Too Many Voices: I'm Arguing with Myself Over How to Manage Cash During Roth Conversions

EricGold · Post by **EricGold** » Thu May 09, 2024 9:46 pm

Hi all,

I've decided to take out ~ $415k a year from 2025 - 2031 from our IRA, of which a large fraction will go into Roth. This is being done to blunt IRMAA somewhat, to blunt rising RMD, and as a hedge against rising tax brackets in 2026. I know I have to budget for living expenses, taxes, and IRMAA.

I have a $250k CD in post-tax maturing next week;
A $500k CD in post-tax maturing in August;
A $537k TIPS in pre-tax maturing 10/2026;
A $127k TIPS in pre-tax maturing 10/2026
From 2028 about $65k a year of SS begins
$40k of I-bonds with 0% fixed, less than 5 years old

One of my voices says to build a CD ladder that goes out about 3 years at 5% APR, combined with a 5 year MYGA at 6.2%
My other voices want a larg(er) fraction in MMF

I have been preoccupied the last couple of years and ignored my investments; recently I gained some time and realized that my asset allocation for the fixed investments is shabby, and they are being remediated. While planning for the remediation I added the complexity of the Roth conversions ... which brings me to today. Fwiw, I don't feel strongly about using post tax cash to pay for the IRA conversions, except in a downturn or crash.

I'd appreciate some advice

retiredjg · Post by **retiredjg** » Thu May 09, 2024 10:31 pm

I think you need to describe your investments more fully. And your goal(s) and how you are trying to achieve the goal more fully.

It appears to me that your IRA only contains about $664k in pre-tax assets. If you are married you may not need to do Roth conversions at all. Even if single, it is not clear why you would need to convert $415k a year for 7years.

Maybe I'm missing the point, but I don't understand your post at all.

EricGold · Post by **EricGold** » Thu May 09, 2024 10:44 pm

The large majority of my IRA is in stocks, and it is a fraction of those I'll be converting to Roth.

The list is only fixed investments

FiveK · Post by **FiveK** » Thu May 09, 2024 11:15 pm

EricGold wrote: ↑Thu May 09, 2024 9:46 pmFwiw, I don't feel strongly about using post tax cash to pay for the IRA conversions...

In that case there isn't much (anything?) about Roth conversions that would affect your choice regarding cash in Tax-efficient fund placement.

...except in a downturn or crash.

Why that exception?

EricGold · Post by **EricGold** » Thu May 09, 2024 11:24 pm

FiveK wrote: ↑Thu May 09, 2024 11:15 pm
EricGold wrote: ↑Thu May 09, 2024 9:46 pmFwiw, I don't feel strongly about using post tax cash to pay for the IRA conversions...
In that case there isn't much (anything?) about Roth conversions that would affect your choice regarding cash in Tax-efficient fund placement.

...except in a downturn or crash.
Why that exception?

My reasoning was that if I have to pay conversion taxes with heavily depressed stocks, time cannot return their value. Perhaps incorrectly, I've viewed that scenario as reason #1 to hold fixed investments at something approaching my current scale

FiveK · Post by **FiveK** » Thu May 09, 2024 11:50 pm

EricGold wrote: ↑Thu May 09, 2024 11:24 pm
FiveK wrote: ↑Thu May 09, 2024 11:15 pm
EricGold wrote: ↑Thu May 09, 2024 9:46 pmFwiw, I don't feel strongly about using post tax cash to pay for the IRA conversions...
In that case there isn't much (anything?) about Roth conversions that would affect your choice regarding cash in Tax-efficient fund placement.

...except in a downturn or crash.
Why that exception?
My reasoning was that if I have to pay conversion taxes with heavily depressed stocks, time cannot return their value. Perhaps incorrectly, I've viewed that scenario as reason #1 to hold fixed investments at something approaching my current scale

With heavily depressed stocks, you would owe little in capital gains, and might even get to claim a capital loss.

