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Old 07-29-2013, 02:28 PM   #21
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PB4USKI,
Are you saying there is a dollar limit being imposed on conversions in 2014 or are you saying that the upper limit that one would want to convert is the 400% FPL to avoid loss of subsidy?
There is no limit being imposed on conversions. Poor wording on my part - sorry.

What I am saying is as a practical matter if you do conversions that bring your O-MAGI above 400% FPL that the economic cost of that conversion is exorbitant due to the loss of the subsidy.

For example, if I made a mistake and converted too much so I was $10k over 400% FPL the loss of the subsidy would likely exceed the $10k that I converted (so the economic cost would be the economic equivalent of a marginal 'tax" rate of over 100%!).
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Old 07-29-2013, 04:17 PM   #22
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Originally Posted by pb4uski View Post
There is no limit being imposed on conversions. Poor wording on my part - sorry.

What I am saying is as a practical matter if you do conversions that bring your O-MAGI above 400% FPL that the economic cost of that conversion is exorbitant due to the loss of the subsidy.

For example, if I made a mistake and converted too much so I was $10k over 400% FPL the loss of the subsidy would likely exceed the $10k that I converted (so the economic cost would be the economic equivalent of a marginal 'tax" rate of over 100%!).
Thanks! My plan is to do some conversions in the future.
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Old 07-29-2013, 10:46 PM   #23
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For people doing the roth, how do you decide how much to convert in year given the 5 year lag? The lower of 400% of the FPL (for ACA) or the top of the 15% tax bracket? Your budgeted ER expense?
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Old 07-29-2013, 11:11 PM   #24
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Originally Posted by pb4uski View Post
There is no limit being imposed on conversions. Poor wording on my part - sorry.

What I am saying is as a practical matter if you do conversions that bring your O-MAGI above 400% FPL that the economic cost of that conversion is exorbitant due to the loss of the subsidy.

For example, if I made a mistake and converted too much so I was $10k over 400% FPL the loss of the subsidy would likely exceed the $10k that I converted (so the economic cost would be the economic equivalent of a marginal 'tax" rate of over 100%!).
A flip side of this is something I have in reserve - I have an unrealized LT capital loss I can turn into a realized loss via tax loss harvesting in case my investment income will be a little too high to qualify for the ACA subsidies. Most years I have a few thousand dollars in LTCG distributions so I can potentially negate those plus as much as another $3,000 if needed to lower my MAGI. I would have to be careful to avoid wash sales to preserve the loss.
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Old 07-30-2013, 03:05 AM   #25
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If you start on 72t distributions, what happens when 59.5 arrives? Once you have unfettered access to your IRA funds at 59.5, can you reduce your withdrawal rate to provide more longevity to your overall nest egg?
If you are more than 59.5 AND you have been withdrawing for at least 5 years from the 72(t), THEN you can cancel it. At which point you can withdraw as much or as little from your IRA penalty free, although you have to pay tax :-( on a traditional IRA.
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Old 07-30-2013, 06:35 AM   #26
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A flip side of this is something I have in reserve - I have an unrealized LT capital loss I can turn into a realized loss via tax loss harvesting in case my investment income will be a little too high to qualify for the ACA subsidies. Most years I have a few thousand dollars in LTCG distributions so I can potentially negate those plus as much as another $3,000 if needed to lower my MAGI. I would have to be careful to avoid wash sales to preserve the loss.
I'm not sure whether to be envious or not.

I can see that the added flexibility would be nice. Since I have minimal unrealized losses (less than $1k) I need to be much more careful because once I go over I am stuck.
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Old 07-30-2013, 02:25 PM   #27
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Yes, its just an unnatural fear. I've always said the 403 B/401k, and the IRAs are only for later retirement. I would feel like I am cheating if I tapped them early. I know the withdrawal calculations at today's rates are almost a non-issue. Also I think there might be some wounded pride in this case. I might have to explain to the DW that the best laid plans fell just a bit short. I am stubborn and would probably jump back in the labor force. I have a whole list of jobs that I have always wanted to try, it would be a good exercise in humility.
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Old 07-30-2013, 02:42 PM   #28
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Originally Posted by photoguy View Post
For people doing the roth, how do you decide how much to convert in year given the 5 year lag? The lower of 400% of the FPL (for ACA) or the top of the 15% tax bracket? Your budgeted ER expense?

