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I’m reading frequently these days about Roth conversions and Required Minimum Distribution tax bombs. Since I couldn’t know my own future tax rates and situation in advance, I have attempted throughout my working years to balance tax-deferred and tax-exempt. I find myself close to retirement with the following breakdown:
45% tax-deferred (Traditional IRA, 401k, etc)
12% taxable (brokerage, savings, etc)
43% tax-exempt (Roth IRA, Roth 401k, HSA)
I haven’t done any kind of analysis to see if Roth conversions will be advantageous to me at some point, but I’m hoping this will work out for me without conversions, since I’m hoping to manage my taxable income to qualify for reasonable Affordable Care Act premiums.
I’m wondering how other HD readers look with regard to these three categories. I know it’s of limited value to know other’s situation, but please indulge my curiosity, if you don’t mind.
Good post-and interesting to see a bit of what is going with other folks..We are 68/65, my wife is retired for 7 years and I am W2 retired for 6 years but consulting part-time since. We are: 66% tax-deferred (including recently purchased QLACs..), 22% taxable and 12% tax free. As my consulting work dropped off some this year, I am doing my first Roth conversion-we plan a few more until delayed SS, pensions and deferred comp + RMDs. I did put some in a Roth solo 401k over the last few years and put 8K in a Roth IRA this year trying to build it up a bit. We expect our Roth/tax free bucket percentage to continue to grow over time as it is all stock funds/ETFs and we plan to draw on it last/if needed. It’s useful for tax efficiency to have the flexibility to draw on these different buckets.
I’ve also been very interested to see all the different responses to this post. I’m not sure the requested breakdown mirrors my thinking about my holdings, but I’ll give it a shot with my definitions:
Liquid cash, subject to taxable dividends – 1.9%
Taxable investment account, subject to capital gains if/when sold, and taxable interest/dividends – 54.6%
Tax deferred – IRA, subject to regular income tax – 43.5%
I’m not a fan of Roth conversions. While I was working and saving in a 401(k), I had the option for Roth savings, but I was doing what I could to keep the tax bite as small as possible. Now I’m 71 and retired. I’ve spoken to planners who are quite willing to advise on conversion processes, but I would need the cash to pay the taxes. I’ve run the numbers and don’t like the idea of liquidating anything to generate that kind of cash. So I plan to let my heirs worry about the taxes on my IRA.
I’m drawing a small amount from my IRA and doing a Qualified Charitable Distribution (QCD) to my church. To the bean counters out there, it looks like I’m following the 2% rule instead of the 4% rule. I also collect Social Security.
Roughly
51% Tax Deferred
48% Taxable
1% Tax Free
Roth 401(k)’s weren’t available to us early in our careers and fortunately we quickly exceeded Roth IRA income limits in our careers. By the time Roth 401(k)’s became available our marginal tax rate was significantly higher than what we expected it to be in retirement.
Currently retired and in our late 50’s. Rough calculations and uncertainties around future tax rates indicate Roth conversions would not be as advantageous as cap gains harvesting at this time. So, we are focusing on cap gains harvesting to minimize future taxes.
Interesting Adam. Every year since retiring I’ve considered whether to do a Roth conversion or realize some capital gains. I actually wrote about this choice on HD a couple of years ago. Interesting that you lean to harvesting the gains. With my also rough calculations and uncertainties around future tax rates, as well as our own longevity, the conversion seems like the better course of action for us, even without a legacy motive.
I’d be happy to reach a different conclusion, as I’d like to simplify our taxable portfolio which would require realizing some gains, but I’m leaning to the conversion.
The Roth conversion calculations involve a number of assumptions, i.e. future tax rates, portfolio growth, etc that put a lot of uncertainty on the outcome. Most of the scenarios suggested I’d save by doing the Roth conversions. However, the savings was often not particularly compelling vs the cap gains harvesting.
Additionally, the issue of how I pay the taxes on Roth conversions is important as I do not want to pay those taxes out current taxable accounts as that would limit my current spending capability.
The nice thing about the cap gains harvesting is that I pay 0 taxes on those cap gains, which I can then reinvest at a higher basis. This has no effect on my current spending capability.
This the kind of discussion which is fascinating to me. That’s because, there are no “permanent” answers. Let me explain.
When I retired in the middle of 2001, my distribution was 38% taxable, and 62% tax deferred. Roth had only started a few years earlier and I don’t think I had even heard of it. Then, it took me until the middle of 2002 get various employer based assets transferred into a traditional IRA. 2002 was a down year and at that time I wasn’t thinking about IRA RMDs. Then, within a few years there were a couple of large % increases in the stock market, I was getting more interested in managing my assets, and I took a look at what things might look like at age 70.5.
