I DON’T TRACK MY finances that closely and I don’t make big financial moves very often. Partly, it’s because I’m so busy with other things. But partly, it’s because I’ve come to see the virtue in benign neglect.
Still, this is shaping up to be a surprisingly busy year. I’ve taken a handful of financial steps—with three key goals in mind:
No. 1: Prepaying retirement. Like many others as they approach retirement, I have the urge to get key expenses out of the way before my earned income disappears. I’m not sure this impulse is entirely rational. Even once we retire, big expenses will keep cropping up, so there’s a limit to how much we can prepay the future.
Yet prepaying costs is undoubtedly part of my motivation in remodeling my house now rather than later. That said, there’s another, more rational reason to get the project done soon: Elaine and I will have more years to enjoy the renovation before we’re potentially forced out of our home by old age, and any cost overruns will be easier to handle while I still have some earned income.
Similarly, in an effort to get costs out of the way, I’ve been writing some big checks to my grandson’s 529 college savings plan. I promised to build the account up to $50,000, and I got there last month. I’ve also said I’ll do the same for any other grandchildren who happen to turn up.
A digression: Based on his parents’ income, my grandson almost certainly won’t qualify for needs-based aid under the current financial-aid system, so funding the 529 seems like a sensible move. On the other hand, when I ponder the student loan mess and the outcry over rising college costs, I sense we could see wholesale changes in the way colleges are priced and financial aid is disbursed. What will that mean for money stashed in 529s? I wish I knew.
No. 2: Prepaying taxes. While I continue to save a modest amount each year, these days I’m mostly moving around the money I’ve already accumulated. What’s behind these moves? A key goal: Reduce my future tax bills, especially once I’m in my 70s and required minimum distributions (RMDs) will force me to pull significant sums each year from my traditional IRA. Those RMDs, coupled with Social Security benefits, are likely to put me in a lofty tax bracket.
To trim future tax bills, I’ve been stashing money this year in three accounts that offer tax-free growth. First, I’m hoping to fully fund my solo Roth 401(k) in 2023, which would mean moving $30,000 into the account as my “employee contribution.”
Second, I’ve been converting a portion of my traditional IRA to a Roth. I converted $80,000 last year and another $50,000 on 2023’s first trading day. I’ll likely convert another chunk later this year, when I have a better handle on my 2023 taxable income. There’s a good chance that chunk will be a large one—because my income this year looks like it’ll be modest, thanks in part to the collapse in digital advertising. HumbleDollar has never made a lot of money, but lately it’s been barely breaking even, with this year’s revenue from advertising running 25% below 2022’s level.
With my Roth conversions, my goal is to get my income close to the top of the 24% tax bracket. That seems like an especially smart strategy for the next three years—for two reasons. First, without Congressional action, today’s tax law will sunset at year-end 2025 and we’ll revert to 2017’s more punishing tax brackets. Second, in 2026, I’ll turn age 63—which means thereafter high taxable income, including income resulting from Roth conversions, could trigger premium surcharges once I turn age 65 and become eligible for Medicare.
What’s the third tax-free account I’m targeting? That would be my health savings account (HSA), which I’m eligible to fund this year because I have a high-deductible health insurance policy. Even though I’ll likely incur some medical expenses later in 2023, my plan is to pay those costs out of pocket while leaving my HSA to grow, so it’ll be available to help with my retirement’s medical expenses.
No. 3: Paying it forward. In stashing money in my solo Roth 401(k) and undertaking Roth conversions, I’m not just trying to limit my future tax bills. I’m also aiming to build up these accounts with an eye to bequeathing them to my two kids.
While a Roth isn’t the great inheritance it once was—thanks to the death of the stretch IRA—it’ll provide my children with a pool of income-tax-free money and potentially 10 years of tax-free growth after my death. Because I have no plans to spend the money during my lifetime, it’s 100% invested in stocks, in the guise of Vanguard Total World Stock Index Fund.
Recently, within my Roth IRA, I swapped from the mutual fund version (symbol: VTWAX) to the exchange-traded version (VT), thus lowering my annual expenses by 0.03 percentage point. While exchange-traded index funds typically have lower ongoing expenses than their mutual fund counterparts, I’ve resisted owning ETFs to date because you lose a little to trading costs every time you buy and sell. But I’m pretty certain I won’t be doing any selling in my Roth, so trading costs aren’t a concern.
