We are late to the Roth party, and will quite probably leave the party very sober. We’ve done some backdoor Roths and put a big chunk of post-tax money into my wife’s 401k this year to be moved to Roth (ala IRS Notice 2014-54). That said, we are around 10% Roth in our tax-advantaged space. Overall, we are 55% taxable, 40% tax-deferred, and 5% Roth.
We generally convert all our retirement $$ to Roth. Our financial planner (a perk DH gets from his job) ran the different scenarios a few years back and it is clearly the best option for us. YMMV
I had anticipated using a Roth 401k more in the future, but have reconsidered. If we use a traditional 401k now (while we’re in the 39.6% Federal marginal bracket), take the tax deduction, and if my wife (knock wood) retires in the next five years, we will have a few (3 maybe) years where we can keep our incomes low as we convert to Roth before her SS, pension, and RMDs bounce us back into higher (28%, 33%?) brackets. YMMV.
We have 0% in Roth.
We know it is likely not good. But since we do not have much outside the retirement accounts (traditional/deductible IRA and 401K.), it is not easy for us to do the conversion, I think. Also, we are on the “older” side and we may start to distribute the money from these accounts not many years from now anyway.
Right or wrong, we did not do any conversion from traditional IRA to Roth.
@IxnayBob
Regarding your post #4682, is the rational behind your in-retirement conversion the use of the Roth account as a vehicle for estate planning? I find ourselves in the same general situation, in which converting now at the highest marginal rate is not merited when compared with an anticipated lower effective rate during retirement UNLESS we plan for the converted Roth account as the one that survives us.
Our CPA told us frankly he knew of no reason we should bother converting our tIRA to Roth IRA, so we haven’t bothered. We had thought our income in retirement would be lower than it had been when we were both working full-time but so far, with RMDs it hasn’t been the case. We do hope not to have to touch the Roth IRAs we have and hope to be able to leave it to our kids as a legacy. It has time to grow, as I’m still under 60 and could live another 40-50 years if I follow my dad’s family, who tends toward siginificant longevity. The Roth IRAs are much larger than we had expected them to be and are happy and grateful for that.
I know there are all kinds of “talk” about how much lower the income a retired couple could have in order to live without lowing their living standard too much.
But, in terms of absolute number, in a not-so-costly area (definitely not HI, definitely not cities in California or NE), will 45K pre-tax income for a retired couple be enough? Or 55K? Or 65K? Or 75K? Assume here that they do not have a paid-off house and is willing to live in a moderately-priced 1 or 2-bedroom apartment.
Isn’t this the main question for this thread for those of us who are not as “prepared” as those whose income after retirement is equal or even greater than their pre-retirement income?
To me, the best guide to your needs in retirement are how much you spend NOW and how many of those expenses will followyou into retirement. If you are comfortable living on $45K now and after retirement you will no longer have to fund retirement and perhaps have paid off your housing–mortgage and perhaps transportation to & from work expenes may also decrease, that can give you some idea of costs in retirement. If you plan to downsize to a modest apartment, you can check monthly rents for the type of place you plan to rent and build that into your budget. You should also consider if your medical insurance and expenses are likely to be the same, increase or decrease. We can all only guestimate, as life always throws surprises.
Knowing what others live on is not that helpful a guideline as to how much anyone else needs to live on. Having a baseline of what historically YOU and spouse have lived on is a better yardstick. As you say, HI & CA & other high COL living areas are quite skewed. Even in high COL areas, there are folks who manage to live on whatever they are able to cobble together–sometimes in low or moderate income housing, sometimes by sharing a home with others, sometimes by living further than they’d like from the center of town. There are MANY people in the US who primarily depend on their SS checks for a large part of their retirement income.
We did a very rough estimate of our expenses while we were both working vs. projected expenses after H retired and were fairly accurate as to basic expenses. When we had more income, we could increase discretionary expenses like travel, dining out, etc. When we had months with more expenses, we could opt to defer these discretionary expenses or just find ways of being more economical.
Having housing and the kids’ educational expenses paid off was huge, as was no longer being able to contribute to H’s retirement. It’s a healthy exercise to try–just run a spreadsheet. If you don’t know how your funds are being spent, try keeping EVERY bill and receipt for the next few months to get a better handle on current spending.
Thanks!
I guess the hardest thing for us to do is “keeping EVERY bill and receipt for the next few months to get a better handle on current spending.”
It requires a good “discipline” to do this. We know how much money comes in, but we do not know where the money goes exactly. This is definitely something we need to work on.
We even do not have a clear idea about how much we paid for our child’s education in the past several years. We noticed recently that we actually did not pay much into the e-pay system at our child’s school. But we do know we paid many expenses (mostly living, travel expenses, etc.) out of school’s e-pay system. We however have no idea about the rough amount we have spent in the past several years.
