Asset Allocation - Reason to Silo my Traditional Accts?

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Topic Author
ronin
Posts: 205
Joined: Wed Apr 22, 2009 9:17 pm

Asset Allocation - Reason to Silo my Traditional Accts?

Post by ronin »

Hello,

DW and I are tracking well towards meeting retirement goals from a financial standpoint based on our own analysis as well as external feedback. Our assets associated with retirement are currently broken down as follows:
  • My 401k (traditional) - 63%
  • My Roth IRA - 15%
  • Her IRA (trad) - 15%
  • Her Roth IRA - 7%
Based on fairly conversative assumptions (earnings on investments and spending), the analysis suggests we would never need tap into either of the Roth IRAs, assuming we withdraw from my 401k and the tIRA accounts to supplement SS.

Now on to the point of my post. I've been living and breathing the idea that I ought to look across all my relevant accounts when setting my asset allocation. Based on this new analysis and some external insight, the suggestion was raised that I may want to apply my asset allocation goals (currnetly 80/20 equity/bond mix) for retirement only on my 401k and her tIRA, ignoring the Roth IRAs. For those, we would stick to the current 100% Total Stock market allocation.

If I pursue this plan, it will create a global asset allocation that is closer to 85/15, which isn't too far off, but that could continue to stray further over time. I would welcome thoughts on taking this approach includes reasons I ought to and ought not to.

My wife and I are about 12-13 years away from planned retirements.

Thank you.
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retired@50
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by retired@50 »

ronin wrote: Sat Feb 10, 2024 1:46 pm Hello,

DW and I are tracking well towards meeting retirement goals from a financial standpoint based on our own analysis as well as external feedback. Our assets associated with retirement are currently broken down as follows:
  • My 401k (traditional) - 63%
  • My Roth IRA - 15%
  • Her IRA (trad) - 15%
  • Her Roth IRA - 7%
Based on fairly conversative assumptions (earnings on investments and spending), the analysis suggests we would never need tap into either of the Roth IRAs, assuming we withdraw from my 401k and the tIRA accounts to supplement SS.

Now on to the point of my post. I've been living and breathing the idea that I ought to look across all my relevant accounts when setting my asset allocation. Based on this new analysis and some external insight, the suggestion was raised that I may want to apply my asset allocation goals (currnetly 80/20 equity/bond mix) for retirement only on my 401k and her tIRA, ignoring the Roth IRAs. For those, we would stick to the current 100% Total Stock market allocation.

If I pursue this plan, it will create a global asset allocation that is closer to 85/15, which isn't too far off, but that could continue to stray further over time. I would welcome thoughts on taking this approach includes reasons I ought to and ought not to.

My wife and I are about 12-13 years away from planned retirements.

Thank you.
A couple thoughts come to mind after reading your post...

1. You seem kind of far away (in years) from retirement, so assuming the Roth IRAs will be untapped seems a bit premature in my mind. Is there a strong bequest motive in play?

2. Many retirees aren't interested in the volatility of an 85/15 portfolio. Are you? Or are you thinking you'll add more bond funds down the road?

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
ronin
Posts: 205
Joined: Wed Apr 22, 2009 9:17 pm

Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by ronin »

retired@50 wrote: Sat Feb 10, 2024 2:00 pm
ronin wrote: Sat Feb 10, 2024 1:46 pm Hello,

DW and I are tracking well towards meeting retirement goals from a financial standpoint based on our own analysis as well as external feedback. Our assets associated with retirement are currently broken down as follows:
  • My 401k (traditional) - 63%
  • My Roth IRA - 15%
  • Her IRA (trad) - 15%
  • Her Roth IRA - 7%
Based on fairly conversative assumptions (earnings on investments and spending), the analysis suggests we would never need tap into either of the Roth IRAs, assuming we withdraw from my 401k and the tIRA accounts to supplement SS.

Now on to the point of my post. I've been living and breathing the idea that I ought to look across all my relevant accounts when setting my asset allocation. Based on this new analysis and some external insight, the suggestion was raised that I may want to apply my asset allocation goals (currnetly 80/20 equity/bond mix) for retirement only on my 401k and her tIRA, ignoring the Roth IRAs. For those, we would stick to the current 100% Total Stock market allocation.

If I pursue this plan, it will create a global asset allocation that is closer to 85/15, which isn't too far off, but that could continue to stray further over time. I would welcome thoughts on taking this approach includes reasons I ought to and ought not to.

My wife and I are about 12-13 years away from planned retirements.

Thank you.
A couple thoughts come to mind after reading your post...