By contrast, in my traditional IRA, which I plan to draw down during retirement—and, indeed, will be required to do so—I’ve avoided ETFs and instead stuck with regular index mutual funds. Could I save a few dollars by converting my traditional IRA to ETFs, even after factoring in some occasional buying and selling? Perhaps. But it doesn’t seem worth fussing with. No doubt true penny-pinchers would disagree.
In bequeathing my Roth accounts to my children, I’m hoping to set an example for them—that we, as a family, should strive to pay it forward to the next generation. I’m unlikely to bequeath so much that my kids never need to work again and, in any case, I don’t think that’s desirable. On the other hand, I do think it’s desirable to bequeath a sense of financial security—the knowledge that, if my children have a rougher financial journey than me, they’ll still be okay come retirement. That sense of financial security, I believe, is worth far more than the raw dollars involved—and I hope my kids will pay it forward to their kids.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.
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An addendum to the previous.
We generally want our Roths to hold much more volatile stocks rather than bonds, with an eye toward big tax-free gains if the market soars.
But if the stock market goes up a lot during my current pre-Social Security no-income period, I may do some of my Roth conversions out of taxable IRA stock funds and into short-term treasuries held in the non-taxable Roth account. The idea would be to temporarily “park” profits on stock gains in the Roth.
If stocks subsequently plunge, I would convert those past-profits held in Roth treasury funds back into equities, with a hopeful eye on tax-free gains in any future bull market.
But if stocks kept going up, those bull market stock sale proceeds held in Roth treasuries would be the first distributions I make from the Roth, which really doesn’t want to hold low-volatility short-term treasuries.
I think I said that right. 😉
A vote for “pre-paying” retirement while working.
I am currently in the zero-income ‘dead zone’ of no longer working, and waiting until age 70 to take SS. While counting the blessings of having “enough” to do that, I can testify it is nevertheless painful to pay 100% of expenses from savings.
Mostly from after-tax cash savings, with minimal IRA distributions, so as to make room for maximum Roth conversions under that next tax bracket.
It’s an interesting problem to have in this period: Balancing the desire to hold a healthy slug of after-tax emergency-fund cash for the long haul, while also maximizing Roth conversions under the next tax bracket. Which means minimizing taxable IRA distributions and spending more already-taxed cash.
Having minimized this no-income waiting-for-SS period by working longer turns out to have been a good (and lucky) move.
We will be doing the same. No Roths to date but plan to start in 2024
Thanks Jonathan, With regard to my Roth, I became aware that keeping it to let the descendants inherit the worth, depending on the situation, may not be desirable.
I elected to take my Roth distribution, and gift it to the sons monthly as long as the proceeds go into their own Roth IRA’s.
The money is tax free to me, tax free to them, and when they have their distribution, tax free again. And they get an equal inheritance now, not later.
Doing this also introduced them both to the world of investment for the future. They both follow their accounts closely and that’s good for me to know!
While not there yet, this strategy has long appealed to me. Still, I have concerns and am curious if you’ve considered. If your kids are married are you okay with potentially losing assets in divorce? Do you have full confidence your sons won’t develop a gambling or drug addiction possibly squandering assets? Sorry to be macabre but have long wondered about the tension of benefits with this strategy versus, well, life often ends up completely surprising us.
Great and timely. One thing I would say, “everyone” needs to watch their finances more closely especially in the age of cyber crime. Whether you mistakenly download an app on your phone or pay for gas with your debit card, it is important to look at your transactions and financial profile at least weekly. Making this a habit allows for you to get incorrect charges off of your accounts, and of course you can get with an institution that has fraud monitoring as well.
As for everything else in the article, very timely.
I had the same idea with our recent house renovations, trying to reduce the odds of big unplanned expenses in retirement from that source. I often wondered if I was just acting on an “end of history” mindset about the start of retirement. Rationalized it as yet another saving bucket (not a liquid one) plus the joy we get from experiencing the improvements, as you said.
The humility comes from the willingness to share not the dollar amount involved. The dollars won’t be of any value in eternity but the humility will go a long way.
I deeply appreciate the information provided and feel it can be applied to most any situation using common sense. I wish I would of had access to the information 50 years ago, it may of made my life less stressful over the years.
Jonathan,
I just tried to make a donation using both Microsoft Edge and Google Chrome and I kept getting the “spinning” circle and it never went through. Just an FYI.
