Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

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Johnsson
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Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by Johnsson »

I've seen this mentioned (related to Roth Conversions) but not specifically discussed.

We'll be Roth converting over the next 7-10 years with a plan to leave some significant amount in our PTAs. How much (in dollars, preferably) do you find useful to keep in there, is the question. I don't want to discuss the benefits of Roth converting here.

Keeping money in a PTA seems to have benefits for many (QCDs, major and/or long-term health care expenses and maybe some others).

Once retired and finished account balancing/Roth converting how much is of benefit (aside from QCDs which are a personal choice) to have/keep in your PTA and what are all those benefits?
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
02nz
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by 02nz »

I think you can make a good argument for at least $300K to $500K in tax-deferred accounts, even up to $1M isn't all that high. That's a decent amount of self-insurance for LTC costs, and the RMDs are modest. Depends a lot on what you plan to do with that money, e.g., if there's a charitable intent then the amount should be higher.
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Watty
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by Watty »

It really varies depending on if your total investments are modest or if you have millions of dollars in investments.

For someone with a more modest net worth then they really want enough in a pre-tax IRA to have enough taxable income to cover the standard deduction and the 12% tax bracket for a single person. A couple should look at the single rates too since it is likely that one of them will survive the other.

That would be roughly a million dollars assuming a 4% safe withdrawal rate.

The way that Social Security is taxed complicates that.

How much other taxable income you have is also a factor in keeping in the 12% tax bracket.

If you have a relatively high net worth then estate planning also comes into play.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by Johnsson »

Watty wrote: Mon Aug 02, 2021 9:26 am It really varies depending on if your total investments are modest or if you have millions of dollars in investments.

For someone with a more modest net worth then they really want enough in a pre-tax IRA to have enough taxable income to cover the standard deduction and the 12% tax bracket for a single person. A couple should look at the single rates too since it is likely that one of them will survive the other.

That would be roughly a million dollars assuming a 4% safe withdrawal.

The way that Social Security is taxed complicates that.

How much other taxable income you have is also a factor in keeping in the 12% tax bracket.

If you have a relatively high net worth then estate planning also comes into play.
I think we have enough (especially when adding in future SS) but we're not HNW in my opinion. Roughly $3.5MM before the house, with about ~2MM in PTAs. We'll be converting to some level and I'm trying to figure out when to stop converting. My figuring was to stop at about $800M (all in cds/bond funds)... with no good reason beyond it seems like an appropriate amount. It'll cover a decent amount of healthcare/LTC expenses and if unspent some QCDs and inheritance for the youngest generation when the last of us passes. I'm curious about what others think/are doing.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by Johnsson »

Johnsson wrote: Mon Aug 02, 2021 9:39 am
Watty wrote: Mon Aug 02, 2021 9:26 am It really varies depending on if your total investments are modest or if you have millions of dollars in investments.

For someone with a more modest net worth then they really want enough in a pre-tax IRA to have enough taxable income to cover the standard deduction and the 12% tax bracket for a single person. A couple should look at the single rates too since it is likely that one of them will survive the other.

That would be roughly a million dollars assuming a 4% safe withdrawal.

The way that Social Security is taxed complicates that.

How much other taxable income you have is also a factor in keeping in the 12% tax bracket.

If you have a relatively high net worth then estate planning also comes into play.
I think we have enough (especially when adding in future SS) but we're not HNW in my opinion. Roughly $3.5MM before the house, with about ~2MM in PTAs. We'll be converting to some level and I'm trying to figure out when to stop converting. My figuring was to stop at about $800M (all in cds/bond funds)... with no good reason beyond it seems like an appropriate amount. It'll cover a decent amount of healthcare/LTC expenses and if unspent some QCDs and inheritance for the youngest generation when the last of us passes. I'm curious about what others think/are doing?
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
02nz
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by 02nz »

Johnsson wrote: Mon Aug 02, 2021 9:39 am I think we have enough (especially when adding in future SS) but we're not HNW in my opinion. Roughly $3.5MM before the house, with about ~2MM in PTAs. We'll be converting to some level and I'm trying to figure out when to stop converting. My figuring was to stop at about $800M (all in cds/bond funds)... with no good reason beyond it seems like an appropriate amount.
Well $800M would definitely make you HNW! :happy

I think $800K is probably sensible given other numbers. Don't overthink it - you won't know the exact optimal number until you die. :wink:
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by retiredjg »

Johnsson wrote: Mon Aug 02, 2021 9:01 am How much (in dollars, preferably) do you find useful to keep in there, is the question.
I think the answer depends on your goals.

1. If you are just trying to avoid high RMDs, the answer might be $1 million because the RMDs on $1 million should not be too burdensome for many people. This is just an example. RMDs from $1 million might be a problem for some people.

2. If you want to have some untaxed money available for high medical costs of long term care, maybe something like $200k to $500k per person.