I will not be eligible for health care subsidies so the 400% FPL is not a consideration.

In my case, I have some estimated expected expenses at a future time that would drive me into the 25% Federal Tax Bracket. I will convert enough at least 5 years earlier (within the 15% bracket) to cover those future expenses and avoid the 25% bracket. Should save about $10k in taxes.
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Old 07-30-2013, 07:29 PM   #29
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Struggling to understand why more early retirees are not doing the 72t thing up to 59.5 after which unfettered access to your tax-advantaged accounts kick in? And Social Security will start as a reinforcement somewhere around 65-70 for the home stretch so I would think that would take some of the risk out of running out of funds too early. Is there other 72t-ers out there that have reconciled in their minds the risk of tapping the IRA's pre 59.5?
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Old 07-31-2013, 11:24 AM   #30
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Struggling to understand why more early retirees are not doing the 72t thing up to 59.5 after which unfettered access to your tax-advantaged accounts kick in? And Social Security will start as a reinforcement somewhere around 65-70 for the home stretch so I would think that would take some of the risk out of running out of funds too early. Is there other 72t-ers out there that have reconciled in their minds the risk of tapping the IRA's pre 59.5?
While I could do a 72t, I don't have the need. I'm 56 our plan is to live off post tax accounts. We will however backfill some of that with my qualified 401k. I'm fortunate that the Megacorp 401k had the verbage in it to allow for penelty free withdrawls after 55 and seperated from service.

Otherwise a 72t is a great way to go, just watch your SWR.

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Old 07-31-2013, 12:16 PM   #31
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For people doing the roth, how do you decide how much to convert in year given the 5 year lag? The lower of 400% of the FPL (for ACA) or the top of the 15% tax bracket? Your budgeted ER expense?
It all depends on your specific tax situation, especially in retirement when RMD's kick in. Will you be in the 25% tax bracket then? Are you in a lower tax bracket now or during early retirement? If so, it would be beneficial to take advantage of the lower tax bracket to get some of the tIRA value out at a lower tax cost. If you don't need the tIRA income, you do it as a Roth conversion and preserve the tax advantages (as well as effectively adding the tax amount to your IRA value).

You can save taxes by Roth converting at a lower tax rate, but it might cost you an ACA subsidy, a tuition tax credit, a Roth IRA contribution, a boost into the 15% or 25% tax bracket, AMT taxes, or some other extra tax increase. That's what you have to look at for yourself.

In general, it will be beneficial to convert more earlier, even with a higher tax cost, and then ramp it down a bit later on. That's because you get more after-tax value in a Roth (no taxes on withdrawals), and the earlier you get your money in there and the longer it stays the more advantageous it is.

I my case, this means Roth converting up to the point where AMT taxes start to hit for the first seven years or so, then trimming back to the top of the 15% tax bracket until RMD's start. I'll pretty much be hitting the top of the 15% bracket throughout retirement, using tIRA withdrawals to hit the top and Roth withdrawals to meet the rest of our income needs.
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Old 07-31-2013, 02:02 PM   #32
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I bridged the gap from age 55 to age 62 w/o touching any stock investments. In hindsight, this certainly reduced my stress level regarding ER with big swings in the stock market. About 50% of our monthly income came from my pension. The other 50% came from natural gas royalties. I started the gas drilling partnerships beginning at age 50 and these investments reduced tax liabilities while I was working those last 5 years. Obviously, 401k contributions were already maxed out each year. My other investment was in low income housing credits which basically pays the taxes on income from the natural gas partnerships. More recently, as income from the wells has diminished (thru reduced gas flow and the managing partner buying back some of the wells), I have used the housing credits to cover taxes on some of my Roth conversions.

