My husband is 69 and retired. I am 59 and plan to retire in 2 years. Both of us have pensions. Our financial advisor analyzed our future income and retirement portfolio and determined it made sense for us to have roth conversions. We were told we should pay the taxes due out of pocket instead of withheld taxes from the conversions. However, paying taxes out of pocket will entirely drain our cash emergency fund. If we don’t do roth conversions, we will be pushed to the 34% tax brackets 5 years after we both retired. Shoild we go ahead. And do roth conversions and withhold taxes from the conversion amount? Also, a wealth management company quoted $6000 to help us calculate the roth conversion amount and tax planning services. Is it a fair quote? Thank you for your help!
You are getting mis-led by the taxable nature of each account you have. Don’t think of those account boundaries as hard boundaries (Roth, IRA, 401(k), HSA, taxable bank, taxable brokerage). It’s all just your stuff, and money is the most fungible thing around. Tax rules are dotted lines.
Who told you you couldn’t keep your cash emergency fund in your IRAs? It can be in taxable or IRA.
Now, having said that, I would always keep some cash in taxable accounts, just because if you have to make an emergency car or roof replacement or have an emergency bill late in the year after you’ve already done your Roth conversions and other taxable IRA distrubtions, you don’t want that emergency IRA pull to pop you into another tax bracket or toss you off of another IRMAA cliff. As to that amount I can’t tell you how big it should be, it just depends on your risk exposure.
How I plan to do it… I set my taxable cash limit at (shall go no lower than) $200k, not including any planned special projects (I’m going to set aside more for house renovation and a new car).
But I will spend down my taxable cash to those limits, and then I will do a combination of taxable IRA distribution and Roth conversion such that I can feed myself and also do some Roth conversion.
In practice, I will feed myself from IRA from January-November, and then around December 1 of any given year decide how much room I have left for conversions to fill up whatever tax bracket I want and/or stay away from whatever IRMAA cliff I want.
But I think your advisor could be correct, if you’re quite affluent with tax-deferred assets in the millions, and nice pensions, then you have to shed that tax deferred money. Somehow. Especially before one of you pre-deceases the other, the survivor will get absolutely shafted by tax.
Another thing is, if you’re eligible for Social Security, and if you’re in good health, don’t claim yours until age 70. If your husband is already taking his, I believe we could suspend and resume at 70. That will give you more headroom for conversions, and it’s a better bet for longevity risk.
Thank you for your feedback.
Yes, you can do that:
Is that some hourly rate total or a percentage of the account value? I bet the Bogleheads forum could do it for free:
Since it’s wealthy people with this problem, advisors really try to soak them / us.
I managed to get a reasonable estimate for free by experimenting with the distribution and Roth conversion options in the Flexible Retirement Planner, which is freeware. But the author accepts donations.
It is some hourly rate total for the first annual meaningful advisement plan for tax efficiency planning and roth conversion calculation. However, I decided to use the Boldin aka formerly NewRetirement Planner Plus. The free version does not have the detailed roth conversion explorer based on different scenario. The Planner plus is $120 with a 14 days free trial. Since I already have a spreadsheet with all the fiancials stuff, it is a matter of plugging in the numbers and run the projections. Thet also offer 50 mins coaching sessions with a CFP for $250 to go over the numbers entered in the planner and answers some questions about the projections. Sure beat $6000!
Here is what I managed to do with the freeware Flexible Retirement Planner. By the end of my 74th year, my tax-deferred portfolio is exhausted. From then on, it’s all Roth and HSA, except a little pulse of taxable money comes back at age 89 when I sell my house (honestly, I’ll probably vacate it sooner). Given the huge uncertainties anyway (tax policy, portfolio returns, my spouse’s lifespan, my lifespan) it gives a good enough answer. I will run it annually just to keep the boat vectored in the right direction. Hey, it sure beats $6,000 for one plan!!!
I know it looks like I’m not spending enough, but the worst 10% of investment cases have me drawing the portfolio down to $200,000 by the end of my 94th year, should God grace me with that time on earth. That’s close enough for me. I’ll have a QLAC annuity and will take Social Security at age 70 to maximize the benefit, so even if I do run it to zero, I will be OK. My kids are well-off, I’m sure they will help.
Thanks for the free plan tool link. I may run and compare some numbers between the 2 tools.
If you make a contribution the author Jim Richmond, info@flexibleretirementplanner.com he will send you a perpetual license key and the watermarks will go away… I always tip him every year a few $. He saves me so much money… I owe him something.
The Flexible Retirement Planner results line up pretty well with Fidelity. I use both and take the more conservative one, which is Fidelity, but fidelity doesn’t do Roth conversion.
Jim is out on the Support Forum for the Software, so if you have questions, ask. Or you can ask me here. There is a learning curve!
I would double-check the claim that you’ll be pushed into a 34% bracket. If your pensions and SS cover some or most of your monthly spending, then you can leave your investment portfolio alone and just take required minimum distributions. Yes, you’ll pay tax and yes, it may affect Medicare and other parts of your financial life. But if you think about it, you’ve been not paying taxes on your investments for many years and eventually the bill will come due. Maybe the tax brackets will have changed by then or there will be different formulas.
I’m afraid that a Roth conversion will take away a huge chunk of your cash reserves all at once. Then when your roof leaks, car breaks down, you get unexpected medical bills, etc. you may wish you had kept your funds instead of turning them over to the government years before you had to.
Thanks for your feedback. Yes, will double check before converting large amount. Like you said, will have to pay tax sooner or later.
You’re not powerless… if you run the AARP RMD Calculator, you can get a rough idea of what tax and IRMAA brackets you might end up in. For the hypothetical rate of return, put in your expected rate of return minus the inflation rate… I’d use 2.5% or 3% for inflation, so if portfolio thought to return 8%, then hypothetical rate of return 5%-5.5%. That will model RMDs assuming you make no withdrawls (you’re living off of Social Security and pension and taxable investments).
Once you’ve inflation adjusted the returns you can use current tax tables, because those also inflation adjust. So everything will match.
If you’re going to be pulling from the tax-deferred, the Flexible Retirement Planner is what you need.
As for me, in 2026 I’m going to pick up the pace of conversion / consumption of tax deferred but stop at the top of the 12% bracket (I hope that bracket survives the 2025 Congressional action), which is not far below the first IRMAA cliff, and about at the eligibility limit of the Leukemia and Lymphoma Society co-pay assistance program, a program my wife is going to try to get a grant from. So it’s a sweet spot. If I convert at that rate for a decade, then at my RMD age 75 I will have zero tax-deferred. All Roth and HSA and taxable, and I will not have over-paid to get there. Top of 12% bracket means 11% effective or average tax rate, so… that’s OK with me.
FYI this calculator is a “dinkytown” product, which Clark loves. He loves dinkytown.
I’ve been retired for over ten years. The fact that you can use RMDs to do QCDs and also use them to make late estimated FIT payments with no penalty comes in handy.