3. If you are leaving all your money to a disabled child who will likely always be in a very low tax bracket, the amount might be very large because that person's RMDs will be taxed at a low rate.

4. If you have no taxable account (and therefore no appreciated shares for charitable giving), you might want to leave a certain amount in IRA in order to make your charitable donations through QCDs after reaching age 70.5. That way you make donations of money that you have never paid taxes on.

5. If you are actually paying most of your living expenses using your tax-deferred money, leaving it all tax-deferred might be smart if the RMDs are not going to be significantly greater than your needs each year.

Quite the range. Obviously, there is not much utility in choosing to leave only $50k in tax-deferral. And more than $2 million seems like too much to me.

From my point of view, I suppose something between $250k (for a single person) to $1 million would be what many people might want to choose and it all depends on what goals one has for the money.
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Svensk Anga
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by Svensk Anga »

I was looking at this a couple weeks ago. It looks like we can convert to the top of the 22% bracket or to the first IRMAA tier just to run the risk of winding up in the 40.7% marginal rate zone due to the way SS is taxed. Check the wiki for taxation of SS benefits for the odd details.

From a decade away, it looks too hard to plan to avoid this zone. Inflation rates, return rates, potential tax law or SS changes and the all important single versus joint filing brackets all have influence on the target you would like to hit for tax optimization. Maybe as RMDs get closer, the path will clear and there will be enough scope left to adjust.

I do plan to retain a fairly substantial amount in tax deferred.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by Watty »

Johnsson wrote: Mon Aug 02, 2021 9:39 am I think we have enough (especially when adding in future SS) but we're not HNW in my opinion. Roughly $3.5MM before the house, with about ~2MM in PTAs. We'll be converting to some level and I'm trying to figure out when to stop converting. My figuring was to stop at about $800M (all in cds/bond funds)... with no good reason beyond it seems like an appropriate amount.
I think you are looking at this backwards by worrying about what the lower limit is.

Doing Roth conversions to the top of the 12% federal tax bracket is likely an easy choice but doing that much each year will likely never get you to a point where you need to worry about having converted too much since your investments should keep growing too.

To me doing Roth conversions in the 22% federal tax bracket is hard to justify since the next higher tax bracket is only 24% so to me saving 2% is not worth paying your taxes decades before you need to. Even if tax rates increase a modest amount you may still only save a few percent.

You are doing great but I don't think you need to worry too much about being above the 24% federal tax rate in retirement.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by ymmt »

retiredjg wrote: Mon Aug 02, 2021 10:12 am 2. If you want to have some untaxed money available for high medical costs of long term care, maybe something like $200k to $500k per person.
Hi, could you explain what the benefit is of having a pre-tax balance for medical expenses? I'm actually in the dark about this...
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by leftcoaster »

I have a question about the major medical expenses referred to in this post. Is the argument at one should hold back funds in a deferred account so that one has the option to take a medical expense deduction in years when expenses are high? That seems like a good idea: I just wasn’t sure if that’s the extent of it.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by retiredjg »

Personally, I don't like to suggest that someone "should" do this because there might be other factors or preferences involved. I think the suggestion is that it is certainly OK not to convert everything to Roth.

One of the possible uses for leaving money in tax deferred accounts is to use it to pay for high medical expenses and then take a medical expense deduction in years when expenses are high. If you do that, the medical expenses get paid with money that has never been taxed.

Obviously, the medical deduction can happen no matter where the money comes from, but this should work out a little better than paying for the same expenses with money that has already been taxed.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by retiredjg »

ymmt wrote: Mon Aug 02, 2021 10:40 am
retiredjg wrote: Mon Aug 02, 2021 10:12 am 2. If you want to have some untaxed money available for high medical costs of long term care, maybe something like $200k to $500k per person.
Hi, could you explain what the benefit is of having a pre-tax balance for medical expenses? I'm actually in the dark about this...
If medical expenses are high enough, they can still be deducted from taxable income. Long term care/nursing home care can cost $50 to $100k a year (I've heard).

If you use a tax-deferred account to pay for these expenses, a certain amount of those expenses (after jumping through some hoops) will be paid with money that has never been taxed...as opposed to paying the same expenses with money that has already been taxed.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by bradpevans »

Watty wrote: Mon Aug 02, 2021 10:32 am
Johnsson wrote: Mon Aug 02, 2021 9:39 am I think we have enough (especially when adding in future SS) but we're not HNW in my opinion. Roughly $3.5MM before the house, with about ~2MM in PTAs. We'll be converting to some level and I'm trying to figure out when to stop converting. My figuring was to stop at about $800M (all in cds/bond funds)... with no good reason beyond it seems like an appropriate amount.
I think you are looking at this backwards by worrying about what the lower limit is.

