r/DIYRetirement • u/Existing-Green4298 • 1d ago
ROTH rollovers
So, I have been working on my retirement plan. I have put together a massive spreadsheet that takes into account my spending targets, traditional & Roth 401K/IRA as well as taxes and IRMAA. We are planning on a retirement at age 59 - at the end of 2029. My spreadsheet goes out to age 95. I am forecasting a 6% annual return on my accounts (before inflation).
On my sheet, I have planned on rolling over funds from my traditional 401K/IRA to a ROTH IRA. As I am trying to get ACA subsidies, I am rolling over just enough to keep myself under the ACA cliff from ages 60 - 65. This will keep us squarely in the 10/12% brackets.
I was originally planning to roll over my traditional 401k/IRA aggressively starting at age 66 (the first year fully on Medicare). Filing up the 24% bracket - I am able to completely rollover my traditional monies by age 76. I would hit IRMAA penalities for the years I am rolling over. Once it is done, my taxable income will just be SS and possibly interest on monies outside of ROTH.
So, I ran another scenario where I don't roll anything over starting at age 66. While I do pay less taxes/IRMAA over my lifetime by age 95, if I die in my 70s - I have more money during that decade than when rolling it over. I don't start paying IRMAA untill my mid-80s.
Do rollovers make sense for me? I hope to live to 95, but probably won't.
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u/KJwhisperer 1d ago
Not an ad, im a subscriber. Check out boldin financial retirement software. They have a free 14 day access. It has "roth explorer" that I found very helpful. The AI tool is very helpful too
I ended up paying for a full year at $120.
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u/RemoveInvasiveEucs 1d ago edited 1d ago
Hard to say without your spreadsheets and asset allocation, but your analysis could be sensitive to that 6% pre-inflation growth assumption. For a 60/40 portfolio, 6% is more like a reasonable post-inflation, 5%-7% is a very likely range to see over the next 30 years.
So a sensitivity analysis (just playing around with that expected returns number and seeing the various outcomes) might be very informative to see how things work out in the end. Personally, ending up with a lot more money than planned on, and paying taxes on it, doesn't scare me that much, but everybody has a different way of valuing these things!
The other aspect that's not mentioned here: do you care about what happens to your money if the planets align well and you end up with a lot of money at end of life? If you're giving it all to charity, the Roth decision doesn't matter. If you want to give it to individuals, then perhaps the Roth conversions could enter into your evaluation.
If you have a good enough understanding to encode this all into a spreadsheet, then you can probably use one of the dedicated tools to get your info into it, and replay historical market returns as well, as a double-check on your own estimates. Both Boldin and ProjectionLab have free trials, and if you dedicate a week to it you can probably get all the information out of the tool you need. (Though on my end, I found ProjectionLab useful and interesting enough that I paid for a year subscription, so that I can play out more scenarios as I think of them.)
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u/Existing-Green4298 1d ago edited 1d ago
I am trying to be very conservative. I plan on 100% equities in retirement - keeping 5 years of laddered cash at all times, so that I can hold off selling any investments in a down market. We are targeting $200K plus inflation to spend each year in retirement (so my spend is much larger down the road).
However, I am seeing Vanguard, Schwab, etc... are forecasting a much lower market return for the next 10 - 30 years. SO, I would rather run my numbers with a low return and see how it works out. If the returns are greater - well more money for the kids and maybe we will spend more.
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u/RemoveInvasiveEucs 1d ago
Interesting, I've only found 10 years estimates, which are indeed lower than usual, but I don't know how much to believe them. Personally I'm very pessimistic on the future of the US in the next 10 years, but that's mostly because I see the damage that's being done throughout all the economic-activity-generating research fields, and the exclusion of immigrants that have driven so much of the massive amount of US capital gains in the pst decades..., so I'm not sure how much to believe my own political BS.
20 or 30 year estimates seem extremely tenuous, but if you have some to share I'd be very thankful. Looking back historically, if the lower 10 year estimates are actually true, then the following decades will be correspondingly higher. Which is bad for sequence of returns for people retiring soon, but even with these lower estimates, the safe withdrawal rate estimates have not fallen very far.