When combined with SS, the amount of potential income was kind of staggering. So, over the years between then and age 70, I was able to convert about $600k to Roth. So that by the end of 2016, I showed 18% taxable, 52% tax deferred, and 30% not taxable.
Now, almost 8 years later, as growth in markets has continued despite various down years, I have 32% taxable, 33% tax deferred, and 35% not taxable. You might think, okay, good job….the challenge, is that there is still more in the Traditional IRA than when I made the first conversion in 2005. And, now, of course doing more conversions today would make my tax situation worse, and I’d be paying IRMAA surcharges.
So the cautionary part of this story, (definitely a 1st world issue) is that if you don’t spend or give away what you have to take out as RMDs, it will go into your taxable account. (Please note the change in taxable % between 2016 and today.) And, if you live long enough, the RMD divisor declines, and RMD’s increase. The combination of higher RMD’s and a larger taxable account together with SS means inevitably higher income and tax. And, despite inevitable future down years in the stock market, I expect that over the next decade (assuming I live that long) that my total assets will continue to grow regardless of what we spend or give away.
For most of the years I worked, there was no ROTH. It was either taxable or tax deferred. And, I think that one of the lessons I learned is that if you have achieved a large tax deferred balance by age 55 reducing it is difficult. You will continue to want the 401k match, and growth in the market will not stop. So think of diversifying your savings before you build the problem.
At 57, I am 15% Tax Free(Roth & HSA), 8% Taxable, and the rest in tax deferred 401K and NQDC.
With the talk of a direct or indirect (tarriffs) tax on consumption, I wonder if we are entering an era of being taxed the same irrespective of the type of account.
76% – Traditional IRA
22% – Roth IRA
2% – Taxable
I was slow to start Roth conversions. After 4 years in retirement the benefits of significant Roth conversions would benefit my heirs more than myself. I’ll keep the large traditional IRA as a guard against long term care issues.
Some will say that is selfish, but I never promised my heirs any specific amounts, and there should be a surprising amount left. While I am on the SKI trip, (Spending the Kids Inheritance,) I’m trying to be prudent.
It’s been interesting to see how different people’s tax situations can be. I expected to see most funds in tax-deferred. For the most part, that’s been the case, but with a lot of variation.
I’ve been blindly saving for retirement, and only now starting to think about withdrawing.
55 years old
99% Tax deferred
1% Tax exempt
I will have a few years between retirement and SS to do some conversions, but I’m currently staring at a big RMD tax bill.
At 64 and both retired, we are:
Tax Deferred – 64%
Roth – 32%
Taxable – 4%
Would have liked to have had more taxable, but after fully funding the other two as well as Roth conversions, the extra income wasn’t there. Will probably continue with Roth conversions over the next decade to eliminate/minimize IRMAA which will be an issue once I take SS at 70 and RMDs roll in at 75, but not something I’m going to lose sleep over. There are worse problems to have.
I am looking at 70 before we begin SS with a jump in taxable income. This will give us three years to move more out of taxable-deferred into tax exempt. Current position is:
Tax exempt 15%
Non taxable 15%
Taxable 70%
Retired 66&65-year old educators here, blessed to have defined benefit pensions with annual COLA’s and which more than cover all our expenses. Current asset breakdown is:
tax-exempt, 25%
tax-deferred, 10%
taxable, 65%
Note: the taxable is way out of proportion, but about 75% of that amount was from my mother in law’s estate. Had a couple conversations with my wife about things that could be done with the money, but the conversations were somewhat stressed (very low tolerance for investment risk), so I decided “happy wife, happy life”, and dropped the issue.
Thanks for the question Matt. I thought it would be fun to compare today with where we were on 1/1/21. My wife and I are 66. I do a little consulting and she retired last year.
2021 2024
Tax Deferred 68% 54%
Tax Exempt 19% 38%
Taxable 13% 8%
By the time I turn 70 & start getting social security I’m hoping I’ll be around 40/50/10 for tax deferred/tax exempt/taxable. One big advantage I have (which skews the numbers) is that as a retired minister I’m able to take an annual housing allowance from one of my tax deferred accounts tax free which makes it actually tax exempt $$. We only started doing Roth 6 years ago.