Doing Roth conversions to the top of the 12% federal tax bracket is likely an easy choice but doing that much each year will likely never get you to a point where you need to worry about having converted too much since your investments should keep growing too.

To me doing Roth conversions in the 22% federal tax bracket is hard to justify since the next higher tax bracket is only 24% so to me saving 2% is not worth paying your taxes decades before you need to. Even if tax rates increase a modest amount you may still only save a few percent.

You are doing great but I don't think you need to worry too much about being above the 24% federal tax rate in retirement.
To expand on the idea of what to look at, many (Kitces for instance) suggest trying to smooth out your tax rates over retirement, so focus on the rates rather than the dollars.

For *me* well will have two SS and two pensions. If both are delayed to 70 you can see the income jump there. Add RMD at 72 and it jumps again. So, planning ahead for that (Roth convert in low tax year and/or sell from taxable while staying at 0% LTCG, using that cash to fund more conversions, et) all are ways to avoid a big tax rate spike later.

If/when MFJ --> single, then many tax implications are worse (even with one SS stopped)
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by Svensk Anga »

Watty wrote: Mon Aug 02, 2021 10:32 am
Doing Roth conversions to the top of the 12% federal tax bracket is likely an easy choice but doing that much each year will likely never get you to a point where you need to worry about having converted too much since your investments should keep growing too.

To me doing Roth conversions in the 22% federal tax bracket is hard to justify since the next higher tax bracket is only 24% so to me saving 2% is not worth paying your taxes decades before you need to. Even if tax rates increase a modest amount you may still only save a few percent.

You are doing great but I don't think you need to worry too much about being above the 24% federal tax rate in retirement.
I would plan on the current tax rates sun setting as scheduled at the end of 2025. If that comes to pass, you are looking at 25% with a risk of your income taking it to 28%. A 6% margin could be enough to justify conversions. One might also use the 22% bracket as a couple in order to avoid higher brackets when single.

The top of the 22% bracket becomes unattractive once IRMAA is in play, the year the older of the couple turns 63. The income limit to avoid IRMAA is lower than the top of the 22. One might want to err on the side of too much conversion before one ages into the IRMAA years because large conversions after have a very high effective tax rate.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by Johnsson »

Svensk Anga wrote: Mon Aug 02, 2021 4:32 pm
Watty wrote: Mon Aug 02, 2021 10:32 am
Doing Roth conversions to the top of the 12% federal tax bracket is likely an easy choice but doing that much each year will likely never get you to a point where you need to worry about having converted too much since your investments should keep growing too.

To me doing Roth conversions in the 22% federal tax bracket is hard to justify since the next higher tax bracket is only 24% so to me saving 2% is not worth paying your taxes decades before you need to. Even if tax rates increase a modest amount you may still only save a few percent.

You are doing great but I don't think you need to worry too much about being above the 24% federal tax rate in retirement.
I would plan on the current tax rates sun setting as scheduled at the end of 2025. If that comes to pass, you are looking at 25% with a risk of your income taking it to 28%. A 6% margin could be enough to justify conversions. One might also use the 22% bracket as a couple in order to avoid higher brackets when single.

The top of the 22% bracket becomes unattractive once IRMAA is in play, the year the older of the couple turns 63. The income limit to avoid IRMAA is lower than the top of the 22. One might want to err on the side of too much conversion before one ages into the IRMAA years because large conversions after have a very high effective tax rate.
For the reasons you noted and to protect against 25+% rates when the 1st of us passes we will be converting to the top of 24% this year and the next two (thru the year we turn 62). I'll likely stop the conversions when PTAs total $800M as noted... protecting against medical and LTC expenses.

Note: M is the Roman numeral for 1000 and MM is 1000000.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by HomeStretch »

Your plan is reasonable. If you don’t already do so, placing your fixed income allocation in your tax deferred accounts should slow the growth of the accounts.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by WoodSpinner »

02nz wrote: Mon Aug 02, 2021 9:57 am
Johnsson wrote: Mon Aug 02, 2021 9:39 am I think we have enough (especially when adding in future SS) but we're not HNW in my opinion. Roughly $3.5MM before the house, with about ~2MM in PTAs. We'll be converting to some level and I'm trying to figure out when to stop converting. My figuring was to stop at about $800M (all in cds/bond funds)... with no good reason beyond it seems like an appropriate amount.
Well $800M would definitely make you HNW! :happy

I think $800K is probably sensible given other numbers. Don't overthink it - you won't know the exact optimal number until you die. :wink:
Actually, M is the proper designation for 1000s, not K.

Causes no end of confusion!

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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by WoodSpinner »

Svensk Anga wrote: Mon Aug 02, 2021 4:32 pm
Watty wrote: Mon Aug 02, 2021 10:32 am
Doing Roth conversions to the top of the 12% federal tax bracket is likely an easy choice but doing that much each year will likely never get you to a point where you need to worry about having converted too much since your investments should keep growing too.

