Help Devising Ideal Roth Conversion Schedule

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Topic Author
17oceanis45
Posts: 7
Joined: Sat Nov 14, 2020 10:00 pm

Help Devising Ideal Roth Conversion Schedule

Post by 17oceanis45 »

Hello All, new to the forum but have read several hundred posts to get a feel for the vast expertise on this board. We have large tax advantaged balances but little taxable acct balances to be able to live on in retirement. I need ammo to convince DW to lay down the plow. Now.

Emergency funds: have 4 mos on hand; but feel like a HELOC could serve the same purpose without dedicating funds to cash.

Debt: primary mortgage 390K; HELOC $200K; vacation home mortgage $350K. Primary home FMV $1.2M; 2nd home FMV $600K. No credit card debt; student loans paid in full (2020).

Tax Filing Status: Married Filing Jointly
.
Salary: His: $200K; hers: $30K; Vacay home annual rentals of $32K.
Reinvested dividends of $45K
Both self-employed; I want to stop tomorrow; DW wants to work
longer.

Plan to retire to vacation home in resort town in 1-2 yrs.

Age: 59.5; DW 61.

Current investment asset allocation: 100% stocks; 0% bonds; 150K dry powder (cash).
International allocation: 0% of stocks

Annual expenses: $200K incl. income and property taxes and aggressive paydown of both mortgages (3.75%/30year for primary and 2.75%/15yr vacay prop) and HELOC balance. Sale of primary residence in next 2 yrs would retire all mortgage (80K annual debt service) and HELOC debt.

Current total invest portfolio: $4M made up of 3.85M tIRAs (incl. $25K Inherited IRA); addtl $85K spread across his/her Roth IRAs; addtl $65K in taxable brokerage accts; invest portfolio excludes: emergency funds; home equity in primary/vacay prop; cars and personal prop. Lots of tax advantaged assets; but too few taxable acct funds. Proj. inheritance of approx. $500K (as mgr of elderly parents' finances).

All invest accounts self directed; holdings spread over 30 individual stocks. Converted $300K in 2020: some to Roth, some to retiring kids' student loans and some to knock down HELOC balance. Portfolio regained in 2021 the $300K converted Dec 2020. (Learned afterwards from Boglehead posters smarter than me that I should have converted in March or April 2020 instead of year-end; could have converted $160K in MSFT and AAPL that would be worth $300K by year end. But COVID 19 market gyrations were a white knuckled ride in real time.)

Annual projected retirement income:
He SS at 70yrs: 45492
Her SS at 70 yrs: 39672
Vacay rental inc: 32000
Dividends 45180
RMDs a ticking time bomb for his/her tIRAs calculated at $329K/yr at 72 yrs old. So doing nothing is not an option.

How to generate and how much funds necessary to live for next decade? Know we have to convert up to 22% (or higher) bracket over next 10 years to rebalance b/t tIRAs and Roth IRAs. Want to pass assets tax free to two adult kids (gainfully employed and off The Payroll, thankfully) with Roth funds rather than tIRA funds. Kids in 22% brackets. DW says I'm too focused on tax-free inheritance; and she's right more often than not. Thanks in advance for any advice.
BigJohn
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Re: Help Devising Ideal Roth Conversion Schedule

Post by BigJohn »

I retired at 58 and was in a similar situation with a very large RMD tax bomb waiting. I spent hours with spreadsheets looking for the ideal Roth conversion plan. The conclusion I finally came to was that there is no such thing. There are just too many variables that can overwhelm the accuracy of the calculations (longevity, future tax rates for you and you kids, portfolio rate of return, etc). So I finally landed on this approach.

Every year I look at current balances and project out my future SS + RMD income. My starting point for current and future year conversions is to keep my income about flat with that future income so that the incremental tax should be in the same ballpark. Yes, tax laws can change but no way to plan for that so I just adjust when the changes happen. I recognize that in hindsight I will have either over or under converted from ideal but I shouldn't be too far off. This also gets me to about a 50/50 split of tIRA/Roth when RMDs start which gives me some diversity of income sources depending on situation.

