I like the saying " retirement is a number and not an age." Meaning it's a monetary amount and not an arbitrary age. I'm aggressively trying to hit that number by 50.

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Originally posted by old rugged cross:
oK guys lets not get into the financial advisor discussion or a deep dive into ladder bonds or how to spend your day. Or doing trusts.

That's my fault, orc. I sidetracked the discussion. My apologies.

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Originally posted by bigwagon:

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Originally posted by Georgeair:
Similar to SS timing, the other strategy that has been de rigueur for several years now is actively pursuing pretty high levels of Roth conversions if you have a lot of pre-tax accounts.

I think large scale Roth conversions are over-rated. They are also costly to do, because the right way is to pay the tax upfront out of cash, not out of the converted funds, which is a really exposes you to high sequence of returns risk and extends the break even much farther out.

There’s really no “right way” to pay the tax on a Roth conversion. If you have the extra money already in cash that you don’t have any use for but to pay taxes, then yes, it’s the optimal source of funds but, in that case, the question is: what were you doing with cash sitting around for no purpose but to pay Roth conversion taxes?

All it means if you also have to pay taxes out of your IRA is that your conversion amount is less than if you had money on the outside to pay.

It’s not so much large scale conversions is the fad but tax efficient conversion. For example, if all you need to draw from your 401k gets you to $150,000 total taxable income for joint. That puts you in the 22% tax bracket (I’m doing this from memory). The top of that tax bracket is like $205,000 (or the IRMAA surcharge threshold where you go over by $1 and you’ll be paying higher Medicare premiums 2 years down the line). That means you can efficiently convert $50,000 into the Roth IRA and pay your current marginal tax rate. If you have to pay the Roth conversion tax out of the $50,000, so be it. But that’s still the “correct” way to do it.

You do want your Roth account money to be invested in more high reward investments instead of less riskier low paying investments because that’s the point of paying the taxes up front so you can get higher rewards tax free 5 years down the line.

The idea behind Roth conversions is you want to get ahead of the Required Minimum Distributions which potentially will push you into higher tax brackets when RMDs kick in. Hence, maximizing the Roth conversion amount up to your current tax bracket ceiling.

It does take some ballpark analysis whether RMDs and projected portfolio growth will push you into higher tax brackets when the time comes given the many variables including whether the tax brackets will remain as they are. They were set to revert back to higher tax rates for 2025 had the Big Beautiful Bill not passed.

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Originally posted by mrvmax:

That is my problem with financial advisors, you can get 10% just investing in the S&P500. If they cannot beat that, are they really worth it? In your case, the CPA access is worthwhile. I do not see 10% as a good return for a professional who does that for a living. I can and do exceed that with my own investing and have for years now.

I reached that same conclusion. The benchmark for my previous investment management company was MSCI World Index and if they can be better than a few decimal points, they consider themselves great. It’s mostly like signing on to a bond mutual fund and an equity mutual fund and their personalization is the percentage of your money between each mutual fund. The bulk of your fees go into holding your hand, whispering sweet nothings in your ear about their insights on the market, and getting you to stay put in up or down market.

I started using AI six months ago and my total portfolio is is 8%. That may sound nothing but given the context that it’s designed to avoid a 25% drop for money I need 2 through 10 years out, I’m happy given that’s roughly 16% for a full year. It gives me a better confidence since I’m making it do a top down analysis and I’m pressure testing it’s recommendations.

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Originally posted by Rey HRH:

All it means if you also have to pay taxes out of your IRA is that your conversion amount is less than if you had money on the outside to pay.

Sure you can do it that way, but I rarely if ever see financial advisors recommend taking taxes out of the conversion. Depending on your age and timeline, you can really get killed on gains over time by doing it that way. The 5-year rule may also be a consideration.

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Originally posted by bigwagon:
Sure you can do it that way, but I rarely if ever see financial advisors recommend taking taxes out of the conversion. Depending on your age and timeline, you can really get killed on gains over time by doing it that way.

