If I'm following, you plan to retire at/around 55, withdrawing around $63k/year, delaying pension and social security until 70, with eventual RMD's. Meaning you have 15-18 years of "low-tax" years to deal with. Typically, the best outcomes are when you can maintain consistent taxes throughout retirement. This is because our "progressive" tax system has you pay a higher % of taxes the more "income" you have.Appreciate all the responses. Seems like there are folks on both sides of the issue which confirms that it’s a close call.
Since I am over 50, my plan will be to do catch up in pretax (only available in 2025 due to Secure 2.0) and basic contributions in Roth.
If we model out what things look like with these assumptions, withdrawing "expenses" and optionally "Roth conversions" from pre-tax and any "taxes" from Roth [maybe not ideal - but made my model simpler], assuming a 7% return, we'd get roughly the following:
No Roth Conversion:
Code:
YearIncomeExpensesConversionWithdrawalFed TaxesMarginalEffectivePre-taxRothPortfolio1 $- $63,000 $- $63,000 $(5,522)12%9% $1,274,500 $422,479 $1,696,978.50 2 $- $63,000 $- $63,000 $(5,522)12%9% $1,300,715 $446,530 $1,747,245.50 3 $- $63,000 $- $63,000 $(5,522)12%9% $1,328,765 $472,266 $1,801,031.18 4 $- $63,000 $- $63,000 $(5,522)12%9% $1,358,779 $499,803 $1,858,581.86 5 $- $63,000 $- $63,000 $(5,522)12%9% $1,390,893 $529,268 $1,920,161.09 Code:
YearIncomeExpensesConversionWithdrawalFed TaxesMarginalEffectivePre-taxRothPortfolio1 $- $63,000 $55,350 $118,350 $(17,651)24%15% $1,219,150 $465,699 $1,684,849.00 2 $- $63,000 $55,350 $118,350 $(17,651)24%15% $1,186,141 $535,997 $1,722,137.43 3 $- $63,000 $55,350 $118,350 $(17,651)24%15% $1,150,820 $611,216 $1,762,036.05 4 $- $63,000 $55,350 $118,350 $(17,651)24%15% $1,113,028 $691,700 $1,804,727.57 5 $- $63,000 $55,350 $118,350 $(17,651)24%15% $1,072,590 $777,818 $1,850,407.50 But what you should notice is the Pre-tax amount in the "no conversion" scenario isn't shrinking. That means once you have your pensions + social security + Required Minimum Distributions - you will be forced to withdraw and pay more taxes - at a potentially higher rate .
If we project the models above until you are 73 (RMD's begin) - and assume your pensions & social security = $63k (meaning it covers your "expenses"), here's the comparison:
No Roth Conversion:
Code:
YearIncomeExpensesConversionWithdrawalFed TaxesMarginalEffectivePre-taxRothPortfolio18$63,000$-$- $78,807 $(23,281)24%16%$2,155,765 $1,146,488 $3,302,253.38 19$63,000$-$-$84,540 $(24,657)24%17%$2,222,129 $1,202,086 $3,424,214.74 20$63,000$-$-$90,330 $(26,046)24%17%$2,287,348 $1,260,185 $3,547,533.02 21$63,000$-$-$96,513 $(27,530)24%17%$2,350,949 $1,320,868 $3,671,817.75 22$63,000$-$-$102,662 $(29,006)24%18%$2,412,854 $1,384,323 $3,797,177.68 Code:
YearIncomeExpensesConversionWithdrawalFed TaxesMarginalEffectivePre-taxRothPortfolio18$63,000$-$-$14,392 $(8,640)22%11% $393,684 $2,587,363 $2,981,047.44 19$63,000$-$-$15,439 $(8,870)22%11% $405,803 $2,759,608 $3,165,411.68 20$63,000$-$-$16,496 $(9,103)22%11% $417,714 $2,943,678 $3,361,391.28 21$63,000$-$-$17,625 $(9,352)22%12% $429,329 $3,140,384 $3,569,712.12 22$63,000$-$-$18,748 $(9,599)22%12% $440,634 $3,350,612 $3,791,245.44 With different tax rates (the above uses 2025 rates, not the higher rates if/when the current lower brackets expire), different growth assumptions, etc. - the difference could be bigger and/or sooner. Only scenario that would produce "worse" results is if somehow you had lower tax rates in the future (which would only be the case if you died before RMD's kicked in...).
Which comes back to your "Pre-tax vs. Roth" contribution question. It's as simple as "current rate" (24%) vs. "future rate" - which I'd contend is your "early retirement" rate of 12%, not your deferred pension/social security/RMD rate of 24% (or more). On paper, Pre-tax should be your best option because you have 15 "low-tax" years to do Roth conversions. You'll save money on taxes now, save money over your lifetime by doing Roth conversions in those "low-tax" years by reducing "forced" RMD taxes later in life.
That said - you are only talking about 3 more years of contributions, with already decently sized Pre-tax and Roth balances. I doubt this decision will have a material impact on your retirement plans, so if you prefer to put some (or all) into Roth - go for it. Myself, in a not too dissimilar situation [looking at several years of "low-tax" early retirement] - I'm putting as much as I can into pre-tax and using anything I "save" by doing so to fund Backdoor Roth contributions. But per the above, I'd highly encourage you to re-consider Roth conversions - those many "low-tax" years are prime candidates for doing so IMHO...
Statistics: Posted by SnowBog — Wed Nov 13, 2024 2:17 am — Replies 21 — Views 1682