I’ve been doing this for six years now and it seems to be working as expected. High stock returns have my tIRA balance higher than initially planned but that’s obviously not a bad problem to have. This makes the future RMDs higher so I convert a bit more and it’s somewhat self correcting (would convert less after a prolonged bear market as well).

Good luck with the decision and enjoy your retirement :beer
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
LeeMKE
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Re: Help Devising Ideal Roth Conversion Schedule

Post by LeeMKE »

To answer your specific question, run the calculator at I-ORP.com, the extended version. It will give you a schedule for tIRA to Roth Conversions that includes considerations for life long taxes and legacy.

While a tax free legacy is nice, you may find that you need to have Roth resources to manage your own taxes during retirement and avoid a lot of nasty consequences. Many of us are doing conversions in order to tamp down the tax bomb in later retirement caused by RMDs + Social Security + property transition to cash that await those who don't plan carefully.

However, you have more work to do before you are ready to pull the plug IMHO.

Figure out how much you spend, and multiply that by 25. Can you actually retire? I WAG your expenses sans mortgage payments, and it doesn't look like you are there yet. (And most folks here lean conservative, and will say you should have 30x before you pull the plug younger than 65)

What are your specific steps to get between where you are now and the day after you retire? Sell your current home? Where does the remaining equity go? The chess board isn't clear that you are quite to the point you can say you won the game. You refer to vacation home rental income as retirement income, but also say you plan to move into the vacation home. Which is it?

Your portfolio of individual stocks is something none of us do (anymore) so having a strategy for that portfolio will be needed, and we might not be the best advisors for that. Your current balance is generous, and your current expenses are too. Most people don't want to reduce their lifestyle in retirement, so you might want to do some calculating.

Congratulations on your success, now get over the goal line!
The mightiest Oak is just a nut who stayed the course.
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celia
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Re: Help Devising Ideal Roth Conversion Schedule

Post by celia »

17oceanis45 wrote: Wed Jun 09, 2021 9:46 pm I need ammo to convince DW to lay down the plow. Now.
What are her objections to the plan listed in the first post above? If they are not addressed, the plan won’t “fly”.
Emergency funds: have 4 mos on hand; but feel like a HELOC could serve the same purpose without dedicating funds to cash.
You should have at least 6 months of living expenses on hand for the ER. I don’t think a HELOC should be used for that since you could become disabled and unable to thus pay it back.
Debt: primary mortgage 390K; HELOC $200K; vacation home mortgage $350K. Primary home FMV $1.2M; 2nd home FMV $600K. No credit card debt; student loans paid in full (2020).
Paying the mortgages off from the sale of one of the houses is a good idea, as long as DW agrees with it. But if you both disagree on which house, that needs to be resolved. But there is no point in paying down the mortgages ahead of time as you will need cash for the taxes on Roth conversions.

Current investment asset allocation: 100% stocks; 0% bonds; 150K dry powder (cash).
International allocation: 0% of stocks
This is very risky to have only stocks. If the stock market suddenly drops by 50% like it did in 1987, what will you do? I think you should have 20% bonds/cash and it should be in the tax-deferred accounts where it can slow down growth.
Lots of tax advantaged assets; but too few taxable acct funds. Proj. inheritance of approx. $500K (as mgr of elderly parents' finances).
Don’t overpay on the current house mortgage as that will eat up the cash you need in Taxable. And you CAN’T count on an inheritance until both parents have departed.
DW says I'm too focused on tax-free inheritance; and she's right more often than not.
You may be planning to convert more than is necessary. It would be good to leave $500K to $1M in tax-deferred for non-covered medical expenses in your final years (ie, assisted living). You can also do some QCDs from tax-deferred if you are inclined to make charitable donations.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
marcopolo
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Re: Help Devising Ideal Roth Conversion Schedule

Post by marcopolo »

celia wrote: Thu Jun 10, 2021 1:41 am
17oceanis45 wrote: Wed Jun 09, 2021 9:46 pm I need ammo to convince DW to lay down the plow. Now.
What are her objections to the plan listed in the first post above? If they are not addressed, the plan won’t “fly”.
Emergency funds: have 4 mos on hand; but feel like a HELOC could serve the same purpose without dedicating funds to cash.
You should have at least 6 months of living expenses on hand for the ER. I don’t think a HELOC should be used for that since you could become disabled and unable to thus pay it back.
Debt: primary mortgage 390K; HELOC $200K; vacation home mortgage $350K. Primary home FMV $1.2M; 2nd home FMV $600K. No credit card debt; student loans paid in full (2020).
Paying the mortgages off from the sale of one of the houses is a good idea, as long as DW agrees with it. But if you both disagree on which house, that needs to be resolved. But there is no point in paying down the mortgages ahead of time as you will need cash for the taxes on Roth conversions.

