When you have a close call for Roth vs Trad’l, thoughts on this approach?

[celia]

Every situation is different but for me the Roth is already paying off.

Can you explain how it could already be paying off? What is the payoff?

Knowing I won't have any RMD's and staying in a lower tax bracket is my payoff.

So it's not already paying off, but you feel it will pay off down the road, despite having to pay the taxes up front.

We put Capital Opportunity and Primecap Core in the Roth and just let them roar ahead of everything else. Each year, I can add $25K to each.

We no longer have to pay attention to the Roth accounts or report them ANYWHERE. No RMDs for us and many of our RMDs have done lots of good in crisis areas. So the final QCDs were a godsend to the orgs that received them. And not dealing with RMDs in our coming low-cognitive years will keep things simpler for us and our heirs.

RMDs are required for Roth 401ks.

But they can be rolled into Roth IRAs.

[privateID]

I believe Secure Act 2.0 no longer requires Roth 401K RMDs starting in 2024.

[rivercrosser]

Can you explain how it could already be paying off? What is the payoff?

Knowing I won't have any RMD's and staying in a lower tax bracket is my payoff.

So it's not already paying off, but you feel it will pay off down the road, despite having to pay the taxes up front.

RMDs are required for Roth 401ks.

RMDs are required for Roth 401ks. Thats why I rolled it over to my Roth IRA.

That's good, and smart. So the Roth might pay off somewhere down the road, and might become more lucrative than the taxes you have already paid.

It's not yet "already paying off".

Your right. If it all stays intact till we are both gone the real winners will be our two children.

[JoeRetire]

Knowing I won't have any RMD's and staying in a lower tax bracket is my payoff.

So it's not already paying off, but you feel it will pay off down the road, despite having to pay the taxes up front.

RMDs are required for Roth 401ks.

RMDs are required for Roth 401ks. Thats why I rolled it over to my Roth IRA.

That's good, and smart. So the Roth might pay off somewhere down the road, and might become more lucrative than the taxes you have already paid.

It's not yet "already paying off".

Your right. If it all stays intact till we are both gone the real winners will be our two children.

Fair enough. If your goal is to reward your children when you are gone, you can pay all the taxes now so that they won't need to. It will pay off for them, but not for you.

[nisiprius]

Do not underestimate the amount of nuisance involved in a traditional IRA or 401(k). It was a stupid mistake, but a few years ago I lost $400 because I simply forgot that one of the CDs at a local bank was actually a traditional IRA, and that I had failed to take the RMD. And if you read up on the rules for inherited IRAs, you will realize that if you leave your kids with an IRA when you pass on, it will be a good problem for them, but it will be a problem.

And the $27.99 I spent a few years ago for a Nolo Press book on IRAs, 401(k)s & Other Retirement Plans was wasted money, because so many of the rules have already changed.

[fyre4ce]

Have you tried my software tool?

viewtopic.php?t=352921

It’s the most accurate solution to the problem I’m aware of.

[privateID]

Have you tried my software tool?

viewtopic.php?t=352921

It’s the most accurate solution to the problem I’m aware of.

Looks comprehensive. I will take a look. Thanks.

[joe_the_buckeye]

I was a big believer in "tie goes to the Roth" prior to finding Bogleheads. However, the thread on asymmetric risk, Klang Fool's repeated emphasis on how large a portfolio has to be to actually push a retiree into another bracket, the flexibility of Roth conversions, McQs taxable and traditional comparison thread, and the option of bigger QCDs in a worst (best?) case scenario of having too much money has since swung me the complete opposite direction. I expect to be in the 12%/15% bracket both now and in retirement. I previously was doing 100% Roth IRA and 457.

I now fund my Roth IRA and Traditional 457, with the tax savings building up our taxable account. I've actually toyed with traditional IRA contributions as well, but like the emergency option of withdrawing contributions.

I think I'm better off today and will be in the future because of Boglehead thinking on this one. The first goal of a financial plan should be to secure the future as best you can, and traditional contributions with taxable savings get you there more quickly.

[privateID]

Have you tried my software tool?

viewtopic.php?t=352921

It’s the most accurate solution to the problem I’m aware of.

Looks comprehensive. I will take a look. Thanks.

Took a look at the spreadsheet. I can see it having great value and I will probably play with it some more. Some initial comments:

1) Small mistake: In the user Guide tab, row 15, third line in a row, it has 'Future Value'!G5 = "Pre-tax". I think it should be H4.

2) The biggest limitation I see for me is the Social Security taxable percentage entry in the Future Value tab. It's a single static value. This is probably the biggest factor for my marginal future tax rate. Depending upon my RMDs (affected by the Trad'l vs Roth decisions), my SS percentage changes from year to year. Sometimes, depending on assumptions for rate of return and inflation, I could max out at 85% taxed and my marginal future tax rate then drops below torpedo level. So, a single value here is not capturing it accurately. I haven't played with it for too long, so I apologize if I missed something with this value.

I do have my own comprehensive spreadsheet that I assume will come to the same conclusion as this spreadsheet. I understand what it is doing but need to run through some of the examples to really understand it. I appreciate the suggestion and the link to the spreadsheet.

[FiveK]

I project in 4 years I will have $2M in my TDAs. After a decade of withdrawing/converting to the top of the 15% tax bracket, with conservative return estimates, my TDA drops to $1.5M when SS begins. Other than that I have a small pension (about $8K/yr not linked to inflation). All that does keep me in the 15% tax-bracket once RMDs begin.

How much do expect to have in taxable accounts, and how much annual qualified dividends vs. interest and non-qualified dividends do you expect that to throw off?

Have you looked at Open Social Security: Free, Open-Source Social Security Calculator? If you do, and take the advice given, what SS amounts and starting years do you get?

[fyre4ce]

Have you tried my software tool?

viewtopic.php?t=352921

It’s the most accurate solution to the problem I’m aware of.

Looks comprehensive. I will take a look. Thanks.

Took a look at the spreadsheet. I can see it having great value and I will probably play with it some more. Some initial comments:

1) Small mistake: In the user Guide tab, row 15, third line in a row, it has 'Future Value'!G5 = "Pre-tax". I think it should be H4.

2) The biggest limitation I see for me is the Social Security taxable percentage entry in the Future Value tab. It's a single static value. This is probably the biggest factor for my marginal future tax rate. Depending upon my RMDs (affected by the Trad'l vs Roth decisions), my SS percentage changes from year to year. Sometimes, depending on assumptions for rate of return and inflation, I could max out at 85% taxed and my marginal future tax rate then drops below torpedo level. So, a single value here is not capturing it accurately. I haven't played with it for too long, so I apologize if I missed something with this value.

I do have my own comprehensive spreadsheet that I assume will come to the same conclusion as this spreadsheet. I understand what it is doing but need to run through some of the examples to really understand it. I appreciate the suggestion and the link to the spreadsheet.

Thanks for taking a look. As for #1, yes, that looks like a mistake, and I'll fix it in the next rev.

As for #2, if I'm interpreting your comment accurately, I don't think you're correct. The percentage of SS income that will be taxable is calculated in Cell C32, based on the rest of the income using the appropriate IRS formula (off to the side, in Cells U3-U20). It's a "single value", yes, but it can vary based on inputs. For example, if you expect a high rate of return (B4) and large future pre-tax contributions (C22-23), the percentage may calculate to 85%. If you then reduce your pre-tax contributions by considering doing Roth instead, the percentage will recalculate and might be less than 85%. If you want to make a plot of all possible contribution types today (on the "Trad vs. Roth" tab), the percentage will be calculated independent for each case. So, I think this is giving you what you want.

Note that this percentage is always calculated as a forecast for the future, specifically the first year when withdrawals begin. If you are collecting SS today, and the taxable percent varies based on how much traditional or Roth you contribute, that would need to be reflected in your current tax rates, entered either as a single value for marginal tax rate in 'Future Value'!C13, or in a table of marginal tax rates on "Import from Case Study Sprdsht".

