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Looking for some advice, my wife and I are both newly retired. We are both 60 years of age. All retirement monies are in 401(k)s approximately 2.2 million in traditional form case that we would have to pay taxes on upon distribution and approximately $300,000 in a Roth. Expenses, our houses Paid for our vehicles are paid for we just have day-to-day living expenses, property insurance insurance, utilities, health insurance, etc. I’m looking for some advice on the best way to manage the 401(k) distributions regarding taxes, etc. and any advice would be helpful

I'm in a similar situation, though somewhat complicated having retired in Europe.

The main thing that stands out to me is that you may want to consider doing
annual Roth conversions. I've been doing this for the past 3 years and will
likely continue at least until age 70 when I'll begin receiving social security
benefits.

At a minimum, you will probably want to "fill up" your 10% and 12% brackets
each year until you start collecting your social security benefits (and maybe
even beyond).

This is a topic that a good financial planner (a fiduciary, of course) should
be able to provide good value in assisting your retirement planning.

-Rubic

You should probably consult a fee-only financial adviser. The "fee-only" is important. Don't go with one on commission.

What follows isn't really financial advice, it's just some broad generalities based on your general description.

When you reach 70.5 years, the IRS will expect RMDs to be made, and taxes to be paid on those monies. Combined with any SS and other income (dividends?), that could bump you into another tax bracket (who knows what the brackets will be in 10 years). Also, you may have to worry about IRMAA for Medicare. That starts at age 63 (i.e. they start looking at your income at age 63 to determine your surcharge for Medicare at age 65).

In my case, mom died last year. I inherited what was left of her assets. I had 10 years to distribute the retirement assets, but I'm going to do it in three. I won't be affected by IRMAA because there isn't enough money involved ($206K in our case):

https://www.modwm.com/what-is-irmaa-medicare-incom....

But I still don't want to be bumped into another tax bracket when SS and RMDs both take effect. For me, I'm trying to smooth out the income stream. Most of our retirement money is in our brokerage accounts. Mom's assets are going into cash in bank so we have a few years' living expenses if needed, and won't need to touch investments if the economy goes south (which it does every decade or so). We both have 401Ks, and RMDs will be required. I plan to start withdrawing sooner than that (I'm already 61, so am above the 59.5 age limit). The ROTHs we will leave for last since there are no RMDs, and the withdrawals are tax-free.

<< When you reach 70.5 years, the IRS will expect RMDs to be made ... >>

@onepoorguy: Given the stated ages for you and OP, neither of you will need to
take RMDs until age 75 due to the SECURE 2.0 act:

https://www.troweprice.com/personal-investing/reso...

-Rubic

The RMD age may start at 75, but the RMD calculation table does not change. That is still 4.1% at 75.

Delaying taking withdrawals before 75 means that you will have a larger IRA and thus have a larger RMD amount.

<< Delaying taking withdrawals before 75 means that you will have a larger IRA and thus have a larger RMD amount. >>

Delaying RMDs until age 75 offers the possibility of a few more years
of Roth conversions (compared to age 70.5), potentially reducing your
IRA balance when the RMDs take effect.

-Rubic

True. And thanks for correcting me on the age limits.

We need to call the Fido guy (401K rolled over to IRA) to see about another batch of conversions. We try to do that every year. Mom's assets, and having to realize them, will have an effect. But that isn't relevant to the OP, just me.

Delaying RMDs until age 75 offers the possibility of a few more years
of Roth conversions (compared to age 70.5), potentially reducing your
IRA balance when the RMDs take effect.


Roth conversions are a nothingburger. All they do is shift which year you pay the tax. The only financial benefit that comes in is if your marginal tax rate NOW is lower than it will be in the future. Which is not often the case.

The only financial benefit that comes in is if your marginal tax rate NOW is lower than it will be in the future. Which is not often the case.

But for the OP and myself, maybe it will be. At age 70.5 we have to take SS. The OP and myself have said we are retired (but still too young for Medicare or SS). Let's just use arbitrary round numbers and say $2500 per month. That's $30K per year. If you pile RMDs onto that, depending on the size of the retirement accounts, that could amount to A LOT. Wouldn't it make sense to realize some of that IRA money now, and stick it in a ROTH, thereby evening out the tax load? Otherwise at age 75 (if I live that long), I'll probably end up in a new tax bracket. I'd rather avoid that if I could.