Current investment asset allocation: 100% stocks; 0% bonds; 150K dry powder (cash).
International allocation: 0% of stocks
This is very risky to have only stocks. If the stock market suddenly drops by 50% like it did in 1987, what will you do? I think you should have 20% bonds/cash and it should be in the tax-deferred accounts where it can slow down growth.
Lots of tax advantaged assets; but too few taxable acct funds. Proj. inheritance of approx. $500K (as mgr of elderly parents' finances).
Don’t overpay on the current house mortgage as that will eat up the cash you need in Taxable. And you CAN’T count on an inheritance until both parents have departed.
DW says I'm too focused on tax-free inheritance; and she's right more often than not.
You may be planning to convert more than is necessary. It would be good to leave $500K to $1M in tax-deferred for non-covered medical expenses in your final years (ie, assisted living). You can also do some QCDs from tax-deferred if you are inclined to make charitable donations.
This is all good advice.

Celia,
I am pleasantly surprised by the last (bolded) item. This seems like a new position for you. If i recall correctly, you used to advocate converting ALL tIRA to Roth.
Once in a while you get shown the light, in the strangest of places if you look at it right.
HomeStretch
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Re: Help Devising Ideal Roth Conversion Schedule

Post by HomeStretch »

+1 to celia’s comments

If you decide to add 20% bonds to your asset allocation, hold the bonds in your tax deferred account to help slow growth.

With a 3.75% mortgage rate on your primary home, consider a no-cost refinancing to lower the rate. Check rates at Better.com and other lenders mentioned in recent posts in the BH Mega Refinance thread.
dcabler
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Re: Help Devising Ideal Roth Conversion Schedule

Post by dcabler »

HomeStretch wrote: Thu Jun 10, 2021 4:50 am +1 to celia’s comments

If you decide to add 20% bonds to your asset allocation, hold the bonds in your tax deferred account to help slow growth.

With a 3.75% mortgage rate on your primary home, consider a no-cost refinancing to lower the rate. Check rates at Better.com and other lenders mentioned in recent posts in the BH Mega Refinance thread.
Another +1 for celia's comments except perhaps for the emergency fund part. If you're only 1-2 years from retirement, in my opinion, holding a specific emergency fund isn't all that necessary anymore to buffer for things like unexpected unemployment. If it is, then you're likely more than 1-2 years away.

I am about 1 year away from retirement myself and haven't held an emergency fund for years because I have enough buffer in my overall savings that starting retirement a year earlier than planned won't change things enough to matter should I become unemployed. If some other non-employment related emergency comes up I'll sell some assets to cover it.
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Johnsson
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Re: Help Devising Ideal Roth Conversion Schedule

Post by Johnsson »

All great advice.

We went from 100% equities to ~60/40 AA about 3 years ago (we're retiring in 26 days). Having a decent amount in bonds really does help provide piece of mind when the market drops (even though we have forgone some gains by doing so).

While you may not find the answer palatable, I too believe you should run a variety of scenarios through i-orp/extended to find the answer that feels best for you. Just because an answer doesn't seem palatable doesn't mean it's not the right answer.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
Topic Author
17oceanis45
Posts: 7
Joined: Sat Nov 14, 2020 10:00 pm

Re: Help Devising Ideal Roth Conversion Schedule

Post by 17oceanis45 »

LeeMKE wrote: Wed Jun 09, 2021 11:27 pm To answer your specific question, run the calculator at I-ORP.com, the extended version. It will give you a schedule for tIRA to Roth Conversions that includes considerations for life long taxes and legacy.
I'll definitely do that.

