Roth conversions anyone done this?

[Telemark]

because in retirement (hopefully) you are drawing out more than 90k a year

Have you budgeted for this? In my eyes, you are extremely wealthy. For a retired couple, $90,000 a year is a very lavish lifestyle.

 

[Telemark]

Take it easy on me boys, as I'm just a millennial, but I've never understood going the ROTH route. To me, when investing in a traditional 401K, I'm essentially getting an interest free loan till I withdraw any money. That's a pile of money after 40 years of interest. Money that the guys that invested in ROTH don't get to accrue.

Basically, yes. With a traditional 401k, you are able to invest all that extra money in the mean time and earn interest on it. It is a good idea to have a Roth IRA in addition for any money you want to invest that you can't avoid paying tax on, or that you don't need to pay tax on.

Additionally, you are likely to pay less tax in retirement, as your expenses generally go down. This does not apply to everyone, so it is important to budget for the retirement you plan to have.

 

[TWIG]

here is 1 example, remember a married couple pays 12% tax on earnings under 90k (89,450 to b exact), and 22% tax on earnings over 90k. (This does not include future limit levels being raised, or taxes going up or down)
if you are under 90k it makes a lot of sense to do Roth, because in retirement (hopefully) you are drawing out more than 90k a year, so you save 10% tax on any money over the 90k.
if you are over the 90k, you can put it in a “traditional” tax free, saving the 22%, then if you withdraw less than 90k a year in retirement, it is only taxed at 12%.

This is where you guys totally lose me. So you're giving up a lifetime of accrued interest to save 2% on taxes? Surely I must be missing something?

 

[AtomApple]

This is where you guys totally lose me. So you're giving up a lifetime of accrued interest to save 2% on taxes? Surely I must be missing something?

Lol, well, you’re saving 10%. But you are not giving up any accrued interest. You either pay taxes now, or later, but your net reward at the end is basically the same.

 

[Telemark]

I think there is a huge misunderstanding about tax brackets and how Roth 401k works.

 

[SD51555]

It really doesn't have to be that complicated. The ideal blend is going to look something like this in retirement:

40% tax deferred (traditional 401k, traditional IRA, pension etc)
30% tax free (roth 401k, roth IRA)
30% taxable (plain jane investments)

Ideally, you're able to take your RMD and not get shoved into the higher brackets. You make up the rest of your upper middle class retirement with tax free money while staying in the lower brackets. You have the plain taxable assets in the event you've done well and you don't want to wait for permission from the government to access your own savings at whatever age you want without extreme penalty.

Then it's not such a big deal where you live, what the tax rates are, and what your age is. The error too many make is they take all the tax deferrals while they have kids and less income, and then when all the kids are gone and both spouses are working, they have no room left in their brackets, or tax credits to knock down the bill. One big expense in retirement, and you're shoved into a higher bracket, and you've got to take out $100,000 just to net the $60,000 you need.

 

[Telemark]

Who is paying a 40% effective tax rate?

 

[Foggy47]

It really doesn't have to be that complicated. The ideal blend is going to look something like this in retirement:

40% tax deferred (traditional 401k, traditional IRA, pension etc)
30% tax free (roth 401k, roth IRA)
30% taxable (plain jane investments)

Ideally, you're able to take your RMD and not get shoved into the higher brackets. You make up the rest of your upper middle class retirement with tax free money while staying in the lower brackets. You have the plain taxable assets in the event you've done well and you don't want to wait for permission from the government to access your own savings at whatever age you want without extreme penalty.

Then it's not such a big deal where you live, what the tax rates are, and what your age is. The error too many make is they take all the tax deferrals while they have kids and less income, and then when all the kids are gone and both spouses are working, they have no room left in their brackets, or tax credits to knock down the bill. One big expense in retirement, and you're shoved into a higher bracket, and you've got to take out $100,000 just to net the $60,000 you need.

The biggest advantage of a Roth to me....is that I can pass the Roth accumulation on (contributions and increase value via gains and income) to my kids.....without tax. It can continue to accumulate tax-free income though the years......and even be passed to their heirs.....again without taxes on the accumulated value. The gift that keeps on giving. grin.

 

[b116757]

^^^^
I will likely draw on my Roth contributions last if at all and the kids can have it.

 

[SD51555]

Who is paying a 40% effective tax rate?

You can hit that in a blue state.

Sent from my iPhone using Tapatalk

 

[Telemark]

You can hit that in a blue state.

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You could hit a 40% marginal rate, but not a 40% effective rate. Even in California, you would probably be under 35% effective rate on 100k.

 

[SD51555]

You could hit a 40% marginal rate, but not a 40% effective rate. Even in California, you would probably be under 35% effective rate on 100k.

Marginal is the most important rate. It determines that value of deductions and the costs of your next move. When I was converting my last 401k to my roth IRA, I'd do a pretax in early December and use up my entire tax bracket on a conversion in December. Then if I had budget for more, I'd hold the rest over to January and convert it then. It's not a lot, but it's also not hard to avoid.

Classic case where marginal rates really get someone in trouble is when a spouse takes a second and lesser job, and they withhold at a lower rate because of the withholding charts on that income source. They may be only taking out 10%, and their marginal rate is north of 30% combined. Well, if she makes $20,000 at that job, there's $4,000 in unaccounted for tax that's gonna jump up at filing time and say, "No shopping spree tax refund this year." Most tax preparers can't and don't explain whose fault it was for the refund disappearing. I quite enjoyed that part, because it gave me an opportunity to show why we'd charge them $600 for 90 minutes of my time.