The “decumulation” phase (I love that term) is as interesting as the accumulation phase. My wife and I don’t have children (but have some nieces and nephews who don’t realize they should stay in touch with us more…) and I’m actually planning on spending our Roths first and then letting the regular IRAs play out with RMDs. All of our money will go to charity (unless the nieces and nephews wake up) so there will be no taxes for them on the IRAs. That’s also based on spending more money early in retirement, the Go-Go Years, before we hit the Slow Go and No-Go Years.
It was actually easier to just put the money in over the years than is to take it out. It’s a good problem to have. We are blessed.
Have you looked into a CRT since you want to provide dollars for Charity? Look into some options there which will allow you to spend down the assets and leave rest to charity.
If you are bumping up against certain estate tax issues. Most people do not. Just assuming.
Good point, Kevin. Alan Gassman, a FL estate attorney & his colleages, provide great webinars on trusts. I watch to gain knowlege… and the CPE credit! You can find the courses on CPAacademy’s website, along with dozens of other topics from other teachers about Excel, Intuit products, productivity, etc.–all things accountants embrace. Most of the webinars are free and there are usually pdfs of the Powerpoint slides. These can be a good conversation starter with one’s own financial & legal teams.
Jonathan, you’d be a great instructor if you want to enlighten a bunch of accountants!
I’m leaning towards skipping TIRA conversions & spending Roths first too.
While roths grow tax free, as of now, all medically-related long term care costs over 7.5% of AGI are deductible.
If a senior retiree needs long term care, how fast will they reach 7.5% of AGI with no pensions – just SS & some dividend/interest income? Pretty fast, given how much those services will cost in the next 10-30 years!
Buy into a CCRC and any portion of the monies spent on that for medical care or home health needs (help w/activities of daily living – ADL) qualifies. For seniors with no legacy desires, that seems better than pre-paying a lot of tax now or sky high LTC policy costs.
I too ran into problems donating recently, so I simply sent a check to Jonathan and got a nice written thank you card from him in return.
Sorry to hear about the problems donating — and thanks for trying. I’m not sure what’s going on with donating and commenting, and nor does my web developer, but readers are indeed having occasional problems. Usually, hitting refresh or trying another browser solves the issue.
My experience from retiring over 20 years ago, is that a traditional IRA with a $1 million balance can easily become $3 million by the time RMDs are required. Growth continues in investment values. $80,000 conversions are good but they often do not reduce the TIRA balance as it grows faster than the conversions can reduce it. The best I was able to do before RMDs was to get to the point where the TIRA to Roth IRA ratio was about 55/45. So, my RMD’s are 45% lower than they would otherwise be. I had to pay IRMAA surcharges for my 1st year of Medicare because of doing conversions……. At age 76 from a $3 million IRA, a 45% reduction in RMD is more than $56,000.
That’s why I transitioned my TIRA funds to slower growth bonds and mm. Equities elsewhere. So RMDs shouldn’t be a huge shocker. But I don’t plan on ROTH conversions anyway.
Great point. I see this happening too and it is rarely mentioned. The reason I am doing small conversions is to increase my Roth account for my children. The best inheritance for them will be that tax free account.
I opened Rothsv for kids as teenagers so they will have 1-2-3 million dollars at age 67. Unfortunately for many the Secure Act killed our plans to have the inherited IRAs stretched over their lifetime. Do we really know that tax rates will increase in 2026. The GOP might keep them as is
It’s hard to know what will happen to the tax code in 2026 — but I strongly suspect rates won’t be going down, so Roth conversions today seem like a smart strategy.
But haven’t tax rates gone down 15 of 25 years since 2000?
Were Roth conversions even possible prior to 1998?
Given the capricious nature of politicians I see no compelling reason for me to prepay a future tax liability.
If you have a tax bracket to fill and a year with no income, it’s the time to try.
Jonathan, the theme of your last paragraph echoes an ongoing conversation that I have with my daughter. I’ve also included the topic in my legacy letters.
Jonathan, I’m frustrated that your advertising revenues are decreasing. This website provides so much for its readers: education, variety, advice, inspiration, cautionary tales, humor, and occasional humbugs. I look forward to every Saturday morning as I drink my coffee and read the entire week’s worth of your website’s articles. I’m hopeful Humble Dollar does far better than “barely breaking even”, this year and beyond.
“ . . . and I hope my kids will pay it forward to their kids.” Is anyone using a trust that provides income to your kids during their lifetime with the remainder split among all grandchildren at the (last) death of your children? That’s how my grandparents set up their trusts, which happens to match our ideal estate distribution plan.
The missing component is a reasonable cost alternative to a corporate bank department trustee after the death of both my spouse and me. Any suggestions out there?
