I don’t think a pension will include any mortality credit. The actuarial assumptions are life expectancy and rate of return, right?
If I plug $744,000 into that calculator I get a $49,000 annual benefit. Pretty close to my off the cuff guess.
“Thanks. I was confusing the contribution deadline with the tIRA-rIRA conversion deadline, of which there isn’t one. As I’ve said, Roth conversions give me a headache!”
AttorneyMother, as long as you aren’t generating new taxes from other IRA accounts, the Roth conversion should be really easy and take you just a few minutes.I did one the day after I opened up a new IRA, so zero gain to declare. It’s not painful at all. Though if there are other taxable consequences, I have no idea what the amount of work is.
@notrichenough, it is basically an NPV, and there’s nothing wrong with doing it that way. Your pension also must have mortality credits, since the longer-lived members benefit from the shorter-lived ones. The actuarial assumptions should include your expected lifespan, but also the lifespans of other participants. Extreme case, they all live to be 100: plan runs out of money.
@busdriver11
I’m completely new to the annual conversion plan. Should I open a new account for the new contribution so as to make the process as easy as possible? Does that negate the need to take into account other years’ pre- and post-tax IRA accounts? Each of us has both.
I’m no expert, AttorneyMother, but I’m pretty sure that it doesn’t negate the need to take into account the other year’s IRAs. The tax consequences definitely get more complicated when you have other IRAs. Someone please correct me if I’m wrong, but I don’t think that additional taxes are generated if you only have after tax IRAs, just pre tax IRAs. And then it’s a formula. It is easy to contribute to a non deductible IRA, then convert to a Roth immediately with no tax consequences. Easy to convert a non deductible IRA you already have, though you would owe taxes on the gains. Converting a tax deductible IRA, you’d owe taxes on the whole amount.
This kind of explains some of the Roth conversion, which is definitely more complicated if you have other IRA’s, "This method is most beneficial, tax-wise, if you don’t have other, deductible IRAs. If you do, then the portion that you convert to the Roth has to be prorated over the total amount you have in all your IRAs.
As you can see in in this Roth conversion example, if you have $15,000 in traditional IRAs for which you’ve received a deduction, and want to deposit $5,000 into a nondeductible IRA and convert it to a Roth, you would divide $5,000 by $20,000 (the total value of all IRAs) to get the amount you can convert tax-free, which is 25%. So you’d owe tax on the other $3,750, based on your current tax bracket."
As I understand it, pre-tax IRAs and any earnings on post-tax IRAs will generate taxes (which is why one optimally would convert quickly after making a non-deductible contribution).
In our case, DW had no tIRAs but I did. So, we opened her a tIRA just for the backdoor Roth, but decided that I didn’t want to bother for my account. Any good accountant should be able to figure it out, but basically you are paying taxes on whatever hasn’t been previously taxed (eg, the earnings). Turbo Tax can probably compute the tax effects also.
“As I understand it, pre-tax IRAs and any earnings on post-tax IRAs will generate taxes (which is why one optimally would convert quickly after making a non-deductible contribution)”
So you would pay a percentage of taxes because of your pre-tax IRA’s, but only pay taxes related to the post tax IRA if that happened to be the one you converted, is that correct? If you opened a new IRA for the backdoor, it shouldn’t generate any taxes because of other post tax IRA’s, is how I read it.
Wow. Thanks for the feedback, all. The City defined benefit plan is now well-funded; the state not so much. The city cannot change the multiplier for my group, but has taken steps to dial back benefits for the group hired after a certain date. Your feedback makes me feel much more secure… I kept reading about folks needing Xmillion dollars, and wasn’t sure how to value the defined benefit plans in light of that. We both will also receive SS, and I was lucky to work for a school district that pays into both the state retirement system and social security, so it will be unreduced. We will pay off the house in a few months, and then should have my salary plus part of DH’s to sock away for retirement for another 8 years. Yep - feeling much better about things! [Life often laughs at plans. Hopefully ours will work… ]
anxiousmom - Congrats. The good news about Defined Benefit pensions (if secure) is that you don’t need to guess how long you will live when doing retirement planning. (You’ll still need to guess about investment rate of return and inflation rates … but it’s nice if you have a reliable income stream.)
My understanding is that the IRS requires you to lump them together. The taxes aren’t just calculated on the IRA you convert.
In other words, the annual "back door " IRA requires some prorating of gains from one’s pretax and post-tax IRAs (if one has both types).
Essentially, you can’t isolate each year’s non-deductible contribution and convert “just that one.” You are deemed to be withdrawing a prorata share of all your IRA balances, hence the need to account for the basis in your non-deductible contributions to date. Am I getting close?
Might be worth just converting them all, if you can pay the conversion taxes outside of the IRA.
Yes - which is why a backdoor Roth doesn’t work for me. I’ve rolled all my old 401Ks into IRAs, so the non-taxed proportion in a backdoor would be 95% plus for me. I might as well just convert a tIRA at that point.
For us, the present marginal tax rate is the problem and renders the conversion un-useful. So, will wait until later when personal tax rate is lower, presumably during retirement years…
Same general situation as you, notrichenough.
I’d like to ask a question regarding health insurance for someone in the 60-65 range. Say the husband retires at 65 and is eligible for Medicare. The wife is 60 and not working. She had health insurance through husband’s employment prior to his retirement. Now that he is retiring, what are her options for health insurance - Obamacare and the health care exchanges? Is COBRA an option if she was not the employee? Any other options?
That will be our situation also. I could get insurance through my work, but if DH retires I want to retire as well so that we can travel and do things together.
@anxiousmom
Quite honestly, those who have no DB pensions or retiree medical benefits pre-Medicare are the ones who have to bulk up our personal retirement funds. That’s why those numbers get big, because they have to replace salaries with no help except from SS. Just to keep certain discussions in perspective.
I think it’s best to ask the HR and current insurer what options are available to W after H retires and he gets Medicare. For us, H retired and got Medicare BUT we still were able to keep his insurance plan and pay our portion of the premiums and have his former employer pay the rest. When our S aged off of H’s plan at 22 and later again at 65, he was eligible for both Cobra AND also a BCBS individual plan. We opted for the BCBS individual plan until he was again eligible for H’s plan (after ACA kicked in & before he turned 26). WHen he lost coverage at 26, he bought insurance with one of the plans that his employer subsidized, as it was considered a qualifying event (Turning 26 and becoming ineligible for coverage under H"s plan).
When D ages out of H’s plan, we will have to figure out what to do. She doesn’t have a job – not sure if she will get one by then. Will have to figure out what insurance plan to get for her–ACA or the BCBS individual plan (she’s always have coverage under BCBS and no gaps in coverage so should qualify). It’s not great coverage, but it is something.
“That will be our situation also. I could get insurance through my work, but if DH retires I want to retire as well so that we can travel and do things together.”
You’d better do it! No letting him stay home or travel while you have to slave away at work!
Lol busdriver! Most of the time I love my job and don’t consider it “slaving away” but I might feel different if he wasn’t getting up before me for an hour’s commute.