Retire at 50, 45 Now… questions about Roth Conversions
Greetings,
This is my first post.
I am 45YO and would like to retire by 50 and lead a much more modest lifestyle that includes traveling the US, volunteering and getting some peace that is outside the rat race I have currently been apart of for the 30 years.
Since I ‘suspect’ my tax rate will be much lower after 50YO, does it make sense to start converting my traditional IRA’s to Roth? I get that I will take a hit this year (while I am in a high tax bracket) – but my IRA’s will grow tax free from that point forward. However, my taxe rate ‘should’ be much lower when I plan on taking distributions – I am aiming to start taking them at age 59 1/2/.
I was hoping there were some calculators that could generate some plots and are interactive so I can do some what-if scenarios.
Any help would be appreciated.
Thanks,
fat-angus
Permalink Submitted by Alan - IRA critic on Sun, 2017-01-15 03:02
Angus, you should convert if you expect your tax rate in retirement, even at age 50 to be higher than the rate you will pay for the conversion. Yours will be far lower, therefore you should not convert while you are still working. You should make deductible TIRA contributions if your income lets you, and contribute to pre tax retirement plans at work. Perhaps after you retire you can convert with little or no taxes. At that time conversions at a tax rate of 0 or 10% or perhaps even at 15% are more desirable since all gains in the Roth will never be taxable (after 59.5) and there will be no RMDs required. How much you would convert at that time would depend on how much you have saved up in pre tax retirement accounts or taxable accounts. If all the variables work out, this suggest you would be doing small conversions every year, only up to the amount that makes sense based on the tax rate you are paying vs what you expect down the road. You would not need a calculator until after you retire, to help you determine your future estimated marginal rates, factoring in such things as when you plan to file for SS etc. One of the popular calculators is i orp, although I hear that it tends to be biased toward converting. Of course, if you are married, your spouse’s income must be factored in as that could make a huge difference.
Permalink Submitted by Angus Repper on Sun, 2017-01-15 12:51
Thanks for the thoughtful reply. I can no longer (presently) contribute to a tax deferred IRA because of my income limits and don’t plan on getting married… But of course, you never know. If I ever do, I will make sure the arrangements of the marriage are conducive to my retirement plan. Ha! Everything you said makes perfect sense. I will look at the calculator you’ve recommended in hopes of being able to quantify the different scenarios. Thanks again. Angus
Permalink Submitted by Steve Hagedorn on Tue, 2017-01-24 15:45
If between 50 – 65 years of age you plan on owning a high Deductible insurance plan that is HSA compliant, consider funding your HSA with some of your TIRA:
This, in a sense, is a tax free conversion of TIRA dollars into HSA dollars.
Permalink Submitted by David Mertz on Tue, 2017-01-24 18:03
Moving money from the TIRA to the HSA generally makes sense only if there is no other money available to fund the HSA contribution.
Permalink Submitted by Alan - IRA critic on Tue, 2017-01-24 18:08
Of course, it is preferable to fund the HSA with new money if you have it. If a TIRA distribution is used, the taxes on the IRA distribution will offset the benefit of the HSA deduction. Each option will have tax free HSA distributions for qualified expenses.