I think your observation regarding trust costs and control to efficiently and effectively transfer substantial wealth to future generations is a great question to consider for those with the means and desire to make such gifts. I think a partial solution may be to split your bequests between generations at your death along the outcomes you hope will occur as a result of such thoughtful gifts.
An article by Jeff Levine at Kitces, https://www.kitces.com/blog/using-a-family-dynasty-529-plan-for-multigenerational-college-planning/ , regarding dynasty 529 plan to provide education funding for multiple generations may help in your planning in regards to current and future grand children and their descendants.
I read your line, with the remainder split among all grandchildren at the (last) death of your children, as recognizing a desire to treat all grand children equally regardless of the number of grand kids each of your own children have. If that is the case dynasty 529’s could help in having separate pools of money for 2nd and 3rd generations with less conflict and administrative costs of a single trust.
I hope this helps.
Dan – you are correct that a generation skipping trust appears to leave an ideal family legacy, yet our experience with this kind of trust highlights two fundamental issues – 1) even reasonable trust fees can significantly drain the family’s legacy over subsequent decades and 2) when establishing the trust, no one can know the future ideal structure for taxes and investing.
I wrote about our family’s generation skipping trust which cost our extended family perhaps as much as one-third the value ($900K) over 34 years. Roth’s, Index funds, free trades and modern tax structures did not exist when this trust was set up.
https://humbledollar.com/2022/08/where-theres-a-will-2/
Holy smokes. That’s a huge number.
My wife and I are retired but have so far avoided Roth conversions from our over-funded traditional IRA. We’re in NYS, and conversions would mean 24% fed tax plus approximately 7% NYS tax. At a total conversion tax of 31%, I don’t think it’s wise to convert from Traditional to Roth. We considered a move to a no-income tax/estate tax state, but haven’t done so yet due to other personal reasons. All the articles I’ve read on Roth conversions seem to assume the account holder is in a no-income-tax state. Am I missing something regarding the Roth conversion math?
As a rule, Roth conversions only make sense if you expect to be in the same or a higher tax bracket later on. If you don’t think that’ll be the case, avoiding Roth conversions is probably wise.
As someone who’s parents left a million dollars to, I have a first hand perspective on inheritance. Basically it most likely will have zero impact on your life because you will already be financially independent and retired, or nearly so, when you inherit. It’s a blip on the radar of your financial life because it’s surplus money you won’t need or use unless you’ve mismanaged your own life. And if you have, then you won’t manage the inheritance well either and it will be gone in no time. So, it’s kind of one of life’s ironies. You either do not need it and will never spend it, like me, or you will need it, but will waste it like many others have. It’s a nice cushion to have for your senior adult children, but it’s the tiniest and least impactful piece of your legacy to your progeny.
I was thrilled to receive what this writer would consider a paltry 1/2 million inheritance from my parents. The first Christmas after receiving this wonderful gift I gave 50K to each of my children as a final Christmas present from their grandparents. This has made their financial lives less stressful, as has the balance of funds mine. Perhaps you should donate your inheritance to charity since it will have zero impact in your life but met have a huge impact on others’s. That is unless you would feel they have just mismanaged THEIR lives.
You may not realize it, but you sound rather ungrateful. Your parents left you $1,000,000, and it will “likely have zero impact on your life”? There’s also a touch of cynicism here. You seem to be saying that those without substantial assets are there because they have “mismanaged” their finances and will likely do,so,again with a generous inheritance. Ungrateful, cynical, and, yes, rather pompous. I think I’m probably like many Humble Dollar readers: Retired; quite comfortable; able to do things we want to do with our lives. But I still worry somewhat. In my case, when I die (hopefully not too soon), my spouse will lose approximately
$100,000 in annual income from my pension and Social Security. So, I’m still saving and investing diligently to provide her with the buffer she might need to generate that income should my demise comes sooner rather than later. Had my parents left me $1,000,000, my worries would more than likely be non-existent. When my mom passed at age 99, she left me $125K, and I was shocked. She and my father raised 9 kids, and we never seemed to experience any of the luxuries that many in my community experienced (country club memberships, exciting vacations, cars purchased for us when we were teenagers). The fact that my folks were somehow able to leave a $1,000,000 legacy to their 9 children just blew my mind. I was extremely grateful, proud of what they had accomplished, and humbled that they cared enough for their children to sacrifice their own pleasures during their lifetimes in order to leave us something. And the first thing I did with a portion of that money was to gift it to my 9 grandchildren for their future educational pursuits. I believe your $1,000,000 inheritance would have served society better had your parents left it to some worthwhile charities rather than to you. Unfortunately, they didn’t fully realize the kind of person you were when they made their legacy decisions. Hopefully, others reading this comment thread will be a little more thoughtful in making their own legacy decisions.
