How much $ to retire and how to fund your lifestyle in retirement

[Oil4AsphaultOnly]

There is no conversion ladder required. 401k (or other deferred account) to Roth can be done in one lump sum if you like.

Rule 72t requires very specific structure, Roth conversion is free form, you can make it all at once or in varying sizes, start and stop at any time.

Nothing about roth conversion requires you to make a 5 year ladder or any other length ladder. If the word ladder or the concept of doing 5 years in a row triggers you.

Although you can convert your 401k into a Roth in any amount you'd like, it would be absolutely dumb to convert the entire amount in one sitting (due to progressive nature of income taxes).

That's why a conversion ladder was what I was comparing against. By doing a ladder, you minimize the amount that gets taxed, while also ensuring that you have a reliable stream of income in subsequent years.

So at any age below 53, you'll want to convert just enough for 1 years spending to minimize the taxes. And to do this every year until 55, so that you have spending money until you're unrestricted from withdrawing from your 401k & IRA's. That is a conversion ladder. The younger one starts, the longer the ladder.

Is that really better than a rule 72t distribution?

 

[dhanson865]

Although you can convert your 401k into a Roth in any amount you'd like, it would be absolutely dumb to convert the entire amount in one sitting (due to progressive nature of income taxes).

That's why a conversion ladder was what I was comparing against. By doing a ladder, you minimize the amount that gets taxed, while also ensuring that you have a reliable stream of income in subsequent years.

So at any age below 53, you'll want to convert just enough for 1 years spending to minimize the taxes. And to do this every year until 55, so that you have spending money until you're unrestricted from withdrawing from your 401k & IRA's. That is a conversion ladder. The younger one starts, the longer the ladder.

Is that really better than a rule 72t distribution?

You make finances sound like a one size fits all operation. Funny how no scenario you describe applies to me.

Living in a flyover state my income is low, probably comically low by your standards. So I can convert now and just let it sit for later. I won't be pulling it out in one year chunks the second it's been in the account for 5 years.

Additionally when I turn 55 I don't get access to any grand amount of money. I might be accessing my current employers 401k at that point if I leave the company after I turn 55, but it's a small account compared to my rollover from prior employment.

No it's age 59 1/2 when I get access to the big accounts. But there is also other ages to consider. Whatever age I retire at, the age I start collecting social security, the age I start taking required minimum distributions.

While a person could do Roth conversions in a simple ladder planning to spend them in discrete 1 year chunks and avoid converting any more than they need for those 1 year chunks, a person could also convert more now to avoid higher taxes later or less now because they can't afford to do more now and fill in the income need from non Roth sources. If they are doing more or less it's not the same as the example you give of a evenly repeating conversion ladder.

The big issue for me is that 72t forces me to declare a size payout ahead of time and stick with it for 5 years and there are penalties for not doing so once you start that path. Yes there are multiple ways to calculate the size of the payments but they don't vary it that much. I can't afford to do such a structured plan so I'll have to play it by ear and vary the amounts I'm working with more than a 72t plan would allow.

Due to the mix of accounts I have and the amount I have access to I'm just going to have to keep working or TSLA is going to have to have a much higher market cap. When I'll pull the trigger on retiring will be more about the stock price than my age. My income after retirement is likely to be many times higher than it is now.

But I guess in your world everyone makes the same amount, has the same expenses, has the same savings, and should all make the same choices.

 

[Oil4AsphaultOnly]

You make finances sound like a one size fits all operation. Funny how no scenario you describe applies to me.

Living in a flyover state my income is low, probably comically low by your standards. So I can convert now and just let it sit for later. I won't be pulling it out in one year chunks the second it's been in the account for 5 years.

Additionally when I turn 55 I don't get access to any grand amount of money. I might be accessing my current employers 401k at that point if I leave the company after I turn 55, but it's a small account compared to my rollover from prior employment.

No it's age 59 1/2 when I get access to the big accounts. But there is also other ages to consider. Whatever age I retire at, the age I start collecting social security, the age I start taking required minimum distributions.

While a person could do Roth conversions in a simple ladder planning to spend them in discrete 1 year chunks and avoid converting any more than they need for those 1 year chunks, a person could also convert more now to avoid higher taxes later or less now because they can't afford to do more now and fill in the income need from non Roth sources. If they are doing more or less it's not the same as the example you give of a evenly repeating conversion ladder.

