This is a bit of a complicated question about planning for retirement, estate taxes, etc.
I'm 62, wife is 60. We both enjoy work and plan to continue until 2030, me with reduced hours. We are well paid professionals.
Our tax-deferred retirement accounts have now grown so big that there will be very little room left in the 24% bracket after taking RMDs when we are in our 70s to leave room for low tax rate Roth Conversions. If we restricted our Roth Conversions to only occur into the 24% bracket, I will be 89 when it is all converted.
We aren't there now because the unified credit is so high, but there is a pretty decent but unknowable chance that when we die, the second estate will be subject to estate tax either because we get richer or because the unified credit is lowered. From an earlier post, we concluded that this would effectively tax the traditional retirement funds at 72%. Therefore I have concluded that if I can convert some to Roth at 32%, then it might be worth it .
For the most part, these tax deferred funds are now mostly 1) federal money markets, 2) FIPDX Fidelity Inflation Protected and 3) A real estate fund in my 401K and should grow mostly modestly.
We live in MA and because of a recent state tax law change, it is beneficial for us to file MFS instead of MFJ because the savings in MA tax will far outweigh the loss in Fed Tax.
2024 is the first year we are doing MFS for Federal and I've done the preliminary estimates using Turbo Tax and I am just barely into the 35% bracket Federal and am in the 5% bracket state, and wife is in 37% bracket Federal and 9% bracket state. To the extent possible we have arranged almost all of the investment income to be mine and we have a large taxable equity position, but that dividend and capital gain income gets favorable tax treatment, so I'm leaving it out of the equation. If the income from my money market funds were all munis, I would have had room in 32% to do some 2024 conversions.
I have reduced my hours for 2025 and we have moved almost all of my taxable fixed income, which is basically all cash, to the Vanguard Muni Money Market Fund. I think with my hours reduction and the movement of the bulk of the ordinary investment income to munis, I will have room in the 32% bracket to change my 401K contributions to Roth 401K contributions, which I would max out, and also do some In-plan Roth Conversions in the 32 % bracket in December when I have a clearer picture of my 2025 income. It will live in Roth longer and grow tax-free so I think this makes more sense than waiting and risk getting caught with traditional retirement funds taxed at 72%.
People in the past have suggested lifestyle changes like moving or retiring, but lets assume that we're not moving and plan to work to 2030.
I just wanted to sanity check my thinking. Does this plan to start Roth and move the ordinary income to muni make sense?
Thanks in advance.
I'm 62, wife is 60. We both enjoy work and plan to continue until 2030, me with reduced hours. We are well paid professionals.
Our tax-deferred retirement accounts have now grown so big that there will be very little room left in the 24% bracket after taking RMDs when we are in our 70s to leave room for low tax rate Roth Conversions. If we restricted our Roth Conversions to only occur into the 24% bracket, I will be 89 when it is all converted.
We aren't there now because the unified credit is so high, but there is a pretty decent but unknowable chance that when we die, the second estate will be subject to estate tax either because we get richer or because the unified credit is lowered. From an earlier post, we concluded that this would effectively tax the traditional retirement funds at 72%. Therefore I have concluded that if I can convert some to Roth at 32%, then it might be worth it .
For the most part, these tax deferred funds are now mostly 1) federal money markets, 2) FIPDX Fidelity Inflation Protected and 3) A real estate fund in my 401K and should grow mostly modestly.
We live in MA and because of a recent state tax law change, it is beneficial for us to file MFS instead of MFJ because the savings in MA tax will far outweigh the loss in Fed Tax.
2024 is the first year we are doing MFS for Federal and I've done the preliminary estimates using Turbo Tax and I am just barely into the 35% bracket Federal and am in the 5% bracket state, and wife is in 37% bracket Federal and 9% bracket state. To the extent possible we have arranged almost all of the investment income to be mine and we have a large taxable equity position, but that dividend and capital gain income gets favorable tax treatment, so I'm leaving it out of the equation. If the income from my money market funds were all munis, I would have had room in 32% to do some 2024 conversions.
I have reduced my hours for 2025 and we have moved almost all of my taxable fixed income, which is basically all cash, to the Vanguard Muni Money Market Fund. I think with my hours reduction and the movement of the bulk of the ordinary investment income to munis, I will have room in the 32% bracket to change my 401K contributions to Roth 401K contributions, which I would max out, and also do some In-plan Roth Conversions in the 32 % bracket in December when I have a clearer picture of my 2025 income. It will live in Roth longer and grow tax-free so I think this makes more sense than waiting and risk getting caught with traditional retirement funds taxed at 72%.
People in the past have suggested lifestyle changes like moving or retiring, but lets assume that we're not moving and plan to work to 2030.
I just wanted to sanity check my thinking. Does this plan to start Roth and move the ordinary income to muni make sense?
Thanks in advance.
Statistics: Posted by Buffetologist — Fri Jan 03, 2025 1:20 pm — Replies 1 — Views 52