Anonymous wrote:

Anonymous wrote:Remember it isn't an all or nothing strategy. You don't have to convert all, you want different buckets to pull from as you age in retirement. Plus Roth accts have their advantages, no RMDs and great for estate planning purposes. I have over $1.2 M in traditional IRAs and only $216k in Roth, so my intention is do some conversion every year depending on circumstances. I'm 64.

Yes, you tap your taxable accts and any savings prior to SS.

Curious about this post.
If you retire at 65 and wait until you are 70 to apply for social security
Let’s say you do a Roth conversion of part of your 401k and you have to pay taxes
For example if you have $1 million in the 401k and convert $300 thousand and you are in the 22% tax rate, you lose nearly $100 thousand between federal and state taxes.
So now you have $700 thousand in the 401k and $200 thousand in the Roth and presumably you’d want to leave the Roth balance alone for as long as possible to get the full benefit of the conversion.
So do you withdraw more than 4% from the 401k to make up for delaying social security? Is that wise?
Or do you use your liquid assets such as CDs and money market funds? Is that wise? Aren’t you supposed to have a big cushion of liquid funds for emergencies (stock market crash, long term care needs etc).
Is a Roth conversion only for people who have large balances in both their 401k and in liquid funds?

Each case is different. In your example converting $300k in one year with a $1 Million balance in the 401k isn't ideal, too much in one year. Plus it makes more sense if you can pay the tax from other non qualified money. So yes it makes more sense for folks with higher taxable assets available. Ideally, one would bridge the gap to SS with non qualified funds, but you do what you have to do. And maybe in some cases, you tap the SS before 70. Again it is not an all or nothing propostion, convert what you can. Just better to have different types of buckets to drawn upon in retirement.

Optimizing conversions is no easy task for many. Bogleheads has a number of active threads on this.

From what I have read there, it is usually not worth it if your 401k/IR is $1 million or less. For many, the sweet spot is after retirement and before taking social security. But then, you have to factor in if the conversion subjects you to the net invest tax (NIT) and, if you are taking Medicare, whether it subjects you to IRMAA on Medicare part B. Is it possible that RMDs will go to medical care that puts you over 7.5% of income, qualifying you for a medical deduction for taxes?

What is the source of funds for the conversion? Conversion proceeds makes the benefits less attractive, but if you can use proceeds from sales of holdings in your taxable account it is more attractive as they are taxed at lower long term capital gains tax rates.

I really big consideration, of course, is whether RMDs will catapult you into a higher tax bracket once you are 73. Add in the possibility that in retirement, one spouse may die and the other then will be subject to higher, single tax rates. Consider your views about the possibility of the current lower brackets expiring and not be renewed after 2026.

You also have to factor in what your objectives are for the Roth: Is it something you wish to draw on during retirement, or a pot of money you wish to pass on to your heirs. If the latter, you have to factor in whether a conversion will benefit your heirs from a state (or federal if your estate is large enough) estate tax perspective.

Personally, I am strictly a DIY investor, but taking in all of the above is very tricky, so I am considering getting professional advice. I understand there is financial management software out there that could help (Pralana, New Retirement) but haven't tried it.

Anonymous wrote:

Anonymous wrote:Remember it isn't an all or nothing strategy. You don't have to convert all, you want different buckets to pull from as you age in retirement. Plus Roth accts have their advantages, no RMDs and great for estate planning purposes. I have over $1.2 M in traditional IRAs and only $216k in Roth, so my intention is do some conversion every year depending on circumstances. I'm 64.

Yes, you tap your taxable accts and any savings prior to SS.

Curious about this post.
If you retire at 65 and wait until you are 70 to apply for social security
Let’s say you do a Roth conversion of part of your 401k and you have to pay taxes
For example if you have $1 million in the 401k and convert $300 thousand and you are in the 22% tax rate, you lose nearly $100 thousand between federal and state taxes.
So now you have $700 thousand in the 401k and $200 thousand in the Roth and presumably you’d want to leave the Roth balance alone for as long as possible to get the full benefit of the conversion.
So do you withdraw more than 4% from the 401k to make up for delaying social security? Is that wise?
Or do you use your liquid assets such as CDs and money market funds? Is that wise? Aren’t you supposed to have a big cushion of liquid funds for emergencies (stock market crash, long term care needs etc).
Is a Roth conversion only for people who have large balances in both their 401k and in liquid funds?

This may be too rudimentary thinking, but the decision factor I was going to use was anticipated RMDs that would push us to higher tax rates, in the 30% range. If for whatever reason, our 401k and IRA balance does not grow as expected, and RMDs keep us in the 20% range I may bypass the Roth conversation altogether.