The big issue for me is that 72t forces me to declare a size payout ahead of time and stick with it for 5 years and there are penalties for not doing so once you start that path. Yes there are multiple ways to calculate the size of the payments but they don't vary it that much. I can't afford to do such a structured plan so I'll have to play it by ear and vary the amounts I'm working with more than a 72t plan would allow.

Due to the mix of accounts I have and the amount I have access to I'm just going to have to keep working or TSLA is going to have to have a much higher market cap. When I'll pull the trigger on retiring will be more about the stock price than my age. My income after retirement is likely to be many times higher than it is now.

But I guess in your world everyone makes the same amount, has the same expenses, has the same savings, and should all make the same choices.

No. I was focused on the tax implications. So if your situation will vary so much that you'll be converting different amounts to a Roth every year, then sure I can see how that would work better for you than 72t. But you would still be carrying out a conversion ladder of some form.

Regardless of whether or not you plan on converting a tiny amount of your 401k to Roth or larger chunks, the end result is still better to do it spread out over a few years versus a single large conversion. To start, here's a very brief summary of the federal income tax brackets for 2023 (assuming you do the conversion this year) (taken from 2022-2023 Tax Brackets and Federal Income Tax Rates - NerdWallet):

Tax rate	Taxable income bracket	Tax owed
10%	$0 to $11,000.	10% of taxable income.
12%	$11,001 to $44,725.	$1,100 plus 12% of the amount over $11,000.
22%	$44,726 to $95,375.	$5,147 plus 22% of the amount over $44,725.
24%	$95,376 to $182,100.	$16,290 plus 24% of the amount over $95,375.
32%	$182,101 to $231,250.	$37,104 plus 32% of the amount over $182,100.
35%	$231,251 to $578,125.	$52,832 plus 35% of the amount over $231,250.
37%	$578,126 or more.	$174,238.25 plus 37% of the amount over $578,125.

1) Lowest case. Assuming that after all the deductions, your taxable income is $0, then every dollar (up to $11,000) you convert from your 401k into a Roth will be taxed at 10%. If you convert more than that, then every dollar past $11,000 will be taxed at 12%. And every dollar above $44,725 (until $95,375) would be taxed at 22%. So on and so forth.

2) Middle case. Chances are though, some of your income is still taxable, despite all the deductions. Assuming your AGI (Adjusted Gross Income as reported on your tax return) came out to $11,000, then every dollar (up to $33,725) that you convert will be taxed at the starting point of 12%. And every dollar above $33,725 would be taxed at 22%. So on and so forth.

3) High case. Let's say you had a great year on income, and your AGI came in at $182,100, then every dollar (up to $48,850) you convert in your 401k into a Roth will be taxed at 32%!! And the money above that would be taxed at even higher rates!


So if you did a single large $300,000 conversion it would be like applying scenario 3 to almost half your entire conversion, even if you earned $0 this year. As compared to doing smaller chunks (e.g. $30k this year, $90k next year, $30k the year after, $60k after that, and finally $120k in the last year), which would keep as much of the conversion taxed at the lower brackets as possible.

This is the math that drove me to say that a single large conversion is a non-starter. And if you're retiring with less than $500k in your retirement funds and your cost-of-living can make that work, then congrats! But beware of inflation and medical bills (an HMO plan is easily $1000/month)!

Edit: In case it wasn't clear, Roth conversions are treated as "income" when calculating the taxes owed on it.

 

[mongo]

The big issue for me is that 72t forces me to declare a size payout ahead of time and stick with it for 5 years and there are penalties for not doing so once you start that path.

5 years or 59-1/2, whichever occurs later.
Violating the plan (any additional contributions, increased withdrawl or decreased withdrawl) makes all withdrawals since the start of the plan subject to the 10% penalty plus interest.

 

[juanmedina]

Any one has considered TSLY during retirement? This is a good video about. I think I will get some after I sell my Tesla and own it just for income.

 

[Oil4AsphaultOnly]

Any one has considered TSLY during retirement? This is a good video about. I think I will get some after I sell my Tesla and own it just for income.

Interesting. Thanks for sharing!

 

[dhanson865]

Is a single Roth conversion a ladder? I say no.

Is two years worth of Roth conversions in a row a ladder? I say no.

Is three years worth of Roth conversion in a row a ladder? I'd go by the size, if they are equal or less than your yearly income target sure, that's someone trying to ladder. If they are huge conversions, no I'd say those are just Roth conversions, not a ladder.

