to pull from tax-deferred and contribute to a Roth. For example, if you retired in May at the end of the school year, reducing your income for that year, you could contribute to your Roth.

It is worth considering what would happen if one of you dies, because then one of you would enter the more challenging single tax brackets.

It would be great if you revise your original post to be a bit more precise, for example, is your wife's $6,000 pension a monthly amount or a yearly amount? Will you be getting Social Security?

What would your income be as a single if your wife pre-deceases you? What would her income be?

(if the survivor loses income when one spouse dies, RMDs might not be a huge problem.)

Also, what is the time table on the RMD's? Do both of you have RMDs, and what are the projected amounts for both of you, and how far out are you on those? It would be helpful if we knew your ages, because doing Roth conversions (at age 63 and later) can cause your Medicare premiums to rise due to the income-based IRMAA tiers. Here's a handy calculator:

https://www.schwab.com/ira/ira-calculators/rmd

I calculated a balance of $600,000 as of 12/31/23, and if you were 73 this year, your RMD would be $22,641.

How are you planning to pay for long-term care, if needed? Many Bogleheads leave a good-sized balance in tax-deferred, because long-term care is almost 100% tax deductible, so it is a waste of money to pay taxes on Roth conversions if you would spend it on care, tax-free, anyway.

Your projected tax-deferred amount at age 73, $600,000, would hopefully be sufficient to cover nursing home care for both of you. It's really important to have enough to hold onto the house for the one in good health while funds are needed for the care of the one in long-term care. When the last one of you remaining goes into care, the house could then be sold to help cover their expenses.
Thanks for the questions. I am 59 and she is 61.

Her pension is an annual pension. It appears I may not be getting SS. I only have 15 years of minimum substantial earnings from SS, but my pension projects to be 60k annually.

If my wife dies first, my income projects to be 60k pension, and both deferred accounts, unless she spends hers before death.

If I die first, she has her 6k pension, her Roth IRA of about 34k currently, other deferred accounts about 50k, and her 17k SS.

The plan for long-term care is to buy a SPIA...single premium immediate annuity, but not anytime soon. I would need to know how much we actually have total and by the time that happens, we will be in our early 70s.

I did not know "long term care is almost 100% tax deductible." Would this be an itemized deduction situation every year?
That could change everything.

No house, but an inheritance is very likely, probably 300k in today's dollars. If I need a nursing home, she will probably move in with her sister. If she needs LTC, I will probably do something similar with relatives who live nearby.
Yes, the long-term care is itemized every year as part of the medical expense deductions, except for the 7.5% that is not allowed (this amount could change).

Would the anticipated $600,000 in tax-deferred go to her if you die first? And, vice-versa? This is unclear, as from your last post, it looks like she would only be left with a portfolio of $84,000.

So it looks like you would have a retiree yearly income of $60,000 in the case of her death, and her retiree yearly pension + Social Security would be $23,000. You could also receive some Social Security. Was your 15 years of work before you began working as a teacher?

That is a large disparity between your financial viability if one of you becomes single. Is there any way she could get survivor benefits from your pension? I think it's worth investigating.

Also, you may be able to collect on her Social Security, as a survivor, if she were to die first.

At her current projected retiree income:
$23,000 (pension + Social Security) (I don't know if she will pay much tax on her Social Security)
$28,000 estimated RMD for a $600,000 tax-deferred balance at age 73

$51,000-ish very rough ball-park estimate for her taxable income as a single (you need to do the RMD calculator yourself, obviously, as I'm not clear how much of the tax-deferred she ends up with)

The top of the 12% single tax bracket for 2024 is $47,150. No doubt it will be much higher when one of you becomes single. I just don't see RMDs as a big problem. It would be more of a problem for you as a single, but statistically that is less likely. Many of us with pensions will never see the 12% bracket as single retirees, and that is a very good "problem" to have.

I am more concerned about her much lower yearly income if you die first than I am about whether you do Roth conversions this year. And if she is left with only a $84,000 portfolio, I would be very concerned about her financial viability.

Please do your best to state financial concepts as precisely as possible.
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AlaskaTeach
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Re: Another Roth Conversion ? - into the weeds I go.

