worth doing Roth conversions in our situation?

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Topic Author
Jimsad
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worth doing Roth conversions in our situation?

Post by Jimsad »

I am putting some more information together which might help to answer our question better and am reposting.


Early 50s age

Mid 7 figures investment portfolio - 66% in tax deferred and 33% in taxable accounts
8% of total portfolio in IRAs

Expect to leave at least some of the portfolio to heirs. Too early to know how much


We presently contribute to 401ks and also have defined benefit(cash balance) and profit sharing plan options. . We both have Roth option in 401k and contribute 50% of 401k contributions towards roth 401k (we max out 401ks)

We put in about 150k per year into a defined benefit (cash balance plan) which are Pretax contributions and also contribute to taxable account

We have IRAs- rollover and SEP IRAs from previous employers which account for 8% of our total portfolio . Rest of portfolio-92% is in 401Ks , defined benefit(cash balance plan) and taxable accounts

We are in the top income tax bracket and at least one of us (likely my spouse-lower earner )will work another 10 years . I may cut down and work partime another 5-10 years during which our income may still put us close to, if not in top tax bracket and we will not touch the portfolio for a while

In our situation, is it worthwhile to do Roth conversions of the IRAs and pay taxes now or leave it alone as it is small and may not make a big difference. Also I have a demanding career and am short of time. I do not really want to go through hassle of doing backdoor Roths unless it makes a huge difference for us (Some of the IRAs have mixed dedcutible and non deductible contributions and will add to complexity of doing back door Roths).
We would rather contribute 100% into Roth 401k to increase Roth space if needed. Mega Backdoor Roth option not available to us

We would appreciate your input .

Thank you
Last edited by Jimsad on Mon Dec 06, 2021 6:29 pm, edited 1 time in total.
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retiredjg
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Re: worth doing Roth conversions in our situation?

Post by retiredjg »

In the top income tax bracket, it would be very unusual for Roth conversions to be a good choice. You are already "protecting" yourself some by using some Roth 401k.

Other than that, there is not enough information to consider your question. We don't know if you have $500k or $2 million in tax-deferred accounts. We don't know if you are 35 years old or 65 years old. We don't know if you are saving for heirs or if your heirs will be a charity. And so on. All these things matter.

But, in the 37% bracket, the answer is likely to be "no" for most situations.
Topic Author
Jimsad
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

Thanks for your reply

A bit more info
Early 50s age
Mid 7 figures investment portfolio - 66% in tax deferred and 33% in taxable accounts - total about 8% of porrfolio in IRAs

Expect to leave at least some of the porrfolio to heirs. Too early to know how much
babystep
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Joined: Tue Apr 09, 2019 9:44 am

Re: worth doing Roth conversions in our situation?

Post by babystep »

You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
Topic Author
Jimsad
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
tibbitts
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Joined: Tue Feb 27, 2007 5:50 pm

Re: worth doing Roth conversions in our situation?

Post by tibbitts »

Jimsad wrote: Sun Dec 05, 2021 8:19 pm
babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
It really depends on your assumptions for returns and taxes going forward. It doesn't make any sense to contribute to a deductible account while also doing Roth conversions into the highest bracket. If you're at a point where you can direct all your future contributions to Roth and still end up with RMDs driving you into what you believe will be the highest bracket when you retire (due to appreciation/growth without additional contributions), then it can make sense to convert into the highest bracket now, to give you more flexibility, hedge against filing status changes, etc, but probably only to the point where you break that cycle of growth.
babystep
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Re: worth doing Roth conversions in our situation?

Post by babystep »

Jimsad wrote: Sun Dec 05, 2021 8:19 pm
babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
Even with a guess of about 3.5M in pre-tax now, I would prefer to do 100% in pre-tax because of the highest tax bracket.

Back of the envelope: let us assume that 3.5M with 4% real return would become around 6M by the time of retirement. Even if you withdraw 5% then you would still be in 24% bracket.

Please run your numbers. It is highly unlikely to reach highest tax bracket in retirement and that would mean 100% pre-tax is still better.

Also, when only one of you is working then you are likely to be in lower bracket that allows for more opportunity to convert/contribute to Roth in lower brackets.

Given all that I realize that numbers are very small compared to your current balance so in big-picture, it won't make much difference either way.
Topic Author
Jimsad
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

tibbitts wrote: Sun Dec 05, 2021 8:27 pm
Jimsad wrote: Sun Dec 05, 2021 8:19 pm
babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
It really depends on your assumptions for returns and taxes going forward. It doesn't make any sense to contribute to a deductible account while also doing Roth conversions into the highest bracket. If you're at a point where you can direct all your future contributions to Roth and still end up with RMDs driving you into what you believe will be the highest bracket when you retire (due to appreciation/growth without additional contributions), then it can make sense to convert into the highest bracket now, to give you more flexibility, hedge against filing status changes, etc, but probably only to the point where you break that cycle of growth.
At least for next 10 years we will likely be in highest tax bracket and in retirement not sure if we will be in highest bracket but will likely have mid seven figures in pretax accounts at retirement. Will RMDs then put us in highest tax bracket ? Not sure ,have to do read up on RMDs !
To be honest , have not thought in depth about RMDs as it seems far away when we have to do them
Topic Author
Jimsad
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

babystep wrote: Sun Dec 05, 2021 8:36 pm
Jimsad wrote: Sun Dec 05, 2021 8:19 pm
babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
Even with a guess of about 3.5M in pre-tax now, I would prefer to do 100% in pre-tax because of the highest tax bracket.

Back of the envelope: let us assume that 3.5M with 4% real return would become around 6M by the time of retirement. Even if you withdraw 5% then you would still be in 24% bracket.

Please run your numbers. It is highly unlikely to reach highest tax bracket in retirement and that would mean 100% pre-tax is still better.

Also, when only one of you is working then you are likely to be in lower bracket that allows for more opportunity to convert/contribute to Roth in lower brackets.

Given all that I realize that numbers are very small compared to your current balance so in big-picture, it won't make much difference either way.
Thank you for your reply .
As I just posted, we also have to figure out about RMDs
tibbitts
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Re: worth doing Roth conversions in our situation?

Post by tibbitts »

Jimsad wrote: Sun Dec 05, 2021 8:37 pm
tibbitts wrote: Sun Dec 05, 2021 8:27 pm
Jimsad wrote: Sun Dec 05, 2021 8:19 pm
babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
It really depends on your assumptions for returns and taxes going forward. It doesn't make any sense to contribute to a deductible account while also doing Roth conversions into the highest bracket. If you're at a point where you can direct all your future contributions to Roth and still end up with RMDs driving you into what you believe will be the highest bracket when you retire (due to appreciation/growth without additional contributions), then it can make sense to convert into the highest bracket now, to give you more flexibility, hedge against filing status changes, etc, but probably only to the point where you break that cycle of growth.
At least for next 10 years we will likely be in highest tax bracket and in retirement not sure if we will be in highest bracket but will likely have mid seven figures in pretax accounts at retirement. Will RMDs then put us in highest tax bracket ? Not sure ,have to do read up on RMDs !
To be honest , have not thought in depth about RMDs as it seems far away when we have to do them
To me RMDs (plus your assumptions about growth and tax rates) are almost entirely what determine when/how much to convert. Especially if you want to hedge again RMDs filing single, but even if you don't and the balances are large enough. Also although minor in comparison in your case, you might want to add in differences in IRMAA and NIIT, which could be higher if you don't convert.

You'll never be able to come up with a definitive answer, except in the most extreme cases possibly, because so many assumptions are involved.
twh
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Re: worth doing Roth conversions in our situation?

Post by twh »

Perfect time to do Roth converson is post-retirement and pre-SS. Your tax rate will be lower then and SS will not have kicked in yet.
Topic Author
Jimsad
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

tibbitts wrote: Sun Dec 05, 2021 8:45 pm
Jimsad wrote: Sun Dec 05, 2021 8:37 pm
tibbitts wrote: Sun Dec 05, 2021 8:27 pm
Jimsad wrote: Sun Dec 05, 2021 8:19 pm
babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
It really depends on your assumptions for returns and taxes going forward. It doesn't make any sense to contribute to a deductible account while also doing Roth conversions into the highest bracket. If you're at a point where you can direct all your future contributions to Roth and still end up with RMDs driving you into what you believe will be the highest bracket when you retire (due to appreciation/growth without additional contributions), then it can make sense to convert into the highest bracket now, to give you more flexibility, hedge against filing status changes, etc, but probably only to the point where you break that cycle of growth.
At least for next 10 years we will likely be in highest tax bracket and in retirement not sure if we will be in highest bracket but will likely have mid seven figures in pretax accounts at retirement. Will RMDs then put us in highest tax bracket ? Not sure ,have to do read up on RMDs !
To be honest , have not thought in depth about RMDs as it seems far away when we have to do them
To me RMDs (plus your assumptions about growth and tax rates) are almost entirely what determine when/how much to convert. Especially if you want to hedge again RMDs filing single, but even if you don't and the balances are large enough. Also although minor in comparison in your case, you might want to add in differences in IRMAA and NIIT, which could be higher if you don't convert.

You'll never be able to come up with a definitive answer, except in the most extreme cases possibly, because so many assumptions are involved.
Thank you . Will read about IRMAA and NIIT
Topic Author
Jimsad
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

twh wrote: Sun Dec 05, 2021 8:47 pm Perfect time to do Roth converson is post-retirement and pre-SS. Your tax rate will be lower then and SS will not have kicked in yet.
Good suggestion. Thanks
aristotelian
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Re: worth doing Roth conversions in our situation?

