Roth Conversion 2019 Style

I’ve been dutifully converting according to my pre-disclosed schedule and have just shy of 500K converted. My goal was to convert 1M by age 70 (3 years from now) and an unchanged schedule would result in 600K of Roth by the end of 2019. I already have the taxes paid on my present conversion from last year carryover and some additional money sent to the treasury.

It turns out a bill is wending its way through congress raising the RMD age to 72 from 70. This gives me the option to convert at the same schedule for 2 more years at a higher net conversion (probably around 1.2M net). OR I can convert to the same 1M by age 72, paying less taxes along the way. The tax savings on the slower conversion is not trivial about 97K over 5 years or 20K/yr not huge but not chump change either. The 5 years will be covered under the current tax law, so there will be no danger of reversion to 2018 law before it’s all said and done.

None of my arguments regarding how much to convert changes. At 72 I still want 1M in Roth and abut 600K in Pretax which I will RMD at 72. The Pretax will contain my bonds offering slow growth and steady returns, keeping me in a lower tax bracket longer. We will still do the SS doe see doe, where my wife will claim SS at 62 and I will claim spousal until I become 70 when I will claim my maxed out SS, she will continue with her SS. Upon my death she will acquire my survivor benefit maximizing our SS payout over our life times. All of it works the same except by extending the period of conversion I manipulate myself into a lower tax bracket for the next 5 years of conversion, which is how the extra 100K is generated. That’s money I will no longer pay in conversion taxes and will stay in the bank. This tweaking around the edges, but tweaking none the less should result in a free extra year of retirement thanks to this change in the tax code. I will still use small aliquots of post tax money to round out my yearly spending with a net cap gain of zero.

Thought I’d let everybody know what’s coming down the pike. Full (no side gig) retirement with the ability control these situations is the best thing that ever happened to me. It didn’t happen out of the blue or according to a MMM formula. The plan took a couple years create, understand and optimize all the moving parts, and to bring to fruition. If I was still “making money” as in some kind of W2 like income none of this would work.

6 Replies to “Roth Conversion 2019 Style”

  1. Did not hear about the proposal to raise the RMD age to 72. That would definitely be a great scenario for everyone.

    Hopefully it passes and is still around when I can use it

    1. Yea tax law optimization is all so nebulous. But I see a window so may dive through while the window is open. Thought others might be interested in the development as well

  2. Thrilled to see you back and even writing! May the remainder of your recovery be we uneventful as your planned conversions. Appreciate the tip on possible legislative changes,

    CD

    1. My level of fatigue is amazing. It’s like crawling out of a gravity well, I feel a little caged, well enough I dodged the rehab bullet but a long way from normal. I lost 2 weeks of sleep and catching up only in 2 hour aliqouts. Hospitalization is way stressful. In the mean time plans need to be made and executed in a timely way so I broke out Excel to reconsider my optimization. Not Sure if I’ll actually alter my plans but I wanted something to document a potential slight shift in narrative. Tnx CD

  3. From your analysis in this post, I can tell your squash is working just fine. Hooray for good outcomes! Being able to Roth convert out to age 72 would be a good thing if this actually gets passed through the legislative sausage-making process. One of the downsides though is the stretch IRA for non-spousal inheritance may end up being limited to 5 or 10 years depending on the version. Not an issue if it all IRA funds are needed by you or your spouse, but not as beneficial if you were planning to leave the remainder to the kids. For the inheritors of traditional IRAs there is definitely potential for bracket creep and for Roth IRAs it ends the tax-free growth sooner. Uncle Sam wants his share, the bigger the better.

    1. This is a good point. My TIRA is an annuity to fund my life. My SS is an annuity to fund my life. The TIRA is not a growth vehicle, it is my source of low risk and is planned to provide 3% (+-) steady return come rain or shine and it will provide the RMD % rate of decay which is about similar to the inflation rate. So year 1 my 600K dumps 22K into my life, year 2 22.5K etc. SS will net about 50K/yr inflation adjusted. So about 6K/mo “inflation adjusted” annuity income. The low chosen rate of return means I won’t bracket creep for a while probably a couple decades. SS is tax advantaged and charged at 85% of income so my annuity tax liability is on .85*SS + RMD So 1st year my taxes will be based 42.5k+ 22K or 64.5K liability for a 72K net income. The MFJ top of the 12% bracket including deductions goes to 104K so I have about 40K of bracket creep till I hit the 22% bracket. My yearly tax bill will bobble along at about $4200 on 72,000 income or at effective 5.8% tax rate. That’s the “ordinary income” aspect of my yearly income. It’s an adequate optimized return and low risk.

      My potential growth and wealth transfer is dedicated to Roth IRA and post tax accounts, which have different tax treatments. If I want 10K/mo income, I need to come up with 4K/mo additional money beyond the ordinary income stream. My next store of wealth available is the post tax account. I have tax loss harvest so I can pull some money out of post tax, cap gains free. To make up the difference I merely sell 40K of post tax equity. My portfolio yields about 8% return with 10% risk with all assets considered as per Personal Capital’s analyzer. 72K is virtually assured. I chose 600K TIRA as described for its entirely predictable income and tax liability. My Post tax portfolio is simply mutual funds with some admix of diversity. I own BRK.B for example plus a few other shares but mostly US small cap and total market kind of stuff. I own a small amount of foreign as well. My non correlated diversity is between equities, cash and bonds. My overall AA is about 60/40. To make the extra money I use some small dividends from the mutuals plus sell some small amount of shares. I’m not at all hung up on selling stock since the portfolio grows and new shares are purchase automatically all the time. If my portfolio generates say 100 reinvested shares and I sell 40, I still have 60 newly invested shares netted out at the end of the year. I subtract my TIRA assets since those constitute an annuity, apart from my WR calculation. So if I have 3.6M and 600K is TIRA annuity 3M is available for WR. 40K on 3M is a 1.3% WR on a portfolio slated to return 8%. At some point it becomes hard to run out of money. I will spend down the TIRA annuity, then the post tax. I have different assets I can buy or sell like GLD in a downturn which tends to soar, so if stocks are tanking GLD is rising and I always have something to sell high. Rule 1 sell high so you need something to sell high when the bottom drops out. I also re-balance. In the up years some profit is transferred to bonds. In the down years those bonds are available to pay for monthly income or to buy stock cheap.

      My final pile is the Roth which is being funded now. My Roth will grow unmolested, will provide wealth transfer as well as self insurance in case of disaster. A 1M Roth at 72 is a 5M pile of money inflation adjusted at 92 more than enough as legacy and protection of my spouse. If my heirs have to spend the fairly small amount of TIRA money in 5 years or 10 years not my worry. At age 92 my TIRA is still worth 300K despite 20 years of extraction. The bulk of my wealth will be transferred in Trust

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