SS at 62 or 70? Roth Conversions, Large TDA Complexity

[FlamePoint]

A few facts before I dive into my question -

Age: 60/60. Retired at age 58.
Total portfolio: $3.7M
TDA balance: $2.85M
Roth balance: $720K
My SS PIA at age 67: $38,328 annual (not adjusted for inflation)
Spouses SS PIA at age 67: $40,008 annual (not adjusted for inflation)
Roth's will go to heirs

Due to the size of our TDA, I plan to do Roth conversions through age 74. Based on my modeling, this should move our Roth/TDA balances to around 50/50 (or as high as 60/40) depending on when I take SS.

I've run the SS numbers through the open social security tool, and they are recommending I take my SS beginning 9/2024 at age 62. This equates to $26,989 starting in 2025, not adjusted for inflation. My spouse should take his at age 70. Total non-inflation adjusted lifetime payout is $1,086,021.

If I hold off and take my SS at age 70 along with my spouse, total non-inflation adjusted lifetime payout is estimated to be $1,043,234, a -$42,787 difference.

In the overall scheme of things, I don't think taking SS at age 62 vs. 70 for me will make much difference in the overall outcome of our situation. We will be spending no more than 2% of our portfolio once we hit age 70 either way, so have a very low risk of running out of money. However, I would be interested in others thoughts on this. Anything I'm missing anything here in terms of how I should be thinking about this? We are both relatively healthy and active (and intend to stay that way), so should have a normal lifespan (barring any unanticipated health problems). Getting more into a Roth before age 75 has it's appeal, but there are a lot of assumptions that went into my modeling that may or may not pan out.

[curmudgeon]

The SS estimate lets you see that other factors and uncertainties are probably more important than the specific claiming choice. Leaving the higher benefit till age 70 is probably optimal due to the survivor benefit, but otherwise you have lots of flexibility.

To some degree, the value of the Roth conversions may depend on your cash flow needs and plans. If you are mostly drawing living expenses from IRAs from now until you claim SS, that will tend to draw down the balances to some degree in itself. You might end up just wanting to do Roth conversion to the top of the current tax bracket or IRMAA tier.

If you are using ACA for health insurance until medicare at age 65, there can be a substantial subsidy available if you can keep your MAGI taxable income down. It can vary a lot depending on specific health plans, locations, and individual circumstances, but the subsidy can sometimes be $20,000 per year. Whether the "bird in hand" of a current subsidy is worth more or less than the "bird in bush" of doing more Roth conversions is not always obvious. That can make delaying one SS till age 70, and the other to age 65 or a bit later desirable.

For the most part, I look at Roth conversions as "taxable income smoothing" across different phases of retirement. A second order can be locally optimizing to the edges of specific tax brackets or IRMAA, but that is generally of more marginal utility unless you can move below the SS taxation threshold (which would be unlikely to be optimal with large TDA at age 60).

[Exchme]

Early SS increases the tax costs of Roth Conversions, so as long as both of you have good health, I would wait to claim SS for a few years while you work on Roth Conversions.

[FlamePoint]

The SS estimate lets you see that other factors and uncertainties are probably more important than the specific claiming choice. Leaving the higher benefit till age 70 is probably optimal due to the survivor benefit, but otherwise you have lots of flexibility.

To some degree, the value of the Roth conversions may depend on your cash flow needs and plans. If you are mostly drawing living expenses from IRAs from now until you claim SS, that will tend to draw down the balances to some degree in itself. You might end up just wanting to do Roth conversion to the top of the current tax bracket or IRMAA tier.

If you are using ACA for health insurance until medicare at age 65, there can be a substantial subsidy available if you can keep your MAGI taxable income down. It can vary a lot depending on specific health plans, locations, and individual circumstances, but the subsidy can sometimes be $20,000 per year. Whether the "bird in hand" of a current subsidy is worth more or less than the "bird in bush" of doing more Roth conversions is not always obvious. That can make delaying one SS till age 70, and the other to age 65 or a bit later desirable.

