[In the 32% tax bracket - Should I do a Roth conversion?]

[kt2062]

[Moved into a new thread from: Roth conversions to 32%, 35% tax bracket? --admin LadyGeek]

Along these lines, I am 67, single, no children, live in California and still working. I make pre-tax contributions to my 457b of about $24,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS.
About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs. I would like to do ROTH conversions but I'm probably in the 32% tax bracket.

Any thoughts?

[FiveK]

Along these lines, I am 67, single, no children, live in California and still working. I make pre-tax contributions to my 457b of about $24,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS.
About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs. I would like to do ROTH conversions but I'm probably in the 32% tax bracket.

Any thoughts?

Stop working now?

[smitcat]

Along these lines, I am 67, single, no children, live in California and still working. I make pre-tax contributions to my 457b of about $24,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS.
About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs. I would like to do ROTH conversions but I'm probably in the 32% tax bracket.

Any thoughts?

Stop working now?

That would be my very first thought as well.
We would also need to know what the purpose is for all these funds.

[Artsdoctor]

Along these lines, I am 67, single, no children, live in California and still working. I make pre-tax contributions to my 457b of about $24,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS.
About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs. I would like to do ROTH conversions but I'm probably in the 32% tax bracket.

Any thoughts?

I'm sure the comments about stopping work were made with the best of intentions but most would agree that if you enjoy your job, go ahead and continue working as long as want.

Weighing the pros and cons of Roth conversions can be complicated, especially while you're still working. The idea would be that you'll pay less tax on the conversions now than you will pay in the future when withdrawing from your IRA. The information you've provided isn't enough to make a comment on whether or not it's worthwhile for you to make partial conversions. What are your goals? (Meaning, what are your legacy plans?) Do you anticipate any philanthropic gifting? Do you have specific heirs you'd like to pass some of your estate on to? How aggressively are you investing your IRAs? Do you have non-deductible portions of the IRA balances?

If you're firmly in the 32% marginal federal rate (and 9% marginal state rate), it would be a tough sell to justify conversions although not impossible. It all depends on your long-term plans.

[celia]

Along these lines, I am 67, single, no children, live in California and still working. I make pre-tax contributions to my 457b of about $24,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS.
About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs. I would like to do ROTH conversions but I'm probably in the 32% tax bracket.

Any thoughts?

Stop working now?

At a minimum, also stop contributing to all tax-deferred accounts. That's just making it worse for the future.

You should also start Roth conversions NOW! Stop looking at the taxes and income for one year. Look long term instead. If you don't want to pay the high taxes now, I guess you won't like the even higher taxes later.

[tibbitts]

At a minimum, also stop contributing to all tax-deferred accounts. That's just making it worse for the future.

You should also start Roth conversions NOW! Stop looking at the taxes and income for one year. Look long term instead. If you don't want to pay the high taxes now, I guess you won't like the even higher taxes later.

I agree unless deferred is the only employer option that gets a match, in which case it can still be worthwhile.

[123]

At a minimum, also stop contributing to all tax-deferred accounts. That's just making it worse for the future.

You should also start Roth conversions NOW! Stop looking at the taxes and income for one year. Look long term instead. If you don't want to pay the high taxes now, I guess you won't like the even higher taxes later.

+1. If you continue to work devote all your earnings to Roth conversions to get the full value of converted amounts. If you stop work pension and/or social security might make the tax cost of conversions too high to stomach converting too much (I would not want to give up much of the flexibility that taxable assets provide.)

[tibbitts]

Along these lines, I am 67, single, no children, live in California and still working. I make pre-tax contributions to my 457b of about $24,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS.
About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs. I would like to do ROTH conversions but I'm probably in the 32% tax bracket.

Any thoughts?

My thought is to post this in a separate thread, because it's now very confusing to know whether replies are being made to the OP or you.

[celia]

My thought is to post this in a separate thread, because it's now very confusing to know whether replies are being made to the OP or you.

The situations are quite similar and my comments apply the same to both of them. The only significant difference I notice is that one is retired and one is working. But if the worker retires, as suggested, there's not much difference.

Tibbitts, do you see any difference where someone would make different replies to the two who are asking questions?

(I have not yet posted my major comment. Still working on it and it will be meant for both of them.)

[celia]

Roth conversions are pre-paying taxes today in the hope of saving taxes at some future date.

This doesn't make sense to me. To be able to do Roth conversions (and never have to pay taxes on that money again), that means that you tax-deferred some of the income taxes you owed earlier. Instead of paying those taxes, you put the money (and taxes owed) into a tax-deferred account. The taxes are still owed, because you are just deferring them. While they are in the tax-deferred account, you are "investing" them for your "partners", Uncle Sam and maybe your state. As your account grows, their shares also grow. If you lose money, their shares also lose money. As you withdraw some money, they want their share. The money was never all yours to begin with.

One day, you decide to transfer the money to a Roth. As you withdraw from the tax-deferred, you give Uncle Sam and your state their shares. You are not "pre-paying" any taxes. You are just paying off your tax debt to the government by giving them their shares.

Without knowing future tax rates, the ROR for my TIRA and future legislation I cannot be sure that conversions will be profitable.

There's no expectation that conversions should be "profitable". Rather, you are just paying off what you implicitly had agreed to when you put some money (and the taxes) into a tax-deferred account.

Your shares and your "partners' shares" could lose value too. But you still need to pay some taxes to them, regardless if you made money or not. That's what you agreed to when you contributed to tax-deferred accounts!

[Tundrama]

I am not interested in converting at 32% or 35%. Yes, tax rates could be higher in several years (2026) and even higher
later. But people have been saying that for the past 40+ years and rates have only declined during that time.

I would think of it this way. Roth conversions are pre-paying taxes today in the hope of saving taxes at some future date.
Without knowing future tax rates, the ROR for my TIRA and future legislation I cannot be sure that conversions will be
profitable. At 0%, certainly. At 10%,12%,15% probably. At 22%,24%,25%, possibly especially if I am very well off. But once I
covert, those taxes are never coming back. I have lost the ability to spend that money should I need it. Health expenses,
long-term care, poor stock returns and personal "mistakes" could lead to a situation where I might regret paying those taxes
early. I might need that money.

A painful example. During Oct 2007, I was retired and living a fantasy life. I had left my job at age 47. Fat portfolio. A
paid-off condo. Small but very nice and perfectly located. I was traveling the world, with an apartment in Spain. Yet despite
my extravagant lifestyle, my net worth was increasing every year. Inflation averaged 2.4%, my portfolio 9.6% and I was spending
about 3%/year. How much would I have in 18 months? Well, possibly about the same or a little less. Most likely 5-10% more. And
with a little luck, 15-30% more. But the real answer was less than half. Not just my equities down 50%. Or my portfolio down
50%. But my net worth less than 50%. My condo value dropped 45%. My art and antiques were worth 60-80% less.
Total market (VTI) = -51%. US Value = -54% Total Intl (VEU) = -58% Emerging (VWO) = -62% Reit (VNQ) = -65%. And since I was sure
that a rebound was close, I continually rebalanced from bonds to stocks and watched my new purchases drop. Even my corporate
bonds, lost some money. I went from a bullet-proof retirement to suddenly looking for a job in 2009. I never got that job. Finding
employment at 55+ is tough.