Is it worth doing a single large conversion versus two or more smaller conversions? Almost never, like 99.x% of the time it's better to split it across multiple years.

Is it conceivable that only two or three years of Roth conversions could be tax efficient? Yes, absolutely.

Someone above posted a simple tax table as an example why you wouldn't want to do a single mega roth conversion. Which is valid but this thread is called "How much $ to retire and how to fund your lifestyle in retirement" not how your taxes would look if you aren't retired. That tax table didn't consider any of the taxes or subsidies that are retirement specific.

The images below speak to those retirement specific costs/taxes and why you might not want to do roth conversions over enough years to be "laddering".

I can only attach 10 pictures to a message so I'll have to split this out to multiple messages.

.

 

[dhanson865]

Some examples of roth conversions going up into higher tax brackets and still being tax efficient. They may be only a couple of years or they may be long term but none of them are for the purposes of "yearly income".

Note these are multiple scenerios, not a progression of a single scenario.

 

[dhanson865]

OK, so this isn't Rule of 55 but here is another way you can pull money out before 59 1/2 without using a 72t.

Essentially if you put a roth in your account between birth and age 54 1/2 it means that money (even the gains), can be taken out as though it's a contribution. You could have bought shares of TSLA in 2013 in a roth tax deferred account and pulled them out (with all the crazy gains) after the all time high in 2021 even if you were a freshman in college in your 20s and not paid the early withdrawal penalty.

Essentially your age doesn't matter if the money is old money. I saw the 59 1/2 rule so many times and no where did anyone make it clear that the loophole on that is so wide you could drive a cargo freighter through it.

There is more than one 5 year rule for roth accounts and I think this video explains it more clearly than the average article I've seen on roth 5 year rules.

So when I said I could do this, I mean I started investing in my first 401k decades ago. I invested in TSLA in 2013. I have gains in my 401k now that are large. I will be converting some 401k to roth before I turn 54 so I will have access to those gains before I turn 59 1/2.

I just don't know if I'll be at my current employer at the end of this year, or all through next year, or the year after that (and so on) and I don't know the exact price TSLA will be at any of those points.

So I've been planning a worst case scenario if I quit or get fired while TSLA is low, another scenario for if I quit or get fired with TSLA at an all time high, and what ifs for various levels of TSLA stock.

I'm not planning on "roth laddering" to get access to purely roth income at exactly my spending rate for the years 55 to 59 1/2 no matter the price of TSLA stock. I am planning to roth convert for considerations of long term tax benefits.

and I'm happy to know that I can do this and still grab small chunks out of the Roth if needed in a penalty free manner before I'm 59 1/2.

If I had known earlier I might have converted some last year or the year before.

 

[Oil4AsphaultOnly]

So when I said I could do this, I mean I started investing in my first 401k decades ago. I invested in TSLA in 2013. I have gains in my 401k now that are large. I will be converting some 401k to roth before I turn 54 so I will have access to those gains before I turn 59 1/2.

I just don't know if I'll be at my current employer at the end of this year, or all through next year, or the year after that (and so on) and I don't know the exact price TSLA will be at any of those points.

So I've been planning a worst case scenario if I quit or get fired while TSLA is low, another scenario for if I quit or get fired with TSLA at an all time high, and what ifs for various levels of TSLA stock.

I'm not planning on "roth laddering" to get access to purely roth income at exactly my spending rate for the years 55 to 59 1/2 no matter the price of TSLA stock. I am planning to roth convert for considerations of long term tax benefits.

and I'm happy to know that I can do this and still grab small chunks out of the Roth if needed in a penalty free manner before I'm 59 1/2.

Having been there and done exactly that (in 2020), it pretty much depends on your outlook of TSLA. If you think TSLA will definitely be higher in the next few years, then convert as much as you can (I converted just enough to be right below the next tax bracket - at that time ~200 shares) while the stock is still at a "low". This way if you withdraw later on, you'll still have most of your gains in the ROTH growing tax free.

If on the other hand, you think macroeconomics will take TSLA lower, then wait. Especially if you think you might be laid-off or fired, since the reduced income would probably mean a lower tax bracket.

2022 would've been a great time to convert more, but since I already started the 72t distributions, I can no longer make changes to my IRA - one of the drawbacks you were worried about. 2022 taught me that the best laid plans are often torn asunder when met with reality.

