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I thank everyone in advance for any assistance and advice you can provide regarding my Roth conversion scenario. I am currently 56 with a potential retirement age of 58 (approx. 2 yrs). My wife is younger and will continue working for another 8 years following my retirement. I plan on deferring Social Security as long as possible, age 70. I have $850,000 in a regular IRA and an additional $600,000 in a company sponsored 401K. My wife and I file jointly and are currently in the 24% tax bracket ($206,700- $394,600).
I understand the benefits and general tax implications of a Roth conversion; foremost to pay the IRA conversion tax from a taxable account, not the IRA. In my case, I will cover Roth conversion taxes from selling index funds in a brokerage account. I am looking for clarity on when to start converting my IRA to a Roth. General convention says that you convert when you retire and earn less income. However, I have a wife that will continue working for 8+ years. At my retirement my wife’s salary and my residual income will put us in the 22% tax bracket but very close to the max $206,700 threshold.
Wouldn’t this threshold significantly limit the amount I can convert to a Roth and still stay in the 22% bracket?
As I am already in the 24% bracket, wouldn’t it make sense to start converting now? I would be able to convert about $75,000 in 2025 and still stay in my current 24% tax bracket.
Is there a way to file taxes separately and convert more of the IRA at a lower tax bracket? I don’t think this is an option.
I have listened to podcasts and heard different conversations about the importance of the Right Timing & Right Amounts to maximize the Roth conversion. What am I missing?
Are there advanced Roth conversion calculators that can provide individual conversion timing breakdowns with amounts based on tax brackets and future income?
All comments and assistance are greatly appreciated. Regards, John
Looks like you’re on track for a great retirement financially speaking. My concern is that what are you going to do for the first 8 years while your wife is still working? I’m on year number four of retirement and loving it. What I’ve found is that it’s best when both spouses retire at the same time. So my recommendation is have your spouse retire early. You have more than enough money and you will quickly find that both of you being free is the ideal choice. Enjoy this season of your life together. Don’t worry about the additional money your wife would have made during the next eight years. Your time together far outweighs this. Plus when you hit 70 you can cash in on your social insecurity. And your wife can begin collecting as soon as she’s eligible. Enjoy this season of life. You never know when your last day will come.
The difference in ages between you and your wife makes me wonder if it will make sense until you have both retired.
For me, I decided the best time to start converting was when I had stopped working but wasn’t yet required to take RMDs.
This probably doesn’t apply to most people, but I eventually realized that I had converted too much. My only close relative is my younger sister, who won’t need any inheritance from me. We have discussed it and both plan to leave most of our estates to non-profits. While I’m living, I plan to donate as much as prudent through QCDs. I’m almost 76 and my traditional and Roth IRAs have over $1 million each. It seems unlikely that I will exhaust my Roth during my lifetime so much of it will go to non-profits. Since they won’t pay any tax on it anyway, the amount I spent paying taxes on my conversions will be wasted.
John, we’re about one year apart in age so this topic is of interest to me as well. You said you already reviewed a number of resources. At the risk of sharing something you’ve already seen, I recently watched this video by Kevin Lum. He would argue for earlier Roth conversions. I appreciate reading a variety of opinions — including opposing opinions — to help me come to an independent informed decision. As others mentioned, the math on Roth conversions is but one factor among many in making a decision for your specific situation. I also agree 100% with David that that the future is unknowable. I’m at 25% Roth and 75% traditional but will look for good opportunities to convert (convert at the dip) to get this closer to 50%-50%.
I strongly recommend using sophisticated planning software to help analyze your situation. The various considerations, such as IRMAA, interact, and it’s impossible to model it accurately on your own. I use Maxifi with its Roth Conversion optimizer, and recommend it. Its default assumptions can be adjusted so you can see what would happen if, e.g., inflation is higher than the default or your investment returns are lower. But the program’s default assumptions are very conservative, including that you’ll live to the age of 99.
