Thanks, and thanks again AJ. Yeah I’ve run the numbers a few ways, with taxes assuming some inflation indexing for std deduction & tax brackets. My mental calculation is the Roth conversion doesn’t really make sense for us, as I will need most if not all of the 4% withdrawals on top of pension & SS to “live on” - but that high 5-figure “income” level in total (to start) will make 85% of SS taxable anyway, and keep us in the 22% marginal bracket.
Assuming I took about 12 years to convert the TIRAs to Roth, keeping under the top marginal bracket of $200K, (on top of the SS & pension), it looks like I’d pay $100K more in taxes over the lifespan converting. The $4-$5K a year in tax savings after all conversions done, net wouldn’t make up for the first 10 years of hits. But I could be wrong.
Is there a good calculator out there to do these comparisons?
Assuming the 4% rule starting in '26, with ~2.8% inflation, and a conservative “significantly below average” market return, and my flat (non-indexed) pension for 30 years, those last 10 years or so I’ll be withdrawing north of 8% a year anyway - health willing, burning most of the TIRA down. Without selling the house, and somewhere in there paying off the mortgage. If health deteriorates badly, well, we had a good time until then.
I get the sense that conversions at this age are for the very financially successful strata that has portfolios well into the 7 digits. And they’re best done well before retirement.
After converting to a Roth IRA, there are two main tax savings. One, the lower RMDs from the TIRA will result in lower taxable income which will result in tax savings. Two, and this is usually the bigger tax savings, all the gains in the Roth IRA will never be taxed at all. Let’s say you have $500k in a TIRA, and let’s say you are age 59, and let’s say you have pension+social security+regular taxable accounts to live on for the early part of retirement. If that $500k in the TIRA is invested and is then worth $1.2M at age 73 when RMDs begin, you will eventually pay taxes on the RMD, and in that first year, the RMD will be nearly $100k, add that to the pension, to the social security, and perhaps some interest and/or capital gains on taxable accounts, and you could easily be in the 28% or even 33% tax bracket (after TCJA expires). So it may still be worth converting some of the TIRA to a Roth IRA at the current 22% rate bracket (and by the way, currently, 2024/25, the next rate bracket is hardly much higher at 24%). Reducing that $100k RMD to $50k could easily save you $14k a year starting at age 73. And it would cost you a total of $55k now (now = during the years you convert TIRA to Roth IRA while paying 22% tax) if you convert $250k out of the $500k in the TIRA. Obviously we can’t know exactly how much it’ll cost because tax rates will change in 2026, but we can at least benefit from the 22%/24% rates in 2024 and 2025.
So converting some of the TIRA to a Roth IRA has the two benefits described above, which could be substantial even if the account currently is “under 7 figures”.
No, I haven’t seen one. That’s probably because the calculation is relatively complex and requires various assumptions regarding income, tax rates, and life expectancy of spouse (that’s because when a spouse dies, the remaining spouse suddenly has to file as single, with much narrower tax brackets).
Yes, this is a really good reason to consider Roth conversions if you think there’s a reasonable chance that one of you will outlive the other by more than a few years.
I’m with you overall, but I see a problem with the example.
The first year RMD is currently a 27.4 year distribution, which is to say 1/27.4, or about 3.65%. Which, applied to 1.2 million, comes to $43.8k, which is not nearly $100k.
I used this calculator (with birthdate 1/1/64, balance 1.2M, calculate RMD at age 73). But I didn’t look closely enough at its methodology. Turns out that when I entered 1.2M, it took that as the “now” balance and added gains out to age 73. So the actual RMD is closer to $44k depending on the gains. But the principle still stands. Once that RMD hits, it’ll all be taxed at the highest marginal rate because it will be additive to existing income (as is almost always the case).
I will point out that 9 years from now (2033), the RMD age will be raised to 75 under current law. So there wouldn’t actually be an RMD required at 73 for the example you provided. I’m not sure why these calculators aren’t accounting for this age change, but several of the calculators that I’ve seen seem to have the age stuck at 73, even though some of them mention in the footnotes that the age changes to 75 in 2033.
Thank you for the thoughtful answer, and that’s a good, detailed scenario. However, my scenario won’t be waiting until 73 to start withdrawals - I would be starting them at 62.
I’ve done a spreadsheet including taxes on the income net of standard deduction every year, and taxes reduced by withdrawing from the Roth residual after it’s converted, starting about 10-11 years out. I’ll never get close to the 33% marginal bracket except for the Roth conversion years.
I would pay ~$140K in conversion taxes, nearly 20% of the TIRA over those 11 or 12 years.
At age 71 the forecast is about $50K less in the fully converted Roth IRA balance, after annual 4% withdrawals from the TIRA and conversions under the 33% marginal from the TIRA. Assumes same “significantly below average” return numbers, applied to the Roth balances untouched until the T-IRA is completely burned down.
