privateID wrote: ↑Mon Jan 23, 2023 2:11 pm
fyre4ce wrote: ↑Mon Jan 23, 2023 1:28 pm
privateID wrote: ↑Mon Jan 23, 2023 12:52 pm
Interesting thoughts. I have thought about blasting through the spike one year if I thought it was necessary. I would greatly appreciate if you can run your spreadsheet with my numbers. Here's the input you requested.
- Expected return on investments: I have about 50% in stock, so by your rough equation, that works out to 6.5%. I usually start using 6% stocks and 3% for fixed and have my different accounts grow accordingly. And then I up it to see the differences. 6.5% overall, although a bit higher than my estimates, seems totally reasonable.
- Current total pre-tax balance: $1,630,000
- Contributions you are considering whether to make pre-tax or Roth: $30,000 (I'm 56, so have that choice).
- Other pre-tax contributions that must be pre-tax: $19,466 ($7,500 is actually my wife's IRA, but as we live in NY, where $20K per year per person in retirement income is tax-free, and she doesn't have alot of TDA income, I am trying to build her TDA to get that state tax-free money. I therefore put her contribution in this bucket and not the considering bucket).
- Planned total Social Security income, and age when you expect it to begin: $77,540 starting in 2037 (I turn 71 that year, the year before we have a small SS)
Edit: Not sure if needed, but a couple of other data points. I have a pension that will add $7,900/yr of income. Currently no taxable income from taxable investments, but that may change at some point with an inheritance. I expect to use most of the taxable up before SS, but you never know how things will turn out.
Thanks for the info. One more question- in the years between age 61 and 70, what is the total amount you expect to withdraw and Roth-convert each year?
Edit: Sorry, two more questions. Are you comfortably able to make $30k of Roth contributions for the next five years (56-60) and cover the tax payments without impacting your budget? In other words, would you contribute the full $30k/year whether you are choosing pre-tax or Roth? The alternative would be that you have to curtail your nominal contributions if you are contributing Roth.
Between 61-70 I expect to withdraw/convert to the top of 12% tax bracket (future 15%).
I am able to handle $30K Roth contributions. Note that it will really be for 4 years as I turn 57 this year (maybe even a little less, but that's close enough).
I will add my goal of not having income greater than $160K for any year. I guess we can ignore that for now, but that will probably restrict any result that says anything like do 100% Roth. Of course, if it says for 100% trad'l, then all good.
Thanks. I took a closer look tonight, and I think you should lean more toward Roth. Let me explain why.
Using the formulas here
, I looked at the tax rate terrain you'll be on when you start collecting $77,540 of SS at age 70. If the tax rates stay as they are (no sunset), you'll be facing a tax rate spike of 44.7% (40.7% fed + 4% state) between about $56k and $68k of tIRA withdrawals. Below the spike, the rate is 26.2% and above 26%. If the rates do
sunset, the spike will be 50.25% (46.25% fed + 4% state) between $54k and $68k, with 31.75% below and 29% above. In either case, if you want to stay under the spike, you'll want a pre-tax balance of ~$1.4M (inflation-adjusted), assuming about a 4% withdrawal rate.
So where do we expect your pre-tax balance to be when you're 70? If you contribute (say) 100% Roth for the next 5 years but still get the $19,466 match, then withdraw/convert ~$117,000/year (gets you to the top of the 12/15% MFJ bracket) for the next 10, and get 3.5% real growth the whole time, you'll have a pre-tax balance of about $1.5M, which will generate $60k of taxable income and put you right in the middle of the SS spike. If you instead contribute 100% pre-tax now ($30k/year x 5 years, plus match), with the same assumptions you'll have a $1.73M pre-tax balance, which will put you barely over the spike.
This is a perfect case of the problem I mentioned before, where near the spike, you either want to sneak in below it or go way above. This is a rare case where mixing pre-tax and Roth will probably make you worse
off than 100% of either. To make a dramatic analogy, it's like if your car is skidding off the road toward a tree - you want to push it left or right, but not keep it going the same direction. (None of these options are going to be like a crash for you, you're doing great, and we're talking about squeezing out a few thousand dollars of annual tax savings, if that.)
Leaning toward pre-tax could work out well, especially if tax rates don't sunset. Once you're past the spike, you're only paying 26% marginal rate versus 29% now, so you're getting a 3% arbitrage. It also has flexibility if your plans change and your income goes down, or and will have been the better choice if your investments outperform the assumed 3.5% real. (This is not a type-o; because of the non-progressive behavior of future tax rates, high investment performance favors pre-tax today, the opposite of typical.) It's also the better choice if you unexpectedly move to a lower-tax or tax-free state (7% is on the high side).
Leaning toward Roth works out best in different scenarios. If you are able to contribute the maximum $30k now to Roth, the break-even withdrawal rate in 15 years is actually 24%, 2% less than your best-case future rate of 26%, so you are still coming out slightly ahead by going Roth. If you get your inheritance sometime between 60-70, you can use those funds to pay the taxes on Roth conversions and that will also help mathematically. Roth also helps a lot if the tax rates sunset, because rates will increase. In fact, if you think this increase is likely, that would suggest larger conversions are beneficial. Converting today at 31% (24% fed + 7% state) is less than the 31.75% that will lie below the spike, so will be slightly beneficial. Roth also has the major advantage that if either you or your spouse die young, you are saving a lot of taxes. Ditto for IRMAA; you are most likely not in IRMAA territory while you are both alive, but if one of you dies you very likely will be. And Roth will also have been the better choice if you end up living in California or if your investments underperform expectations.
Looking at the two options and the likelihood of the scenarios where pre-tax and Roth are better, I would lean toward Roth because I think the likelihood of one of those scenarios happening is higher than a scenario where pre-tax is better. But ultimately it's up to you to weigh the probabilities. If you had the cash to cover Roth conversions up to the top of the 24% bracket today, that would be my suggestion. You don't, so I think just doing 100% Roth contributions and no conversions is fine. But, I would monitor your pre-tax balance as you get closer to 70, and my goal would be to Roth-convert enough between 60 and 70 to come in just under the spike, which again I estimated is a $1.4M pre-tax balance. The good news is you don't have to make a bet now; you'll have plenty of room to convert at 29%, 31%, or 32% as you approach 70, to avoid the 44.7% or 50.25% spike. This will also give time to see how tax laws and markets play out. But I would not add to the potential problem by contributing more pre-tax now than I had to.
Spreadsheet I used to work these numbers: https://drive.google.com/file/d/1fZueZ_ ... sp=sharing