Agreed. Considering that tax rates are the crux of the matter, it is unlikely that any of us for whom conversion now is not an option but perhaps for later during retirement can know until we see the numbers and tax rates.
The calculator does help in demonstrating apples-to-apples comparison of three different scenarios with the same initial numbers and then the results for Roth v. tIRA v. tIRA without the tax bite from conversion. (Assuming I am understanding the analysis correctly.)
Wish that you could access hedge funds for your investing dollars?
http://fortune.com/2015/02/03/berkshires-buffett-adds-to-his-lead-in-1-million-bet-with-hedge-fund/
The (perhaps biggest) factor for me would be coming up with the money to pay the taxes. If I converted all my tIRAs to Roths, I would have a six-figure tax bill. Even spread out over some number of years, it would be hard to come up with the money. I could borrow it from my HELOC I suppose, but that makes the numbers worse.
@notrichenough, you are right – IMO if you have to borrow to pay the tax bill, it’s a non-starter. There might be a situation where it makes sense (maybe a massive pension starting soon that would put you in the Max tax bracket even in retirement), but it’s tough to come up with a reasonable scenario.
Well, it would be cheap money, around 2% after taxes. But still.
^^ I sometimes forget that I’m so debt-averse that it might be considered a phobia.
I think that in many cases it’s almost a guessing game, almost a six-the-one half-dozen-the-other situation that even a low 2% loan might swing the calculation. Even absent a loan, I’m reluctant to go all-in.
BOA has a tracking function that will automatically show groceries, insurances, fuel, etc. It takes the program a little while to figure out some but you can make your own categories too.
“@notrichenough, you are right – IMO if you have to borrow to pay the tax bill, it’s a non-starter. There might be a situation where it makes sense (maybe a massive pension starting soon that would put you in the Max tax bracket even in retirement), but it’s tough to come up with a reasonable scenario.”
We borrowed to pay taxes on our Roth conversion, and I don’t regret it. With interest rates so crazy low, we got a mixture of zero percent credit cards, low rate loans on cars and HELOC. I’m irritated by debt, especially since we have massive real estate debt, but for the most part it makes financial sense for us and we are paying it down at a pretty good clip. We thought the conversion was a no brainer, and were not willing to take money from within the Roth to pay the taxes. It seems like you want to get the money anywhere else than from the Roth.
Do the tax brackets for income INCLUDE social security income or is that excluded? I thought tax ceiling was 32,000 for joint filiers?
With the caveat that advice on the internet is free (except the opportunity cost of time spent), here’s another article about SS benefits that may raise some issues and get thoughts flowing:
The tax brackets are for taxable income (generally, adjusted gross income - deductions and exemptions). Whether any of your SS income is included in that depends on what your other income is and whether it is taxable, and whether your “combined” income (AGI + non-taxable income + 1/2 of your SS) exceeds a certain threshold (which is pretty low, as low as $32K for married). The taxable amount is calculated and added on line 20b of the 1040.
One under-discussed aspect of Roth vs. tIRA is that distributions from tIRAs, since they count as regular income, can cause some or most of your SS to be taxable, and push your some of your distributions into a higher bracket.
Roth distributions, on the other hand, because they are not taxable, do not cause any of your SS income to become taxable.
Plus, how states tax SS income varies - some do, some don’t, some have rules.
It’s difficult to model, though, and I’ve never seen any calculators that consider this.
@notrichenough
"One under-discussed aspect of Roth vs. tIRA is that distributions from tIRAs, since they count as regular income, can cause some or most of your SS to be taxable, and push your some of your distributions into a higher bracket.
Roth distributions, on the other hand, because they are not taxable, do not cause any of your SS income to become taxable."
That is a good point you’ve made. One FP I’ve spoken with emphasizes that SS and Roth conversions must be examined as a whole. And, quite frankly, the numbers of the moving parts are all quite speculative until one gets fairly close to retirement. So, indeed, YMMV.
If anyone finds a non-proprietary-to-FPs calculator (though unlikely) that takes all these factors into account, please share here as that would be very helpful.
Yes, state tax rules vary considerably. In HI, neither pensions nor SS are taxed, which is helpful for our planning and makes those calculations a bit simpler.
I like how @HImom tracked expenses in those young tight income days. During college days and very early marriage years, we spent little ‘discretionary’ - meaning ‘luxury’; we had financial goals to get into a house ASAP (paid off H’s school loans which were low considering he had 2 brothers also in college at the same time and one teacher income for the family of 6), bought needed furnishings along the way (we lived on one income, had one paid for car between us, the other income would buy the couch, the coffee table, build up first house down payment). We still have the $200 oak coffee table 
There are several ways to simplify things so that you identify discretionary purchasing and trim back unnecessary expenses to start saving for retirement. One needs to see some ‘traction’ so that being frugal on spending - that you see some progress.
I originally thought we would downsize our home here to get cash out, but I don’t think we will sell here until we want to relocate. I also was feeling a bit ‘bad’ about potentially not getting the money out of the house. However rethought things - if we had been renting a home (avg maybe $1500, which is low-balling) for our 22 years that we have been in our home, that is $18,000/year or $396,000 and would have nothing to show for it. Our home is very energy efficient and is in a good neighborhood. Will have some sprucing up to sell, but not feeling bad about the money tied up in the house all these years.