Post by aristotelian »

Jimsad wrote: Sun Dec 05, 2021 8:19 pm
babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
That does not make mathematical sense. I would max the traditional 401k and no Roth conversions. Wait until retirement when you are in a lower tax bracket.
Topic Author
Jimsad
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Joined: Mon Mar 20, 2017 5:54 pm

Re: worth doing Roth conversions in our situation?

Post by Jimsad »

aristotelian wrote: Sun Dec 05, 2021 8:53 pm
Jimsad wrote: Sun Dec 05, 2021 8:19 pm
babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
That does not make mathematical sense. I would max the traditional 401k and no Roth conversions. Wait until retirement when you are in a lower tax bracket.
So not make use of Roth 401 k at all now?
SnowBog
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Re: worth doing Roth conversions in our situation?

Post by SnowBog »

As a "rule of thumb" if you have < $1M in pre-tax, I wouldn't worry too much... If you have more than that, at some point it might make sense to shift some to a Roth. But whether that is now - while working at the highest tax rates - or between retirement and RMD's beginning - is a different question.

If you want an "objective" opinion, plug your numbers into Extended iORP: https://www.i-orp.com/Plans/extended.html

It attempts to find you the "optimal" retirement path - including if you should be doing more/less into pre-tax vs. Roth.

For myself, it recommends we cut back on pre-tax and direct more to Roth. But I'm ignoring that recommendation. I'll take the tax savings - I'd rather have more money saved (due to lower taxes) than less money saved (although future taxes might be lower). Some of this though is also because we are:
  • Maxing out 2x Backdoor Roths
  • Maxing out 1x Mega Backdoor Roth
  • Planning to retire before RMD's and do Roth conversions
Which bring me to my recommendations for you... If you aren't already:
  • Start a Backdoor Roth for yourself - and spouse - if over 50 that could be an extra $14k/year ($7k each) going into Roth
  • Check employer plan(s) - looking specifically for mentions of "after-tax" contributions (or a 3rd option that is not pre-tax or Roth), if your plan(s) allow this - and ideally they allow either "in-plan" or rollover conversions to Roth - you've found yourself a "Mega Backdoor Roth" - which could allow up to $40,500 ($60k - your contributions and employer match) going to Roth.
Both of these would have otherwise been going to taxable investments (same initial tax treatment - but will be tax-free going forward in the Roth).

For ourselves, I'll take the tax-savings on my 401k contributions and grow my Roth by more than most people could...
aristotelian
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Re: worth doing Roth conversions in our situation?

Post by aristotelian »

Jimsad wrote: Sun Dec 05, 2021 8:57 pm
aristotelian wrote: Sun Dec 05, 2021 8:53 pm
Jimsad wrote: Sun Dec 05, 2021 8:19 pm
babystep wrote: Sun Dec 05, 2021 8:14 pm You would likely save taxes by doing regular 401k instead of Roth 401k while in the highest bracket.
We are actually a bit torn about giving up the tax benefit now but want to try to increase our Roth Space too
That’s why do 50/50 regular and Roth 401k
That does not make mathematical sense. I would max the traditional 401k and no Roth conversions. Wait until retirement when you are in a lower tax bracket.
So not make use of Roth 401 k at all now?
I wouldn't. In the highest tax bracket now, the worst case scenario is a wash when you withdraw. Far more likely you will come out ahead.
Topic Author
Jimsad
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

SnowBog wrote: Sun Dec 05, 2021 8:59 pm As a "rule of thumb" if you have < $1M in pre-tax, I wouldn't worry too much... If you have more than that, at some point it might make sense to shift some to a Roth. But whether that is now - while working at the highest tax rates - or between retirement and RMD's beginning - is a different question.

If you want an "objective" opinion, plug your numbers into Extended iORP: https://www.i-orp.com/Plans/extended.html

It attempts to find you the "optimal" retirement path - including if you should be doing more/less into pre-tax vs. Roth.

For myself, it recommends we cut back on pre-tax and direct more to Roth. But I'm ignoring that recommendation. I'll take the tax savings - I'd rather have more money saved (due to lower taxes) than less money saved (although future taxes might be lower). Some of this though is also because we are:
  • Maxing out 2x Backdoor Roths
  • Maxing out 1x Mega Backdoor Roth
  • Planning to retire before RMD's and do Roth conversions
Which bring me to my recommendations for you... If you aren't already:
  • Start a Backdoor Roth for yourself - and spouse - if over 50 that could be an extra $14k/year ($7k each) going into Roth
  • Check employer plan(s) - looking specifically for mentions of "after-tax" contributions (or a 3rd option that is not pre-tax or Roth), if your plan(s) allow this - and ideally they allow either "in-plan" or rollover conversions to Roth - you've found yourself a "Mega Backdoor Roth" - which could allow up to $40,500 ($60k - your contributions and employer match) going to Roth.
Both of these would have otherwise been going to taxable investments (same initial tax treatment - but will be tax-free going forward in the Roth).

For ourselves, I'll take the tax-savings on my 401k contributions and grow my Roth by more than most people could...
Thanks for your reply
I feel that by contributing to the Roth 401k available to us we are doing the same as doing a mega back door or a back door Roth without all the extra work to increase the Roth space
I have a defined benefit plan which gives me plenty of pretax space for pretax contributions.
Do you agree ?
twh
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Joined: Sat Feb 08, 2020 2:15 pm

Re: worth doing Roth conversions in our situation?

Post by twh »

Keep contributing to the Roth 401k for sure. Even if it is marginal in terms of tax savings now versus later, you are done with taxes on this money forever. So, just keep doing the Roth version.
FlamePoint
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Re: worth doing Roth conversions in our situation?

Post by FlamePoint »

Here’s what we did in our situation:

1. Retired at age 58 with a combined $4M 401k. Moved everything to rollover IRAs.
2. We are living off taxable income for the next few years and filling up the entire 24% tax bracket with Roth conversions. Once we run out of taxable funds, we will still pull out funds up to the top of the 24% bracket, but some will be used for living expenses and taxes. The rest will be converted.
3. The Roth accounts only hold equities. All bonds will remain in tax deferred to help slow down growth,
3. We plan to take SS at age 70, so will continue to pull from our tax deferred funds until that time.

My hope is that by the time we hit 70, we’ll have a 50/50 split between Roth and our IRAs. This approach will help keep us from a tax torpedo at age 72 once RMD’s kick in. Our Roth’s will be our legacy funds for the kids.

As others stated, the best time to do conversions is from the time you retire to when you start taking SS. In hindsight, my only regret is not having more taxable $’s to live off of the first 4-5 year after retirement to allow for maximum Roth conversions during this time. Also we did not fund our Roth’s during our working years….we took advantage of the tax benefits available under our 401k knowing that with the right post-retirement Roth conversion strategy we would be in a lower tax bracket even with RMDs.
Last edited by FlamePoint on Sun Dec 05, 2021 11:46 pm, edited 1 time in total.
Topic Author
Jimsad
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Joined: Mon Mar 20, 2017 5:54 pm

Re: worth doing Roth conversions in our situation?

Post by Jimsad »

twh wrote: Sun Dec 05, 2021 9:19 pm Keep contributing to the Roth 401k for sure. Even if it is marginal in terms of tax savings now versus later, you are done with taxes on this money forever. So, just keep doing the Roth version.
Thank you . Presently both of us doing 50:50 pretax and Roth 401k
Probably one of us will do 100% Roth 401k as we also have a defined benefit plan available for pretax space for few more years
SnowBog
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Re: worth doing Roth conversions in our situation?

Post by SnowBog »

Jimsad wrote: Sun Dec 05, 2021 9:10 pm
SnowBog wrote: Sun Dec 05, 2021 8:59 pm As a "rule of thumb" if you have < $1M in pre-tax, I wouldn't worry too much... If you have more than that, at some point it might make sense to shift some to a Roth. But whether that is now - while working at the highest tax rates - or between retirement and RMD's beginning - is a different question.

If you want an "objective" opinion, plug your numbers into Extended iORP: https://www.i-orp.com/Plans/extended.html

It attempts to find you the "optimal" retirement path - including if you should be doing more/less into pre-tax vs. Roth.

For myself, it recommends we cut back on pre-tax and direct more to Roth. But I'm ignoring that recommendation. I'll take the tax savings - I'd rather have more money saved (due to lower taxes) than less money saved (although future taxes might be lower). Some of this though is also because we are:
  • Maxing out 2x Backdoor Roths
  • Maxing out 1x Mega Backdoor Roth
  • Planning to retire before RMD's and do Roth conversions
Which bring me to my recommendations for you... If you aren't already:
  • Start a Backdoor Roth for yourself - and spouse - if over 50 that could be an extra $14k/year ($7k each) going into Roth
  • Check employer plan(s) - looking specifically for mentions of "after-tax" contributions (or a 3rd option that is not pre-tax or Roth), if your plan(s) allow this - and ideally they allow either "in-plan" or rollover conversions to Roth - you've found yourself a "Mega Backdoor Roth" - which could allow up to $40,500 ($60k - your contributions and employer match) going to Roth.
Both of these would have otherwise been going to taxable investments (same initial tax treatment - but will be tax-free going forward in the Roth).

For ourselves, I'll take the tax-savings on my 401k contributions and grow my Roth by more than most people could...
Thanks for your reply
I feel that by contributing to the Roth 401k available to us we are doing the same as doing a mega back door or a back door Roth without all the extra work to increase the Roth space
I have a defined benefit plan which gives me plenty of pretax space for pretax contributions.
Do you agree ?
Personally - no... Especially if you are in high tax-brackets with excess income (meaning excess money going into taxable accounts). As a general rule - with rare exceptions like estate planning - Roth are always better than taxable.

