There have been a few threads here on this topic which I've tried to follow. I've tried to study this conversion and understand the high level concept / benefit.

However, it remains elusive whether a conversion for my specific case is materially beneficial for me. Depending on assumptions (and subsequent reality), I suspect that conversion of some amount of my 401K is beneficial but again not sure if it would be material or not.

But I can't figure out:
1. how much to convert between now and <date?>; keeping in mind I don't have post-tax cash available to pay for the conversion tax. And what would be my break even criteria and date (Do nothing (keep 401K as-is) or convert some amount to Roth (paying taxes at conversion).
2. what the impact would be to RMD (I think I can calculate this but not sure I'm doing it right)
3. what the impact would be to SS payout
4. what the impact would be to medicare premium and benefits.
5. what the impact would be to fed/state taxes.
6. other impacts?

I'm going to see my FA to get some pointers on how to assess this for myself. It may help if I can could go in with some pointed questions and I'm receptive to any suggestions you guys may have.

This is proving somewhat complicated for me to assess.

Also talk to your tax guy, to see about taxable income for last year-he will know about the SS and Medicare info.

We did an inplan conversation from pretax to Roth last year. And that became taxable federally (we don’t have state taxes), so we paid taxes on it last year. And it was a big check-ouch. Mrs. Mike says it was between 20-25% of the value.

Yea, I need to find a tax accountant to do my taxes for the next couple of years. Never had one before - not sure what to look for. Honestly, I'm a bit apprehensive in giving my SSN, etc. But I assume it's okay since millions do it.

Anyone have recommendations on where to go for Roth conversion edumacation?

quote:

Originally posted by Fenris:
Anyone have recommendations on where to go for Roth conversion edumacation?

You might try here. https://www.bogleheads.org/wiki/Roth_conversion

One of the guys I liked back in the day was Bob Brinker(RIP). One adage he had was it may not be beneficial to pay a tax today to avoid or reduce a ‘potential’ tax in the future. At the time I had both traditional and Roth IRAs.

In retirement one has ways to adjust taxable income, likely lower than in the working years. I know some were big with the conversion, I never did it. There were certain tricks, like maybe in a down market, a year with lower income, etc..

I’m not even saying don’t do it, just look into if the juice is worth the squeeze.

In my case it was OBE(overcome by events). I grew out of favor with Vanguard and gave it all to the EX as we parted ways, zero regrets.

quote:

Originally posted by konata88:
There have been a few threads here on this topic which I've tried to follow. I've tried to study this conversion and understand the high level concept / benefit.

However, it remains elusive whether a conversion for my specific case is materially beneficial for me. Depending on assumptions (and subsequent reality), I suspect that conversion of some amount of my 401K is beneficial but again not sure if it would be material or not.

But I can't figure out:
1. how much to convert between now and <date?>; keeping in mind I don't have post-tax cash available to pay for the conversion tax. And what would be my break even criteria and date (Do nothing (keep 401K as-is) or convert some amount to Roth (paying taxes at conversion).
2. what the impact would be to RMD (I think I can calculate this but not sure I'm doing it right)
3. what the impact would be to SS payout
4. what the impact would be to medicare premium and benefits.
5. what the impact would be to fed/state taxes.
6. other impacts?

I'm going to see my FA to get some pointers on how to assess this for myself. It may help if I can could go in with some pointed questions and I'm receptive to any suggestions you guys may have.

This is proving somewhat complicated for me to assess.

First off, kudos for saving anything at all! You'd be amazed at how few people have the first-world problem of worrying about RMD taxes kicking you into high brackets. Man, there are worse problems to have in life. Sounds like you're already ahead in the game of life.


Not enough information to make a recommendation.
How old are you?
Are you retired?
What are your income sources?
How high are your 401K balances?
Do you have any other savings/brokerage/taxable?


As I understand it, Roth conversions make the most sense in the "golden years" between your last paycheck and your first RMD. They are most useful when tapped prior to turning on SS/Medicare.

Once you retire, and turn off the W2 income, you need to replace your income with withdrawals from your savings buckets. You want to do this with as much tax-efficiency as possible (obviously).

You mentioned that you DON'T have post-tax cash available to pay conversion taxes. I think this is the key issue. If I'm reading into that correctly, you don't have a taxable brokerage account/savings to tap into to pay taxes on the conversion?
This leads me to think that most (all?) of your retirement money is in your 401k?


There are many strategies for drawing down 401k balances, but they have to be built around your scenario (which we don't know). The answers could be wildly different if we're talking about a $10M 401k, or a $500k 401k. RMDs hit very differently at large balances.

