How massive of Roth conversions, given lopsided holdings post-retirement?

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JDCarpenter
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

telemark wrote: Thu Jun 10, 2021 4:13 pm One other thing: if you can get into an HSA-eligible health plan, contributions to that will reduce your AGI, thereby allowing you to convert more to Roth. Not likely to make a big difference, but every little bit helps.
Yep; a good idea that we are employing. It is a nibble--but then we also have the HSA monies in equities for the long term. The receipt pile gets big!
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BigJohn
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

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 check to be sure I’m not just over the edge of some breakpoint like IRRMA tiers. Hasn’t been an issue to date but I might adjust down a bit to avoid if that made sense. 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
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FiveK
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by FiveK »

chazas wrote: Thu Jun 10, 2021 3:45 pm Starting to plan on retiring in a couple years at 62. Tried i-orp and it only recommended some modest conversions the first two years....
When one is still working, conversions would be taxed on top of work income and thus at higher marginal rates relative to conversions when no W-2/pension income is present. Don't know your specific numbers but at first glance the i-orp result appears reasonable.
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JDCarpenter
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

BigJohn wrote: Thu Jun 10, 2021 5:24 pm .... 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 ....

... 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.... I check to be sure I’m not just over the edge of some breakpoint like IRRMA tiers. Hasn’t been an issue to date but I might adjust down a bit to avoid if that made sense. ... 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.

...
Amen to the highlighted comment. Only with 20/20 hindsight, which we lack. Not a bad plan you are implementing. 50/50 split would be fantastic by RMDs, but we'll see. And yes to m/l flat income.
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chazas
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by chazas »

FiveK wrote: Thu Jun 10, 2021 5:53 pm
chazas wrote: Thu Jun 10, 2021 3:45 pm Starting to plan on retiring in a couple years at 62. Tried i-orp and it only recommended some modest conversions the first two years....
When one is still working, conversions would be taxed on top of work income and thus at higher marginal rates relative to conversions when no W-2/pension income is present. Don't know your specific numbers but at first glance the i-orp result appears reasonable.
Thanks. I meant the first two years of retirement. No conversions at the top single marginal tax rate…
Katietsu
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Katietsu »

ChrisC wrote: Thu Jun 10, 2021 4:40 pm
retiredjg wrote: Thu Jun 10, 2021 2:02 pm
JDCarpenter wrote: Wed Jun 09, 2021 9:11 pm As of now (61/60), we have slightly more in TIRAs than we started with, as well as a bit more than 2 mill in Roths (Roths are 100% equity, with all bond/cash investments constituting a part of the TIRA accounts).
I know this will not be a popular suggestion, but you could slow down the growth of the tIRAs by filling them almost entirely with bond/cash investments. That might give you a very different AA from what you are willing to hold, but I don't see a downside in this situation. Once the money is converted to Roth, you can put it back in stock funds again.

If you do not trim down your tIRAs, your first RMD will be about $144,000. (Is that wrong? Why did Lee_WSP get $300k?) Combined with the large SS income, will that be overly burdensome? If not, other than being married to IRMAA the rest of your life, you may not have too big a problem to solve. Maybe you can get that tiRA down to $2 million with your large conversions.
Yeah, looks like you're wrong and Lee WSP is correct, if you use an RMD calculators, and assume that the OP's $4 million account balance will mushroom with growth, then OP's first RMD is likely to be around $300K. https://www.schwab.com/ira/understand-i ... lators/rmd
Except that, I think, the OP is planning to spend 4.5% of the traditional IRA balance each year. The returns of the last few years are unlikely to continue for the next decade. And, it is likely that the traditional is already less than half equities with the % of equities decreasing as Roth balance increases. Given these assumptions, I would think that the $144k estimate will be closer to actual than the $300k number.