My point is that "stuff" happens. Next time that 18-month disaster could be a 10-year lost decade. I might need those pre-paid taxes
for daily living expenses, health care and/or nursing home. If not, I will remain wealthy, and I won't mind paying that extra tax at 73,
75 or 80. Chances are you will die rich and the TIRA money will be inherited by someone in a much lower tax bracket. Or you will give it
all away to charity in which case QCDs from a TIRA is really the best option. Wait until 70 to receive SS and you will have 8 extra years to
convert more and avoid IRMAA surcharges. And you could wisely move to Texas before conversion and save 10%. Move back to Cali several years
later if you must. You probably won't . . .

That is not to say that I didn't do any conversions. I have managed to move $1.5M to Roth over the past 23 years, but at tax rates of 15%
22% and 24%. Almost certainly, I now see that I should have done more. But that is hindsight. The 2009 rebound might never have
happened. I could have been in trouble. I don't regret not converting more. Higher RMDs are the price we pay for being wealthy.

Appreciate you sharing real life scenarios. Truly beats the…this and that may happen thing.

[smitcat]

I am not interested in converting at 32% or 35%. Yes, tax rates could be higher in several years (2026) and even higher
later. But people have been saying that for the past 40+ years and rates have only declined during that time.

I would think of it this way. Roth conversions are pre-paying taxes today in the hope of saving taxes at some future date.
Without knowing future tax rates, the ROR for my TIRA and future legislation I cannot be sure that conversions will be
profitable. At 0%, certainly. At 10%,12%,15% probably. At 22%,24%,25%, possibly especially if I am very well off. But once I
covert, those taxes are never coming back. I have lost the ability to spend that money should I need it. Health expenses,
long-term care, poor stock returns and personal "mistakes" could lead to a situation where I might regret paying those taxes
early. I might need that money.

A painful example. During Oct 2007, I was retired and living a fantasy life. I had left my job at age 47. Fat portfolio. A
paid-off condo. Small but very nice and perfectly located. I was traveling the world, with an apartment in Spain. Yet despite
my extravagant lifestyle, my net worth was increasing every year. Inflation averaged 2.4%, my portfolio 9.6% and I was spending
about 3%/year. How much would I have in 18 months? Well, possibly about the same or a little less. Most likely 5-10% more. And
with a little luck, 15-30% more. But the real answer was less than half. Not just my equities down 50%. Or my portfolio down
50%. But my net worth less than 50%. My condo value dropped 45%. My art and antiques were worth 60-80% less.
Total market (VTI) = -51%. US Value = -54% Total Intl (VEU) = -58% Emerging (VWO) = -62% Reit (VNQ) = -65%. And since I was sure
that a rebound was close, I continually rebalanced from bonds to stocks and watched my new purchases drop. Even my corporate
bonds, lost some money. I went from a bullet-proof retirement to suddenly looking for a job in 2009. I never got that job. Finding
employment at 55+ is tough.

My point is that "stuff" happens. Next time that 18-month disaster could be a 10-year lost decade. I might need those pre-paid taxes
for daily living expenses, health care and/or nursing home. If not, I will remain wealthy, and I won't mind paying that extra tax at 73,
75 or 80. Chances are you will die rich and the TIRA money will be inherited by someone in a much lower tax bracket. Or you will give it
all away to charity in which case QCDs from a TIRA is really the best option. Wait until 70 to receive SS and you will have 8 extra years to
convert more and avoid IRMAA surcharges. And you could wisely move to Texas before conversion and save 10%. Move back to Cali several years
later if you must. You probably won't . . .

That is not to say that I didn't do any conversions. I have managed to move $1.5M to Roth over the past 23 years, but at tax rates of 15%
22% and 24%. Almost certainly, I now see that I should have done more. But that is hindsight. The 2009 rebound might never have
happened. I could have been in trouble. I don't regret not converting more. Higher RMDs are the price we pay for being wealthy.

This is the part of your post I can relate to and agree with....
"That is not to say that I didn't do any conversions. I have managed to move $1.5M to Roth over the past 23 years, but at tax rates of 15%
22% and 24%. Almost certainly, I now see that I should have done more."

[kt2062]

I am reposting this due to confusion over my situation with another poster. There are important differences in our situations: I am 67, still working and will likely have to start RMDs as soon as or shortly after I retire.

Along these lines, I am 67, single, no children, live in California and still working. I make pre-tax contributions to my 457b of about $30,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS.
About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs. I would like to do ROTH conversions but I'm probably in the 32% tax bracket. If I stop contributing to my 457b, my tax bracket will increase. I am paying off my mortgage--no suggestions there please, it is something I just want to do.

Some people feel that you should save enough to replace 100% of your net income. I am not there yet.

I do plan to make charitable contributions but also like the financial security of having the funds. Having no family to take care of me, I am also considering moving into a Continuing Care Retirement Community (CCRC) which can be pricey.

Any thoughts?

[bsteiner]

Do you plan to leave your estate to your nieces, nephews and friends, or to charity?

[Artsdoctor]

There are so many ways to handle this but unless you know someone's goals, you can't really offer suggestions that would be right for that particular person. If someone has philanthropic interest, that changes the equation altogether. If someone is anticipating investing mostly for legacy purposes, that changes the asset allocation and Roth planning. If you're single and have no heirs, you can't really make a suggestion unless you know what the individual's "long-term plans" are. If your "tax-deferred" bucket makes up 90% of your assets, you'll handle this very differently than if it makes up 30% of your assets.

You can easily be in the 32% marginal tax bracket (and 9% marginal tax bracket for CA) through work, donate to your DAF bringing your marginal rates down to 24%, and use that space to transfer money to a Roth. Or, if you have charities you're working with, you can QCD your way through RMDs and convert that tax-deferred money into tax-free money.

Sometimes IRMAA matters and sometimes it really doesn't. If you want to work until you're in your 70s, it shouldn't influence your planning. If you have hefty HSA balances, the IRMAA bite matters less. There are innumerable variables here.

[Artsdoctor]

This is a continuation of another ongoing thread:

viewtopic.php?f=1&t=435316&newpost=8057 ... ead#unread

[smitcat]

Much more data is needed to even try and supply a decent answer. Some of the larger things that are missing include:
- your target draw amount $$ when retired
- Pension amount and terms (Cola, start, etc)
- SS amount at what election age
- total amounts in taxble accounts now
- total amounts in tax defferred now
- total amounts in Roth accounts now
- goals for heir(s)
- goals for charity
- if goals for heirs what are their ages and expected tax rates
- do you live in a state that collects estate taxes
- if yes above what other assetts of value do you have (homes, collectibles, etc)

[tibbitts]

I am reposting this due to confusion over my situation with another poster. There are important differences in our situations: I am 67, still working and will likely have to start RMDs as soon as or shortly after I retire.

Along these lines, I am 67, single, no children, live in California and still working. I make pre-tax contributions to my 457b of about $30,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS.
About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs. I would like to do ROTH conversions but I'm probably in the 32% tax bracket. If I stop contributing to my 457b, my tax bracket will increase. I am paying off my mortgage--no suggestions there please, it is something I just want to do.

Some people feel that you should save enough to replace 100% of your net income. I am not there yet.