Consider the amount being withdrawn from the traditional account, and an amount in a taxable account. You can either pay the conversion tax from the amount withdrawn or from the taxable account. One approach yields more money in the Roth account, free of all future tax. The other approach yields less money in the Roth account, leaving more in the taxable account where it will be subject to tax drag.

steadyosmosis · Post by **steadyosmosis** » Fri May 10, 2024 1:30 am

I convert to Roth only when I can do so at federal tax cost of 12%, or less.
And I jump at any chance to convert when prices are depressed.

EricGold · Post by **EricGold** » Sat May 11, 2024 4:27 pm

It helped to see my upcoming cash maturities in a different format -- a list, in this case. The next 3 years of so are reasonably well laid out, I'd say much by accident

toddthebod · Post by **toddthebod** » Sat May 11, 2024 4:34 pm

EricGold wrote: ↑Thu May 09, 2024 11:24 pm
FiveK wrote: ↑Thu May 09, 2024 11:15 pm
EricGold wrote: ↑Thu May 09, 2024 9:46 pmFwiw, I don't feel strongly about using post tax cash to pay for the IRA conversions...
In that case there isn't much (anything?) about Roth conversions that would affect your choice regarding cash in Tax-efficient fund placement.

...except in a downturn or crash.
Why that exception?
My reasoning was that if I have to pay conversion taxes with heavily depressed stocks, time cannot return their value. Perhaps incorrectly, I've viewed that scenario as reason #1 to hold fixed investments at something approaching my current scale

That's backwards. If stocks are down, you can convert more of your Roth for less taxes.

avalpert1 · Post by **avalpert1** » Sat May 11, 2024 6:24 pm

You probably need to share more information (like your complete current portfolio, taxable income and expenses). But at first glance, if you are actually suggesting converting $415k a year to avoid future IRMAA and RMDs you will be paying much more in taxes and reducing your future assets. Is it possible you are letting tails wag the dog here?

twh · Post by **twh** » Sat May 11, 2024 6:34 pm

You don't give your full life and financial picture, but I wonder if you have too much in fixed income investments?

aristotelian · Post by **aristotelian** » Sun May 12, 2024 12:18 pm

EricGold wrote: ↑Thu May 09, 2024 9:46 pm Hi all,

I've decided to take out ~ $415k a year from 2025 - 2031 from our IRA, of which a large fraction will go into Roth. This is being done to blunt IRMAA somewhat, to blunt rising RMD, and as a hedge against rising tax brackets in 2026. I know I have to budget for living expenses, taxes, and IRMAA.

I have a $250k CD in post-tax maturing next week;
A $500k CD in post-tax maturing in August;
A $537k TIPS in pre-tax maturing 10/2026;
A $127k TIPS in pre-tax maturing 10/2026
From 2028 about $65k a year of SS begins
$40k of I-bonds with 0% fixed, less than 5 years old

One of my voices says to build a CD ladder that goes out about 3 years at 5% APR, combined with a 5 year MYGA at 6.2%
My other voices want a larg(er) fraction in MMF

I have been preoccupied the last couple of years and ignored my investments; recently I gained some time and realized that my asset allocation for the fixed investments is shabby, and they are being remediated. While planning for the remediation I added the complexity of the Roth conversions ... which brings me to today. Fwiw, I don't feel strongly about using post tax cash to pay for the IRA conversions, except in a downturn or crash.

I'd appreciate some advice

Can you buy equities and then sell equities/buy bonds in one of your retirement accounts? Money is fungible so the typical recommendation is to allocate based on tax efficiency. https://www.bogleheads.org/wiki/Tax-eff ... _placement

If your question is how to choose among CD's, TIPS, Treasuries, MMF, and MYGA, they are all fine options with pros and cons. The difference is largely personal preference. All of the options are safe and have similar expected return within a few basis points.

EricGold · Post by **EricGold** » Sun May 12, 2024 1:57 pm

aristotelian wrote: ↑Sun May 12, 2024 12:18 pm If your question is how to choose among CD's, TIPS, Treasuries, MMF, and MYGA, they are all fine options with pros and cons. The difference is largely personal preference. All of the options are safe and have similar expected return within a few basis points.

