How’s Our Roth Conversion Strategy for Tax-Efficient Retirement Distributions?
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Question: Hi Joe, Al and Andi. Thank you for taking my question today. My name is Ken. I live in beautiful Southern California and I am calling on behalf of my wife and I. I drive a Toyota Camry. My wife drives a Lexus SUV. She doesn’t drink but I enjoy a cold beer in the Summer months and a nice glass of wine or a gin and tonic in the Winter. We have a question, a spitball question on what you would call distributions, tax efficient distributions during retirement. We are overfunded in IRA and 401(k)s. We’re 57, both of us are 57, and plan to retire in about 3 years. At that time, we thought that we would do Roth conversions of about $300,000 a year. And live on what we have as far as muni bond interest, rental income, and some regular interest and qualified dividends. We believe we can live on that comfortably. If we can’t, then maybe we take something out of a brokerage or a little bit out of the conversion. But our plan was to do that up until RMD age. We understand that IRMAAs are going to be expensive. We’re not worried about that. However, we do want to draw down these pre-tax retirement accounts by the time we get to RMD age. My thought on this would be is if we convert these to Roth and pay with our brokerage accounts, that would be the way to do it. Right now we have some tax loss harvesting at about $100,000. So our plan was to sell some of our stock, not pay capital gains because of that tax loss harvesting and do that for a year or two. And then go and take money out or sell stocks from the brokerage account and pay for the taxes on the Roth conversion. That way on the tax basis, we have quite a bit of basis in that brokerage, so we don’t believe we will have a big tax hit for the capital gains because there’s a lot of basis in tax loss harvesting there. We plan to do that until about 75 where these muni bonds will mature. And then we get into RMDs. Does that sound like a plausible plan to you? Looking forward to your response. Thank you.
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