Posted: 6/1/2026 10:17:57 AM EDT
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We have roughly 1/2 of our total savings in a taxable account and that fraction will slowly increase until I retire. Approximately 3/4 of that taxable cash is in a few index funds with significant unrealized long term gains, the other 1/4 is cash or treasury bills. Intent is to retire within a few years in my early 50s. This cash is plenty to get us past 60 to access our roth/pretax savings. General plan was to take long term gains (at 0%) and do roth conversions (filling up the 12% bracket) of my pretax money after I retire. I've come to realize that I won't be able to take all the gains at 0% and convert everything within the 12% bracket before irmaa/SS have to be factored in. In the 22% bracket now and any capital gains are at 15%. My thinking is that the capital gains difference between 0 and 15 is greater than the bracket jump from 12 to 22, so it would be best to to take capital gains at zero and do conversions into the 22% bracket. Filling up the 22% bracket with conversions will likely get everything converted before the old person issues (irmaa, SS, etc) become factor. The question I have is: If some roth conversions will be done at 22% in the future, why not fill up the 22% bracket now with roth conversions (or change my 401k contributions from pretax to roth which is effectively the same thing)? When you consider the current historically low income tax rates this doesn't seem like a crazy idea if 22% is your lowest possible tax rate. |
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I am hardly an expert but fill the Roth all the way up now. Early in is best in! I wasn’t that deep in to my own stuff and should have set up a Roth much earlier. I in fact only got in to Roth when the work plan finally added it to the existing 457b plan. I should have been on that 20 years earlier. At least I was hammering the regular pretax and saving, just not the optimal place. Now I have to do periodic rollovers as a single filer. It’s almost a wash as a single person without dependents. Now if you’re married you would be well advised to move stuff from pretax to after tax to later avoid the widow’s penalty. If one of you die early the survivor will be stuck in the single person’s high brackets like myself. Huge difference at that point. Single filers imho are getting screwed hard. Roth from current income now has more growth time than Roth done later. You’re effectively rebalancing your “portfolio percentages” by another method. I retired early and last year got a good timing to rollover at a devalued rate during the tariff flap. I figure that probably saved me half that 22% with the timing. I need another one of those to fill the bracket this year. If one doesn’t happen I’ll do one after the elections to see what possible disaster we get off of them. |
The only hyphenated names I like are cartridge names......30-06, 30-40, 38-55 etc.
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Originally Posted By Procat: All unknown and unknowable variables aside I’d rather pay 22% now and get more time to grow tax free than grow more and pay 22% later. If I change my 401k contributions to roth we'll be just inside the 22% bracket which is what I'm considering doing. But the unknown is just that... A recession or even a modest market correction could flip the tables and let me convert everything at 12%. I'm pretty set on holding the long term gains until I can take them at 0% since they could all be taken in just a couple years and if I get struck by lightning they will get basis stepped up for the family. |
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You need to account for ordering rules: The IRS would look at your Roth conversion as income. It would stack any Capital gains on top of that. So if you are maxing out the 12% bracket with Roth conversions, you have NO 0% capital gains bracket. For this year 0% capital gains ends at $98,900 (MFJ). However the 12% is topped at $100,800. So when you convert the $100,800 to fill the top of the 12% bracket, everything on top of that would put your capital gains in the 15%. Of course, you have standard deductions etc, but this is the basics. You haven't provided enough info to tell you if Roth conversions are valuable or not. What sort of pre-tax balance are you looking at when you retire? Can you spend that down from the date you retire at 12 - 22% and achieve the same thing as Roth conversions (assuming you are using rule of 55, or high enough balance that a 72T could get you the $$)? There is a use case for doing Roth conversions while still working. I converted over $750,000 in my 40s and until I was 51, maxing out the top of the 24% bracket each year and contributing only to Roth 401K/IRA (the company match is still pre-tax). One reason is I was building a roth conversion ladder that would allow me to access the $$ before 59.5. Other reasons was I was looking to eliminate RMD's, IRMAA, social security tax torpedo, and especially the widow tax trap. Also, don't forget that you can use things