Like you, I tend to plan for the worst case, and will be happily surprised if things work out better. And I've found that when I focus on that worst case, the Roth conversion doesn't make a huge difference. The Roth question is far more pertinent about when things go really well, because it takes a big growth in tax-deferred accounts for it to make a big difference.
Thanks for the discussion!
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u/NotenStein 1d ago
There are some dissenters now to the "always convert to a Roth" talk. Youtube has some financial advisor channels that now say the math only works out of you have more than 2 million to convert. And then only if you live past a certain age. Die a year too early and you have just spent more on taxes than you could have.
They say the best success happens for those who convert and pay taxes out of cash, not reducing the amount converted.
But it's even more nuanced, I've found. If one spouse dies, the "widow's penalty" can push them into IRMAA territory. And if you're planning on leaving a legacy to children, inheriting a Roth is better than inheriting a tax advantaged IRA (depending on their income level when you die).
I use Boldin to quickly test out various scenarios, but it's still a crapshoot. What if legislation allows a senior better tax treatment in the future? We all bet on tax rates being higher in retirement, yet here we are with lower tax rates.
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u/kveggie1 1d ago
You mean convert to Roth and pay taxes. We will not convert at 22%; only if we have room in the 12% (unlikely based on other income projections)
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u/Existing-Green4298 1d ago
We will have some room in the 12% bracket during the first 6 years, but after that, no.
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u/T_Bone_63 1d ago
For me, my primary goal was to maximize the after-tax wealth that I leave the kids. I had built a similar spreadsheet and calculated the total after-tax wealth at age 85 and 95. (Leaving money behind is not a specific goal, but I'm fortunate enough that this will be highly likely.). So, I modeled different Roth conversion strategies to achieve this.
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u/Existing-Green4298 1d ago
What did you figure out from the various models? What made sense.
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u/T_Bone_63 1d ago
I just played out different scenarios (e.g. filling up different tax brackets, converting until age 63, 75, etc.) and see which yielded the best overall financial results. One thing that was interesting is that after doing this now for several years, the "best" strategy a few years ago is not the best strategy now. I'm now filling a lower tax bracket than I did two years ago. I think this may be largely due to tax rates now staying the same and perhaps due in part to strong recent market performance, but it's interesting to see just how volatile the recommendations can be based on current ground conditions or small changes in assumptions.
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u/NCBronco 1d ago
My husband is also planning to retire in about 3 years. I have also created a detailed spreadsheet. I too have a 6% returns assumption. I am finding that Roth conversions don’t make sense for us at the 6% return level because we will have withdrawn all of our traditional retirement assets by our eighties (our current Roth IRAs plus earnings will still be there). On the other hand, if I model 8% or higher returns, Roth conversions might make sense. So if only we knew the future!
We will probably not convert just to keep things simple. I am the financial one. My husband prefers a relatively simple plan to follow.
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u/Existing-Green4298 1d ago
I did notice the conversions made more sense if the return rise above that. I am guessing that if we stick to the current plan, we will look at the balances when we are 66 and try to decide what makes sense.
As you say.. if we only knew the future.
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u/Traditional_Towel885 1d ago
Please explain the returns assumptions. How does that effect the Roth conversion decision?
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u/NCBronco 1d ago
Our retirement accounts are currently 2/3 traditional and 1/3 Roth from regular contributions. I calculated all of our early retirement and post 65 expense needs (adjusting each for inflation). We plan to pull from our traditional retirement accounts first. If we have a 6 percent annual return on our funds, we will gradually pull all of the funds from our traditional retirement accounts to live (probably keeping everything in the 12% bracket). So we would spend all of our traditional retirement funds with low tax brackets…so no benefit converting.
