401K Retirement Advice

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Finley2021
Posts: 23
Joined: Sun Jul 26, 2020 10:52 pm

401K Retirement Advice

Post by Finley2021 » Sat Aug 01, 2020 8:39 am

Is this a good idea or am i getting guided down the wrong path?

Guy retires from the Railroad at 62 - 40 years of service. Lets just say he doesn't need his 401K (Balance - 1 million) to live the same quality of life, at the moment. He has 8 years before the government makes him start to withdraw funds from that 401K. Is it wise during those 8 years to take out monthly withdrawals from the 401K and roll them into a ROTH that this guy has set up when he was 45 years old? All accounts are with Fidelity because of the employer.
If it is a good idea, how much money per month?

I am not very confident at the moment and this is why i am need help. I just read Bogleheads guide to investing. What should I read next?

lakpr
Posts: 5736
Joined: Fri Mar 18, 2011 9:59 am

Re: 401K Retirement Advice

Post by lakpr » Sat Aug 01, 2020 9:02 am

Firstly, you have 10 years now, not 8 years. The SECURE act raised the minimum age at which RMDs begin to 72.

To complete Roth conversions of $1 million within 10 years is approximately $100k per year.

If your current income is increased by $100k from what you get now, in terms of pensions, Social Security (?, I seem to remember that Railroad employees are not eligible for SS) etc.? What tax bracket does that place you in? If it is the same tax bracket you are in right now, then Roth conversions make sense.

Consider converting at least to the top of the current tax bracket annually. It may mean continuing the conversions even beyond age 72, so be it.

There are a couple of tools, the Retiree Portfolio Model (RPM - search the forum), and iORP which would advice you the best way and schedule to convert your tax deferred balances to Roth.

Topic Author
Finley2021
Posts: 23
Joined: Sun Jul 26, 2020 10:52 pm

Re: 401K Retirement Advice

Post by Finley2021 » Sat Aug 01, 2020 9:19 am

I didn't think that taking 100K a year out for 10 years would make sense because i would get killed in taxes. I guess what i am asking is if I should take anything out over the 10 years or do nothing? What would be a sensible number - 5K per month?
You are correct, no social security for me. I pay into Railroad Retirement.

sailaway
Posts: 1778
Joined: Fri May 12, 2017 1:11 pm

Re: 401K Retirement Advice

Post by sailaway » Sat Aug 01, 2020 9:23 am

Finley2021 wrote:
Sat Aug 01, 2020 9:19 am
I didn't think that taking 100K a year out for 10 years would make sense because i would get killed in taxes. I guess what i am asking is if I should take anything out over the 10 years or do nothing? What would be a sensible number - 5K per month?
You are correct, no social security for me. I pay into Railroad Retirement.
It depends on your current tax rates vs expected tax rates when RMDs start. Many people do the calculations to fill a certain tax bracket.

lakpr
Posts: 5736
Joined: Fri Mar 18, 2011 9:59 am

Re: 401K Retirement Advice

Post by lakpr » Sat Aug 01, 2020 9:25 am

You get killed in taxes and your heirs will get killed in even bigger taxes if you don’t convert to Roth.

You do not have to convert everything, do consider converting up to the top of current tax bracket.

If you bequeath a Traditional 401k to your heirs with $1 million in it, your heirs are obligated to empty that within 10 years anyway. Uncle Sam will get his cut one way or another.

As I said, look for RPM tool and play with it. It would suggest the optimum amounts to convert to Roth based on your particular situation while ensuring that you are left with the maximum after-taxes pile.

User avatar
David Jay
Posts: 8908
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: 401K Retirement Advice

Post by David Jay » Sat Aug 01, 2020 9:26 am

Finley2021 wrote:
Sat Aug 01, 2020 9:19 am
I didn't think that taking 100K a year out for 10 years would make sense because i would get killed in taxes. I guess what i am asking is if I should take anything out over the 10 years or do nothing? What would be a sensible number - 5K per month?
You are correct, no social security for me. I pay into Railroad Retirement.
It really comes down to your marginal tax rate - the tax rate paid on the last dollar of income. That depends on your total income. It is also affected by single or married.

This is what lakpr was talking about. It likely makes sense to convert to the top of the 22% tax bracket, however much that is in your case.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

Topic Author
Finley2021
Posts: 23
Joined: Sun Jul 26, 2020 10:52 pm

Re: 401K Retirement Advice

Post by Finley2021 » Sat Aug 01, 2020 9:27 am

I understand now. Thank you

ralph124cf
Posts: 2530
Joined: Tue Apr 01, 2014 11:41 am

Re: 401K Retirement Advice

Post by ralph124cf » Sat Aug 01, 2020 9:55 am

It is not necessary to convert monthly. Towards the end of the year, figure out your approximate income for the year, and then make a single conversion from 401(k) to the Roth.

Take a look at Medicare IRMAA. If you would be close to a bracket step, be sure you don't go over by converting too much. One dollar over the step costs you very significant money two years down the road.

Ralph

Topic Author
Finley2021
Posts: 23
Joined: Sun Jul 26, 2020 10:52 pm

Re: 401K Retirement Advice

Post by Finley2021 » Sat Aug 01, 2020 11:51 am

Thank you Ralph

02nz
Posts: 5393
Joined: Wed Feb 21, 2018 3:17 pm

Re: 401K Retirement Advice

Post by 02nz » Sat Aug 01, 2020 12:00 pm

David Jay wrote:
Sat Aug 01, 2020 9:26 am
It likely makes sense to convert to the top of the 22% tax bracket, however much that is in your case.
Up to the top of the 12% bracket almost certainly makes sense, at 22% depends.

