Roth IRA conversion planning

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redwine
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Roth IRA conversion planning

Post by redwine »

60 year old single person with about 2.5m in a company tax deferred (ie, non Roth) 401k as well as an old 403b. Looking at retirement in the next year or two with lower tax rates and I would like to move all monies from this company 401k as well as the 403b to a traditional IRA at Vanguard. I do not have any nontax deferred traditional IRA money and do a “backdoor” Roth IRA every year. Since all the 401k to traditional IRA money will be tax deferred, I should be able to take small amounts and convert yearly to a Roth IRA without any problems correct? Don’t have to worry about pro rata rules or any other pitfall? This is my strategy to get some money out before the RMD tax bomb at age 75. 401k fees are not awful but certainly a drag on performance compared to Vanguard. I know there are some differences in legal protection with a 401k vs IRA but I’m relatively low risk. Any comments/advice welcome.
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ichee_marone
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Re: Roth IRA conversion planning

Post by ichee_marone »

if you don't have after-tax money in the (to-be) rollover IRA than converting to Roth IRA should not be a problem. You should model the amount of Roth conversions in software (Pralana Gold, New Retirement, etc). It's usually to the top of the appropriate tax bracket 12/15% , 22/25% etc. RMDs are likely to be a relatively significant thing for you so thinking about Roth conversions is a good thing.
cas
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Re: Roth IRA conversion planning

Post by cas »

redwine wrote: Mon Jun 10, 2024 9:22 am 60 year old single person [. . .] Looking at retirement in the next year or two with lower tax rates [ . . .] Since all the 401k to traditional IRA money will be tax deferred, I should be able to take small amounts and convert yearly to a Roth IRA without any problems correct?
How are you planning to obtain health insurance after retirement, but before Medicare? (ACA? COBRA? retiree health benefits?)

If ACA, many people discover that the way the the premium they pay is linked to their income causes their marginal tax rate to be considerably higher than they were expecting for "small amounts" of Roth conversion. It depends on the rest of your anticipated income profile, though. (One person's example with excellent annotated graph.) (However, a complication is that the way the ACA determines the premium has been changing every few years, with a currently scheduled expiration of the current way it works at the end of 2025.)

And then once you get to age 63, many people - especially single people - doing Roth conversions discover a need to keep an eye on the Medicare IRMAA income thresholds as well.
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retired@50
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Re: Roth IRA conversion planning

Post by retired@50 »

redwine wrote: Mon Jun 10, 2024 9:22 am ... Any comments/advice welcome.
Your understanding is correct. You can do T-IRA to Roth IRA conversions in small (or large) chunks each year as desired.

As for how much to convert, that gets into a whole hornet's nest of other tax considerations.

Do you do your own income taxes?

Using Turbo Tax or similar tax software in the fall, Nov - Dec. time frame can help you model how many dollars (or shares) you should convert to Roth. Seeing the income tax impact first hand - before the year end - can be very helpful.

ACA / IRMAA / etc. can all play a part in guiding your decision.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
tibbitts
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Re: Roth IRA conversion planning

Post by tibbitts »

redwine wrote: Mon Jun 10, 2024 9:22 am 60 year old single person with about 2.5m in a company tax deferred (ie, non Roth) 401k as well as an old 403b. Looking at retirement in the next year or two with lower tax rates and I would like to move all monies from this company 401k as well as the 403b to a traditional IRA at Vanguard. I do not have any nontax deferred traditional IRA money and do a “backdoor” Roth IRA every year. Since all the 401k to traditional IRA money will be tax deferred, I should be able to take small amounts and convert yearly to a Roth IRA without any problems correct? Don’t have to worry about pro rata rules or any other pitfall? This is my strategy to get some money out before the RMD tax bomb at age 75. 401k fees are not awful but certainly a drag on performance compared to Vanguard. I know there are some differences in legal protection with a 401k vs IRA but I’m relatively low risk. Any comments/advice welcome.
The least concern you have is whether to leave the money in a 401k or roll it over to an IRA, unless you have truly extraordinary 401k fees. You just need to concentrate on the amount of the deferred balance and the effect that dealing with it might have on the other considerations mentioned (IRMAA, ACA, etc.) Of course this is usually where you'll come back and say ACA doesn't matter because you'll have employer-provided insurance, but most people will still have IRMAA.
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redwine
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Re: Roth IRA conversion planning

Post by redwine »