Hi Don. I think you must have a typo in your numbers. Your 2021 figures are way over 100% if I’m reading your post correctly.
Thanks Matt- fixed!
If I had another go at it, I would shoot for 33% of each due to the knowledge I have gained since retiring.
33% tax deferred IRA
16% tax free Roth
51% pre-tax brokerage
It did work great for ACA income control having a large taxable account.
“I would shoot for 33% of each due to the knowledge I have gained since retiring.”
Would you mind expounding on that, Dan?
I am going to try to build up more taxable before retirement, but I don’t think I will get anywhere near 33%. Hopefully I’ll end up with something like 40/20/40.
Not what I would necessarily aim for if I could do it again, but…
Taxable 45%
Tax deferred 45%
Roth 10%
We don’t have a legacy motive so not too bothered by a smallish percentage in Roth, though may still do some conversion.
52% Roth
16% taxable
32 tax-deferred (IRAs and 457)
I’m 70 and retired 10 years ago. I took advantage of some low income years in retirement to do a lot of Roth conversions, figuring I will never see 15% or 12% marginal tax rates once I start taking Social Security (as I just did). I might even do another conversion this year. Given the evenly divided Congress, it is within the realm of possibility that no one can pass any tax changes, in which case the current tax rates will sunset at the end of 2025. I don’t see my taxes going down under any circumstances (and I am okay with that), so locking in at the current rate is not a bad idea.
Wanted to get the latest numbers before I answered.
71% Stock based IRA’s
29% Money Markets & cash
I have never liked bonds or bond funds
At retirement roughly: 90% tax-deferred, 10% taxable, zero Roth
Eight years later roughly: 74% tax-deferred, 12% taxable, 14% Roth
How we got here, here:
https://humbledollar.com/2024/07/driven-by-taxes/
Good article, John.
49% taxable brokerage account
40% Rollover IRA
7% tax-favored annuities
4% cash
no tax exempt except municipal bond fund interest in brokerage account.
Retired 14+ years
Not the distribution I’d like to have, but here it is:
68% tax-deferred (yup, ticking time bomb…13 year fuse)
17% taxable
15% tax-exempt
No new contributions are going into the tax-deferred pot. The tax exempt pot will continue to get new contributions as long as I have earned income.
My wife and I are 64 and retired. Our investments are 84% tax deferred and 16% tax free. Virtually no taxable money! I jumped on the 401(k) bandwagon early and never looked back. I occasionally considered contributing to a Roth account but couldn’t justify it given our tax rate in those high earning years prior to retirement.
I did some Roth conversions just before and after retirement at 62 and have used the money to fund some spending and get a reasonable ACA premium tax credit. I will continue to do Roth conversions when it makes sense.
I am a big believer that having money in each of the various buckets is wise and would have done some things differently if I knew then what I know now.
I ran our numbers and they are about 59% tax deferred, 23% tax free and 18% taxable. I am not sure if that means we will need to do Roth conversions, though. I think we are in a lower tax bracket than some of the other HD folks, and it will be awhile before we need to do RMD. Chris
For context I’m 39 and spouse is 41.
57% Tax-Deferred (Traditional IRA, 401k)
12% Taxable (Brokerage, Savings)
31% Tax-Exempt (Roth IRA, Roth 401k)
I also want a mix. In our earlier working years with lower incomes we prioritized Roth but in our current phase of life with higher incomes we have been prioritizing tax-deferred. I expect this to change as one or both of us plan to shift to lower-stress/lower-income roles in the next several years, at which point we will go back to prioritizing Roth.
As we approach 60ish years old and are (hopefully) looking at part-time or no-time work, we may use these several pre-Medicare years to make some Roth conversions. That is the plan at least, and plans may change based on work needs and future tax rates.
In the end, as long as I have some sort of mix I feel ok and will make adjustments as our retirement picture comes into better focus.
I worked in schools until age 70, contributing to the TIAA 403(b). When the Roth 403(b) became available in the last few years while I was working part-time, I chose to max it out rather than make Roth conversions that would lead to Medicare IRMAA and other tax pain. Retired since 2021, I rolled everything over to Vanguard. My total investments there are currently 70% tax-deferred, 9% taxable, 21% tax-exempt.
While that answers your question, I also have two annuities that alter the partition in different ways: a single premium immediate annuity (SPIA) and a qualified longevity annuity contract (QLAC). Together, they add 19% to the Vanguard total. However, the SPIA was paid with cash, so its tax treatment is very different from that of the QLAC, which came out of the tax-deferred IRA.