1. You seem kind of far away (in years) from retirement, so assuming the Roth IRAs will be untapped seems a bit premature in my mind. Is there a strong bequest motive in play?

2. Many retirees aren't interested in the volatility of an 85/15 portfolio. Are you? Or are you thinking you'll add more bond funds down the road?

Regards,
Thank you for the questions.
  • There is not a strong bequest motive in play. We do have two kids, however our priority is to not be any type of financial burden to them as we age, more so than outright being motivated to target a certain amount of bequest to them.
  • I would plan on shifting to more bonds; maybe another 5+ percent in the next five years, and then continue towards a 60/40 or 50/50 as we head into retirement or sometime shortly thereafter.
Your comment about being far off from retirement suggests it may be premature to assume a zero reliance on those Roth IRAs. Am I understanding you correctly, and if so, would you argue against the silo approach?
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retired@50
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by retired@50 »

ronin wrote: Sat Feb 10, 2024 2:12 pm
retired@50 wrote: Sat Feb 10, 2024 2:00 pm
ronin wrote: Sat Feb 10, 2024 1:46 pm Hello,

DW and I are tracking well towards meeting retirement goals from a financial standpoint based on our own analysis as well as external feedback. Our assets associated with retirement are currently broken down as follows:
  • My 401k (traditional) - 63%
  • My Roth IRA - 15%
  • Her IRA (trad) - 15%
  • Her Roth IRA - 7%
Based on fairly conversative assumptions (earnings on investments and spending), the analysis suggests we would never need tap into either of the Roth IRAs, assuming we withdraw from my 401k and the tIRA accounts to supplement SS.

Now on to the point of my post. I've been living and breathing the idea that I ought to look across all my relevant accounts when setting my asset allocation. Based on this new analysis and some external insight, the suggestion was raised that I may want to apply my asset allocation goals (currnetly 80/20 equity/bond mix) for retirement only on my 401k and her tIRA, ignoring the Roth IRAs. For those, we would stick to the current 100% Total Stock market allocation.

If I pursue this plan, it will create a global asset allocation that is closer to 85/15, which isn't too far off, but that could continue to stray further over time. I would welcome thoughts on taking this approach includes reasons I ought to and ought not to.

My wife and I are about 12-13 years away from planned retirements.

Thank you.
A couple thoughts come to mind after reading your post...

1. You seem kind of far away (in years) from retirement, so assuming the Roth IRAs will be untapped seems a bit premature in my mind. Is there a strong bequest motive in play?

2. Many retirees aren't interested in the volatility of an 85/15 portfolio. Are you? Or are you thinking you'll add more bond funds down the road?

Regards,
Thank you for the questions.
  • There is not a strong bequest motive in play. We do have two kids, however our priority is to not be any type of financial burden to them as we age, more so than outright being motivated to target a certain amount of bequest to them.
  • I would plan on shifting to more bonds; maybe another 5+ percent in the next five years, and then continue towards a 60/40 or 50/50 as we head into retirement or sometime shortly thereafter.
Your comment about being far off from retirement suggests it may be premature to assume a zero reliance on those Roth IRAs. Am I understanding you correctly, and if so, would you argue against the silo approach?
I agree that Job #1 is to not be a burden to children, so we're certainly on the same page there. Shifting to a more conservative asset mix down the road also makes sense.

Yes, you're understanding me, but I can't say I'd argue against what you're calling the "silo approach". Many folks only hold stock index funds in their Roth accounts, so that's not really unique.

I think the difference is whether or not you can tolerate the higher stock allocation in your portfolio in the meantime, or if you re-balance your tax-deferred accounts into a more conservative position to maintain the 80/20 mix.

Frankly, the 5% one way or the other isn't huge, but you know your own emotions best. If you can tolerate the higher stock percentage, then great, but if you think you'd be in danger of a behavioral error or panic selling, then dialing back the risk may be appropriate.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by stan1 »

ronin wrote: Sat Feb 10, 2024 2:12 pm Your comment about being far off from retirement suggests it may be premature to assume a zero reliance on those Roth IRAs. Am I understanding you correctly, and if so, would you argue against the silo approach?
It depends and is entirely up to you, if the Traditional accounts are in the millions and even with taxes taken out they will in all likelihood ensure you have a well funded retirement (including end of life care) then I'd have no issue investing the Roths for your heirs. Or you wait longer before you make that decision, such as around the time you start taking out RMDs.
livesoft
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by livesoft »

ronin wrote: Sat Feb 10, 2024 1:46 pm If I pursue this plan, it will create a global asset allocation that is closer to 85/15, which isn't too far off, but that could continue to stray further over time. I would welcome thoughts on taking this approach includes reasons I ought to and ought not to.
I don't think it matters what you do. You can even switch back and forth if you like. You can market time if you like: When equities are going up put them in your Roth IRAs. When you think they are going to go down, put them in your 401(k) and traditional IRA. Have some fun with all this.