Thanks so much for the replies. I keep taxes to a minimum using VTI in my taxable account and have accumulated a significant amount in I bonds (also tax deferred). I am willing to go up to the top of the 24% tax bracket because my personal feeling is taxes will be higher in the future (just my humble opinion). Will do COBRA which is an HSA eligible plan, then pay on the open market, not trying to get an ACA subsidy. IRMMA is a consideration but is a lesser concern since I'm willing to pay extra for Medicare for a few years in order to max Roth conversions. Again, if I wait till age 75 for RMDS and taxes are even slightly higher than current rates, I think I'm looking at some hefty taxes at the single rates. The 401k conversion to a Vanguard traditional IRA will save significant money since the majority of the 2.5m is in the 401k and I'm a big believer in Jacks' phrase the "tyranny of fees"; Vanguard VTI has a 0.03 percent ER which is crazy good!
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ichee_marone
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Re: Roth IRA conversion planning

Post by ichee_marone »

redwine wrote: Mon Jun 10, 2024 12:28 pm Thanks so much for the replies. I keep taxes to a minimum using VTI in my taxable account and have accumulated a significant amount in I bonds (also tax deferred). I am willing to go up to the top of the 24% tax bracket because my personal feeling is taxes will be higher in the future (just my humble opinion). Will do COBRA which is an HSA eligible plan, then pay on the open market, not trying to get an ACA subsidy. IRMMA is a consideration but is a lesser concern since I'm willing to pay extra for Medicare for a few years in order to max Roth conversions. Again, if I wait till age 75 for RMDS and taxes are even slightly higher than current rates, I think I'm looking at some hefty taxes at the single rates. The 401k conversion to a Vanguard traditional IRA will save significant money since the majority of the 2.5m is in the 401k and I'm a big believer in Jacks' phrase the "tyranny of fees"; Vanguard VTI has a 0.03 percent ER which is crazy good!
Sounds right and may be right, but I would run it in the two of the software tools mentioned to verify that this is the right play (as much as possible). HSAs remain the best retirement vehicle, so load up on that, too, until Medicare. 8-)
tibbitts
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Re: Roth IRA conversion planning

Post by tibbitts »

redwine wrote: Mon Jun 10, 2024 12:28 pm Thanks so much for the replies. I keep taxes to a minimum using VTI in my taxable account and have accumulated a significant amount in I bonds (also tax deferred). I am willing to go up to the top of the 24% tax bracket because my personal feeling is taxes will be higher in the future (just my humble opinion). Will do COBRA which is an HSA eligible plan, then pay on the open market, not trying to get an ACA subsidy. IRMMA is a consideration but is a lesser concern since I'm willing to pay extra for Medicare for a few years in order to max Roth conversions. Again, if I wait till age 75 for RMDS and taxes are even slightly higher than current rates, I think I'm looking at some hefty taxes at the single rates. The 401k conversion to a Vanguard traditional IRA will save significant money since the majority of the 2.5m is in the 401k and I'm a big believer in Jacks' phrase the "tyranny of fees"; Vanguard VTI has a 0.03 percent ER which is crazy good!
I'd be curious to know what whichever software you use suggests in terms of conversions, and what assumptions (returns, etc.) you choose to supply.
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FiveK
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Re: Roth IRA conversion planning

Post by FiveK »

tibbitts wrote: Mon Jun 10, 2024 2:17 pm I'd be curious to know what whichever software you use suggests in terms of conversions, and what assumptions (returns, etc.) you choose to supply.
+1

And whether the suggestion provides a significantly different result than "converting now through the expected marginal tax rate in retirement."
hvaclorax
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Re: Roth IRA conversion planning

Post by hvaclorax »

You can convert more to Roth if you hold your spending in check. Taxes at the top of your chosen bracket would be the same.
For my situation I would rather spend more and convert less. Maybe you have already made your decision on this. Many reasons exist for enjoying your retirement funds while you have your younger years. The spending curve tends to fall off naturally as we get to 75 years old or so.
EricGold
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Re: Roth IRA conversion planning

Post by EricGold »

redwine wrote: Mon Jun 10, 2024 9:22 am 60 year old single person with about 2.5m in a company tax deferred (ie, non Roth) 401k as well as an old 403b.
You can probably convert to Roth 401k now, but I think this is company dependent. Most people wait until they no longer have W-2 income in order to not have the conversion in a higher tax bracket.