What the tool doesn't do is look at multiple years of retirement. For example, you may retire at age 65 with 85% taxable SS, but what about at age 70, or 75, given a set of assumptions about withdrawals, conversions, etc. It was too complex for me to code multi-year withdrawal scenarios, as the number of assumptions and inputs would increase dramatically. If this is what you want, I believe there are other tools that are more focused on retirees, like the Retiree Portfolio Model.

Hope that helps; let me know if you have more luck with it.

[Golf maniac]

This topic is typical of the Roth vs Traditional debate. Lots of opinions but no real concrete answers. One other risk to consider when married filing jointly is what about the risk of one person dying? The tax rate goes to single after one year as widow. So that would seem to be a plus for Roth conversions over traditional. Like it has been said there are so many variables to consider.

[rivercrosser]

What about future tax rates? Will they go up in 2026? If nothing changes, they will.

[capran]

Rates revert back to 15% and 25% from 2026 going forward (unless congress acts to change them).

I am MFJ. Using todays brackets, the top of the 15% tax bracket, with the standard deduction, is between $117K and $120K depending upon if you are 65 years. I plan to withdraw or convert to the top of the future 15% tax bracket.

My point was showing that the difference in my future marginal tax rates and my marginal rate today is very small (although very difficult to actually determine) given my current plan. As such, I thought a middle of the road approach was reasonable for my last 4 years of work. With my AA at 50/50, I thought doing my Roth/trad’l at 50/50 where the Roth would be all stocks and the trad’l would be all bonds seems like a good idea. It's also easy to implement (set the same percentage for both with my company). Nothing crazy here, but I usually don't hear people talk about a middle of the road approach that often. Adding to it, that it helps my asset placement (stocks in Roth), I liked the idea.

Still reading the thread, but up till now I have not seen a mention of what would be the marginal rate if your surviving spouse lives on, filing as a single. That is one of my motivating issues of converting more tIRA to Roth. We always did the max Roth and max deferred when working anyway, but we started our retirement years with a substantial tIRA that, if left untouched, would incur a substantially higher marginal rate for surviving spouse and one of the kids when she passes.

[privateID]

I project in 4 years I will have $2M in my TDAs. After a decade of withdrawing/converting to the top of the 15% tax bracket, with conservative return estimates, my TDA drops to $1.5M when SS begins. Other than that I have a small pension (about $8K/yr not linked to inflation). All that does keep me in the 15% tax-bracket once RMDs begin.

How much do expect to have in taxable accounts, and how much annual qualified dividends vs. interest and non-qualified dividends do you expect that to throw off?

Have you looked at Open Social Security: Free, Open-Source Social Security Calculator? If you do, and take the advice given, what SS amounts and starting years do you get?

I pretty much have no taxable account. We do expect to inherit some money (somewhere between $500K and $800K) at some point in the next decade and, as such, I will be able to invest that money in tax-efficient way. For example, I will probably invest a good chunk of it in TSM and remove any stock I have in my 401k at that time.

As for OpenSocialSecurity, I have looked at it. It advises my wife to start at 62 and me to wait till 70. At this point I expect us both to wait till 70. OpenSocialSecurity shows a small difference between her starting at 62 vs 70. But the real kicker to me are the extra taxes on SS. If she were to start at 62, I project 85% of SS will be taxed between 62-70. I also project, because at 70 we will be getting less SS together if she starts early, that a higher percentage of SS after we hit 70 will also be taxed. Life is alot easier if I were to assume 85% SS will be taxed. But I don't think that will be the case for us unless they change the rules.

As for #2, if I'm interpreting your comment accurately, I don't think you're correct. The percentage of SS income that will be taxable is calculated in Cell C32, based on the rest of the income using the appropriate IRS formula (off to the side, in Cells U3-U20). It's a "single value", yes, but it can vary based on inputs. For example, if you expect a high rate of return (B4) and large future pre-tax contributions (C22-23), the percentage may calculate to 85%. If you then reduce your pre-tax contributions by considering doing Roth instead, the percentage will recalculate and might be less than 85%. If you want to make a plot of all possible contribution types today (on the "Trad vs. Roth" tab), the percentage will be calculated independent for each case. So, I think this is giving you what you want.

Note that this percentage is always calculated as a forecast for the future, specifically the first year when withdrawals begin. If you are collecting SS today, and the taxable percent varies based on how much traditional or Roth you contribute, that would need to be reflected in your current tax rates, entered either as a single value for marginal tax rate in 'Future Value'!C13, or in a table of marginal tax rates on "Import from Case Study Sprdsht".

What the tool doesn't do is look at multiple years of retirement. For example, you may retire at age 65 with 85% taxable SS, but what about at age 70, or 75, given a set of assumptions about withdrawals, conversions, etc. It was too complex for me to code multi-year withdrawal scenarios, as the number of assumptions and inputs would increase dramatically. If this is what you want, I believe there are other tools that are more focused on retirees, like the Retiree Portfolio Model.

So I have my own spreadsheet, similar to RPM (not as complex). In that spreadsheet I look at multiple years. The amount of SS being taxed varies alot based on assumptions. I can definitely change assumptions to get 85% taxed in all years - increase rate of return enough will do it. I am using a conservative 6% return for stocks. At 9%, it shows 85% will be taxed in all years. Of course, when a randomize it a bit, then some years do and some don't (tends to have trends as returns rise/fall). Thanks for the tool. I always like to compare things.

Still reading the thread, but up till now I have not seen a mention of what would be the marginal rate if your surviving spouse lives on, filing as a single.

Single will be 25%. 85% of SS will be taxed. IRMAA is close. Depending on assumptions, single survivor could hit it.


I am pretty sure that converting to the top of 15% tax bracket to get my TDA balance down to $1.5M helps. I am also convinced that both of us starting SS at 70 is the way to go. After that, it really is a guessing game (again, depending on the assumptions). My current plan is to contribute to my Roth 401k up to the point where we can get the AOTC education credit. That means about 2/3 Roth 401K this year and less the next couple of years. After that, I'll see if converting into the 25% tax bracket makes sense.

[capran]

Still reading the thread, but up till now I have not seen a mention of what would be the marginal rate if your surviving spouse lives on, filing as a single.

Single will be 25%. 85% of SS will be taxed. IRMAA is close. Depending on assumptions, single survivor could hit it.


I am pretty sure that converting to the top of 15% tax bracket to get my TDA balance down to $1.5M helps. I am also convinced that both of us starting SS at 70 is the way to go. After that, it really is a guessing game (again, depending on the assumptions). My current plan is to contribute to my Roth 401k up to the point where we can get the AOTC education credit. That means about 2/3 Roth 401K this year and less the next couple of years. After that, I'll see if converting into the 25% tax bracket makes sense.
[/quote]

At least you're taking it all in. Because we have two pensions we figured we'd be on the hook to pay tax on 85% of our SS. Unfortunately I took my SS at 64 after a same age friend fell on ice and bumped his head (and never woke up). But spouse and I had near equal pay so it didn't make that much difference if it was going to one or the other that delayed to 70. Except we could have had a few more years of reducing our deferred accounts. We really didn't start off that aggressive, but after looking at what RMD's would do to her as a surviving spouse, both tax rate and IRMAA, it made sense to try to get the IRA converted as much as possible. I just made the last conversion this month (so have done 900k) and we started on hers. If we could get hers down to below 200k, RMD's would be less problematic re: taxes and IRMAA, so if I survive long enough to do it, worth it in my mind. It would be nice if she didn't have to pay a higher tax rate in the future than we do now, and avoid IRMAA. Good luck!

[FiveK]

I project in 4 years I will have $2M in my TDAs. After a decade of withdrawing/converting to the top of the 15% tax bracket, with conservative return estimates, my TDA drops to $1.5M when SS begins. Other than that I have a small pension (about $8K/yr not linked to inflation). All that does keep me in the 15% tax-bracket once RMDs begin.

I pretty much have no taxable account. We do expect to inherit some money (somewhere between $500K and $800K) at some point in the next decade and, as such, I will be able to invest that money in tax-efficient way. For example, I will probably invest a good chunk of it in TSM and remove any stock I have in my 401k at that time.