I do plan to make charitable contributions but also like the financial security of having the funds. Having no family to take care of me, I am also considering moving into a Continuing Care Retirement Community (CCRC) which can be pricey.

Any thoughts?

I agree with you about liking the security of having the funds, and even if you pay taxes you still get to keep about half your money. Charities will be there and still need your money after you die and/or after you know how your ending will play out.

I don't think replacing 100% of employment "net" income makes any sense, although I'm not sure if "net" means after taxes or after taxes+savings..? I would just be concerned about income vs. expenses in retirement.

What matters is how your taxes now will compare to post-retirement, and that depends on many assumptions that are personal to you. You could use one of the usual software tools to experiment with different assumptions and see how different scenarios might play out. My guess is - actually I'm pretty certain - you could make conversions make sense or not by relatively minor tweaks to your assumptions.

I do think it was a good decision to move this discussion to another thread.

[bsteiner]

...

I do plan to make charitable contributions but also like the financial security of having the funds. ...

There's no financial security of having the funds. You can't ever spend a dollar of your IRA without paying the tax on it.

[retired@50]

...

I do plan to make charitable contributions but also like the financial security of having the funds. ...

There's no financial security of having the funds. You can't ever spend a dollar of your IRA without paying the tax on it.

Generally true, but sometimes late in life medical expenses for help with activities of daily living means those dollars withdrawn from the IRA become a medical expense deduction.

Regards,

[Watty]

Any thoughts?

When you are in that sort of tax bracket you really need professional estate and tax planning because the laws are very complex, constantly changing, vary with your state, and there are lots of Murphy's Law special cases.

Even well intended comments on board like this may not be right for the details of your situation or they may be confusing.

[tibbitts]

...

I do plan to make charitable contributions but also like the financial security of having the funds. ...

There's no financial security of having the funds. You can't ever spend a dollar of your IRA without paying the tax on it.

Isn't the financial security simply the ability to spend at least roughly half the amount in your deferred accounts, vs. zero of whatever you donate?

[Watty]

I plan to work 2-5 more years and will likely have to start paying RMDs.

One other thing.

Keep in mind that the RMDs only start out at about 4% but your retirement accounts will still be invested and might be growing, on average, by 7%(?) or more.

It will vary a lot from year to year but you will not need to start actually drawing down your retirement accounts until the RMD percentage is higher than the growth rate percentage of your account.

If your account is growing at 7%(on average) then your RMD percentage will not be higher than that until you are in your late 80s.

Paying taxes is never fun but for the next 20 years or so the RMDs may not be as big a problem as you are afraid of.

[bsteiner]

...
At a minimum, also stop contributing to all tax-deferred accounts. That's just making it worse for the future.

...

That's not correct. There's a benefit to it. Suppose you contribute $1,000 and over some period of time it grows to $10,000. You or your beneficiaries withdraw it and pay 40% tax, and have $6,000 left. If you instead paid $400 tax now, your remaining $600 will grow to something less than $6,000 since the income and gains on it each year will be taxable.

The key factor is whether the original poster will be leaving the retirement benefits to his/her nieces, nephews and friends or to charity.

[tibbitts]

Any thoughts?

When you are in that sort of tax bracket you really need professional estate and tax planning because the laws are very complex, constantly changing, vary with your state, and there are lots of Murphy's Law special cases.

Even well intended comments on board like this may not be right for the details of your situation or they may be confusing.

I'm not sure the OP is at all atypical for a Boglehead today, so in fact many people here have very relevant experience (and even live in CA.) I probably wouldn't have said that a few years ago, and it definitely doesn't apply to me, but do you believe it's very unusual for Bogleheads who are still working at 67 to earn somewhere in the $200k range or have $2M in deferred accounts? We don't know how much retirement income will be involved because we don't know the pension and SS amounts. It could be that the OP will always be at at least 32% with those three items (pension, SS, and RMD), even in the early RMD years, depending on growth and other assumptions. There's not enough information here to know.

Certainly the OP would want the usual array of estate documents in place, especially ones that designate someone responsible for decision-making if the OP is still alive but incapacitated. But we don't know that there are any family or kids involved here so complicated planning for a "legacy" might not be a consideration. With tax planning, the OP would still have to know enough to evaluate whether a professional was providing appropriate guidance, so what better way to gain that knowledge than by posting here?

[Prokofiev]

Roth conversions are pre-paying taxes today in the hope of saving taxes at some future date.

This doesn't make sense to me. If you lose money, their shares also lose money. As you withdraw some money, they want their share. The money was never all yours to begin with.

One day, you decide to transfer the money to a Roth. As you withdraw from the tax-deferred, you give Uncle Sam and your state their shares. You are not "pre-paying" any taxes. You are just paying off your tax debt to the government by giving them their shares.

Without knowing future tax rates, the ROR for my TIRA and future legislation I cannot be sure that conversions will be profitable.

There's no expectation that conversions should be "profitable". Rather, you are just paying off what you implicitly had agreed to when you put some money (and the taxes) into a tax-deferred account.
That's what you agreed to when you contributed to tax-deferred accounts!

Celia,
I don't believe you are thinking about this correctly.

Yes, the TIRA money is tax-deferred and someday will end up on a 1040 form. But taxes can be deferred for many years. My 401k contributions
from age 24 will be taxable at age 73. If I Roth convert when I am 40, 50 or 60 that IS pre-paying taxes because they were not due for 20-30 years.
Certainly, paying my taxes 25 years early is "pre-paying", no? Importantly, this is not a revocable decision. I can't ask for those monies back
should I find I need them several years down the road.

Real example.
Years ago, I was doing taxes for my elderly parents. They had around $250k in a 401k TIRA and I considered doing a Roth conversion
for them. They were in the 25% rate with plenty of room within that bracket. So they could convert $50-60k each year and fed plus state (CA) would
be 33%. But when one of them died, the remaining parent would be in the 28% bracket, 37% including state. So we could save at least 3-4% by converting and with the possibility of higher tax rates in the future, it seemed like a good idea. I never did it. Instead, my mother entered a nursing home 18 months later and my father followed her 6 months after. Now we were paying $180k/year long-term care costs which were deductible. We were able to almost drain the entire TIRA at 0% taxes. A Roth conversion would have cost them $83k! in taxes. They used that money instead for medical expenses.

This is what I mean when I expect a Roth conversion to be "profitable". We hope to pay less in overall taxes by pre-paying before they were due.
Would you do a conversion if you knew for certain it would result in MORE taxes over your lifetime? I hope not.

My larger point here is that conversions are difficult to optimize. A computer program can give an answer, if you input all the important data.
But what will tax rates be in 10-30 years? What will my TIRA ROR be over that period? If still working, for how long? Will I lose my job and get
laid-off? Will I suffer a disability and suddenly have major health expenses? What is the money used for should I die early? How long will I live?
Will nursing home or home care be needed? For how long? What software can give us these answers?

As I wrote, I NOW see that larger Roth conversions would have been slightly better for me. But I didn't know this 16 years ago when I was worried
about my finances. I have been lucky with my investments over that period. I suffered no health scares or any expenses. I inherited a little
money that I never saw coming. Luck was on my side. An alternate universe could have happened with completely different results.

[Jack FFR1846]

Some homework.

