Posted: 9/8/2025 11:11:48 AM EDT
|
Inspired by this thread: https://www.ar15.com/forums/General/A-financial-milestone-/133-2811264/ It's a good time to be thinking of planning ahead of to-do or NOT to do Roth conversions. It makes very little sense to do Roth conversions at 75 years old, with a few caveats. At least start the planning and thinking through now. Food for thought, we've been investigating this concept the last 3 months or so. A couple key points for this topic for success for anyone out there but I could be wrong and there could be more: Needs to be done as early as possible so the Roth growth can outpace the taxes paid. Typically needs to be done when the household only has 1 income, typically $90k or less OR no income. It needs about a 10 year run of growth +/- Sweet spot of age looks like about 55-58 or so. Income needs to be as low as possible or no W-2 income. Rule of thumb, it's about a $10,000 cash tax foot print per $100,000. This scales upwards and could be $15,000 depending on income. Ideal to use outside or free cash to pay the taxes NOT conversion. So one strategy is for year 1 or year 2 of "not working" to have an extra $15k-$30k in Bucket 1 that is dedicated to perform a conversion. Do the conversion while living off Bucket 1 free flow cash with no W-2 income. Attached File Attached File Attached File Attached File |
|
Some things everyone needs to look at first (beyond just RMDs) to be automatic triggers for Roth conversions: 1. Widows tax trap. If one spouse dies and the surviving spouse is now filling as single, what does the tax situation look like. Will that spouse end up with a bigger tax bill and less take home? 2. IRMAA will your taxable income (including IRA and brokerage account) cause you to pay more for Medicare? Medicare has multiple tiers and can cost you several thousand more per person. 3. Social security tax torpedo. Taxation of social security is dependent on a provisional income formula. Up to 85% of you SS can be taxed and the thresholds haven’t changed since the 80/90s when it was put into place. Taking $1 of IRA money can be taxed as if you took out $2 as $1 of the IRA is taxed plus $1 or you SS gets pulled into being taxed that wasn’t before. 4. Pensions and annuities. Pensions is almost a guarantee to need to do Roth conversions and Annuities should be accounted for also. These income sources are the first dollars that account for taxable income with other income types layering on top. You could go from $0 in capital gains to 23% if you aren’t careful. I started looking at this in my 40s. Since I have a pension, and had been maxing my pre-tax for a couple decades it was looking like I could be paying massive amounts in taxes. This year I completed my last Roth conversion and am projected to have saved several million in taxes. A good tool like projection lab or similar is helpful in modeling. |
| Something I have been looking at is my company plan and match program has very limited choice on what I can pick for investments. My Roth account is with someone else and I can choose almost anything to invest in that I want with that. I haven’t pulled the trigger on this idea yet as I will take a tax hit but the more I think about it, the more I am seriously considering taking the hit now in order to gain more control of my investments. At least for some portion of it depending on all the factors tax brackets, income, write offs etc. |
|
Originally Posted By InsaneRusher: Something I have been looking at is my company plan and match program has very limited choice on what I can pick for investments. ..... the more I think about it, the more I am seriously considering taking the hit now in order to gain more control of my investments. It takes a lot of growth to make up for the tax hit of converting while working when compared even to high fee index funds in the neighborhood of 1%. On the taxes, recall that roth and 401k have equal performance if your taxable income is the same. The benefit is in choosing when to pay the tax man - choose pretax or roth based on when you will be in a lower tax bracket! If you are retiring "early" and will have some low-income years then those are the prime time for roth conversions. You can get as fancy as filling up a low tax bracket each year for maximum savings. The green blob is roth conversions to fill up the 12% tax bracket starting when I quit working at 53. Assuming everything goes to plan! So that cash will get taxed at 12% rather than 22 or 24% and will have many years to grow tax-free. Again, make sure you have cash to pay the taxman and do not pay the taxes out of the conversion money! (unless you are old enough to avoid the penalty, then it doesn't matter) Attached File |
|
