I should point out, again, that the titles of these blogs are Financial Myths.  Especially this one.
Conversions from your pre-tax retirement accounts such as:

  • Traditional IRA
  • 401k
  • 403b
  • TSA. etc.

must be calculated every year to be sure you don’t bump yourself up into the next tax bracket . . . except sometimes.  For example, raising your Federal marginal tax rate from 10 to 12% isn’t a big deal, normally.  Unless you’re on Social Security and that causes your Social SEcurity to become taxable.  At higher income levels it’s not a disaster if the Roth conversion bumps you from 22% to 24%, the upper limit of which is $164,925 for single filers, $329,850 for joint filers.

But assuming Roth conversions make tax sense, what do you do with the money?  Where do you invest it?  How?  In many cases the answers are diametrically opposed in terms of investment strategy.  Let’s focus on two examples:

**Background #1:  You don’t really need the money in your $500,000 IRA that you rolled out of your 401k when you quit work at age 60.  But you know it is a disaster to pass pre-tax retirement accounts to your kids.  Until age 70 you plan to live off cash, capital gains and rental income.  When you start Social Security at 70 you plan to stop taking capital gains in order to reduce its taxation.  (You’re delaying Social Security until 70 because when you took the https://www.livingto100.com/ calculator it indicated your mortality age at 94, well past the breakeven age of 83)
Your Roth Conversion Strategy
a. Convert as much as you can each year up to the top of your 24% bracket.  Why?  Because taxes are going up. 
b. This is also your gift to your kids, taking care of the taxes for them.
c. Invest very aggressively for the long term.  This will easily recoup the taxes you’ve paid.
Now you’ll have a spending cushion that you can tap if you need it without affecting your Social Security taxation.  And when the kids inherit, they’ll pay no tax on the Roth funds.

**Background #2:  You’ve been very conservative in savings and budgeting and if you can just meet your budget throughout retirement you’ll be OK.  You need every penny, can’t afford losses, and want the assurance of adequate, guaranteed lifetime cash flow.  You quit work at 60 because it was killing you.  You have a nice pension which, right now, is enough to meet your budget.  But it has no inflation protection.  You still have great longevity.  You plan to spend down your excess cash savings to bridge the gap between age 67-70.
Your Roth Conversion Strategy-
a. Convert just enough each year to stay in the 12% bracket.
b. Over the next ten years put it into a Roth IRA income annuity that accepts premiums after the first year. 
c. Once your Social Security kicks in you will need to reduce or stop the conversions to keep Social Security totally or at least partially tax free.
d. Turn on the annuity income in 15-20 years, which will be tax-free and guaranteed to last your lifetime.  It will also have no effect on taxation of your Social Security benefits.  And it will be welcome step-up in income for your later years.  In the meantime your principal and interest credits are protected.

Naturally, all the rules could change in the ensuing years.  Or even this year.  And there are a virtually infinite number of “Backgrounds” we could consider.  I like these because they’re based on real people and result in vastly different strategies.  Disclaimer:  Even if one of these examples mirrors your situation exactly I haven’t detailed every thing you need to consider because I risk making this blog a sleep aid.  It is well worth the time and expense to consult with your adviser to be sure you make no mistakes.

Your Constructive Comments are Welcome!

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