 

[Jerry-B-WI]

It really doesn't have to be that complicated. The ideal blend is going to look something like this in retirement:

40% tax deferred (traditional 401k, traditional IRA, pension etc)
30% tax free (roth 401k, roth IRA)
30% taxable (plain jane investments)

Ideally, you're able to take your RMD and not get shoved into the higher brackets. You make up the rest of your upper middle class retirement with tax free money while staying in the lower brackets. You have the plain taxable assets in the event you've done well and you don't want to wait for permission from the government to access your own savings at whatever age you want without extreme penalty.

Then it's not such a big deal where you live, what the tax rates are, and what your age is. The error too many make is they take all the tax deferrals while they have kids and less income, and then when all the kids are gone and both spouses are working, they have no room left in their brackets, or tax credits to knock down the bill. One big expense in retirement, and you're shoved into a higher bracket, and you've got to take out $100,000 just to net the $60,000 you need.

Looking at your plan 60% of your portfolio is invested after taxes are taken out. And half of that will be taxed every year, capital gains on divedends etc., or on appreciation when sold. But as you stated Uncle Sam can't tell you when to take it.

 

[SD51555]

Looking at your plan 60% of your portfolio is invested after taxes are taken out. And half of that will be taxed every year, capital gains on divedends etc., or on appreciation when sold. But as you stated Uncle Sam can't tell you when to take it.

For me, it's all about when you want to pay your taxes, and what are your options when you have a sudden need for cash. I don't want to wait to 59 to retire, and I don't want to have to live in a high cost tax refuge state (FL, AZ, TX). It seems like you can get 160 acres, a house, fish pond, skid steer, tractor, and flail mower in northern MN for what a townhouse costs in Florida or Arizona. I am planning on the 160 acres and a robust travel budget for the worst 90 days of winter each year. If the deer herd gets really bad, I'll have to budget for a 6' low fence around the whole property.

I've got my Roth about funded now to where it doesn't really need anything other than management. Still do Roth 401k and full match at work, max HSA funding every year, and the rest goes into my taxable slice. That's the biggest hole in my pie right now.

 

[rocksnstumps]

^^^^^Jerry B
A first world problem I would LOVE to have if 30% of my invested assets bumps me into a bracket where I would have to pay any taxes. From Bankrate.com and notice that amounts increase from year to year before you get bumped into next tax bracket. So if married filing jointly, investments have to pump out over $89K a year without lifting a finger (capital gains and dividends) to get into the 15% tax bracket. If I had that kinda bling coming in I would of course be delaying social security to not mess with that on my tax rates and if bigger money buckets are needed on occasion would just draw some principal from savings or small slices from the Roth. Again the max tax is still only 15% so not that horrendous anyway. And looking at 2024 that amount gets bumped to $94K.

Please, please, please sign me up for that problem!

Long-term capital gains tax rates for the 2023 tax year​

FILING STATUS	0% RATE	15% RATE	20% RATE
Single	Up to $44,625	$44,626 – $492,300	Over $492,300
Married filing jointly	Up to $89,250	$89,251 – $553,850	Over $553,850
Married filing separately	Up to $44,625	$44,626 – $276,900	Over $276,900
Head of household	Up to $59,750	$59,751 – $523,050	Over $523,050

Source: Internal Revenue Service

Long-term capital gains tax rates for the 2024 tax year​

FILING STATUS	0% RATE	15% RATE	20% RATE
Single	Up to $47,025	$47,026 – $518,900	Over $518,900
Married filing jointly	Up to $94,050	$94,051 – $583,750	Over $583,750
Married filing separately	Up to $47,025	$47,026 – $291,850	Over $291,850
Head of household	Up to $63,000	$63,001 – $551,350	Over $551,350

 

[Jerry-B-WI]

For me, it's all about when you want to pay your taxes, and what are your options when you have a sudden need for cash. I don't want to wait to 59 to retire, and I don't want to have to live in a high cost tax refuge state (FL, AZ, TX). It seems like you can get 160 acres, a house, fish pond, skid steer, tractor, and flail mower in northern MN for what a townhouse costs in Florida or Arizona. I am planning on the 160 acres and a robust travel budget for the worst 90 days of winter each year. If the deer herd gets really bad, I'll have to budget for a 6' low fence around the whole property.

I've got my Roth about funded now to where it doesn't really need anything other than management. Still do Roth 401k and full match at work, max HSA funding every year, and the rest goes into my taxable slice. That's the biggest hole in my pie right now.

I just wanted to point out for others who may be following this thread and doubting the sanity of the after tax investment strategy. While I was working I had 401k, brokerage account, and Roth IRA.

I started to draw on the Roth first because of our age and the credit for the ACA. Keeping the taxable income below 39k has saved me about 20k in insurance premiums each of the last two years and will save me about the same for 2024. Yeah, I was happy to pay the taxes before the money was invested. We had to take out an additional 32k for a unplanned vehicle purchase also. After we turn 65 we'll leave the Roth alone so we can do conversions and maybe leave some for the kids or grandkids, tax free for them and they can blow it when they want not when they're told to.

 

[Telemark]

Looking at your plan 60% of your portfolio is invested after taxes are taken out. And half of that will be taxed every year, capital gains on divedends etc., or on appreciation when sold. But as you stated Uncle Sam can't tell you when to take it.

It's far more complicated than that. If you have an asset that is down, you can sell it and write off the loss against your taxable income. You can then go right back into the same position if you expect to realize gains. Or you can go into another position that you think is more promising.

It's an extremely complex and opaque world. I'm far from an expert, but the more I learn about it the more it appears like a grand financial symphony. It has been really rewarding learning about it.