However, you have more work to do before you are ready to pull the plug IMHO.
I agree

Figure out how much you spend, and multiply that by 25. Can you actually retire? I WAG your expenses sans mortgage payments, and it doesn't look like you are there yet. (And most folks here lean conservative, and will say you should have 30x before you pull the plug younger than 65)
Without primary mortgage payments/taxes, save $76K annually. DW wants to live there 2 more years.

What are your specific steps to get between where you are now and the day after you retire? Sell your current home? Where does the remaining equity go? The chess board isn't clear that you are quite to the point you can say you won the game. You refer to vacation home rental income as retirement income, but also say you plan to move into the vacation home. Which is it?
Sell primary residence yesterday given this hot market. Retire debt; plow remaining equity into market. Debt holding me back from pulling plug now.
Good point on the vacay rental. Only rents seasonally; 60 days in 2020 (despite COVID challenges) and 66 days this year after raising rates. But you're essentially right, I always overlook that we do have to live somewhere. I'd rent a condo at 1/3 our current primary residence expenses.


Your portfolio of individual stocks is something none of us do (anymore) so having a strategy for that portfolio will be needed, and we might not be the best advisors for that. Your current balance is generous, and your current expenses are too. Most people don't want to reduce their lifestyle in retirement, so you might want to do some calculating.
Enjoy the research and stock activity (LLY popped 20 points earlier this week); but agree index funds are in my near future when lack time/interest to stock pick. Feel like I can accept singles and doubles; relieved to feel it's unnecessary to swing for investing grandslams anymore.
Totally agree living expenses excessive; would prefer to live on $125K/yr; eliminating debt service would get us far closer to ideal.
Appreciate your lens on the issues that need work.
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celia
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Re: Help Devising Ideal Roth Conversion Schedule

Post by celia »

marcopolo wrote: Thu Jun 10, 2021 4:15 am This is all good advice.

Celia,
I am pleasantly surprised by the last (bolded) item. This seems like a new position for you. If i recall correctly, you used to advocate converting ALL tIRA to Roth.
I intentionally did not address the Roth conversions, since I don’t think OP is ready to retire and we’ve already seen in other cases that it is next to impossible to convert $4M in 10-15 years even when your living expenses are more like $60K.

OP, you need to get a realistic retirement budget too. You can’t spend $200K each year in retirement (or even $120K if the mortgages are paid off) since that will burn through all your money in 20-30 years without having converted a single dollar. Here is where you should rely on your wife’s experience and jointly analyze what the minimum is that you need for living expenses as well as “would like” expenses. I know this can be done since you currently have joint income of $200K + $30K in wages but you were able to save great amounts while working. If the kids have moved out, that should have lowered your expenses too.

Edit to add: Start by getting a good handle on the current living expenses. That means to account for every dollar of income received in the last year, whether it went to taxes/employer benefits, gifts, spent in cash (that one is hard). Then will you spend more or less than that when retired? Go through a year’s work of checking account balances and credit card statements.

You also need to account for one of you dying. One SS will then disappear while the survivor will then start filing as Single. The room in each tax bracket for Single is half of what it is for MFJ, so the survivor will likely be bumped into a higher tax bracket. I challenge you to see what happens when one of you dies at 75 and even 65. Ouch. (But you need to plan for it.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
Topic Author
17oceanis45
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Re: Help Devising Ideal Roth Conversion Schedule

Post by 17oceanis45 »

HomeStretch wrote: Thu Jun 10, 2021 4:50 am
With a 3.75% mortgage rate on your primary home, consider a no-cost refinancing to lower the rate. Check rates at Better.com and other lenders mentioned in recent posts in the BH Mega Refinance thread.
Good advice; I figured quicker pay down equated to no-cost rate decrease. And given the short horizon of living there. Still can't believe this generation's good fortune of int rates %'s in 3's and 2's after those rates in the 1970's and 80's.
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celia
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Re: Help Devising Ideal Roth Conversion Schedule

Post by celia »

