I'm 60 and have been retired the last 2 years with a pension. $2 million in traditional 401k. Exempt from early withdrawal penalties. Have already been in the 24% marginal tax bracket the last 2 years. Trying to decide whether and how much to convert to Roth over the next few years. At this point, doesn't seem like I'll save any significant tax money by converting. But maybe I'm missing something.
Here's a couple of hypotheticals:
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73 year old with $5 million today: Let's pretend I turned 73 in 2025 and will have to make my first RMD in 2026 and it's roughly 4 percent. If I currently have $5 million in 401k, this comes out to only $200,000 rmd this first year (but RMD rate will rise every year of course). Adding in my pension and SS payments, I would still be well below the 32% marginal tax bracket of AGI of greater than $403,000.
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73 year old with $10 million today: But if I were 73 with $10 million today, then my first RMD would be about $400,000. Adding in my pension and SS, this would push me into the 32% marginal fed tax bracket. So in this situation, I clearly would have been better off converting a bunch of my 401k to Roth so that my traditional 401k would be substantiall lower at age 73. I get this.
I'm having difficulty properly articulating my question, so please bear with me. But what I'm trying to figure out is what my target traditional 401k holdings should be in 15 years to minimize the income taxes associated with RMD when I'm 75 in 15 years. I currently plan to withdraw roughly about $150k/year from my 401k for the next few years, and expect to have under $5 million (as an example) in 15 years (the first year I need to pay RMD). If I do end up having "only" $5 million in traditional 401k, it looks to me like there is zero need to do a roth conversion now to reduce that $5 million.
So is there some guideline I can follow to calculate a traditional 401k dollar amount at which there's no federal income tax advantage in doing a roth conversion? I know it also depends on my other income sources at age 75+.
Roth conversion to minimize RMD: when is it pointless?
byu/RandomQueefs inpersonalfinance
Posted by RandomQueefs
1 Comment
If your pension sets your floor at the 24% bracket, then at the very least each year you should convert enough to Roth to fill out the 24% bracket. Best case that money will be taxed at 24% in the future (barring tax bracket changes), so locking in 24% now gives you upside.
Whether you should convert any dollars in the 32% bracket becomes a lot more complicated to calculate. That becomes a multivariate analysis of how much you have, projected growth, projected health/lifespan, and more broad estate planning. It would probably be worth meeting with an estate planning lawyer who can help you with that analysis and get all of your end of life documentation put into place.