You don't need your "working income" in retirement. You need enough to cover "retirement spending" including any taxes from withdrawals from a 401k/IRA that's pre-tax. Include Medicare costs. I retired 15 months ago and our retirement spending is 50% MORE than while working and we have spent zero on travel.

You won't have to take RMDs at 70. At 70, you will want to start social security. Once you retire, you will want to start Medicare if you haven't already and you'll need the form from work showing you were properly covered from the time you turned 65. Your RMDs start at 73 (I'm also 67 so don't have to even look it up).

Schwab has an excellent RMD calculator. https://www.schwab.com/ira/ira-calculators/rmd

At the bottom, hit "estimated lifetime projection". The graph is nice to see but the labels are off. Click each year of your age and write down the RMD at that point to get a better understanding. Doing Roth conversions will lower the RMDs but account gains will raise them.

Once you have a better understanding of what your retirement spending will be, you can make the Roth conversion decision. Remember that IRMAA will also play a roll as it will raise your Medicare rates. They go by your MAGI from 2 years ago.

[tibbitts]

The situations are quite similar and my comments apply the same to both of them. The only significant difference I notice is that one is retired and one is working. But if the worker retires, as suggested, there's not much difference.

Tibbitts, do you see any difference where someone would make different replies to the two who are asking questions?

(I have not yet posted my major comment. Still working on it and it will be meant for both of them.)

Yes, I see these as almost completely unrelated questions. Regardless, it's too difficult to follow a conversation where the replies are alternately being made to two substantially different scenarios. Fortunately the second question now has a thread of its own.

[celia]

...
At a minimum, also stop contributing to all tax-deferred accounts. That's just making it worse for the future.

...

That's not correct. There's a benefit to it. Suppose you contribute $1,000 and over some period of time it grows to $10,000. You or your beneficiaries withdraw it and pay 40% tax, and have $6,000 left. If you instead paid $400 tax now, your remaining $600 will grow to something less than $6,000 since the income and gains on it each year will be taxable.

The key factor is whether the original poster will be leaving the retirement benefits to his/her nieces, nephews and friends or to charity.

By saying "At a minimum, also stop contributing to all tax-deferred accounts. That's just making it worse for the future", that means that all that accumulated tax-deferred is pushing you up into future higher tax brackets too.

In your numeric example, the $1,000 contribution you made to tax-deferred should be converted while in the same or lower bracket so that growth can grow tax-free in a Roth and without forced withdrawals. And it is recommended to pay the taxes from Taxable instead of from the withdrawal.

[celia]

In previous meetings with my Fidelity representative, she recommended Roth conversions up to 24% tax bracket. I have 2.7M in tax deferred, and now the representative suggests Roth conversions up to 32% or even 35%. What are your thoughts on this?

In simulations, RMD for below average market conditions starts at $165K for age 75. For average conditions, RMD starts at $291K.

Also, I pay quarterly estimated taxes. Can I make the Roth conversion in any quarter?

I am single, age 56, and retired last year with a pension of $39K. I live in California with a tax rate of 9.3%.

Start taking an age 80 (5% of portfolio balance) RMD every year starting now up till age 80 and have fun! That's only $174K a year (135K + 39K) pre-tax including your pension. That 5% drag should eliminate any real growth in the portfolio in an average sequence of returns.

This doesn't make sense to me. Withdrawals of only $135K won't do much to the IRA balance. And RMDs at age 75 and more will be more than that. RMDs can't be put into a Roth. So, in effect, are you suggesting to never convert? The taxes will be the same whether the withdrawal is spent, moved to taxable, or converted.

And don't forget that the IRA balance will keep growing until yearly withdrawals are more than yearly growth.

Can you think of better things to do with a nice income than pay a huge amount of taxes prematurely on Roth conversions?

I would hardly call paying the taxes as "pre-mature". They've already been deferred since the contribution was made. They would be due anyways if your suggestion of having fun was followed instead.

[celia]

I am reposting this due to confusion over my situation with another poster.

You should have at least used a thread title that differs more than the one in the other thread. You risk having these two threads combined. It is now confusing (at least to me) if we are looking for a specific thread. But, let's move ahead...

Please see my "major comment" there as it applies to both of you:
viewtopic.php?p=8057255#p8057255
Also learn about the "Rule of 72" there. It will help you understand compounding.

... I am 67, single, no children, live in California and still working.

Since you are 67 now (born before 1960), your RMDs will start at age 73, in 6 years. So that is all the time you have to make significant changes.

I make pre-tax contributions to my 457b of about $30,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS. About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs.

So your liquid assets are $5M. You can stop working today and stop contributing to tax-deferred accounts. Continued contributions will just increase your future RMDs and their taxes.

I would like to do ROTH conversions but I'm probably in the 32% tax bracket. If I stop contributing to my 457b, my tax bracket will increase.

You should first confirm your current tax bracket and what it will be if you were to stop working today. If you are earning similar wages as last year, use your 2023 Taxable Income (a line on last year's tax return) to do a lookup in this table:
2024 Tax Brackets
Then do a lookup with 1/4 of your wages missing for 2024. (We are just finishing the 3rd quarter of the year.) See what that does to your taxes.

I am paying off my mortgage--no suggestions there please, it is something I just want to do.

OK, you could pay it off using some withdrawals from tax-deferred. That will decrease future RMDs and you would be paying taxes on the withdrawals in the year(s) they are taken. That might be a good step towards making your retirement expenses more stable.

Some people feel that you should save enough to replace 100% of your net income. I am not there yet.

You don't need to replace your income. You need to have enough to cover your living expenses including taxes. But first take your SS and pension into account. (Ours covers all of our living expenses, with money left over.)

I do plan to make charitable contributions but also like the financial security of having the funds. Having no family to take care of me, I am also considering moving into a Continuing Care Retirement Community (CCRC) which can be pricey.

You could sell your house/condo to buy into the CCRC and maybe have some money left over. But this would most likely make your future living expenses much higher. Save the charitable donations until after you die, in case you need them for yourself.


Now, I notice you didn't comment or ask questions about Roth conversions, which is what I thought this thread would be about. I'm not sure if you understand what impacts federal and state income taxes and how the tax brackets work. You may not have:
* found out what our current tax bracket is (without conversions) and
* calculated what your current living expenses are and
* priced out a few CCRCs and
* found out what your pension will pay and
* found out if your pension increases with inflation (COLA) and
* found out what your SS will be at age 70

So I will add this to your "homework". It's hard to go much further without more details.

[MnD]

In previous meetings with my Fidelity representative, she recommended Roth conversions up to 24% tax bracket. I have 2.7M in tax deferred, and now the representative suggests Roth conversions up to 32% or even 35%. What are your thoughts on this?

In simulations, RMD for below average market conditions starts at $165K for age 75. For average conditions, RMD starts at $291K.

Also, I pay quarterly estimated taxes. Can I make the Roth conversion in any quarter?

I am single, age 56, and retired last year with a pension of $39K. I live in California with a tax rate of 9.3%.

Start taking an age 80 (5% of portfolio balance) RMD every year starting now up till age 80 and have fun! That's only $174K a year (135K + 39K) pre-tax including your pension. That 5% drag should eliminate any real growth in the portfolio in an average sequence of returns.