Anonymous wrote:Remember it isn't an all or nothing strategy. You don't have to convert all, you want different buckets to pull from as you age in retirement. Plus Roth accts have their advantages, no RMDs and great for estate planning purposes. I have over $1.2 M in traditional IRAs and only $216k in Roth, so my intention is do some conversion every year depending on circumstances. I'm 64.

Yes, you tap your taxable accts and any savings prior to SS.

Curious about this post.
If you retire at 65 and wait until you are 70 to apply for social security
Let’s say you do a Roth conversion of part of your 401k and you have to pay taxes
For example if you have $1 million in the 401k and convert $300 thousand and you are in the 22% tax rate, you lose nearly $100 thousand between federal and state taxes.
So now you have $700 thousand in the 401k and $200 thousand in the Roth and presumably you’d want to leave the Roth balance alone for as long as possible to get the full benefit of the conversion.
So do you withdraw more than 4% from the 401k to make up for delaying social security? Is that wise?
Or do you use your liquid assets such as CDs and money market funds? Is that wise? Aren’t you supposed to have a big cushion of liquid funds for emergencies (stock market crash, long term care needs etc).
Is a Roth conversion only for people who have large balances in both their 401k and in liquid funds?

Anonymous wrote:

Anonymous wrote:Am I missing something? I thought you had to convert everything in your traditional IRA at the same time. Is the strategy to roll over only part of your 401(k) to a traditional IRA to be converted to Roth each year?

I don't understand your question. I was referring to converting from Traditional IRA to Roth IRA. Your question about the 401(k) needs to be addressed to where your funds are held.

Yes, you can convert just a portion of your Traditional to Roth in any given year (does not have to be the whole thing). Pro rata rule does not come into play unless you a mix of pre-tax and post-tax funds in there, which is rare. You just pay income tax on the dollars that you convert.

Anonymous wrote:Am I missing something? I thought you had to convert everything in your traditional IRA at the same time. Is the strategy to roll over only part of your 401(k) to a traditional IRA to be converted to Roth each year?

I don't understand your question. I was referring to converting from Traditional IRA to Roth IRA. Your question about the 401(k) needs to be addressed to where your funds are held.

you need to create a table showing annual income between retirement and RMD start year. then you can estimate how to convert (no more than max amount of your tax rate). like camel's back

There is a pro rata consideration if you have any funds that will remain in a traditional IRA at the end of the year. So, yes, you may want to only rollover the amount you ultimately want to convert and not just roll over everything from a tax-deferred workplace plan account (401k, 403b, etc.)

Am I missing something? I thought you had to convert everything in your traditional IRA at the same time. Is the strategy to roll over only part of your 401(k) to a traditional IRA to be converted to Roth each year?

Remember it isn't an all or nothing strategy. You don't have to convert all, you want different buckets to pull from as you age in retirement. Plus Roth accts have their advantages, no RMDs and great for estate planning purposes. I have over $1.2 M in traditional IRAs and only $216k in Roth, so my intention is do some conversion every year depending on circumstances. I'm 64.

Yes, you tap your taxable accts and any savings prior to SS.

Anonymous wrote:Yes that is what you should do. If you retire before receiving social security, those can be prime years for Roth conversions (when you have come is lower). You need to look at your expected annual income and try to fill up a tax rate you think is reasonable. How much you should convert may depend on how much you have in your 401ks and what your RMDs will be (and resulting tax rate).

This depends on if your spouse is still working and your age difference. There may not be an appropriate window for this.

Thank you PPs! So during the early retirement phase, before taking social security, should I just live off a bank of taxable investments/savings accounts for a few years? (That’s what I was planning to do in order to keep income low to facilitate the conversions.)

And if these are invested funds in a Traditional IRA, be strategic with your timing of the conversions. IOW when the market tanks or slumps, that is when I pick up my conversion pace. Esp if dealing with individual stocks or growth funds. I do conversions with Schwab online, pricing within a min.

Yes that is what you should do. If you retire before receiving social security, those can be prime years for Roth conversions (when you have come is lower). You need to look at your expected annual income and try to fill up a tax rate you think is reasonable. How much you should convert may depend on how much you have in your 401ks and what your RMDs will be (and resulting tax rate).

Has anyone done a Roth conversion later in life or near retirement? I'm trying to be strategic about when we do the conversion to avoid taxes as much as possible. Did you wait until retirement when your tax rate was lower?