Post by AlaskaTeach »

Yes, she gets all of the deferred accounts when I die. Her being 2 years older than me, as I think about it now, does not level the playing field in terms of dying first. Some people say men die about 6 years quicker. But one thing that a might help level it a bit would be for me to select a Partial Lump Sum Option from my pension. I can choose anything from one to three years of my pension. Neither one of us is in great shape, but she is an a little worse shape than I am, imo.

Look at it this way. If we have a total of 600k in deferred accts. and she has her Roth, by the time I select my pension option 5+ years from now, then her Roth should be worth 50k+. I only know all numbers for three years, so let's say I choose 3 years lump sum option, it adds 180k to the accts, so now we have a total of 780k. Plenty for both of us to live if we have all of our marbles, and if she dies first, I would have the now 45k pension in addition to 780k pile of money. I die first then she has her 23k plus the pile of money.

The wildcard is an inheritance I will receive. If it is 300k or more I plan to invest all of it in a SPIA, with the survivor getting 100% payment, and will buy the 2% inflation rider.

Yes, I earned my 15 years of minimum substantial earnings before I became a teacher. Sometimes I think it is worth 8k per year, and sometimes I think it is worth nothing, depending upon who answers the question. Someone here the other day had me convinced it is worth $0, so sometime between now and the time I select my pension I will sign up online and try to get an accurate number. It's a pretty rare thing, I think for a teacher to have so many years of minimum substantial earnings so far removed from the present. My last year of MSE was probably 2000.
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LilyFleur
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Re: Another Roth Conversion ? - into the weeds I go.

Post by LilyFleur »

AlaskaTeach wrote: Mon Jun 10, 2024 8:38 pm Yes, she gets all of the deferred accounts when I die. Her being 2 years older than me, as I think about it now, does not level the playing field in terms of dying first. Some people say men die about 6 years quicker. But one thing that a might help level it a bit would be for me to select a Partial Lump Sum Option from my pension. I can choose anything from one to three years of my pension. Neither one of us is in great shape, but she is an a little worse shape than I am, imo.

Look at it this way. If we have a total of 600k in deferred accts. and she has her Roth, by the time I select my pension option 5+ years from now, then her Roth should be worth 50k+. I only know all numbers for three years, so let's say I choose 3 years lump sum option, it adds 180k to the accts, so now we have a total of 780k. Plenty for both of us to live if we have all of our marbles, and if she dies first, I would have the now 45k pension in addition to 780k pile of money. I die first then she has her 23k plus the pile of money.

The wildcard is an inheritance I will receive. If it is 300k or more I plan to invest all of it in a SPIA, with the survivor getting 100% payment, and will buy the 2% inflation rider.

Yes, I earned my 15 years of minimum substantial earnings before I became a teacher. Sometimes I think it is worth 8k per year, and sometimes I think it is worth nothing, depending upon who answers the question. Someone here the other day had me convinced it is worth $0, so sometime between now and the time I select my pension I will sign up online and try to get an accurate number. It's a pretty rare thing, I think for a teacher to have so many years of minimum substantial earnings so far removed from the present. My last year of MSE was probably 2000.
It is good that you are thinking about all of this now. And yes, an inheritance is a wildcard. I did not ever count on an inheritance, but receiving one did make my life easier, although most of it was spent on helping my children with college.

I have a close friend who is a teacher who will receive an extremely small Social Security amount but will have a teacher pension. I have a friend who was in city government who has a great pension but a very small Social Security monthly amount. This friend actually worked a few quarters after they retired from city government in order to get in enough Social Security quarters. It does help out on paying for their Medicare premiums. There is something called WEP which reduces your Social Security if you are going to be collecting a government pension. Just be aware that this is a factor.
https://www.ssa.gov/pubs/EN-05-10045.pdf

I think, for the next few years, you need to carefully gather the facts. Read this forum thoroughly. And, yes, sign up for your online Social Security account. It is tricky, though, because I think perhaps the online calculator assumes you will continue to work, and WEP may be a factor. Come back to the forum with specific questions as you go along.

Also, check with the employer who will be providing your pension. It is fairly common that you can select an option that will provide survivor benefits but it will reduce your monthly amount. You need to take a look at that, in order to make educated decisions when the time comes. The forum has been very helpful to other forum members when they made lump sum vs. monthly pension decisions. That is also a decision to be made very carefully.