Roth conversions are obviously beneficial if your marginal tax rate now for the conversion is lower than you anticipate it will be in retirement (i.e., pure tax arbitrage). But as others have mentioned, Roth conversions are usually advisable even if they move you to a higher tax bracket now. This is because one of the main advantages of Roth conversions is that, when you pay the tax on the conversion out of a taxable account, the conversion in effect moves the amount you paid in tax from your taxable to your Roth account. That reduces the yearly tax drag that would occur if you did not convert and that amount stayed in your taxable account. Over time the tax drag from a taxable investment account has a huge cumulative effect, and you have an unusually long amount of time to benefit greatly from this factor. I suspect that Maxifi will recommend large conversions for you — other considerations aside, conversions into the 24% bracket will definitely be advisable.
The White Coat Investor has a nice article on 10 principles to consider with Roth IRA contributions and Roth IRA conversions. His Principle #4 works out an example of this effect. In his particular example, with a 30-year time horizon (which is less than you have at your current age of 56), it is beneficial to convert now even if your tax rate 30 years from now will be up to 9 percentage points lower than the tax rate on a conversion now.
That said, last year I did not convert as much as the large amount that Maxifi recommended. That was because all future planning programs convey a false sense of precision because the future, especially the distant future, is so unknowable. And there are other considerations discussed in the White Coat Investor Article.
David, nice post. Do you know how MaxiFi handles paying the taxes on the Roth conversion? I’m not sure the older versions that I ran went into that level of detail.
I’m not sure exactly what you mean, but I think it just assumes the taxes are paid from a taxable account without going into detail about which types of income or investments to use. But I may not have examined the output or options closely enough.
Based on my personal experience, now at 78 years old, and your situation, it would be best for you to maximize your Roth each year up to the max and stay in the 24% bracket. For me, my tax rate has been the same in retirement, at 24%. As others have suggested, find the best software to do some modeling to optimize your changes to a Roth. I applaud you to have the Humble Dollar community chime in, they are highly knowledgeable folks. Best to you.
If you are going to sell something to pay the taxes, sell at a loss. This will help offset the income at the least. What I did, several years prior, was to rebalance the accounts, and socked profit into a cash equivalent. Granted the return was not astronomical (closer to 5%), but I can use that for emergencies or tax paydown without incurring income tax. You always want to use free standing cash to pay the taxes. I will pay the tax on a $25K conversion from that cash eq pile. I can convert more knowing I won’t have surprise capital gains come Dec 31.
Boldin (formerly New Retirement) offers reasonable software to model Roth conversions that folks seem to like. There is a FB group devoted mainly to users so one could see the nuances. As I guess you know, it’s a tax analysis between now and the future with several nuances. Generally a series of partial conversions, which can be of variable sizes based on income and other factors can be indicated. IRMAA is a consideration at 63 with the 2 year lookback. An important input to the process of course is income projections from retirement to RMDs. Another consideration is some folks want to leave some amount in their traditional IRA for long term care and health care later in life. Of course legacy goals are also a consideration and thinking about taxation of the next generation. Good luck.
I am always amazed at the depth of knowledge the folks here at HD have and their genuine wanting to help people. It is refreshing, even when something doesn’t apply to me. Chris
Lots of good thoughts so far. My short advice…
-Build a model of you and your wife’s income (pensions, investment income, RMD’s, etc.) through the time of you both taking RMD’s. Include estimated SS at 85% value for tax purposes.
-Add whatever assets you expect to contribute to Tax Deferred. Assume growth in the value of the Tax deferred investments…I use 3%
-Assume tax rates are the same as today.
-If you make no further conversions, what will your marginal tax rate be when both you and your spouse are taking RMD’s?
-What is your capital gains tax rate today? You will be selling stock to fund the taxes.
Is the calculated future tax rate the same or greater than your current rate? If they are the same or future rate is higher, I would convert along the way to stay in the rate you mention (24%). If one of you ends up passing, you will have dealt with the “widow’s penalty” as best you can.
If this modeling is beyond your comfort level, use one of the model’s mentioned in the comments or ask a financial advisor to build a plan for you.
These are big dollars that you are committing in tax arbitrage, so get good advice.