Thanks, yes that was the question. After posting I realized that enough of my fixed investments are maturing along a convenient schedule for my conversion plans. I'm undecided whether to convert $400k in 2024 but it is not problem. The $500k CD that matures in early August can go into a 3 month CD or MMF until the election results give some additional clarity on future tax bracket rates. I'll still have 6 weeks to get the conversion done, and the physical bank that holds the CD as well as a Schwab branch are both within a mile of each other. No problem. The 2025 conversion will be paid with after-tax dollars from the August 2024 CD that is held in a 6 month CD. The 2026 conversion will be paid from the maturing TIPS in 10/2026, and a 3 month CD derived from the 10/2026 TIPS will pay for the 2027 conversion. I'll buy a 3 year MYGA from the 8/2024 CD to pay for the 2028 conversion, and I'll buy a 5 year MYGA from the 2024 CD to pay for the 2029 conversion. I haven't planned for 2030+ but I think 6 years of $400k conversions is a reasonable plan so I only have one more $400k conversion plan to sort out and I don't expect that to be much of a chore

As an aside, I played around with a spreadsheet to quantify some of the more elusive benefits of serial Roth conversions. Using 'X' as the base Medicare Part B monthly payment, I can save 0.3X of IRMAA over a 20 year timeframe. That is ~ a 1% income tax savings, while a reversion to prior tax brackets is a 4% income tax increase. This makes conversions sooner rather than later an easy choice ... except for 2024. In 2024 a conversion will cost me $8,000 in ACA costs which makes a conversion this year something of a wash, unless it saves me a conversion in the future at 28% tax bracket.

Phew! TMI, right ?

I learned only this week about I-bond purchases in excess of $10k/year*person using the 'gift' approach. That is very appealing as an alternative for the 2030 Roth conversion.

chassis · Post by **chassis** » Sun May 12, 2024 2:04 pm

EricGold wrote: ↑Thu May 09, 2024 9:46 pm I'd appreciate some advice

If there are too many voices, then go sit in another room and close the door where you can reflect peacefully.

You used the word "added...complexity" in relation to Roth conversions.

Have you considered not doing Roth conversions? Has the notion crossed your radar that Roth conversions could be a chase after the wind?

EricGold · Post by **EricGold** » Sun May 12, 2024 2:35 pm

chassis wrote: ↑Sun May 12, 2024 2:04 pm
EricGold wrote: ↑Thu May 09, 2024 9:46 pm I'd appreciate some advice
If there are too many voices, then go sit in another room and close the door where you can reflect peacefully.

It was a joke. Internal voices

I'm a physician, so my sense of humor is biased. Somewhere along the line I heard this story, and it has stuck with me:

It is fine to talk to yourself
You can argue with yourself if you want
Seek help when you hear a voice say "excuse me, what did you say" ?

Wash.Invest · Post by **Wash.Invest** » Sun May 12, 2024 2:53 pm

steadyosmosis wrote: ↑Fri May 10, 2024 1:30 am I convert to Roth only when I can do so at federal tax cost of 12%, or less.
And I jump at any chance to convert when prices are depressed.

^^^
This is my plan.

Any depressed LT equities get transferred from tIRA >Roth ("in kind" transfer, no sell required).

My Roth generally only holds equities, (growth side).

Cash instruments reside in tIRA and 401k Rollovers - that will be fine for RMDs (which will all be QCDs)

At the moment.... MMA is equivalent or better than CDs, so I'm not doing ladders, unless LT rates justify parking cash.

Handling cash during Roth conversion is only relevant to how I fund annual expenditures while staying within 12% marginal rate. $20k plus in annual property taxes = majority of cash needs.

County needs a volunteer labor / mentoring / tax payment program utilizing skilled senior citizens

dodecahedron · Post by **dodecahedron** » Sun May 12, 2024 3:00 pm

Slightly perplexed by your usage of the first person plural pronoun in “our IRA” in the first sentence of OP but singular “I” elsewhere. Are you married and MFJ? In any case, IRA is an inherently individual account though obviously one can designate successor beneficiaries including a spouse. Ages, projected income streams, and health/disability status of beneficiaries are considerations, unless your beneficiaries are charities.

