Roth rollovers post retirement - or not?

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Topic Author
reddison
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Roth rollovers post retirement - or not?

Post by reddison » Wed Mar 13, 2019 5:25 pm

I need help with how to analyze whether or not my wife and I should be doing tIRA to Roth rollovers post retirement. We are currently in the 35% tax bracket so no rollovers now. We are both contemplating retirement in January 2021 when we are 63 and 62. I will receive a taxable retirement benefit of close to $100k for 5 years post retirement plus a $3k/yr pension for life. So our income from my age 64-68 will be $103k plus interest and dividends (30k?) - $133k. I could rollover roughly $35k per year until age 68, and around 130k or more the last 2 years before RMDs kick in. This would put us in the 24% tax bracket. This assumes that we don’t claim my wife’s social security during this time period (I am planning to wait until 70 for mine). I estimate our initial combined RMDs to be around $134k/yr if we do not do any Roth rollovers and $105k/yr if we do – plus interest and dividends. If things work out as planned (hoped) we will be leaving a fairly sizeable inheritance for children and charity, and I know it'd be much easier for our kids to receive Roths than IRAs. But there will still be a lot in IRAs no matter what. Is there an obvious answer? I would appreciate advice from others with a better understanding of this. TYIA.

Edited: I forgot to add, I had estimated our SS benefits at $80k (future dollars) if my wife filed at 65 and I filed at 70. So a bit more if she were to wait until 70 too.

Alan S.
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Re: Roth rollovers post retirement - or not?

Post by Alan S. » Wed Mar 13, 2019 7:50 pm

reddison wrote:
Wed Mar 13, 2019 5:25 pm
I need help with how to analyze whether or not my wife and I should be doing tIRA to Roth rollovers post retirement. We are currently in the 35% tax bracket so no rollovers now. We are both contemplating retirement in January 2021 when we are 63 and 62. I will receive a taxable retirement benefit of close to $100k for 5 years post retirement plus a $3k/yr pension for life. So our income from my age 64-68 will be $103k plus interest and dividends (30k?) - $133k. I could rollover roughly $35k per year until age 68, and around 130k or more the last 2 years before RMDs kick in. This would put us in the 24% tax bracket. This assumes that we don’t claim my wife’s social security during this time period (I am planning to wait until 70 for mine). I estimate our initial combined RMDs to be around $134k/yr if we do not do any Roth rollovers and $105k/yr if we do – plus interest and dividends. If things work out as planned (hoped) we will be leaving a fairly sizeable inheritance for children and charity, and I know it'd be much easier for our kids to receive Roths than IRAs. But there will still be a lot in IRAs no matter what. Is there an obvious answer? I would appreciate advice from others with a better understanding of this. TYIA.

Edited: I forgot to add, I had estimated our SS benefits at $80k (future dollars) if my wife filed at 65 and I filed at 70. So a bit more if she were to wait until 70 too.
You should definitely do some conversions post retirement, the question is how much? Generally, you want to attempt to produce roughly the same amount of taxable income per year from retirement on. That means increasing your conversions before RMDs and substantial SS benefits kick in. One plus here is that under current law all marginal rates will probably be about as low as they ever will be. That said, it is not possible to accurately determine more than a general approach to the future. You will have to fine tune it each year based on variations that emerge from year to year.

In striving to equalize your taxable income from retirement on, any conversions simultaneously increase your current taxable income while reducing future taxable income, so each converted dollar is worth a little more than the next converted dollar. I don't think I would start to factor in your children's expected financial success until late on with respect to whether they should inherit pre tax or Roth IRAs. Too many variables and things can change, but you might start to think about that later on.

Good plan to defer SS benefits since that generates more SS income later, amounts that receive COLAs and 15% is non taxable. Moreover, it opens up more conversion space before SS and RMDs kick in.

Am curious about that 5 year 100k retirement payout. Can you provide more details on that? Has the plan indicated whether this amount is rollover eligible or not? It might be due to the limited payout period. Whatever, by shifting things around you can effectively adjust to whether it is rollover eligible, and if so whether to convert it.

Does either spouse have any NUA potential from employer shares in a 401k? Do the IRAs or employer plans have any basis from non deductible contributions? In either case, the planning presents additional options, of course with additional complexity.

ByThePond
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Re: Roth rollovers post retirement - or not?