17oceanis45 wrote: Thu Jun 10, 2021 9:28 am
HomeStretch wrote: Thu Jun 10, 2021 4:50 am
With a 3.75% mortgage rate on your primary home, consider a no-cost refinancing to lower the rate. Check rates at Better.com and other lenders mentioned in recent posts in the BH Mega Refinance thread.
Good advice; I figured quicker pay down equated to no-cost rate decrease. And given the short horizon of living there. Still can't believe this generation's good fortune of int rates %'s in 3's and 2's after those rates in the 1970's and 80's.
I’d forget refinancing if you will sell in a year or two, if you need to pay any fees. You could end up paying more in fees than you save in interest.
HomeStretch
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Re: Help Devising Ideal Roth Conversion Schedule

Post by HomeStretch »

17oceanis45 wrote: Thu Jun 10, 2021 9:28 am
HomeStretch wrote: Thu Jun 10, 2021 4:50 am
With a 3.75% mortgage rate on your primary home, consider a no-cost refinancing to lower the rate. Check rates at Better.com and other lenders mentioned in recent posts in the BH Mega Refinance thread.
Good advice; I figured quicker pay down equated to no-cost rate decrease. And given the short horizon of living there. Still can't believe this generation's good fortune of int rates %'s in 3's and 2's after those rates in the 1970's and 80's.
Agree, my mortgage started out at 10% in the 90’s and refinancings were not as cheap/easy!

You might also check refi rates on the 2nd property and, depending on the HELOC rate, whether it makes sense to bundle the balance in. Posters in the mega refi thread were saying Better.com would match other online lender no-cost rates (which are easy to research) and close in two weeks.
Topic Author
17oceanis45
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Re: Help Devising Ideal Roth Conversion Schedule

Post by 17oceanis45 »

celia wrote: Thu Jun 10, 2021 9:10 am You also need to account for one of you dying. One SS will then disappear while the survivor will then start filing as Single. The room in each tax bracket for Single is half of what it is for MFJ, so the survivor will likely be bumped into a higher tax bracket. I challenge you to see what happens when one of you dies at 75 and even 65. Ouch. (But you need to plan for it.)
[ quote fixed by admin LadyGeek]

Forgot to list a whole life policy (face value $318K) on my life. Cancelled a 700K term policy when we exceeded $3M in investments. DW and I agreed on cancelling the term coverage; and on survivor moving from primary residence upon early death of the other. Also circulated a detailed memo to DW and kids about if I go first (assets, liabilities, accts nos., contacts and strategies for each account.) They found the memo subject matter morbid; but should be helpful provided it gets updated.
Topic Author
17oceanis45
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Re: Help Devising Ideal Roth Conversion Schedule

Post by 17oceanis45 »

celia wrote: Thu Jun 10, 2021 1:41 am
What are her objections to the plan listed in the first post above? If they are not addressed, the plan won’t “fly”.
Mostly 30,000 foot observations like we're too young; or don't have enough saved; nothing specific or substantive.
Paying the mortgages off from the sale of one of the houses is a good idea, as long as DW agrees with it. But if you both disagree on which house, that needs to be resolved. But there is no point in paying down the mortgages ahead of time as you will need cash for the taxes on Roth conversions.
DW agrees to the sequence of selling primary residence to retire to vacation home.
This is very risky to have only stocks. If the stock market suddenly drops by 50% like it did in 1987, what will you do? I think you should have 20% bonds/cash and it should be in the tax-deferred accounts where it can slow down growth.
You're right the risk/reward is higher for stocks than mutual funds. Black Monday fell on my birthday 18 mos. into my career so remember it distinctly. Called broker that afternoon and told him to sell my holdings of less than $5K. He shrugged, no doubt weary from the same panicked order in different magnitudes from all his clients, "Too late, yours and every other customer acct are toast." He did reassure me, "Relax, you're young--it'll come back." And it did. Since then, think of that conversation when it comes time to ignore the noise. And bought more after Y2K fallout, 2008-09 sub prime and March 2020 COVID collapse. Now, only wish I'd converted quality holdings to Roth when buying, instead of December 2020 after they recovered. I was afraid of converting too much; not knowing business revenues would tank to -0- when the pandemic triggered shutdowns.
Don’t overpay on the current house mortgage as that will eat up the cash you need in Taxable. And you CAN’T count on an inheritance until both parents have departed.
Agreed on the futility of paying down primary mort. Not counting on or spending the inheritance; but with both parents in their 90's, just acknowledging events are closer than they appear in the mirror. Appreciate all your advice.
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