OP, if you tell us married/single, and how much your pension (and any other income) is, we can give you a better estimate.

User avatar
FiveK
Posts: 9588
Joined: Sun Mar 16, 2014 2:43 pm

Re: 401K Retirement Advice

Post by FiveK » Sat Aug 01, 2020 1:54 pm

Finley2021 wrote:
Sat Aug 01, 2020 8:39 am
What should I read next?
Perhaps Traditional versus Roth - Bogleheads. Won't change any of the advice already given, but goes into more details on "why".

sycamore
Posts: 877
Joined: Tue May 08, 2018 12:06 pm

Re: 401K Retirement Advice

Post by sycamore » Sat Aug 01, 2020 2:12 pm

Finley2021 wrote:
Sat Aug 01, 2020 8:39 am
Is this a good idea or am i getting guided down the wrong path?

Guy retires from the Railroad at 62 - 40 years of service. Lets just say he doesn't need his 401K (Balance - 1 million) to live the same quality of life, at the moment. He has 8 years before the government makes him start to withdraw funds from that 401K. Is it wise during those 8 years to take out monthly withdrawals from the 401K and roll them into a ROTH that this guy has set up when he was 45 years old? All accounts are with Fidelity because of the employer.
If it is a good idea, how much money per month?

I am not very confident at the moment and this is why i am need help. I just read Bogleheads guide to investing. What should I read next?
Finley2021, not to be picky but the terminology you use doesn't sound right. In particular you wouldn't literally take withdrawals from the 401k (into a taxable account) and then put that money in a Roth IRA. Putting money from a taxable account into a Roth IRA is considered a contribution, and you can only contribute to a Roth IRA if you have earned income.

Instead, you would rollover (directly) your 401k to a Traditional IRA and subsequently (either monthly or annually) convert some of the Traditional IRA to a Roth IRA.

I may be misunderstanding what you're suggesting so I welcome any correction.

User avatar
FiveK
Posts: 9588
Joined: Sun Mar 16, 2014 2:43 pm

Re: 401K Retirement Advice

Post by FiveK » Sat Aug 01, 2020 2:18 pm

sycamore wrote:
Sat Aug 01, 2020 2:12 pm
Finley2021 wrote:
Sat Aug 01, 2020 8:39 am
Is it wise during those 8 years to take out monthly withdrawals from the 401K and roll them into a ROTH that this guy has set up when he was 45 years old? All accounts are with Fidelity because of the employer.
Finley2021, not to be picky but the terminology you use doesn't sound right. In particular you wouldn't literally take withdrawals from the 401k (into a taxable account) and then put that money in a Roth IRA. Putting money from a taxable account into a Roth IRA is considered a contribution, and you can only contribute to a Roth IRA if you have earned income.

Instead, you would rollover (directly) your 401k to a Traditional IRA and subsequently (either monthly or annually) convert some of the Traditional IRA to a Roth IRA.

I may be misunderstanding what you're suggesting so I welcome any correction.
The 401k from my Megacorp at Fidelity allows direct 401k -> Roth IRA conversions, so it's possible Finley2021's does also.

sycamore
Posts: 877
Joined: Tue May 08, 2018 12:06 pm

Re: 401K Retirement Advice

Post by sycamore » Sat Aug 01, 2020 2:54 pm

FiveK wrote:
Sat Aug 01, 2020 2:18 pm
sycamore wrote:
Sat Aug 01, 2020 2:12 pm
Finley2021 wrote:
Sat Aug 01, 2020 8:39 am
Is it wise during those 8 years to take out monthly withdrawals from the 401K and roll them into a ROTH that this guy has set up when he was 45 years old? All accounts are with Fidelity because of the employer.
Finley2021, not to be picky but the terminology you use doesn't sound right. In particular you wouldn't literally take withdrawals from the 401k (into a taxable account) and then put that money in a Roth IRA. Putting money from a taxable account into a Roth IRA is considered a contribution, and you can only contribute to a Roth IRA if you have earned income.

Instead, you would rollover (directly) your 401k to a Traditional IRA and subsequently (either monthly or annually) convert some of the Traditional IRA to a Roth IRA.

I may be misunderstanding what you're suggesting so I welcome any correction.
The 401k from my Megacorp at Fidelity allows direct 401k -> Roth IRA conversions, so it's possible Finley2021's does also.
Ok, that's a new one for me - none of my 401k plans supported that option. Nice to have, helps avoid having to open an intermediary account.
I assume you can convert only some of the 401k balance, though maybe that's plan-specific as well?

User avatar
FiveK
Posts: 9588
Joined: Sun Mar 16, 2014 2:43 pm

Re: 401K Retirement Advice

Post by FiveK » Sat Aug 01, 2020 2:58 pm

sycamore wrote:
Sat Aug 01, 2020 2:54 pm
I assume you can convert only some of the 401k balance, though maybe that's plan-specific as well?
Yes to both.

Topic Author
Finley2021
Posts: 23
Joined: Sun Jul 26, 2020 10:52 pm

Re: 401K Retirement Advice

Post by Finley2021 » Sat Aug 01, 2020 3:04 pm

Thank you for the advice. Looks i am in the right place to learn!

Post Reply