As for OpenSocialSecurity, I have looked at it. It advises my wife to start at 62 and me to wait till 70. At this point I expect us both to wait till 70. OpenSocialSecurity shows a small difference between her starting at 62 vs 70. But the real kicker to me are the extra taxes on SS. If she were to start at 62, I project 85% of SS will be taxed between 62-70. I also project, because at 70 we will be getting less SS together if she starts early, that a higher percentage of SS after we hit 70 will also be taxed. Life is alot easier if I were to assume 85% SS will be taxed. But I don't think that will be the case for us unless they change the rules.

Given that, the Simple method of estimating your retirement income is probably best, although as you have already indicated the moving parts in that one equation (investment return and withdrawal rates) are still subject to guesswork.

Good analysis on the SS issue! When one adds the extra cost of significant Roth conversions if one starts SS before the OSS-determined optimum, it would not be surprising that delaying the start of SS for the lower earner would be best overall.

You might already have this in your own spreadsheet, but if not using something like the personal finance toolbox Excel tool to look at your marginal rates for various Roth conversion amounts now, and how things might look when SS and/or the qualified dividends from an inherited taxable account appear along with RMDs, could give you an idea for what to do this year. Then repeat the analysis next year, etc.

Worth pushing through the Social Security hump and/or IRMAA cliffs? and Taxation of Social Security benefits - Bogleheads may also be of interest if you haven't come across those.

[privateID]

I appreciate the links. On my todo list is to explore the different calculators in the Wiki.

[fyre4ce]

As for #2, if I'm interpreting your comment accurately, I don't think you're correct. The percentage of SS income that will be taxable is calculated in Cell C32, based on the rest of the income using the appropriate IRS formula (off to the side, in Cells U3-U20). It's a "single value", yes, but it can vary based on inputs. For example, if you expect a high rate of return (B4) and large future pre-tax contributions (C22-23), the percentage may calculate to 85%. If you then reduce your pre-tax contributions by considering doing Roth instead, the percentage will recalculate and might be less than 85%. If you want to make a plot of all possible contribution types today (on the "Trad vs. Roth" tab), the percentage will be calculated independent for each case. So, I think this is giving you what you want.

Note that this percentage is always calculated as a forecast for the future, specifically the first year when withdrawals begin. If you are collecting SS today, and the taxable percent varies based on how much traditional or Roth you contribute, that would need to be reflected in your current tax rates, entered either as a single value for marginal tax rate in 'Future Value'!C13, or in a table of marginal tax rates on "Import from Case Study Sprdsht".

What the tool doesn't do is look at multiple years of retirement. For example, you may retire at age 65 with 85% taxable SS, but what about at age 70, or 75, given a set of assumptions about withdrawals, conversions, etc. It was too complex for me to code multi-year withdrawal scenarios, as the number of assumptions and inputs would increase dramatically. If this is what you want, I believe there are other tools that are more focused on retirees, like the Retiree Portfolio Model.

So I have my own spreadsheet, similar to RPM (not as complex). In that spreadsheet I look at multiple years. The amount of SS being taxed varies alot based on assumptions. I can definitely change assumptions to get 85% taxed in all years - increase rate of return enough will do it. I am using a conservative 6% return for stocks. At 9%, it shows 85% will be taxed in all years. Of course, when a randomize it a bit, then some years do and some don't (tends to have trends as returns rise/fall). Thanks for the tool. I always like to compare things.

Still reading the thread, but up till now I have not seen a mention of what would be the marginal rate if your surviving spouse lives on, filing as a single.

Single will be 25%. 85% of SS will be taxed. IRMAA is close. Depending on assumptions, single survivor could hit it.


I am pretty sure that converting to the top of 15% tax bracket to get my TDA balance down to $1.5M helps. I am also convinced that both of us starting SS at 70 is the way to go. After that, it really is a guessing game (again, depending on the assumptions). My current plan is to contribute to my Roth 401k up to the point where we can get the AOTC education credit. That means about 2/3 Roth 401K this year and less the next couple of years. After that, I'll see if converting into the 25% tax bracket makes sense.

It's important to note that the best strategies for dealing with the SS taxation spike is to go either just below it, or far above it. A common mistake is thinking that if you're just barely above it, such that your marginal rate drops back down, that you've solved the problem. This is usually not the case. If you're just barely above it, you are still "eating" the spike every year on whatever range of income that is the width of the spike.

There are a couple caveats. First, the severity of the spike depends on the amount of SS income. At around $61,000/year of SS income for a married couple, there is actually no spike at all. The severity of the spike grows as SS income moves in either direction from this number. You can check out these heat map plots to see what I mean. Second, whether Roth contributions/conversions make sense as a strategy to avoid the spike also depend on your tax rate now, so finding the right strategy is a balancing act.

My Excel tool correctly accounts for the spike effect, including the tax impact for being just barely above it. It only considers contributions, however, and does not consider the possibility of Roth conversions, which are sometimes needed for coming in just under the spike. Coding in possible Roth conversions would add complexity and I tried to keep it as simple as possible. If you like, if you give me your inputs I can see if I have a recommendation. I'd need:

• Expected return of investments (I know you say this is unknown. I think assuming 4% plus 0.5% for every 10% of stocks and real estate in your asset allocation is reasonable. Remember, this will be updated every year.)
• Current total pre-tax balance
• Contributions you are considering whether to make pre-tax or Roth (eg. $22,500 401k limit)
• Other pre-tax contributions that must be pre-tax (Eg. employer match)
• Planned total Social Security income, and age when you expect it to begin

[privateID]

As for #2, if I'm interpreting your comment accurately, I don't think you're correct. The percentage of SS income that will be taxable is calculated in Cell C32, based on the rest of the income using the appropriate IRS formula (off to the side, in Cells U3-U20). It's a "single value", yes, but it can vary based on inputs. For example, if you expect a high rate of return (B4) and large future pre-tax contributions (C22-23), the percentage may calculate to 85%. If you then reduce your pre-tax contributions by considering doing Roth instead, the percentage will recalculate and might be less than 85%. If you want to make a plot of all possible contribution types today (on the "Trad vs. Roth" tab), the percentage will be calculated independent for each case. So, I think this is giving you what you want.

Note that this percentage is always calculated as a forecast for the future, specifically the first year when withdrawals begin. If you are collecting SS today, and the taxable percent varies based on how much traditional or Roth you contribute, that would need to be reflected in your current tax rates, entered either as a single value for marginal tax rate in 'Future Value'!C13, or in a table of marginal tax rates on "Import from Case Study Sprdsht".

What the tool doesn't do is look at multiple years of retirement. For example, you may retire at age 65 with 85% taxable SS, but what about at age 70, or 75, given a set of assumptions about withdrawals, conversions, etc. It was too complex for me to code multi-year withdrawal scenarios, as the number of assumptions and inputs would increase dramatically. If this is what you want, I believe there are other tools that are more focused on retirees, like the Retiree Portfolio Model.

So I have my own spreadsheet, similar to RPM (not as complex). In that spreadsheet I look at multiple years. The amount of SS being taxed varies alot based on assumptions. I can definitely change assumptions to get 85% taxed in all years - increase rate of return enough will do it. I am using a conservative 6% return for stocks. At 9%, it shows 85% will be taxed in all years. Of course, when a randomize it a bit, then some years do and some don't (tends to have trends as returns rise/fall). Thanks for the tool. I always like to compare things.

Still reading the thread, but up till now I have not seen a mention of what would be the marginal rate if your surviving spouse lives on, filing as a single.

Single will be 25%. 85% of SS will be taxed. IRMAA is close. Depending on assumptions, single survivor could hit it.


I am pretty sure that converting to the top of 15% tax bracket to get my TDA balance down to $1.5M helps. I am also convinced that both of us starting SS at 70 is the way to go. After that, it really is a guessing game (again, depending on the assumptions). My current plan is to contribute to my Roth 401k up to the point where we can get the AOTC education credit. That means about 2/3 Roth 401K this year and less the next couple of years. After that, I'll see if converting into the 25% tax bracket makes sense.