Post by ByThePond » Wed Mar 13, 2019 8:41 pm

You may wish to run your numbers through the Retiree Portfolio Model in the wiki. (https://www.bogleheads.org/wiki/Retiree_Portfolio_Model) It allows for the various conditions you want to consider and not only evaluates the advisability of Roth conversions, but also demonstrates the projected tax/monetary advantages. There's a learning curve, but I found it very helpful in answering just this question for myself.
Once set up, you can fiddle with it to find a sweet spot for your exact situation.

BigJohn
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Re: Roth rollovers post retirement - or not?

Post by BigJohn » Wed Mar 13, 2019 8:53 pm

I retired at age 58 and spent long hours with spreadsheets trying to analyze this same scenario. After all that work, I concluded that there were just too many unknowns to be very accurate and landed on the same approach as suggested by Alan S. I am deferring SS until age 70 so both that and RMDs start at essentially the same time. I've picked a small range of real returns (2%-4%) and each year I take the prior YE balances and do Roth conversion that I estimate will keep my taxable income about flat over the next 20 years. This approach leaves me at about a 50/50 split between traditional and Roth IRAs at age 70 which give me a good diversification of income sources.

LeeMKE
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Re: Roth rollovers post retirement - or not?

Post by LeeMKE » Wed Mar 13, 2019 10:19 pm

I use I-ORP.com (extended calculator) for this problem. I'm following the schedule from I-ORP to do our tIRA to ROTH conversions. So far, so good. For us, it makes a big difference in our tax rates later in retirement. (12%/15% rather than a bumpy ride that included several years at 34%)

The Retiree Portfolio Model had a few too many levers for me to get comfortable with the tool. It was designed to answer a different set of questions, and is probably great at that. But for the Roth conversion question (and how taking SS at various ages changes the math) I-ORP is my choice.
The mightiest Oak is just a nut who stayed the course.

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Peter Foley
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Re: Roth rollovers post retirement - or not?

Post by Peter Foley » Wed Mar 13, 2019 10:44 pm

As Big John states there are a lot of unknowns - based in part on the fact that there are a lot of variables.

There is a kinda "do no harm" approach along the lines of what Alan suggests. At your projected income levels a good target might be to convert to a MAGI that would keep you below the increase in Medicare B premiums (IRMAA). For married filing jointly that is $170,000.

The Wizard
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Re: Roth rollovers post retirement - or not?

Post by The Wizard » Wed Mar 13, 2019 10:49 pm

BigJohn wrote:
Wed Mar 13, 2019 8:53 pm
I retired at age 58 and spent long hours with spreadsheets trying to analyze this same scenario. After all that work, I concluded that there were just too many unknowns to be very accurate and landed on the same approach as suggested by Alan S. I am deferring SS until age 70 so both that and RMDs start at essentially the same time. I've picked a small range of real returns (2%-4%) and each year I take the prior YE balances and do Roth conversion that I estimate will keep my taxable income about flat over the next 20 years. This approach leaves me at about a 50/50 split between traditional and Roth IRAs at age 70 which give me a good diversification of income sources.
The idea of levelizing your AGI is indeed close to the optimal approach, especially for single people. A few percent increase per year is good also.
Only complication for some of us might be the Medicare IRMAA tiers; not good to be "just over" one.

And for MFJ folks, the issue of the eventual survivor's AGI needs to be considered, which might be a vote in favor of somewhat higher Roth conversions in your pre-70 years...
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sawdust60
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Re: Roth rollovers post retirement - or not?

Post by sawdust60 » Thu Mar 14, 2019 12:40 am

+1 for using RPM. It has an input column where you load Roth conversion amounts by year. And a few columns to the right, you are able to see how much of the tax rate you are using at that level. On the Results sheet, there is a table (Lines 178-185) that compares ultimate portfolio balances with/without Roth.

Review how the settings impact the tax on the earnings of the Taxable Portfolio. When I did the analysis of the after-tax impacts of the changes in the portfolios, I found that there was no tax impact on the difference in the Taxable Portfolio until I entered amounts in Setup E205 & E206. [This was a reminder to me that some part of the Taxable portfolio would not be taxed, if heirs get a basis step-up. I still prefer Roth over Taxable, but another uncertainty to consider.

Also remember that when you use taxable funds to pay the tax on a Roth conversion, those funds are effectively moved into the Roth. This may be how it is done in these models, but don't forget about it when you actually do the conversion -- 0% withholding on the conversion, and then do an estimated tax payment.

