Convert IRA to Roth While Working to Save on Taxes

[TravelforFun]

We're married-joint-filers, my wife is retired but I'm still working, and my lone salary puts us in the 28% tax bracket. The conventional thinking is that one should wait until after retirement to withdraw from IRA because by then one should be in a lower tax bracket. Not true for everyone!

I plan to work until 70 and when I retire, RMD will kick in almost immediately. The first few years of RMD withdrawals will put us squarely in the 40% bracket. This is not good!

Using a simple spreadsheet, I was able to determine the IRA amount I should withdraw every year beginning now even when I'm still working. This really goes against the rule of thumb but I can tell you the tax savings are significant.

Any BH in the same situation?

[123]

I haven't done that calculation but I suspect we may be a victim as well. Maybe your calculation is telling you that the best time to retire for you is now.

[cheese_breath]

Your strategy is sound. I don't know if anybody is in the exact same situation, but many of us are in similar situations, converting to Roths early to avoid RMDs bumping us out of the 15% bracket. I'm in the RMD stage of my life now, and because I did conversions over many years I've moved enough out of my tIRAs into Roths that I can stay in the 15% bracket.

[TravelforFun]

Your strategy is sound. I don't know if anybody is in the exact same situation, but many of us are in similar situations, converting to Roths early to avoid RMDs bumping us out of the 15% bracket. I'm in the RMD stage of my life now, and because I did conversions over many years I've moved enough out of my tIRAs into Roths that I can stay in the 15% bracket.

Very good planning, Cheese!

[Northern Flicker]

It actually can be even worse than what the OP describes.  RMDs also can cause a substantial increase of percentage of social security benefits that are taxable.  Here is a description of the issue:

http://www.oregonlive.com/finance/index ... _rang.html

-jalbert

[mhalley]

I don't know whether to say congratulations for having a job you love enough to work till 70 or condolences you don't have enough money to retire. Sounds like a good plan, but you could double check some figures using i-orp.
http://www.i-orp.com/
Mike

[basspond]

Remember to calculate the time vale of money. You are either going to pay the piper now or later. We are going to choose later and hope that the money we are investing by not paying taxes now will offset the taxes later. But if we could see the crystal ball our decision would be a no brainer and if we would have had the Roth available our entire careers our savings would be more diversified between 401k and Roth.

[GerryL]

It actually can be even worse than what the OP describes.  RMDs also can cause a substantial increase of percentage of social security benefits that are taxable.  Here is a description of the issue:

http://www.oregonlive.com/finance/index ... _rang.html

-jalbert

And a too-big RMD can also cause your Medicare premiums (B and D) to increase significantly as a result of IRMAA.

[hulburt1]

I'm going to be big time. I'm 62 how much can you convert to Roth per year? I'm at 15% now but at 70 we could be at 28%. We saved all our life's and lived on very little. We have 2m and no expenses. At 70 Our income will be around 144,000 a year. It's now $60,000 and living pretty good.

[rkhusky]

I plan to work until 70 and when I retire, RMD will kick in almost immediately. The first few years of RMD withdrawals will put us squarely in the 40% bracket. This is not good!

By 40% bracket, do you mean 39.6% federal? Or 40% due to increased SS taxation? Or some other phaseout?

[Bill M]

Your strategy is sound. There is no substitute for doing the calculations in advance (even if based on assumption that rates won't change).

I encountered a situation a few years ago (due to timing of bonus payments) where I was just over the AMT exemption phaseout point, so had a wide plateau with a fixed 28% tax rate. Much better than the 33% expected in the future. So we did a significant Roth conversion that year.

[TravelforFun]

I don't know whether to say congratulations for having a job you love enough to work till 70 or condolences you don't have enough money to retire.

I accept your congratulations. I love what I do.

By 40% bracket, do you mean 39.6% federal? Or 40% due to increased SS taxation? Or some other phaseout?

39.6%. I just rounded it up.

I'm going to be big time. I'm 62 how much can you convert to Roth per year? I'm at 15% now but at 70 we could be at 28%. We saved all our life's and lived on very little. We have 2m and no expenses. At 70 Our income will be around 144,000 a year. It's now $60,000 and living pretty good.

Start calculating now or talking to a CPA.

[randomguy]

I'm going to be big time. I'm 62 how much can you convert to Roth per year? I'm at 15% now but at 70 we could be at 28%. We saved all our life's and lived on very little. We have 2m and no expenses. At 70 Our income will be around 144,000 a year. It's now $60,000 and living pretty good.

You can convert 2 million+/yr:) In your case maxing out the 15-25% brackets is probably the sane way of going. You are paying that money in taxes it is just a matter of when.

Personally I am a bit amazed that anyone could save that much in a 401(k) to generate RMDS of 200k+ per year (assuming somethign like 100k of pensions and 70k of SS, and 100k of qdivs). Getting 5+ million in s 401(k) in todays dollars given the contribution limits is a bit of an accomplishment even with 2 people contributing.

I don't know how close to 70 the OP is but I would factor that in. A 55 year old planning to work til 70 is a lot different than a 65 year old planning to work til 70.

[David Jay]

I'm with Cheese in a bit lower bracket - I looked at my RMDs and saw that I would bump out of the 15% bracket. So starting this year I'm filling my 15% bracket with an appropriately sized tIRA to ROTH conversion. If I do this through age 69 all my SS+RMD after age 70 should be less than 15%.

[rkhusky]

By 40% bracket, do you mean 39.6% federal? Or 40% due to increased SS taxation? Or some other phaseout?

39.6%. I just rounded it up.

In order to have RMD's that put you in the highest bracket, you need a portfolio in excess of $12M, unless you have some other source of income.

Presumably you are checking on whether the Roth conversions push you into a higher bracket. And that you are aware that all your RMD is not taxed at the highest rate, unless you are already in that bracket because of other sources of income.

Out of curiosity, what is the average tax rate that you will incur on your RMD's in the first year? And what is the size of your projected Roth conversion for this year?

[randomguy]

By 40% bracket, do you mean 39.6% federal? Or 40% due to increased SS taxation? Or some other phaseout?

39.6%. I just rounded it up.

In order to have RMD's that put you in the highest bracket, you need a portfolio in excess of $12M, unless you have some other source of income.

Presumably you are checking on whether the Roth conversions push you into a higher bracket. And that you are aware that all your RMD is not taxed at the highest rate, unless you are already in that bracket because of other sources of income.

Out of curiosity, what is the average tax rate that you will incur on your RMD's in the first year? And what is the size of your projected Roth conversion for this year?

I think it is pretty safe to say that their other income (probably at least 60k of SS between him and his wife plus who knows how much in taxable and pensions) involved but yeah you are looking at a 5 million + 401(k) for this to remotely be an issue for most people. Unless you are assuming a long time span (10+ years) or high rate of returns (15% over 10 years), it is hard to imagine how doing ROTH conversion help. If you have a 3 million dollar account today, you will not be able to take money out fast enough while staying in the <33% brackets to make much of a difference.