But for some, that may be the only option. No other funds to pay for taxes other than part of the conversion amount. This is what gives me pause. And it's hard to assess how much I'm really gaining by converting - is it a practical value or not? If one can pays more in taxes or medicare premiums but is still financially sound, does it matter? And again, this is the part that seems difficult to assess - no tools to model this. (speaking as a novice and one who is not well versed or financially savvy).

I agree with you. That's why I made the comment in the first place. It can be a complex calculation. It's not an automatic slam-dunk must-do for everyone.

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Originally posted by konata88:

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Originally posted by bigwagon:
Sure you can do it that way, but I rarely if ever see financial advisors recommend taking taxes out of the conversion. Depending on your age and timeline, you can really get killed on gains over time by doing it that way.

But for some, that may be the only option. No other funds to pay for taxes other than part of the conversion amount. This is what gives me pause. And it's hard to assess how much I'm really gaining by converting - is it a practical value or not? If one can pays more in taxes or medicare premiums but is still financially sound, does it matter? And again, this is the part that seems difficult to assess - no tools to model this. (speaking as a novice and one who is not well versed or financially savvy).

Konata88: you got the point correctly. If it’s determined doing a Roth conversion is a good idea but you don’t have any post-taxed cash to pay for the Roth conversion tax, it’s silly to think the decision will be to not do the conversion. For those who are supplementing their retirement income out of their 401k, the question is moot; they’re already taking money out and paying taxes on it. There’s no difference between cashing out the money from your 401k to pay the tax and paying the tax as part of the Roth conversion or even waiting until the end of the year. That advice to not pay taxes out of the Roth conversion is for people still working with presumably discretionary income. Even then, the amount converted is still driven by the marginal tax rate.

Now, if you’re considering that a Roth conversion amount is still of financial benefit even if it pushes you into a higher tax bracket or Medicare premiums, then you have enough assets to justify getting a financial planner with tax accountant skills. Because they will need to net out your potential benefits of tax-free returns minus the incremental tax / Medicare premium costs.

But, if you’re simply converting up to the ceiling of your current threshold and you don’t believe income tax rates will go down in the future, then you’re guaranteed no loss - you’re simply paying income taxes at the current rate ahead of time for the benefit of avoiding higher taxes later on. Whatever will happen in your investment inside a regular IRA or Roth IRA will still be the same.

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Originally posted by 6guns:

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Similar to SS timing, the other strategy that has been de rigueur for several years now is actively pursuing pretty high levels of Roth conversions if you have a lot of pre-tax accounts.

Yes! I think this is very important and depending on your tax situation, it's worth converting IRA funds into your Roth fund. Yes, you pay tax for the conversion, but I believe worth it over time. I convert as much as I can and have for several years. I'll continue until I'm 73...six more years.

You might consider taking a pause for the next 3 years. Why? The Big Beautiful Bill has the No Tax on Social Security provision which is only in effect for the next three years. It gives 65 and older an additional $6,000 deduction to shield their social security from income taxes. But that deduction starts to decrease at $150,000 income for joint returns. To maximize that deduction, you need to keep your total income plus Roth conversions to $150,000.

Considering how woefully uneducated I am on financials, if I said something correctly, it was probably more luck than informed.

But good to know that perhaps I'm starting to understand some concepts. Or at least as the financial advisor would say, perhaps at least asking some of the right questions. It's a start.

I'm having to re-read your post several times to make sure I understand what you're saying (and what perhaps I'm viewing correctly). But it is good to know that I'm wondering about things correctly.

It's really great that you guys share your expertise like this, and in plain english. It's very valuable.

It seems that we are collectively all over the map and that’s a good thing as I believe that one strategy is not going to work for everyone.