 

[ReddyLeaf]

Similar to @Oil4AsphaultOnly, each year I have been converting a small portion of my IRA into a ROTH, just enough to stay below the next tax bracket. I timed it nearly perfectly in 2023, converting on 1/5/23 at the 2nd lowest SP of the year. . Unfortunately, my conversion in 2022 was almost a polar opposite, again completed at the beginning of the year, but near the year’s max SP. I definitely plan to do similar conversions every year, hopefully with better timing due to a few more years of experience watching the SP.

I think I have another 5-10 years of conversions, perhaps $200-$500k total, depending on the SP growth. I haven’t really dug into the calculations, but it just seems logical to do the conversion slowly over a number of years, paying the minimum taxes possible, while still earning/living off of non-IRA money. Of course, if TSLA were to increase another 100x in 10 years, then a full conversion to ROTH, before such an increase, would have been the best option. Unfortunately, we cannot know what future returns will be.

Edit: I have not started a 72t distribution plan.

 

[dhanson865]

"right below the next tax bracket" is vague (and both Oil and Reddy just did it in the last 2 posts), do you mean

* right below the next tax bracket while still employed on employer health care
* right below the next tax bracket while retired but only looking at the simple IRS tax bracket.
* right below the next tax bracket while retired and taking into account ACA (are you still getting any subsidy? Or did you blow past ACA and are paying full price?)
* right below the next tax bracket while retired and taking into account SS (are you getting taxed on your SS income? Are you clearly under or fully past the big hump in SS taxes?)
* right below the next tax bracket while retired and taking into account IRMAA (are you in an IRMAA penalty zone? If so did you max out the IRMAA zone or did you max out the IRS tax bracket, Optimal is to max an IRMAA zone not the IRS tax bracket)

The spot to the next change in cost for the marginal dollar varies widely. If you aren't looking at the combined graph you may not be taking an optimal path.

 

[Oil4AsphaultOnly]

"right below the next tax bracket" is vague (and both Oil and Reddy just did it in the last 2 posts), do you mean

* right below the next tax bracket while still employed on employer health care
* right below the next tax bracket while retired but only looking at the simple IRS tax bracket.
* right below the next tax bracket while retired and taking into account ACA (are you still getting any subsidy? Or did you blow past ACA and are paying full price?)
* right below the next tax bracket while retired and taking into account SS (are you getting taxed on your SS income? Are you clearly under or fully past the big hump in SS taxes?)
* right below the next tax bracket while retired and taking into account IRMAA (are you in an IRMAA penalty zone? If so did you max out the IRMAA zone or did you max out the IRS tax bracket, Optimal is to max an IRMAA zone not the IRS tax bracket)

The spot to the next change in cost for the marginal dollar varies widely. If you aren't looking at the combined graph you may not be taking an optimal path.

All of that is just noise. At the time that you decide to do the conversion, you'll make the decision that's appropriate for THAT point in time. You "could" make your conversion amount based upon what your retirement income will be, but you have ZERO idea what will actually happen then. You have a range of probabilities, all of which you can plan for, but nothing is certain until it has happened (ergo my reference to the "best laid plans").

If you're just looking for context: I did my conversion while still fully employed in 2020, and then after leaving my job in 2021. No conversions done after that, because of a disastrous 2022. If things recover as expected in 2024, then I'll open new IRA's at that time to do back-door roth conversions until I'm 59 1/2. The thinking is that I have enough to live off my distributions now (although barely), so moving as much into the ROTH as I can will give me more flexibility in the later years.

Edit: No SSI, because too young to start withdrawing. Fully paying for ACA converage. Wife's working part-time to cover the shortfalls this year.

 

[ReddyLeaf]

"right below the next tax bracket" is vague (and both Oil and Reddy just did it in the last 2 posts), do you mean

Yes, I was intentionally vague on purpose. Those are all things that each individual should evaluate.

 

[SageBrush]

Fully paying for ACA coverage

I'm curious what you mean here, since I read it as implying a large cost. I've had ACA coverage for years now. I choose the 'bronze' plan to reduce my premium to ~ $0, and then pay deductibles and other medical out of pocket expenses with pre-tax dollars from an HSA. This has worked out very well for me money wise, although admittedly it is in part because my wife and I don't have serious genetic disorders and we have a healthy lifestyle. The only bump in the road I've encountered so far is that the HSA ACA plans available to me are expensive, so I have not been able to contribute to my HSA the last decade or so.