You can also rollover some or all of your 401k now to a tIRA. E.g you want different investment choices or lower ER fees. Roth conversions would be when you choose.
EricGold
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Re: Roth IRA conversion planning

Post by EricGold »

tibbitts wrote: Mon Jun 10, 2024 10:57 am
redwine wrote: Mon Jun 10, 2024 9:22 am 60 year old single person with about 2.5m in a company tax deferred (ie, non Roth) 401k as well as an old 403b. Looking at retirement in the next year or two with lower tax rates and I would like to move all monies from this company 401k as well as the 403b to a traditional IRA at Vanguard. I do not have any nontax deferred traditional IRA money and do a “backdoor” Roth IRA every year. Since all the 401k to traditional IRA money will be tax deferred, I should be able to take small amounts and convert yearly to a Roth IRA without any problems correct? Don’t have to worry about pro rata rules or any other pitfall? This is my strategy to get some money out before the RMD tax bomb at age 75. 401k fees are not awful but certainly a drag on performance compared to Vanguard. I know there are some differences in legal protection with a 401k vs IRA but I’m relatively low risk. Any comments/advice welcome.
The least concern you have is whether to leave the money in a 401k or roll it over to an IRA, unless you have truly extraordinary 401k fees.
I suppose 'extraordinary' is in the eyes of the beholder, but I would move for 0.2% ER difference ($5,000 a year) unless the liability shelter was a strong consideration. And even then, I think an umbrella probably makes more sense. You can buy a lot of umbrella for $500, let alone $5,000
Last edited by EricGold on Sun Jun 16, 2024 3:59 pm, edited 1 time in total.
tibbitts
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Re: Roth IRA conversion planning

Post by tibbitts »

EricGold wrote: Sun Jun 16, 2024 3:16 pm
tibbitts wrote: Mon Jun 10, 2024 10:57 am
redwine wrote: Mon Jun 10, 2024 9:22 am 60 year old single person with about 2.5m in a company tax deferred (ie, non Roth) 401k as well as an old 403b. Looking at retirement in the next year or two with lower tax rates and I would like to move all monies from this company 401k as well as the 403b to a traditional IRA at Vanguard. I do not have any nontax deferred traditional IRA money and do a “backdoor” Roth IRA every year. Since all the 401k to traditional IRA money will be tax deferred, I should be able to take small amounts and convert yearly to a Roth IRA without any problems correct? Don’t have to worry about pro rata rules or any other pitfall? This is my strategy to get some money out before the RMD tax bomb at age 75. 401k fees are not awful but certainly a drag on performance compared to Vanguard. I know there are some differences in legal protection with a 401k vs IRA but I’m relatively low risk. Any comments/advice welcome.
The least concern you have is whether to leave the money in a 401k or roll it over to an IRA, unless you have truly extraordinary 401k fees.
I suppose 'extraordinary' is in the eyes of the beholder, but I would move for 0.2% ER difference ($5,000 a year) unless the liability shelter was a strong consideration. And even then, I think an umbrella probably makes more sense. You can buy a lot of umbrella for $500, let along $5,000
Although the exact difference in fees wasn't mentioned until now, what I meant is that the impact from converting (or not) could easily be more important (and more than the $5k/yr.)
EricGold
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Re: Roth IRA conversion planning

Post by EricGold »

tibbitts wrote: Sun Jun 16, 2024 3:50 pm
EricGold wrote: Sun Jun 16, 2024 3:16 pm
tibbitts wrote: Mon Jun 10, 2024 10:57 am
redwine wrote: Mon Jun 10, 2024 9:22 am 60 year old single person with about 2.5m in a company tax deferred (ie, non Roth) 401k as well as an old 403b. Looking at retirement in the next year or two with lower tax rates and I would like to move all monies from this company 401k as well as the 403b to a traditional IRA at Vanguard. I do not have any nontax deferred traditional IRA money and do a “backdoor” Roth IRA every year. Since all the 401k to traditional IRA money will be tax deferred, I should be able to take small amounts and convert yearly to a Roth IRA without any problems correct? Don’t have to worry about pro rata rules or any other pitfall? This is my strategy to get some money out before the RMD tax bomb at age 75. 401k fees are not awful but certainly a drag on performance compared to Vanguard. I know there are some differences in legal protection with a 401k vs IRA but I’m relatively low risk. Any comments/advice welcome.
The least concern you have is whether to leave the money in a 401k or roll it over to an IRA, unless you have truly extraordinary 401k fees.
I suppose 'extraordinary' is in the eyes of the beholder, but I would move for 0.2% ER difference ($5,000 a year) unless the liability shelter was a strong consideration. And even then, I think an umbrella probably makes more sense. You can buy a lot of umbrella for $500, let along $5,000
Although the exact difference in fees wasn't mentioned until now, what I meant is that the impact from converting (or not) could easily be more important (and more than the $5k/yr.)
Due to tax brackets and W-2 wages, it is highly doubtful that more than $200k conversion is being considered (and probably quite a bit less). The range of tax arbitrage is probably 2 - 3%, but perhaps as much as 5%. So the decision tree is for as little as $4,000 and as much as $10,000

I suggest approaching Rollover and Roth Conversion as separate questions, each deserving of consideration
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