This would pay $60K less in total taxes from ages 72 to end of plan. (Roughly 33% reduction in annual taxes)
This would run out of money by age 88 and be taking out way more than RMD to meet expenses.
==> all of these assume not selling the house sometime.
==> all using same assumptions of annual expenses
Bottom line it looks like I’d make up for the lower balance in the converted Roth with lower taxes after about another 15 years. Seems like a Pyrrhic victory.
Many variables to consider. Gonna go back and recheck the non-Roth scenario now too.
The essential general rule of converting to Roth, really the essential rule of “paying tax now rather than later” all depends on being in a lower marginal tax bracket now than the tax rate that would be due on the money later. It makes little sense to pay X% now when you could pay Y% later when Y is less than X. Someone in the 32/35/37% tax brackets today who will be in the 24% or lower brackets later are NOT advised to convert to a Roth.
Also, it would be prudent to keep in mind that tax rates will definitely be changing in 2026 (when TCJA expires), and will likely change yet again once congress gets their act together and passes a new tax law someday. It is quite possible that that new tax law will change things up completely and new “tricks” would have to be learned to optimize ones balance of taxable/tax-deferred (TIRA)/tax-free (RIRA) assets.
While I think it unlikely, is there really any thing beyond politics to prevent Congress from deciding to tax Roth IRAs? They certainly can and do change tax rates.
Just because you move money out of an IRA to meet the RMD doesn’t mean it has to be spent. If following the 4% guideline you’d take an RMD but only spend 4% (plus inflation adjustment) and (probably) reinvest the rest…thus not running out of money.
The fact that people voluntarily pay taxes faster than they strictly need to in order to get money into a Roth style account is a powerful motivator to keep them around.
You can see signs of that sort of thinking in the Secure 2.0 legislation, where they actually require high-income earners to make catch-up contributions to Roth-style 401ks.
In the short-term focused scoring systems that Congress uses, getting some money from taxes today is often better than getting more money from taxes 10+ years from now.
That said, I wouldn’t put it past them to do something related to Roth IRAs, such as make withdrawals “visible” to the calculations on how much of a person’s Social Security is taxed or what that person’s Medicare part B and D premiums are…
No, of course not. But it is very unlikely that they will tax them directly. Much more likely (as @aj485 said above) they will tinker around the edges and cause other taxes to go up due to Roth balances/withdrawals.
I’m not aware of any tax law that “requires” catch-up contributions. I think they just added the option of catch-up contributions, like they did previously with IRAs and traditional 401ks.
I could have communicated my original point more clearly.
Before Secure 2.0, people aged 50 and up who chose to make catch up contributions to their 401k style plans could choose to make those catch up contributions as either Traditional style or Roth style. After Secure 2.0 (officially starting in 2026), high income people who choose to make catch up contributions to their 401k style plans must make those catch up contributions to Roth-style plans.
The over-arching point is that activity like that means Congress does see value in Roth-style plans because Roth-style plans mean money gets taxed immediately instead of several years down the road.
Don’t forget IRMAA premiums on Medicare. The calculations that impact IRMAA start with the year that you turn 62, since they look back to your most recent tax return that’s available when you become eligible for Medicare at 65.
Also, as previously mentioned, you may want to run scenarios where one of you dies several years earlier than the other, and the survivor is required to file as a Single, and taxed at Single rates.
Why do you think I would put a spreadsheet together with all those calculations, scenarios and forecasts if I didn’t need to spend the money?
I thought it was clear that I need to spend it to cover the living expenses that my non-inflating pension and social security won’t cover. This is not a theoretical tax reduction exercise where someone has $millions playing around with reducing taxes.
I don’t know about y’all, but every dollar I can save by paying less in taxes is an extra dollar I can spend. Part of your living expenses ARE those taxes.
If you are going to run out of money I don’t think it has much to do with the RMD rate. IMO, if this is the case I don’t think doing ROTH conversions (especially up to a 33% bracket) is a good idea at all. You would be guaranteeing paying a high tax rate in exchange for maybe less taxes later…but if you will be running out of money you will have a lowish tax rate in later years
Just because you need to spend money in Traditional accounts for living expenses doesn’t mean you are going to run out of money. What could mean is that you have most, if not all of your retirement savings in Traditional accounts:
And that’s not even counting if some of the other retirement balance is in Traditional accounts owned by the spouse, and/or the current employer’s 401(k).
I would agree that it’s not a good idea to do conversions if the bracket will be higher than what you anticipate the brackets to be in the future. But doing conversions at bracket levels at (or especially, below), what you anticipate your bracket being after RMDs kick in can very well result in lower taxes paid over your lifetime.
And since MFJ brackets are lower than Single brackets, you also have to account for what the bracket will be when one of a couple MFJ dies and the survivor is forced to pay at Single rates.