like donor advised funds to get both a tax deduction, and to raise your basis on your brokerage account. You can also use things like QCD on pre-tax IRA's to offset RMD's and IRMAA challenges. I've become a big fan of the Vanguard BETR calculations, especially if you are paying out of cash or a tax inefficient account like brokerage. Right now, I'm running 75% of my entire portfolio as Roth and it will be significantly higher by the time I retire in 4 years. Because Roth is best used for high growth, I'm currently getting 99% 1 year returns in the current market and 47% YTD, compared to YTD 11% S&P. ETA: If you do consider Roth conversions, you also need to consider that you will be required to pay quarterly estimated taxes, or up the taxes taken out of your paycheck to cover the taxes. Even if you do all the conversions in q4, you still need to make quarterly estimated taxes by 1/15. You can't just pay it when you file your taxes for the year without penalties. |
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Originally Posted By Joe_Blacke: You need to account for ordering rules: You haven't provided enough info to tell you if Roth conversions are valuable or not. What sort of pre-tax balance are you looking at when you retire? Can you spend that down from the date you retire at 12 - 22% and achieve the same thing as Roth conversions (assuming you are using rule of 55, or high enough balance that a 72T could get you the $$)? There is a use case for doing Roth conversions while still working. I've become a big fan of the Vanguard BETR calculations, especially if you are paying out of cash or a tax inefficient account like brokerage. I would plan to max the conversion or capital gains for a given year to avoid this. No need to mix the two in a given year. A decade of tax free pay without matching is why I didn’t contribute pretax (why lock the money away until 60?). I also roth converted the wife’s pretax Ira over a couple of those tax free years. Pretax balance is on the order of $250k ish because I’ve been maxing it for 3 years in this job. If I work another 2-3 years and it then sits for a decade and doubles it could be quite large by the time we’re in our 60s. I agree, but until now I haven’t ever been concerned about it! I’ve seen the BETR making the rounds on investing medias…. They’re sufficiently vague about the specifics though. And given the major unknowns of medium-term returns (a decade or so) and who knows what tax rate changes it’s not a clear yes/no answer whether Roth converting while working makes sense. |
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What are you going to live off of the years when you do Roth conversions? You still need money to spend, and you said you are not touching capital gains the years you do Roth conversions. 0% Capital gains is still sub 100K and that might be hard to live off of for 2 years. What is the pre-tax balance you expect to hit when you start to withdrawl, and at what age? The "rule of 72" gives you a rough guide to how long it takes an account to double. You just divide 72 by your expected rate of return, so if you are getting 7% it would take roughly 11 years for the balance to double. If you think it is going to be a problem, then don't make the problem worse by adding more pre-tax $$ into the account. Like I said there isn't enough information to make a decision. Don't know your age, your spouse age, age when you retire, age you expect to touch your pre-tax balance, social security filling, etc. For me, I'll be at 1,000,000 (pre-tax) at least when I retire at 56 in 4 years. My wife is older than me, so I have to calculate based on her age for Roth conversions (the age she turns 63 will affect her IRMAA when she is 65). I started tackling this problem early. Otherwise I'd have $6,000,000+ sitting in pre tax when I retired. I've already built my withdrawal plan, my tax plan, my income plan, my investment plan. I'll avoid IRMAA, RMD's, widow tax trap and social security tax torpedo. BETR only tells you at what tax rate it makes sense to convert. Meaning if you are converting below that rate, it is a good idea. For me, 24% now was far better than waiting. |
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Originally Posted By Joe_Blacke: What are you going to live off of the years when you do Roth conversions? You still need money to spend, and you said you are not touching capital gains the years you do Roth conversions. 0% Capital gains is still sub 100K and that might be hard to live off of for 2 years. What is the pre-tax balance you expect to hit when you start to withdrawl, and at what age? The "rule of 72" gives you a rough guide to how long it takes an account to double. You just divide 72 by your expected rate of return, so if you are getting 7% it would take roughly 11 years for the balance to double. If you think it is going to be a problem, then don't make the problem worse by adding more pre-tax $$ into the account. Some of the taxable cash is in cash and treasuries, that would last a few years to get started and I’d alternate years doing conversions or taking long term gains as needed. I thought I said it above but apparently didn’t, my military retirement pay is $45k so that is a big bite out of the conversion/profits I can do each year at 12 or 0 percent. As a SWAG, maybe retire at 53 with pretax is around $400k and $200k of taxable long term gains to take. So to do it all by 62 for Irmaa means 9 years, or almost $70k per year of conversion/profit taking. Stack that $70k on my $45k retirement pay and it’s in the neighborhood of the 12/0 percent brackets. I changed my 401k from 100% pretax to 50% Roth. Will do a 2026 tax estimate and then probably go with 80-100% Roth. |