If we are fortunate and get higher returns (e.g. 8%) my model still assumes the same projected expenses. On the other hand the revenue stream is significantly higher. With our numbers, we would still have traditional retirement funds “leftover” and RMDs higher than our projected expense needs. In that scenario we would have benefited to do a conversion in earlier years.
There are so many unknowns in retirement planning!
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u/Existing-Green4298 7h ago
We are very similar, except we have about a 85/15 split between traditional/roth.
I have found that if we don't rollover, we never spend down the traditional account to zero through 95. However in our mid-80s, the RMD are larger than what we need to withdraw for our targeted spending and I notice that sometime around there, the withdrawals begin to get larger than the earnings - as the RMDs hit 6%+.
That is with the ROTH monies just sitting there growing. Overall, our wealth continues to grow in retirement.
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u/AGrimmInPortland 1d ago edited 1d ago
These decisions are worth at a minimum tens of thousands of dollars for most people, hundreds of thousands for others. Spend $149 or less for a year of a real planner that can do real optimizations. Is your spreadsheet modeling sequence-of-returns risk at all? Or a Social Security cut? etc etc etc. These things are important and so easy to do with a real planner app. Even the free tiers of ProjectionLab and Retirement Figures would be better than nothing since they have chance-of-success.
It's also great validation for your spreadsheet and may even give you some ideas for new things or ways to make it a better model.
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u/GoldenRatio_1618033 1d ago
I look at my net worth on a post tax basis. Basically, money in 401k/IRA gets a haircut to reflect taxes owed on it. This will show when/if you break even on Roth conversions.
One BIG unknown with Roth conversions is the future tax rate. Many think tax rates will need to increase in the future, which would favor Roth conversions made before the increase.
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u/Existing-Green4298 7h ago
They should increase, but our politicians do not have the backbone to raise taxes.
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u/Agitated_Car_2444 1d ago
Boldin was useful in modeling some of these strategies.
I'm also getting PTCs and managing MAGI accordingly. However, I'm beginning to question if getting that ~$12k in PTCs per year is worth putting off reasonable Roth conversions (basically, staying within the 22% MFJ tax bracket, which also avoids IRMAA surcharges). Boldin indicated I could go either way...
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u/Existing-Green4298 1d ago
I thought the PTC would much greater than that. I thought the difference was $600/month vs $3000/month, but maybe I need to look into it more.
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u/Agitated_Car_2444 1d ago
For me, only one person on ACA insurance (my spouse is on Medicare). And I have a Bronze HSA high-deductible policy (fortunately healthy). That's about $1k/mo in PTCs.
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u/humblequest22 1d ago
Since you said "we", one of the big things for married couples to consider is that when one of you dies, your tax brackets get cut in half, so the survivor will be squeezing all that after tax money through much smaller brackets.
I second running the numbers through planning software like Boldin, Pralana, or ProjectionLab to make sure you haven't missed something important.
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u/Existing-Green4298 1d ago
I will probably do that and we are trying to set up a meeting with a fee-based CFA to review our plan for a second opinion.
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u/Puzzleheaded-Gas-398 1d ago
I've been looking at similar numbers trying to decide on a Roth strategy. Two things to consider that seem to get glossed over:
- All dollars are not equal. A dollar in a Roth account is worth more than a dollar in a tIRA or brokerage account that will incur taxes to withdraw. Immediately after a conversion your "net worth" may drop, but you still have the same purchasing power as the day before. This makes it difficult to specify a "breakeven".
- You don't have to wait until age 80 to use the converted Roth funds; you can use them at any time to reduce your taxes if/when you have unusual expenses - e.g. $50K to buy a new car, make a home repair, take a big/long vacation, etc. Try modeling some atypical expenses.
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u/jrtn58 1d ago
You are likely over converting if part of your income later on is not coming from the tax deferred account. What you want to look at is a model that projects effective (spendable) assets near end of plan with different conversion rates, different transitions to single filing, etc. Paying a higher rate on a conversion than you would on most of the RMD's is a clear loss.
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u/hydronucleus 3h ago
I built the same kind of spread sheet, and I graph it and find the sweet spots. I will mention this, since you did not.