So, I too am wondering if this is as large of a tax burden looming as it may initially seem.
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FiveK
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by FiveK »

chazas wrote: Thu Jun 10, 2021 7:56 pm
FiveK wrote: Thu Jun 10, 2021 5:53 pm
chazas wrote: Thu Jun 10, 2021 3:45 pm Starting to plan on retiring in a couple years at 62. Tried i-orp and it only recommended some modest conversions the first two years....
When one is still working, conversions would be taxed on top of work income and thus at higher marginal rates relative to conversions when no W-2/pension income is present. Don't know your specific numbers but at first glance the i-orp result appears reasonable.
Thanks. I meant the first two years of retirement. No conversions at the top single marginal tax rate…
Were you able to determine why I-ORP suggested low conversions then (and, reading between the lines, high conversion amounts in subsequent years)? That is unusual for I-ORP.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by chazas »

FiveK wrote: Thu Jun 10, 2021 10:11 pm
chazas wrote: Thu Jun 10, 2021 7:56 pm
FiveK wrote: Thu Jun 10, 2021 5:53 pm
chazas wrote: Thu Jun 10, 2021 3:45 pm Starting to plan on retiring in a couple years at 62. Tried i-orp and it only recommended some modest conversions the first two years....
When one is still working, conversions would be taxed on top of work income and thus at higher marginal rates relative to conversions when no W-2/pension income is present. Don't know your specific numbers but at first glance the i-orp result appears reasonable.
Thanks. I meant the first two years of retirement. No conversions at the top single marginal tax rate…
Were you able to determine why I-ORP suggested low conversions then (and, reading between the lines, high conversion amounts in subsequent years)? That is unusual for I-ORP.
No. Modest conversions the first two years of retirement then no more, just living off the traditional. I’m assuming because it decided without substantial taxable I should just spend down for normal living expenses.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by Lee_WSP »

Katietsu wrote: Thu Jun 10, 2021 9:51 pm
ChrisC wrote: Thu Jun 10, 2021 4:40 pm
retiredjg wrote: Thu Jun 10, 2021 2:02 pm
JDCarpenter wrote: Wed Jun 09, 2021 9:11 pm As of now (61/60), we have slightly more in TIRAs than we started with, as well as a bit more than 2 mill in Roths (Roths are 100% equity, with all bond/cash investments constituting a part of the TIRA accounts).
I know this will not be a popular suggestion, but you could slow down the growth of the tIRAs by filling them almost entirely with bond/cash investments. That might give you a very different AA from what you are willing to hold, but I don't see a downside in this situation. Once the money is converted to Roth, you can put it back in stock funds again.

If you do not trim down your tIRAs, your first RMD will be about $144,000. (Is that wrong? Why did Lee_WSP get $300k?) Combined with the large SS income, will that be overly burdensome? If not, other than being married to IRMAA the rest of your life, you may not have too big a problem to solve. Maybe you can get that tiRA down to $2 million with your large conversions.
Yeah, looks like you're wrong and Lee WSP is correct, if you use an RMD calculators, and assume that the OP's $4 million account balance will mushroom with growth, then OP's first RMD is likely to be around $300K. https://www.schwab.com/ira/understand-i ... lators/rmd
Except that, I think, the OP is planning to spend 4.5% of the traditional IRA balance each year. The returns of the last few years are unlikely to continue for the next decade. And, it is likely that the traditional is already less than half equities with the % of equities decreasing as Roth balance increases. Given these assumptions, I would think that the $144k estimate will be closer to actual than the $300k number.