To me doing Roth conversions in the 22% federal tax bracket is hard to justify since the next higher tax bracket is only 24% so to me saving 2% is not worth paying your taxes decades before you need to. Even if tax rates increase a modest amount you may still only save a few percent.

You are doing great but I don't think you need to worry too much about being above the 24% federal tax rate in retirement.
I would plan on the current tax rates sun setting as scheduled at the end of 2025. If that comes to pass, you are looking at 25% with a risk of your income taking it to 28%. A 6% margin could be enough to justify conversions. One might also use the 22% bracket as a couple in order to avoid higher brackets when single.

The top of the 22% bracket becomes unattractive once IRMAA is in play, the year the older of the couple turns 63. The income limit to avoid IRMAA is lower than the top of the 22. One might want to err on the side of too much conversion before one ages into the IRMAA years because large conversions after have a very high effective tax rate.
Did you mean Marginal Tax rates? If so this post might be helpful.

If you really meant effective tax then my modeling shows an approximate 10% increase in effective taxes due to IRMAA Tiers2 or 3. Your mileage will vary….

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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by 02nz »

Johnsson wrote: Tue Aug 03, 2021 10:58 am M is the Roman numeral for 1000 and MM is 1000000.
In Roman numerals MM is two thousand, not a million, just as XX = 20 not 100. And it's just outright confusing to use two different systems to express a single figure, it would be like writing 50 as 5X, which would certainly cause confusion. Using the Greek-influenced K=kilo/thousand and M=mega/million makes more sense.

https://www.orsurety.com/blog/is-it-m-f ... r-a-friend

All just nitpicking, of course. :happy
Last edited by 02nz on Wed Aug 04, 2021 11:38 am, edited 2 times in total.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by delamer »

WoodSpinner wrote: Tue Aug 03, 2021 11:44 am
02nz wrote: Mon Aug 02, 2021 9:57 am
Johnsson wrote: Mon Aug 02, 2021 9:39 am I think we have enough (especially when adding in future SS) but we're not HNW in my opinion. Roughly $3.5MM before the house, with about ~2MM in PTAs. We'll be converting to some level and I'm trying to figure out when to stop converting. My figuring was to stop at about $800M (all in cds/bond funds)... with no good reason beyond it seems like an appropriate amount.
Well $800M would definitely make you HNW! :happy

I think $800K is probably sensible given other numbers. Don't overthink it - you won't know the exact optimal number until you die. :wink:
Actually, M is the proper designation for 1000s, not K.

Causes no end of confusion!

WoodSpinner
Tell that to my econ professors!
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by celia »

02nz wrote: Tue Aug 03, 2021 12:03 pm
Johnsson wrote: Tue Aug 03, 2021 10:58 am M is the Roman numeral for 1000 and MM is 1000000.
In Roman numerals MM is two thousand, not a million. And it's just outright confusing to use two different systems to express a single figure, it would be like writing 500 as V00 (ok I know that Vanguard cleverly made VOO the ticker symbol for their S&P 500 ETF). Using the Greek-influenced K=kilo and M=mega/million makes more sense.

https://www.orsurety.com/blog/is-it-m-f ... r-a-friend

All just nitpicking, of course. :happy
It's also confusing to talk about "Pre-Tax accounts (PTAs)" and give it a user-defined abbreviation/acronym when we usually refer to it as "Tax-Deferred" here. The worst is "Tax-advantaged" which combines Pre-Tax and Post-Tax, which are opposites, in my book.

There is no tax-deferred dollar amount that is recommended as it is specific to each investor and the size of their retirement accounts and their expected living expenses. An amount of $x could be appropriate for one investor while another doesn't even have that much in their portfolio!
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by delamer »

bradpevans wrote: Mon Aug 02, 2021 12:02 pm
Watty wrote: Mon Aug 02, 2021 10:32 am
Johnsson wrote: Mon Aug 02, 2021 9:39 am I think we have enough (especially when adding in future SS) but we're not HNW in my opinion. Roughly $3.5MM before the house, with about ~2MM in PTAs. We'll be converting to some level and I'm trying to figure out when to stop converting. My figuring was to stop at about $800M (all in cds/bond funds)... with no good reason beyond it seems like an appropriate amount.
I think you are looking at this backwards by worrying about what the lower limit is.

Doing Roth conversions to the top of the 12% federal tax bracket is likely an easy choice but doing that much each year will likely never get you to a point where you need to worry about having converted too much since your investments should keep growing too.

To me doing Roth conversions in the 22% federal tax bracket is hard to justify since the next higher tax bracket is only 24% so to me saving 2% is not worth paying your taxes decades before you need to. Even if tax rates increase a modest amount you may still only save a few percent.