As an example, several people have stated that they are a or will be taking SS as soon as possible. In my case I believe that’s not in my best interest. My family have for the most part lived well into their 90’s. My mom just turned 95. So for me I will be delaying my withdrawal until I turn 70. Given that the break even point is somewhere around 78 I could have another 15 or 20 years of above average payments.

The next thing is IRMAA which for a married couple kicks in at just over $200k/ yr. So my plan is to withdraw as much money as possible but keeping under that threshold and pay my taxes so that as my RMD’s don’t kick me into a progressively higher tax bracket as I get older.

One final thought. Many studies on retiree spending divide the spending into three age groups. The first are sometimes referred to as the Go Go Years, where your health is relatively good and you travel and do all those things that you’ve always wanted. These are your high spending years. The second is the SLO Go years where things slow down and your expenses also are reduced and the final is your No Go years in which your expenses can go down even further but medical costs and long term care can come into play. It’s explained here better …

https://www.pranawealth.com/th...ur-spending-changes/

Again, I'm not an expert. I'm just trying to better understand high level implications of 401k, RMD and IRMAA (new term for me today).

Using theoretical numbers just for concept to sort of get a feeling for best case, worst case, it seems that if an RMD is less than $212K, then one pays the base medicare part b premium of $185/month (per person, I would assume).

If the joint RMD / income is between $212K and $266K, then the premium is $259/month/person.

If I'm calculating correctly, an RMD of $212K at age 73 means about $5M in 401K. If this is correct and if that were true, I'm not sure how sensitive I would be to paying $259/month/person vs $185. But I guess it depends on the person and their expense level.

My RMD is much lower than $212K and my expense levels are considerably lower so Roth conversions don't seem pragmatically meaningful to me from a medicare premium cost perspective.

Does this sound about right? Or am I missing something?

Next - understand RMD/MAGI and implications to SS.

Re: Where to get the money to pay taxes on a ROTH conversion. If you have the money in a taxable account such as a regular brokerage account or a bank, by using that money to pay the ROTH conversion taxes you are effectively making that amount of money exempt from future taxes, including any gains. So this is a bonus on top of the simple tax rate comparison of now vs future.

Example, you convert $50k and owe 22% federal taxes on it, which is $11k. If you pay the taxes from your brokerage account, that $11k stops earning in the brokerage, and those earnings would have been taxed. So instead, you have deposited $11k more into the ROTH, and the gains will never be taxed. Those avoided future taxes are a bonus, though kind of impossible to quantify up front.

Re: To ROTH convert or not? Don't forget all the other stuff beyond the federal tax bracket. IRMAA is one, though most of us won't trigger it just from doing a ROTH conversion once we are retired. State income taxes. Increased Soc Sec taxation triggers. The BBB 3 year $6k credit which phases out at higher incomes. Any loss of ObamaCare subsidies (if they ever come back and you retire before Medicare age 65). Any tax credits you might qualify for (energy efficient home improvements, etc) which might increase or decrease how much you can convert.

Re: IRMAA. Do learn everything you can about it. Note that you can trigger it from selling your home if it generates a capital gain. If you have gains beyond whatever exemption you might get ($250k if single, $500k if married, and haven't taken the exemption in the past 2 years), that counts towards IRMAA. Thus you should consider selling your home prior to the year you turn 63.

Note if your birth month is late in the year, IRMAA would only apply to those few months if you sold the house at age 63. Example, your 65th birthday was October 15 this year. You will start Medicare October 1, and any IRMAA would be based on your MAGI from 2023. IRMAA would only apply for October, November, and December of this year, and then they'd look at your 2024 MAGI to determine if you pay IRMAA in 2026. So with a late in the year birthday, you don't get penalized too terribly with IRMAA in the year you turn 65, and thus selling your home or taking other large income when you're 63 isn't so bad. The year you turn 64 and after that, IRMAA applies the entire year if you trigger it by $1 over the limit.

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Originally posted by konata88:

If the joint RMD / income is between $212K and $266K, then the premium is $259/month/person.