The other thing to consider when doing Roth conversions is the IRMAA (the amount you pay for medicare) surcharge if your income is above certain levels 2 years prior. So if you turn 65 in 2 years from now, they look at your MAGI and that determines how much you will pay for medicare for that year. That can add up for a couple.

We both turn 65 in 2027. I'm contemplating taking a large tax hit this year to fill up the 15%, 22% and 24% tax brackets to reduce the possibilities of dealing with the IRMAA and other tax issues down the road when we are required to do RMDs. Another factor for us is a likely inheritance (IRA tax deferred, not Roth) from a relative (non-parent). I try not to consider that in my spending but I need to consider it in terms of tax issues down the road. That could be a decent amount and that would also have to be distributed within 10 years and could cause us tax problems.

Further complicating the issue is that we don't know what will have to the tax brackets/deductions since they are supposed to revert to old (higher) levels in 2026.

I usually try to hedge my bets and if I get a windfall then paying taxes isn't the worst thing but if you can reduce it a bit, it wouldn't hurt.

Currently my money is roughly:
Regular: 26%
Roth : 13%
tax deferred: 60%

Without the inheritance and barring significant tax changes we should be ok although when one of us passes away that will change things. I also have to convert more of my inheritance from my father this year and next while our income is low (no social security, no RMDs, only 1 pension at this time).

This is complicated enough when you know all of the numbers but becomes tougher when you don't know what the numbers will be.

Rich

Roth conversions are a nothingburger. All they do is shift which year you pay the tax. The only financial benefit that comes in is if your marginal tax rate NOW is lower than it will be in the future. Which is not often the case.

But it isn't hard to think of a scenario where it could be. For example, RMDs pushing you into a higher tax bracket. That's a real consideration for many people. Probably many people here.

Roth conversions.... The only financial benefit that comes in is if your marginal tax rate NOW is lower than it will be in the future.

Not entirely. Roths inherited by non-spouses--children, for instance--still get favorable tax treatment relative to TIRAs.

Eric Hines

All retirement monies are in 401(k)s approximately 2.2 million in traditional form....

You might think about rolling your Roth and traditional 401(k)s into Roth and Traditional IRAs, respectively. Your 401(k) distribution schedules are Plan dependent, which often is faster than what the IRS requires. Too, you'll have more flexible investments options in the IRAs.

Eric Hines

The only financial benefit that comes in is if your marginal tax rate NOW is lower than it will be in the future. Which is not often the case.

I think it is the case for nearly everyone (everyone who is married and middle class or higher) at some point in their life. Usually beginning the year after their spouse dies. When married filing jointly for the first X years of retirement, your tax rate is usually lower than it is for the Y years of retirement after your spouse has died. So if you do the conversions, and they otherwise make sense of course, during those X years, then you will likely be better off overall from a tax perspective.

Roth conversions are a nothingburger. All they do is shift which year you pay the tax. The only financial benefit that comes in is if your marginal tax rate NOW is lower than it will be in the future.

Hmmm ... maybe.

Case I: $10,000 stays in IRA, in 10 years it worth $20,000 and RMD is required of $20,000. Marginal tax rate is 24%. Tax is $4,800. After taxes, you have $15,200 in your taxable account.

Case II: $10,000 is converted to Roth IRA, marginal tax rate is 24%, tax is $2,400, you have $10,000 in Roth and it cost you $2,400 from your taxable account. In 10 years, Roth IRA doubled to $20,000, and you have foregone $4,800 in your taxable account. Marginal tax rate is still 24%, so you have foregone paying taxes on $2,400 (the foregone gain in taxable account) of $576. Seems like after 10 years, you are $576 better taxwise. And each year that passes, you become more better off taxwise having done the Roth conversion 10 years earlier. And all the gains in that Roth IRA will never be taxed, and are a little easier to pass to heirs.

Does this make sense to y'all?

Does this make sense to y'all?

No.
Multiplication is commutative. It does not matter what order you pay the tax.

Assuming the investment doubles in the 10 year period.