You are doing great but I don't think you need to worry too much about being above the 24% federal tax rate in retirement.
To expand on the idea of what to look at, many (Kitces for instance) suggest trying to smooth out your tax rates over retirement, so focus on the rates rather than the dollars.

For *me* well will have two SS and two pensions. If both are delayed to 70 you can see the income jump there. Add RMD at 72 and it jumps again. So, planning ahead for that (Roth convert in low tax year and/or sell from taxable while staying at 0% LTCG, using that cash to fund more conversions, et) all are ways to avoid a big tax rate spike later.

If/when MFJ --> single, then many tax implications are worse (even with one SS stopped)

The rate spike after the first spouse dies is a big factor in our decision-making process.

Under current rates, moving into the 32% bracket at that point is highly likely. If the rates revert to pre-2018 levels, then it’s 28%. We also have multiple pensions plus Social Security, so will never be below 22% (current) federal rate in retirement.

There are lots of factors and lots of unknowns that impact the decision on how much to convert. So there is no one good answer for all retirees or retired couples.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by tj »

retiredjg wrote: Mon Aug 02, 2021 11:09 am Personally, I don't like to suggest that someone "should" do this because there might be other factors or preferences involved. I think the suggestion is that it is certainly OK not to convert everything to Roth.

One of the possible uses for leaving money in tax deferred accounts is to use it to pay for high medical expenses and then take a medical expense deduction in years when expenses are high. If you do that, the medical expenses get paid with money that has never been taxed.

Obviously, the medical deduction can happen no matter where the money comes from, but this should work out a little better than paying for the same expenses with money that has already been taxed.
How does it work out better than paying with after tax money and taking the deduction? There's nothing special about using itemized deductions to offset IRA Distributions over Interest, Rental Income, Business profit, etc.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by suewolf »

I'm in a similar situation to OP. Here's what I did: I calculate how much RMD's I will need at age 72 to meet my expected expenses. Anything over that, I am convert to Roth. I'm currently 62 so I'm dealing with a 10+ year forecast.

To determine the RMD amount, I estimated my total expenses when I'm 72 (including taxes), subtracted pension, subtracted social security and subtracted interest and dividends from taxable accounts. The remainder is the needed amount of RMD's. I then determined the average conversion per year and checked to see if that kept me below the 24% tax bracket. In my case it did and in fact most years comes very close to the limit. So that really sets the limit as far as how much to convert overall.

There's a bazillion assumptions here of course (projecting asset values years in advance, tax rates in future years, interest and dividend out that far) but at least I have a basis.

For those that like formulas:
Desired RMD = (estimated income - pension income - social security - interest - dividends)
Remaining amount in qualified accounts (IRA, 401k) = Desired RMD * IRS distribution period (25.6 years in my case)

Hopefully this makes sense. I'd appreciate any comments on this logic as I always value this forum's opinions.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by pasadena »

02nz wrote: Tue Aug 03, 2021 12:03 pm
Johnsson wrote: Tue Aug 03, 2021 10:58 am M is the Roman numeral for 1000 and MM is 1000000.
In Roman numerals MM is two thousand, not a million. And it's just outright confusing to use two different systems to express a single figure, it would be like writing 500 as V00 (ok I know that Vanguard cleverly made VOO the ticker symbol for their S&P 500 ETF). Using the Greek-influenced K=kilo and M=mega/million makes more sense.

https://www.orsurety.com/blog/is-it-m-f ... r-a-friend

All just nitpicking, of course. :happy
1 Million in roman numeral is M with a line on top of it (overline?). The top line means x1,000.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by calmaniac »

retiredjg wrote: Mon Aug 02, 2021 11:14 am
ymmt wrote: Mon Aug 02, 2021 10:40 am
retiredjg wrote: Mon Aug 02, 2021 10:12 am 2. If you want to have some untaxed money available for high medical costs of long term care, maybe something like $200k to $500k per person.
Hi, could you explain what the benefit is of having a pre-tax balance for medical expenses? I'm actually in the dark about this...
If medical expenses are high enough, they can still be deducted from taxable income. Long term care/nursing home care can cost $50 to $100k a year (I've heard).

If you use a tax-deferred account to pay for these expenses, a certain amount of those expenses (after jumping through some hoops) will be paid with money that has never been taxed...as opposed to paying the same expenses with money that has already been taxed.
ymmt, thanks for asking. I had the same question.

retiredjg or others, I'd be grateful if you could point to some resources, blog, or Wiki item that reviews this approach (above text in red) in more detail. Or is this just a matter of having a greater taxable income due to taking IRA distributions and hence greater deduction from health care expenses? I'm missing something. Thanks!
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
02nz
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by 02nz »

calmaniac wrote: Tue Aug 03, 2021 1:08 pm
retiredjg wrote: Mon Aug 02, 2021 11:14 am
ymmt wrote: Mon Aug 02, 2021 10:40 am
retiredjg wrote: Mon Aug 02, 2021 10:12 am 2. If you want to have some untaxed money available for high medical costs of long term care, maybe something like $200k to $500k per person.
Hi, could you explain what the benefit is of having a pre-tax balance for medical expenses? I'm actually in the dark about this...
If medical expenses are high enough, they can still be deducted from taxable income. Long term care/nursing home care can cost $50 to $100k a year (I've heard).

