First Roth conversion to 22%?

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Topic Author
bradpevans
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First Roth conversion to 22%?

Post by bradpevans »

Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).

So, lots of time to Roth convert but convert 40-60k year doesn’t knock down the 401 balance much (currently ~$2M with another 150K to be added pre retirement

So consider the wisdom of converting to 22 or 24% the first full year of no W2 income (will likely retire in April)

Pros: currently in 22 marginal anyway so it’s close to having put the money into Roth initially (had thst been allowed)

Gives more cash to live on, allowing more Roth conversion $ per year

Lowers the 401 balance sooner rather than later, which can only help avoid RMD pushing into higher brackets — there will be two pensions and two SS eventually

Besides the temptation to spend all the $ withdrawn early, what might be other downsides?
secondcor521
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Re: First Roth conversion to 22%?

Post by secondcor521 »

I'm a big fan of Roth conversions, do them myself, and consider them very worthwhile in my case.

The potential downsides can be found by examining the assumptions one makes in the process of determining that it's a good idea.

The biggest potential downside I could see is converting now at 22% when you might be able to convert later at 12%. Most would view that as extremely unlikely, including me, but it's a possibility. This could happen if your projected income streams didn't arrive in the amounts you expect (maybe SS gets cut) or if the size of your traditional IRA or 401(k) drops a lot (maybe you bought the next Enron inside there).

If you're doing it to avoid the higher single taxes, maybe you both live a long healthy life and die together at age 110.

There are probably others. Examine your assumptions and imagine that they don't turn out as you predict. Those are your downsides.
Escapevelocity
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Re: First Roth conversion to 22%?

Post by Escapevelocity »

Based on the information provided, if I were you I would strongly consider retiring NOW instead of working another 3 years. You already have more money than you need by the sound of it.
Topic Author
bradpevans
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Re: First Roth conversion to 22%?

Post by bradpevans »

Escapevelocity wrote: Sat Jul 24, 2021 11:46 am Based on the information provided, if I were you I would strongly consider retiring NOW instead of working another 3 years. You already have more money than you need by the sound of it.
Ya, there’s that too :greedy
babystep
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Re: First Roth conversion to 22%?

Post by babystep »

bradpevans wrote: Sat Jul 24, 2021 10:46 am Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).
Cover expenses? If yes then what is the point of spending down Roth while doing the Roth conversion at the same time?
Wouldn't you need to have expenses including taxes covered from the taxable account?
HomeStretch
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Re: First Roth conversion to 22%?

Post by HomeStretch »

In addition to doing Roth conversions to reduce your tax deferred balance, are you holding your fixed income allocation, if any, in your tax deferred accounts to slow the growth?
tibbitts
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Re: First Roth conversion to 22%?

Post by tibbitts »

In general if you're willing to convert at 22% I'd don't see that 24% is exactly a huge leap. For myself I have front-loaded conversions just to get out of critical mass territory, where the deferred balance will grow (assuming average returns) if I only convert at "reasonable" marginal rates. In retrospect I over-contributed to deferred, but didn't realize until it was too late.
nalor511
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Re: First Roth conversion to 22%?

Post by nalor511 »

Keep in mind that ACA health premium tax credits are based on MAGI, and doing Roth conversion will throw you off that cliff, if that may matter to you.

I think I plan to wait until medicare when magi won't matter as much
Topic Author
bradpevans
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Re: First Roth conversion to 22%?

Post by bradpevans »

babystep wrote: Sat Jul 24, 2021 9:52 pm
bradpevans wrote: Sat Jul 24, 2021 10:46 am Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).
Cover expenses? If yes then what is the point of spending down Roth while doing the Roth conversion at the same time?
Wouldn't you need to have expenses including taxes covered from the taxable account?
Just noting that I have sources to pay the tax outside of the conversion. But using taxable (with any gains) means less space for conversion

The point of conversion both accessing the deferred money at 0/10/12%. And spending it in subsequent years (two year Roth conversion ladder)
Topic Author
bradpevans
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Re: First Roth conversion to 22%?

Post by bradpevans »

HomeStretch wrote: Sat Jul 24, 2021 10:09 pm In addition to doing Roth conversions to reduce your tax deferred balance, are you holding your fixed income allocation, if any, in your tax deferred accounts to slow the growth?
That’s part of the plan too - reduced / zero volatility for some $ amount with deferred, somewhat earmarked for “next year(s) conversion”
lakpr
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Re: First Roth conversion to 22%?

Post by lakpr »

babystep wrote: Sat Jul 24, 2021 9:52 pm
bradpevans wrote: Sat Jul 24, 2021 10:46 am Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).
Cover expenses? If yes then what is the point of spending down Roth while doing the Roth conversion at the same time?
Wouldn't you need to have expenses including taxes covered from the taxable account?
I think the pont is to be able to withdraw from tax deferred accounts without penalties; cannot do that until older than 59.5. Which is about 1.5 years away.
cas
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Re: First Roth conversion to 22%?