B is the initial $10,000 in the IRA
T = (1.0 - tax rate) = (1.0 - 0.24) (What you have left after tax)

Do not convert, pay tax at end.
case 1: (B * 2) * T

Convert, pay tax from the IRA.
Case 2: (B * T) * 2

These are exactly the same.


Consider the cases where you use outside funds to pay the tax.

The math is the same for what the outside fund money does, just replace B (the converted amount) with C (the amount of outside funds earmarked for the tax).

Now your total is greater by the OF contribution, but the two cases still have the same value.

case 1: ((B+C) * 2) * T
Case 2: ((B+C) * T) * 2

The error that people do is they take into account the OF in case 2, but ignore it in case 1.
Of course case 2 will be larger!
You are comparing A+C with A, and A+C will always be larger.

All equivalent and true when measured from the perspective of you, the investor.

However, the picture changes when measured from the perspective of our beneficiaries.

I have been doing Roth conversions, aggressively, for a number of years with the goal of my heirs inheriting a large Roth on which they will owe zero taxes and it will continue to grow tax free for ten additional years after my death.

If I left it to them as an IRA, then the RMD's could very easily drive them into a higher marginal rate than I ever had, especially since they are already very successful without my inheritance.

Does this work?

No conversion (10% cap gains tax in taxable)				
	Start	 End	  Tax	 Total
IRA	 $10,000 $20,000 $4,800  $15,200 
Taxable	 $2,400  $4,800  $480 	 $4,320 
Total	 $12,400         $5,280  $19,520 
				
Convert				
	Start	 End	 Tax	 Total
IRA	 $10,000 $20,000 $-   	 $20,000 
Taxable	 $2,400  $-   	 $2,400 	
Total	 $12,400 $2,400 	 $20,000 

Oops! tax for taxable was wrong. Corrected:

No conversion (10% cap gains tax in taxable)				
	Start	 End	  Tax	 Total
IRA	 $10,000 $20,000 $4,800  $15,200 
Taxable	 $2,400  $4,800  $240 	 $4,560 
Total	 $12,400         $5,280  $19,760 
				
Convert				
	Start	 End	 Tax	 Total
IRA	 $10,000 $20,000 $-   	 $20,000 
Taxable	 $2,400  $-   	 $2,400 	
Total	 $12,400 $2,400 	 $20,000 

It still doesn't work. Because you added an additional tax on one but not the other.

Basically your scenario is:
I can take C from account X or account Y.
X has an additional tax that Y does not have.
Therefore I will take the money from X.
TA-DA!! Y comes out better.

No duh.

Look, all this was hashed out in 1998 when Roth conversions began. There were long threads on TMF discussing the strategies.

BTW, I was on the "conversion is better" side of the argument.
As I recall, Elan was on the side of "doesn't matter."

Eventually it got thorough my thick head that since multiplication is commutative there is no clever way of shuffling things around for the math to NOT be commutative.

You have to look at the entire picture. What happens is that people look at the outside funds used to pay the tax at conversion as "magic money" and don't consider the alternative use you could put it to. The correct alternative to consider is "invest it the same way". The alternative they use, though, is essentially "blow it".

There are still many articles on the internet that argue that conversion is clearly superior. But then again there are lots of people who argue that the Earth is flat.

You have to look at the entire picture. What happens is that people look at the outside funds used to pay the tax at conversion [the $2400] as "magic money" and don't consider the alternative use you could put it to. The correct alternative to consider is "invest it the same way".

That's exactly what I show. In the do not convert case, the $2400 in taxable grows to $4800, and our investor pays 10% cap gains on the $2400 gain.

Doesn't it really come down to when you realize the income, and what tax bracket that puts you into when you do?

I did some conversions simply to try to reduce the inevitable RMDs, as those could bump us up. And, as bhm mentioned, it's easier for heirs.

Well..I think everyone's a little bit right here, depending on what question is being answered.

Suppose:
- George and Martha each have $10,000 in a traditional IRA, and another post-tax $10,000 in cash, and
- on day one, they both a) convert the traditional IRA to a Roth; b) pay the taxes due; and c) put the cash account to work in a taxable brokerage account, and
- they choose identical investments which are destined to double in ten years i.e. just under 7.2%/yr
- and their marginal tax rate is identical now at 24%, and will be the same in ten years

The only difference is that George pays the $2400 in Roth conversion taxes from the IRA, and Martha takes it from the cash destined for the brokerage account

In ten years: yes, their monthly statements read the same: $10K plus $7600 have each doubled
- George has $15,200 in the Roth and $20,000 in his brokerage: total $35,200
- Martha has $20K in her Roth and $15,200 in her brokerage: total $35,200.

