I'm not qualified to offer real financial advice, but FWIW, I transferred all of my 401k into my Rollover IRA shortly before retirement. This allowed me to make my own choices with a much broader array of choices. And it's easy for me to do my yearly rollover to Roth conversions myself.

quote:

Originally posted by konata88:

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?

It sounds like it doesn't apply to you. The idea is that every dollar you put into your ROTH grows totally tax free. You are best off if you can put everything you take out of your 401k into your ROTH. That requires that you have money available from some other source, such as in a bank account, in a non-retirement brokerage account, or from a pension or paycheck. Otherwise you have to use some of that 401k withdrawal to pay taxes, which leaves less going into the ROTH. It is usually still a win in the long run to do the ROTH conversion regardless of where you get the $ to pay the income taxes. It's just a bit more of a win if you don't have to pay taxes out of the 401k withdrawal.

Simple example: You withdraw $10k from the 401k for a ROTH conversion. You will owe $1000 taxes if you're in the 10% tax bracket. If you pay that from the $10k withdrawal, you will only put $9k into the ROTH. That grows tax free forever.

But if you can find the $1k from somewhere else like a bank account, you put the entire $10k into the ROTH which grows tax free forever. Whatever gains you make on that additional $1k will never be taxed.

In the end the difference is a small percentage, but it is a little bit of money we get to keep in our pocket.

Ah. Thanks, now I get it.

quote:

Originally posted by konata88:

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

TL;DR: very simple: don’t convert a Roth amount that will get you $1 higher that your current tax bracket or your current IRMAA bracket. Don’t convert a Roth amount that will get you $1 higher than $150,000 in AGI for joint returns for the next three years. If you have money outside of an IRA in a taxable account with nothing better to do than pay taxes, you need better financial advice.


I’m assuming you’re in the same boat as I am. I’m not so poor because I was fortunate enough to save some money despite the dot com bust, the 2008 debacle, and I didn’t panic during Covid. I’m also not wealthy enough to afford not to pay attention. I have to husband my resources to last me the rest of my life.

You look at your 401k or regular IRA and you ballpark the following: “knowing what I know now, will I be withdrawing to meet my normal needs over the years that I expect the total balance to continue to go down and eventually go down to zero? If so, you most likely don’t need to worry about Roth conversions; just pay the tax as you take out the money.

But if you anticipate and hope your accounts will grow higher as you’re withdrawing for your living expenses, then tax rates going higher and RMDs pushing you into higher tax brackets say you should consider Roth conversions. If you’re at 22% tax bracket, every $100 you withdraw from your IRA will leave you with only $78 after paying $22 to the Federal government. Your $100 in your IRA is really worth only $78. If tax brackets increase or you’re pushed to a higher tax bracket of 35%, your $100 in your 401k is an illusion and it’s actually only $65. $100 in IRA = $65 in your hand.

All the money I have outside of my IRA is for my living expenses. I have to supplement my monthly retirement income by withdrawing from my IRA. Guess where I get the money to pay the taxes on my monthly retirement income and my IRA withdrawals - I get the money by withdrawing money from my IRA. That’s what my IRA is for - to provide money to meet my expenses and part of my expenses is paying taxes. It’s a faux sophistication when financial advisors say clients should pay for Roth conversion taxes with money outside the IRA. They advise that because their clients are ignorant enough to have money laying around with no intended purpose and the best use for it is to pay Roth conversion taxes. Every money I have outside of my IRA is either for my expenses or liquidity float to ensure I have another month’s expenses at the end of the current month. The money to pay for my Federal income taxes is sitting inside my 401k earning interests and dividends until December when I pay the taxes as part of my December withdrawal. You remember those threads here where people are adamant in setting their withholding rates so they owe the government taxes every April 15 instead of a refund? Back then, I didn’t mind a refund because I didn’t want to scramble where to get my money to pay taxes. Now, I wait until December to pay my taxes because the government has a rule that if I paid taxes out of my IRA in December, it’s the same as if I had paid in January. I say this for you to not listen to “you should pay Roth conversion taxes out of money outside of the IRA instead of from the IRA.” If you have money outside your IRA to pay for the conversion tax, you need better money management skills.

So the issue in Roth conversions is about whether you want to pay the taxes now for tax free withdrawals 5 years from now or you want to chance paying higher taxes later.

If you want to pay taxes now to minimize taxes overall, then convert the difference of your current AGI and the top of your current tax bracket or the IRMAA threshold of $206,000 because more than that will make you pay higher wages.