It sounds like you have already made up your mind about many decisions that people come to the forum for input on. For example, the SPIA decision. If you poke around the forum, you may find information that you did not anticipate. It seems a lot of Bogleheads buy an SPIA rather late in life (in their 80s) for various reasons. I won't go into the details because I'm not conversant on it, but an SPIA is worth its own dedicated post closer to the time of purchase.

Also, do your pensions have COLA provisions? Social Security does, but it's good to check on the precise COLA for your pensions. I have a government pension with a maximum 2% yearly COLA. That isn't great, but it is helpful for keeping up with inflation.
tibbitts
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Re: Another Roth Conversion ? - into the weeds I go.

Post by tibbitts »

LilyFleur wrote: Tue Jun 11, 2024 2:25 pm I think, for the next few years, you need to carefully gather the facts...
I suggest not waiting and gathering the facts now, even though some of those facts might change in the future.
Topic Author
AlaskaTeach
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Re: Another Roth Conversion ? - into the weeds I go.

Post by AlaskaTeach »

There is one other unknown factor. There is a chance dw and I, or one of us after the other is gone might want to buy a home. I would do it without a mortgage. The 12% tax bracket will most likely not come back, although we cannot be sure.

Assuming we are looking at a one time only chance to convert at 12%, I could do the following:

Open a Roth IRA where I have my current IRA-- Fidelity, and have the last $4000 for 24 go into that.
Convert an amount up to the top of the 12% tax bracket, about 40k...Could it be as simple as having Fidelity withhold taxes?

$4000 + 40,000 of converted plus dw 34,000 = 78k. Moving forward, IRAs for the next 6 years could be Roth IRAs. For tax purposes move forward about 6 years, when we are both 65+ and that little pile of money could easily be 175k+. In today's dollars that is enough to buy a new, small home in Texas, but even if home prices continue to escalate, the tax bite could be eased on traditional IRAs by redeeming IRA $ in two consecutive years, Dec one year and January the next, and then buy in late January or February when the housing market is very cold.

That strategy would result in the 600k being reduced slightly, only with slightly lower amounts of 457b being contributed. I was planning to contribute the max to the 457b for the next 6 years. Instead of 30,500 maybe that amount is 28,000.
Uniballer
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Re: Another Roth Conversion ? - into the weeds I go.

Post by Uniballer »

Yes, you could have Fidelity withhold taxes from your conversion. Don't do that before you are 59.5 or you will pay 10% penalty on the distribution to pay the taxes (but not on the conversion itself).

Withholding will reduce the amount you have in tax advantaged accounts, and you said you have non-tax-deferred money to pay the taxes. If you would prefer to keep up the tax-advantaged account (e.g. for future conversions) then you can put the withheld amount back into a tIRA within 60 days, and say it is a "60 day rollover". That way your taxes will be paid in a timely fashion without any "underpayment of estimated tax" problem, and you can maintain your tax-advantaged account amount for future conversions, etc. Not sure how much this will matter to you in the long run.
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AlaskaTeach
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Re: Another Roth Conversion ? - into the weeds I go.

Post by AlaskaTeach »

Uniballer wrote: Wed Jun 12, 2024 7:02 am Yes, you could have Fidelity withhold taxes from your conversion. Don't do that before you are 59.5 or you will pay 10% penalty on the distribution to pay the taxes (but not on the conversion itself).

Withholding will reduce the amount you have in tax advantaged accounts, and you said you have non-tax-deferred money to pay the taxes. If you would prefer to keep up the tax-advantaged account (e.g. for future conversions) then you can put the withheld amount back into a tIRA within 60 days, and say it is a "60 day rollover". That way your taxes will be paid in a timely fashion without any "underpayment of estimated tax" problem, and you can maintain your tax-advantaged account amount for future conversions, etc. Not sure how much this will matter to you in the long run.
Thanks, I am trying to refresh my memory. Years ago when our kids were small, one year we had over $5000 in tax credits and I converted my wife's IRA to a Roth at 0% tax rate, but I am trying to remember about when I completed the transaction. I think I made the transaction on or about April 10th of the year I filed, meaning I did it on the spot, which was only successful because there was no increase in tax liability.

With this transaction, it seems to me that I need to complete the transaction as soon as it is convenient after I turn 59.5. I turn 59.5 on June 25, so on June 26 I can start the process.