This doesn't make sense to me. Withdrawals of only $135K won't do much to the IRA balance. And RMDs at age 75 and more will be more than that. RMDs can't be put into a Roth. So, in effect, are you suggesting to never convert? The taxes will be the same whether the withdrawal is spent, moved to taxable, or converted.

And don't forget that the IRA balance will keep growing until yearly withdrawals are more than yearly growth.

I doesn't make sense to you because you are thinking in nominal dollars and nominal tax brackets and not real ones.

Withdrawing in early retirement at an age 80 annual RMD rate (5% of annual portfolio balance) now and annually thereafter should stop real growth in the account. That's what it does in average sequences. Tax brackets meanwhile are indexed to inflation. So no, an age 75 RMD at 75 (only 4% of balance) will very likely not be more than $137K. That's why I suggested continuing a 5% withdrawal till age 80 after which it will creep up.
The OP (single) by then age 80 may be doing tax planning to pass untaxed assets to charities, be dead by then or needing medically necessary long term care which is deductible. Maybe he has some heirs (nieces, nephews) that are of modest means and low to mid brackets.

There are lots of possibilities for never doing Roth conversions where the future taxes are indifferent or lower. There are outcomes where taxes could be higher. You seem perennially stuck in the rut of projecting current tax deferred balances as growing to the sky in real terms throughout retirement.

If individuals don't have any utility whatsoever for the X millions of tax deferred savings they saved for retirement once they enter retirement other than to jack up their their marginal tax rates by doing Roth conversions, it begs the question as to why they saved those sums in the first place. And why didn't they do any tax planning when accumulating those funds?

[tibbitts]

... it begs the question as to why they saved those sums in the first place. And why didn't they do any tax planning when accumulating those funds?

It's easy to forget now but for many years when we were contributing to retirement accounts, individual or employer, the Roth hadn't been invented yet. And the overwhelming thinking for many decades was that deferring would be more favorable than paying taxes at current rates, which were in some cases in fact higher then than now. Some of us don't always shift our thinking as fast as we should, and just as significantly, it was a very long time before any sort of Roth options were available at many employers.

[MnD]

... it begs the question as to why they saved those sums in the first place. And why didn't they do any tax planning when accumulating those funds?

It's easy to forget now but for many years when we were contributing to retirement accounts, individual or employer, the Roth hadn't been invented yet. And the overwhelming thinking for many decades was that deferring would be more favorable than paying taxes at current rates, which were in some cases in fact higher then than now. Some of us don't always shift our thinking as fast as we should, and just as significantly, it was a very long time before any sort of Roth options were available at many employers.

I was in that boat and ended up with 90% tax deferred. I retired as soon as I had enough and in the go-go years of retirement am spending happily from it. At much lower tax rates year after year than what it was deferred at. Exactly like it was described to me in the 1980's seminars on this new 401-K thing.

I won't be "forced" to withdraw at a higher rate than we are withdrawing now for another 20 years and 26 years after retirement at age 81.
What are tax brackets looking like then? Am I dead or alive? In medically qualified LTC? Have I done charitable tax planning by then? What are my heirs tax brackets? It's a mystery.

And six years into retirement I haven't budged from where we are in the lower tax brackets in retirement (still mid-22%) because I'm actually utilizing the funds we saved for retirement for income and enjoyment in retirement. And hence no real growth. THE HORROR!

[celia]

MnD, I understand your view but after re-reading the thread, think we both need to step back and make some adjustments.

I doesn't make sense to you because you are thinking in nominal dollars and nominal tax brackets and not real ones.

Withdrawing in early retirement at an age 80 annual RMD rate (5% of annual portfolio balance) now and annually thereafter should stop real growth in the account. That's what it does in average sequences. Tax brackets meanwhile are indexed to inflation. So no, an age 75 RMD at 75 (only 4% of balance) will very likely not be more than $137K. That's why I suggested continuing a 5% withdrawal till age 80 after which it will creep up.
The OP (single) by then age 80 may be doing tax planning to pass untaxed assets to charities, be dead by then or needing medically necessary long term care which is deductible. Maybe he has some heirs (nieces, nephews) that are of modest means and low to mid brackets.

Let's back up a bit. I think we both forgot that OP is 56 and thus can't withdraw from tax-deferred for 4 more years without having a tax penalty. The usual solution to this is to start a Roth conversion ladder where they can then withdraw the converted amount tax-free after five years (but not the growth until after age 59.5). So, for the first 4 years, she is probably constrained to spend only taxable funds. But there's no reason, she can't get an early start on Roth conversions, especially converting the yearly growth for the year to keep her tax-deferred balance at $2.7M.

I'd guess that the OP was invested such that the tax-deferred account was growing more than 5% a year. How else would she get to $2.7M while always staying in the 12% tax bracket? (I didn't attempt any calculations for this.) Now we need to account for more growth happening until age 59.5 unless each year's growth is converted each year.

Say the account grew 5% this year, that would be a growth of $135K. If she converts that amount to keep the IRA from growing, her Taxable Income would be:
$135K + $39K (pension) - $15K (std deduction) = $159K, which is comfortably in the 24% tax bracket.


Mnd, can we expect someone who appears to be frugal (living on less than $47K a year) to suddenly change their spending as you suggest?

After age 59.5, OP can spend from tax-deferred as she is comfortable with but near the end of the year, have some money withheld for the taxes, then convert until the entire $137K withdrawal you proposed is removed. (ie, finish the $137K withdrawal that is planned for that year for spending, taxes, and Roth conversion). Since the taxes will be the same whether the money is spent, used for taxes, or converted, it makes sense to convert the unspent money. OP just needs to know to track the converted amounts in case Roth withdrawals are suddenly needed. After 5 years, the 5-year clock is finished, OP is over 59.5, and no more tracking in the Roth is needed.

But I think some adjustment would be needed for the years in which growth is more than 5%.
Say the account grew 6.5% this year, that would be a growth of $175K. If she converts that amount to keep the IRA from growing, her Taxable Income would be:
$175K + $39K (pension) - $15K (std deduction) = $199K, which is in the 32% tax bracket.
Unfortunately, the 32% tax bracket for Singles only holds $51K, so it is easy to pass right through that bracket. Note that this is close to what I was originally suggesting. Converting any yearly growth that is more than 8.2% would certainly go into the 35% bracket.


And OP needs to be aware that the IRA will likely start decreasing in her late 80s as the rate of withdrawal becomes more than the rate of growth. Some of the money that was converted in her 60s or was never spent, needs to be saved for her 90s in case she lives that long as RMDs decrease.

[tibbitts]

... it begs the question as to why they saved those sums in the first place. And why didn't they do any tax planning when accumulating those funds?

It's easy to forget now but for many years when we were contributing to retirement accounts, individual or employer, the Roth hadn't been invented yet. And the overwhelming thinking for many decades was that deferring would be more favorable than paying taxes at current rates, which were in some cases in fact higher then than now. Some of us don't always shift our thinking as fast as we should, and just as significantly, it was a very long time before any sort of Roth options were available at many employers.

I was in that boat and ended up with 90% tax deferred. I retired as soon as I had enough and in the go-go years of retirement am spending happily from it. At much lower tax rates year after year than what it was deferred at. Exactly like it was described to me in the 1980's seminars on this new 401-K thing.