If you use a tax-deferred account to pay for these expenses, a certain amount of those expenses (after jumping through some hoops) will be paid with money that has never been taxed...as opposed to paying the same expenses with money that has already been taxed.
ymmt, thanks for asking. I had the same question.

retiredjg or others, I'd be grateful if you could point to some resources, blog, or Wiki item that reviews this approach (above text in red) in more detail. Or is this just a matter of having a greater taxable income due to taking IRA distributions and hence greater deduction from health care expenses? I'm missing something. Thanks!
It's really pretty simple, it's just the medical expenses deduction. If you have little other income (e.g., in retirement), and have large medical expenses paid with a withdrawal from the TIRA, most of the withdrawal will be tax free (usually most but not all, because of the 7.5%/10% threshold).

https://www.irs.gov/taxtopics/tc502

An example: A single filer over 65 withdraws $100K from TIRA in one year to pay for $100K of medical expenses, no other income and no SS. Without the medical expenses deduction, about $23K of federal income tax would be due, but with the deduction, this person owes only about $1K.

If that same person has $40K in SS benefits and makes a $60K TIRA withdrawal, then without the $100K in medical expenses they'd owe about $13K in federal income tax, but the deduction brings that to about $300.

(Numbers are from TaxCaster, using 2020 rates.)

You can think of this as a pseudo-HSA, basically.
Last edited by 02nz on Tue Aug 03, 2021 9:39 pm, edited 1 time in total.
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retiredjg
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by retiredjg »

tj wrote: Tue Aug 03, 2021 12:27 pm
retiredjg wrote: Mon Aug 02, 2021 11:09 am Personally, I don't like to suggest that someone "should" do this because there might be other factors or preferences involved. I think the suggestion is that it is certainly OK not to convert everything to Roth.

One of the possible uses for leaving money in tax deferred accounts is to use it to pay for high medical expenses and then take a medical expense deduction in years when expenses are high. If you do that, the medical expenses get paid with money that has never been taxed.

Obviously, the medical deduction can happen no matter where the money comes from, but this should work out a little better than paying for the same expenses with money that has already been taxed.
How does it work out better than paying with after tax money and taking the deduction? There's nothing special about using itemized deductions to offset IRA Distributions over Interest, Rental Income, Business profit, etc.
Let's say you have a hospital bill of $10k. If you pay out of savings or out of Roth IRA, all of that $10k is your money. If you pay the $10k bill from a pre-tax IRA, part of the $10k is your money and part actually belongs to Uncle Sam, even though it is sitting in your IRA.

Another way to look at it is...let's say you converted $12,500 from tax-deferred IRA to Roth, withholding $2,500 for taxes (so only $10k actually got converted to Roth). Then use the $10k you got into Roth to pay the $10k hospital bill. If you had paid the bill directly from the tIRA, it would have only required you to remove $10k from the IRA. Since you paid the bill after paying tax on the conversion, you had to remove $12,500 from the IRA to get the bill paid.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by 02nz »

retiredjg wrote: Tue Aug 03, 2021 2:06 pm
tj wrote: Tue Aug 03, 2021 12:27 pm
retiredjg wrote: Mon Aug 02, 2021 11:09 am Personally, I don't like to suggest that someone "should" do this because there might be other factors or preferences involved. I think the suggestion is that it is certainly OK not to convert everything to Roth.

One of the possible uses for leaving money in tax deferred accounts is to use it to pay for high medical expenses and then take a medical expense deduction in years when expenses are high. If you do that, the medical expenses get paid with money that has never been taxed.

Obviously, the medical deduction can happen no matter where the money comes from, but this should work out a little better than paying for the same expenses with money that has already been taxed.
How does it work out better than paying with after tax money and taking the deduction? There's nothing special about using itemized deductions to offset IRA Distributions over Interest, Rental Income, Business profit, etc.
Let's say you have a hospital bill of $10k. If you pay out of savings or out of Roth IRA, all of that $10k is your money. If you pay the $10k bill from a pre-tax IRA, part of the $10k is your money and part actually belongs to Uncle Sam, even though it is sitting in your IRA.