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Gotcha. Yes, having cash on hand for early retirement is very important. That is one thing I have consistently noticed when looking at optimizing plans is cash is one thing that gives plans flexibility. So with a guaranteed $45K per year, that wipes out your standard deduction and still gives you a baseline income of $13K or so. Retiring at 53, you don't have access to 401K funds with the rule of 55. You can move them into an IRA and use 72T to have access to the funds. Using that, though, requires you do it until you are 59.5. Your $400k pretax will grow over 6.5 years until you can touch it normally (assuming you don't do the 72t). That is not a horrible amount. A couple years of conversions after you retire should easily keep you under IRMAA once you hit 63. The question is finding out how much of it to convert. Here is one issue. Since you are under 59.5, if you move this pre-tax to a rollover IRA, and want to convert to Roth, you have to have money outside of this to pay the tax. Otherwise if you are going to try and pay the tax out of the converted $$, you will be hit with an early withdrawal penalty. Here is the good news. Out of all the problems to have, trying to find the most tax efficient way to access your money is the best problem to have. I'll take it over not having enough money every day. If you are still working, and have enough spare cash to pay taxes, it could very well be worthwhile to convert for a couple years at 22%. That gives you even more flexibility as these conversions are accessible to you after 5 years. So you can do a couple years of roth conversions and in 5 and 6 years you have Roth $$ you can access tax and penalty free. That is before you are 59.5. So in this example, we convert say $75K in 2026 and 2027. That is going to lower your ending pre-tax balance far below the $150K you take out due to compounding. Once you retire, you don't have to address the pre-tax money right away, but can spend down your cap gains up to the top of the 0% bracket. A couple years after you retire, you now have free access to the first year's conversions as well. By the time you hit 59.5, your pre-tax balance should be easily manageable via standard withdrawals that IRMAA won't be an issue for you. |
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Originally Posted By Joe_Blacke: If you are still working, and have enough spare cash to pay taxes, it could very well be worthwhile to convert for a couple years at 22%. So in this example, we convert say $75K in 2026 and 2027. That is going to lower your ending pre-tax balance far below the $150K you take out due to compounding. Once you retire, you don't have to address the pre-tax money right away, but can spend down your cap gains up to the top of the 0% bracket. A couple years after you retire, you now have free access to the first year's conversions as well. By the time you hit 59.5, your pre-tax balance should be easily manageable via standard withdrawals that IRMAA won't be an issue for you. I came to this realization (that maybe I can’t get everything at 12 or 0 percent) this week because I had to change my 401k contributions to partially Roth since catch up now has to be Roth. So it seems that my decision is to pay 22% now or 22% later. I think I would choose now because that leaves the most room for zero capital gains taking and taxes are very low (so more likely to increase than decrease in the future). |
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If you convert some of it now, you probably don't need to convert much or any after you retire (assuming you stop contributing to pre-tax). That leaves you the entire time from 53 to 59.5 to get those free capital gains. Not a bad choice. Let's say you get $50K per year of capital gains out tax free over those 6 years. That is $45,000 in capital gains taxes you didn't have to pay over that timeframe assuming you were going to have to pay 15% otherwise. So even if you paid $32,000 ($75,000 converted at 22% over 2 years) in taxes on your conversions you still come out ahead $13,000 in taxes. If you wait until you retire in 3 years, you probably only need to convert for 2-3 years at 12% to keep that pre-tax balance from becoming a problem by the time you are 59.5. Not a bad choice. Especially if you can time the down market years and do in kind conversions to achieve higher effectiveness in the conversions. For easy