If you are doing 50/50 - in 2021 (ignoring > 50 catchup amounts) - that would mean $9,750 into Roth & $9,750 into pre-tax (per person), or $19,500 for a couple.

If you max out 2x Backdoor and 1x Mega Backdoor, you'd be getting up to $50k into Roth per year (depending on how much employer match, as well as how many can access Mega Backdoor).

I'd take $50k of Roth over $20k of Roth any time I could afford to do so!

Part of this is also now knowing that both Backdoor and Mega Backdoor Roths are very easy to execute (once you learn the first time). In the case of a Mega Backdoor Roth - if your employer plan supports an "in-plan conversion" - and especially if it's an automatic one - that's about as easy as it gets - set it up once and forget about it. For the "regular" Backdoor variant - its recommended that you get rid of any existing IRA's - often by rolling them into your current employer 401k if allowed - that's usually the "hard" part. Otherwise, it's just making [non-deductible] contribution(s) to a traditional IRA - waiting 1- to 2-days, then converting to a Roth, and ensuring you fill out taxes correctly. (Plan an extra 30 - 60+ minutes the first year - but now probably takes me 5-10 minutes to do both and fill out taxes.)

But back to you should be putting your original contributions into Roth vs. pre-tax - or split 50/50 as you are doing now...
  • If you went 100% pre-tax, you'd avoid 37% tax on the $19,500 (assuming both are 50/50) going to Roth, leaving an extra $7,215 to invest (essentially - you'd save enough in taxes to max out pre-tax and take your tax savings to fund 1x Backdoor Roth's)
  • If you live in a high tax state, let's say with a 9%+ rate, that's another $1,755+ saved in taxes each year - that's available to invest in Backdoor Roths/Mega Backdoor Roths/taxable.
  • Combined, that's nearly $9k+ less taxes paid each year... (I'll pay every cent I owe - but I don't want to voluntarily pay more than I need...)
My view is I'd rather save on taxes today while in high tax brackets, keeping more of my money to save/invest, especially because we are planning to retire early and maximize our opportunities then to pay much lower taxes doing Roth conversions if/as needed if we have "too much" pre-tax. Even if we can only get down a tax bracket or two before RMD's kick in - that's still substantial savings long term...
SnowBog
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Joined: Fri Dec 21, 2018 10:21 pm

Re: worth doing Roth conversions in our situation?

Post by SnowBog »

But I'll give another reminder to check out Extended iORP https://www.i-orp.com/Plans/extended.html.

It can be a little hard to read - you'll need to plug in your numbers and then look at the tables it produces. If you pay attention, you'll see where iORP recommends investing - and how much.

As a reminder, for ourselves - it recommends we drastically reduce pre-tax next year, and within 2 years if I recall stop - and direct everything into Roth. I'd feel OK if I followed that recommendation... But as previously noted, personally I don't want to volunteer to pay more taxes today than I need to (and I think through Roth conversions we'll come out ahead overall).
Topic Author
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: worth doing Roth conversions in our situation?

Post by Jimsad »

SnowBog wrote: Sun Dec 05, 2021 9:52 pm
Jimsad wrote: Sun Dec 05, 2021 9:10 pm
SnowBog wrote: Sun Dec 05, 2021 8:59 pm As a "rule of thumb" if you have < $1M in pre-tax, I wouldn't worry too much... If you have more than that, at some point it might make sense to shift some to a Roth. But whether that is now - while working at the highest tax rates - or between retirement and RMD's beginning - is a different question.

If you want an "objective" opinion, plug your numbers into Extended iORP: https://www.i-orp.com/Plans/extended.html

It attempts to find you the "optimal" retirement path - including if you should be doing more/less into pre-tax vs. Roth.

For myself, it recommends we cut back on pre-tax and direct more to Roth. But I'm ignoring that recommendation. I'll take the tax savings - I'd rather have more money saved (due to lower taxes) than less money saved (although future taxes might be lower). Some of this though is also because we are:
  • Maxing out 2x Backdoor Roths
  • Maxing out 1x Mega Backdoor Roth
  • Planning to retire before RMD's and do Roth conversions
Which bring me to my recommendations for you... If you aren't already:
  • Start a Backdoor Roth for yourself - and spouse - if over 50 that could be an extra $14k/year ($7k each) going into Roth
  • Check employer plan(s) - looking specifically for mentions of "after-tax" contributions (or a 3rd option that is not pre-tax or Roth), if your plan(s) allow this - and ideally they allow either "in-plan" or rollover conversions to Roth - you've found yourself a "Mega Backdoor Roth" - which could allow up to $40,500 ($60k - your contributions and employer match) going to Roth.
Both of these would have otherwise been going to taxable investments (same initial tax treatment - but will be tax-free going forward in the Roth).

For ourselves, I'll take the tax-savings on my 401k contributions and grow my Roth by more than most people could...
Thanks for your reply
I feel that by contributing to the Roth 401k available to us we are doing the same as doing a mega back door or a back door Roth without all the extra work to increase the Roth space
I have a defined benefit plan which gives me plenty of pretax space for pretax contributions.
Do you agree ?
Personally - no... Especially if you are in high tax-brackets with excess income (meaning excess money going into taxable accounts). As a general rule - with rare exceptions like estate planning - Roth are always better than taxable.

If you are doing 50/50 - in 2021 (ignoring > 50 catchup amounts) - that would mean $9,750 into Roth & $9,750 into pre-tax (per person), or $19,500 for a couple.

If you max out 2x Backdoor and 1x Mega Backdoor, you'd be getting up to $50k into Roth per year (depending on how much employer match, as well as how many can access Mega Backdoor).

I'd take $50k of Roth over $20k of Roth any time I could afford to do so!

Part of this is also now knowing that both Backdoor and Mega Backdoor Roths are very easy to execute (once you learn the first time). In the case of a Mega Backdoor Roth - if your employer plan supports an "in-plan conversion" - and especially if it's an automatic one - that's about as easy as it gets - set it up once and forget about it. For the "regular" Backdoor variant - its recommended that you get rid of any existing IRA's - often by rolling them into your current employer 401k if allowed - that's usually the "hard" part. Otherwise, it's just making [non-deductible] contribution(s) to a traditional IRA - waiting 1- to 2-days, then converting to a Roth, and ensuring you fill out taxes correctly. (Plan an extra 30 - 60+ minutes the first year - but now probably takes me 5-10 minutes to do both and fill out taxes.)

But back to you should be putting your original contributions into Roth vs. pre-tax - or split 50/50 as you are doing now...
  • If you went 100% pre-tax, you'd avoid 37% tax on the $19,500 (assuming both are 50/50) going to Roth, leaving an extra $7,215 to invest (essentially - you'd save enough in taxes to max out pre-tax and take your tax savings to fund 1x Backdoor Roth's)
  • If you live in a high tax state, let's say with a 9%+ rate, that's another $1,755+ saved in taxes each year - that's available to invest in Backdoor Roths/Mega Backdoor Roths/taxable.
  • Combined, that's nearly $9k+ less taxes paid each year... (I'll pay every cent I owe - but I don't want to voluntarily pay more than I need...)
My view is I'd rather save on taxes today while in high tax brackets, keeping more of my money to save/invest, especially because we are planning to retire early and maximize our opportunities then to pay much lower taxes doing Roth conversions if/as needed if we have "too much" pre-tax. Even if we can only get down a tax bracket or two before RMD's kick in - that's still substantial savings long term...
I am not sure you caught it but I have a defined benefit plan I can put away >150k per year pre tax
Topic Author
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: worth doing Roth conversions in our situation?

Post by Jimsad »

Jimsad wrote: Sun Dec 05, 2021 9:58 pm
SnowBog wrote: Sun Dec 05, 2021 9:52 pm
Jimsad wrote: Sun Dec 05, 2021 9:10 pm
SnowBog wrote: Sun Dec 05, 2021 8:59 pm As a "rule of thumb" if you have < $1M in pre-tax, I wouldn't worry too much... If you have more than that, at some point it might make sense to shift some to a Roth. But whether that is now - while working at the highest tax rates - or between retirement and RMD's beginning - is a different question.

If you want an "objective" opinion, plug your numbers into Extended iORP: https://www.i-orp.com/Plans/extended.html

It attempts to find you the "optimal" retirement path - including if you should be doing more/less into pre-tax vs. Roth.

For myself, it recommends we cut back on pre-tax and direct more to Roth. But I'm ignoring that recommendation. I'll take the tax savings - I'd rather have more money saved (due to lower taxes) than less money saved (although future taxes might be lower). Some of this though is also because we are:
  • Maxing out 2x Backdoor Roths
  • Maxing out 1x Mega Backdoor Roth
  • Planning to retire before RMD's and do Roth conversions
Which bring me to my recommendations for you... If you aren't already:
  • Start a Backdoor Roth for yourself - and spouse - if over 50 that could be an extra $14k/year ($7k each) going into Roth
  • Check employer plan(s) - looking specifically for mentions of "after-tax" contributions (or a 3rd option that is not pre-tax or Roth), if your plan(s) allow this - and ideally they allow either "in-plan" or rollover conversions to Roth - you've found yourself a "Mega Backdoor Roth" - which could allow up to $40,500 ($60k - your contributions and employer match) going to Roth.
Both of these would have otherwise been going to taxable investments (same initial tax treatment - but will be tax-free going forward in the Roth).