For the most part, I look at Roth conversions as "taxable income smoothing" across different phases of retirement. A second order can be locally optimizing to the edges of specific tax brackets or IRMAA, but that is generally of more marginal utility unless you can move below the SS taxation threshold (which would be unlikely to be optimal with large TDA at age 60).

Thanks for the well thought out response curmudgeon. Your suggestions are basically on point with the approach I’m leaning towards. We are currently taking advantage of ACA subsidies and college tax credits (at least for the next few years), so Roth conversions are on hold for the time being. I plan to pick them up again in 2026 when the the ACA cliff no longer matter, thus no real benefit to restricting income. Once we move to Medicare, I’ll look to convert up to the top of the first and possibly second IRMAA tier….the plan will need to be a bit fluid based on market conditions (I.e convert more if stocks are down).

Chances of us ever being below the SS taxation threshold are slim to none. Total SS payments combined with RMD’s will pretty much take care of that. At some point we’ll most likely need to look at QCD’s and gifting to heirs to keep our estate $’s down…..thus another good reason to transfer a decent chunk to Roth’s between now and age 75.

[tibbitts]

Your comment about "assumptions that went into my modeling that may or may not pan out" is important so it's not like there's a right and wrong you'd know ahead of time. You obviously have an extremely good situation regardless of what strategy you choose so I don't think any of your choices would be a mistake, except in retrospect all but one would be sub-optimal, of course. I would probably take some middle ground and just do conversions up to a bracket or cliff limit, although I can't get excited about differences like 22% vs. 24% the way most people seem to. Leaving the higher SS until 70 seems like the only obvious aspect, but you're already going to do that.

[smitcat]

Your comment about "assumptions that went into my modeling that may or may not pan out" is important so it's not like there's a right and wrong you'd know ahead of time. You obviously have an extremely good situation regardless of what strategy you choose so I don't think any of your choices would be a mistake, except in retrospect all but one would be sub-optimal, of course. I would probably take some middle ground and just do conversions up to a bracket or cliff limit, although I can't get excited about differences like 22% vs. 24% the way most people seem to. Leaving the higher SS until 70 seems like the only obvious aspect, but you're already going to do that.

"Your comment about "assumptions that went into my modeling that may or may not pan out" is important so it's not like there's a right and wrong you'd know ahead of time"
Each person's numbers and goals will affect these choices.
Unknown variables can always make a difference, but each person can select their own most likely scenarios and run all of them through a calculator lime RPM or Pralana for review.
During a review of these possibilities the person can see the potential direction a conversion amount can make (positive or negative) and its potential magnitude (how positive or how negative).
Using these future possible outcomes helps greatly in selecting personal choices.

[aristotelian]

Is TDA the same as traditional IRA? Intuitively I would wait on SS as long as possible to allow you to do bigger Roth conversions now.

[crefwatch]

You should model your RMD payments and associated taxes on a spreadsheet as soon as possible. (This spreadsheet should have IRMAA amounts after each of you goes on Medicare.) That will help you decide in favor of paying annoying tax levels from Roth Conversions now. It is very likely that you will not be paying a lower tax rate in the Roth conversions than on post-73 RMDs, but at least you will be reducing huge tax amounts once you start RMDs.

You also have to model Net Investment Income tax surcharges. IRAs don't count as that income, but they can push other income over the threshold.

I have no personal experience, but some people have had trouble doing Roth conversions directly from a 403(b). Some providers with elderly software work better if you roll over to an IRA (TIRA) and then do a Roth conversion. Cannot advise you specifically.

Bottom line, it is likely that you should do Roth conversions as large and as soon as you can bring yourself to do it. It only gets harder and more expensive. That's also the reason why you might want to put off SS, maybe even (gasp) take early retirement income from tax-deferred FIRST instead of LAST. Just speculating, not running actual figures.

[Call_Me_Op]

Is TDA the same as traditional IRA? Intuitively I would wait on SS as long as possible to allow you to do bigger Roth conversions now.

I interpreted TDA as "Tax-Deferred Account."

[Parkinglotracer]

Early SS increases the tax costs of Roth Conversions, so as long as both of you have good health, I would wait to claim SS for a few years while you work on Roth Conversions.

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