So, if the question is, who has the bigger statement balance in ten years? the answer is, multiplication is commutative etc

-------------

But if the question is, if they each cash out of both accounts at the ten year mark, who can buy the bigger boat?, then:
- George gets $15,200 from his Roth and ($20,000 less 24% =) $15,200 after tax from his brokerage, or $30,400
- Martha gets $20,000 from her Roth and ($15,200 less 24% =) $11,552 after tax from her brokerage, or $31,552

-------------

But if the question is, how does their son John fare estate-wise when they both die while looking at boat catalogs at the 9.99 year mark?, the answer is:
- it depends - to a large degree, whether John inherited his money management skills from his mom or his stepdad, but also estate size, other assets, probate regardless? etc.
- but often, better with Martha's
- and George and Martha never got their boats, so there's that

-- sutton

So I said to myself: Self, proofread before posting, because on review there will be a mistake.

Nah, I said. Chores to do.

-----------------

Ahem

At the ten-year mark, both Gorge and Martha will owe 24% on the capital gains in the brokerage account, not the balance. So while the relative positions will be unchanged, each will cash out 12% more from the brokerage: Martha gets $13,376 ($33,376 total) while George takes home $17,600 ($32,800)

-- sutton
sheesh

You have to look at the entire picture. What happens is that people look at the outside funds used to pay the tax at conversion as "magic money" and don't consider the alternative use you could put it to. The correct alternative to consider is "invest it the same way". The alternative they use, though, is essentially "blow it".

I understand that multiplication is commutative, and all things being equal, paying tax now or paying tax later after growth is exactly equal (assuming equal tax rates, of course). But that isn't the case here. The case here is that you can use outside money ($2400) to pay the tax, while the entire value can move to a tax free account. That effectively allows you to add an additional $2400 into a tax free account (that you otherwise couldn't have added) to grow tax free "forever" (well until your death plus 10 years if you so choose). The tax benefit to you is the tax on everything that $2400 would have earned over all those years. If you hadn't done the conversion, that $2400 would have sat in a taxable account (or in a tax-deferred IRA) for all that time and taxes will continuously or eventually be due on it.

I'll have to think some more about that.

Problem is, almost no papers and articles even touch on that subject.
Most of them just say "Paying the tax with outside money is a super clever way to stuff more money into a Roth." That is, they completely ignore the alternative uses for that money; they just assume that it magically appears.

There is a small amount of voices in the wilderness discussing about that there is no benefit to a conversion unless your marginal tax rate is smaller now than in the future.

I don't recall reading any article or paper that delved into tax that gains on the outside funds would be subject to.

My gut feeling is that this "obvious" take is incomplete and quite probably wrong.

Just at first level, it is the case that the money in an IRA will be taxed eventually. So why go through gyrations to pay the tax now rather than as far in the future as possible?

The two major cases I see are if your tax filing becomes single instead of joint, and you voluntarily pay the tax so that your heirs don't.

That is, they completely ignore the alternative uses for that money; they just assume that it magically appears.


People do gloss over the fact that the money has to come from somewhere. Back when I was young and money was tight, it was easier to put more money into a regular 401K since you didn't pay taxes on it, while a Roth you did have to pay taxes on it and that either would reduce my contribution or have to come from somewhere and in those days there was "nowhere" it was coming from. Of course my earliest years, the Roth option wasn't available.

I've been paying taxes now rather than later with my inherited account since the "later" there does have an ending point and that falls when I'll be collecting social security (and so will my wife) so income now is more controllable than later.

I also have pondered whether to make Roth conversions up to the top of the 24% bracket but I do like the idea of putting it off since I may not be around to deal with it later although I kind of think the tax rates now are the lowest they will be for much of my future.

Lots of options in investing. Some people know that annuities (SPIA/Immediate) may not be the best investment in terms of returns but just don't want to worry about the stock market and managing money they will need for daily living.

Rich

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