Roth decision: What estimated rate of return for RMD calculator?

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LilyFleur
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Roth decision: What estimated rate of return for RMD calculator?

Post by LilyFleur »

I occasionally take a look at Schwab's online RMD calculator. I'm 61, with an age appropriate asset allocation, and semi-retired. Currently equities are at about 57%, with the rest in a bond index fund and a stable value fund with some cash in the brokerage. I will probably start withdrawing from my 401k in a couple of years, but only for a portion of my expenses, as I will start SS at 62 or 63, and I also have a modest pension. My social security is low, and will only cover half of my annual health insurance premiums which are about $20,000 a year right now.

Currently 21% of my portfolio is post-tax (part is in a Roth 401k which I cannot access until I am 64, and part is in already-taxed investments in my brokerage account in a combination of cash and index funds.) I did a $100,000 Roth 401k conversion in 2019 to start the clock ticking.

How do you know what value to enter for estimated rate of return when using an estimated RMD calculator?

If I use 2% in the RMD calculator, then perhaps I don't need to do a Roth conversion this year at a very painful tax rate (24% effective, including both state and federal). But if I use 6%, then, there will be a much larger tax problem down the road for me and for my heirs.

I'm 61, so I feel like I should do a conversion this year just because the countdown to IRMAA is right around the corner. And doing a $100,000 conversion is--unfortunately and fortunately-- just a drop in the bucket. My 401k is on track to exceed that in earnings this year. (But all that could change, of course.)

At the same time, a Roth conversion of $100k or higher will drain cash out of my taxable account for the tax bill. Although, that cash is just sitting there basically earning nothing at the moment, but I want to help my children with large down payments on houses. Depending on the timing of that help, it could also bump me up on IRMAA if I'm short on post-tax cash at the time and have to take it out of my 401k. Most likely I'll be paying the second or third-tier IRMAA anyway. One child could be ready for a downpayment next year, and the other probably not for several years (after I'm already 63).

There are so many moving parts. I am grateful but want to be wise about taxes. I came late to Bogleheads and have only known about Roth conversions recently.
lazynovice
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by lazynovice »

How will you be in the IRMAA brackets with such low SS? A big pension?

For rate of return, it depends on the composition of the account. Mine is all bonds so I use 2%, but if it had stocks, I’d use 9%. If a blend, then a weighted average of those.
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by The Stone Wall »

FYI. You need to get that money out of the Roth 401k and into a regular Roth prior to when you are 72. That Roth 401k is also subject to RMD's.
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by LilyFleur »

lazynovice wrote: Sun Jun 13, 2021 1:50 pm How will you be in the IRMAA brackets with such low SS? A big pension?

For rate of return, it depends on the composition of the account. Mine is all bonds so I use 2%, but if it had stocks, I’d use 9%. If a blend, then a weighted average of those.
Pension + SS + 401k withdrawals (I will start pulling some out of my 401k whenever I stop my part-time job. I don't know when that will be.)

I want to travel while I am still able. I have a chronic health condition which means I most likely will not be traveling at age 70.
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LilyFleur
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by LilyFleur »

The Stone Wall wrote: Sun Jun 13, 2021 3:42 pm FYI. You need to get that money out of the Roth 401k and into a regular Roth prior to when you are 72. That Roth 401k is also subject to RMD's.
Is that going to start the 5-year-clock ticking again?
NancyABQ
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by NancyABQ »

I actually had the same question this week, when playing with the RMD calculator at Schwab.

If my Traditional IRA was 100% bonds, what is a reasonable rate of return to use to calculate future RMDs? The default setting of 6% is obviously meant for some kind of balanced portfolio.

Like with OP, if the return is only 2%, I may not have an RMD problem even with no more conversions.

My plan for now is to do Roth conversions at least until 2025 (when tax rates under current law will go up, but also coincidentally when I will be 63 and have to consider IRMAA), but I am not going to go crazy about it.

What is a reasonable guesstimate for future return-rate on 100% bonds? 0%? 2%?
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by Lee_WSP »

LilyFleur wrote: Sun Jun 13, 2021 4:43 pm
The Stone Wall wrote: Sun Jun 13, 2021 3:42 pm FYI. You need to get that money out of the Roth 401k and into a regular Roth prior to when you are 72. That Roth 401k is also subject to RMD's.
Is that going to start the 5-year-clock ticking again?
You're past the five year concern. You can withdraw as much as you want.
Last edited by Lee_WSP on Sun Jun 13, 2021 6:03 pm, edited 1 time in total.
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by LilyFleur »

Lee_WSP wrote: Sun Jun 13, 2021 5:50 pm
LilyFleur wrote: Sun Jun 13, 2021 4:43 pm
The Stone Wall wrote: Sun Jun 13, 2021 3:42 pm FYI. You need to get that money out of the Roth 401k and into a regular Roth prior to when you are 72. That Roth 401k is also subject to RMD's.
Is that going to start the 5-year-clock ticking again?
You're past the five year concern. You can withdraw as much as you want. But to answer the question, only the principal added is subject to the five year rule. You should have plenty to withdraw from if you weren't 59.5
Thanks.
I wonder about the order of this? Can I do a Roth conversion from my 401k this year and put it directly into a Roth IRA at Schwab? Or do I convert the $s to Roth in my 401k and then move the Roth money directly from the Roth 401k to the Roth IRA?
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by lazynovice »

NancyABQ wrote: Sun Jun 13, 2021 5:42 pm I actually had the same question this week, when playing with the RMD calculator at Schwab.