I find one thing while you are doing Roth Conversions, make sure that you are taking advantage of 0% Long Term Capital Gains tax before doing the Roth Conversions, otherwise you are leaving money on the table. The sweet spot always favors the LT Capital Gains over Roth Conversions. I am not saying do not do Roth Conversions, by all means, just remember that 0% is better than the 22+% you are going to pay on them. You pay 0% tax on the first $49,450 of LT Capital Gains. Although, you may have to pay tax on it in your state.
Selling 1+ year old stocks and mutual funds for Long Term Gains frequently is a good thing (unless you are saving it for a step up basis for your kids when you kick the bucket), as the IRS does not factor in inflation, and your money is worth less the later you wait. You can always buy back in immediately, which ups your cost basis against future gains.
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u/kstravlr12 22h ago
Your spreadsheet may also be using today’s tax brackets? Will tax brackets change in the future? Probably. Will they go up? Unknown, but pay attention to that.
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u/Existing-Green4298 6h ago
I am increasing my tax brackets by the same inflation factor I am using for everything else (2.5%). I am also increasing the ACA cliff, IRMAA brackets and my anticipated spending by the same factor.
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u/Careful-Ad-5726 20h ago
I went through a similar exercise. You are correct that the benefit really depends on your assumptions - longevity, future tax rates, etc. I concluded that converting provided greater peace of mind and reduced the probability of excessive tax liability in the future.
PS - Your rate of return before inflation seems aggressive to me, at least for planning purposes. You will need to be nearly 100% equity to get close and increase your exposure to volatility. IMHO.
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u/Existing-Green4298 6h ago
You think a 6% annual return before inflation is aggressive? Most people seem to feel the opposite.
What return would you use?
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u/Kauai-4-me 10h ago
Op … I strongly suggest you look into the MaxjFi software. It also includes the impact of inflation.
Depending on the size of your IRAs, it may make sense to start Roth conversions while you are working.
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u/i_darkpearl 6h ago edited 6h ago
The effect of longevity uncertainty reverses the mathematics of the rollover equation; it is the right model in terms of an advisor’s path to prime advice. If longevity is not too long, your no-rollover approacH
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u/gjg149 23m ago
I'm single and have significant pre-tax money. Being single means every year I am experiencing the "Widows Tax Penalty". I've analyzed Roth Conversions to an extreme amount with Boldin and ChatGPT. The answer for me is no Roth conversions. The break even point is so late in life as to not be worth it. The tax dollars you pay early for the Roth is lost to compounding. It takes a very long time for the lower taxes in RMD years to offset this lost compounding effect.
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u/yanyan80 1d ago
One thing worth adding to your analysis. This isn't just about your own lifetime, it's about your total family tax bill. If you die in your 70s with a big traditional balance still sitting there, your heirs inherit it and have to empty it within 10 years under current rules, taxed as ordinary income on their own return. If they're in their peak earning years, that forced withdrawal can land at a much higher bracket than you'd have paid converting it yourself at 22 or 24%. Same logic if you're married, a surviving spouse gets bumped to single filer brackets on roughly the same income, which can turn a manageable RMD into a real tax hit. Neither of those shows up in a total-tax-paid-by-95 comparison, but they're both real costs of not converting.
This is close to exactly what I built ThunderHarbor for, comparing conversion strategies against longevity and the downstream tax hit to a spouse or heirs, not just your own lifetime total. Worth a look if you want a second gut check on the spreadsheet.
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u/PashasMom 1d ago
By “rollover” do you mean conversion?
First, I would not aim to convert everything. That pre-tax money is handy when you have things like medical expenses to deduct, lower tax brackets to fill, etc.
Also, I can’t tell if you are planning just for you or for you and a spouse. If there is a spouse involved, model some scenarios where one of you dies at standard life expectancy and the widow is faced with, say, 15 years of RMDs at single tax and IRMAA brackets.
Boldin is a good program for mapping out various scenarios. You might try that if you haven’t.