EricGold wrote: ↑Thu May 09, 2024 9:46 pm I've decided to take out ~ $415k a year from 2025 - 2031 from our IRA, of which a large fraction will go into Roth. This is being done to blunt IRMAA somewhat, to blunt rising RMD, and as a hedge against rising tax brackets in 2026. I know I have to budget for living expenses, taxes, and IRMAA.

Or perhaps the “our” in the first sentence refers to the multiple voices?

EricGold · Post by **EricGold** » Sun May 12, 2024 3:21 pm

dodecahedron wrote: ↑Sun May 12, 2024 3:00 pm Slightly perplexed by your usage of the first person plural pronoun in “our IRA” in the first sentence of OP but singular “I” elsewhere. Are you married and MFJ? In any case, IRA is an inherently individual account though obviously one can designate successor beneficiaries including a spouse. Ages, projected income streams, and health/disability status of beneficiaries are considerations, unless your beneficiaries are charities.
EricGold wrote: ↑Thu May 09, 2024 9:46 pm I've decided to take out ~ $415k a year from 2025 - 2031 from our IRA, of which a large fraction will go into Roth. This is being done to blunt IRMAA somewhat, to blunt rising RMD, and as a hedge against rising tax brackets in 2026. I know I have to budget for living expenses, taxes, and IRMAA.
Or perhaps the “our” in the first sentence refers to the multiple voices?

"Our" referred to the combined IRAs of myself + spouse, but it mostly was just acknowledging MFJ. Wife gets grumpy when I say 'my IRA', and I get in further trouble when I point out the technical accuracy or the fact that 1/2 is hers no matter what.

dodecahedron · Post by **dodecahedron** » Sun May 12, 2024 6:47 pm

EricGold wrote: ↑Sun May 12, 2024 3:21 pm
dodecahedron wrote: ↑Sun May 12, 2024 3:00 pm Slightly perplexed by your usage of the first person plural pronoun in “our IRA” in the first sentence of OP but singular “I” elsewhere. Are you married and MFJ? In any case, IRA is an inherently individual account though obviously one can designate successor beneficiaries including a spouse. Ages, projected income streams, and health/disability status of beneficiaries are considerations, unless your beneficiaries are charities.
EricGold wrote: ↑Thu May 09, 2024 9:46 pm I've decided to take out ~ $415k a year from 2025 - 2031 from our IRA, of which a large fraction will go into Roth. This is being done to blunt IRMAA somewhat, to blunt rising RMD, and as a hedge against rising tax brackets in 2026. I know I have to budget for living expenses, taxes, and IRMAA.
Or perhaps the “our” in the first sentence refers to the multiple voices?

"Our" referred to the combined IRAs of myself + spouse, but it mostly was just acknowledging MFJ. Wife gets grumpy when I say 'my IRA', and I get in further trouble when I point out the technical accuracy or the fact that 1/2 is hers no matter what.

I can relate to your wife’s grumpiness. I would have been grumpy if my own late husband had not on his own from the very beginning of our marriage, always chosen to use inclusive our and we pronouns in all financial decisions and to emphasize how much he valued my insight

Grateful that he always took explicit pride in fact that we were a great decision-making team, with the whole being more than the sum of the parts. He did a lot of opportunistic Roth conversions which turned out great, ex post, for reasons we could not have fully imagined at the time.

He enjoyed doing the actual investment, asset allocation, tax placement and conversion stuff for all our many accounts (multiple 401k, 403b, 457, 529, tIRA, SEP-IRA, and Roth accounts as well as taxable) and I was happy to delegate that, but he was always careful to talk through his reasoning before he did anything and he frequently let me know how much talking things through with me helped clarify his thinking and improve his decisionmaking.

Maybe talking through things with your wife might also help clarify the discordant voices in your own head, OP.

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Too Many Voices: I'm Arguing with Myself Over How to Manage Cash During Roth Conversions

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