----

A bit of pontificating, unrelated to my question above: a healthy lifestyle unlocks early retirement, and also makes financial planning vastly easier. All this talk about tax mitigation strategies is reasonable, but I sure hope people realize that the elephant in the room is staying healthy for most of the retirement years.

 

[tivoboy]

I'm curious what you mean here, since I read it as implying a large cost. I've had ACA coverage for years now. I choose the 'bronze' plan to reduce my premium to ~ $0, and then pay deductibles and other medical out of pocket expenses with pre-tax dollars from an HSA. This has worked out very well for me money wise, although admittedly it is in part because my wife and I don't have serious genetic disorders and we have a healthy lifestyle. The only bump in the road I've encountered so far is that the HSA ACA plans available to me are expensive, so I have not been able to contribute to my HSA the last decade or so.

----

A bit of pontificating, unrelated to my question above: a healthy lifestyle unlocks early retirement, and also makes financial planning vastly easier. All this talk about tax mitigation strategies is reasonable, but I sure hope people realize that the elephant in the room is staying healthy for most of the retirement years.

I think their comment above was about if one is below 400% of the NPL, then there are SUBSIDIES to the ACA monthly premiums that one can collect - essentially not pay to the ACA insurance provider. It gets trued up on an annual basis with the following year tax filings. But yeah, for some ppl they can end up paying less than ~ 25% of the monthly premium, and in SOME cases NONE of the premium for an individual or family ACA plan.

Just taking a quick swag at ACA compliant plans, here in 94301, a couple with ~ 85K in income (sadly, would be considered poor’ ish) would get about an 80% subsidy, paying about $500 a month, with $1550 in subsidies. There are also many ways to lower out of pocket costs, paying no co-pays, or co-insurance amounts but that is more dependent on the care provider and not the insurance coverage.

 

[Oil4AsphaultOnly]

I'm curious what you mean here, since I read it as implying a large cost. I've had ACA coverage for years now. I choose the 'bronze' plan to reduce my premium to ~ $0, and then pay deductibles and other medical out of pocket expenses with pre-tax dollars from an HSA. This has worked out very well for me money wise, although admittedly it is in part because my wife and I don't have serious genetic disorders and we have a healthy lifestyle. The only bump in the road I've encountered so far is that the HSA ACA plans available to me are expensive, so I have not been able to contribute to my HSA the last decade or so.

----

A bit of pontificating, unrelated to my question above: a healthy lifestyle unlocks early retirement, and also makes financial planning vastly easier. All this talk about tax mitigation strategies is reasonable, but I sure hope people realize that the elephant in the room is staying healthy for most of the retirement years.

As tivoboy noted, I get no subsidy. $1300/month (started off at $1100 last year) for an HMO with deductibles. Am healthy, so really just need it for the emergency room coverage.

Edit: I guess I'm NOT getting ACA! But I got the plan from starting at the ACA site.

 

[SageBrush]

I think their comment above was about if one is below 400% of the NPL, then there are SUBSIDIES to the ACA monthly premiums that one can collect - essentially not pay to the ACA insurance provider.

ACA is capped at 8.5% of mAGI. For now; as the rules are now, the 400% FPL subsidy cliff will be re-instated from the 2026 tax year. 2024 and 2025 do not have an income cliff.
The 8.5% of income cost is based on the purchase of the second lowest cost silver (SLCSP) plan. If a bronze plan is selected then most if not all of the premium is paid by the government.

 

[SageBrush]

Edit: I guess I'm NOT getting ACA! But I got the plan from starting at the ACA site.

I wonder if you chose that plan back when a HH income put you over 400% of FPL and made you ineligible for the ACA subsidy, leading to purchase of a plan outside of the healthcare exchange. If that was the case and your annual renewal since has been semi-automatic, you may have not realized that income limits are not in play anymore (until it changes.)

If the 400% of FPL limit for subsidy becomes a thing again in the future, you may wish to consider alternating higher and lower income years if it lets you have an ACA plan during the lower income years.

 

[Oil4AsphaultOnly]

I wonder if you chose that plan back when a HH income put you over 400% of FPL and made you ineligible for the ACA subsidy, leading to purchase of a plan outside of the healthcare exchange. If that was the case and your annual renewal since has been semi-automatic, you may have not realized that income limits are not in play anymore (until it changes.)

If the 400% of FPL limit for subsidy becomes a thing again in the future, you may wish to consider alternating higher and lower income years if it lets you have an ACA plan during the lower income years.

Thanks, I didn't think to re-apply.