For ourselves, I'll take the tax-savings on my 401k contributions and grow my Roth by more than most people could...
Thanks for your reply
I feel that by contributing to the Roth 401k available to us we are doing the same as doing a mega back door or a back door Roth without all the extra work to increase the Roth space
I have a defined benefit plan which gives me plenty of pretax space for pretax contributions.
Do you agree ?
Personally - no... Especially if you are in high tax-brackets with excess income (meaning excess money going into taxable accounts). As a general rule - with rare exceptions like estate planning - Roth are always better than taxable.

If you are doing 50/50 - in 2021 (ignoring > 50 catchup amounts) - that would mean $9,750 into Roth & $9,750 into pre-tax (per person), or $19,500 for a couple.

If you max out 2x Backdoor and 1x Mega Backdoor, you'd be getting up to $50k into Roth per year (depending on how much employer match, as well as how many can access Mega Backdoor).

I'd take $50k of Roth over $20k of Roth any time I could afford to do so!

Part of this is also now knowing that both Backdoor and Mega Backdoor Roths are very easy to execute (once you learn the first time). In the case of a Mega Backdoor Roth - if your employer plan supports an "in-plan conversion" - and especially if it's an automatic one - that's about as easy as it gets - set it up once and forget about it. For the "regular" Backdoor variant - its recommended that you get rid of any existing IRA's - often by rolling them into your current employer 401k if allowed - that's usually the "hard" part. Otherwise, it's just making [non-deductible] contribution(s) to a traditional IRA - waiting 1- to 2-days, then converting to a Roth, and ensuring you fill out taxes correctly. (Plan an extra 30 - 60+ minutes the first year - but now probably takes me 5-10 minutes to do both and fill out taxes.)

But back to you should be putting your original contributions into Roth vs. pre-tax - or split 50/50 as you are doing now...
  • If you went 100% pre-tax, you'd avoid 37% tax on the $19,500 (assuming both are 50/50) going to Roth, leaving an extra $7,215 to invest (essentially - you'd save enough in taxes to max out pre-tax and take your tax savings to fund 1x Backdoor Roth's)
  • If you live in a high tax state, let's say with a 9%+ rate, that's another $1,755+ saved in taxes each year - that's available to invest in Backdoor Roths/Mega Backdoor Roths/taxable.
  • Combined, that's nearly $9k+ less taxes paid each year... (I'll pay every cent I owe - but I don't want to voluntarily pay more than I need...)
My view is I'd rather save on taxes today while in high tax brackets, keeping more of my money to save/invest, especially because we are planning to retire early and maximize our opportunities then to pay much lower taxes doing Roth conversions if/as needed if we have "too much" pre-tax. Even if we can only get down a tax bracket or two before RMD's kick in - that's still substantial savings long term...
I am not sure you caught it but I have a defined benefit plan I can put away >150k per year pre tax so the 401k is not my only pre tax space , so I do not feel the need to do all those manoueveres to preserve the 401k pretax space when I can make use if the Roth 401k and use the defined benefit for pretax space
Last edited by Jimsad on Sun Dec 05, 2021 10:06 pm, edited 1 time in total.
milktoast
Posts: 625
Joined: Wed Jul 10, 2019 8:17 pm

Re: worth doing Roth conversions in our situation?

Post by milktoast »

Top bracket = no conversion (or contribution in leu of pretax) with very few exceptions.

Right now you are 33/66 taxable vs pretax. But that ratio should be shifting to taxable because in top bracket you should be saving more than you can contribute to tax advantaged accounts.

So max 401k pretax, catch-up pretax, backdoor roth, and mega backdoor Roth. Then toss the rest into taxable.

In top bracket you only start clearly winning by contributing / converting to Roth over pretax if your pretax account is on track to exceed $7M. If it’s on track to hit $3M you are clearly losing.

And don’t trust the growth projections tossed around here. In top bracket, your taxable and Roth should be all equity. Which means your pretax will be bond heavy to hit your AA, pulling down returns (and lowering RMD).
Topic Author
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: worth doing Roth conversions in our situation?

Post by Jimsad »

milktoast wrote: Sun Dec 05, 2021 10:05 pm Top bracket = no conversion (or contribution in leu of pretax) with very few exceptions.

Right now you are 33/66 taxable vs pretax. But that ratio should be shifting to taxable because in top bracket you should be saving more than you can contribute to tax advantaged accounts.

So max 401k pretax, catch-up pretax, backdoor roth, and mega backdoor Roth. Then toss the rest into taxable.

In top bracket you only start clearly winning by contributing / converting to Roth over pretax if your pretax account is on track to exceed $7M. If it’s on track to hit $3M you are clearly losing.

And don’t trust the growth projections tossed around here. In top bracket, your taxable and Roth should be all equity. Which means your pretax will be bond heavy to hit your AA, pulling down returns (and lowering RMD).
I also have available defined benefit plan for pretax space and hence feel I can use more of the Roth 401k option
I am also contributing to taxable accounts regularly
Topic Author
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: worth doing Roth conversions in our situation?

Post by Jimsad »

Jimsad wrote: Sun Dec 05, 2021 10:10 pm
milktoast wrote: Sun Dec 05, 2021 10:05 pm Top bracket = no conversion (or contribution in leu of pretax) with very few exceptions.

Right now you are 33/66 taxable vs pretax. But that ratio should be shifting to taxable because in top bracket you should be saving more than you can contribute to tax advantaged accounts.

So max 401k pretax, catch-up pretax, backdoor roth, and mega backdoor Roth. Then toss the rest into taxable.

In top bracket you only start clearly winning by contributing / converting to Roth over pretax if your pretax account is on track to exceed $7M. If it’s on track to hit $3M you are clearly losing.

And don’t trust the growth projections tossed around here. In top bracket, your taxable and Roth should be all equity. Which means your pretax will be bond heavy to hit your AA, pulling down returns (and lowering RMD).
I also have available defined benefit plan for pretax space and hence feel I can use more of the Roth 401k option
I am also contributing to taxable accounts regularly
But I agree that there may not be much benefit in converting my present IRAs at this time to Roth
SnowBog
Posts: 4680
Joined: Fri Dec 21, 2018 10:21 pm

Re: worth doing Roth conversions in our situation?

Post by SnowBog »

Jimsad wrote: Sun Dec 05, 2021 9:58 pm
SnowBog wrote: Sun Dec 05, 2021 9:52 pm
Jimsad wrote: Sun Dec 05, 2021 9:10 pm
SnowBog wrote: Sun Dec 05, 2021 8:59 pm As a "rule of thumb" if you have < $1M in pre-tax, I wouldn't worry too much... If you have more than that, at some point it might make sense to shift some to a Roth. But whether that is now - while working at the highest tax rates - or between retirement and RMD's beginning - is a different question.

If you want an "objective" opinion, plug your numbers into Extended iORP: https://www.i-orp.com/Plans/extended.html

It attempts to find you the "optimal" retirement path - including if you should be doing more/less into pre-tax vs. Roth.

For myself, it recommends we cut back on pre-tax and direct more to Roth. But I'm ignoring that recommendation. I'll take the tax savings - I'd rather have more money saved (due to lower taxes) than less money saved (although future taxes might be lower). Some of this though is also because we are:
  • Maxing out 2x Backdoor Roths
  • Maxing out 1x Mega Backdoor Roth
  • Planning to retire before RMD's and do Roth conversions
Which bring me to my recommendations for you... If you aren't already:
  • Start a Backdoor Roth for yourself - and spouse - if over 50 that could be an extra $14k/year ($7k each) going into Roth
  • Check employer plan(s) - looking specifically for mentions of "after-tax" contributions (or a 3rd option that is not pre-tax or Roth), if your plan(s) allow this - and ideally they allow either "in-plan" or rollover conversions to Roth - you've found yourself a "Mega Backdoor Roth" - which could allow up to $40,500 ($60k - your contributions and employer match) going to Roth.
Both of these would have otherwise been going to taxable investments (same initial tax treatment - but will be tax-free going forward in the Roth).

For ourselves, I'll take the tax-savings on my 401k contributions and grow my Roth by more than most people could...
Thanks for your reply
I feel that by contributing to the Roth 401k available to us we are doing the same as doing a mega back door or a back door Roth without all the extra work to increase the Roth space
I have a defined benefit plan which gives me plenty of pretax space for pretax contributions.
Do you agree ?
Personally - no... Especially if you are in high tax-brackets with excess income (meaning excess money going into taxable accounts). As a general rule - with rare exceptions like estate planning - Roth are always better than taxable.

If you are doing 50/50 - in 2021 (ignoring > 50 catchup amounts) - that would mean $9,750 into Roth & $9,750 into pre-tax (per person), or $19,500 for a couple.

If you max out 2x Backdoor and 1x Mega Backdoor, you'd be getting up to $50k into Roth per year (depending on how much employer match, as well as how many can access Mega Backdoor).

I'd take $50k of Roth over $20k of Roth any time I could afford to do so!

Part of this is also now knowing that both Backdoor and Mega Backdoor Roths are very easy to execute (once you learn the first time). In the case of a Mega Backdoor Roth - if your employer plan supports an "in-plan conversion" - and especially if it's an automatic one - that's about as easy as it gets - set it up once and forget about it. For the "regular" Backdoor variant - its recommended that you get rid of any existing IRA's - often by rolling them into your current employer 401k if allowed - that's usually the "hard" part. Otherwise, it's just making [non-deductible] contribution(s) to a traditional IRA - waiting 1- to 2-days, then converting to a Roth, and ensuring you fill out taxes correctly. (Plan an extra 30 - 60+ minutes the first year - but now probably takes me 5-10 minutes to do both and fill out taxes.)