You’re not making up for the “tax hit”. The focus is on amount of tax paid today (at historic low rates, versus the tax paid in the future (which rates can always change). First you need to know if you 401k even allows”in service withdrawals” or in plan conversions? If it doesn’t allow for in service withdrawals you can’t move the money out to an IRA (Roth or otherwise. If it allows in plan conversions and you have a Roth option in you 401k you can’t move convert in plan, regardless of in service withdrawals. You convert strategically. Almost never do you do a single one time conversion of an entire balance. It took me 5 years to convert $900K of pre-tax to Roth. |
|
Originally Posted By jsippel: Another way to reduce your taxable income is to max out the IRA contribution for the non-working spouse.... Originally Posted By jsippel: Another way to reduce your taxable income is to max out the IRA contribution for the non-working spouse.... Originally Posted By Joe_Blacke: You’re not making up for the “tax hit”. The focus is on amount of tax paid today (at historic low rates, versus the tax paid in the future (which rates can always change). This is what most people don't appreciate - roth and pretax provide the same returns and the only benefit to you is being able to choose when to pay your tax bill. If you pay when your taxes are lower you win. If you paid when your taxes are higher you lose. |
|
Originally Posted By Morgan321: This is what most people don't appreciate - roth and pretax provide the same returns and the only benefit to you is being able to choose when to pay your tax bill. If you pay when your taxes are lower you win. If you paid when your taxes are higher you lose. This is an important point. A lot of people weren't paying attention in school when they covered the commutative property of multiplication. A lot of people also don't understand tax brackets, marginal tax rates and deductions. |
| What you plan to do with the funds is also important. Doing a Roth conversion now is a way to transfer wealth tax free to your heirs and prevent them with being hit with a tax bomb in their most productive years, but only if you aren't planning to use the money yourself in retirement. |
|
Originally Posted By networkguru: My Dad converted about $150k of IRA to his ROTH over a 2 year period because he was slowly dying and it "seemed" easier to pass it on to me and my siblings. He only had social security as income but paying the tax sucks. Roth IRA is likely the most reliable, easiest, and tax/cost efficient way to leave money to your heirs. |
| My FiL has a very large 401k that he is now going to need to RMD mid-5 figures out of. I keep telling him to use that money to do his conversions to slowly lower his distributions. Mind you, he has ignored my advice to slowly move it over for 10 years now. |
WTF is up with this bullshit anti-bayo lug crap. Was there a group of irrate japanese guys bonzai charging disabled school children and puppies that I wasn't aware of?
|
Originally Posted By Silverbulletz06: My FiL has a very large 401k that he is now going to need to RMD mid-5 figures out of. I keep telling him to use that money to do his conversions to slowly lower his distributions. Mind you, he has ignored my advice to slowly move it over for 10 years now. When my grandmother died my mom asked me about investing money and how to avoid taxes, etc. I told her to call Fidelity and tell them what she wanted and they would handle it. Instead she went to a local "wealth manager" who worked for free.... because all he did was sell very poor life insurance policies and annuities to old people. When my mom died I found out she had bought an annuity with the money she got when her mom died.... the annuity had guaranteed returns of, wait for it, 0-3.5%. So from the late 2000s up until 2024, just over 15 years of insanely high market returns, my mom was getting 3.5% with all the profits above 3.5% going to the annuity company. So instead of around 300% profit she got maybe 50%. The purchase price of the annuity was high 6-figure range, ie. she gave up between 1-2 million dollars in profits. Old people like security and what feels comfortable to them, they don't like change. Don't act like and old person when you become one! |
|
I struggle with exactly what to do in this situation. I've got a big mix of accounts from Roth 401k, Regular 401k, IRA, Roth IRA, and a Taxable Brokerage(I know it doesn't matter here). We've got a combined income north of $300K each year and we are 43 years old. There will be a sizable inheritance and $1M+ in RMD's from IRA's that will have to be taken. We should benefit from a step up basis with the remaining. But I just don't know when or if we'll make less money. What scares me though is how quickly inflation is increasing this money and what we see now in tax brackets will be changed significantly in the next 30 years. We both plan to work another 15 years or so. But that time could shorten quite a bit if things go better than planned. |