But, as I also said, if you want to minimize taxes, convert only up to the AGI target of $150,000 to maximize the no tax on social security provision which will sunset in 3 years.

Rey - thanks much! You’re probably in much better shape than me but perhaps I’m at the bottom end of the same category. So, I’m going to read your post several times to make sure I understand your points. This is stuff that they should teach you years before retirement. I’m learning as I go. And not very well at that. But I’m striving to make improvements here and there as they come.

quote:

Originally posted by Rey HRH:

All the money I have outside of my IRA is for my living expenses. I have to supplement my monthly retirement income by withdrawing from my IRA. Guess where I get the money to pay the taxes on my monthly retirement income and my IRA withdrawals - I get the money by withdrawing money from my IRA. That’s what my IRA is for - to provide money to meet my expenses and part of my expenses is paying taxes.

Lots of people have a significant percentage of their portfolio outside of a retirement account. We sold our home and downsized, so the equity went into a regular brokerage account. It is approximately half of our retirement portfolio. Regardless, this next part of your post is not true:

quote:

Originally posted by Rey HRH:
It’s a faux sophistication when financial advisors say clients should pay for Roth conversion taxes with money outside the IRA. They advise that because their clients are ignorant enough to have money laying around with no intended purpose and the best use for it is to pay Roth conversion taxes.

Money in a ROTH is superior to money in a taxable account. In the taxable account it will, hopefully, accrue some form of gains, and those gains are taxable. Money in a ROTH never gets taxed, including gains. (assuming the owner is over age 59 1/2).

When you do a conversion, think of it as first putting the entire amount into your ROTH. But since taxes must be paid, you either take it back out of the ROTH or take it out of a taxable brokerage account. Assuming the money will be invested the same way in either account, the returns are higher in the ROTH because they will not be taxed. Thus paying taxes from a brokerage account is superior.

And, it gets better because ROTH withdrawals do not add to your MAGI for IRMAA nor to taxable income for determining how much of your Social Security gets taxed. If a person is under age 65 and on an Obamacare health plan, ROTH withdrawals don't count towards determining how much the premiums are.

The difference in eventual total return between taking taxes from the conversion amount or from a brokerage account is a percentage of a percentage, so probably not a life changing amount, but the math does favor paying taxes from the taxable non-retirement source.

There is one important exception to my last post, which is that withholding taxes from an IRA/401k withdrawal eliminates late payment penalties.

The IRS wants their money at the time we have a taxable event throughout the year. If I take a large IRA withdrawal in January 2025, they want their money via an estimated tax filing by April 15, 2025 . If I don't do that and file next April to pay it, there is a penalty.

But if I do a withholding at any time during the year, including up to Dec 31, 2025 from an IRA/401k withdrawal that covers the amount owed, there is no late penalty. I could do a withdrawal and withhold 100% of it just to cover taxes.

Thus doing an IRA/401k withdrawal in December to cover the entire year's taxes is a viable tactic. That withdrawal itself is taxable as income, so one must consider all the other implications.

quote:

Money in a ROTH is superior to money in a taxable account..

And money in your safe is superior to both.

quote:

Originally posted by Gustofer:
And money in your safe is superior to both.

You wouldn't have five years to retirement if you weren't invested in cash....

My plan:

1. Work my whole life.
2. Save and invest about 15% of my earnings.
3. Live frugally.

quote:

Originally posted by Fly-Sig:

Lots of people have a significant percentage of their portfolio outside of a retirement account. We sold our home and downsized, so the equity went into a regular brokerage account. It is approximately half of our retirement portfolio. Regardless, this next part of your post is not true:

quote:

Originally posted by Rey HRH:
It’s a faux sophistication when financial advisors say clients should pay for Roth conversion taxes with money outside the IRA. They advise that because their clients are ignorant enough to have money laying around with no intended purpose and the best use for it is to pay Roth conversion taxes.

Money in a ROTH is superior to money in a taxable account. In the taxable account it will, hopefully, accrue some form of gains, and those gains are taxable. Money in a ROTH never gets taxed, including gains. (assuming the owner is over age 59 1/2).

1) I had money also from selling my house. I used that money to live on first before withdrawing from my IRA account. Why? Because using that up first is better than withdrawing from my IRA. If I were doing Roth conversions at the time, I would have used that money also to pay for the Roth conversion taxes. But I wasn’t doing Roth conversion taxes at the time. Why? Because Roth Conversions is an income event and I wanted to maximize my Affordable Care Act subsidies since my wife and I were under 65.

