Convert IRA to Roth While Working to Save on Taxes

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TravelforFun
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Convert IRA to Roth While Working to Save on Taxes

Post by 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?
Last edited by TravelforFun on Thu Jul 16, 2015 10:46 pm, edited 1 time in total.
123
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by 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.
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cheese_breath
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by 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.
The surest way to know the future is when it becomes the past.
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TravelforFun
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by TravelforFun »

cheese_breath wrote: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
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by 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
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by 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/
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basspond
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by 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.
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GerryL
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by GerryL »

jalbert wrote: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
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by 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
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by rkhusky »

TravelforFun wrote: 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
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by 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.
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TravelforFun
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by TravelforFun »

mhalley wrote: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.
rkhusky wrote: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.
hulburt1 wrote: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
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by randomguy »

hulburt1 wrote: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.
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David Jay
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by 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%.
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rkhusky
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by rkhusky »

TravelforFun wrote:
rkhusky wrote: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
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Re: Convert IRA to Roth While Working to Save on Taxes

Post by randomguy »

rkhusky wrote:
TravelforFun wrote:
rkhusky wrote: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.
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