But back to you should be putting your original contributions into Roth vs. pre-tax - or split 50/50 as you are doing now...
  • If you went 100% pre-tax, you'd avoid 37% tax on the $19,500 (assuming both are 50/50) going to Roth, leaving an extra $7,215 to invest (essentially - you'd save enough in taxes to max out pre-tax and take your tax savings to fund 1x Backdoor Roth's)
  • If you live in a high tax state, let's say with a 9%+ rate, that's another $1,755+ saved in taxes each year - that's available to invest in Backdoor Roths/Mega Backdoor Roths/taxable.
  • Combined, that's nearly $9k+ less taxes paid each year... (I'll pay every cent I owe - but I don't want to voluntarily pay more than I need...)
My view is I'd rather save on taxes today while in high tax brackets, keeping more of my money to save/invest, especially because we are planning to retire early and maximize our opportunities then to pay much lower taxes doing Roth conversions if/as needed if we have "too much" pre-tax. Even if we can only get down a tax bracket or two before RMD's kick in - that's still substantial savings long term...
I am not sure you caught it but I have a defined benefit plan I can put away >150k per year pre tax
I didn't see the $150k amount of pre-tax...

But I did see the defined benefit plan...

But if you are in the "top tax brackets" - that's still an extra 37% (plus any state/local tax) you are choosing to pay on the amount you put into Roth vs. pre-tax - which per my example is roughly $9k extra in taxes a year - enough to fully fund at least 1x Backdoor Roth with $0 impact to your net income.

However, if you've been contributing > $150k to pre-tax for many years, you are likely well over the $1M threshold I mentioned in my first thread in pre-tax. And assuming the higher earner plans to work another 10 years (so retire early 60's) - you may have < 10 years to do Roth conversions before social security and RMD's kick in - with an excessively large pre-tax balance.

Let's say you can live off taxable and make "large" Roth conversions - say up to the 24% bracket - during your years between retirement and social security/RMD. That would give you roughly $360k (including standard deduction - but you'd need to reduce by any other income - including taxable dividends/etc.) - let's just say $300k is left for simple math. Let's say you are 51 (early 50's), retire 61, and then have basically 10 years before RMD's start. So, you could covert potentially $3M ($300k x 10 years) at the 24% tax rate vs. paying the 37% tax rates now - on $3M that's roughly $390k saved...

The harder question is do you think tax rates will increase later, we'll see significant tax law changes, etc.

And perhaps even harder - how much will your pre-tax still be growing... If you have a $10M pre-tax at that time - it's possible that $300k wouldn't even make a dent in the original balance - so you'd still get hit with high RMD's and high taxes on them...

So, you might be a great candidate to ignore what I'd do, look at the Extended iORP results for yourself as I've recommended a few times - and my gut says it's going to recommend quit going 50/50 and instead move as much into Roth as you can (although I'd still recommend adding the Backdoor & Mega Backdoor if you can). While you'll pay more in taxes - at some point - and you may well be there - you have "too much" pre-tax and aggressive options to reduce it may be better over your lifetime.
Topic Author
Jimsad
Posts: 903
Joined: Mon Mar 20, 2017 5:54 pm

Re: worth doing Roth conversions in our situation?

Post by Jimsad »

SnowBog wrote: Sun Dec 05, 2021 10:20 pm
Jimsad wrote: Sun Dec 05, 2021 9:58 pm
SnowBog wrote: Sun Dec 05, 2021 9:52 pm
Jimsad wrote: Sun Dec 05, 2021 9:10 pm
SnowBog wrote: Sun Dec 05, 2021 8:59 pm As a "rule of thumb" if you have < $1M in pre-tax, I wouldn't worry too much... If you have more than that, at some point it might make sense to shift some to a Roth. But whether that is now - while working at the highest tax rates - or between retirement and RMD's beginning - is a different question.

If you want an "objective" opinion, plug your numbers into Extended iORP: https://www.i-orp.com/Plans/extended.html

It attempts to find you the "optimal" retirement path - including if you should be doing more/less into pre-tax vs. Roth.

For myself, it recommends we cut back on pre-tax and direct more to Roth. But I'm ignoring that recommendation. I'll take the tax savings - I'd rather have more money saved (due to lower taxes) than less money saved (although future taxes might be lower). Some of this though is also because we are:
  • Maxing out 2x Backdoor Roths
  • Maxing out 1x Mega Backdoor Roth
  • Planning to retire before RMD's and do Roth conversions
Which bring me to my recommendations for you... If you aren't already:
  • Start a Backdoor Roth for yourself - and spouse - if over 50 that could be an extra $14k/year ($7k each) going into Roth
  • Check employer plan(s) - looking specifically for mentions of "after-tax" contributions (or a 3rd option that is not pre-tax or Roth), if your plan(s) allow this - and ideally they allow either "in-plan" or rollover conversions to Roth - you've found yourself a "Mega Backdoor Roth" - which could allow up to $40,500 ($60k - your contributions and employer match) going to Roth.
Both of these would have otherwise been going to taxable investments (same initial tax treatment - but will be tax-free going forward in the Roth).

For ourselves, I'll take the tax-savings on my 401k contributions and grow my Roth by more than most people could...
Thanks for your reply
I feel that by contributing to the Roth 401k available to us we are doing the same as doing a mega back door or a back door Roth without all the extra work to increase the Roth space
I have a defined benefit plan which gives me plenty of pretax space for pretax contributions.
Do you agree ?
Personally - no... Especially if you are in high tax-brackets with excess income (meaning excess money going into taxable accounts). As a general rule - with rare exceptions like estate planning - Roth are always better than taxable.

If you are doing 50/50 - in 2021 (ignoring > 50 catchup amounts) - that would mean $9,750 into Roth & $9,750 into pre-tax (per person), or $19,500 for a couple.

If you max out 2x Backdoor and 1x Mega Backdoor, you'd be getting up to $50k into Roth per year (depending on how much employer match, as well as how many can access Mega Backdoor).

I'd take $50k of Roth over $20k of Roth any time I could afford to do so!

Part of this is also now knowing that both Backdoor and Mega Backdoor Roths are very easy to execute (once you learn the first time). In the case of a Mega Backdoor Roth - if your employer plan supports an "in-plan conversion" - and especially if it's an automatic one - that's about as easy as it gets - set it up once and forget about it. For the "regular" Backdoor variant - its recommended that you get rid of any existing IRA's - often by rolling them into your current employer 401k if allowed - that's usually the "hard" part. Otherwise, it's just making [non-deductible] contribution(s) to a traditional IRA - waiting 1- to 2-days, then converting to a Roth, and ensuring you fill out taxes correctly. (Plan an extra 30 - 60+ minutes the first year - but now probably takes me 5-10 minutes to do both and fill out taxes.)

But back to you should be putting your original contributions into Roth vs. pre-tax - or split 50/50 as you are doing now...
  • If you went 100% pre-tax, you'd avoid 37% tax on the $19,500 (assuming both are 50/50) going to Roth, leaving an extra $7,215 to invest (essentially - you'd save enough in taxes to max out pre-tax and take your tax savings to fund 1x Backdoor Roth's)
  • If you live in a high tax state, let's say with a 9%+ rate, that's another $1,755+ saved in taxes each year - that's available to invest in Backdoor Roths/Mega Backdoor Roths/taxable.
  • Combined, that's nearly $9k+ less taxes paid each year... (I'll pay every cent I owe - but I don't want to voluntarily pay more than I need...)
My view is I'd rather save on taxes today while in high tax brackets, keeping more of my money to save/invest, especially because we are planning to retire early and maximize our opportunities then to pay much lower taxes doing Roth conversions if/as needed if we have "too much" pre-tax. Even if we can only get down a tax bracket or two before RMD's kick in - that's still substantial savings long term...
I am not sure you caught it but I have a defined benefit plan I can put away >150k per year pre tax
I didn't see the $150k amount of pre-tax...

But I did see the defined benefit plan...

But if you are in the "top tax brackets" - that's still an extra 37% (plus any state/local tax) you are choosing to pay on the amount you put into Roth vs. pre-tax - which per my example is roughly $9k extra in taxes a year - enough to fully fund at least 1x Backdoor Roth with $0 impact to your net income.

However, if you've been contributing > $150k to pre-tax for many years, you are likely well over the $1M threshold I mentioned in my first thread in pre-tax. And assuming the higher earner plans to work another 10 years (so retire early 60's) - you may have < 10 years to do Roth conversions before social security and RMD's kick in - with an excessively large pre-tax balance.

Let's say you can live off taxable and make "large" Roth conversions - say up to the 24% bracket - during your years between retirement and social security/RMD. That would give you roughly $360k (including standard deduction - but you'd need to reduce by any other income - including taxable dividends/etc.) - let's just say $300k is left for simple math. Let's say you are 51 (early 50's), retire 61, and then have basically 10 years before RMD's start. So, you could covert potentially $3M ($300k x 10 years) at the 24% tax rate vs. paying the 37% tax rates now - on $3M that's roughly $390k saved...

The harder question is do you think tax rates will increase later, we'll see significant tax law changes, etc.

And perhaps even harder - how much will your pre-tax still be growing... If you have a $10M pre-tax at that time - it's possible that $300k wouldn't even make a dent in the original balance - so you'd still get hit with high RMD's and high taxes on them...

