Complete Roth Conversion before 72 RMD

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WhiteMaxima
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Complete Roth Conversion before 72 RMD

Post by WhiteMaxima »

Me 55 before tax 401k 1.0mil, pension after 65 $36,000
DW 50 before tax 401k 1.0mil, pension after 65 $6,000

We plan to retire 5 year from now. We plan to do Roth conversion before 72 RMD. So we have 12-17 years to convert 401k to Roth 401k or Roth before RMD starts. We will try to keep our tax below 12% (15% after 2025) to aviod 22% (25% after 2025). so we would average 2.0mil/15 year =140k/year which will exceed the 12% (15% after 2025).

If we retire 5 years from now, we will start Roth conversion + withdraw from our 401k < $80250 which is till > 140k

after 72, we will have SSx2 (about $3000x2) +$36000+6000 which should cover our yearly budget.

We would like to hear from BH opinion on how to complete Roth convention. Thanks.
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WhiteMaxima
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Re: Complete Roth Conversion before 72 RMD

Post by WhiteMaxima »

I assume standard deduction is $24000. So for a couple can roth conversion $80,250+$24000=$104250/year to keep tax bracket below 12% (15% after 2025). Is this right?
Carl53
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Re: Complete Roth Conversion before 72 RMD

Post by Carl53 »

The tax brackets are inflation adjusted each year. The 80250 quoted as the top of the 12% bracket was the number for 2020, in 2021 it is 81050. Adjustments will also be made to the standard deduction.

I see no way for you to convert $2 million pretax to Roths while staying in the 12 (15) % tax brackets in the next 15 or so years. There are several models out there, including BigFoots Retiree Portfolio Model on this website, that can help you decide what is best for you. I'm more than a decade along the journey than you and we had less in pretax than you currently did. I chose to just convert or use whatever space I had left in the 15 or 12% brackets for conversions. Over time the pretax accounts have still grown a little, and the Roths are approaching the pretax in magnitude. Doing things like bunching deductions in alternate years (mostly before the standard deduction was increased), have allowed for some additional conversions beyond what was otherwise possible. Leaving a fair amount in the pretax for the upcoming SS/RMD era for us was a conscious decision based on running a number of cases on my own model (somewhat like early versions of BF RPM. I look for it to fund, if necessary, LTC with it's potential commensurate health care deductions and utilize it to also fund charitable deductions via QCDs. Looks like we will eventually get into the 22 (25) percent brackets, but barely.

Think about where you will retire, family commitments and desires, your health and know that all your planning could be for naught. Be satisfied that you are doing your best with the planning but that your plans will most likely change from what you now see as life before you.
RyeBourbon
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Re: Complete Roth Conversion before 72 RMD

Post by RyeBourbon »

There is no need to convert all your tax-deferred accounts to Roth. You can also spend it down while deferring SS as long as possible. Even when RMD's hit, you should be able to take distributions in a low tax bracket.
Retired June 2023. AA = 55/35/10
MrJedi
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Re: Complete Roth Conversion before 72 RMD

Post by MrJedi »

I think it is reasonable for you to aim for the top of 22% bracket while it is still here. The reason is that your pensions alone will already put you on the edge of the SS taxation heat map where each additional $1.00 of income makes an additional $0.85 of your SS taxable. This effectively makes the 12% tax go up to a 22.2% marginal tax. (And 15% tax will become 27.75% marginal tax).

May want to crunch numbers here but my gut would say go to the top of 22% in the next few years and then re-evaluate when tax brackets go back up to normal. As mentioned I don't think you can stay in 12/15% pre SS while also staying out of this SS taxation hot spot when you do get to SS.

Also if you just try to push through the hot spot, you will not have much room between the last dollar of SS becoming 85% taxable vs the next tax bracket anyway.
Last edited by MrJedi on Sun Sep 26, 2021 8:18 am, edited 3 times in total.
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retiredjg
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Re: Complete Roth Conversion before 72 RMD

Post by retiredjg »

I think you will have to choose whether you stay in the 12% (15%) bracket or convert it all. Unless the market takes a big and long dip...in which case you may accomplish both of your wishes.

I see no need at all to convert it all. I think it is a good idea to convert a good part (something more than half) in order to keep the tax-deferred account from being a problem later on.
randomguy
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Re: Complete Roth Conversion before 72 RMD

Post by randomguy »

MrJedi wrote: Sun Sep 26, 2021 7:55 am I think it is reasonable for you to aim for the top of 22% bracket while it is still here. The reason is that your pensions alone will already put you on the edge of the SS taxation heat map where each additional $1.00 of income makes an additional $0.85 of your SS taxable. This effectively makes the 12% tax go up to a 22.2% marginal tax. (And 15% tax will become 27.75% marginal tax).