Your 401k manager may give you free access to a tax-planning advisor. Mine is with Fidelity and I get all kinds of resources included.

Highly recommend you consult with a tax advisor that specializes in retirement planning.

It is a nearly impossible puzzle to solve! I do put value into not paying taxes in the future because then I know every dollar in my Roth is real, whereas every dollar in a 401k is only partially mine. Also there is value, but probably not quantifiable, in having the choice where to take money from as situations evolve in the future. The paranoid part of me likes the possibility to empty my Roth tax-free if in the future the government wants to confiscate 401k/IRA accounts.

The crudest calculation is the tax rate today vs the future. Assuming equal tax rates, there is no difference at all in final spendable money. This is for IRA/401k vs Roth.

But also consider state and local taxes. If you move between now and when you withdraw the money in retirement, will those taxes increase or decrease?

If you retire early, health insurance after age 59.5 but before Medicare age 65 can be a factor. The lower your reportable income the cheaper it is on the Obamacare exchanges. Who knows how this will evolve, though.

IRMAA after age 65 is a real thing, especially if you sell your home or have another unusual spike in income. e.g cashing a large stock option from work to fund retirement, or doing a large Roth conversion in one year. Thus you want to do these things prior to Jan 1 of the year you turn 63. (The later in the year your birthday is, the less of a penalty if you do it at age 63, but after age 63 it is a full year penalty.) Ideally you'd Roth convert prior to the year you turn 63 wrt IRMAA.

Social Security gets very progressively taxed by the way it gets added into taxable income. It creates a web of increased taxes. Capital gains, qualified dividends, possible property tax exclusions, etc. Thus it may make sense to delay starting SS while you do Roth conversions, especially if you retire early.

A common strategy is to fill the tax rate bucket. If you're in the 12% federal tax bracket, you'd Roth convert enough to take you to the top of that bracket but not into the next bracket of 22%. If you're in higher brackets it may be less obvious if it is worth doing the conversion at that higher rate.

RMD is a potential factor, though there are numerous guesses and assumptions involved. My opinion is that RMD isn't an issue to try to wrestle with unless your 401k/IRA is quite large already, perhaps in the millions and you're retiring early. Tax minimization is significant for those people. It is, from my observation of relatives and friends, more of an emotional issue of hating to pay taxes. But, taxes will be paid on that money. Now, or when you RMD, or by your heirs when you're dead. RMD may not be a factor for you if you'd withdraw that amount anyhow as part of your plan.

A good financial advisor should be able to show you graphs of what the tax rates are for various scenarios with your situation.

As a slightly related item, delaying SS is less advantageous in the long run than the simple calculation of how many years to break even. One issue is if you don't Roth and then have higher RMD than you'd otherwise withdraw from your IRA, your SS will be more heavily taxed. If you take SS early the tax impact is less, making that early SS more valuable than it might appear. So the age you take SS plays into how valuable a Roth conversion might be.

Imho, there is no single concrete mathematical solution because of the complexity as well as unknowns in the future. You'll probably get 10 different opinions from 10 different qualified financial advisors, of which I am not.

Thanks guys.

I'm still enumerating a list of pointed questions I want to ask the FA. I don't know what I don't know.

And it seems I should consult someone regarding taxes - in addition to CPA, there appears to be tax planners and EA's. It sounds like I need one of the latter two but not sure. BTW, it doesn't sound palatable already - they want to charge a nice fee just to come in and talk about what I want and see if they can help ($300/hr?). I'm gonna defer this unless I really can't find a direction on my own; I think I can, I just need some education. My situation is not relatively that complicated, I presume.

I think I've more firmly determined my objective. I don't think it's about minimizing my future tax burden. I think it's more about ensuring funding for desired quality of life. This includes sufficient medicare coverage and SS payouts with undue burden on my 401k. But minimizing taxes is not the end objective. For example, if my RMD results in no SS and high medicare premiums / deductibles (ie - same as health care before 65), then that will be a problem. If my RMD has just incremental impacts on SS and medicare, then that may be immaterial impacts (I could live with it).

Problem right now is that I don't know the extent of the impact (and how it may change) from 72 to 100.

If I'm expecting a sizeable balance at the end, then I'm assuming taxes aren't an issue in and of itself. Minimizing taxes just leaves a larger balance (that I can't take with me). But material impacts to income (SS payouts) and medicare will affect quality of life; if SS is reduced to zero, that will hurt.