I won't be "forced" to withdraw at a higher rate than we are withdrawing now for another 20 years and 26 years after retirement at age 81.
What are tax brackets looking like then? Am I dead or alive? In medically qualified LTC? Have I done charitable tax planning by then? What are my heirs tax brackets? It's a mystery.

And six years into retirement I haven't budged from where we are in the lower tax brackets in retirement (still mid-22%) because I'm actually utilizing the funds we saved for retirement for income and enjoyment in retirement. And hence no real growth. THE HORROR!

We all attended the same seminars, yet some of us are withdrawing at higher marginal tax rates than we deferred at. This is largely a matter of how you define "enough" and how much money is involved, plus factors like allocation and filing status. When you use the term "I haven't budged" but then the term "we", are you considering the brackets for MFJ or single? If you're MFJ and suddenly became single would you still be withdrawing at lower tax rates than you deferred at?

[smitcat]

... it begs the question as to why they saved those sums in the first place. And why didn't they do any tax planning when accumulating those funds?

It's easy to forget now but for many years when we were contributing to retirement accounts, individual or employer, the Roth hadn't been invented yet. And the overwhelming thinking for many decades was that deferring would be more favorable than paying taxes at current rates, which were in some cases in fact higher then than now. Some of us don't always shift our thinking as fast as we should, and just as significantly, it was a very long time before any sort of Roth options were available at many employers.

I was in that boat and ended up with 90% tax deferred. I retired as soon as I had enough and in the go-go years of retirement am spending happily from it. At much lower tax rates year after year than what it was deferred at. Exactly like it was described to me in the 1980's seminars on this new 401-K thing.

I won't be "forced" to withdraw at a higher rate than we are withdrawing now for another 20 years and 26 years after retirement at age 81.
What are tax brackets looking like then? Am I dead or alive? In medically qualified LTC? Have I done charitable tax planning by then? What are my heirs tax brackets? It's a mystery.

And six years into retirement I haven't budged from where we are in the lower tax brackets in retirement (still mid-22%) because I'm actually utilizing the funds we saved for retirement for income and enjoyment in retirement. And hence no real growth. THE HORROR!

It appears that your pension(s) along with your tax deferred withdrawals (maybe 5%) currently keep you in the mid 22% bracket along ....with no real growth so far.
Will you be recieving one or two SS payments, and if so what will they do to the equations?

[freckles01]

Along these lines, I am 67, single, no children, live in California and still working. I make pre-tax contributions to my 457b of about $24,000 each year. I currently have about 2.5 million in my retirement accounts, aside from a pension and SS.
About 53% of my total savings are in taxable IRAs/457b accounts.

I plan to work 2-5 more years and will likely have to start paying RMDs. I would like to do ROTH conversions but I'm probably in the 32% tax bracket.

Any thoughts?

You have 2.5M in retirement accounts and another 2.5M+in taxable, 67, single and still working?

Unless you absolutely love what you're doing, I'd stop working. Even if you love your job, if you only had 1 year to live, would you choose to spend that 1 year working? If not, stop working and do that instead!

[ttcbj]

I recently read the book The Retirement Planning Guidebook, and really enjoyed it (its pretty wonky).

https://a.co/d/20WsVmT

One thing to be aware of is that your marginal tax rate is more than the federal tax rates. You pay taxes on SS earnings at different rates (presumably you are waiting until 70 on SS), you have various "cliffs' for increasing medicare costs, and then there is the net investment tax around $200k.

He has a whole thing on optimizing tax rates over time, using "tax maps" that show your marginal tax rates. The idea is that you pick a target tax rate, then fill in your income up to that rate with roth conversions, or stay below that rate with roth withdrawals. But, there are actually often several income ranges in which the same marginal tax rate occurs.

Anyway, I think it might be useful to you because it shows that the tax impact of increasing your income is super-complicated. You can get advice here about federal tax rates, but I think attempting to 'optimize' your long-term tax rates is much more complicated than that, and needs to take disappearing subsidies and other marginal taxes into account.

[MnD]

MnD, I understand your view but after re-reading the thread, think we both need to step back and make some adjustments.

I doesn't make sense to you because you are thinking in nominal dollars and nominal tax brackets and not real ones.

Withdrawing in early retirement at an age 80 annual RMD rate (5% of annual portfolio balance) now and annually thereafter should stop real growth in the account. That's what it does in average sequences. Tax brackets meanwhile are indexed to inflation. So no, an age 75 RMD at 75 (only 4% of balance) will very likely not be more than $137K. That's why I suggested continuing a 5% withdrawal till age 80 after which it will creep up.
The OP (single) by then age 80 may be doing tax planning to pass untaxed assets to charities, be dead by then or needing medically necessary long term care which is deductible. Maybe he has some heirs (nieces, nephews) that are of modest means and low to mid brackets.

Let's back up a bit. I think we both forgot that OP is 56 and thus can't withdraw from tax-deferred for 4 more years without having a tax penalty. The usual solution to this is to start a Roth conversion ladder where they can then withdraw the converted amount tax-free after five years (but not the growth until after age 59.5). So, for the first 4 years, she is probably constrained to spend only taxable funds. But there's no reason, she can't get an early start on Roth conversions, especially converting the yearly growth for the year to keep her tax-deferred balance at $2.7M.

I'd guess that the OP was invested such that the tax-deferred account was growing more than 5% a year. How else would she get to $2.7M while always staying in the 12% tax bracket? (I didn't attempt any calculations for this.) Now we need to account for more growth happening until age 59.5 unless each year's growth is converted each year.

Say the account grew 5% this year, that would be a growth of $135K. If she converts that amount to keep the IRA from growing, her Taxable Income would be:
$135K + $39K (pension) - $15K (std deduction) = $159K, which is comfortably in the 24% tax bracket.


Mnd, can we expect someone who appears to be frugal (living on less than $47K a year) to suddenly change their spending as you suggest?

After age 59.5, OP can spend from tax-deferred as she is comfortable with but near the end of the year, have some money withheld for the taxes, then convert until the entire $137K withdrawal you proposed is removed. (ie, finish the $137K withdrawal that is planned for that year for spending, taxes, and Roth conversion). Since the taxes will be the same whether the money is spent, used for taxes, or converted, it makes sense to convert the unspent money. OP just needs to know to track the converted amounts in case Roth withdrawals are suddenly needed. After 5 years, the 5-year clock is finished, OP is over 59.5, and no more tracking in the Roth is needed.

But I think some adjustment would be needed for the years in which growth is more than 5%.
Say the account grew 6.5% this year, that would be a growth of $175K. If she converts that amount to keep the IRA from growing, her Taxable Income would be:
$175K + $39K (pension) - $15K (std deduction) = $199K, which is in the 32% tax bracket.
Unfortunately, the 32% tax bracket for Singles only holds $51K, so it is easy to pass right through that bracket. Note that this is close to what I was originally suggesting. Converting any yearly growth that is more than 8.2% would certainly go into the 35% bracket.


And OP needs to be aware that the IRA will likely start decreasing in her late 80s as the rate of withdrawal becomes more than the rate of growth. Some of the money that was converted in her 60s or was never spent, needs to be saved for her 90s in case she lives that long as RMDs decrease.

