Partial Roth conversions--okay to withdraw them?

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Nightowl99
Posts: 39
Joined: Mon Feb 26, 2018 7:49 pm

Partial Roth conversions--okay to withdraw them?

Post by Nightowl99 »

If I decide to make partial Roth conversions over the next seven years, up to the top of the 22% tax bracket, I can pay the taxes with money from my taxable account. The Retiree Portfolio Model indicates that I may come out ahead by doing this, maybe ~$80,000 if I live to be 90, or something like that (assuming no user errors). I'm currently thinking it would be beneficial if I can convert enough to avoid slipping into the 28% bracket when RMDs begin. Or at least there's a reasonable chance that a series of partial conversions may reduce future tax bills somewhat. . . .

Meanwhile, I'll also need to withdraw money to bridge the gap between my pension and expenses because I'm waiting until age 70 to collect Social Security. Would it be better to withdraw more money from the taxable account, for living expenses, or would it be okay to withdraw some of the converted money from the Roth? The Roth has been open for more than five years, and I'm currently 61.

Is it always better to withdraw from the Roth last? I've read that Roth conversions work better if the Roth account is left alone to grow for a long time. If you've already paid taxes on that money, though, and you would have paid taxes on it anyway if you had just withdrawn it from your traditional IRA, does it really make that much of a difference if you withdraw it from the Roth?

The taxable account is a little volatile since it's mostly stock mutual funds, such as Total Stock Market, with only a small amount in a muni bond fund and one c.d. If I go ahead with these partial conversions, I'll move stock funds into the Roth, leaving mainly bond funds in the tIRA. Does that sound like a good plan to you--or would you say that it's not worth the effort because future taxes are unknown, maybe Roths will somehow end up being taxed in the future, etc.?
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Silk McCue
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Joined: Thu Feb 25, 2016 7:11 pm

Re: Partial Roth conversions--okay to withdraw them?

Post by Silk McCue »

Although it is true that no one knows the future we absolutely should plan using the best information we have. If you can convert to Roth now at 22% to avoid what you believe will be 28% in 9 years when you begin taking RMDs that is very reasonable.

My wife and I are under 60 and are already converting in advance of full retirement in 2.5 years and will continue until our goal is met. Our goal is to leave enough in tax deferred to distribute all charitable giving starting at the first of us reaching 70.5 via Qualified Charitable Distributions (QCDs) resulting in 0% tax on all remaining tax deferred for the rest of our lives. Otherwise those RMD's would be taxed at 22.2% and 40.7%.

From another post I find that you have a pension that provides some level of support in addition to your taxable account between now and 70. Having converted to Roth I would not be inclined as a first choice to pull from the Roth account while continuing to do conversions as that seems counter productive. Hopefully your taxable account can be consumed in a tax efficient manner along with your pension in order to maximize the headroom for making conversions. If you consume your taxable account during this process prior to 70 you could pull tax free gains from your Roth account to complete the bridge.

In answer to your last paragraph it is absolutely worth it to make and execute the best plan you can based upon what you know and can control even if you can't control the future. A farmer plants a field even if they can't be certain that the weather will be favorable or that the crop will be bountiful this season. You plant because you are farmer and you expect a harvest. As the CEO of your retirement plan you develop and implement reasonable plans for the success of your enterprise even if you can't control all outcomes. You make decisions and implement because you are the CEO.

Cheers
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Nightowl99
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Joined: Mon Feb 26, 2018 7:49 pm

Re: Partial Roth conversions--okay to withdraw them?

Post by Nightowl99 »

Thank you for the reply! I am so happy to have found the Bogleheads website and the helpful information that everyone shares.
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Epsilon Delta
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Re: Partial Roth conversions--okay to withdraw them?

Post by Epsilon Delta »

Silk McCue wrote: Fri May 18, 2018 6:36 am From another post I find that you have a pension that provides some level of support in addition to your taxable account between now and 70. Having converted to Roth I would not be inclined as a first choice to pull from the Roth account while continuing to do conversions as that seems counter productive.
To first order it's neither productive or counter productive, it's a wash. There may be second order effects that make it better or worse for people in particular circumstances.

If there is nothing special going on then converting to hit a particular taxable income and then drawing whatever you happen to spend from the Roth may make it easier to manage.
Silk McCue
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Re: Partial Roth conversions--okay to withdraw them?

Post by Silk McCue »

Epsilon Delta wrote: Fri May 18, 2018 11:41 am
Silk McCue wrote: Fri May 18, 2018 6:36 am From another post I find that you have a pension that provides some level of support in addition to your taxable account between now and 70. Having converted to Roth I would not be inclined as a first choice to pull from the Roth account while continuing to do conversions as that seems counter productive.
To first order it's neither productive or counter productive, it's a wash. There may be second order effects that make it better or worse for people in particular circumstances.

If there is nothing special going on then converting to hit a particular taxable income and then drawing whatever you happen to spend from the Roth may make it easier to manage.
I would have much preferred that you included the next sentence in the paragraph that you pulled my quote from which was:

"Hopefully your taxable account can be consumed in a tax efficient manner along with your pension in order to maximize the headroom for making conversions.'

The Roth dollars are worth more than the Taxable dollars. Why would you spend Roth dollars that you paid 22% tax on to convert them when you can spend Taxable dollars that will only have the capital gains taxed? Allowing the Roth to grow for later spending will have zero impact on taxes years down the road while taxes on Taxable spent combined with Pension, and Social Security, and RMDs will likely have a more pronounced impact from a tax perspective.

Their are a lot of unknowns here but I would stick with my recommendation in absence of any clear flaw in my thinking. I am always ready to learn more and this site is responsible for that in great part.

Cheers
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