Social security is never reduced to zero. What changes is how much of your social security check is subjected to income taxes. If you had zero additional income (beyond SS checks) you would pay zero taxes on your SS.

If your income above and beyond SS raises to Erin thresholds they begin to tax your SS benefit at your tax rate.

Your tax rates are determined by your income.

This is why large RMDs can affect your net. Not only are RMds taxed, the income from RMD can push your total income up into the ranges that result in your SS also being taxed.

Same for Medicare premiums.

You need to become familiar with these thresholds and triggers, and structure your withdraws for efficiency.

It may (or may not) make sense to convert some 401k to Roth. Distributions form Roth do not count toward income calculations.

However, the initial conversion DOES count toward ordinary income calculations.

You really must know your baseline spending requirement. What do you have to have every month to keep the lights on, pay the bills, secure health care. You fill up that bucket first from wherever it makes the most sense and minimizes your current and future tax burden. This is your “nut”. Make your nut first.



After that, you just calculate “what fun money do I want?”, and plan accordingly.


Have you already turned on social security?

A few good YouTube channels with a lot of educational information, in order of best at the top. Between them, they cover all the relevant topics and concepts. Schmidt has excellent general information. Merit Financial has a lot of actionable details, and though I have not worked with them, he seems to have some really powerful computer tools to figure out how to configure retirement finances both before and in retirement. Were I to hire someone, he would be on the short list of candidates. I learned a lot from his channel that I've applied to our finances. The other channels all have good information, too.

https://www.youtube.com/@HolySchmidt

https://www.youtube.com/@MeritFinancialAdvisors

https://www.youtube.com/@StreamlineFinancial

https://www.youtube.com/@rob_berger

https://www.youtube.com/@RootFP

https://www.youtube.com/@JamesShack

quote:

It is a nearly impossible puzzle to solve! I do put value into not paying taxes in the future because then I know every dollar in my Roth is real, whereas every dollar in a 401k is only partially mine. Also there is value, but probably not quantifiable, in having the choice where to take money from as situations evolve in the future. The paranoid part of me likes the possibility to empty my Roth tax-free if in the future the government wants to confiscate 401k/IRA accounts.

The crudest calculation is the tax rate today vs the future. Assuming equal tax rates, there is no difference at all in final spendable money. This is for IRA/401k vs Roth.

There's a lot of good advice in this thread... especially from Fly-Sig and fwbulldog.

It can be complicated, and it can change, but the simple question is: How much will a conversion impact current taxation? And are you willing to pay that?

In my opinion, a Roth IRA is the greatest thing since sliced bread BUT it's probably best funded earlier in life, if possible. I encourage younger people to put as much into a Roth IRA as they can.

quote:

Originally posted by fwbulldog:
Social security is never reduced to zero. What changes is how much of your social security check is subjected to income taxes. If you had zero additional income (beyond SS checks) you would pay zero taxes on your SS.

Same for Medicare premiums.

You need to become familiar with these thresholds and triggers, and structure your withdraws for efficiency.

It may (or may not) make sense to convert some 401k to Roth. Distributions form Roth do not count toward income calculations.

However, the initial conversion DOES count toward ordinary income calculations.

You really must know your baseline spending requirement. What do you have to have every month to keep the lights on, pay the bills, secure health care. You fill up that bucket first from wherever it makes the most sense and minimizes your current and future tax burden. This is your “nut”. Make your nut first.



After that, you just calculate “what fun money do I want?”, and plan accordingly.


Have you already turned on social security?

Thanks! I kind of knew that SS never gets reduced to zero but am not sure how much I would actually net on SS with RMD. That's one critical aspect of this excercise. But it may be that if the RMD is enough to make SS net to be insignificant, then perhaps this is not the problem to worry about. Same concern w/ medicare.

Agree w/ the need for familiarity - it's one key aspect of this exercise. I learned a little last year but now I need to get into the weeds. And I need to work scenarios like I die early (say, before 75) but my wife lives to 100.

Aware of the possible taxes related to conversion - it's one of my concerns with which path really has the best ROI (depending on assumptions and scenarios). It's complicated (for me) to assess and I need more education on a variety of things before doing so. Again, I'm not even sure what to ask.

I've got an handle on monthly expense amounts for now but not sure how to address possible new things like a new (chronic) medical issue comes up. I've factored in some fun budget for later; not doing anything fun until things get figured out and perhaps until SS kicks in (at least a few years from now if not deferred longer).

quote:

Originally posted by Fly-Sig:
A few good YouTube channels with a lot of educational information, in order of best at the top.

