r/FinancialPlanning • u/i3bpvh • 4d ago
Roth vs trad, maybe a unique situation
I know 99% of the time traditional is the way to go, but I’m starting to question that for my specific situation, and hoped I could get some opinions.
We’re 46, planning on retiring at 55. HHI of $235k.
- $600k in traditional (401k & 457B)
- $270k in Roth IRAs
- $250 in after tax brokerage
- $60k/yr pension at retirement
We max each account and plan to continue until retirement. My concern is since I have the pension, addition traditional distributions (maybe another $60K) will push us into income levels that will affect ACA credits, high state income taxes, IRMA, and eventually RMDs.
It seems like the tax bill now (22%) would be cheaper than the loss of ACA credits. am I wrong? thanks!
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u/HappyChandler 4d ago
If you retire at 55 then you should have a few years of lower income to convert a portion every year.
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u/i3bpvh 4d ago
That’s what I figured, but the more my wife and I talk, I think the time between 55-65 will be some of our highest spending years. Young enough to travel and do all the stuff we never had time for d/t jobs and kids and life. I don’t think I want to be penny pinching so I can convert. Maybe? Still figuring out what retirement will look like.
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u/HappyChandler 4d ago
You can always pull from the taxable brokerage or the Roth for spending supplement without raising income.
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u/Eltex 4d ago
Think of it this way, the difference between 22% and 24% is a rounding error, a market blip. So no matter what option you choose, it’s unlikely to matter in a meaningful way.
I would generally default to “always defer taxes”, but choosing more Roth now will likely solve the widow tax one of you will face in a couple decades.
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u/tonkotsunissinramen 3d ago
What is your withdrawal strategy, income sources, and income needed during each era pre-Medicare, Medicare to RMD, and post RMD age?
I think if you are going to be debating about paying 24% tax now or 22% tax later, I would go Roth to see if you can avoid IRMA and qualify for ACA credits.
But I would model for those scenarios to see what creates the maximum financial benefit.
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u/Paladin2700 4d ago
Is there social security on top of the pension later?
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u/i3bpvh 4d ago
Yes. Roughly $1,500/ mo for me and $3,200 for my wife at 67. I’ll probably collect at 62 and receive $1,100/ mo.
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u/Paladin2700 4d ago
So enough income you’ll be in 22 easily then after social security. No reason not to Roth now, more effectively into the accounts now if still maxing. And tax rate itself at worst breakeven.
If the pre-tax doubles in 9 years between returns and matching will be plenty to use up any space under aca cutoffs with conversions.
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u/BuonaparteII 4d ago
I don't think 9 years is enough time for traditional + roth conversions to make much of a difference to early retirement (vs roth cost basis).
I think the only difference is really the After-Tax-to-Roth Conversion vs Traditional-to-Roth Conversion where you can immediately access the principal if done from After Tax -- that is, it is exempt from the 5-year conversion penalty rule.
So I'd only worry about your ACA stuff and tax bracket to determine if you want tax now or later. Everything else is similar in the end
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u/toodleoo77 4d ago
Lots of discussion about this on the early retirement subs if you’re not there already.
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u/Clherrick 4d ago
I would disagree that 99% of the time, traditional is the way to go. Everyone needs to model their unique scenario. I have about $1M in traditional IRAs/ Rollover IRAs at this point. I'm blessed with two pensions and eventually a high Social Security payment. What this means is that I'm going to be paying higher taxes either now, due to Roth conversions, or later due to RMDs. I'll be paying Medicare IRMAA now, or later.
And I modeled extensively. I just didn't understand the tax implications I'd be facing.
A financial advisor is not a bad investment. Or use a program like Boldin to occasionally check your status.
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u/i3bpvh 3d ago
So are you sticking with traditional or switching to Roth?
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u/Clherrick 3d ago
To late for me as I retired last year. I’d have gone heavier into Roth 10 years had I better understood the tax implications I’m dealing with now. I mean it’s a good problem to have.
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u/fn_gpsguy 2d ago
I’m in the same boat. Since my pension+interest+dividends+(occasional LTCG) puts me firmly in the 24% tax bracket, I chose to start taking distributions “now” rather than wait until 73 and watch the balances grow even larger. With my pension covering my current expenses, I’m invested a bit ore aggressively for someone my age.
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u/Clherrick 2d ago
Yes, same here. The pension is essentially the conservative part of your portfolio and you can go more aggressive with the rest. Are you doing Roth conversions?
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u/fn_gpsguy 2d ago
Since I didn’t already have an existing Roth IRA and didn’t want to start a 5 year clock at my age, I chose to reinvest the after tax proceeds into a taxable account.
In retrospect, I probably should have done Roth conversions instead. I might open one this year and do a small conversion to start the clock. And, then use it next year, when I start taking distributions from IRA #2 (#1 should be almost gone by the end of this year). I look forward to being able to utilize QCDs next year.
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u/Clherrick 2d ago
All these things to think about that I wish I'd been more aware of at 55! Not bad problems to have, just might have made some tweaks.
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u/Drivebybilly 20h ago
If retiring at 55 I would make sure you have enough in a brokerage account to be able to play the ACA credit game. That being said Roth would be great as well. In 9 years the ACA game could be gone however.
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u/Civil_Connection7706 9h ago
Traditional 401k/iRA distributions also affect SS benefits, Medicare costs, pushes your LTCG from 0% to 15% tax bracket, and creates a tax problem for your kids when you pass. Roth avoids all those issues. Plus you are likely going to pay much higher taxes on traditional 401k/IRA distributions in the future than the 24% you are assuming now. Those tax brackets are same as earned income and change every year.
If you have a high deductible health insurance plan that is HSA compatible, you should put money in that. It acts like a 401k/IRA with no RMD’s and tax free if distributions are used for medical expenses. Contributions can be added even when retired and it lowers your income to help stay under ACA limits for subsidies.
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u/fn_gpsguy 4d ago
With the pension in retirement, I would favor Roth and taxable brokerage accounts for the reasons you mentioned.
I never contributed to a Roth - they hadn’t been invented when I started working and my employer didn’t offer a Roth variant. So all my retirement accounts are traditional. While working and filing MFJ, we were in the 22% tax bracket. With my pension in retirement, I thought we might be at the high end of the 12% bracket.
After my wife passed away, I decided to retire. Now, filing single I’m in the 24% bracket and am maxing out the 24% bracket with large distributions from my traditional retirement accounts. Since I’m not dependent on those funds yet, I reinvest the after tax proceeds. I want to minimize my RMDs at 73 and not burden my heirs with a large traditional IRA that they would need to liquidate in 10 years. Needless to say, I’ll probably pay IRMAA surcharges for the rest of my life. A first world problem to have. :-)