When/if a taxable account comes into the picture, then I'd keep it 100% passively-managed, broad-market index funds of equities.
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by mhadden1 »

For me, silos and buckets and such are forms of mental accounting that aren't useful. DW allows/expects me to manage our assets as a whole. That said, I think that in general it's good to put only stocks in Roth accounts, for the highest expected return. That's what I do.

I have hopes that our Roth accounts, untapped, will end up as nice legacies. :happy I wish they comprised a greater percentage of our assets. :(
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KlangFool
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by KlangFool »

OP,

1) Your statement of do not use your Roth IRA account does not make any sense to me at all.

2) The amount that you choose to Roth convert every year does not have to match your annual expense need.

3) Hence, it may make sense to spend from your Roth account and Roth convert at the same time.

4) Actually, it will be very unusual and accidental for your annual expense need to be the same as Roth conversion.

For example, if it makes sense for you to Roth convert up to 80K per year but you only need to spend 40K per year, why won't you do it?

For example, at the minimum, you have to Roth convert the annual growth of your tax deferred account or else, your tax burden will grow bigger and push you to the next tax bracket. This Roth conversion amount could be a lot larger than your annual expense need.

For example, you could Roth convert at 15% now or pay 20+% tax later, why won't you Roth convert more now?

In summary, your base assumption that you only need to withdraw from your tax deferred account from your annual expense need and everything will be fine probably does not work.

KlangFool
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Topic Author
ronin
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Joined: Wed Apr 22, 2009 9:17 pm

Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by ronin »

retired@50 wrote: Sat Feb 10, 2024 2:30 pm
ronin wrote: Sat Feb 10, 2024 2:12 pm
retired@50 wrote: Sat Feb 10, 2024 2:00 pm
ronin wrote: Sat Feb 10, 2024 1:46 pm Hello,

DW and I are tracking well towards meeting retirement goals from a financial standpoint based on our own analysis as well as external feedback. Our assets associated with retirement are currently broken down as follows:
  • My 401k (traditional) - 63%
  • My Roth IRA - 15%
  • Her IRA (trad) - 15%
  • Her Roth IRA - 7%
Based on fairly conversative assumptions (earnings on investments and spending), the analysis suggests we would never need tap into either of the Roth IRAs, assuming we withdraw from my 401k and the tIRA accounts to supplement SS.

Now on to the point of my post. I've been living and breathing the idea that I ought to look across all my relevant accounts when setting my asset allocation. Based on this new analysis and some external insight, the suggestion was raised that I may want to apply my asset allocation goals (currnetly 80/20 equity/bond mix) for retirement only on my 401k and her tIRA, ignoring the Roth IRAs. For those, we would stick to the current 100% Total Stock market allocation.

If I pursue this plan, it will create a global asset allocation that is closer to 85/15, which isn't too far off, but that could continue to stray further over time. I would welcome thoughts on taking this approach includes reasons I ought to and ought not to.

My wife and I are about 12-13 years away from planned retirements.

Thank you.
A couple thoughts come to mind after reading your post...

1. You seem kind of far away (in years) from retirement, so assuming the Roth IRAs will be untapped seems a bit premature in my mind. Is there a strong bequest motive in play?

2. Many retirees aren't interested in the volatility of an 85/15 portfolio. Are you? Or are you thinking you'll add more bond funds down the road?

Regards,
Thank you for the questions.
  • There is not a strong bequest motive in play. We do have two kids, however our priority is to not be any type of financial burden to them as we age, more so than outright being motivated to target a certain amount of bequest to them.
  • I would plan on shifting to more bonds; maybe another 5+ percent in the next five years, and then continue towards a 60/40 or 50/50 as we head into retirement or sometime shortly thereafter.
Your comment about being far off from retirement suggests it may be premature to assume a zero reliance on those Roth IRAs. Am I understanding you correctly, and if so, would you argue against the silo approach?
I agree that Job #1 is to not be a burden to children, so we're certainly on the same page there. Shifting to a more conservative asset mix down the road also makes sense.

Yes, you're understanding me, but I can't say I'd argue against what you're calling the "silo approach". Many folks only hold stock index funds in their Roth accounts, so that's not really unique.

I think the difference is whether or not you can tolerate the higher stock allocation in your portfolio in the meantime, or if you re-balance your tax-deferred accounts into a more conservative position to maintain the 80/20 mix.