Sunday’s ‘Parade’ had a column article “Money Saving too much or too little”. Had a target chart. At age 40, savings should be seven times your income, and graduated up to age 65 with savings at 12 times your income; that is assuming retiring at age 65 needing 75% of pre-retirement income, and that Social Security income will cover about a third of your expenditures. Everybody agrees that over-saving beats under-saving (unless your squeezing nickels when you don’t need to, or stress over money when you don’t need to).
Most people on this thread have done a great job raising their kids (including no ‘addictions’ in teen years, which are so draining to a family in so many ways), and even if a late start on retirement saving, just getting started and getting intentional is a big help. Protecting one’s health is something that doesn’t cost a lot to do, but it does require exercise and watching the diet. Having the right kind of insurance policies in place.
I have three different Dave Ramsey books that all have Financial Mgmt Forms. Once one goes through the planning process the first time, it says you do two work sheets once a month which takes about 30 minutes, and one worksheet that is quarterly. Maybe updating once a year to review/adjust. It says should be able to manage your finances in 30 minutes per month (plus what it takes to write checks and balance your checkbook). If you cannot identify where your money is going, how are you going to control it? If you leave stuff out, it gives you an excuse to quit.
For some, there are extra expenses with students away at college (if the student is not handling their college fund themselves). I keep a running total of expenses so that I then transfer $$ out of their college fund investment (where I am custodian). My kids should be debt free with gaining their degree, with hopefully some money left in their account. They know they are fortunate. I had inheritance from my parents that died too young (63 and 77); those funds came in over several years and helped us during my cancer years and H flat income with additional expenses.
Always things to do when it comes to having ‘everything in order’.
Since we are probably 7 years away from retiring, we did pay taxes on converting IRA to Roth IRA. 2015 will convert the last of it - this helps close out an account that had annual fees. I estimated 28% on our taxes (we are not bumping into the next tax rate) - have to work on 2014 taxes yet, but sent in an estimate. Having the Roth money gives flexibility when you want to stay below a certain income level in retirement years - so if you need a few thousand, you have a place to get it. Plan to keep the Roth money building up those tax free dollars.
Social Security Administration online calculator:
http://www.ssa.gov/retire2/AnypiaApplet.html
The SSA no longer sends annual statements (if our experience is accurate), so those who want to confirm their SS benefits should create an account and log in to confirm. It is a good idea to make sure that the earnings reflected in your account match your actual historical earnings.
“At age 40, savings should be seven times your income, and graduated up to age 65 with savings at 12 times your income;” - Wow, I don’t imagine that many families can meet those targets.
Actually the SSA has resumed mailing statements, but it’s not every year, it’s on your age ending in 5 or 0, if you haven’t signed up online.
http://mobile.reuters.com/article/idUSBREA3I0GL20140419?irpc=932
““At age 40, savings should be seven times your income, and graduated up to age 65 with savings at 12 times your income;” - Wow, I don’t imagine that many families can meet those targets.”
That does seem pretty crazily unrealistic. Especially since people’s income can fluctuate greatly, and many people don’t start making higher incomes until their thirties or later. Lower incomes in the twenties, spending money raising kids in the thirties, the peak saving/earnings years in the forties and fifties does not equal seven times ones income at age 40. I guess my older son could do that, as he started saving and making a good salary at 23, as long as he doesn’t have a family. But that’s kind of depressing.
Just wanted to say thank you to all the great posters here. Early on I posted a question about where I should consider putting cash that is more than we really need accessible but, well, I feel most secure when we have access to a fair amount of cash and dh has indulged me on this. I ended up investing the cash in a vanguard fund that dh and I picked together and d1 showed me how to use an app on my phone to track it to which I then added several other stocks we hold. Don’t necessarily want to check it daily but I’m glad I have easy access to monitor. (Dh has a spreadsheet and monitors often; this has always been his job but I wanted to increase my knowledge and be more involved.) May be a baby step but I’m so glad I took it!
““At age 40, savings should be seven times your income, and graduated up to age 65 with savings at 12 times your income;” - Wow, I don’t imagine that many families can meet those targets.”
I definitely can not meet those targets, especially it implies that the equity in the house is not a part of the “saving” - which I think is 401K + IRA + savings outside of the retirement accounts IRA or 401K.
Just received this month’s Money magazine, in it one family’s financial snapshot is mentioned: (as far as I remember, roughly only)
A family of 4: husband 47, wife 46.
K1 13, K2 11.
Annual income: 127’000, in Texas.
401K, 245’000 (only 2 * income @ 47)
Equity in the house: 30’000 (so little?)
529 plan: 5’000
After-tax saving account: 3’500 (low)
Debt:
Car loans: 13’500.
Credit card: 9’500. (Bad debt!)
A/C debt: 9’000
I could be off due to my poor memory, but likely not off by much.
Do you think this family is in a relatively good shape if they plan to retire at 65 yo?
But FP still thinks they could be on track to retire at 65 yo using some “magic” calculation.