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Old 01-19-2011, 09:15 PM   #21
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Originally Posted by walkinwood View Post
Surprising (to me at least) is that if your current & future tax bracket is the same, you'll be better off converting to a ROTH IRA.

I attached my spreadsheet & would appreciate someone looking it over to see if I made a mistake. No macros in the spreadsheet, but please use an AV.

I made the assumption that you pay your conversion taxes from your taxable savings, and took the opportunity loss on that tax amount into consideration. I taxed the returns on the opportunity loss annually.
That's what the Fidelity calculator comes up with too.

I think the simplest way to look at it is that a $100k TIRA holds $85k "tax free" for you and $15k for the IRS, both growing with the market. When converted into a $100k Roth IRA, with $15k taxes paid by other funds, you now have $100k tax free in the Roth. You've given the IRS their $15k. Your $15k in previously taxable funds is now growing tax free (that's the reason conversion is good even if tax rates stay the same). The Roth is allowing you to shelter more after-tax value than the TIRA. The longer it grows, the better the conversion benefit.
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Old 01-20-2011, 12:26 AM   #22
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Originally Posted by Nords View Post
The biggest problem with conventional IRAs is the stealth time bomb of RMDs. After age 70, RMDs will not only bump you up to a higher tax bracket but will also beat the crap out of your Social Security by subjecting it to taxation. Far better at that age to be able to leave a Roth IRA untouched and make do with cap gains from taxable accounts.
good points about RMDs and higher brackets and SS taxation. If you're getting Medicare , you may also get subjected to the medicare surcharge based on higher income.
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Old 01-20-2011, 12:31 AM   #23
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I believe you are missing the $15k you paid in taxes. In (1) you started with $115k, in (2) you started with $100k.
I believe you may have misread.......in both cases, started w/ 15K side fund in taxable and 100K TIRA. In one case, side fund was used to pay conversion tax. In other case nothing was changed until the end when the after tax comparison was made and side fund was taken into account.
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Old 01-20-2011, 09:31 AM   #24
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Originally Posted by Animorph View Post
That's what the Fidelity calculator comes up with too.

I think the simplest way to look at it is that a $100k TIRA holds $85k "tax free" for you and $15k for the IRS, both growing with the market. When converted into a $100k Roth IRA, with $15k taxes paid by other funds, you now have $100k tax free in the Roth. You've given the IRS their $15k. Your $15k in previously taxable funds is now growing tax free (that's the reason conversion is good even if tax rates stay the same). The Roth is allowing you to shelter more after-tax value than the TIRA. The longer it grows, the better the conversion benefit.
Well put! Thanks.
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Old 01-20-2011, 10:46 AM   #25
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I have come up with what I believe is a good plan. I have money roughly divided into thirds, with taxable being the largest, followed by IRAs and finally Roth IRAs. My own plan is before 60 years old, I will be using taxable equity. At 60 years old I will start to use a modest pension, at 62, wife's Soc Sec and a small annuity to fund the bare basics. I will then switch so that the bills beyond the basics will come from and draw down the IRA and excess funds to rollover to a Roth while keeping the tax at a low level ($83,000 approx for two? at current rates). When those funds are depleted (if they are), I will start on taxable equities. If I start breaking tax thresholds here, I will draw on Roth IRAs. Somewhere in this time, I will reach full retirement age and put in for my own Soc Sec.
There are other complexities of efficient taxed money location but this plan will keep the tax bites fairly low throughout our retirement. If I make good returns on investments, I could have too much money to be fully tax efficient, but if too much money is the problem, I will be happy to suffer those consequences.
Any input of things that I have overlooked will be appreciated. The work that I have today is to start consolidating Roth funds while still keeping the five year rules met. If the SHTF, that may be necessary to keep all options open.
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Old 01-20-2011, 11:40 AM   #26
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Originally Posted by kaneohe View Post
I believe you may have misread.......in both cases, started w/ 15K side fund in taxable and 100K TIRA. In one case, side fund was used to pay conversion tax. In other case nothing was changed until the end when the after tax comparison was made and side fund was taken into account.
Sorry, I confused the two 30's. Like Walkinwood, you're using the conversion as an opportunity to shelter the investment income on some otherwise taxable long term investments.
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Old 01-20-2011, 11:42 AM   #27
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It's certainly an interesting problem. There are a couple of complexities that I don't understand. (1) The 15K fund that might either be used to pay for conversion to a 100K Roth IRA, or else just put aside for later use to satisfy the later tax obligation, could itself be sheltered in a IRA. (2) If you don't convert to a Roth IRA, the money in the TIRA is not all subject to tax at once, but only the amounts you withdraw, with the remainder that is left in the TIRA (more than the amount in the corresponding Roth) still appreciating.
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Old 01-20-2011, 02:10 PM   #28
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It's certainly an interesting problem. There are a couple of complexities that I don't understand. (1) The 15K fund that might either be used to pay for conversion to a 100K Roth IRA, or else just put aside for later use to satisfy the later tax obligation, could itself be sheltered in a IRA. (2) If you don't convert to a Roth IRA, the money in the TIRA is not all subject to tax at once, but only the amounts you withdraw, with the remainder that is left in the TIRA (more than the amount in the corresponding Roth) still appreciating.
Greg....1)I guess I was thinking about a retiree who no longer has earned
income so he couldn't do an TIRA anymore. If you had a working person,
you would have to compare him with another working person who could also be putting new money in a TIRA as well as converting, so wouldn't the same analysis apply? I think the assumption here is that funds availability is not an issue for conversion.

2) I haven't done your problem in any gory detail but I thought since it held for doubling (no # of yrs specified) and quadrupling (no # of yrs specified), that it would hold for any given rate of return and any distribution pattern. That might be an intuitive leap of faith that might not be true for a real world situation which is perhaps why I haven't made the leap to do it 100% yet.(mind converted but not gut). If you pursue this, I'd be interested in your findings.....perhaps this is the same idea as the stretch IRA?
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