Thanks! Will give them a watch.

quote:

Originally posted by chellim1:
In my opinion, a Roth IRA is the greatest thing since sliced bread BUT it's probably best funded earlier in life, if possible. I encourage younger people to put as much into a Roth IRA as they can.

Roth was kind of perceived as a funny, gimmicky thing for the longest time for me (obviously incorrectly in retrospect). In any case, I funded 401k as much as I could (taxes and match) which left me living paycheck to paycheck for the most part. Perhaps I should have allocated some to Roth instead but too late now.

We'll see if I'm okay after this and if there is fun money to be had.

I have what I hope is a simple question. I started IRA’s when I enlisted in the Navy. So I have a lot of money in traditional IRA’s before the creation of ROTH. I missed the window they gave to spread the taxes out when ROTH came out because I was young and didn’t really grasp the long term realities.

Fast forward 30 years and I put my money into a ROTH 401k. I am a believer.

Here’s my simple (hopefully) question. I have always understood that I can have ROTH or traditional IRA’s. Ie, if I wanted to contribute to an IRA and then back door convert I have to do it first to my traditional IRA’s as well. I would love to do the back door conversion going forward without converting literally hundreds of thousands of dollars of IRA’s I have had since I was 18. That would be a massive tax burden. Can I just do traditional IRA going forward and just convert those and leave the old stuff traditional? I have always been told no. Help. lol.

Well, contributing to a Roth IRA has income limits, a traditional does not. I used to put $$ into a Roth, if I reached the cap for the year, put the rest in a traditional IRA, up to the limits.

Not sure if that’s your question. One can have both, contribute some to either, under the income limits for Roth.

The whole conversion question is another thing, kinda like this thread is about.

Well yea, that’s the whole point of backdoor conversions. It’s a legal way for people who are over the income limits to contribute to a traditional IRA and then immediately convert to a ROTH. The idea is that since it’s done nearly simultaneously you only pay taxes on the capital gains which are effectively zero.

People have been doing this over the “income limits” for decades. If I was younger I wouldn’t have a question. But I’m old so I have a bunch of traditional IRA’s and I’ve always understood that you gave to convert them before/same time as you do the back door conversions on future IRA’s. That is the question.

quote:

Originally posted by pedropcola:
I have what I hope is a simple question. I started IRA’s when I enlisted in the Navy. So I have a lot of money in traditional IRA’s before the creation of ROTH. I missed the window they gave to spread the taxes out when ROTH came out because I was young and didn’t really grasp the long term realities.

Fast forward 30 years and I put my money into a ROTH 401k. I am a believer.

Here’s my simple (hopefully) question. I have always understood that I can have ROTH or traditional IRA’s. Ie, if I wanted to contribute to an IRA and then back door convert I have to do it first to my traditional IRA’s as well. I would love to do the back door conversion going forward without converting literally hundreds of thousands of dollars of IRA’s I have had since I was 18. That would be a massive tax burden. Can I just do traditional IRA going forward and just convert those and leave the old stuff traditional? I have always been told no. Help. lol.

Back door Roth conversion of traditional Ira is possible, but there is a formula used to calculate the tax implications.

Best scenario is to roll over your Ira into another tax deferred account, like a 401k. Zero out the Ira first, then contribute the max contribution, and then immediately roll it over to Roth.

If you can’t roll your IRA into another account first then you’ll have to pay tax on the conversion amount based on the value ALL your IRAs.

The key IRS formula (from Form 8606 and Publication 590-B worksheets) for the nontaxable percentage is:
Nontaxable % = Total basis in traditional IRAs ÷ (Year-end value of all traditional IRAs + Total distributions/conversions in the year)
• Then: Nontaxable portion of conversion = Conversion amount × Nontaxable %
• Taxable amount = Conversion amount - Nontaxable portion

quote:

Originally posted by konata88:
There have been a few threads here on this topic which I've tried to follow. I've tried to study this conversion and understand the high level concept / benefit.

However, it remains elusive whether a conversion for my specific case is materially beneficial for me. Depending on assumptions (and subsequent reality), I suspect that conversion of some amount of my 401K is beneficial but again not sure if it would be material or not.

Here’s a big picture breakdown for you as to whether a Roth conversion will be beneficial for you. It’s a big pdf but I’ll guide you just so you have the overview in place when you’re talking to a tax / CPA / Roth conversion specialist.

Link to latest official pdf.

