Best method to convert 457 to ROTH after retirement
I will be retiring in about a year. My retirement election will include a monthly check of about $5000 and a lump.
I have money in deferred compensation, a 457 plan (Im a career firefighter) and have a balance of ~$150,000. I plan on adding the lump sum from my retirement package of about ~$250,000 to the 457 account giving me a total of ~$400,000 in my 457.
My retirement check of ~$5000/month will put my income at ~$60,000/year. I thought in the first 2-3 years I would withdraw ~$50,000/year from my 457 and use much of that cash to pay the taxes on converting the remaining money to a ROTH over the course of about 5 years.
Does this make sense?
Considering Im 57 and am of the opinion that taxes have nowhere but up to go, and the fact that I would prefer to leave an inheritance that is tax free I feel compelled to convert to a ROTH.
I suppose what I need is a financial counselor but have thus far avoided the issue as I am inherently cautious with my money and have no good recommendations of specific counselors and dont really want to just guess and hope that I find the advice I need. Hence, my joining this forum.
Any thought would be appreciated
Permalink Submitted by Alan - IRA critic on Mon, 2017-07-10 16:46
The conversion advantage exists when the tax rate you pay for the conversion is less than what you expect your marginal rate to be in retirement. The closer you are to retirement, the more likely you will be able to make a more accurate projection of your retirement rate. When you are young, that is more of a crap shoot. If your conversion is taxed at a higher rate than you would have paid in retirement had you not converted, then the conversion is not beneficial unless you are doing it because your beneficiaries will be in a higher bracket than you are and you are doing the conversion primarily for their benefit. The gray area is when the rates are about the same and in your case you might want to convert up to the point that your tax rate on the conversion becomes clearly higher than what you expect it to be in retirement if you did not convert. There are also some less important factors in converting such as whether you are have good long term care insurance or not. Because the largest nominal tax rate increase is when the 15% rate goes to 25%, many people find it convenient to convert up to the top of their 15% bracket and avoid paying 25%. Leaving a Roth to your beneficiaries only helps them if their tax rate is expected to be higher than yours. If they are low income, then they are better served to inherit more (due to the taxes you did NOT pay to convert) and then pay at their lower rate. Non spouse beneficiaries must take RMDs regardless of the IRA type.
Permalink Submitted by D Rockwell on Mon, 2017-07-10 18:09
Incredibly helpful! Maybe the most helpful reply to a financial question I’ve ever received.Thanks so much for the quick concise reply. Food for thought for sure