It's important to note that the best strategies for dealing with the SS taxation spike is to go either just below it, or far above it. A common mistake is thinking that if you're just barely above it, such that your marginal rate drops back down, that you've solved the problem. This is usually not the case. If you're just barely above it, you are still "eating" the spike every year on whatever range of income that is the width of the spike.

There are a couple caveats. First, the severity of the spike depends on the amount of SS income. At around $61,000/year of SS income for a married couple, there is actually no spike at all. The severity of the spike grows as SS income moves in either direction from this number. You can check out these heat map plots to see what I mean. Second, whether Roth contributions/conversions make sense as a strategy to avoid the spike also depend on your tax rate now, so finding the right strategy is a balancing act.

My Excel tool correctly accounts for the spike effect, including the tax impact for being just barely above it. It only considers contributions, however, and does not consider the possibility of Roth conversions, which are sometimes needed for coming in just under the spike. Coding in possible Roth conversions would add complexity and I tried to keep it as simple as possible. If you like, if you give me your inputs I can see if I have a recommendation. I'd need:

• Expected return of investments (I know you say this is unknown. I think assuming 4% plus 0.5% for every 10% of stocks and real estate in your asset allocation is reasonable. Remember, this will be updated every year.)
• Current total pre-tax balance
• Contributions you are considering whether to make pre-tax or Roth (eg. $22,500 401k limit)
• Other pre-tax contributions that must be pre-tax (Eg. employer match)
• Planned total Social Security income, and age when you expect it to begin

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.

[fyre4ce]

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.

[privateID]

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.

[fyre4ce]

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

[FiveK]

privateID, thanks for engaging with more details on this discussion. Too often people post and then don't respond to follow-up questions. But back to your situation....

One can quibble about a percent or two here or there, but the analysis in the OP that you are facing "about 30%" on marginal rates both now and through retirement looks correct. At least, that's what I see using the personal finance toolbox tool with NY (side note: for NY, it appears to subtract the SS correctly and has a $20K/person IRA+pension subtraction) for the state.

Big levers that could change "about 30%" include
- exorbitant medical costs that lead to huge itemized medical expenses and lower taxable income
- making full use of Qualified Charitable Distributions (QCDs) to withdraw from traditional accounts without affecting AGI
- death of a spouse, leaving the survivor subject to single filer rates
- death of both, and the tax situation of heirs

You could stay under the marginal rate "hump" created by SS taxation for a while by not taking money out of traditional accounts, but that would lead to a higher traditional balance and perhaps IRMAA adders due to higher RMDs.

In other words, it appears you are pretty much in coin flip territory. If it were me, the combination of considering the "death of a spouse" effect, plus the “Traditional plus taxable” vs. Roth effect fyre4ce mentioned, would tip the scales toward Roth contributions now. Also, Roth conversions to the top of the 22% (and perhaps 24% prior to IRMAA effects starting at age 63) bracket are not unreasonable, at least to the extent you can pay the tax on those conversions from cash flow.

[privateID]

...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.

Thank you so much for running the numbers and a double thank you for a link to the spreadsheets. I love looking at other people's spreadsheet, but they are intimidating to understand when I'm not the one entering the formulas. I will look it over this evening. One quick question I have is on this quoted part. I see around $1.5M as well and I do see it generating around $60K of taxable income. But I don't see how that puts me in the middle of the spike (I assume when we say spike we are talking about the 40.7% fed rate, using the no sunset numbers). In my tax projections, using a 2.5% inflation rate, I see that puts me in the 12% tax bracket, which is the 22.2% rate after including the SS tax impact. Am I missing something there? Or when you say spike, is it any time .85% gets added because of SS (or maybe the .5% as well if it applies)?

Thanks again to you and Fivek. Something about making your own spreadsheet, where I am concerned I made a mistake, that getting validation helps a ton. I also love to compare the spreadsheet for key formulas as a validation.

Edit: Hmm. I think I may have misstated something earlier. I said I would get $77,540 starting in 2037. That amount was real. In other words, I would get $109,562 after factoring in 2.5% inflation.

[fyre4ce]

...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.

Thank you so much for running the numbers and a double thank you for a link to the spreadsheets. I love looking at other people's spreadsheet, but they are intimidating to understand when I'm not the one entering the formulas. I will look it over this evening. One quick question I have is on this quoted part. I see around $1.5M as well and I do see it generating around $60K of taxable income. But I don't see how that puts me in the middle of the spike (I assume when we say spike we are talking about the 40.7% fed rate, using the no sunset numbers). In my tax projections, using a 2.5% inflation rate, I see that puts me in the 12% tax bracket, which is the 22.2% rate after including the SS tax impact. Am I missing something there? Or when you say spike, is it any time .85% gets added because of SS (or maybe the .5% as well if it applies)?

Thanks again to you and Fivek. Something about making your own spreadsheet, where I am concerned I made a mistake, that getting validation helps a ton. I also love to compare the spreadsheet for key formulas as a validation.

Edit: Hmm. I think I may have misstated something earlier. I said I would get $77,540 starting in 2037. That amount was real. In other words, I would get $109,562 after factoring in 2.5% inflation.

I did all my calculations in real dollars; I find it's much easier. A 6.5% nominal return minus assumed 3% inflation gives a real return of 3.5%. I took your $77,540 to be in today's dollars, but since SS is inflation-indexed the same value can be used in the future. I took your $7,900/year pension to be in real dollars, which might not be correct. If it's nominal dollars, that would be worth $7900 / 1.03^15 = $5071, that will affect the results a little bit.

You mentioned the uncertainty in whether the SS taxation thresholds will ever be indexed to inflation. I did my analysis assuming they will be adjusted for inflation sometime in the next 15 years, because it makes the math easier; whether this actually happens is anyone's guess. If you want, you could take the formulas here and adjust UB and LB downward for inflation. If these thresholds are not adjusted for inflation, this will mean you'll need a lower pre-tax balance to come in under the spike, and will favor more Roth conversions. If the spike is lowered far enough in the income scale, it might make sense to go above the spike instead, but you would have to make that bet now.

[privateID]

...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.

Thank you so much for running the numbers and a double thank you for a link to the spreadsheets. I love looking at other people's spreadsheet, but they are intimidating to understand when I'm not the one entering the formulas. I will look it over this evening. One quick question I have is on this quoted part. I see around $1.5M as well and I do see it generating around $60K of taxable income. But I don't see how that puts me in the middle of the spike (I assume when we say spike we are talking about the 40.7% fed rate, using the no sunset numbers). In my tax projections, using a 2.5% inflation rate, I see that puts me in the 12% tax bracket, which is the 22.2% rate after including the SS tax impact. Am I missing something there? Or when you say spike, is it any time .85% gets added because of SS (or maybe the .5% as well if it applies)?

Thanks again to you and Fivek. Something about making your own spreadsheet, where I am concerned I made a mistake, that getting validation helps a ton. I also love to compare the spreadsheet for key formulas as a validation.

Edit: Hmm. I think I may have misstated something earlier. I said I would get $77,540 starting in 2037. That amount was real. In other words, I would get $109,562 after factoring in 2.5% inflation.

I did all my calculations in real dollars; I find it's much easier. A 6.5% nominal return minus assumed 3% inflation gives a real return of 3.5%. I took your $77,540 to be in today's dollars, but since SS is inflation-indexed the same value can be used in the future. I took your $7,900/year pension to be in real dollars, which might not be correct. If it's nominal dollars, that would be worth $7900 / 1.03^15 = $5071, that will affect the results a little bit.

You mentioned the uncertainty in whether the SS taxation thresholds will ever be indexed to inflation. I did my analysis assuming they will be adjusted for inflation sometime in the next 15 years, because it makes the math easier; whether this actually happens is anyone's guess. If you want, you could take the formulas here and adjust UB and LB downward for inflation. If these thresholds are not adjusted for inflation, this will mean you'll need a lower pre-tax balance to come in under the spike, and will favor more Roth conversions. If the spike is lowered far enough in the income scale, it might make sense to go above the spike instead, but you would have to make that bet now.