There is an alert on the Setup sheet (Line 137) that shows a total IRMAA amount and the years; you may need to unhide some rows on the Tax Tables sheet to see the detail. Although the results are calculated, the IRMAA values are not included as a tax or elsewhere; so remember to adjust as appropriate.

The web-based Extended ORP may provide some insights in its timing of Roth conversions, etc. Optimal Retirement Planner, and then select Extended ORP (second item at the top of the page). ORP doesn't include IRMAA; Medicare MAGI (AGI plus tax exempt interest income) is a critical number in my modeling. And ORP always includes SS income at 85%, which is fine for a lot of cases, but is inaccurate for others.

-- more on IRMAA --
In evaluating your choice for converting to the top of the 24% bracket: You incur IRMAA from age 63+. If you pay IRMAA, it amounts to an additional tax of 3.6% for the first tier and 4.6% for the others. So instead of a 24% marginal rate, the combined rate is 28.6%. Paying IRMAA in some years prior to RMD might help avoid IRMAA for future years. But what if it doesn't? Your Roth portfolio is higher, and if higher earnings result in your incurring IRMAA, perhaps not a terrible problem. Something to consider, as you will get to evaluate Roth conversions each year.

Note that the month you turn 65 will be used for the first year, as it is a monthly amount. The next year your wife turns 65 and so your premium will be 12 months and hers would be based on the months she was 65. IRMAA uses your tax return from two years prior. And you don't know what the brackets are when you do your Roth conversions.

Topic Author
reddison
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Re: Roth rollovers post retirement - or not?

Post by reddison » Thu Mar 14, 2019 9:01 am

Alan S. wrote:
Wed Mar 13, 2019 7:50 pm
reddison wrote:
Wed Mar 13, 2019 5:25 pm
I need help with how to analyze whether or not my wife and I should be doing tIRA to Roth rollovers post retirement. We are currently in the 35% tax bracket so no rollovers now. We are both contemplating retirement in January 2021 when we are 63 and 62. I will receive a taxable retirement benefit of close to $100k for 5 years post retirement plus a $3k/yr pension for life. So our income from my age 64-68 will be $103k plus interest and dividends (30k?) - $133k. I could rollover roughly $35k per year until age 68, and around 130k or more the last 2 years before RMDs kick in. This would put us in the 24% tax bracket. This assumes that we don’t claim my wife’s social security during this time period (I am planning to wait until 70 for mine). I estimate our initial combined RMDs to be around $134k/yr if we do not do any Roth rollovers and $105k/yr if we do – plus interest and dividends. If things work out as planned (hoped) we will be leaving a fairly sizeable inheritance for children and charity, and I know it'd be much easier for our kids to receive Roths than IRAs. But there will still be a lot in IRAs no matter what. Is there an obvious answer? I would appreciate advice from others with a better understanding of this. TYIA.

Edited: I forgot to add, I had estimated our SS benefits at $80k (future dollars) if my wife filed at 65 and I filed at 70. So a bit more if she were to wait until 70 too.
You should definitely do some conversions post retirement, the question is how much? Generally, you want to attempt to produce roughly the same amount of taxable income per year from retirement on. That means increasing your conversions before RMDs and substantial SS benefits kick in. One plus here is that under current law all marginal rates will probably be about as low as they ever will be. That said, it is not possible to accurately determine more than a general approach to the future. You will have to fine tune it each year based on variations that emerge from year to year.

In striving to equalize your taxable income from retirement on, any conversions simultaneously increase your current taxable income while reducing future taxable income, so each converted dollar is worth a little more than the next converted dollar. I don't think I would start to factor in your children's expected financial success until late on with respect to whether they should inherit pre tax or Roth IRAs. Too many variables and things can change, but you might start to think about that later on.

Good plan to defer SS benefits since that generates more SS income later, amounts that receive COLAs and 15% is non taxable. Moreover, it opens up more conversion space before SS and RMDs kick in.

Am curious about that 5 year 100k retirement payout. Can you provide more details on that? Has the plan indicated whether this amount is rollover eligible or not? It might be due to the limited payout period. Whatever, by shifting things around you can effectively adjust to whether it is rollover eligible, and if so whether to convert it.