The total amount in our after-tax accounts do not decrease at least. We increased the total amount of our 401K and IRA accounts quite significantly in the past several years (power saving?) This is good. But our after-tax assets seem to stay where they were for quite many years, neither increasing nor decreasing. This is bad.
Several decades ago, I noticed we had troubles in saving money in an after-tax account. It was then I decided to put money into the retirement account because otherwise we would not have anything saved. It seems we still have the same problem now, several decades later. (I guess we are not frugal at all!)
Automatic withholding so you never see the money helps a lot of people save more than they would otherwise. It’s REAlLY critical to get a handle on where you funds are going before you can decide what changes might be needed. You & your spouse need to commit to track EVERY sexpenditure over the next few months to get a better idea of where your money is going. There is no magical way. It makes no sense to worry about funds already spent, but you need to look at where you are CURRENTLY spending and where you will be spending going forward.
mcat you are in the same situation as most Americans.
@mcat2, if it weren’t for Quicken data, I’d have no idea what we spend where. Even with Quicken, it takes some PITA discipline to track it. I’m in the habit now, so it’s just part of the routine, like making coffee in the morning.
@HImom, I know it’s a typo, but “sexpenditures” made me do a double take and almost spit out the afore-mentioned morning coffee. I’m hoping those expenses go up in retirement 
Partly yes. Unless there are big medical expenses or my wife decides to run off with a gigolo, we will probably leave behind assets, and Roth is good for that. But I can’t say it’s my motivation. I am doing it mostly because I don’t want to waste a few years where we can be in a low marginal tax rate.
We are well into the 39.6% tax bracket because my wife’s income has increased greatly in the past 5-10 years. My wife enjoys working, so I’d be surprised if she stopped working in less than 5 years, but for this analysis, let’s figure that she stops at age 65. That gives us ~5 years before her SS, pensions, and RMDs kick in – at which time we will be in the 28-33% bracket, so it would be nice to engineer a few years of conversions at lower rates.
It’s a first-world problem. It’s embarrassing, but even at Bogleheads, I skipped every thread on Roths. I started paying attention recently. PM me if you want details.
We are big Quicken fans here. Yes, it takes discipline, but I can tell you exactly how much we spend on Metro, medical expenses, eating out, gifts, etc. Agree on payroll withholding as an effective way of saving. If it never hits our checking account, we don’t miss it, and budget our other expenses based on what does go to checking.
If you aren’t putting enough in your 401(k) to get the maximum employer match, change that NOW. You’re leaving compensation on the table!
@ixnaybob Absolutley brillant plan. I haven’t done a roth conversion either because it didn’t make sense to pay at such a high tax bracket along with state income tax. We plan to move to a state with no income tax so I was waiting until then. However, when I read your message your plan is smart! We will do the same thing - wait until we retire, move and convert before we start SS/RMD because our tax brackets will be the lowest too! BRILLANT! Thanks!!
It takes only about $50K to go from 30% tax rate to the top rate. If you spread out the conversion over 5 years, the saving will be about $25K. It is a lot but in the scheme of things…
Where did you get this number? There is no 30% incremental rate.
Brackets for married filing a joint return:
10%: $0 to $18,450
15%: 18,450 to $74,900
25%: $74,900 to $151,200
28%: $151,200 to $230,450
33%: 230,450 to $411,500
35%: $411,500 to $464,850
39.6%: $464,850+
That’s after exemptions and deductions.
From the top of the 33% bracket to the 39.6% bracket is $53K, but if you are at the top of the 33% bracket you are a 1%'er.
From the top of the 25% bracket it is $310K+, from the top of the 28% bracket it is $234K+ to the 39.6% bracket.
As I see understand it, then, using these examples:
– convert today: marginal tax on each $1 of income is 39.6%
– covert while in retirement before RMDs, SS kick in at 70.5, and assuming that you have some control over your other income (because you may not with dividends and cap gains distributions from mutual funds) - project what your tax year (in retirement) marginal rate would be. Assuming you can keep your taxable income at the 28% or 33% marginal rate brackets, then it’s a 11.6% or 6.6% savings for each $1 of income, with corresponding greater savings if taxable income falls in the lower brackets.
And this opportunity exists primarily between the year retirement takes effect and age 67-70.5 (when SS or RMDs kick in). Correct?
Yes, that opportunity would exist when your tax bracket drops which is usually when you retire. However, not everyone’s income drops in retirement.
You’d have to figure out how much and when to do it so you can maximize this benefit.
Also, if you move to a state with lower state income taxes or to a state with NO income taxes such as Texas, Florida, Washington, etc., that’s an additional savings too!
I messed up. I meant 33%. The basic claim remains valid. For 33% and 39.6%, there’s only $50K difference. Tax savings on that would be less than $3,500. Again that’s not small but if you are converting millions… If you convert all at once, you lose out $14K that you’ve saved on if you repeated the conversion 4 more times.