May want to crunch numbers here but my gut would say go to the top of 22% in the next few years and then re-evaluate when tax brackets go back up to normal. As mentioned I don't think you can stay in 12/15% pre SS while also staying out of this SS taxation hot spot when you do get to SS.
It isnt clear to me what their SS is (3k/year? 3k/month?) but that would be my first order guess. Heck maxing out the 24% might even make sense to reduce IRMAA and SS taxation.

and hopefully 1 million today is 1.5 million in 5 years. We could be looking at numbers where you are paying 22% on a good chunk of the money no matter what. That is sort of unavoidable when talking mid 6 figure incomes.

Alterantively you can also convert to the top of the 12% and deal with paying 22% later. It is soet of a wash if you spend the money bit there is tax drag if you invest it in taxable..
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jeffyscott
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Re: Complete Roth Conversion before 72 RMD

Post by jeffyscott »

We are somewhat similar and retired about 5/10 years ago. We are converting each year only to the top of the 12% bracket (actually, to the 0% cap gains bracket, but they are about the same). If there is little chance that you will exceed the 22/25% bracket, I'd not convert beyond 12%.

For us, I looked at it this way:
We will always be in at least the 12% tax bracket, due to pensions. A sole survivor will move into the 22% bracket with RMDs and SS. There is very little chance that we would ever move beyond 22%, especially with doing the Roth conversions and, even if we did, the next bracket is only 2 percentage points higher. I figure our heirs will likely be at least 12%, especially since they now have to withdraw all inherited IRA money in 10 years. So all that is how I settled on only filling the 12% bracket each year as the strategy that makes most sense for us and our plans.

We don't have much of a taxable account, so I don't have to give any real thought to the stepped up cost basis for taxable assets passed on vs. passing on more traditional IRA assets. We also are not leaving or giving anything to charities, so I don't have to think about any tax strategies that might come from that.

Taxation of SS is not much of an issue for us, as pensions put us close to or beyond the point where it is 85% taxable. Lower earning spouse will start SS at 62, higher earning may or may not delay to 70 (may start earlier to avoid going in to 22% bracket while both alive and IRMAA for sole survivor).
Topic Author
WhiteMaxima
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Re: Complete Roth Conversion before 72 RMD

Post by WhiteMaxima »

So far we are still working. we are in 24% tax bracket after maximized all our before tax 401k contribution. My company offers both aft-tax 401k so I contribute $58000-$19000-Compnay match and bonus contribution. I do mega Roth in-service conversion every year, We plan to retire earlier using one of the EU golden visa program and spend around 10 years in one of the low cost EU nation and purchase private health insurance. We would either use the 401k withdraw plus Roth covversion to 12% (15% from 2025 and on). Back to US to live at our 70s to claim our SS.
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retiredjg
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Re: Complete Roth Conversion before 72 RMD

Post by retiredjg »

I would wait until you finish working to convert to Roth.
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WoodSpinner
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Re: Complete Roth Conversion before 72 RMD

Post by WoodSpinner »

OP,

As others have indicated above, it is rarely a good idea to convert all of your 401K/IRA to completely avoid RMDs.

Consider the wisdom of keeping some for Charitable Donations (via QCDs) and possible Medical Care.

In addition, it seems that you will need some of this money for your expenses and which will further reduce the balances.

There is some good basic rule of thumb advice in the McQ Roth Conversion thread, viewtopic.php?t=351540&start=50

WoodSpinner
WoodSpinner
HomeStretch
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Re: Complete Roth Conversion before 72 RMD

Post by HomeStretch »

In addition to doing Roth conversions to reduce your deferred tax account balances, also hold your fixed income allocation in those accounts to keep the growth down (if you aren’t already doing so).
BigJohn
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Re: Complete Roth Conversion before 72 RMD

Post by BigJohn »

WoodSpinner wrote: Sun Sep 26, 2021 11:11 am OP,

As others have indicated above, it is rarely a good idea to convert all of your 401K/IRA to completely avoid RMDs.

Consider the wisdom of keeping some for Charitable Donations (via QCDs) and possible Medical Care.

In addition, it seems that you will need some of this money for your expenses and which will further reduce the balances.

There is some good basic rule of thumb advice in the McQ Roth Conversion thread, viewtopic.php?t=351540&start=50

WoodSpinner
+1

I started off retirement at 100% in tIRA. My conversion target is based on trying to keep my taxable income about the same now as after SS and RMDs kick in. This should get me to about a 50/50 split by the time I turn 72 which feels like a reasonable landing zone.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
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