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Mechanics of doing a Roth conversion in retirement

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  • #16
    Originally posted by JBME View Post

    this is the general mantra, but if you have a $2-$3+ million tax-deferred account by age 50 and plan to retire early, you should be converting some of that because you can see that if you leave it alone, when RMDs come at age 72 your tax-deferred balances could be $8-$12m and you easily could have seen it from a mile(years) away and yet did nothing about it.
    yup, definitely a good problem to have though

    the OP and I aren't in that situation and the 401k is more bond heavy for me so I'm not stressing about converting too much. I only plan to convert up to the 12% bracket

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    • #17
      Originally posted by triad View Post

      wouldn't it make sense to withdraw from taxable first and to delay taxes as long as possible?

      Also I think it makes sense to make sure you aren't over converting. no reason to convert up to the 24% bracket when your RMDs leave you in a lower bracket. If you had 1.25M in your 401k your RMD at 75 years old would put you in the 12% bracket, I believe.
      It really depends on how large your pre-tax account is, work status (retired, PT vs FT work), age, estate plans etc. The larger the account, the more likely the benefit to Roth convert funds sooner rather than later. If retired early or working PT, spending some from pre-tax to meet expenses may serve the dual purpose of providing necessary funds and lowering future RMDs. As noted in JBME ‘s reply, high income individuals with good savings and investment habits can accumulate significant amounts in their pre-tax accounts and Roth conversions are one way to decrease the impact of future RMDs.

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      • #18
        Apologies if I’m being dense, but if you’re already retired, needing 100k per year from a 2.5M portfolio, of which 1.25M is in a 401k, I’m not sure conversions are a good strategy.

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        • #19
          Originally posted by Dewangski1 View Post
          Apologies if I’m being dense, but if you’re already retired, needing 100k per year from a 2.5M portfolio, of which 1.25M is in a 401k, I’m not sure conversions are a good strategy.
          It’s actually not so straightforward. As mentioned above, estate planning can be a significant factor. Children in higher tax bracket, you in lower tax bracket, Roth conversions especially when market is in bear or correction territory, can turn 100% taxable income into tax-free income for the heirs. Important not to overlook the basis step-up at death, too. The SECURE Act complicates planning even further, moving taxable accounts up a notch beyond pre-tax accounts impo. And you need to consider that Roth conversions for high-income taxpayers are a hot topic in Congress. Maybe not an issue in retirement viewed in a vacuum but for the fact that the conversion itself moves you to a higher bracket.

          A very general allocation goal for clients is to have 1/3 pre-tax, 1/3 Roth, and 1/3 taxable allocation during retirement. No studies or anything fancy to rely on there, just a starting point and an ongoing measurement tool. Higher Roth relative to pre-tax is, of course, preferable. One of the trickier planning areas.
          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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          • #20
            Originally posted by GasFIRE View Post
            It really depends on how large your pre-tax account is, work status (retired, PT vs FT work), age, estate plans etc. The larger the account, the more likely the benefit to Roth convert funds sooner rather than later. If retired early or working PT, spending some from pre-tax to meet expenses may serve the dual purpose of providing necessary funds and lowering future RMDs. As noted in JBME ‘s reply, high income individuals with good savings and investment habits can accumulate significant amounts in their pre-tax accounts and Roth conversions are one way to decrease the impact of future RMDs.
            I think the principle always applies. converting into the 32% bracket doesn't make sense unless your account is >11M, right?

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            • #21
              Originally posted by triad View Post

              I think the principle always applies. converting into the 32% bracket doesn't make sense unless your account is >11M, right?
              While I am comfortable up to the 24% bracket, I do agree my pre-tax would have to be very large before I would want to convert in the 32% bracket. I’m not sure though I would use a hard and fast rule like (top of 32% bracket)/[email protected] (which is how I assume you arrived at the $11M amount). RMDs continuously increase as you age, typical spending levels could be significantly lower than the RMD, taxes could increase in the future among other things are all factors which might suggest using a smaller target value (although still a large retirement account). Depending on what your goal tIRA is when you start RMDs, rate of return, taxable income from work or dividends and when your able to start Roth converting, filling the 24% bracket may not be enough room to substantially decrease your pre-tax account.

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