00001 Special Topic, December 16, 2023: U.S. Retirement Account Management Issues (1)

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U.S. Retirement Account Management (1): Casual Investment Talk on Clubhouse

1. Should you contribute to a traditional retirement account, a ROTH retirement account, or both?

• Traditional retirement accounts use pre-tax money; withdrawals are taxed later as ordinary income.

• Traditional retirement accounts require RMDs. The required age was 72, becomes 73 next year, and later becomes 75. RMDs may continue to age 120 or beyond; there is no fixed age when the account is considered fully withdrawn.

• Therefore, we should avoid having so much money in traditional retirement accounts that forced withdrawals push the tax rate higher.

• ROTH retirement accounts hold after-tax money; qualified withdrawals are tax-free.

• Each time we contribute to an after-tax IRA, we then do a backdoor to Roth. There is currently no prorate issue.

Because my salary level does not allow tax deferral through an IRA and also does not allow direct Roth IRA contributions, I do this for capital gain tax benefits. Teacher, is there anything I may be misunderstanding?

Thank you.

Principle three: it is best to have balances in both traditional and ROTH retirement accounts, ideally around 1:1

• The principle is to rely as much as possible on borrowing in retirement. A brokerage account should probably reach more than 1,500,000 before securities-backed borrowing can get a lower rate. That is the general idea.

• If contributing to a traditional account saves taxes, contribute as much as you reasonably can, as long as it does not violate the broader principles.

• Principle three is that both the traditional retirement account and the ROTH retirement account should have balances, preferably around 1:1.

• We want to put as much money as possible into traditional accounts for tax savings, but if the balance grows too large, future traditional-to-ROTH conversions or RMDs may create too much tax. One approach is to use the ROTH account for leveraged funds while keeping the traditional retirement account in a Money Market position, so the traditional account does not grow too quickly. If the ROTH retirement account has no money, you cannot operate this way; the traditional account may grow too large even though you saved taxes up front.

SECURE ACT 2.0 – WHEN DOES THE RMD START? | NSTP https://www.nstp.org/article/secure-act-2-0-–-when-does-the-rmd-start

Calculate Your RMD - RMD Calculator| Charles Schwab https://www.schwab.com/ira/ira-calculators/rmd

How should you contribute to a traditional retirement account without letting it grow too quickly?

• Use the ROTH retirement account to invest in a 2x leveraged fund, and use the traditional retirement account for money market funds. This slows the traditional account's growth while keeping overall risk volatility near Beta 1.0.

• This lets you contribute to the traditional retirement account and receive the tax benefit without letting that account grow too fast.

• In many 401k plans you cannot invest in leveraged funds, so this operation is usually only possible in a ROTH IRA.

• Third question: when should money be converted from a traditional IRA account to a ROTH retirement account? When should it begin? How much should be converted each year? Should the conversion be done quickly or gradually?

10% return, RMD at age 73, net worth at age 120

• 216,580,334.1

• 10% return, convert to ROTH before age 73, net worth at age 120.

• 232,777,915.1

• 10% return, convert to ROTH before age 70, net worth at age 120.

• 229,764,137.8

• 10% return, convert to ROTH at age 67, net worth at age 120.

• 227,219,180.4

• 5% return, convert to ROTH at age 73, net worth at age 120.

• 193,859,172.7

• 10% return: start converting at lower tax rates until the assets grow to a level that requires moving into a higher bracket, then convert the maximum amount at the lowest acceptable tax rate. 241,525,634.0

• Thanks to Willian Deng for the following information:

• There are two extra complications in real life: Social Security, whose taxability depends on other income, and higher Medicare costs if income exceeds IRMAA thresholds. If we are only modeling Roth conversions, we can ignore these two factors. I think the general rule matters more because there are many variables: tax rates change each year, market conditions change, income can fluctuate, expenses can change, and so on.

• 1. Choose an appropriate tax bracket, such as the 10% bracket in the final label, and fill that whole bracket. It should be lower than the tax rate while working; otherwise, using a Roth 401k while working may be better.

• Note that tax rates are likely to rise in 2026, after the Trump tax cuts expire at the end of 2025. Consider converting more before 2026.

• 2. Use the brokerage account to pay taxes, ideally with PAL, or sell stocks and pay the lower long-term capital gains tax rate.

After retirement, if income is no longer very volatile and mainly comes from sources such as Social Security and rental income, and if future income is unlikely to change much, you should begin considering distributions from the traditional retirement account.

• Summary:

• After retirement, once income is relatively stable, such as Social Security plus rental income, and future income is unlikely to change much, begin considering distributions from traditional retirement accounts.

• If you are confident that your marginal tax rate in retirement will be lower than your current marginal tax rate, contribute to the traditional retirement account now and take distributions later at the relatively lower marginal rate.

• Keep distributions plus Social Security and other income near the top of the lower tax bracket. Even after RMDs, this can still work. The tax rate is the key; timing comes second.