I spent some time going through the spreadsheet. I understand your conclusions based on the input I gave you. There are a number of tweeks I needed to make:

• I turn 57 this year, so really 4 years left instead of 5.
• You already mentioned the adjustment for the real value of $7,900 pension.
• SS taxation - I did not update for inflation, but as you mention it will only tilt the decision further toward Roth.

The biggest modification, however, was the withdrawal rate. You had put down 4%. First, that number is too high for when SS starts. Second, I think I handle that number much differently. Anything I need beyond my RMD+pension+SS, I expect to withdraw from my Roth money so my AGI is lower. I am not taking out anything close to 4% from my TDA. My AGI is RMD+pension+SS taxation. My spreadsheet shows a withdrawal rate of closer to 1.5% when SS starts. So, when I compute my AGI through the years after SS starts, I am firmly in the 12% tax bracket. I input that into your spreadsheet and that changed the calculations drastically. I am no longer at 85% of SS taxed, meaning I am not passed the spike. However, I do hit 22.2% marginal tax rate due to SS (ie., 12% Fed tax rate turns into 22.2% with SS). Now my spreadsheet looks alot more like your results. The result shown to do 100% Roth is still valid, but mostly because 22.2% is very close to 22%. Does all that sound right?

BTW - I now have a much better understanding of how your spreadsheet works and plan to play around with it some more.

My current game plan:
1) Given the AOTC education credit is worth $2,500/yr, I plan to do Roth contributions up to the point where my income hits the AOTC limit.
2) Given how close things are, as FiveK mentioned it's like a "coin toss", meaning any variable could change things, I plan to keep an eye on things. If need be, I will convert past the point of the top of the 15% tax bracket (below IRMAA) from 60-70.

Thanks to all who contributed to this thread and huge thanks to fyre4ce and FiveK for all their contributions.

[secondopinion]

On any "close call" with Roth versus Traditional IRAs, I will say to take the Roth IRA because that is a known. There can be some strategic benefits with Traditional IRAs, but they are the riskier choice. It is easier to know my needs now than later; the last thing I need is a tax headache later.

Given you are relying on married tax brackets, I definitely would do Roth.

[retire2022]

RMDs are required for Roth 401ks.

But they can be rolled into Roth IRAs.

My understanding is Secure 2.0 act conforms Designated Roth 401k, 403b. & government 457 accounts to follow Roth IRA rules, no more RMD, yes I concur they can be rolled into Roth IRA.

[retire2022]

I believe Secure Act 2.0 no longer requires Roth 401K RMDs starting in 2024.

I concur, Secure Act 2.0 no longer requires RMD in 401k.

[fyre4ce]

...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.

Thank you so much for running the numbers and a double thank you for a link to the spreadsheets. I love looking at other people's spreadsheet, but they are intimidating to understand when I'm not the one entering the formulas. I will look it over this evening. One quick question I have is on this quoted part. I see around $1.5M as well and I do see it generating around $60K of taxable income. But I don't see how that puts me in the middle of the spike (I assume when we say spike we are talking about the 40.7% fed rate, using the no sunset numbers). In my tax projections, using a 2.5% inflation rate, I see that puts me in the 12% tax bracket, which is the 22.2% rate after including the SS tax impact. Am I missing something there? Or when you say spike, is it any time .85% gets added because of SS (or maybe the .5% as well if it applies)?

Thanks again to you and Fivek. Something about making your own spreadsheet, where I am concerned I made a mistake, that getting validation helps a ton. I also love to compare the spreadsheet for key formulas as a validation.

Edit: Hmm. I think I may have misstated something earlier. I said I would get $77,540 starting in 2037. That amount was real. In other words, I would get $109,562 after factoring in 2.5% inflation.

I did all my calculations in real dollars; I find it's much easier. A 6.5% nominal return minus assumed 3% inflation gives a real return of 3.5%. I took your $77,540 to be in today's dollars, but since SS is inflation-indexed the same value can be used in the future. I took your $7,900/year pension to be in real dollars, which might not be correct. If it's nominal dollars, that would be worth $7900 / 1.03^15 = $5071, that will affect the results a little bit.

You mentioned the uncertainty in whether the SS taxation thresholds will ever be indexed to inflation. I did my analysis assuming they will be adjusted for inflation sometime in the next 15 years, because it makes the math easier; whether this actually happens is anyone's guess. If you want, you could take the formulas here and adjust UB and LB downward for inflation. If these thresholds are not adjusted for inflation, this will mean you'll need a lower pre-tax balance to come in under the spike, and will favor more Roth conversions. If the spike is lowered far enough in the income scale, it might make sense to go above the spike instead, but you would have to make that bet now.

I spent some time going through the spreadsheet. I understand your conclusions based on the input I gave you. There are a number of tweeks I needed to make:

• I turn 57 this year, so really 4 years left instead of 5.
• You already mentioned the adjustment for the real value of $7,900 pension.
• SS taxation - I did not update for inflation, but as you mention it will only tilt the decision further toward Roth.

The biggest modification, however, was the withdrawal rate. You had put down 4%. First, that number is too high for when SS starts. Second, I think I handle that number much differently. Anything I need beyond my RMD+pension+SS, I expect to withdraw from my Roth money so my AGI is lower. I am not taking out anything close to 4% from my TDA. My AGI is RMD+pension+SS taxation. My spreadsheet shows a withdrawal rate of closer to 1.5% when SS starts. So, when I compute my AGI through the years after SS starts, I am firmly in the 12% tax bracket. I input that into your spreadsheet and that changed the calculations drastically. I am no longer at 85% of SS taxed, meaning I am not passed the spike. However, I do hit 22.2% marginal tax rate due to SS (ie., 12% Fed tax rate turns into 22.2% with SS). Now my spreadsheet looks alot more like your results. The result shown to do 100% Roth is still valid, but mostly because 22.2% is very close to 22%. Does all that sound right?

BTW - I now have a much better understanding of how your spreadsheet works and plan to play around with it some more.

My current game plan:
1) Given the AOTC education credit is worth $2,500/yr, I plan to do Roth contributions up to the point where my income hits the AOTC limit.
2) Given how close things are, as FiveK mentioned it's like a "coin toss", meaning any variable could change things, I plan to keep an eye on things. If need be, I will convert past the point of the top of the 15% tax bracket (below IRMAA) from 60-70.

Thanks to all who contributed to this thread and huge thanks to fyre4ce and FiveK for all their contributions.

The caution with withdrawing 1.5% at age 70 is that RMDs start at age 75 at 4.07% of the pre-tax balance, and increase from there. So if you follow this plan, you'll be below the spike for 5 years, but then probably above it starting at age 75, and if you live to 95, you'll have eaten the spike for 25 years. If you find yourself in that situation around age 75, you could probably fix the problem with one large conversion, but I still favor trying to get the pre-tax balance down before you start collecting SS. If you are below the spike 70-75, those won't be good years to do conversions because you'll pay the spike any year with a conversion. As FiveK pointed out, IRMAA starts to become a factor at age 63, so my opinion (and his too, it seems) is that it's better to "manage" (ie. reduce) your pre-tax balance before age 63, because after that it gets a little more expensive. If I'm in your shoes, my goal would be to hit age 70 such that I am coming in just under the spike with an RMD-like withdrawal rate (around 4%) from my pre-tax account.

I agree with FiveK that you're basically in coin-toss territory, facing about 30% tax rate on either end. But, the tax spike is 15-20% higher than that, and probably the biggest mistake you could make here is to pay that spike, by landing inside it or slightly above it, for many years, starting at age 70. That would cost you a few thousand dollars a year in extra taxes. If you're aware of it, you can always make conversions to keep your pre-tax balance down, even after RMD's start. The question to fine-tune this process is finding the best times to do those conversions between now and then. But the best and worst timing is only going to affect your outcome by a few percent; that's where I would say the toss-up is. Bottom line: avoid the spike, and everything else is small potatoes.