You’ve gotten a lot of great specific advice, so I’ll just add that if I were in your shoes, I’d absolutely go ahead and start making Roth conversions now, even though you’re in the 24% bracket and not the 22%. That is not a huge difference in the big scheme of things, and you have the gift of lots and lots of time between now and when you take SS and then later RMDs.
We’re stuck. My husband is still working, we both have pensions, and we’re in a high tax bracket now. We’re 65 and have almost all our money in tax-deferred retirement accounts. We’re well aware of the big tax trap coming our way in ten years, which will get even worse when one of us passes. Yet we’re not really in a position where it makes sense to do Roth conversions, either—we’d just be paying more taxes in our already high bracket. I’m still trying to figure out a way forward. First-world problems, I know. You, however, still have great options.
Hi Dana,
Maybe others can comment on this thought. Would it make sense to start taking some distributions from your traditional account to pay your living expenses and increase the withholding from your husband’s work earnings, or your pensions?
This way you would have the added bonus of decreasing your traditional IRA balance from both the conversions and the withdrawls for some living expenses, thus reducing your RMD amount when you turn 73.
Given her age of 65 her RMDs will probably be required at 75 instead of 73.
Hmmm, interesting thought. I’ll have to run some numbers!
This is what we are doing. Taking some from the traditional IRA now instead of Roth conversions. We are 66 and 67. Also plan to do the qualified charitable contributions starting at 70 1/2 since we tithe anyway. We are in a lower tax bracket, though. Chris
The QCDs are definitely in the plan for us, too, Chris.
John says “I will cover Roth conversion taxes from selling index funds in a brokerage account.”
Would you be paying more in taxes by selling the index funds, plus the taxes for the conversion? I’m assuming you have capital gains on the index funds.
I never did a Roth conversion because I didn’t want to sell funds in my taxable account, and I didn’t have the cash on hand to pay the taxes. In addition, my Enrolled Agent tax person tells me not to convert, although I now have the cash to do so. There are always two sides to the argument.
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Just to add something in your favor John, you are soon to be at an ideal age to start the conversion. I might have found a way to pay the taxes had I known the situation I’d be in now. Some youtube videos say it’s alright to have the taxes taken out from the conversion amount when you don’t have other ways to pay the tax. At my age, early 70’s and not taking RMDs yet, I don’t like the five year restriction on each conversion. If only my piggy bank could give advice…
I’ve always been a little unsure, but I thought the five year rule is just from when you first fund the Roth IRA, NOT on each individual conversion.
Can others clarify?
David, the info below is from kitces.com regarding conversions.
Unlike the 5-year rule for contributions, in the case of conversions, each conversion amount has its own 5-year time period (Treasury Regulation 1.408A-6, Q&A-5(c)), and thus with multiple conversions there may be multiple different 5-year periods underway at once.
https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
Thanks Olin,
The most pertinent point in the article for me, and most Humble Dollar readers is this,
“On the other hand, as noted earlier, if the individual is otherwise exempt from the early withdrawal penalty (e.g., by being over age 59 1/2), the withdrawal of conversion principal is penalty-free (over 59 1/2) and tax-free (as it was already taxed at conversion). Thus, for those who are already over age 59 1/2 (or totally disabled), the Roth conversion 5-year rule is essentially a moot point, and only the 5-year rule for contributions remains relevant.”
At times this topic becomes nebulous, so I asked ChatGPT to simplify this further.
“When you convert a traditional IRA to a Roth IRA, each conversion has its own 5-year rule, meaning you must wait five years from the conversion date before you can withdraw the converted funds tax-free. If you withdraw the converted amounts before the five years are up, you may face a 10% penalty unless you are over 59½, but you will still owe taxes on the amount withdrawn.”
From my reading it appears you can withdraw the converted amount (because you just paid taxes on those monies at the time of conversion), only the earnings are taxable if withdrawn in <5 years if you are <59 1/2 based on this sentence in the Kitces article:
When withdrawals occur from conversion amounts, they are deemed to be withdrawal on a first-in, first-out basis under IRC Section 408A(d)(4)(B)(ii)(II), which effectively means the oldest conversions (most likely to have finished their 5-year requirement) are withdrawn first, and the most recent conversions are withdrawn last. (Overall, the ordering rules from Roth IRAs stipulate that withdrawals are after-tax contributions first, conversions second, and earnings third.)