If I'm calculating correctly, an RMD of $212K at age 73 means about $5M in 401K. If this is correct and if that were true, I'm not sure how sensitive I would be to paying $259/month/person vs $185. But I guess it depends on the person and their expense level.

My RMD is much lower than $212K and my expense levels are considerably lower so Roth conversions don't seem pragmatically meaningful to me from a medicare premium cost perspective.

Does this sound about right? Or am I missing something?

Next - understand RMD/MAGI and implications to SS.

When analyzing things, it’s best to analyze that one thing and hold everything else “constant.” So I would avoid trying to understand IRMAA and RMD together at the same time. Once you understand each of them well enough, you’ll understand both of them together.

First, IRMAA is based on your Adjusted Gross Income plus any tax-free income such as municipal bond interest or tax-excluded foreign income. For 2025, the threshold is $206,000 for joint tax returns. If you exceed that just by $1, you’ll be paying the higher premium two years from now. It’s what they call a cliff; it’s not gradual. For some couples, assume $4,000 each for social security, maybe another $4,000 in pensions. That’s $12,000 a month. You’re just under $150,000 for the year. You may be newly retired and wanting to draw money for splurges and you can bump up to $206,000 pretty quickly and you don’t need $2 million in your 401k to do that. If so, you’ll be seeing that IRMAA surcharge as a pretty hefty fine for going over it by just a dollar.

You stay with that same couple when RMDs start to kick in, the requirements as a percentage of your portfolio keeps rising and you’ll see that RMD start pushing you into higher tax brackets and higher IRMAA surcharges. $120,000 isn’t that much money in most parts of the country and be living large.

In a way, you’re correct; you can be in one of three places. You can be very wealthy $5million in liquid assets or very poor that you don’t have to worry about these things. But if you’re somewhere in the middle, then you need to pay attention.

But, you’re right; I was arguing with a psychologist who was whining about her IRMAA surcharges and how it was unfair. She certainly has the money so she could well afford it and consider herself blessed.

Methinks simple got lost on page 1 right after Q nailed it.

1) Zero debt
2) Expenses > income = bad

Everything else is choice.

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Originally posted by Rey HRH:

quote:

Originally posted by konata88:

If the joint RMD / income is between $212K and $266K, then the premium is $259/month/person.

If I'm calculating correctly, an RMD of $212K at age 73 means about $5M in 401K. If this is correct and if that were true, I'm not sure how sensitive I would be to paying $259/month/person vs $185. But I guess it depends on the person and their expense level.

My RMD is much lower than $212K and my expense levels are considerably lower so Roth conversions don't seem pragmatically meaningful to me from a medicare premium cost perspective.

Does this sound about right? Or am I missing something?

Next - understand RMD/MAGI and implications to SS.

When analyzing things, it’s best to analyze that one thing and hold everything else “constant.” So I would avoid trying to understand IRMAA and RMD together at the same time. Once you understand each of them well enough, you’ll understand both of them together.

First, IRMAA is based on your Adjusted Gross Income plus any tax-free income such as municipal bond interest or tax-excluded foreign income. For 2025, the threshold is $206,000 for joint tax returns. If you exceed that just by $1, you’ll be paying the higher premium two years from now. It’s what they call a cliff; it’s not gradual. For some couples, assume $4,000 each for social security, maybe another $4,000 in pensions. That’s $12,000 a month. You’re just under $150,000 for the year. You may be newly retired and wanting to draw money for splurges and you can bump up to $206,000 pretty quickly and you don’t need $2 million in your 401k to do that. If so, you’ll be seeing that IRMAA surcharge as a pretty hefty fine for going over it by just a dollar.

You stay with that same couple when RMDs start to kick in, the requirements as a percentage of your portfolio keeps rising and you’ll see that RMD start pushing you into higher tax brackets and higher IRMAA surcharges. $120,000 isn’t that much money in most parts of the country and be living large.