Heir tax rates are something we haven't discussed. FiveK mentioned it. Do you have any idea what your likely heirs' tax rates will be? Ie. are your kids investment bankers in Manhattan, or public school teachers in Florida?

[retire2022]

privateID, thanks for engaging with more details on this discussion. Too often people post and then don't respond to follow-up questions. But back to your situation....

One can quibble about a percent or two here or there, but the analysis in the OP that you are facing "about 30%" on marginal rates both now and through retirement looks correct. At least, that's what I see using the personal finance toolbox tool with NY (side note: for NY, it appears to subtract the SS correctly and has a $20K/person IRA+pension subtraction) for the state.

privateID

Here is the references on regards to NYS taxation on pensions and retirement accounts on IT-201, please review instructions & publication 36 below.

https://www.tax.ny.gov/forms/html-instr ... i-2022.htm

https://www.tax.ny.gov/pdf/publications ... /pub36.pdf

[privateID]

The caution with withdrawing 1.5% at age 70 is that RMDs start at age 75 at 4.07% of the pre-tax balance, and increase from there. So if you follow this plan, you'll be below the spike for 5 years, but then probably above it starting at age 75, and if you live to 95, you'll have eaten the spike for 25 years. If you find yourself in that situation around age 75, you could probably fix the problem with one large conversion, but I still favor trying to get the pre-tax balance down before you start collecting SS. If you are below the spike 70-75, those won't be good years to do conversions because you'll pay the spike any year with a conversion. As FiveK pointed out, IRMAA starts to become a factor at age 63, so my opinion (and his too, it seems) is that it's better to "manage" (ie. reduce) your pre-tax balance before age 63, because after that it gets a little more expensive. If I'm in your shoes, my goal would be to hit age 70 such that I am coming in just under the spike with an RMD-like withdrawal rate (around 4%) from my pre-tax account.

I agree with FiveK that you're basically in coin-toss territory, facing about 30% tax rate on either end. But, the tax spike is 15-20% higher than that, and probably the biggest mistake you could make here is to pay that spike, by landing inside it or slightly above it, for many years, starting at age 70. That would cost you a few thousand dollars a year in extra taxes. If you're aware of it, you can always make conversions to keep your pre-tax balance down, even after RMD's start. The question to fine-tune this process is finding the best times to do those conversions between now and then. But the best and worst timing is only going to affect your outcome by a few percent; that's where I would say the toss-up is. Bottom line: avoid the spike, and everything else is small potatoes.

Heir tax rates are something we haven't discussed. FiveK mentioned it. Do you have any idea what your likely heirs' tax rates will be? Ie. are your kids investment bankers in Manhattan, or public school teachers in Florida?

That 1.5% withdrawal rate is from my total portfolio. At age 75, I'm currently showing $1.5M in TDAs, but another 3.5M in Roth accounts. I believe I will not be near the large spike at any point with my current assumptions. The 30% at the end is being in the 15% tax bracket (I've switched to using sunset numbers) causing my marginal rate to be 1.85 * 15% = 27.75 plus state taxes. Of course, changing a few assumptions and I can possibly hit the spike. The single survivor case and the heir case (I have 3 kids and I expect varying degrees of financial wealth from each - two recently out of college and one in college), really cement my desire to bring down the TDA balance a little more. My guess is I will end up doing one large conversion at some point to knock the TDA balance below $1.5M.

The years between 70 and 74 are special cases that I have pondered a bit. I expect at age 70, where we get a partial year SS, to max out the 85% of SS taxed because it won't take much income to hit it. I will at least convert to the top of the 15% tax bracket that year and maybe the top of the 25% tax bracket depending on how things look. Between ages 71-74, when I have total control of SS taxation, I may only convert to the top of the 10% tax bracket to minimize SS taxation. All that may depend on cash flow and such at the time.

[privateID]

privateID, thanks for engaging with more details on this discussion. Too often people post and then don't respond to follow-up questions. But back to your situation....

One can quibble about a percent or two here or there, but the analysis in the OP that you are facing "about 30%" on marginal rates both now and through retirement looks correct. At least, that's what I see using the personal finance toolbox tool with NY (side note: for NY, it appears to subtract the SS correctly and has a $20K/person IRA+pension subtraction) for the state.

privateID

Here is the references on regards to NYS taxation on pensions and retirement accounts on IT-201, please review instructions & publication 36 below.

https://www.tax.ny.gov/forms/html-instr ... i-2022.htm

https://www.tax.ny.gov/pdf/publications ... /pub36.pdf

Thank you

[retire2022]

Thank you

Your welcomed, here is example of inputs for tax year 2021:

viewtopic.php?p=7011073#p7011073

[FiveK]

privateID, thanks for engaging with more details on this discussion. Too often people post and then don't respond to follow-up questions. But back to your situation....

One can quibble about a percent or two here or there, but the analysis in the OP that you are facing "about 30%" on marginal rates both now and through retirement looks correct. At least, that's what I see using the personal finance toolbox tool with NY (side note: for NY, it appears to subtract the SS correctly and has a $20K/person IRA+pension subtraction) for the state.

privateID

Here is the references on regards to NYS taxation on pensions and retirement accounts on IT-201, please review instructions & publication 36 below.

https://www.tax.ny.gov/forms/html-instr ... i-2022.htm

https://www.tax.ny.gov/pdf/publications ... /pub36.pdf

One thing that isn't clear is whether Mr. & Mrs. privateID both have accounts/pensions to justify the full $40K ($20K each), or if all the money comes from one spouse and thus only $20K could be subtracted. Not a big deal in the overall picture, but....

[retire2022]

One thing that isn't clear is whether Mr. & Mrs. privateID both have accounts/pensions to justify the full $40K ($20K each), or if all the money comes from one spouse and thus only $20K could be subtracted. Not a big deal in the overall picture, but....

My CPA did my 2021 taxes, and pensions according to what the figures I have on the link, pensions and retirement plans goes over the 20k limit.

see my numbers here:

viewtopic.php?p=7011073#p7011073

[privateID]

privateID, thanks for engaging with more details on this discussion. Too often people post and then don't respond to follow-up questions. But back to your situation....

One can quibble about a percent or two here or there, but the analysis in the OP that you are facing "about 30%" on marginal rates both now and through retirement looks correct. At least, that's what I see using the personal finance toolbox tool with NY (side note: for NY, it appears to subtract the SS correctly and has a $20K/person IRA+pension subtraction) for the state.

privateID

Here is the references on regards to NYS taxation on pensions and retirement accounts on IT-201, please review instructions & publication 36 below.

https://www.tax.ny.gov/forms/html-instr ... i-2022.htm

https://www.tax.ny.gov/pdf/publications ... /pub36.pdf

One thing that isn't clear is whether Mr. & Mrs. privateID both have accounts/pensions to justify the full $40K ($20K each), or if all the money comes from one spouse and thus only $20K could be subtracted. Not a big deal in the overall picture, but....

Mr. privateID has most of our TDA accounts. Mrs privateID has about $65K in her TDA accounts, but she is contributing to a trad'l IRA for the next few years to help build it up. So, that is one account we purposefully don't contribute to a Roth to save on NY state taxes.

[privateID]

Deleted - made a faulty assumption will post when I understand better.

[privateID]

The caution with withdrawing 1.5% at age 70 is that RMDs start at age 75 at 4.07% of the pre-tax balance, and increase from there. So if you follow this plan, you'll be below the spike for 5 years, but then probably above it starting at age 75, and if you live to 95, you'll have eaten the spike for 25 years. If you find yourself in that situation around age 75, you could probably fix the problem with one large conversion, but I still favor trying to get the pre-tax balance down before you start collecting SS. If you are below the spike 70-75, those won't be good years to do conversions because you'll pay the spike any year with a conversion. As FiveK pointed out, IRMAA starts to become a factor at age 63, so my opinion (and his too, it seems) is that it's better to "manage" (ie. reduce) your pre-tax balance before age 63, because after that it gets a little more expensive. If I'm in your shoes, my goal would be to hit age 70 such that I am coming in just under the spike with an RMD-like withdrawal rate (around 4%) from my pre-tax account.