Does either spouse have any NUA potential from employer shares in a 401k? Do the IRAs or employer plans have any basis from non deductible contributions? In either case, the planning presents additional options, of course with additional complexity.
Alan - thank you for your helpful response. The retirement payout is not part of a plan. It's per the terms of a partnership agreement. So it's not something that is rollover eligible. And neither of us have any employer stock. As to the amount of rollover, I anticipate rolling over as much as I can up to (currently) the $170k IRMAA limit or top of 24% tax bracket, which is similar. Presumably those amounts will change in the future. When I ran the opensocialsecurity program, it told us to take the wife's SS at 62, and mine at 70. But if we take hers then, that's $17000/yr less that we can rollover. So do we wait and take both when I turn 70 to maximize the rollovers?

Topic Author
reddison
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Re: Roth rollovers post retirement - or not?

Post by reddison » Thu Mar 14, 2019 9:06 am

Thx to everyone who has responded. I have used the i-orp program but didn't know how to add the Roth conversions variable so I'll go back and try that again (thx Sawdust). Thx also for the info on the Optimal Retirement Planner. I will give it a try as well.

sawdust60
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Re: Roth rollovers post retirement - or not?

Post by sawdust60 » Thu Mar 14, 2019 9:55 am

As to the amount of rollover, I anticipate rolling over as much as I can up to (currently) the $170k IRMAA limit or top of 24% tax bracket, which is similar.
170k Medicare MAGI is similar to 145k taxable -- well below the top of the 22% bracket.

bradpevans
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Re: Roth rollovers post retirement - or not?

Post by bradpevans » Thu Mar 14, 2019 10:59 am

at some point one of you will file as single (and smaller SS will stop)
That also can trigger higher tax rates (again suggesting rollover post retirement should be explored)

Topic Author
reddison
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Re: Roth rollovers post retirement - or not?

Post by reddison » Thu Mar 14, 2019 1:58 pm

sawdust - yes, good point. There will be room for a higher level of rollover.

brad - Trying not to think about there being only one, but agreed.

The Wizard
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Re: Roth rollovers post retirement - or not?

Post by The Wizard » Thu Mar 14, 2019 2:26 pm

sawdust60 wrote:
Thu Mar 14, 2019 9:55 am
As to the amount of rollover, I anticipate rolling over as much as I can up to (currently) the $170k IRMAA limit or top of 24% tax bracket, which is similar.
170k Medicare MAGI is similar to 145k taxable -- well below the top of the 22% bracket.
On big question with the IRMAA tiers is where you will be from age 71 on.
I'll be in the middle of the IRMAA tier structure, so I figure I might as well get used to that in my late 60s with Roth conversions of the right amount...
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Topic Author
reddison
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Re: Roth rollovers post retirement - or not?

Post by reddison » Thu Mar 14, 2019 2:47 pm

The Wizard wrote:
Thu Mar 14, 2019 2:26 pm
sawdust60 wrote:
Thu Mar 14, 2019 9:55 am
As to the amount of rollover, I anticipate rolling over as much as I can up to (currently) the $170k IRMAA limit or top of 24% tax bracket, which is similar.
170k Medicare MAGI is similar to 145k taxable -- well below the top of the 22% bracket.
On big question with the IRMAA tiers is where you will be from age 71 on.
I'll be in the middle of the IRMAA tier structure, so I figure I might as well get used to that in my late 60s with Roth conversions of the right amount...
I am assuming the IRMAA tiers will go up over the next 9 years but I guess anything could happen. I don't even know what they were in past years.

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Peter Foley
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Re: Roth rollovers post retirement - or not?

Post by Peter Foley » Fri Mar 15, 2019 3:02 pm

The IRMAA number have been the same for 2016-2017-2018.

I do not know if they are automatically indexed or not.

Edit: A quick check with Michael Kitces's Bird's Eye view came up with the following:
The annual MAGI thresholds for IRMAA Medicare Premium surcharges are adjusted annually for inflation, although under the Affordable Care Act, the inflation adjustments to the MAGI thresholds were frozen in place from 2011 to 2019. As a result, the impact of inflation on household incomes itself will cause at least some people to creep into a higher IRMAA tier, although overall the IRMAA surcharges are still projected to impact fewer than 5% of Medicare enrollees.

Topic Author
reddison
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Re: Roth rollovers post retirement - or not?

Post by reddison » Mon Mar 18, 2019 1:53 pm

Thx for the info Peter. That's certainly a long time to freeze it.

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