In a way, you’re correct; you can be in one of three places. You can be very wealthy $5million in liquid assets or very poor that you don’t have to worry about these things. But if you’re somewhere in the middle, then you need to pay attention.

But, you’re right; I was arguing with a psychologist who was whining about her IRMAA surcharges and how it was unfair. She certainly has the money so she could well afford it and consider herself blessed.

Well said Rey.

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Originally posted by pace40:
Methinks simple got lost on page 1 right after Q nailed it.

1) Zero debt
2) Expenses > income = bad

Everything else is choice.

Agreed . It's not just about how much you have in your account , it's also about CASH FLOW . Not everyone has a million or two in their various Alphabet accounts . Some of us just want to live comfortable and not worry about leaving a fat inheritance for the kids.

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Originally posted by Rey HRH:
I was arguing with a psychologist who was whining about her IRMAA surcharges and how it was unfair. She certainly has the money so she could well afford it and consider herself blessed.

What irritates me about IRMAA is that it is another incremental punishment of success. Our Social Security already returns less the more one earned during their working years. "Bending the Curve" they call it. Then in retirement it gets taxed more and more if we have other income. And that bumps us into a higher tax bracket, too, taxing that other income more. Saved a lot in your IRA? Gotta take the RMD which stacks onto the rest of it, increasing tax rates further. Sold your home for a profit (which likely includes a lot of inflation that isn't factored out), and you get to pay IRMAA (another tax).

In addition, the claim is the cost to the government of Medicare Part B is much higher than what we get charged, with taxpayers footing the majority of the cost. We taxpayers are being royally ripped off if that is true. Without IRMAA, my Medicare will cost me 50% more in premiums than I pay now for a non-employer and non-Obamacare plan. With IRMAA next year it will be around 2x. Deductibles for Medicare are higher, too. Part D coverage is potentially much worse than my present plan, depending on what new Rx may be needed.

Thanks guys. I've learned a lot from this thread. Very timely too.

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Originally posted by Rey HRH:
When analyzing things, it’s best to analyze that one thing and hold everything else “constant.” So I would avoid trying to understand IRMAA and RMD together at the same time. Once you understand each of them well enough, you’ll understand both of them together.

Thanks and I agree. I said RMD but it's really a proxy for AGI since that's all I'll really have other than SS. Anticipating that RMD will be higher than my expense burn rate so it seems like it will be an important consideration, especially after I start SS (likely at 67 since COLA is likely much less than 401k growth).

Assuming I fall into the middle, seems like I need to figure out how much conversion to Roth will help avoid IRMAA/SS adverse impacts, what the 'cost / risks' of the conversion would be (costs being explicit and opportunity costs) and what the pragmatic effects of the IRMAA/SS impacts would be. Wild card may be the tax rates now vs 20 years from now.

Something like:
High cost, low impact: don't do conversion.
High cost, high impact: need more analysis
Low cost, low impact: don't do conversion
Low cost, high impact: Do conversion

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Originally posted by Fly-Sig:
Re: Where to get the money to pay taxes on a ROTH conversion. If you have the money in a taxable account such as a regular brokerage account or a bank, by using that money to pay the ROTH conversion taxes you are effectively making that amount of money exempt from future taxes, including any gains. So this is a bonus on top of the simple tax rate comparison of now vs future.

Example, you convert $50k and owe 22% federal taxes on it, which is $11k. If you pay the taxes from your brokerage account, that $11k stops earning in the brokerage, and those earnings would have been taxed. So instead, you have deposited $11k more into the ROTH, and the gains will never be taxed. Those avoided future taxes are a bonus, though kind of impossible to quantify up front.

I've re-read this several times but I'm not sure I'm understanding correctly. What's the money in the brokerage account - perhaps this doesn't apply to me. I have money in 401k only. Any money I put into Roth and/or use to pay taxes for a conversion would come from the 401k. Does this example apply to me?