Frankly, the 5% one way or the other isn't huge, but you know your own emotions best. If you can tolerate the higher stock percentage, then great, but if you think you'd be in danger of a behavioral error or panic selling, then dialing back the risk may be appropriate.

Regards,
Thanks for sharing your perspective on this.
Topic Author
ronin
Posts: 205
Joined: Wed Apr 22, 2009 9:17 pm

Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by ronin »

KlangFool wrote: Sat Feb 10, 2024 3:05 pm OP,

1) Your statement of do not use your Roth IRA account does not make any sense to me at all.

2) The amount that you choose to Roth convert every year does not have to match your annual expense need.

3) Hence, it may make sense to spend from your Roth account and Roth convert at the same time.

4) Actually, it will be very unusual and accidental for your annual expense need to be the same as Roth conversion.

For example, if it makes sense for you to Roth convert up to 80K per year but you only need to spend 40K per year, why won't you do it?

For example, at the minimum, you have to Roth convert the annual growth of your tax deferred account or else, your tax burden will grow bigger and push you to the next tax bracket. This Roth conversion amount could be a lot larger than your annual expense need.

For example, you could Roth convert at 15% now or pay 20+% tax later, why won't you Roth convert more now?

In summary, your base assumption that you only need to withdraw from your tax deferred account from your annual expense need and everything will be fine probably does not work.

KlangFool
Unless I'm misunderstanding your comments, they are all predicated on the assumption that I would be doing Roth conversions of some magnitude when it's not clear to me (at this point) that would necessarily occur. That said, your comments regarding the idea of potentially spending out of our Roth while simultaneously doing Roth conversions is a concept I hadn't thought of before.

The modeling performed by one of our advisors showed us being able to cover estimated retirement expenses til death and solely by paying from our traditional accounts and still having money left over in them while never having touched the Roth's. This also allows for estimated taxes. If I understand your comments, you would suggest even if the above is true, that I consider using the Roths to help fund expenses and then perform roth conversions up to some optimal marginal tax rate?

Thank you.
Topic Author
ronin
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by ronin »

mhadden1 wrote: Sat Feb 10, 2024 2:53 pm For me, silos and buckets and such are forms of mental accounting that aren't useful. DW allows/expects me to manage our assets as a whole. That said, I think that in general it's good to put only stocks in Roth accounts, for the highest expected return. That's what I do.

I have hopes that our Roth accounts, untapped, will end up as nice legacies. :happy I wish they comprised a greater percentage of our assets. :(
The silos approach I'm contemplating might be more of a liability matching concept, meaning that the Roths would be treated as bequest funds with a presumed liability well beyond (hopefully) the start of my retirement, whereas the traditional accounts would be trying to match assets to liabilities (costs during retirement) that would have a closer time horizon.

Otherwise, I agree with you about them being mental buckets.
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ronin
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by ronin »

livesoft wrote: Sat Feb 10, 2024 2:42 pm
ronin wrote: Sat Feb 10, 2024 1:46 pm If I pursue this plan, it will create a global asset allocation that is closer to 85/15, which isn't too far off, but that could continue to stray further over time. I would welcome thoughts on taking this approach includes reasons I ought to and ought not to.
I don't think it matters what you do. You can even switch back and forth if you like. You can market time if you like: When equities are going up put them in your Roth IRAs. When you think they are going to go down, put them in your 401(k) and traditional IRA. Have some fun with all this.

When/if a taxable account comes into the picture, then I'd keep it 100% passively-managed, broad-market index funds of equities.
Thank you for sharing your thougths.
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by KlangFool »

ronin wrote: Sat Feb 10, 2024 8:29 pm
If I understand your comments, you would suggest even if the above is true, that I consider using the Roths to help fund expenses and then perform roth conversions up to some optimal marginal tax rate?
Correct!

Your advisor should model and advise how much Roth conversion is optimal for you. And, that could be a totally different number from your annual expense needs.

KlangFool
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Topic Author
ronin
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by ronin »

KlangFool wrote: Sat Feb 10, 2024 8:55 pm
ronin wrote: Sat Feb 10, 2024 8:29 pm
If I understand your comments, you would suggest even if the above is true, that I consider using the Roths to help fund expenses and then perform roth conversions up to some optimal marginal tax rate?
Correct!

Your advisor should model and advise how much Roth conversion is optimal for you. And, that could be a totally different number from your annual expense needs.

KlangFool
The advisor said it was too soon to model out Roth conversions and also speculated that they may not be either needed or make sense, but I'm inclined to explore this further with them.