Assuming the 12% bracket never comes back, I am making an instant gain to my accts. of $1200 by comparing the taxes on $40,000 @ 12% to $40,000 @15%.

When I estimated the taxes last night I came up with the income number on the tax table of $44500, and I went up to $84500, to convert, leaving about $9000 "on the table" in the 12% bracket.

If I ask for a little more than 12% withheld from the 40k, it seems to me that I could do another conversion in early 2025, after I have final numbers on the taxes, but before filing. Make sense? If I did the second conversion by February 10, I could get the sixty day rollover completed before filing on April 15. Or I may not need a second rollover if I get enough withheld?

Any holes in this plan, other than the incredible amount of possible negative attention from the IRS?
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Re: Another Roth Conversion ? - into the weeds I go.

Post by RetiredAL »

AlaskaTeach wrote: Thu Jun 13, 2024 8:35 am
Uniballer wrote: Wed Jun 12, 2024 7:02 am Yes, you could have Fidelity withhold taxes from your conversion. Don't do that before you are 59.5 or you will pay 10% penalty on the distribution to pay the taxes (but not on the conversion itself).

Withholding will reduce the amount you have in tax advantaged accounts, and you said you have non-tax-deferred money to pay the taxes. If you would prefer to keep up the tax-advantaged account (e.g. for future conversions) then you can put the withheld amount back into a tIRA within 60 days, and say it is a "60 day rollover". That way your taxes will be paid in a timely fashion without any "underpayment of estimated tax" problem, and you can maintain your tax-advantaged account amount for future conversions, etc. Not sure how much this will matter to you in the long run.
Thanks, I am trying to refresh my memory. Years ago when our kids were small, one year we had over $5000 in tax credits and I converted my wife's IRA to a Roth at 0% tax rate, but I am trying to remember about when I completed the transaction. I think I made the transaction on or about April 10th of the year I filed, meaning I did it on the spot, which was only successful because there was no increase in tax liability.

With this transaction, it seems to me that I need to complete the transaction as soon as it is convenient after I turn 59.5. I turn 59.5 on June 25, so on June 26 I can start the process.

Assuming the 12% bracket never comes back, I am making an instant gain to my accts. of $1200 by comparing the taxes on $40,000 @ 12% to $40,000 @15%.

When I estimated the taxes last night I came up with the income number on the tax table of $44500, and I went up to $84500, to convert, leaving about $9000 "on the table" in the 12% bracket.

If I ask for a little more than 12% withheld from the 40k, it seems to me that I could do another conversion in early 2025, after I have final numbers on the taxes, but before filing. Make sense? If I did the second conversion by February 10, I could get the sixty day rollover completed before filing on April 15. Or I may not need a second rollover if I get enough withheld?

Any holes in this plan, other than the incredible amount of possible negative attention from the IRS?
Unlike contributions, which have until April 15 of the next year to be contributed, conversions work on physical year, so it must be done by 12/31.
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Re: Another Roth Conversion ? - into the weeds I go.

Post by Uniballer »

I have been estimating my parents' (and my own) income in late December (after dividends are announced) to determine how much to convert to Roth before 12/31. This is as late as you can go for conversions in a given tax year. I have generally preferred to leave some money on the table rather than risk going over the 0% capital gains limit, which is a little below the top of the 12% tax bracket.

My parents pay just enough in estimated tax every year to reach safe harbor, and I adjust my extra withholding periodically to make sure I get there, too.
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Re: Another Roth Conversion ? - into the weeds I go.

Post by Lalamimi »

AlaskaTeach wrote: Mon Jun 10, 2024 3:09 pm
Lalamimi wrote: Mon Jun 10, 2024 2:59 pm I'm no help, I can't get past your coming to Texas in August from Alaska....

Ha! I probably set some kind of record for highest differential in temperature. I left a rural village in late May at about 10:20 a.m. and the temp was 38 degrees. Late the next day, I arrived at 5:00 p.m. to a mind-melting 102 degrees. 64 degrees difference!. 8-)
We just had company from New Zealand. They were warned, but boy where they hot. They left winter, to come to 99 degrees (she fainted at The Alamo Monday). They just left to do a cruise out of Vancouver.
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Re: Another Roth Conversion ? - into the weeds I go.

Post by WoodSpinner »

AlaskaTeach,

Personally, I don’t think you have enough information to make a decision especially since you are still working and don’t present much in the way of Cashflow and Tax Planning projections.