If my Traditional IRA was 100% bonds, what is a reasonable rate of return to use to calculate future RMDs? The default setting of 6% is obviously meant for some kind of balanced portfolio.

Like with OP, if the return is only 2%, I may not have an RMD problem even with no more conversions.

My plan for now is to do Roth conversions at least until 2025 (when tax rates under current law will go up, but also coincidentally when I will be 63 and have to consider IRMAA), but I am not going to go crazy about it.

What is a reasonable guesstimate for future return-rate on 100% bonds? 0%? 2%?
https://investor.vanguard.com/etf/profi ... rmance/bnd

Over 3, 5 and 10 year period, total bond has been 3-5%. I use 2% since I expect rates to increase in the near future but of course nobody knows.
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by Lee_WSP »

LilyFleur wrote: Sun Jun 13, 2021 5:57 pm
Lee_WSP wrote: Sun Jun 13, 2021 5:50 pm
LilyFleur wrote: Sun Jun 13, 2021 4:43 pm
The Stone Wall wrote: Sun Jun 13, 2021 3:42 pm FYI. You need to get that money out of the Roth 401k and into a regular Roth prior to when you are 72. That Roth 401k is also subject to RMD's.
Is that going to start the 5-year-clock ticking again?
You're past the five year concern. You can withdraw as much as you want. But to answer the question, only the principal added is subject to the five year rule. You should have plenty to withdraw from if you weren't 59.5
Thanks.
I wonder about the order of this? Can I do a Roth conversion from my 401k this year and put it directly into a Roth IRA at Schwab? Or do I convert the $s to Roth in my 401k and then move the Roth money directly from the Roth 401k to the Roth IRA?
Roll into traditional IRA and then convert.
NancyABQ
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by NancyABQ »

lazynovice wrote: Sun Jun 13, 2021 6:02 pm
NancyABQ wrote: Sun Jun 13, 2021 5:42 pm I actually had the same question this week, when playing with the RMD calculator at Schwab.

If my Traditional IRA was 100% bonds, what is a reasonable rate of return to use to calculate future RMDs? The default setting of 6% is obviously meant for some kind of balanced portfolio.

Like with OP, if the return is only 2%, I may not have an RMD problem even with no more conversions.

My plan for now is to do Roth conversions at least until 2025 (when tax rates under current law will go up, but also coincidentally when I will be 63 and have to consider IRMAA), but I am not going to go crazy about it.

What is a reasonable guesstimate for future return-rate on 100% bonds? 0%? 2%?
https://investor.vanguard.com/etf/profi ... rmance/bnd

Over 3, 5 and 10 year period, total bond has been 3-5%. I use 2% since I expect rates to increase in the near future but of course nobody knows.
I think those are nominal returns (not adjusted for inflation), and the RMD calculator would want real returns (after adjusting for inflation)? So if the future inflation rate (which is completely unknown) was 2%, the 3-5% nominal would be 1-3% real? If so, I agree 2% real seems reasonable for the RMD calculator. For purposes of calculating future RMDs, one would want to guess high, not low and 2% real is probably optimistic?
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by lazynovice »

NancyABQ wrote: Sun Jun 13, 2021 6:08 pm
lazynovice wrote: Sun Jun 13, 2021 6:02 pm
NancyABQ wrote: Sun Jun 13, 2021 5:42 pm I actually had the same question this week, when playing with the RMD calculator at Schwab.

If my Traditional IRA was 100% bonds, what is a reasonable rate of return to use to calculate future RMDs? The default setting of 6% is obviously meant for some kind of balanced portfolio.

Like with OP, if the return is only 2%, I may not have an RMD problem even with no more conversions.

My plan for now is to do Roth conversions at least until 2025 (when tax rates under current law will go up, but also coincidentally when I will be 63 and have to consider IRMAA), but I am not going to go crazy about it.