|
Originally Posted By Morgan321: An inherited Roth IRA has no RMDs and a 10 year window for you to withdraw the funds which will be all tax free. If you name beneficiaries on the account then the account transfer also bypasses probate and is not contestable in court. Roth IRA is likely the most reliable, easiest, and tax/cost efficient way to leave money to your heirs. If the owner of the IRA has already begun to take RMDs before they die, the one who inherits it must also continue the RMD as well as hit the 10 year withdrawl. |
|
Originally Posted By Morgan321: That’s a struggle bus I’d be happy to ride on! See any thread about financial advisors here, find a good one and pay him to help you avoid multiple hundreds of $k in taxes. Originally Posted By Morgan321: Originally Posted By WrightP: I struggle with exactly what to do in this situation. See any thread about financial advisors here, find a good one and pay him to help you avoid multiple hundreds of $k in taxes. I've quickly learned that there is a difference in a financial advisor and a tax planning attorney... |
|
Originally Posted By @WrightP: I struggle with exactly what to do in this situation. I've got a big mix of accounts from Roth 401k, Regular 401k, IRA, Roth IRA, and a Taxable Brokerage(I know it doesn't matter here). We've got a combined income north of $300K each year and we are 43 years old. . This will make more sense as my inspiration for this thread is nearly exactly what you posted above, scenario. I'm 49 and about 9 quarters out from walking away from work, or so. Right now my traditional IRA is sitting around $1.4m so I am strategizing: When to do conversions? How am I going to pay for them? OR NOT do conversions but use the RMD's as our income in 15 years. Basically I'm building a Age vs Year chart and plan from 2028 for the next 30 years. Where I'll be pulling money from to fund our lifestyle. Many boxes and buckets options is the goal. My results are looking like:
Meanwhile, I'm building a dedicated bucket for the conversions. Trying to go for the 5 year conversion plan, as someone else had posted. And just stomach the cash outlay out of a brokerage money market account. During those 5 years, we will not want to sell anything as that would drive up our LTCG or tax foot print for the conversions so we'll need the buckets ready to go, in advance. With the accelerated plan, the Roth could be worth $10m in 2040+ and fully tax free. Discipline equals freedom. Hence this graphic is part of our plan: Attached File |
|
Looking at doing conversions when I go p/t in 2 years. I plan to max conversions to keep us in our current tax bracket. I plan on doing 2yrs p/t then retire altogether. I can bump up conversions more then. I was doing scenarios and implications of RMD's at 73 and was shocked how much would have to be pulled each year and the taxes incurred. It was a lot more than I envisioned. |
|
I am converting some but I am not going nuts on it being a single person tax payer. My concern is the rules keep changing. I’d hate to pay for the conversions then the laws change and seniors get some kind of break in the tax law down the road. I certainly don’t expect that or bank on it so I hedge my bets and look to convert chunks when the market takes a hard dip like it did this year. I generally don’t have the cash reserves to pay the taxes on a large conversion anyhow. I will work up to the mid twentyish tax rates but no more. If I get half converted before I get to the IRMA looked at age I’ll be content. Not knowing the future tax law makes it somewhat guesswork. Do your best planning possible. |
The only hyphenated names I like are cartridge names......30-06, 30-40, 38-55 etc.
|
Originally Posted By bigborehound: Looking at doing conversions when I go p/t in 2 years. I plan to max conversions to keep us in our current tax bracket. I plan on doing 2yrs p/t then retire altogether. I can bump up conversions more then. I was doing scenarios and implications of RMD's at 73 and was shocked how much would have to be pulled each year and the taxes incurred. It was a lot more than I envisioned.  Also, I know the BBB made the tax brackets permanent, but that doesn't mean they can't be changed. Who knows in 5+ years when the deficit is 40+ Trillion what tax brackets they will have. |
Then conquer we must, when our cause it is just,
And this be our motto: 'In God is our trust.'
And the star-spangled banner in triumph shall wave
O'er the land of the free and the home of the brave!
And this be our motto: 'In God is our trust.'
And the star-spangled banner in triumph shall wave
O'er the land of the free and the home of the brave!