A 5% spending drag (of portfolio balance) is very likely going to take care of any real growth despite your speculation (without a shred of evidence) that it won't. You might post that as a separate question on Bogleheads and see what the experts think.

You also apparently haven't ever heard of 72(T) which would seem to accommodate a 5% withdrawal rate prior to 59-60.
Personally I utilized the rule of 55 to spend 5% annually from tax deferred from day one of age 56 retirement.
Seems like there are various solutions to that objective.

So I'm not going to respond in detail to a false premise argument, but you might read this thread and consider the number of posts pointing out things you are wrong about. The absolutist gospel of Roth conversions is a strong one, but in reality these can be detrimental, indifferent or beneficial.

In this case, advice for doing so at 32%-35% plus CA state rates as an off-the-cuff opinion from Fidelity seems extremely suspect at best.
I'm throwing out the suggestion to spend at 5% for the next 24 years mainly to counter the dogmatic Roth conversion advocates.
Maybe the OP would enjoy that, or maybe they never considered such a thing. Maybe they would be miserable. It's a mystery.
But with pre-tax dollars in a high cost and high tax state it's not some vast net income.
Life is short and precious.

[evancox10]

I'm not buying that annual conversions of $150k (inflation adjusted) wouldn't make any difference. Viewing this as a SWR question, that's a 5.6% withdrawal rate. According to firecalc, 17% of the time the entire IRA would be depleted (aka converted) within 20 years. The average case you end up with $2.3 million, but I believe that's a nominal amount so that is quite a dent if you adjust for 20 years of inflation, and should put you well under the top of the 24%/28% bracket (though who knows what tax laws will look like in 20 years anyways).

Is the pension inflation adjusted, or fixed? If fixed, that would mean the above analysis overestimates the remaining IRA balance after 20 years, since conversion room in the 24%/28% bracket would expand faster than inflation.


It's all a bit of a gamble anyways. Note that the so called "doomsday" tax scenario actually means your portfolio did amazing and you have lots of money. Converting to the top of the 24% bracket seems reasonable.

[MnD]

... it begs the question as to why they saved those sums in the first place. And why didn't they do any tax planning when accumulating those funds?

It's easy to forget now but for many years when we were contributing to retirement accounts, individual or employer, the Roth hadn't been invented yet. And the overwhelming thinking for many decades was that deferring would be more favorable than paying taxes at current rates, which were in some cases in fact higher then than now. Some of us don't always shift our thinking as fast as we should, and just as significantly, it was a very long time before any sort of Roth options were available at many employers.

I was in that boat and ended up with 90% tax deferred. I retired as soon as I had enough and in the go-go years of retirement am spending happily from it. At much lower tax rates year after year than what it was deferred at. Exactly like it was described to me in the 1980's seminars on this new 401-K thing.

I won't be "forced" to withdraw at a higher rate than we are withdrawing now for another 20 years and 26 years after retirement at age 81.
What are tax brackets looking like then? Am I dead or alive? In medically qualified LTC? Have I done charitable tax planning by then? What are my heirs tax brackets? It's a mystery.

And six years into retirement I haven't budged from where we are in the lower tax brackets in retirement (still mid-22%) because I'm actually utilizing the funds we saved for retirement for income and enjoyment in retirement. And hence no real growth. THE HORROR!

It appears that your pension(s) along with your tax deferred withdrawals (maybe 5%) currently keep you in the mid 22% bracket along ....with no real growth so far.
Will you be recieving one or two SS payments, and if so what will they do to the equations?

Great question. We've turned on the pension of course and her SS. And 5% of portfolio balance annually, 90% of which is taxable.

The pension and her SS fills up the 0% bracket, 10% bracket and only $15.1K of the 12% bracket.
Portfolio withdrawals fill up the remaining 12% bracket space but only $44,400 of the 22% bracket leaving $62,350 in 22% space.
My current SS, were we to turn it on now would only fill $30K of the remaining $62K.

How much it will actually fill at age 70 depends on a number of things. I believe the SS formula does provide real growth for waiting but it won't exceed $62K real. My statement suggest 52K real if I understand it correctly. I'm reasonably confident with lifestyles and family history we'll both be alive. The biggie will be what real growth if any will the portfolio experience over the next 8 years with effectively an annual expense ratio of 5.1% (5% spending drag and .1% actual ER). I'm estimating 0% real but I'd speculate a number of Bogleheads would think that's optimistic.

Then you have the single rate at some point but consider one of the SS benefits goes away and if I go first (very likely given family history and gender) the pension is fully cut in half. Doubt the survivor would escape the 24% bracket but that's a big deal.

[MnD]

... it begs the question as to why they saved those sums in the first place. And why didn't they do any tax planning when accumulating those funds?

It's easy to forget now but for many years when we were contributing to retirement accounts, individual or employer, the Roth hadn't been invented yet. And the overwhelming thinking for many decades was that deferring would be more favorable than paying taxes at current rates, which were in some cases in fact higher then than now. Some of us don't always shift our thinking as fast as we should, and just as significantly, it was a very long time before any sort of Roth options were available at many employers.

I was in that boat and ended up with 90% tax deferred. I retired as soon as I had enough and in the go-go years of retirement am spending happily from it. At much lower tax rates year after year than what it was deferred at. Exactly like it was described to me in the 1980's seminars on this new 401-K thing.

I won't be "forced" to withdraw at a higher rate than we are withdrawing now for another 20 years and 26 years after retirement at age 81.
What are tax brackets looking like then? Am I dead or alive? In medically qualified LTC? Have I done charitable tax planning by then? What are my heirs tax brackets? It's a mystery.

And six years into retirement I haven't budged from where we are in the lower tax brackets in retirement (still mid-22%) because I'm actually utilizing the funds we saved for retirement for income and enjoyment in retirement. And hence no real growth. THE HORROR!

We all attended the same seminars, yet some of us are withdrawing at higher marginal tax rates than we deferred at. This is largely a matter of how you define "enough" and how much money is involved, plus factors like allocation and filing status. When you use the term "I haven't budged" but then the term "we", are you considering the brackets for MFJ or single? If you're MFJ and suddenly became single would you still be withdrawing at lower tax rates than you deferred at?

See the post above. Definitely since we deferred at a mix of 28%, 31% 33% and higher. But the 24% bracket is a definite possibility for some of the portfolio income especially in favorable sequences and despite the reductions in other income at the demise of one of us. I'm not really worried about that given all the other uncertainties.

[smitcat]

... it begs the question as to why they saved those sums in the first place. And why didn't they do any tax planning when accumulating those funds?

It's easy to forget now but for many years when we were contributing to retirement accounts, individual or employer, the Roth hadn't been invented yet. And the overwhelming thinking for many decades was that deferring would be more favorable than paying taxes at current rates, which were in some cases in fact higher then than now. Some of us don't always shift our thinking as fast as we should, and just as significantly, it was a very long time before any sort of Roth options were available at many employers.

I was in that boat and ended up with 90% tax deferred. I retired as soon as I had enough and in the go-go years of retirement am spending happily from it. At much lower tax rates year after year than what it was deferred at. Exactly like it was described to me in the 1980's seminars on this new 401-K thing.