My point is that in retirement, you should know where all your money is at and what its purpose in being where it’s at. If you have money sitting in a taxable account and you have no other purpose for it, of course, you’re going to use it to pay for the taxes for the Roth conversion. But that should be a no-brainer; it’s not rocket surgery to come up with that advice. Hence, it’s “faux sophistication.”

2) You’re misunderstanding what I said that you say is not true. I did not say money in a Roth is NOT superior to money in a taxable account. Read again the part that you quoted. I’m not arguing against doing a Roth conversion; I’m against the idea of insisting that people should pay for the taxes for a Roth conversion with money in a taxable account because what if the person does not have money in a taxable account to pay for the Roth conversion taxes?

Whether it’s beneficial to do a Roth conversion is a separate issue and I’ve discussed that previously. If your RMDs and projected IRA withdrawals are not going to push you into a higher tax bracket, then there’s no need for doing the extra work now of doing Roth conversions. And I’m saying this in the spirit of keeping things SIMPLE.

Once you decide it’s of benefit to do a Roth conversion, then how to fund the tax payment is another simple exercise. If you have money in a taxable account for which you have no better purpose, then you should pay your Roth conversion taxes with it so you can convert more without going over the thresholds i previously mentioned - the maximum of the tax bracket you’re working with or the next IRMAA threshold. Paying for the Roth conversion taxes out of a taxable account is not “superior,” it’s just plain COMMON SENSE. But if the money you have sitting in your taxable account is for this year’s living expenses or the vacation you want to take this year, then still do the Roth conversion and you’ll just have to take the tax payments out of the total conversion amount. Yes, it means you actually convert less money, but what are you going to do, not make the Roth conversion at all?

And you having this discussion with me supports my statement that the advice to pay Roth conversion taxes out of a taxable account is faux sophistication because you’re resistant or unable to understand the simplicity and practicality of what I’m saying.

quote:

Originally posted by Sig2340:
My plan:

1. Work my whole life.
2. Save and invest about 15% of my earnings.
3. Live frugally.

When I was faced with the definite prospect of needing to work until the day I die, I was very depressed. What’s the point of working your whole life, saving and investing money, and living frugally?

I’m seriously asking you. What’s the point of life for you? Working, saving money, and living frugally - I’ve done all three for most of my life up until I stopped working for a living some 5 years ago. But I don’t think those three things make up what this life should be about.

Good info and discussion exchange. Thanks guys. Btw, what is IRMAA?

Thanks.

quote:

Originally posted by Rey HRH:

quote:

Originally posted by Sig2340:
My plan:

1. Work my whole life.
2. Save and invest about 15% of my earnings.
3. Live frugally.

When I was faced with the definite prospect of needing to work until the day I die, I was very depressed. What’s the point of working your whole life, saving and investing money, and living frugally?

I’m seriously asking you. What’s the point of life for you? Working, saving money, and living frugally - I’ve done all three for most of my life up until I stopped working for a living some 5 years ago. But I don’t think those three things make up what this life should be about.

I actually think his is a great plan, depending on how one defines "frugally". We always lived within our means, saved 15% or more and still had a hell of a good time along the way.
I actually basically agree with both of you. What I'm saying is one can have both within reasonable limits.

ORC, IRMAA is Income Related Monthly Adjustment Amount. Basically if you earn too much in retirement (and years going into it) they penalize you on Medicare. You need to be aware of the limits and plan around it.

quote:

Originally posted by Sig2340:
My plan:

1. Work my whole life.
2. Save and invest about 15% of my earnings.
3. Live frugally.

It’s always the balance between planning for the future and enjoying your life while living it. Some people do that and never live to enjoy it, others never save, live for the day and are in trouble when they can no longer work and have nothing saved.

Retirement comes up quicker than you think, zi remember when it seemed 100 years away and now I am within 4 years of it. I think you have a good lan but enjoy things on the way too.

quote:

Originally posted by Rey HRH:

Once you decide it’s of benefit to do a Roth conversion, then how to fund the tax payment is another simple exercise. If you have money in a taxable account for which you have no better purpose, then you should pay your Roth conversion taxes with it so you can convert more without going over the thresholds i previously mentioned - the maximum of the tax bracket you’re working with or the next IRMAA threshold. Paying for the Roth conversion taxes out of a taxable account is not “superior,” it’s just plain COMMON SENSE . But if the money you have sitting in your taxable account is for this year’s living expenses or the vacation you want to take this year, then still do the Roth conversion and you’ll just have to take the tax payments out of the total conversion amount. Yes, it means you actually convert less money, but what are you going to do, not make the Roth conversion at all?