So, I too am wondering if this is as large of a tax burden looming as it may initially seem.
Unless OP withdraws 207k per year for the next ten years and changes the AA to 100% bonds (probably not the wisest idea, but not the worst idea either since Bogle did something similar), the RMD's will push OP into a fairly high bracket. It's really just a question of whether OP wants to pay taxes now vs later. Now may make more sense since they're scheduled to go up.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by infotrader »

BigJohn wrote: Thu Jun 10, 2021 5:24 pm 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 check to be sure I’m not just over the edge of some breakpoint like IRRMA tiers. Hasn’t been an issue to date but I might adjust down a bit to avoid if that made sense. 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
Same here. I have been doing it for 5 years now, and I am still working. I have only seen my Roth balance tripled and tIRA doubled, and the tax bomb is still waiting. I am ok with it, since I figured out earlier that there is no way to solve the problem anyway.
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FiveK
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by FiveK »

chazas wrote: Thu Jun 10, 2021 10:24 pm No. Modest conversions the first two years of retirement then no more, just living off the traditional. I’m assuming because it decided without substantial taxable I should just spend down for normal living expenses.
Ah, that sounds more like I-ORP: whatever conversions it suggests usually (absent some unusual other income pattern) occur in the earliest years.
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by curmudgeon »

JDCarpenter wrote: Thu Jun 10, 2021 4:58 pm
telemark wrote: Thu Jun 10, 2021 4:13 pm One other thing: if you can get into an HSA-eligible health plan, contributions to that will reduce your AGI, thereby allowing you to convert more to Roth. Not likely to make a big difference, but every little bit helps.
Yep; a good idea that we are employing. It is a nibble--but then we also have the HSA monies in equities for the long term. The receipt pile gets big!
It's not completely clear from your post, but if you've been saving HSA-eligible receipts for later use, I would start pulling from the HSA now. Once you hit the point where you are drawing living expenses from the tIRA (that are not RMD), you might as well draw what you can from the HSA instead. While an HSA is nice, money in a Roth is even more flexible, and by drawing from the HSA you can effectively convert that much more into your Roth while staying at the same taxable income.

It's a less clear choice when you are living off your taxable accounts, but I've been choosing the simplicity of once or twice per year just drawing our accumulated expenses out as we go. Since our medical expenses have been low, the tax arbitrage of $1000 more or less in taxable vs HSA is pretty minor and it's nice to clear off the books. We'll still probably have $100K in the HSA when we hit medicare, and even with IRMAA, it may take a while to work down.
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JDCarpenter
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by JDCarpenter »

curmudgeon wrote: Fri Jun 11, 2021 1:01 pm ...

It's not completely clear from your post, but if you've been saving HSA-eligible receipts for later use, I would start pulling from the HSA now. Once you hit the point where you are drawing living expenses from the tIRA (that are not RMD), you might as well draw what you can from the HSA instead. While an HSA is nice, money in a Roth is even more flexible, and by drawing from the HSA you can effectively convert that much more into your Roth while staying at the same taxable income.

It's a less clear choice when you are living off your taxable accounts, but I've been choosing the simplicity of once or twice per year just drawing our accumulated expenses out as we go. Since our medical expenses have been low, the tax arbitrage of $1000 more or less in taxable vs HSA is pretty minor and it's nice to clear off the books. We'll still probably have $100K in the HSA when we hit medicare, and even with IRMAA, it may take a while to work down.
Hmm. It appears that you are correct, in that the HSA isn't quite as flexible as the Roth and can't pass through to beneficiaries. Obviously, continuing to make contributions to the HSA is worthwhile to withdraw more from the TIRAs, but I look to have taken an inappropriate mental shortcut in continuing to let it build after we started drawing our living expenses from TIRA. (said short cut being "HSA is Roth with a deduction on front end....")

Thanks!

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E.T.A.--this is why I started this thread, so see if I had some blind spots. :oops:
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antiqueman
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Re: How massive of Roth conversions, given lopsided holdings post-retirement?

Post by antiqueman »

My philosophy is to convert as much of my T IRA to a Roth as I reasonably can before I take SS.

I am top have with qualified funds although not to the extent of the OP. I want as much of my investments in retirement to be as much Roth as I can stand to convert, with the understanding I will still have enough TIRA to balance out my retirement withdrawals from Roth and TIRA. I will not convert above the 24 percent bracket. I will have IRMMA increases but only for a few years.
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