I won't be "forced" to withdraw at a higher rate than we are withdrawing now for another 20 years and 26 years after retirement at age 81.
What are tax brackets looking like then? Am I dead or alive? In medically qualified LTC? Have I done charitable tax planning by then? What are my heirs tax brackets? It's a mystery.

And six years into retirement I haven't budged from where we are in the lower tax brackets in retirement (still mid-22%) because I'm actually utilizing the funds we saved for retirement for income and enjoyment in retirement. And hence no real growth. THE HORROR!

It appears that your pension(s) along with your tax deferred withdrawals (maybe 5%) currently keep you in the mid 22% bracket along ....with no real growth so far.
Will you be recieving one or two SS payments, and if so what will they do to the equations?

Great question. We've turned on the pension of course and her SS. And 5% of portfolio balance annually, 90% of which is taxable.

The pension and her SS fills up the 0% bracket, 10% bracket and only $15.1K of the 12% bracket.
Portfolio withdrawals fill up the remaining 12% bracket space but only $44,400 of the 22% bracket leaving $62,350 in 22% space.
My current SS, were we to turn it on now would only fill $30K of the remaining $62K.

How much it will actually fill at age 70 depends on a number of things. I believe the SS formula does provide real growth for waiting but it won't exceed $62K real. My statement suggest 52K real if I understand it correctly. I'm reasonably confident with lifestyles and family history we'll both be alive. The biggie will be what real growth if any will the portfolio experience over the next 8 years with effectively an annual expense ratio of 5.1% (5% spending drag and .1% actual ER). I'm estimating 0% real but I'd speculate a number of Bogleheads would think that's optimistic.

Then you have the single rate at some point but consider one of the SS benefits goes away and if I go first (very likely given family history and gender) the pension is fully cut in half. Doubt the survivor would escape the 24% bracket but that's a big deal.

The math all sounds good, it appears you 'fit into' an account size and draw that works fairly well. I would run it through one of the calculators and review a few scenarios to see how some of the alternatives that you speak about may or may not affect the choices now including the SS creep on taxation.
I do not know what your portfolio makeup is but you are right in that we typically do not use 5% real returns for every test run - maybe a couple of runs but we also spend time testing other returns.

One other thought - if your pension is COLA'd and a few other things go your way you will be very near the IRMMA line. Best to try out a few of these to test those lines as well, no need to cross that line for a few thousand only to get a fee for more than the amount crossed.

[celia]

I'm throwing out the suggestion to spend at 5% for the next 24 years mainly to counter the dogmatic Roth conversion advocates. Maybe the OP would enjoy that, or maybe they never considered such a thing.

I've been trying to counter your spending notion. Those who are going to spend it, will. But OP asked about Roth conversions and the taxes will be the same no matter what is done with the withdrawals, except if QCDs are used.

The percentage you are required to withdraw for your RMD increases every year. Those withdrawing need to realize that their accounts will keep growing until the withdrawals are more than the growth and that typically happens in their late 80s. But once the withdrawals start to decrease the balance, there's nothing you can do. You eventually need to have another source of money. That's where the Roth IRA will be needed. If not needed, the heirs will be happy.

[smitcat]

I'm throwing out the suggestion to spend at 5% for the next 24 years mainly to counter the dogmatic Roth conversion advocates. Maybe the OP would enjoy that, or maybe they never considered such a thing.

I've been trying to counter your spending notion. Those who are going to spend it, will. But OP asked about Roth conversions and the taxes will be the same no matter what is done with the withdrawals, except if QCDs are used.

The percentage you are required to withdraw for your RMD increases every year. Those withdrawing need to realize that their accounts will keep growing until the withdrawals are more than the growth and that typically happens in their late 80s. But once the withdrawals start to decrease the balance, there's nothing you can do. You eventually need to have another source of money. That's where the Roth IRA will be needed. If not needed, the heirs will be happy.

Yes - if you are not going to spend down the tax deferred ....and maybe you have a goal for heirs the choices change rather abruptly.

[tibbitts]

I'm throwing out the suggestion to spend at 5% for the next 24 years mainly to counter the dogmatic Roth conversion advocates. Maybe the OP would enjoy that, or maybe they never considered such a thing.

I've been trying to counter your spending notion. Those who are going to spend it, will. But OP asked about Roth conversions and the taxes will be the same no matter what is done with the withdrawals, except if QCDs are used.

The percentage you are required to withdraw for your RMD increases every year. Those withdrawing need to realize that their accounts will keep growing until the withdrawals are more than the growth and that typically happens in their late 80s. But once the withdrawals start to decrease the balance, there's nothing you can do. You eventually need to have another source of money. That's where the Roth IRA will be needed. If not needed, the heirs will be happy.

I agree that spending vs. conversions don't matter regarding taxes. But when you say "withdrawals start to decrease the balance" you mostly mean the balance in deferred, since there is no obligation to spend the entire RMD. You have to spend probably 30-45% of the withdrawal for taxes but not the other 55-70%.

This spending comment might be referring to the discussions we see all the time with Bogleheads expecting - almost demanding - that their balances overall continue grow until they die. So we get these 1.x% withdrawal - really spending - rates.

The "other source of money" could just as well be taxable as Roth.

The biggest effect I think conversions have is changing the deferred allocation, so instead of thinking about maybe 3-4% real and that being highly variable, once you've done some conversions now you're looking at 1% - 2%/yr with not as much variability.

[celia]

Yes - if you are not going to spend down the tax deferred ....and maybe you have a goal for heirs the choices change rather abruptly.

Spending vs saving has nothing to do with it. You need to understand that when you are older, the balance can drop pretty fast. Even if you don't have health issues in your 90s, you'll still need some money.

At age 90, you will be required to withdraw 17.5%.
At age 100, you will have to withdraw 37.7%.

But if the money is in a Roth, you can do withdrawals as needed or not at all!

[smitcat]

Yes - if you are not going to spend down the tax deferred ....and maybe you have a goal for heirs the choices change rather abruptly.

Spending vs saving has nothing to do with it. You need to understand that when you are older, the balance can drop pretty fast. Even if you don't have health issues in your 90s, you'll still need some money.

At age 90, you will be required to withdraw 17.5%.
At age 100, you will have to withdraw 37.7%.

But if the money is in a Roth, you can do withdrawals as needed or not at all!

If you expect your accounts to decline in retirement the tax deferred accounts afford less of a potential problem.
If you expect your accounts to grow in retirement the tax deferred accounts require a plan to deal with.

[tibbitts]

...Schwab has an excellent RMD calculator. https://www.schwab.com/ira/ira-calculators/rmd

At the bottom, hit "estimated lifetime projection". The graph is nice to see but the labels are off. Click each year of your age and write down the RMD at that point to get a better understanding. Doing Roth conversions will lower the RMDs but account gains will raise them.

Once you have a better understanding of what your retirement spending will be, you can make the Roth conversion decision. Remember that IRMAA will also play a roll as it will raise your Medicare rates. They go by your MAGI from 2 years ago.

This is very true, although I'm not sure about the labels being off...?

However the calculator defaults to a huge rate of return, and I think it's easier to think of it in real vs. nominal amounts, so I use what I think is a realistic real return number. Then I can use today's tax and IRMAA tables etc. to get an idea what the damage is going to be (NIIT is an exception but maybe somebody will fix that, eventually.) It can be misleading to look at the huge numbers from nominal values.