Latest rules say you have to take a minimum required distribution beginning at age 73. The reason for this is because the government wants to start taxing your tax deferred money. You have to take an RMD from each type of tax-deferred account per name, not each account except for 401(k)s but the total of each type of account. I don’t know what kinds you have so I’ll list them all. When you start taking RMDs, it’s important you take enough from each type / account.

Group 1: Accounts That Can Be Aggregated (Single RMD Calculated Across All, Withdrawable from Any One or More)
These types allow you to sum the year-end balances across all qualifying accounts, compute one total RMD amount using the Uniform Lifetime Table (or Joint Life if applicable), and satisfy it by taking the distribution from any combination of those accounts.
• Individual Retirement Accounts (IRAs): Includes traditional IRAs, SEP IRAs, and SIMPLE IRAs. All are treated as one for RMD purposes.
• 403(b) Plans: All your 403(b) accounts (e.g., from different employers) can be aggregated into a single RMD calculation and withdrawal.
Group 2: Accounts That Cannot Be Aggregated (Separate RMD Required for Each Individual Account/Plan)
These require calculating and taking an RMD independently for each plan, based on its own balance and the applicable life expectancy table. You cannot combine balances across different plans or satisfy one plan’s RMD using funds from another.
• 401(k) Plans and Similar Employer-Sponsored Defined Contribution Plans: Includes 401(k)s, profit-sharing plans, money purchase plans, and other qualified plans under IRC Section 401(a). If you have multiple from different employers (or even separate plans from the same employer), each gets its own RMD.
• 457(b) Plans: Governmental or tax-exempt organization deferred compensation plans. Each must have its RMD calculated and distributed separately.

Next: understanding how much is your RMD for every year once you start taking RMDs. I’ll assume you and your wife’s ages are within 10 years of each other. If not, you’ll be using a different table. For couples 10 years or less in ages apart, you’ll use the uniform lifetime table on page 67. If your spouse is 10 years or more younger than you, you’ll use the more complicated Joint and Survivor table that start on page 52.

Back to page 67, uniform lifetime table. At age 73, you see 26.5 under Distribution Period. That means, statistically, at age 73, you have 26.5 years left to live so required minimum distribution you have to withdraw is 1/26.5 of the total of your tax-deferred a count type / account. That means you add your account balances and group them according to the grouping I provided above, divide the total by 26.5 and that’s your RMD. By age 93 according to that table, you have only 10.1 years left to live so the government wants you to withdraw 10.1% minimum so that they can tax it.

Next: would Roth conversions benefit you:

Take your yearly cash flow budget - your expenses (cash lay out) versus your income separate from what you may or may not take out of your account. Your income would be any monthly pensions, annuity, social security, rental income, etc. This is tedious to start to create if you don’t have one but it’s your money and no one is going to care more about your money than you. First question: is your expenses less than your income? If yes, then yes, doing Roth conversions to minimize taxes due to RMDs will benefit you.

If you’re going to need to withdraw from your tax deferred accounts to fund your retirement, then a little more work is needed. A spreadsheet will be useful. Take the total of your tax deferred accounts right now. Label the columns: Year, Calendar Year, Age, Distribution Period, Beginning Balance, percent growth, amount growth, withdrawal, Ending Balance, RMD Amount.

For the first row, 0, 2026, your age this year, enter the Distribution Period for your age which would be zero, the current total of your tax-deferred account, 6% or whatever you want to project as an average growth net of inflation (I ignore inflation from my projections so that everything washes out and if anyone wants to object I should factor in inflation as if they had a crystal ball, they can do the fucking work), put in a formula that multiplies the beginning balance with the percent growth, your net withdrawal for the year, add the beginning balance plus the growth amount minus the withdrawal amount and that’s your ending balance for the year. The RMD Amount is the beginning balance x 1 / the distribution period.

Just propagate the numbers and formulas down the rows. Enter the distribution period from the PDF. Compare your withdrawal amounts with the RMD amounts. If the RMD amounts are less than the withdrawal amount or your balance goes down to zero, then you shouldn’t have to worry about RMDs or Roth conversions. If your RMD withdrawals get bigger then you need to look at whether the RMD amounts, when added to your income, will push you into the next tax bracket using this year’s tax tables. That’s also the benefit of not factoring in inflation because, not only does no one know what inflation will be 10 years from now, you can analyze everything in today’s dollars.

This should give you enough to at least be knowledgeable in talking with a professional and be able to ask the right questions or even challenge them if they’re giving you questionable advice.

This message has been edited. Last edited by: Rey HRH,