So, you might be a great candidate to ignore what I'd do, look at the Extended iORP results for yourself as I've recommended a few times - and my gut says it's going to recommend quit going 50/50 and instead move as much into Roth as you can (although I'd still recommend adding the Backdoor & Mega Backdoor if you can). While you'll pay more in taxes - at some point - and you may well be there - you have "too much" pre-tax and aggressive options to reduce it may be better over your lifetime.
Thank you for your detailed reply
Will chew on it and understand .
MrBeaver
Posts: 491
Joined: Tue Nov 14, 2017 3:45 pm

Re: worth doing Roth conversions in our situation?

Post by MrBeaver »

Jimsad wrote: Sun Dec 05, 2021 7:44 pm Thanks for your reply

A bit more info
Early 50s age
Mid 7 figures investment portfolio - 66% in tax deferred and 33% in taxable accounts - total about 8% of porrfolio in IRAs

Expect to leave at least some of the porrfolio to heirs. Too early to know how much
So you have 20 years until RMDs begin, 10 years of that with at least one person working.

Seems like you should maximize Roth contributions after only one of you is working, and then convert as much as you can once both retire until RMD age.
milktoast
Posts: 625
Joined: Wed Jul 10, 2019 8:17 pm

Re: worth doing Roth conversions in our situation?

Post by milktoast »

Jimsad wrote: Sun Dec 05, 2021 10:10 pm I also have available defined benefit plan for pretax space and hence feel I can use more of the Roth 401k option
I am also contributing to taxable accounts regularly
Well, it’s all tax arbitrage. Take your defined benefit, projected social security, and approximate RMD. Then figure out if that will put you in a tax bracket higher than your current bracket. If not, maximize pretax.

If you are truly in the top bracket (I’ve had this chat with OP that later revealed they were in 32%) the only reason to not maximize pretax is due to tax law changes.

And since we can’t talk about that on this forum... really the only allowed recommendations is to max pretax. 😈
SnowBog
Posts: 4680
Joined: Fri Dec 21, 2018 10:21 pm

Re: worth doing Roth conversions in our situation?

Post by SnowBog »

MrBeaver wrote: Sun Dec 05, 2021 10:30 pm
Jimsad wrote: Sun Dec 05, 2021 7:44 pm Thanks for your reply

A bit more info
Early 50s age
Mid 7 figures investment portfolio - 66% in tax deferred and 33% in taxable accounts - total about 8% of porrfolio in IRAs

Expect to leave at least some of the porrfolio to heirs. Too early to know how much
So you have 20 years until RMDs begin, 10 years of that with at least one person working.

Seems like you should maximize Roth contributions after only one of you is working, and then convert as much as you can once both retire until RMD age.
Depends on if the 2nd income changes their tax-brackets...

My spouse could retire - and our tax-bracket would remain the same...

But that was one of my thoughts as well, if when the first spouse retires, they have less "income" and less "taxes" as a result - it might buy them more time to do Roth conversions in lower brackets (if they actually decrease).
SnowBog
Posts: 4680
Joined: Fri Dec 21, 2018 10:21 pm

Re: worth doing Roth conversions in our situation?

Post by SnowBog »

If you haven't read it yet, highly recommend checking out "Traditional vs. Roth" in the wiki: https://www.bogleheads.org/wiki/Traditional_versus_Roth

If you are truly in the "top tax bracket" and have been putting in > $150k/year into pre-tax, I'd point you to this "Complex Case - Very High Income and Wealth" - which effectively makes that case to go against the typical recommendation of pre-tax for high-taxed income and instead maximize Roth https://www.bogleheads.org/wiki/Traditi ... and_wealth
tibbitts
Posts: 23589
Joined: Tue Feb 27, 2007 5:50 pm

Re: worth doing Roth conversions in our situation?

Post by tibbitts »

milktoast wrote: Sun Dec 05, 2021 10:05 pm Top bracket = no conversion (or contribution in leu of pretax) with very few exceptions.

Right now you are 33/66 taxable vs pretax. But that ratio should be shifting to taxable because in top bracket you should be saving more than you can contribute to tax advantaged accounts.

So max 401k pretax, catch-up pretax, backdoor roth, and mega backdoor Roth. Then toss the rest into taxable.

In top bracket you only start clearly winning by contributing / converting to Roth over pretax if your pretax account is on track to exceed $7M. If it’s on track to hit $3M you are clearly losing.

And don’t trust the growth projections tossed around here. In top bracket, your taxable and Roth should be all equity. Which means your pretax will be bond heavy to hit your AA, pulling down returns (and lowering RMD).
Even conservative me at 50/50 (which at one time was thought to be aggressive for age 60+, but now... not so much) would be pretty aggressive with my allocation given the amount of wealth the OP has. Sure, no "need" to take risk, but minimal effective downside to it either, unless the OP is spending vast amounts. So given the high percentage of wealth in deferred, that's where equities would need to be.

I'm guessing that if the OP is lucky (or not, depending on perspective), your stated $7M in deferred or even more might be realistic at retirement. So while you can never know for sure it might not be the worst thing to convert some at least before the high bracket the OP is in reverts to pre-2017 rates as is provided in current law. And certainly I wouldn't compound the problem by contributing to deferred accounts where there is a Roth option. Where there is no option, well that might still make sense to contribute to deferred there.

With more in Roth you also have the hedging against ending up with that $7M+ at single tax rates.
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Re: worth doing Roth conversions in our situation?

Post by SnowBog »

tibbitts wrote: Sun Dec 05, 2021 10:48 pm Even conservative me at 50/50 (which at one time was thought to be aggressive for age 60+, but now... not so much) would be pretty aggressive with my allocation given the amount of wealth the OP has. Sure, no "need" to take risk, but minimal effective downside to it either, unless the OP is spending vast amounts. So given the high percentage of wealth in deferred, that's where equities would need to be.
As a counter-argument - at least in my own personal case (although we likely have no-where near OP's pre-tax balance, and likely less than their overall savings) - we are mid-40's with a 60/40 AA - within 1-2 years of FI - and planning to work 5-7 years more. Like OP, we don't have the "need" for more risk, and it appears we are likely to be overfunded, so we have the "ability" to take more risk. But we choose not to - primarily because a) we recognize we'll have "enough" b) our priority at this point is that 5- to 7-year timeline, and a lower AA is more likely get us to plan without any large variances with a badly timed down year (in other words - we do not want to "have to work longer" if the markets go south just before/at targeted retirement date).

But to your other points - I agree! As referenced from the Wiki link on Roth for high income/wealth - if OP's numbers are as originally presented - they likely fall into that camp and should consider doing as much Roth as possible. (Even thought that is somewhat counterintuitive for high income - which is usually recommended to go pre-tax...)
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Re: worth doing Roth conversions in our situation?

Post by tibbitts »

SnowBog wrote: Sun Dec 05, 2021 11:00 pm
tibbitts wrote: Sun Dec 05, 2021 10:48 pm Even conservative me at 50/50 (which at one time was thought to be aggressive for age 60+, but now... not so much) would be pretty aggressive with my allocation given the amount of wealth the OP has. Sure, no "need" to take risk, but minimal effective downside to it either, unless the OP is spending vast amounts. So given the high percentage of wealth in deferred, that's where equities would need to be.
As a counter-argument - at least in my own personal case (although we likely have no-where near OP's pre-tax balance, and likely less than their overall savings) - we are mid-40's with a 60/40 AA - within 1-2 years of FI - and planning to work 5-7 years more. Like OP, we don't have the "need" for more risk, and it appears we are likely to be overfunded, so we have the "ability" to take more risk. But we choose not to - primarily because a) we recognize we'll have "enough" b) our priority at this point is that 5- to 7-year timeline, and a lower AA is more likely get us to plan without any large variances with a badly timed down year (in other words - we do not want to "have to work longer" if the markets go south just before/at targeted retirement date).

But to your other points - I agree! As referenced from the Wiki link on Roth for high income/wealth - if OP's numbers are as originally presented - they likely fall into that camp and should consider doing as much Roth as possible. (Even thought that is somewhat counterintuitive for high income - which is usually recommended to go pre-tax...)
I'd say the 10yrs or so difference in retirement age between you and the OP here is significant in that you're saying retirement at about 50 vs. 60 for the OP. The OP will have less time left to fund and as you say more money. So I don't think a down year at a fairly aggressive allocation would affect the OP's retirement plans in any way, obviously depending on spending level of course.
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retiredjg
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Re: worth doing Roth conversions in our situation?

Post by retiredjg »

Jimsad wrote: Sun Dec 05, 2021 6:16 pm We presently contribute to 401ks and also have defined benefit and profit sharing plan options. . We both have Roth option in 401k and contribute 50% of 401k contributions towards roth 401k (we max out 401ks)

We have IRAs- rollover and SEP IRA s from previous employers which account for 8% of our total portfolio . Rest of portfolio-92% is in 401Ks , defined benefit(cash balance) and taxable accounts

We are in the top income tax bracket and at least one of us will work another 10 years and will not touch the portfolio

In our situation, is it worthwhile to do Roth conversions of the IRAs and pay taxes now?

Thank you
I think you thought you asked a simple question. :D It's not. And not everybody has the same opinion on the matter either.

A problem that has occurred here is that more information keeps dribbling in, changing the fact pattern. For example, we now know this is not just about a couple of 401ks, but there is also a separate large tax-deferred contribution to a different account. Some people knowing that you were deferring taxes on $150k in another account might have given different answers if they had known that.

