Admiral wrote: ↑Mon May 03, 2021 2:19 pm
RetiredAL wrote: ↑Mon May 03, 2021 1:40 pm
My point is that you don't have to have a big pile of cash, as you put it, to get your tax rate elevated.
Admiral wrote: ↑Mon May 03, 2021 7:36 am
RetiredAL wrote: ↑Sun May 02, 2021 9:30 pm
Admiral wrote: ↑Sun May 02, 2021 7:55 pm
Most people can convert to Roth if needed, they don't need to save in Roth while they are working.
Retired in 2016, but had some residual wage income that allowed us to fund 2017 and 2018 Roth's. Our Roth's were fully funded for nearly 20 years and were contributed at the then 15% rate. Our current deferred withdrawals are about 1/2 of what the RMD will be starting next year, and these withdrawals already have us into the current 22% rate, thanks to the SS Hump. We now have $450K in Roth's.
Someday one of us will be the filing-single survivor. If those extra $ had gone into deferred instead, my modeling says the survivor would likely be into the 33% (reverting back to 36%) by age 80.
I for one, am very glad we did the Roth's all those years vs further funding into deferred.
Which is great, for you. My argument/point is not directed at those like you who have a big pile of cash spread across accounts and will be in the uppermost brackets.
If you (or your surviving spouse) doesn't want to pay the tax, you can donate your shares. People also seem to forget they can can actually spend
the money in their tax deferred accounts before RMDs become an issue.
I have $1.4M in deferred, which is not huge. That includes my retirement lump sum which I rolled into an Ira. It will be adequate for us, but not enough to really be considered rich.
The culprit is the SS Hump. With $50K is SS and MFJ, that forces us into 22% by the time we get our total gross income, that's SS + deferred withdrawals + any retirement (I don't have any), into the mid $70K's and above. For a still working stiff, that 22% point is approx $110K gross.
I know we will be stuck with 22-25% going forward. I'm not happy about it, but it is what it is. However, I've taken steps to keep the survivor out the 35% brackets. People should not be burying their head in the sand trying to ignore the issue.
The point you are missing is that the last 15+ years of working, my marginal rate was 15% except for one year that I was a couple of $k into the 25% bracket. I think you will find a substantial percentage of people here on BH are financially similar and they too are surprised at their tax rate in retirement.
Lol $1.4m is not “huge”?? Compared to whom? Another Bh perhaps. Compared to 95% of retirees it’s a very rare metal indeed: unobtanium.
I have no idea how old you are. You can/could convert substantial sums well before age 72 in the 15 or 22% brackets if you take the standard deduction and delay SS to age 70.
I've converted every year since I retired in May 2016, at age 66. The 401K balance at retirement was not quiet $700K and I rolled in an IRA. The first year's conversion was still at 15%, as only I was receiving SS, but it was only $10K as anything greater would have been 25%. Every other conversion has been at at 22-25% because DW had started her SS the next year. RMD's start next year, and I have not decided if I will continue with conversions as a personal policy, or only if my model predicts the survivor entering the 35% bracket.
If had not taken my retirement as a lump sum into an IRA, the deferred today would a lot less, but those monthly retirement $ would have put us at the same point taxation point. It's not about how much is in deferred, it's about how the SS Hump jacks up the marginal rate much earlier than what most people expect, which affects ANY additional non-SS income, whether it's retirement, supplemental wages, rental income, bank interest, or regular investment income.
I am very thankful that the sequence of returns, during these early years of retirement have been very positive. If going forward we have a sequence of even a few consecutive bad years, the survivor will never reach 35% bracket. But since net impact of 22% paid today is the same at 22% paid in 5 years, I've converted what today seems adequate to avoid the 35%. If during RMD I find we are staring at 35%, I plan to act soon enough when there is still room to stay in the 22-25% and convert $ on top of the RMD.
Work's Roth 401K arrived until too late for me to use. So I'm damn glad I fully funded our Roth's.
This pickle is not about being uber rich. It's about being just a regular Joe in upper-middle-class. Am I better off than many, yes! I also worked hard, first in college, then on the job, to support and raise a family, and still achieve a retirement that would not be caviar, but not dog food either. Yeah it helped my parents were good role models.
I am a firm believer in maxing out one's Roth before maxing out deferred. Fully funding a Roth is unlikely to be a poor choice, and it's much more likely to be a good choice, or even a brilliant choice.