Thank you!
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by KlangFool »

ronin wrote: Sat Feb 10, 2024 9:15 pm
KlangFool wrote: Sat Feb 10, 2024 8:55 pm
ronin wrote: Sat Feb 10, 2024 8:29 pm
If I understand your comments, you would suggest even if the above is true, that I consider using the Roths to help fund expenses and then perform roth conversions up to some optimal marginal tax rate?
Correct!

Your advisor should model and advise how much Roth conversion is optimal for you. And, that could be a totally different number from your annual expense needs.

KlangFool
The advisor said it was too soon to model out Roth conversions and also speculated that they may not be either needed or make sense, but I'm inclined to explore this further with them.

Thank you!
Let them show you the numbers. Then, you can look at them and verify.

"Trust but verify!".

KlangFool
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by retired@50 »

ronin wrote: Sat Feb 10, 2024 8:18 pm
Thanks for sharing your perspective on this.
Happy to help.

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
ronin
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Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by ronin »

KlangFool wrote: Sat Feb 10, 2024 9:25 pm
ronin wrote: Sat Feb 10, 2024 9:15 pm
KlangFool wrote: Sat Feb 10, 2024 8:55 pm
ronin wrote: Sat Feb 10, 2024 8:29 pm
If I understand your comments, you would suggest even if the above is true, that I consider using the Roths to help fund expenses and then perform roth conversions up to some optimal marginal tax rate?
Correct!

Your advisor should model and advise how much Roth conversion is optimal for you. And, that could be a totally different number from your annual expense needs.

KlangFool
The advisor said it was too soon to model out Roth conversions and also speculated that they may not be either needed or make sense, but I'm inclined to explore this further with them.

Thank you!
Let them show you the numbers. Then, you can look at them and verify.

"Trust but verify!".

KlangFool
KlangFool,

Can you help explain/list the pros and cons of the strategy you are suggesting, or refer me to guidance that explains such? I'm thinking there are tradeoffs, like with most things in life, and would like to understand them.

I assume based on your suggested strategy, you would be making the case for looking at my asset allocation across my traditional and Roth accounts as a single pool, correct?

Thank you.
KlangFool
Posts: 31170
Joined: Sat Oct 11, 2008 12:35 pm

Re: Asset Allocation - Reason to Silo my Traditional Accts?

Post by KlangFool »

ronin wrote: Sun Feb 11, 2024 11:01 am
KlangFool wrote: Sat Feb 10, 2024 9:25 pm
ronin wrote: Sat Feb 10, 2024 9:15 pm
KlangFool wrote: Sat Feb 10, 2024 8:55 pm
ronin wrote: Sat Feb 10, 2024 8:29 pm
If I understand your comments, you would suggest even if the above is true, that I consider using the Roths to help fund expenses and then perform roth conversions up to some optimal marginal tax rate?
Correct!

Your advisor should model and advise how much Roth conversion is optimal for you. And, that could be a totally different number from your annual expense needs.

KlangFool
The advisor said it was too soon to model out Roth conversions and also speculated that they may not be either needed or make sense, but I'm inclined to explore this further with them.

Thank you!
Let them show you the numbers. Then, you can look at them and verify.

"Trust but verify!".

KlangFool
KlangFool,

Can you help explain/list the pros and cons of the strategy you are suggesting, or refer me to guidance that explains such? I'm thinking there are tradeoffs, like with most things in life, and would like to understand them.

I assume based on your suggested strategy, you would be making the case for looking at my asset allocation across my traditional and Roth accounts as a single pool, correct?

Thank you.
ronin,

"I assume based on your suggested strategy, you would be making the case for looking at my asset allocation across my traditional and Roth accounts as a single pool, correct?"

Yes.

"Can you help explain/list the pros and cons of the strategy you are suggesting, or refer me to guidance that explains such? I'm thinking there are tradeoffs, like with most things in life, and would like to understand them."

This is basically tax management across a long period of time.

Let's assume you have enough Roth contribution or you are above 59 1/2 years old, you can withdraw Roth without tax and/or penalty.

Let's assume you have 1 million in tax deferred account and it grew 80K this year.

A) You Roth convert 160K at X%. You locked in paying tax for 160K at X%.

Or,

B) You Roth convert nothing. Your tax deferred account grew to 1.08 million. You have increase your future tax burden. And, due to compounding, it will get a lot worse.

The most dangerous part of the future tax burden is one of you will live longer than the other. Hence, you will drop from married filed jointly to single tax bracket. Your future tax burden could be tremendous and you cannot avoid withdrawing because of RMD.

The key here is to diversify your tax burden across a longer period of time. Pay some now and pay some later via Roth conversion. Hence, your tax burden will be lowered.

KlangFool
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