And you having this discussion with me supports my statement that the advice to pay Roth conversion taxes out of a taxable account is faux sophistication because you’re resistant or unable to understand the simplicity and practicality of what I’m saying.

The part that I bolded is what I took exception to. I agree completely that if your non-retirement monies are needed for near term expenses, then it is not possible to use them. But that is not what you said, or at least not what you implied when calling it "faux sophistication".

Money in a taxable account "with nothing better to do than pay taxes" sounds like you're saying people are being dumb with their non-retirement account investments in general, and/or that paying taxes is a low level use of money.

Mathematically, paying taxes from the taxable account is superior than from the ROTH account, because the ROTH money grows tax free forever. This assumes the person would invest the money in a similar fashion between the ROTH and the brokerage accounts, and that is a good assumption. How many $$ it amounts to depends on the amount of taxes and how long the money can remain invested before being withdrawn.

quote:

Originally posted by old rugged cross:
Good info and discussion exchange. Thanks guys. Btw, what is IRMAA?

Thanks.

IRMAA is an increase in what you pay for Medicare Parts B and D depending on your income. IRMAA stands for Income-Related Monthly Adjustment Amount. You pay this penalty for a calendar year, based on your tax return MAGI* from 2 years ago. Thus for 2026 any IRMAA adjustment is based on your 2024 tax return. If you go over by 1$ you pay the full penalty. i.e. it is not a pro-rated or bracket thing like our income tax brackets.

The government says with no IRMAA surcharge we are paying only 25% of the actual cost of Parts B and D. So if you're "rich" you should pay more. The income thresholds step you up to paying 35%, 50%, 65%, 80%, or 85%.

Part B cost is pre-determined by Medicare. Part D cost depends on the exact plan you choose, some cheap some expensive.

Medicare does not publish future numbers, so it is impossible to know precisely what the future baseline premium will be for Parts B or D. Also unknown is what the MAGI thresholds will be for future years, so when we file our 2025 taxes we have no idea how the numbers will impact our 2027 IRMAA.

For filing single the MAGI income thresholds and Part B premiums for 2025 are:
<= $106k $185
> $106k to <= $133k $259
> $133k to <= $162k $333
> $162k to <= $193k $407
> $193k $481

So if your MAGI is $106,001 then you will pay $259 per month for Part B, an a similar % increase in your Part D premium

If you file married joint, double the thresholds for MAGI.

Most of us married folks won't hit $212k or higher MAGI, except if we sell our home (or rental income property) with a capital gain. So IRMAA is probably not a lifelong penalty for most of us. Just beware of IRMAA in planning when/if to sell real estate.

* MAGI is your adjusted gross income plus tax exempt interest income which wasn't included in AGI. AGI already includes a portion of your Social Security, from 0% up to 85% depending on how much other income you had. This can cause a quick escalation in the effective tax rates, because the inclusion of Social Security increases at much lower income levels. With a joint married return, income from other sources totaling up to $44k will bring 50% of your Social Security into AGI. Over $44k results in 85% of Social Security being taxed as AGI.

quote:

Originally posted by Rey HRH:

quote:

Originally posted by Sig2340:
My plan:

1. Work my whole life.
2. Save and invest about 15% of my earnings.
3. Live frugally.

When I was faced with the definite prospect of needing to work until the day I die, I was very depressed. What’s the point of working your whole life, saving and investing money, and living frugally?

I’m seriously asking you. What’s the point of life for you? Working, saving money, and living frugally - I’ve done all three for most of my life up until I stopped working for a living some 5 years ago. But I don’t think those three things make up what this life should be about.

I don't need to work. I have more than enough savings to live out my days, even without Social Security. I own my home outright, and have few expenses because I live within my means.

I work because I've done so since I was 13 and well, I enjoy it.

^^^ Yup. Enjoy what you do, and you don’t work a day in your life.

quote:

Originally posted by Sig2340:
I work because I've done so since I was 13 and well, I enjoy it.

Same here, except for... Writing software has always been fun as hell. Making something from nothing. At 70 it's turning into a bit of a grind now (not bad but a grind). I'm hanging up the keyboard and gonna watch sunsets with the wife. Money is not an issue but we don't live high on the hog.