I've never done a BD Roth. Am I foolish?

[OldSoul]

Hi All, It seems like every WCI forum poster and their mothers are doing BD Roths, except for us. Roth IRAs and BD Roths weren't around earlier in our careers. But now that they are available, I feel like I am missing out. My living and financial situation, and reasons for not doing Roth contributions, are as follows:

1. We live in a state with HIGH income tax (9.9%)
2. Gross about 650K/year. Part of that is 30-50K/year of consulting/legal work that I do, allowing me to contribute annually to my SEP-IRA.
3. We max out our 403Bs, 457bs, and have additional contributions to 401a accts and a pre-tax state retirement account (totaling about 135-140K of pre-tax space), such that we now have 3.5M in pre-tax retirement accounts.
4. Also contribute about 6K/month to a taxable account, and use that for investments and saving for large purchases (remodeling, etc).
4. I'll be getting a pension of about 100K/year when I turn 65. That, plus SS of about 65K/year 5-7 yrs later will provide more than we need to live on in retirement.
5. Through 529s and cashflowing, we paid A LOT for private school/ college/ grad school for our older two kids, and we are paying A LOT for our youngest, who is now at a NESCAC college. The kids' education has been our major splurge over the past 15 years.

We're planning to move to a no income tax state in retirement, and I'll do Roth conversions of the retirement accounts up to the 24% tax bracket limit (without the 10% state income tax), if conversions are still around.

Please poke holes in my plan.

[JBME]

What's your current age and at what age to you plan to move/retire to the no income tax state? Given your total balances and your plan to do Roth conversions once you retire, I wouldn't call you foolish at all. Would it have been better to do it? Yes. But we're talking about $12k per year between you and your spouse and you already have $3.5m in tax-deferred and some money in a taxable account as well. With such a large tax-deferred balance I'd worry about RMDs but you've already planned how to take care of that. Would be interesting to know how many years you'll be able to do that given pension starts at 65

[jhwkr542]

I think you'll have tax "problems" with all of the pre-tax accounts, pension, and SS coming up. Knowing your current age and age you're planning to retire would be helpful. Spending money and sitting down with a professional would probably be money well spent to run all the numbers.

[bovie]

I see an RMD problem in your future.

And, hopefully, Roth conversions.

[Hatton]

I also have never done a BDR. Roth did not exist when I set up my practice retirement plan. My office plan was a SEP/IRA. It was the best fit at the time. This is why I am Roth converting now.

[GasFIRE]

I wouldn’t call it foolish, but it is suboptimal. For no. 2 if you used an individual 401k instead of the SEPIRA you could save the same amount and contribute to a BDR. The real aggressive Roth aficionado would use a MBDR eligible custom 401k plan to save even more in Roth. Per no. 4b, most of us won’t have access to a pension. You already have a large pre-tax savings that will likely be significantly larger by the time you must take RMDs. How much will you need over pension and SS?

[StarTrekDoc]

4. Also contribute about 6K/month to a taxable account, and use that for investments and saving for large purchases (remodeling, etc). --- if you KNOW not using for ANY consumption; for two months flow that into a BD roth

yes - RMD issue for you. IIRC, you're ahead of track than us, but same destination -- you're just much higher earner

The question is WHEN to pull the parachute and glide into retirement with Roth conversions. The larger the tax deferred, the sooner you have to pull the ripcord or else deal with Medicare tiers and popping above 24% bracket. --- AND have to build the cash bucket.

[Craigslist]

correct me if im wrong, but isn't the BDR point moot since OP has a SEPIRA?

[StarTrekDoc]

RMD: just to show you if you add NOTHING to pretax and earn 5% returns:

https://www.schwab.com/ira/understand-iras/ira-calculators/rmd

Your Required Minimum Distribution starting at the age of 72 will be$373,664.69

Right when you're pulling 100k pension AND 65k SS.

-- your taxes at 72 will be nearly as high if not higher than current taxes.
-- Roth conversions not going to be enough

-- Annuities can help
-- We're looking to name 2nd generation beneficiaries on our pension to reduce pensions and offload to next gen.






How is my RMD calculated?


- Important calculator assumptionsAccount Balance
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See your future RMDs and plan ahead.


Get prepared for the years ahead. Review your projected RMDs over 10 years and over your lifetime.

10 year projection

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A percentage used to estimate your future RMDs. Not sure of your rate? Guesstimate using the default rate shown.