Hi John,
Mike and William make excellent points to consider. Further, I would reiterate or add:
1) Roth conversions are beneficial when the future RMD tax rate is the same or higher than the tax rate upon conversion.
2) You have a seventeen year runway until RMDs begin which creates a likely scenario that your tax-deferred accounts could double $3MM or even triple $4.5MM. RMDs start with a ~4% withdrawal rate, so RMDs alone could be in the neighborhood of $120K to $180K per year. Add social security and any other income, and a fair chance you and your wife will still be in the married-filed-jointly 22-24% marginal brackets unless tax-rates are increased.
3) You didn’t mention if your wife had any tax-deferred accounts, but if she does, that would increase the benefit of Roth conversions.
4) You also didn’t mention heirs, and Roth conversions would provide them an extra 10 years of tax-free earnings growth.
5) The two main reasons your future tax rates could be significantly higher are an increase in today’s low tax rates that have just been extended and the death of the first spouse which changes tax filing to single rate status.
Most likely you and your wife would benefit from significant Roth conversions at the 22-24% marginal tax rates between your retirement at age 58 and age 63 when increased Medicare IRMAA premiums would kick in. You may want to Roth convert up toward the top of your current 24% tax bracket – at $75K or possibly a bit more per year, this could potentially reduce your tax-deferred accounts by $300-500K.
You would then end up with a more balanced structure of tax-deferred and Roth balances. This would reduce future RMDs potentially to the extent to ensure you always stay in the 22-24% tax range. Once you hit age 63, the impact of Roth conversions to Medicare IRMAA premiums must be considered. Here is my article on IRMAA considerations but you have 5 years before worrying about this – again, I’d probably max Roth conversions up to the 24% bracket top in the meantime
https://humbledollar.com/2023/04/that-28000000-tax/
Here’s a good article on the basics of when to Roth covert:
https://humbledollar.com/2020/05/to-roth-or-not/
Hi John,
Like Bill Perry, I have also read a few of Dr. Kotlikoff’s books and used his MaxiFi planning software for a number of years. Since we retired I have let my subscription lapse, so I haven’t run the new Roth Optimizer. I looked at the case study and informational video this morning and am considering diving back in. From what I saw and read this tool provides the type of conversion plan you are looking for. If you are unfamiliar with this tool it is worth spending some time understanding the underlying economic theory they model. It is a very comprehensive and powerful tool.
The other option you might consider is Boldin’s Retirement Planner. I tried it when it first came out and was pretty impressed. It advertises the capability to generate a multi-year Roth conversion strategy. I have not tried this, but others in the HD community may have.
I heartily second Bill’s recommendation that you seriously consider your goals before, during, and after you build your strategy. It’s worth a little time figuring out what is most important to you and your family as you build your retirement plan.
Congratulations on your success to date and best of luck.
Hi John,
Congratulations on what you have achieved thus far. With almost $1.5 M saved already with some runway left, you are ahead of most. Now, on to your question, as you can see there is not a ‘one sized fit all’ approach here. The key to unlocking the power of Roth conversions is to make them when your income the lowest. As you will no longer have an income and not yet claiming SS it should be lower now and should be the optimum time to do those. Keep in mind the marginal tax rates and effective tax rates will come into play here. Even if the tax calculation evens out, meaning that you pay the exact same tax rates now that you might in the future, the flexibility to control withdrawals is handy. Especially if you wanted to withdraw a substantial sum to gift a child for a down payment on a house or some other purchase without unnecessarily creating either tax or Medicare IRMA issue, and then there is Mr. RMD that will come into play too. I am contributing the majority of my 401(k) $$ into the Roth bucket and I am in a very high tax bracket. For most, doing some Roth conversions up the 12% bracket almost always make sense and then even up to the next might still be prudent. In summary, I’d do some, but wouldn’t fret over what is left over. It is not ideal to pay more taxes than you have to, but the alternative of not having enough to live in retirement is far worse. I am almost exactly in the same scenario as you are except my wife and I will pretty much stop working around the same time, 57-58 and I plan on taking Social Security sooner than later somewhere around 63 when we should have zero earned income (subject to change of course).