math, lets assume 3 years of $100K conversions at 12%. That is $36K in income taxes plus loosing out on 3 years of free capital gains. This means you paid $2K more in taxes on your conversions by waiting, and had an opportunity cost of $22,500 of capital gains taxes (50K x .15 x3) you don't get on those 3 years where you did conversions. We know rates today. Rates in 3 years and until you hit 59.5 are a guess. They could remain the same, or we can have a different president/congress that wants to raise rates. That is some phycological comfort to converting today. Your use case isn't as extreme as some, which makes it harder to choose. Either option is a good choice, but the better choice is only a minor improvement over the other. If it were me, I'd choose to make some smallish conversions today, assuming the cash balance still remains at a level I'm comfortable with. I just prefer to manage these problems early when I have most control. |
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I wish I didn't wait until age 42 to stop maxing 401k at the expense of funding my Roth IRA. I've got 401k set to growth funds and Roth IRA in VTI. Also started brokerage in 100% VTI. Only have ~$75k in IRA mostly gains from contributions made nearly 20 years ago. |
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For followup in case it helps anybody - for the time being I changed my 401k contributions to about 60% roth and 40% pretax. (was 100% pretax) It seems easier than converting and also resolves the "catch up has to be roth" issue that I just became aware of. As a side benefit it's getting money into my roth without having to worry about staying under the roth ira contribution limit every year. Come December I'll look at converting some of my rollover ira based on where my income for the year will land. |
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Originally Posted By Morgan321: For followup in case it helps anybody - for the time being I changed my 401k contributions to about 60% roth and 40% pretax. (was 100% pretax) It seems easier than converting and also resolves the "catch up has to be roth" issue that I just became aware of. As a side benefit it's getting money into my roth without having to worry about staying under the roth ira contribution limit every year. Come December I'll look at converting some of my rollover ira based on where my income for the year will land. It all comes down to your tax bracket now, vs your tax bracket while in early/full retirement with regard to Roth now vs conversions later. I am deep into the 24% bracket today. In retirement, I will be in the 12% bracket during early retirement, and 22% bracket later. If I end up being able to convert a lot in the 12% bracket, I win. If I end up in the 22% bracket, it is largely a wash. There are no right answers. But I am still 100% pretax contributions for 401k elective deferral. But I also contribute my $8000 catchup as Roth (as now required) and do $35k in mega backdoor Roth, and $8600 in Backdoor Roth IRA contributions. So that's around $50k in Roth contribution, and ~$25k in pretax contributions (plus pre-tax employer match). For many people, the results will be the same, unless they get forced into HUGE RMD's. That said, if you have $1 million in pretax 401k, your starting RMD is only $40k and your 80 year old is only $50k. If you made it to 90 years old, its only $82k. That's not enough to upset the apple cart, to me. If your planned balance at RMD age is 2 million or more, that's where I'd start looking more seriously at some planning. But no calculation will be perfect, because of the unknowns. |
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Originally Posted By FALARAK: There are no right answers. …..$8600 in Backdoor Roth IRA contributions. Another benefit of a sizeable conversion now would be that I could get rid of my rollover ira and then I’d be able to do backdoor roth. I’ve also considered moving my rollover ira into my 401k for the same reason but without the tax hit. Could also do a combination the two…. |
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Originally Posted By Morgan321: maybe not a right answer, but there is a best answer! I just need to be able to see the future to know that answer…. Another benefit of a sizeable conversion now would be that I could get rid of my rollover ira and then I’d be able to do backdoor roth. I’ve also considered moving my rollover ira into my 401k for the same reason but without the tax hit. Could also do a combination the two…. Originally Posted By Morgan321: Originally Posted By FALARAK: There are no right answers. …..$8600 in Backdoor Roth IRA contributions. Another benefit of a sizeable conversion now would be that I could get rid of my rollover ira and then I’d be able to do backdoor roth. I’ve also considered moving my rollover ira into my 401k for the same reason but without the tax hit. Could also do a combination the two…. I rolled my pre-tax IRA into my 401k to remove the pro-rata rule issue with BackDoor Roth non-deductible contribution-conversions. Zero regrets. |