Another way to look at it is...let's say you converted $12,500 from tax-deferred IRA to Roth, withholding $2,500 for taxes (so only $10k actually got converted to Roth). Then use the $10k you got into Roth to pay the $10k hospital bill. If you had paid the bill directly from the tIRA, it would have only required you to remove $10k from the IRA. Since you paid the bill after paying tax on the conversion, you had to remove $12,500 from the IRA to get the bill paid.
Or, put differently, the money that came out of the tIRA and qualified for the medical expenses deduction was never taxed going in, during growth, or coming out. Triple-tax-advantaged, like an HSA.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by tj »

02nz wrote: Tue Aug 03, 2021 2:10 pm
retiredjg wrote: Tue Aug 03, 2021 2:06 pm
tj wrote: Tue Aug 03, 2021 12:27 pm
retiredjg wrote: Mon Aug 02, 2021 11:09 am Personally, I don't like to suggest that someone "should" do this because there might be other factors or preferences involved. I think the suggestion is that it is certainly OK not to convert everything to Roth.

One of the possible uses for leaving money in tax deferred accounts is to use it to pay for high medical expenses and then take a medical expense deduction in years when expenses are high. If you do that, the medical expenses get paid with money that has never been taxed.

Obviously, the medical deduction can happen no matter where the money comes from, but this should work out a little better than paying for the same expenses with money that has already been taxed.
How does it work out better than paying with after tax money and taking the deduction? There's nothing special about using itemized deductions to offset IRA Distributions over Interest, Rental Income, Business profit, etc.
Let's say you have a hospital bill of $10k. If you pay out of savings or out of Roth IRA, all of that $10k is your money. If you pay the $10k bill from a pre-tax IRA, part of the $10k is your money and part actually belongs to Uncle Sam, even though it is sitting in your IRA.

Another way to look at it is...let's say you converted $12,500 from tax-deferred IRA to Roth, withholding $2,500 for taxes (so only $10k actually got converted to Roth). Then use the $10k you got into Roth to pay the $10k hospital bill. If you had paid the bill directly from the tIRA, it would have only required you to remove $10k from the IRA. Since you paid the bill after paying tax on the conversion, you had to remove $12,500 from the IRA to get the bill paid.
Or, put differently, the money that came out of the tIRA and qualified for the medical expenses deduction was never taxed going in, during growth, or coming out. Triple-tax-advantaged, like an HSA.
I'd need some serious medical expenses to deplete the HSA with another 30+ years of contributions and growth...
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by calmaniac »

Just to be clear, for tIRAs (not HSAs) this only works on medical expenses that are above 7.5% of AGI? And, the deduction is only on that amount above the 7.5%?

If so, this 'hack' is mainly for very large medical costs, such as long term care or high end cancer drugs not completely covered by insurance. Correct?

Thanks y'all
"Pretired", working 20 h/wk. AA 75/25: 30% TSM, 19% value (VFVA/AVUV), 18% Int'l LC, 8% emerging, 25% GFund/VBTLX. Military pension ≈60% of expenses. Pension+SS@age 70 ≈100% of expenses.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by David Jay »

calmaniac wrote: Tue Aug 03, 2021 2:26 pm Just to be clear, for tIRAs (not HSAs) this only works on medical expenses that are above 7.5% of AGI? And, the deduction is only on that amount above the 7.5%?
But if one has done a bunch of Roth conversions in early retirement, one can make their AGI pretty darn small…
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by MathWizard »

I had planned to Roth convert to the top of the 12, then 15% of fed tax bracket down
to reduce the tax deferred to $400K , this went into the late 70's for me. This kept
RMDs down to a reasonable level for my wife when she is a widow.

I did not take QCDs into account.

Recently I decided to get an extra $100K for the case of a nursing home
for one of us (probably me). If nursing home car costs $100K for a year, I can take that
from tax deferred plus SS and Roth withdrawals for other expenses, that should allow
me to deduct about $65K from taxable income. The savings vs. Roth conversion of that
$100K should be about $15K.

Not a lot, and this may happen, so I am not planning on leaving more
than $500K in tax deferred.

When we get closer to 70 1/2 I will look at the effect of QCDs.
QCDs affect federal taxes, but I don't know if QCDs affect state taxes.

Remember that you will also have to itemize for the medical deductions, so
in addition to only being able to deduct medical expenses above 7.5% of AGI,
you also would need to give up the standard deduction of about $25K (MFJ).
Last edited by MathWizard on Tue Aug 03, 2021 3:02 pm, edited 1 time in total.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by retiredjg »

calmanic, that's the idea.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by David Jay »

My “big picture” rules of thumb:

1. I don’t like the idea of entering retirement with less than 500K in tax-deferred. There are lots of ways to utilize those funds.

2. If one projects entering retirement with more than a million in tax-deferred, they should go through the effort of looking at future RMD amounts and tax brackets, particularly after the passing of the first spouse.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by 02nz »

calmaniac wrote: Tue Aug 03, 2021 2:26 pm Just to be clear, for tIRAs (not HSAs) this only works on medical expenses that are above 7.5% of AGI? And, the deduction is only on that amount above the 7.5%?