What is a reasonable guesstimate for future return-rate on 100% bonds? 0%? 2%?
https://investor.vanguard.com/etf/profi ... rmance/bnd

Over 3, 5 and 10 year period, total bond has been 3-5%. I use 2% since I expect rates to increase in the near future but of course nobody knows.
I think those are nominal returns (not adjusted for inflation), and the RMD calculator would want real returns (after adjusting for inflation)? So if the future inflation rate (which is completely unknown) was 2%, the 3-5% nominal would be 1-3% real? If so, I agree 2% real seems reasonable for the RMD calculator. For purposes of calculating future RMDs, one would want to guess high, not low and 2% real is probably optimistic?
If it is asking for “real” then you are right. As far as it being optimistic, I try to be internally consistent in my assumptions. If I am counting on 2% to grow the portfolio then I use the same for RMDs.

I am 22 years away from RMDs and 3 years or so away from any potential conversions so I can afford to be less precise.
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by Nestegg_User »

LilyFleur wrote: Sun Jun 13, 2021 5:57 pm
Lee_WSP wrote: Sun Jun 13, 2021 5:50 pm
LilyFleur wrote: Sun Jun 13, 2021 4:43 pm
The Stone Wall wrote: Sun Jun 13, 2021 3:42 pm FYI. You need to get that money out of the Roth 401k and into a regular Roth prior to when you are 72. That Roth 401k is also subject to RMD's.
Is that going to start the 5-year-clock ticking again?
You're past the five year concern. You can withdraw as much as you want. But to answer the question, only the principal added is subject to the five year rule. You should have plenty to withdraw from if you weren't 59.5
Thanks.
I wonder about the order of this? Can I do a Roth conversion from my 401k this year and put it directly into a Roth IRA at Schwab? Or do I convert the $s to Roth in my 401k and then move the Roth money directly from the Roth 401k to the Roth IRA?

If your company allows for only Roth 401k to be moved... then it should be a direct transfer [ Roth 401k ==> regular Roth ]. personally, I would try to keep separate [ Roth 401k ==> Roth and regular 401k ==> rollover IRA (...with subsequent conversion to Roth over time to minimize tax hit)]
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by Lee_WSP »

NancyABQ wrote: Sun Jun 13, 2021 5:42 pm If my Traditional IRA was 100% bonds, what is a reasonable rate of return to use to calculate future RMDs? The default setting of 6% is obviously meant for some kind of balanced portfolio.
This is fairly easy to estimate. The expected return of the bond fund if held to the average length is the yield to maturity as advertised in the prospectus.
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by LilyFleur »

Nestegg_User wrote: Sun Jun 13, 2021 6:28 pm
LilyFleur wrote: Sun Jun 13, 2021 5:57 pm
Lee_WSP wrote: Sun Jun 13, 2021 5:50 pm
LilyFleur wrote: Sun Jun 13, 2021 4:43 pm
The Stone Wall wrote: Sun Jun 13, 2021 3:42 pm FYI. You need to get that money out of the Roth 401k and into a regular Roth prior to when you are 72. That Roth 401k is also subject to RMD's.
Is that going to start the 5-year-clock ticking again?
You're past the five year concern. You can withdraw as much as you want. But to answer the question, only the principal added is subject to the five year rule. You should have plenty to withdraw from if you weren't 59.5
Thanks.
I wonder about the order of this? Can I do a Roth conversion from my 401k this year and put it directly into a Roth IRA at Schwab? Or do I convert the $s to Roth in my 401k and then move the Roth money directly from the Roth 401k to the Roth IRA?

If your company allows for only Roth 401k to be moved... then it should be a direct transfer [ Roth 401k ==> regular Roth ]. personally, I would try to keep separate [ Roth 401k ==> Roth and regular 401k ==> rollover IRA (...with subsequent conversion to Roth over time to minimize tax hit)]
I am retired and am very happy with my 401k investment choices, low expense ratios, and the stable value fund (especially valuable now with cash investment opportunities elsewhere that pay much less. An IRA will not have access to a stable value fund.). So, I will only be moving my Roth 401k to a Roth IRA, and a new Roth conversion to the Roth IRA. The bulk of the 401k is pre-tax, and it will stay there. The Roth will be aggressively invested in the market, mostly in index funds.
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Re: Roth decision: What estimated rate of return for RMD calculator?

Post by Exchme »

You didn't give the balances or allocations in your various accounts or your spending, so not much anyone can do to offer specific help.

A general piece of advice is to put stocks in Roth and bonds in tax deferred. That slows your tax deferred growth, putting the growth in the Roth instead. That can make your problem much less of a problem.

If you really have 57% equities in your tax deferred, then for planning, a 2% rate of return does not sound reasonable. Historically, stocks have done 10%/year on average (so maybe 6% return on your portfolio), I think you want to plan for the most likely case, adjusting your plans as things get better or worse.

For the Roth IRA, you can access all your contributions tax free but would pay taxes if you withdrew the earnings since you are over 59.5 but haven't had the first account open for more than 5 years, see the great chart at the link:

https://www.bogleheads.org/wiki/Roth_IRA#Distributions

I would do whatever feels like aggressive conversions this year and next to get as much converted before IRMAA as possible.
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