The defined benefit plan usually means a pension and a pension is a big part of this decision. A pension usually argues for using more Roth because you will not need much in a tax-deferred account in retirement and because the pension reduces the amount you can convert to Roth at low tax rates while in retirement.

As things are shaping up, I'd say you are always going to be paying taxes at a high rate not matter what choice you make now. I would not suggest Roth conversions now but putting money into Roth 401k makes sense to me, even at 37%.

I don't think there is a particularly good solution to your tax problem. Retiring now would help but I think the person still working is doing it not for money but for the love of the work.

If you decide later on to give this question another go of it, please post all your financial information in one place from the start and use the format suggested in "Asking Portfolio Questions" (although I don't think it is important to include the actual investments for this question). Details matter for this question. Doing that might reduce some of the conflicting comments you have gotten in this thread.
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Re: worth doing Roth conversions in our situation?

Post by chemocean »

Jimsad wrote: Sun Dec 05, 2021 7:44 pm Expect to leave at least some of the porrfolio to heirs. Too early to know how much
What is the expected tax bracket of the heirs when they receive it?

The decision I have made to convert is looking at your tax bracket during conversion compared to:
1) After retirement and before SS (sweet spot),
2) After both SS and RMDs take affect,
3) Filing as single after the death of the first spouse,
4) During the 10-year period of the SECURE act in which the heirs must withdrawal the traditional IRA.

With inherited Roth IRA, they can let it accumulate for 10 years and pay no taxes.

I also balance the goal of reducing the RMDs to stay in tax bracket in which I converted or lower with amounts to leave in the traditional IRA:
1) total amount of life-time QCDs that allows tax-free withdrawals from a traditional IRA, thus freeing up annual cash flow,
2) end-of-life medical and long-term care expenses that are exceeds the AGI threshold for medical expenses to the point that total deductions exceed the standard deduction.

Previously, I guesstimated end-of-life medical and long-term care expenses. I recently read Wade Pfau book and his chapter on Contingencies led me to actually make a calculation of contingencies and how much would be tax-deductible. However, there are many variables that cannot be predicted

With the medical (maximum out-of-pocket) and long-term care insurance (daily rate, length, inflation protection) we have, I concluded that only in years in which the elimination period for Long-term care insurance or skilled nursing beyond the coverage period are applied would tax deductible medical expenses exceeds the AGI threshold for medical expenses to the point that total deductions exceed the standard deduction.
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Jimsad
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

Thank out all for your very helpful and thoughtful responses
Will post shortly with all info at one place and some additional information
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Jimsad
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

I am putting some more information together which might help to answer our question better and am reposting.


Early 50s age

Mid 7 figures investment portfolio - 66% in tax deferred and 33% in taxable accounts
8% of total portfolio in IRAs

Expect to leave at least some of the portfolio to heirs. Too early to know how much


We presently contribute to 401ks and also have defined benefit(cash balance) and profit sharing plan options. . We both have Roth option in 401k and contribute 50% of 401k contributions towards roth 401k (we max out 401ks)

We put in about 150k per year into a defined benefit (cash balance plan) which are Pretax contributions and also contribute to taxable account

We have IRAs- rollover and SEP IRAs from previous employers which account for 8% of our total portfolio . Rest of portfolio-92% is in 401Ks , defined benefit(cash balance plan) and taxable accounts

We are in the top income tax bracket and at least one of us (likely my spouse-lower earner )will work another 10 years . I may cut down and work partime another 5-10 years during which our income may still put us close to, if not in top tax bracket and we will not touch the portfolio for a while

In our situation, is it worthwhile to do Roth conversions of the IRAs and pay taxes now or leave it alone as it is small and may not make a big difference. Also I have a demanding career and am short of time. I do not really want to go through hassle of doing backdoor Roths unless it makes a huge difference for us (Some of the IRAs have mixed dedcutible and non deductible contributions and will add to complexity of doing back door Roths).
We would rather contribute 100% into Roth 401k to increase Roth space if needed. Mega Backdoor Roth option not available to us

We would appreciate your input .

Thank you
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Re: worth doing Roth conversions in our situation?

Post by inbox788 »

Can you roll the IRA into your 401k plans rather than convert? Seems to me Roth is very valuable to you in your situation, so explore every possible option.
Jimsad wrote: Mon Dec 06, 2021 5:40 pm 8% of total portfolio in IRAs
Is this 8% getting in the way of doing backdoor Roth? I have to review the thread to see all the issues, but I was just looking into this backdoor Roth, iORP and other calculators, and RMD IRA tax bomb that all seem to tie together. It's all so complicated, and improving one aspect seems to hurt another.

https://sapientinv.com/investment-artic ... g-tax-bomb

There is just so much unknown or variability that's hard to optimize without knowing the future. If you retire early, you might have decades before RMD to optimize, but if you decide to retire 5 or 10 years later, the calculation might be vastly different. How many gaps years and what kind of space do you have to optimize in that time? Your sequence of return risk and bond tent also might be factors. And how aggressive you're willing to go plays a part as well, not to mention actual market results. As equities grow and you exceed your targets in an overly aggressive portfolio, do you reduce or increase risk if either may make sense and is an option? Knowing some or most of those answers are required to answer the questions.

Anyway, the earlier you know you will be forced into a higher tax bracket, possibly by too much tax deferred (how much is too much?) and RMDs can't be brought down, the more valuable Roth is and helps you pay the upfront price to convert. Your situation is an outlier that needs more information and calculations to decide. And since it's December, if you were to convert, does doing some of it now and some in January help or harm anything?
Jimsad wrote: Sun Dec 05, 2021 8:57 pmSo not make use of Roth 401 k at all now?
I'm wondering if you're a candidate for all Roth 401k, does it expand your tax advantaged space? https://www.bogleheads.org/wiki/401(k)#Advantages

You might familiarize yourself with QCD, QLAC, or other strategies like LI as possible options to consider, and even consult an estate planner that specializes in these situations, if you can find one that isn't going to further complicate matters.
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Re: worth doing Roth conversions in our situation?

Post by inbox788 »

tibbitts wrote: Sun Dec 05, 2021 8:27 pm It really depends on your assumptions for returns and taxes going forward. It doesn't make any sense to contribute to a deductible account while also doing Roth conversions into the highest bracket. If you're at a point where you can direct all your future contributions to Roth and still end up with RMDs driving you into what you believe will be the highest bracket when you retire (due to appreciation/growth without additional contributions), then it can make sense to convert into the highest bracket now, to give you more flexibility, hedge against filing status changes, etc, but probably only to the point where you break that cycle of growth.
How does one determine that point? The example in the link above is 3M at age 60 growing to 4.23M by 72 RMD age begins to go into higher tax brackets, but doesn't stay. [Ah, the example is for single, so double for married!]

OP, what's the AA in tax deferred? Going all bonds or maximizing bonds in tax deferred should still grow, but at an expected rate lower than equities. Keep 100% equities in Roth and taxable.

More complicating factors are taxation of social security and state specific issues or changes. OP are you in a high or low tax state and any chance of moving? And then there's also the step up basis, with no certainty it will be there when you need it.
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Re: worth doing Roth conversions in our situation?

Post by Jimsad »

inbox788 wrote: Mon Dec 06, 2021 7:24 pm
tibbitts wrote: Sun Dec 05, 2021 8:27 pm It really depends on your assumptions for returns and taxes going forward. It doesn't make any sense to contribute to a deductible account while also doing Roth conversions into the highest bracket. If you're at a point where you can direct all your future contributions to Roth and still end up with RMDs driving you into what you believe will be the highest bracket when you retire (due to appreciation/growth without additional contributions), then it can make sense to convert into the highest bracket now, to give you more flexibility, hedge against filing status changes, etc, but probably only to the point where you break that cycle of growth.
How does one determine that point? The example in the link above is 3M at age 60 growing to 4.23M by 72 RMD age begins to go into higher tax brackets, but doesn't stay.

OP, what's the AA in tax deferred? Going all bonds or maximizing bonds in tax deferred should still grow, but at an expected rate lower than equities. Keep 100% equities in Roth and taxable.

More complicating factors are taxation of social security and state specific issues or changes. OP are you in a high or low tax state and any chance of moving? And then there's also the step up basis, with no certainty it will be there when you need it.
Thank you for your reply
In tax deferred about 50:50 stocks and bonds and in taxable about 80:20 stocks and bonds
Live in state with no state tax and no plans to move
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Re: worth doing Roth conversions in our situation?

Post by SnowBog »

inbox788 wrote: Mon Dec 06, 2021 7:24 pm How does one determine that point?
One could look at the previously linked Extended iORP tool.

It attempts to "optimize" your plan, including how much to contribute into pre-tax, Roth, taxable; if enabled how much and when to convert to Roth, etc.

It's a bit clunky to use and understand, but it can help recommend what it thinks is optimal.

One side note, unless they've changed it, I generally recommend using the same AA for all account types. Otherwise if you list 100/0 for Roth, it may skew the results to put more into Roth, as it seems to ignore your overall AA.
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Re: worth doing Roth conversions in our situation?

Post by inbox788 »

SnowBog wrote: Mon Dec 06, 2021 7:38 pmOne could look at the previously linked Extended iORP tool.
...
One side note, unless they've changed it, I generally recommend using the same AA for all account types. Otherwise if you list 100/0 for Roth, it may skew the results to put more into Roth, as it seems to ignore your overall AA.
Thanks. I'm still trying to figure out what it does and what to input. I understand the simplicity of keeping one AA across account times and the hedge it sometimes provides, but intuitively, I'm an optimizer, and think the better answer is to skew the AA with equities 100% Roth and 100% bonds in tax deferred, and assuming there's enough room for both left, using the taxable to reach the desired AA.