I’m a bit shocked at the number of thumbs up on this comment. I underestimated the wealth and income strata of many HD readers it seems. Not many people can relate to this scenario and point of view – or can they? Maybe I’m out of touch 😎
My pov on OP comment: he had enough wealth that he didn’t need to worry. Daily life did not change with the bountiful inheritance. His gifts to his children are likely the experiences they had as a family…plus the future financial bequests… that already would have been adequate. The extra money is “just” icing on the cake. More peace of mind, yes, but not life altering, because it’s already a great life. Good for him! He made it on his own and was blessed again!
after reading the comment above I too was shocked that this post is in a at the positive rating
Deleted my response – read too fast and misunderstood original comment lol.
But just for the record, inheriting even a fraction of a million dollars would have given me a lot of comfort and security – as it would for most people I know.
But I came from and hang with people of very humble means.
I’m more the audience you expected. My wife and I have been comfortably retired for 11years. Our comfort is due primarily to a traditional pension; combined with social security and some dividend income. We travel more than a bit and don’t feel financially constrained.
But. We won’t have a million to leave to each child, let alone half a million to each grandchild. Given our stable (so far) group long term care policies and our excellent retirement medical benefits, we expect the portfolio to remain much as it is now until our deaths. There should be something around a million in total left to pass on, but we have advised our two sons that if there’s anything left, we probably messed up.
In the meantime we help each of them along the way on occasion and expect that their careers will continue to develop and that the eventual inheritance will simply be icing on their cakes.
You sound a lot like my wife and me, but I suspect you realize we are far from the typical retiree. Why do you feel you messed up if there is anything left?
Sorry. That part was supposed to be amusing. When we retired we sat down with both of our sons to discuss finances and the future. We wanted to let them know they wouldn’t have to take care of us later in life. And at the same time, advise that while there should be something left when we’re both gone, that it wouldn’t be enough to change their lives.
You make a good point
The expectation of money down the road isn’t, I believe, solely about its financial impact. Instead, it’s also about the emotional impact — the sense of financial security, that things will work okay. I believe that’s enormously valuable.
The emotional impact goes both ways — parent and offspring — I think.
I began saving early on for my financial independence and never assumed an inheritance. Eventually, my father understood that I did not need his money. That pleased him, as I was pleased that he nonetheless wished to provide for me. We spoke often about how inherited money could be used constructively and what charities it would fund.
I don’t think the emotional impact can be underestimated. I borrow Warren Buffett’s “Margin of Safety” (he got it from Ben Graham) to make that point. If something financial happens that you can easily handle, it’s a lot more comfortable than having the same event take you down.
Steve, I think your view is a tad myopic. If I could leave a million dollars to each of my four children it would have a great positive impact on their lives. Hardly surplus money or not needed.
My children are in their early fifties with children still In grammar school, one turned 8 a few days ago. When they would hope to retire, they will still have children in college, even just entering college.
Like most people they are attempting to raise a family, save for retirement and college and pay high medical bills for children and in two cases spouses even though they are insured.
In short, they are quite average and do not mismanage their money.
I will be 80 in a few months and my wife is 83. If we are lucky to live another seven years any inheritance will come at a critical time for each of them between retirement and college payments. If not, it will give them a boost for their retirement savings.
Anything we leave will not be a blip or surplus which is why I am fixated on leaving as much as possible.
Steve, the average person/family is nothing like you in this regard.
As a preparer of income tax returns I have seen plenty of people that are just as Steve describes. I have also seen many kids who benefited from inheriting as Mr. Quinn states. I’ve observed that financial IQ is lacking in all generations. It seems to me that the folks who are reading pubs like Humble Dollar don’t really need to, while the peeps that could really benefit from these fine conversations don’t seek it at all.
Bingo!
It reminds me of the observation someone made years ago: You see a lot of people exercising who don’t really need to. I don’t know how true that is today.
I do hope we get some basic financial education installed in all our schools. The kids are going to really need it.
Plenty of tax returns where inheriting $1,000,000 is a surplus blip that’s not needed? I take it you are not volunteering for the AARP🤣
Richard, it sounds like it may very well be the case that the Humble Dollar isn’t as “humble” as we thought it was 🙂
👍