If so, this 'hack' is mainly for very large medical costs, such as long term care or high end cancer drugs not completely covered by insurance. Correct?

Thanks y'all
I like to think of it as an insurance policy of sorts. Especially given how unaffordable LTC insurance has become. If I don't need to use my tax-deferred in this way, great, the money can go to charity, heirs, etc.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by RetiredCSProf »

OP: Thank you for starting this thread -- I have been facing the same question. Most BH discussions on Roth conversions advocate spreading partial Roth conversions over multiple years, without addressing when to stop converting.

Retirement is not an end in itself. How much to keep in TDA adjusts by the retiree's age and their longevity. Are you asking how much to accumulate in pre-tax before you retire? how much to keep in pre-tax before you start RMDs? when you turn 85? or at age 100?

If you assume 6-7% annual return in TDA and withdrawals only for RMDs/QCDs, then the TDA balance peaks at about age 85; that is, withdrawals for RMDs/QCDs eventually exceed the annual growth in TDA if you live long enough.

For no particular reason, I think that having $500,000 in TDA at age 72 for a single person is more enough.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by WoodSpinner »

suewolf wrote: Tue Aug 03, 2021 12:54 pm I'm in a similar situation to OP. Here's what I did: I calculate how much RMD's I will need at age 72 to meet my expected expenses. Anything over that, I am convert to Roth. I'm currently 62 so I'm dealing with a 10+ year forecast.

To determine the RMD amount, I estimated my total expenses when I'm 72 (including taxes), subtracted pension, subtracted social security and subtracted interest and dividends from taxable accounts. The remainder is the needed amount of RMD's. I then determined the average conversion per year and checked to see if that kept me below the 24% tax bracket. In my case it did and in fact most years comes very close to the limit. So that really sets the limit as far as how much to convert overall.

There's a bazillion assumptions here of course (projecting asset values years in advance, tax rates in future years, interest and dividend out that far) but at least I have a basis.

For those that like formulas:
Desired RMD = (estimated income - pension income - social security - interest - dividends)
Remaining amount in qualified accounts (IRA, 401k) = Desired RMD * IRS distribution period (25.6 years in my case)

Hopefully this makes sense. I'd appreciate any comments on this logic as I always value this forum's opinions.
Suewolf,

I think this is a good start but wonder what other things you might want to consider when trying to size your IRA.
  • Beneficiaries that are in lower tax brackets than you are while converting
  • Charity, via QCDs or inheritance
  • Long Term Care funding
It’s not clear if your approach to converting the funds not needed is optimal for you. I would consider:
  1. Tax Diversification and Resilience for unexpected events during Retirement
  2. Tax Equilibrium of taxes paid for conversions now vs taxes paid for RMDs.
  3. Other Retirement Goals
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celia
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by celia »

calmaniac wrote: Tue Aug 03, 2021 1:08 pm retiredjg or others, I'd be grateful if you could point to some resources, blog, or Wiki item that reviews this approach (above text in red) in more detail. Or is this just a matter of having a greater taxable income due to taking IRA distributions and hence greater deduction from health care expenses? I'm missing something.
The big key is to itemize your deductions instead of taking the standard deduction (assuming your itemized deductions are larger). There are other things than medical expenses that can also be itemized, such as property taxes or interest paid on a mortgage. And the medical expenses don't include 7.5% of AGI. Only the medical expenses on top of that amount are deductible.

Look at IRS Schedule A to see what else you should be on the outlook for.
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Re: Once retired, how much SHOULD one keep in their Pre-Tax accounts (PTAs)?

Post by Johnsson »

RetiredCSProf wrote: Tue Aug 03, 2021 5:19 pm OP: Thank you for starting this thread -- I have been facing the same question. Most BH discussions on Roth conversions advocate spreading partial Roth conversions over multiple years, without addressing when to stop converting.

Retirement is not an end in itself. How much to keep in TDA adjusts by the retiree's age and their longevity. Are you asking how much to accumulate in pre-tax before you retire? how much to keep in pre-tax before you start RMDs? when you turn 85? or at age 100?

If you assume 6-7% annual return in TDA and withdrawals only for RMDs/QCDs, then the TDA balance peaks at about age 85; that is, withdrawals for RMDs/QCDs eventually exceed the annual growth in TDA if you live long enough.

For no particular reason, I think that having $500,000 in TDA at age 72 for a single person is more enough.
We are mostly retired as of a month ago. We started converting last year. I've been thinking (also for no particular reason) to leave about $800M (for two of us) in pretax when we're done converting in our late 60s. Medical and LTC are the main reasons with QCDs also in the mix. I'm not sure of other reasons to leave funds there. Pretax will remain in bonds for the duration.
'In theory there is no difference between theory and practice. In practice there is.' Yogi Berra
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