I made a mistake once putting bonds into a new mini mega backdoor Roth, and went through many steps and hoops to figure out how to turn them into equities because of the difference in expected growth and tax benefit 20+ years from now. Given the 2 choices, Roth vs deferred, and equities outpace bonds, my simple minded thinking is more tax-free earnings in Roth and less tax liability in deferred.
Jimsad wrote: Mon Dec 06, 2021 7:34 pmIn tax deferred about 50:50 stocks and bonds and in taxable about 80:20 stocks and bonds
Live in state with no state tax and no plans to move
If you swap the 20 bonds in taxable and move that into tax deferred, you can expect similar growth (up to you whether and how you tax adjust), but more in taxable and less in tax deferred, with net benefits in the 2 account types. As your need for more bonds increases, you'll probably rail 100% bonds in tax deferred and have to figure out where next to add more bonds, but that's another topic for a later time (or review past threads).

More alphabet soup: QHFD, IRMAA
viewtopic.php?t=345995
https://www.thorwealthmanagement.com/th ... w-and-why/

Seems like one time and small amount, but there may be other hidden treats like these.
Jimsad wrote: Sun Dec 05, 2021 9:10 pmI feel that by contributing to the Roth 401k available to us we are doing the same as doing a mega back door or a back door Roth without all the extra work to increase the Roth space
I have a defined benefit plan which gives me plenty of pretax space for pretax contributions.
Do you agree ?
Are you saying you aren't maxing out your tax advantaged space? Are you running out of liquidity? (time to ask if selling taxable to fund tax deferred is worth it?)
At 32% marginal rate, that $1 in your pocket invested in IRA gets your $0.32 more to spend or invest after-tax. More in higher tax bracket or state tax.
Putting that $1 in Roth and growing it to $2 or $4 gives you $1-3 more tax-free dollars to spend later. Will that $0.32 grow enough to pay the taxes on the $1-$3 in the IRA when you withdraw it during retirement? Either will easily beat taxable.
tibbitts wrote: Sun Dec 05, 2021 10:48 pmI'm guessing that if the OP is lucky (or not, depending on perspective), your stated $7M in deferred or even more might be realistic at retirement. So while you can never know for sure it might not be the worst thing to convert some at least before the high bracket the OP is in reverts to pre-2017 rates as is provided in current law. And certainly I wouldn't compound the problem by contributing to deferred accounts where there is a Roth option. Where there is no option, well that might still make sense to contribute to deferred there.
Since OP is contributing 50/50 deferred/Roth and considering converting IRA to Roth (say 8% of that). Is there any net difference or other consequence in doing the conversion and then adding 58/42 deferred/Roth? Seem to me functionally the same with the extra 8 of 58 deduction covering the conversion tax liability. It's like taking out of IRA and putting it in 401k, and helps eliminate the issues with having an IRA and backdoor strategies. Unnecessary if there is unused tax advantaged space (Roth) or if the strategy ever goes away.
Last edited by inbox788 on Mon Dec 06, 2021 10:28 pm, edited 1 time in total.
SnowBog
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Re: worth doing Roth conversions in our situation?

Post by SnowBog »

inbox788 wrote: Mon Dec 06, 2021 8:02 pm
SnowBog wrote: Mon Dec 06, 2021 7:38 pmOne could look at the previously linked Extended iORP tool.
...
One side note, unless they've changed it, I generally recommend using the same AA for all account types. Otherwise if you list 100/0 for Roth, it may skew the results to put more into Roth, as it seems to ignore your overall AA.
Thanks. I'm still trying to figure out what it does and what to input. I understand the simplicity of keeping one AA across account times and the hedge it sometimes provides, but intuitively, I'm an optimizer, and think the better answer is to skew the AA with equities 100% Roth and 100% bonds in tax deferred, and assuming there's enough room for both left, using the taxable to reach the desired AA.
For clarity, I'm not recommending keeping your AA the same in all accounts. I'm 100% with your that it makes sense to be 100/0 in Roth, hold bonds in tax-deferred, etc.

Unfortunately, iORP does not (or did not last I looked) honor or maintain your overall AA. Let's say your Roth is 100/0, your taxable is 100/0, and your tax-deferred is 20/80, for a combined 60/40 portfolio. iORP will end up skewing the results towards Roth and taxable, and override your AA.

So - only for iORP - and only to avoid skewing its recommendations (and maintain your overall AA) - do I recommend using your overall AA on each account type. (In my example above, tax-deferred, taxable, and Roth all 60/40.) The result can be used to figure out "at what point" and how much to shift more to Roth.

Granted, this skews the results in a different way, as in the example above your Roth and Taxable may grow faster than modeled, and your tax-deferred slower. But since the end result is unknowable given the variations in the market, and the output remains aligned to my AA, I think that's the "more accurate" comparison. YMMV
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Re: worth doing Roth conversions in our situation?

Post by tibbitts »

inbox788 wrote: Mon Dec 06, 2021 7:24 pm
tibbitts wrote: Sun Dec 05, 2021 8:27 pm It really depends on your assumptions for returns and taxes going forward. It doesn't make any sense to contribute to a deductible account while also doing Roth conversions into the highest bracket. If you're at a point where you can direct all your future contributions to Roth and still end up with RMDs driving you into what you believe will be the highest bracket when you retire (due to appreciation/growth without additional contributions), then it can make sense to convert into the highest bracket now, to give you more flexibility, hedge against filing status changes, etc, but probably only to the point where you break that cycle of growth.
How does one determine that point? The example in the link above is 3M at age 60 growing to 4.23M by 72 RMD age begins to go into higher tax brackets, but doesn't stay. [Ah, the example is for single, so double for married!]

OP, what's the AA in tax deferred? Going all bonds or maximizing bonds in tax deferred should still grow, but at an expected rate lower than equities. Keep 100% equities in Roth and taxable.

More complicating factors are taxation of social security and state specific issues or changes. OP are you in a high or low tax state and any chance of moving? And then there's also the step up basis, with no certainty it will be there when you need it.
For my own deferred account I could never determine that point in the sense that it's always dependent on assumptions for inflation, investment growth, future taxes, asset allocation, etc. So I took some values toward the middle of the ranges and went with those . I worked backwards from roughly the amount I felt comfortable being left in deferred when RMDs started.
inbox788
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Re: worth doing Roth conversions in our situation?

Post by inbox788 »

SnowBog wrote: Mon Dec 06, 2021 10:28 pmFor clarity, I'm not recommending keeping your AA the same in all accounts. I'm 100% with your that it makes sense to be 100/0 in Roth, hold bonds in tax-deferred, etc.
Thanks for the clarification and nuances of iORP. I'm not sure I get all the details yet and just beginning to learn the information being presented and how to use it.
tibbitts wrote: Mon Dec 06, 2021 11:11 pmFor my own deferred account I could never determine that point in the sense that it's always dependent on assumptions for inflation, investment growth, future taxes, asset allocation, etc. So I took some values toward the middle of the ranges and went with those . I worked backwards from roughly the amount I felt comfortable being left in deferred when RMDs started.
This graph example helped me understand the higher limit. And the importance and limits of using the Gap Years to lower the overall path.
Image

The orange bars are RMD starting age 72 with growth from 3M to 4.23M and 2.9% return. And adding Taxable SS blue bars get you into the 32/35% tax ranges. If you're married, then it's higher, so starting RMD at 4M isn't top tax rates, but you have to consider when one of the spouses passes and is subject to single rates. In the 80's RMD is over 200k, so if you started with half the amount, you may still be facing higher tax rates if RMD + SS + other income + high returns driving you into the higher tax brackets.

I'm estimating the max you can withdraw at 24% tax bracket in a gap year is around 150k (more for married). And in the earlier RMD years, there's some space before hitting the next tax bracket that would reduce the peak rate a bit.

My current conclusion from all this is discussion is if you have less than $1M in tax-deferred at age 60 or can use gap years to take down the tax-deferred below 2-3M by RMD start, you probably don't have anything to worry about. Above $5M, you might not be able to avoid some higher rates later, but still should maximize that 24% tax bracket. It's a wide range, but in-between is where good planning makes the biggest difference on the things you control.
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Re: worth doing Roth conversions in our situation?

Post by tibbitts »

inbox788 wrote: Tue Dec 07, 2021 8:26 am My current conclusion from all this is discussion is if you have less than $1M in tax-deferred at age 60 or can use gap years to take down the tax-deferred below 2-3M by RMD start, you probably don't have anything to worry about. Above $5M, you might not be able to avoid some higher rates later, but still should maximize that 24% tax bracket. It's a wide range, but in-between is where good planning makes the biggest difference on the things you control.
I'm not sure if you're saying single or MFJ here, but for me I used the Schwab calculator to produce output similar to what you showed (https://www.schwab.com/ira/understand-i ... lators/rmd) and decided (a few years later than I wished - not until age 61) that the upper $1M range (so, below $2M) was a reasonable maximum for starting RMDs (so obviously higher for MFJ.) Of course the calculator says "IRA" but really it's just for deferred accounts that have similar rules to IRAs, and I think that was one of my problems in that I wasn't always considering all my deferred accounts together. Of course it depends on what you assume for future tax rates/brackets, and how much you convert at any given time depends on how much growth you're projecting, and to some extent when you project that growth might happen. Growth issues become much less as you progress with conversions and move equities out of deferred, leaving mostly more predictable fixed income... so a higher balance becomes less potentially "harmful."
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