“Even if the tax calculation evens out, meaning that you pay the exact same tax rates now that you might in the future, the flexibility to control withdrawals is handy.”
Besides taking this into account you should also consider that all of the Roth account compounding will be tax free. If you live to the average life expectancy of a male that should be about another three decades. Also IF the tax rules stay the same any children could hold the money for an additional decade tax free.
Mike:
Why are you planning, “on taking Social Security sooner than later somewhere around 63”, eschewing the “standard” advice of waiting until 70 for the bigger “payout?”
Because running the calculations, I feel leaving the money ‘on the table’ to draw down my retirement accounts is not what I want to do, nor do i think it is the smart play. I prefer to use the SS dollars to fund part of my living expenses earlier and let the retirement go untouched for a few additional years. If and when I die, I can pass some of those dollars to my heirs, I can’t pass the bigger SS check to anyone, it dies with me. It is not a situation where the bigger checks are going to matter much for me, we have probably overfunded the retirement accounts to the point where even if I stopped contributing today and assuming a growth rate of only 6%, we have more than enough to be comfortable. I get some want the bigger check, I feel I make up for it on the retirement side. Now, I better be sharp with my conversions, since RMDs for us could be in the +$200k range
I even ran this by a CFP, and he said it bucks the conventional thinking, but based on my goals, it made sense. I reserve the right to change my mind in the future, but for now, that is the plan.
Hi John,
I have read a couple of different books authored or co-authored by Dr. Lawrence Kotlikoff, PhD in Economics at BU. Those books encouraged me to decide to wait until age 70 to claim my earned SS benefit, as you plan to do, and I enjoy his writing and much, but not all, of his economic thinking. The good professor also has a company named Maxifi Planner that has a Roth Conversion Optimizer. If I were in the market for a advanced Roth conversion calculator that is where I would start my search.
You ask the question “What am I missing?” and gave the HD community a lot of your data but I think it is likely we need to know more about your goals to help you with our thinking about Roth conversions.
For example-
Do you plan to make large qualified charitable distributions when you reach your required beginning date for IRA / 401(k) distributions?
Do you plan to have a qualified annuity in your retirement assets?
Will you leave all of your tax deferred accounts to your spouse, children, charities, other? Those different beneficiaries would likely impact your decision on Roth conversions as they each likely have different tax ramifications.
Are you coordinating your Roth conversion decisions with the decisions your wife is making regarding her tax deferred accounts? Your wife is much younger than you but bad health events can and do happen. Conversely, if you should die an early death then your spouse may be forced into a much higher tax bracket as with her taxes would then be determined as a single filer.
Typically there is a period after work ends and before you claim SS benefits and RMD’s begin that is a good period to make Roth conversions if your goal is to smooth the taxes you pay over your lifetime. I will be 75 this year and I plan to make Roth contributions or conversions for 2025 to 2028 as I expect my federal tax rate will go up when the OBBBA short term tax breaks go away. I doubt that anyone can currently predict what taxes will look like after 2028.You have a much longer runway that I do. You will at least have some certainty about what will congress actually does about funding social benefits when the trust fund is gone.
I hope my thoughts help. My default factor in my tax decisions is what I expect is best for my wife and then my adult children in the event things go poorly.
Best, Bill
I agree with William Perry. Buy and Use MaxiFi Planner with Roth conversion. It will cost about $149 for year 1 and then 20% less for additional years. (Use in additional years if something important changes or you want a double check of something.)
I have used it pretty extensively for myself, family and friends. And it works well confirmed by deep dives I have done comparing the MaxiFi planner automatically generated solution vs. various other solutions.
In addition (and this is important), with MaxiFi you can optimize all the other aspects of your personal financial planning and do what-if analysis to test your plan for robustness. Just excellent. (Full Disclosure: I have no financial or other interest in MaxiFi. so this is my unbiased experience.)