2022	50	$0.00	$3,675,000.00
2023	51	$0.00	$3,858,750.00
2024	52	$0.00	$4,051,687.50
2025	53	$0.00	$4,254,271.88
2026	54	$0.00	$4,466,985.47
2027	55	$0.00	$4,690,334.74
2028	56	$0.00	$4,924,851.48
2029	57	$0.00	$5,171,094.05
2030	58	$0.00	$5,429,648.76
2031	59	$0.00	$5,701,131.19

[spiritrider]

correct me if im wrong, but isn't the BDR point moot since OP has a SEPIRA?

As has been pointed out, the OP could adopt a one-participant 401k and make employer contributions there and rollover the SEP IRA to the one-participant 401k. With little to no pre-tax balances in any traditional, SEP and SIMPLE IRA accounts on 12/31 of any year doing a Roth conversion, there would be little to no prorata taxation.

[PhysicianOnFIRE]

It saves you dozens of dollars in taxes the first year you do it. Sure, that can add up over time, but I think you'll be just fine with or without doing an annual backdoor Roth.

• Calculating the Value of Your Backdoor Roth Contributions

[MaxPower]

With an SEP-IRA you’re hosed as far as BD Roth is concerned, unless you can get it into an i401k plan to avoid the pro rata rule. But if you’re contributing $6k per month to a taxable account, why would you want to pay any more tax on that than you have to? Admittedly it would only be tax savings on $12k of contributions annually, but might give you some increased flexibility in retirement.

But honestly, running out of money won’t be your problem. You’re set either way, so to answer your question, no you aren’t foolish. You’ve done great, just maybe you could have gotten an A+++ instead of an A+.

[OldSoul]

What's your current age and at what age to you plan to move/retire to the no income tax state?

Thanks for the quick reply. We're in our late 50's. The plan is to retire in 8 years, when I start taking the pension. Wife will be retired by then too. We'll move to the no income tax state at that time as well. We file as Married/Filing Jointly, so the current 24% bracket goes up to 329,850. Between 65 and 72, I'm guessing that we draw down the difference between 329K and the 100K pension income (around 229K). I'll have to meet with my CPA and/or a retirement FA to go through the details, but I'm assuming that some of the draw down could be used for ongoing expenses in retirement, and the remainder could be used for the Roth conversion.

[JBME]

Thanks for the quick reply. We're in our late 50's. The plan is to retire in 8 years, when I start taking the pension. Wife will be retired by then too. We'll move to the no income tax state at that time as well. We file as Married/Filing Jointly, so the current 24% bracket goes up to 329,850. Between 65 and 72, I'm guessing that we draw down the difference between 329K and the 100K pension income (around 229K). I'll have to meet with my CPA and/or a retirement FA to go through the details, but I'm assuming that some of the draw down could be used for ongoing expenses in retirement, and the remainder could be used for the Roth conversion.

forget the backdoor Roth issue. Late 50s and $3.5m in tax-deferred with a $100k/yr pension coming at the same time when you retire? yes you're going to have an RMD problem, and you'll be limited in your roth conversions because of that pension income. If your 401k plans allow it I'd consider making Roth 401k contributions rather than pre-tax at this time, all the way to retirement.

Do you and/or your wife have any interest in retiring now? What is your current marginal tax bracket?

[OldSoul]

I wouldn’t call it foolish, but it is suboptimal. For no. 2 if you used an individual 401k instead of the SEPIRA you could save the same amount and contribute to a BDR. The real aggressive Roth aficionado would use a MBDR eligible custom 401k plan to save even more in Roth. Per no. 4b, most of us won’t have access to a pension. You already have a large pre-tax savings that will likely be significantly larger by the time you must take RMDs. How much will you need over pension and SS?

Thanks for the great suggestion! I believe my workplace allows rolling my rollover and SEPIRA accounts into my 403b. I am calling now to confirm. If they do allow, I will look into opening an individual 401k plan, and contribute my consulting income into that.

I made some estimates regarding our retirement expenses (~$175K/year), but I find them to be just very rough guesses. Reasonable estimates can be made regarding our healthcare expenses/ property taxes/ income taxes/ food/ water/ clothing, etc. There won't be any mortgage, and the kids will be paid off. However, I really have no idea how much traveling we'll be doing. We dream of the PoF slow travel (month in Portugal, month in Spain, month in Thailand), and maybe that'll take up 3 months out of the year, or maybe 6 months. Who knows really? In any case, we'll start taking withdrawals from our retirement accounts starting at 65yo and at worst, we'll be paying federal tax, but not the 9.9% state income tax. It's hard for me to be more precise than that.