I agree with FiveK that you're basically in coin-toss territory, facing about 30% tax rate on either end. But, the tax spike is 15-20% higher than that, and probably the biggest mistake you could make here is to pay that spike, by landing inside it or slightly above it, for many years, starting at age 70. That would cost you a few thousand dollars a year in extra taxes. If you're aware of it, you can always make conversions to keep your pre-tax balance down, even after RMD's start. The question to fine-tune this process is finding the best times to do those conversions between now and then. But the best and worst timing is only going to affect your outcome by a few percent; that's where I would say the toss-up is. Bottom line: avoid the spike, and everything else is small potatoes.

Heir tax rates are something we haven't discussed. FiveK mentioned it. Do you have any idea what your likely heirs' tax rates will be? Ie. are your kids investment bankers in Manhattan, or public school teachers in Florida?

That 1.5% withdrawal rate is from my total portfolio. At age 75, I'm currently showing $1.5M in TDAs, but another 3.5M in Roth accounts. I believe I will not be near the large spike at any point with my current assumptions. The 30% at the end is being in the 15% tax bracket (I've switched to using sunset numbers) causing my marginal rate to be 1.85 * 15% = 27.75 plus state taxes. Of course, changing a few assumptions and I can possibly hit the spike. The single survivor case and the heir case (I have 3 kids and I expect varying degrees of financial wealth from each - two recently out of college and one in college), really cement my desire to bring down the TDA balance a little more. My guess is I will end up doing one large conversion at some point to knock the TDA balance below $1.5M.

The years between 70 and 74 are special cases that I have pondered a bit. I expect at age 70, where we get a partial year SS, to max out the 85% of SS taxed because it won't take much income to hit it. I will at least convert to the top of the 15% tax bracket that year and maybe the top of the 25% tax bracket depending on how things look. Between ages 71-74, when I have total control of SS taxation, I may only convert to the top of the 10% tax bracket to minimize SS taxation. All that may depend on cash flow and such at the time.

Although my explanation of my 1.5% withdrawal rate is accurate of the whole, I think the 4% withdrawal rate from the TDA account you used was correct as it was based on the starting RMD. The main difference in what your spreadsheet is computing and what I computed was the rate of return used. You used a 6.5% return for the TDA account as the number I supplied. I was incorrectly basing that value on my whole portfolio. In my spreadsheet, I was using between a 3.2% and 4.2% nominal return for my TDA as it has more fixed income in it. If I use the 4.2% return in your spreadsheet, the future pre-tax balance is closer to $1M. That will reduce the AGI below the spike and into the 22.2% fed marginal tax rate (sorry, for switching back to the pre-sunset numbers, but now talking about your spreadsheet). The part I am still trying to understand in the tool is how the cumulative tax rate can be greater than the marginal tax rate in this case. I see this when I change the return to 4.2% and click to populate the table on the "Trad vs. Roth" tab.

[Tom_T]

Have you tried my software tool?

viewtopic.php?t=352921

It’s the most accurate solution to the problem I’m aware of.

It's going to take some time to plow through this, but this is a pretty cool labor of love on your part, and I'm going to start filling in the blanks bit by bit.

[HomeStretch]

Take into consideration in your analysis that your age 75+ blended marginal tax rate may be even higher than 33% due to higher Medicare premiums (IRMAA) and net investment income tax.

[FiveK]

Take into consideration in your analysis that your age 75+ blended marginal tax rate may be even higher than 33% due to higher Medicare premiums (IRMAA) and net investment income tax.

Including both of those was part of the "about 30%" quoted in that post. An advantage to using the tool mentioned there, as the ad writers for Prego said, It’s in there for most of the usual "did you consider...?" items.

[HomeStretch]

Take into consideration in your analysis that your age 75+ blended marginal tax rate may be even higher than 33% due to higher Medicare premiums (IRMAA) and net investment income tax.

Including both of those was part of the "about 30%" quoted in that post. An advantage to using the tool mentioned there, as the ad writers for Prego said, It’s in there for most of the usual "did you consider...?" items.

The 33% I was quoting was from OP’s original post which looked to only include Federal/state marginal tax rates.

… 75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state (RMDs begin so more income) = 33% …

[privateID]

Take into consideration in your analysis that your age 75+ blended marginal tax rate may be even higher than 33% due to higher Medicare premiums (IRMAA) and net investment income tax.

Including both of those was part of the "about 30%" quoted in that post. An advantage to using the tool mentioned there, as the ad writers for Prego said, It’s in there for most of the usual "did you consider...?" items.

The 33% I was quoting was from OP’s original post which looked to only include Federal/state marginal tax rates.

… 75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state (RMDs begin so more income) = 33% …

If I'm in the 15% tax bracket, I am pretty sure I won't hit IRMAA or NIIT. From my projections, I think I am far enough away for them to be a concern while MFJ. However, the single survivor case is a different story. And that is part of my reason for wanting to lower my TDA balance. At $1.5M (nominal dollars) in 15 years, that is close enough that changing a variable or two can put the single survivor at least into IRMAA territory. Of course, the single survivor would be able to afford it as a single person consuming our investments.

[FiveK]

Take into consideration in your analysis that your age 75+ blended marginal tax rate may be even higher than 33% due to higher Medicare premiums (IRMAA) and net investment income tax.

Including both of those was part of the "about 30%" quoted in that post. An advantage to using the tool mentioned there, as the ad writers for Prego said, It’s in there for most of the usual "did you consider...?" items.

The 33% I was quoting was from OP’s original post which looked to only include Federal/state marginal tax rates.

… 75-end: 15% Fed * 1.85 (for SS bump) + 5.5% state (RMDs begin so more income) = 33% …

Ok, got it. Perhaps neither the NIIT nor IRMAA would be in effect in the 15% bracket (whatever happens for 2026).

[privateID]

The part I am still trying to understand in the tool is how the cumulative tax rate can be greater than the marginal tax rate in this case. I see this when I change the return to 4.2% and click to populate the table on the "Trad vs. Roth" tab.

Been playing around to figure out that last question. I think the key is that lowering my return puts me into the spike. If I'm in the spike (at least the lower part where in the 12% tax rate, my marginal fed rate is 22.2%, 1.85 * 12% because of SS) and I set the state tax rate to 1%, the Marginal column shows a value of 23.2% (that's 22.2% + 1%). The cumulative column shows 24.05%. That is .85% more than the marginal column. Is the spreadsheet computing that extra income needed to pay the state taxes would cause more SS to be taxed. So, 1% more needed would cause 1.85% of actual taxes?

Is that what I'm seeing?

[fyre4ce]

The caution with withdrawing 1.5% at age 70 is that RMDs start at age 75 at 4.07% of the pre-tax balance, and increase from there. So if you follow this plan, you'll be below the spike for 5 years, but then probably above it starting at age 75, and if you live to 95, you'll have eaten the spike for 25 years. If you find yourself in that situation around age 75, you could probably fix the problem with one large conversion, but I still favor trying to get the pre-tax balance down before you start collecting SS. If you are below the spike 70-75, those won't be good years to do conversions because you'll pay the spike any year with a conversion. As FiveK pointed out, IRMAA starts to become a factor at age 63, so my opinion (and his too, it seems) is that it's better to "manage" (ie. reduce) your pre-tax balance before age 63, because after that it gets a little more expensive. If I'm in your shoes, my goal would be to hit age 70 such that I am coming in just under the spike with an RMD-like withdrawal rate (around 4%) from my pre-tax account.

I agree with FiveK that you're basically in coin-toss territory, facing about 30% tax rate on either end. But, the tax spike is 15-20% higher than that, and probably the biggest mistake you could make here is to pay that spike, by landing inside it or slightly above it, for many years, starting at age 70. That would cost you a few thousand dollars a year in extra taxes. If you're aware of it, you can always make conversions to keep your pre-tax balance down, even after RMD's start. The question to fine-tune this process is finding the best times to do those conversions between now and then. But the best and worst timing is only going to affect your outcome by a few percent; that's where I would say the toss-up is. Bottom line: avoid the spike, and everything else is small potatoes.