Post by cas »

bradpevans wrote: Sat Jul 24, 2021 10:46 am Taxable and current Roth will cover two years (probably 4).

[. . .]

So consider the wisdom of converting to 22 or 24% the first full year of no W2 income (will likely retire in April)

[. . .]

Besides the temptation to spend all the $ withdrawn early, what might be other downsides?
Depending on the size of annual taxable distributions from the taxable account (plus some other income items) and depending on whether you are filing single, MFJ, or something else ... you may need to keep an eye on Net Investment Income Tax (NIIT). NIIT of 3.8% on "investment income" kicks in at $200K/$250K Single/MFJ *MAGI* (not Taxable Income). At that point, your 22%/24% marginal rate becomes 25.8%/27.8%.
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midareff
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Re: First Roth conversion to 22%?

Post by midareff »

Escapevelocity wrote: Sat Jul 24, 2021 11:46 am Based on the information provided, if I were you I would strongly consider retiring NOW instead of working another 3 years. You already have more money than you need by the sound of it.
Interesting recommendation without knowing expenses and many other things.
babystep
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Re: First Roth conversion to 22%?

Post by babystep »

lakpr wrote: Sun Jul 25, 2021 8:35 am
babystep wrote: Sat Jul 24, 2021 9:52 pm
bradpevans wrote: Sat Jul 24, 2021 10:46 am Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).
Cover expenses? If yes then what is the point of spending down Roth while doing the Roth conversion at the same time?
Wouldn't you need to have expenses including taxes covered from the taxable account?
I think the pont is to be able to withdraw from tax deferred accounts without penalties; cannot do that until older than 59.5. Which is about 1.5 years away.
If that is the reason to wait for 2 years then the SEPP might be another option to consider. The SEPP would have to continue till age 63 but would be good to see if that is possible and better for OP.
infotrader
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Re: First Roth conversion to 22%?

Post by infotrader »

You need to do this yesterday!
I am still working, started doing it since 2017, and convert about 120k each year and use taxable to cover the tax (I am contributing 401k etc to the max and do conversion at the same time).
The percentage of my deferred balance vs taxable and roth went down about 2%, but the balance went up from 1.2 to 2.2m.
It is a losing battle.
02nz
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Re: First Roth conversion to 22%?

Post by 02nz »

lakpr wrote: Sun Jul 25, 2021 8:35 am
babystep wrote: Sat Jul 24, 2021 9:52 pm
bradpevans wrote: Sat Jul 24, 2021 10:46 am Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).
Cover expenses? If yes then what is the point of spending down Roth while doing the Roth conversion at the same time?
Wouldn't you need to have expenses including taxes covered from the taxable account?
I think the pont is to be able to withdraw from tax deferred accounts without penalties; cannot do that until older than 59.5. Which is about 1.5 years away.
Then OP should check whether the plan allows penalty-free withdrawals if separating in the year in which one turns 55 or later.
invest4
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Re: First Roth conversion to 22%?

Post by invest4 »

midareff wrote: Sun Jul 25, 2021 9:10 am
Escapevelocity wrote: Sat Jul 24, 2021 11:46 am Based on the information provided, if I were you I would strongly consider retiring NOW instead of working another 3 years. You already have more money than you need by the sound of it.
Interesting recommendation without knowing expenses and many other things.
Agreed. Op references monies available to pay for the Roth conversion, but we don't really have a very good picture in terms of overall portfolio, etc. I would suggest a bit more information in the usual format to help ensure the appropriate advice.
Topic Author
bradpevans
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Re: First Roth conversion to 22%?

Post by bradpevans »

lakpr wrote: Sun Jul 25, 2021 8:35 am
babystep wrote: Sat Jul 24, 2021 9:52 pm
bradpevans wrote: Sat Jul 24, 2021 10:46 am Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).
Cover expenses? If yes then what is the point of spending down Roth while doing the Roth conversion at the same time?
Wouldn't you need to have expenses including taxes covered from the taxable account?
I think the pont is to be able to withdraw from tax deferred accounts without penalties; cannot do that until older than 59.5. Which is about 1.5 years away.
I need to verify but I think rule of 55 will be allowed with my plan (mega Corp / Fidelity)
Longdog
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Re: First Roth conversion to 22%?