At your income level, I think maxing out your Roth contributions are a great idea, I would not be making any Traditional contributions. This is a much better bet than additional conversions.

Lastly, your LTC plan of purchasing a SPIA needs some more refinement. This can be significant factor if you are trying to Self Fund.

Just my $.02

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Re: Another Roth Conversion ? - into the weeds I go.

Post by mhadden1 »

AlaskaTeach wrote: Mon Jun 10, 2024 1:49 pm
My latest retirement plan has me working five years in Texas education, our deferred accounts could reasonably top $600k at my planned retirement in 2029, all but her 35k Roth is deferred. I project a pension of $60k. MFJ, her pension of 6k, her projected SS of 17k totals 83k, which is still in the 15% bracket, but then RMDs appear later.
I don't think the $600k is likely to cause a tax bomb unless maybe it doubles before RMDs start. Converting in the 12% bracket will likely do no harm if you do encounter good opportunities. And, making an estimated tax payment is easy if you can't reach a safe harbor - I did it for my mother, online, this year.
Retired 12/31/2015, age 58 years 77 days (but who's counting?)
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Re: Another Roth Conversion ? - into the weeds I go.

Post by JBTX »

AlaskaTeach wrote: Mon Jun 10, 2024 1:49 pm I never thought I would get to the point of thinking Roth conversions so far from actual retirement...probably 5-6 years, but here it goes:

I got a job teaching in Texas, and am taking a large pay cut from Alaska, which leads me to possibly doing some conversions.

I have already contributed $26400 to my 457b. My paychecks in Texas start in late August. My Traditional IRA contributions do not finish until November.

Am I a candidate to do conversions or maybe the dw and our salaries are low enough? The number on the tax table is looking like 51k, if I stop 457b contributions.

For this year only, if our withholding is much lower than the 90% requirement, I conclude the whole process is worthless. Am I more or less correct? Or is there a way to pay estimated taxes on the conversions. I know I can change my W-4, but being a new employee I don't want to make too many changes. I am good at being the new kid on the block and I know that means don't make too many changes.

Should I seek to aggressively convert this year regardless of how much $ are in deferred accounts because the tax bracket is going from 12% to 15% on January 1, 2025?

My latest retirement plan has me working five years in Texas education, our deferred accounts could reasonably top $600k at my planned retirement in 2029, all but her 35k Roth is deferred. I project a pension of $60k. MFJ, her pension of 6k, her projected SS of 17k totals 83k, which is still in the 15% bracket, but then RMDs appear later.

If I needed to reduce my pension I could get a PLSO-partial lump sum, up to three years worth of pension to add to the deferred accounts, which would lower my pension to about 45k, which would allow plenty of room for conversions. A state retirement person told me the 75% factor if doing a 3 year lump sum. The math on that is 45 + 6+ 17 = 68. Over 7-8 years, I could easily convert maybe 25% of our accts.
The tax law reverts to higher rates on 1/1/26.

We aren’t allowed to speculate on future tax law, and anything can happen, including nothing / stalemate, but at the moment there is general consensus across the aisle that tax rates for most taxpayers should not increase in 2026.

I see little risk of doing Roth conversions up to the top of the 12% tax bracket for 2024 and 2025.
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Re: Another Roth Conversion ? - into the weeds I go.

Post by celia »

LilyFleur wrote: Mon Jun 10, 2024 5:33 pm How are you planning to pay for long-term care, if needed? Many Bogleheads leave a good-sized balance in tax-deferred, because long-term care is almost 100% tax deductible, so it is a waste of money to pay taxes on Roth conversions if you would spend it on care, tax-free, anyway.
You could say this about any taxable income: RMDs, Roth conversions, part-time job, 85% of SS....

For example, we've converted all tax-deferred accounts. If one of us needs LTC, the deduction would bring down our AGI, the same as if we had less pension, fewer dividends, or less SS.

It's really important to have enough to hold onto the house for the one in good health while funds are needed for the care of the one in long-term care. When the last one of you remaining goes into care, the house could then be sold to help cover their expenses.
Unfortunately, holding on to a house after first death for over 5 years before selling will only give you a $250 exemption (for one person) instead of $500k for two of you. But if you get a step-up after the death of the first spouse, maybe it's not that bad.
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