Heir tax rates are something we haven't discussed. FiveK mentioned it. Do you have any idea what your likely heirs' tax rates will be? Ie. are your kids investment bankers in Manhattan, or public school teachers in Florida?

That 1.5% withdrawal rate is from my total portfolio. At age 75, I'm currently showing $1.5M in TDAs, but another 3.5M in Roth accounts. I believe I will not be near the large spike at any point with my current assumptions. The 30% at the end is being in the 15% tax bracket (I've switched to using sunset numbers) causing my marginal rate to be 1.85 * 15% = 27.75 plus state taxes. Of course, changing a few assumptions and I can possibly hit the spike. The single survivor case and the heir case (I have 3 kids and I expect varying degrees of financial wealth from each - two recently out of college and one in college), really cement my desire to bring down the TDA balance a little more. My guess is I will end up doing one large conversion at some point to knock the TDA balance below $1.5M.

The years between 70 and 74 are special cases that I have pondered a bit. I expect at age 70, where we get a partial year SS, to max out the 85% of SS taxed because it won't take much income to hit it. I will at least convert to the top of the 15% tax bracket that year and maybe the top of the 25% tax bracket depending on how things look. Between ages 71-74, when I have total control of SS taxation, I may only convert to the top of the 10% tax bracket to minimize SS taxation. All that may depend on cash flow and such at the time.

A few points and some more numbers to throw at you.

Make sure you keep straight real vs. nominal values. I did all my calculations in real values, so those are the balances I reported. When I said you should plan to have a ~$1.4M pre-tax balance by the time you hit 70, that was real. In nominal terms, that would be about $1.4M x 1.03^14 ~= $2.2M.

Also keep in mind that your withdrawal rates from all your accounts don't have to be the same once you retire. Usually, best is to tax-optimize your withdrawals from pre-tax and (to a lesser extent) taxable accounts, and use other assets (Roth, HSA, others) to make up the difference. One constraint on this is that you have to withdraw at least the RMD from pre-tax. So you could conceivably withdraw 4% from pre-tax, but only 1.5% from Roth. You could do it the other way around from 70-74, but starting at 75 you'll be withdrawing 4%+ from pre-tax whether you need the money or not.

I took a closer look at the numbers. I still think your objective should be to hit age 70 with a pre-tax balance such that ~4% withdrawals puts you under the SS spike. I calculated these pre-tax balance numbers for you four different ways: with and without the tax rate sunset, and with and without the SS taxation thresholds:

No sunset, thresholds indexed: $58.9k withdrawals, $1.47M real balance, $2.23M nominal balance
No sunset, thresholds NOT indexed: $53.1k withdrawals, $1.33M real balance, $2.01M nominal balance
Sunset, thresholds indexed: $57.1k withdrawals, $1.43M real balance, $2.16M nominal balance
Sunset, thresholds NOT indexed: $51.4k withdrawals, $1.28M real balance, $1.94M nominal balance

So, under any of these assumptions the numbers are similar. I made your correction of assuming only 4 working years between now and retirement, then an additional 10 years of withdrawals/conversions to the top of the 12/15% bracket. With 100% Roth contributions for you (pre-tax for spouse) those four years and a steady 3.5% real (6.5% nominal) return, you'll end with $1.38M real ($2.09M nominal) pre-tax balance at 70. With 100% pre-tax for both of you, you'll end up with $1.56M real ($2.36M nominal). My conclusion is that the 100% Roth numbers look better, and will probably give you closer to your target, and less headache of needing to do extra conversions at a higher rate. Plus all the contingency scenarios statistically favor Roth, in my opinion. So that's what I would do now. Fourteen years is a long time though, and you should keep yourself on track to this goal as you get closer to 70.

Spreadsheet (messy): https://drive.google.com/file/d/1VH3j6f ... sp=sharing

Edit: I just saw above that you want to assume a 4.2% nominal return for your pre-tax accounts, which have mostly fixed-income. Recalculating the numbers above, with 100% Roth you would have a pre-tax balance of $780k real ($1.18M nominal). With 100% traditional you would have $920k real ($1.39M nominal). In either case, you would be in the wide bracket below the spike (which is good), 26.2% with no sunset and 31.75% with a rate sunset. Under these assumptions, it's basically a bet on whether the sunset happens, because with the sunset Roth is better, and with no sunset traditional is better. I would probably still choose 100% Roth today, because of the contingency scenarios, but it's not quite as clear a play.

Edit #2: To clarify, when I talk about "the spike" I am referring to the 40.7% or 46.25% marginal rate caused by the 22% or 25% bracket combined with a phase-in of 85%. Especially under current tax rates, I don't consider the area below it (22.2%) to be a spike, because it's almost the same as the rate above it (22%). For taxpayers receiving less SS than you, the 22.2% can be a spike if there's significant ranges of 18/18.5% below and 12% above, but this doesn't apply to you. You're thinking about the issue correctly; just want to be clear with what I mean.

[fyre4ce]

The part I am still trying to understand in the tool is how the cumulative tax rate can be greater than the marginal tax rate in this case. I see this when I change the return to 4.2% and click to populate the table on the "Trad vs. Roth" tab.

Been playing around to figure out that last question. I think the key is that lowering my return puts me into the spike. If I'm in the spike (at least the lower part where in the 12% tax rate, my marginal fed rate is 22.2%, 1.85 * 12% because of SS) and I set the state tax rate to 1%, the Marginal column shows a value of 23.2% (that's 22.2% + 1%). The cumulative column shows 24.05%. That is .85% more than the marginal column. Is the spreadsheet computing that extra income needed to pay the state taxes would cause more SS to be taxed. So, 1% more needed would cause 1.85% of actual taxes?

Is that what I'm seeing?

I was able to recreate the issue you identified. The problem relates to how the tool handles state taxation of SS benefits. The calculation for the "marginal" column assumes SS benefits are not taxed by the state, but the "cumulative" calculation assumes that they are (it bases the state tax off federal AGI). At the very least, it should be consistent.

It looks like the rules vary by state. Six states tax SS benefits in the same amount as federal. A further 8 tax SS benefits, but with some limitations (like no taxation of SS below an income limit). The rest either don't have a state income tax, or do but exclude SS income.

In the next version of this tool, I think I'll make an "advanced option" where the user can select whether federally-taxable SS benefits are taxed at the state level.

Do you know if you'll be living in a state that taxes SS benefits? I can send you a patch.

[privateID]

The part I am still trying to understand in the tool is how the cumulative tax rate can be greater than the marginal tax rate in this case. I see this when I change the return to 4.2% and click to populate the table on the "Trad vs. Roth" tab.

Been playing around to figure out that last question. I think the key is that lowering my return puts me into the spike. If I'm in the spike (at least the lower part where in the 12% tax rate, my marginal fed rate is 22.2%, 1.85 * 12% because of SS) and I set the state tax rate to 1%, the Marginal column shows a value of 23.2% (that's 22.2% + 1%). The cumulative column shows 24.05%. That is .85% more than the marginal column. Is the spreadsheet computing that extra income needed to pay the state taxes would cause more SS to be taxed. So, 1% more needed would cause 1.85% of actual taxes?

Is that what I'm seeing?

I was able to recreate the issue you identified. The problem relates to how the tool handles state taxation of SS benefits. The calculation for the "marginal" column assumes SS benefits are not taxed by the state, but the "cumulative" calculation assumes that they are (it bases the state tax off federal AGI). At the very least, it should be consistent.

It looks like the rules vary by state. Six states tax SS benefits in the same amount as federal. A further 8 tax SS benefits, but with some limitations (like no taxation of SS below an income limit). The rest either don't have a state income tax, or do but exclude SS income.

In the next version of this tool, I think I'll make an "advanced option" where the user can select whether federally-taxable SS benefits are taxed at the state level.

Do you know if you'll be living in a state that taxes SS benefits? I can send you a patch.

Still digesting your previous post.

I live in NY and they do not tax SS.