My original plan was simply a bridge to age 59.5, but we were able to make it work until SS kicked in.
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Old 07-31-2013, 09:08 PM   #33
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Thanks for the your input.

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Originally Posted by Animorph View Post
It all depends on your specific tax situation, especially in retirement when RMD's kick in. Will you be in the 25% tax bracket then? Are you in a lower tax bracket now or during early retirement? If so, it would be beneficial to take advantage of the lower tax bracket to get some of the tIRA value out at a lower tax cost. If you don't need the tIRA income, you do it as a Roth conversion and preserve the tax advantages (as well as effectively adding the tax amount to your IRA value).
The problem for me is RMDs are 30 years away and I have no idea what the value of my account will be then. At the beginning, I expect to be in the 15% federal bracket unless my investments do wildly better than I expect.

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You can save taxes by Roth converting at a lower tax rate, but it might cost you an ACA subsidy, a tuition tax credit, a Roth IRA contribution, a boost into the 15% or 25% tax bracket, AMT taxes, or some other extra tax increase. That's what you have to look at for yourself.
I'm definitely planning on staying under the 400% FPL level for the ACA subsidy.

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In general, it will be beneficial to convert more earlier, even with a higher tax cost, and then ramp it down a bit later on. That's because you get more after-tax value in a Roth (no taxes on withdrawals), and the earlier you get your money in there and the longer it stays the more advantageous it is.
I don't follow you, isn't the after-tax value the same (assuming same tax rate)? I.e. I pay 15% tax to convert now and withdraw tax-free from the roth or I keep the money in my IRA and pay 15% when I withdraw.

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I my case, this means Roth converting up to the point where AMT taxes start to hit for the first seven years or so, then trimming back to the top of the 15% tax bracket until RMD's start. I'll pretty much be hitting the top of the 15% bracket throughout retirement, using tIRA withdrawals to hit the top and Roth withdrawals to meet the rest of our income needs.
If I use roth conversions, then I'm torn between the following:
* lower conversion amounts from IRA to ROTH result in lower taxes now and greater ACA subsidy
* higher conversion amounts mean I preserve more of my taxable portfolio, and potentially lower taxes 30 years later if I am hit by RMDs that take me out of the 15% bracket
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Old 08-01-2013, 10:18 AM   #34
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Since I have minimal unrealized losses (less than $1k) I need to be much more careful because once I go over I am stuck.
What do you imply by saying "stuck"? Would you be stuck for one year or until Medicare kicks in?
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Old 08-01-2013, 10:55 AM   #35
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I don't follow you, isn't the after-tax value the same (assuming same tax rate)? I.e. I pay 15% tax to convert now and withdraw tax-free from the roth or I keep the money in my IRA and pay 15% when I withdraw.
At lower tax rates, your best approach is probably to ensure you can take advantage of the 10% bracket and 0% capital gains. The future is all a guess of course, you can only work from your best estimates. But it is worthwhile to develop a rough idea of what your finances will look like, or what they're like if you meet your goals. Diversification between tIRA/Roth/taxable may give you some flexibility in the future.

Regarding tIRA value versus Roth value, both have the same contribution limits. But tIRA withdrawals are taxed while Roth withdrawals are not, unless your income is low enough to avoid taxes. So $10k in a tIRA may be worth $8k to you after federal and state taxes, while $10k in a Roth IRA should be worth $10k to you after taxes. When you Roth convert, you might take $10k out of a tIRA, pay taxes of $2k, and then put $10k into the Roth account. It's sort of like moving that $8k of after-tax value from the tIRA to the Roth and adding $2k from your taxable account into the Roth as well. That's $2k that is no longer being taxed. That's why Roth accounts beat tIRA's when tax rates for contributions and withdrawals are equal. Roths hold a bit more after-tax tax-free value for the same limited contributions.

All dependent on your specific tax situation.
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