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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.