Post by Longdog »

bradpevans wrote: Sun Jul 25, 2021 12:08 pm
lakpr wrote: Sun Jul 25, 2021 8:35 am
babystep wrote: Sat Jul 24, 2021 9:52 pm
bradpevans wrote: Sat Jul 24, 2021 10:46 am Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).
Cover expenses? If yes then what is the point of spending down Roth while doing the Roth conversion at the same time?
Wouldn't you need to have expenses including taxes covered from the taxable account?
I think the pont is to be able to withdraw from tax deferred accounts without penalties; cannot do that until older than 59.5. Which is about 1.5 years away.
I need to verify but I think rule of 55 will be allowed with my plan (mega Corp / Fidelity)
Yes, if you have a 401k with a company and you separate from the company in (or after) the year you turn 55, then you can withdraw from the 401k penalty free. Doesn’t seem to be a reason to withdraw from your Roth and simultaneously convert from 401k to a Roth. Withdraw from the 401k and convert the residual. Unless you can't do partial withdrawals.
Steve
Topic Author
bradpevans
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Re: First Roth conversion to 22%?

Post by bradpevans »

Longdog wrote: Sun Jul 25, 2021 1:35 pm
bradpevans wrote: Sun Jul 25, 2021 12:08 pm
lakpr wrote: Sun Jul 25, 2021 8:35 am
babystep wrote: Sat Jul 24, 2021 9:52 pm
bradpevans wrote: Sat Jul 24, 2021 10:46 am Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).
Cover expenses? If yes then what is the point of spending down Roth while doing the Roth conversion at the same time?
Wouldn't you need to have expenses including taxes covered from the taxable account?
I think the pont is to be able to withdraw from tax deferred accounts without penalties; cannot do that until older than 59.5. Which is about 1.5 years away.
I need to verify but I think rule of 55 will be allowed with my plan (mega Corp / Fidelity)
Yes, if you have a 401k with a company and you separate from the company in (or after) the year you turn 55, then you can withdraw from the 401k penalty free. Doesn’t seem to be a reason to withdraw from your Roth and simultaneously convert from 401k to a Roth. Withdraw from the 401k and convert the residual.

Yeah I can see you but people are getting it at that if you converted and spend it it’s essentially the same as you just spent it.

My thought is to build up some cash and or Roth and that gives also more space for capital gains harvesting and or cashing out of capital gain some money but paying 0% on the game

I Thought the Roth Conversion steps would be withdraw from 401(k) and transfer directly to Roth account.

Is there an avenue to withdraw from 401(k) and then at a later point in time put money into the Roth?

In other words, I thought it had to go directly from the 401/IRA account to the Roth account. But maybe that is not the correct assumption
HENRYGRUGER
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Re: First Roth conversion to 22%?

Post by HENRYGRUGER »

bradpevans wrote: Sat Jul 24, 2021 10:46 am Plan to retire at 58. Taxable and current Roth will cover two years (probably 4).

So, lots of time to Roth convert but convert 40-60k year doesn’t knock down the 401 balance much (currently ~$2M with another 150K to be added pre retirement

So consider the wisdom of converting to 22 or 24% the first full year of no W2 income (will likely retire in April)

Pros: currently in 22 marginal anyway so it’s close to having put the money into Roth initially (had thst been allowed)

Gives more cash to live on, allowing more Roth conversion $ per year

Lowers the 401 balance sooner rather than later, which can only help avoid RMD pushing into higher brackets — there will be two pensions and two SS eventually

Besides the temptation to spend all the $ withdrawn early, what might be other downsides?
Brad,

Went through similar thought process 2 years ago and executed 2 Roth Conversions of $100,000 each of last two years. While the tax bite federally was planned for,(pushed me into the 24% bracket) I neglected to consider NC State Income Taxes. A small surprise, easily overcome, but still, not planned for properly. At my age, 70, I do not have the luxury of taking my time doing smaller conversions, over an extended period.

One issue I had NOT considered was my wife needed ing Long Term Care, later in life. Since she cannot qualify for an LTCi policy or one of the hybrid substitutes, by leaving a significant sum $200,000 plus in my deferred bucket, if she needs care in 10-12 years (typically the age when LTC occurs,) the taxes due on the withdrawals could be offset by deductible medical expense allowance.

Where RMDs might be a concern, the amount of the RMDs on that amount, would be about the same as we make in charitable deductions annually, so again, not taxable event for us.

I am still working and 100% of my annual $26,000 annual allowed contribution goes into a Roth Election, inside my 403b. My employer match is still deposited into the deferred bucket, as required by our friends at the IRS.
Escapevelocity
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Re: First Roth conversion to 22%?

Post by Escapevelocity »

midareff wrote: Sun Jul 25, 2021 9:10 am
Escapevelocity wrote: Sat Jul 24, 2021 11:46 am Based on the information provided, if I were you I would strongly consider retiring NOW instead of working another 3 years. You already have more money than you need by the sound of it.
Interesting recommendation without knowing expenses and many other things.
That’s why I said consider instead of making a definitive suggestion.
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