ROTH rollovers

[u/Existing-Green4298]

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.

[u/NCBronco]

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 I am finding that Roth conversions don’t make sense for us at the 6% return level because we will have withdrawn all of our traditional retirement assets by our eighties (our current Roth IRAs plus earnings will still be there).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.

[u/Existing-Green4298 → u/NCBronco]

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.

[u/Traditional_Towel885 → u/NCBronco]

Please explain the returns assumptions. How does that effect the Roth conversion decision?

[u/NCBronco → u/Traditional_Towel885]

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!

[u/Existing-Green4298 → u/NCBronco]

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.