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Old 12-05-2013, 07:19 PM   #21
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Sorry - I get it now ! You're asking us to help you decide WHICH equities to sell to get you to (a) establish the cash / near cash college fund and (b) get to your new desired 45 / 55 asset allocation once part (a) is completed. Is that correct ?
Mostly.

Yes, on (a).

When that is completed my remaining portfolio (i.e. 78% of my current portfolio), will have a 55/45 asset allocation.

The total -(a) 22% set aside and (b) the remaining 78% - would at this time have a 45/55 overall allocation (of course, that would change over time as I would be spending the 22% and I would not be rebalancing any of that.
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Old 12-05-2013, 08:45 PM   #22
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That would work, but I'm not sure what I do with the funds that I sell in the taxable portfolio. Where would I put them to avoid negative tax consequences?

We do not want to use the taxable funds that are invested for living expenses the next few years. That is basically the only after tax money we have and we won't to keep it in case we want or need to spend money that wouldn't add to our taxable income. For example, if at some point we were close to hitting the limit to have to pay higher medicare premiums but needed to replace our roof then I could use that money. Or, if I wanted to get MAGI down to be eligible for ACA subsidies, I could use some of that money (right now kids and I get subsidized insurance through DH's retiree plan and it is cheaper than ACA insurance, but things could change).

I am not open to using any of the taxable funds for the expenses I have budgeted already for the next 3 years unless doing so would keep us from reaching some limit where we wouldn't get some benefit.

Even so, I guess I could sell the taxable equities (or some of them) and invest that money in fixed income as part of my regular fixed income allocation and not spend that money during the next 3 years. However, my understanding has always been that that is tax disadvantageous which is why I was keeping the taxable fund in equities.
If you want, you can buy Extended Market with your excess taxable cash, and sell the same number of shares of Extended Market in DH's IRA. I do stuff like that all the time, moving cash or equities from retirement accounts to taxable accounts or vice versa.

Given that you will be withdrawing from DH's IRA, you should be doing at least some of that as a Roth conversion. Here's how that works:

Let's say you want to take $10k from the IRA, following your original plan. Let's say you pay 25% tax on that withdrawal, $2.5k, and keep $7.5k for expenses that year. What you should consider trying is a $10k Roth conversion, transferring $10k from DH's IRA to a new Roth IRA. Pay the taxes of $2.5k using the taxable account, and use $7.5k from the taxable account for the year's living expenses. The end result is the same $10k withdrawal from the IRA, the same taxes and spending, and $10k of the taxable account moved into a Roth IRA where it is not taxed again, including capital gains. The total of the taxable account and the Roth IRA is the same as the original taxable account. I think you are OK if DH is eligible for IRA withdrawals, but you should confirm that you will be OK with the 5 year rule or that it will not apply after 59.5.

And just like the taxable account, you can buy Extended Market in the Roth account and sell it in the traditional IRA.
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Old 12-05-2013, 10:13 PM   #23
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If you want, you can buy Extended Market with your excess taxable cash, and sell the same number of shares of Extended Market in DH's IRA. I do stuff like that all the time, moving cash or equities from retirement accounts to taxable accounts or vice versa.

Given that you will be withdrawing from DH's IRA, you should be doing at least some of that as a Roth conversion. Here's how that works:
If I sell equities in the taxable account, and buy equities that doesn't solve my problem of needing to reduce 10% of the equities in my portfolio. I agree I could do it, but I'm not sure it would move the ball forward for selling 10% of the equities and putting that money in fixed income/cash.

I understand the concept of a Roth conversion. I wish I could do them. However, any Roth conversion this year or the next 2 years would have to be done in mostly in the 28% bracket. Therefore, I think any Roth conversions will need to happen from 2016 on (mostly from my portfolio since DH turns 70 in 2017.
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Old 12-06-2013, 05:37 AM   #24
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I am sure you would roll the 401k out to an IRA if you could. That PEOPX is unconscionable with a 0.51% ER for a S&P indexer that does no active trading. Vanguard has several funds with ER of 0.1% or less. Even Schwab does.
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Old 12-06-2013, 11:56 AM   #25
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If I sell equities in the taxable account, and buy equities that doesn't solve my problem of needing to reduce 10% of the equities in my portfolio. I agree I could do it, but I'm not sure it would move the ball forward for selling 10% of the equities and putting that money in fixed income/cash.

I understand the concept of a Roth conversion. I wish I could do them. However, any Roth conversion this year or the next 2 years would have to be done in mostly in the 28% bracket. Therefore, I think any Roth conversions will need to happen from 2016 on (mostly from my portfolio since DH turns 70 in 2017.
Sell the equities as outlined in post 19, that sells the 10% equities. On top of that, buy the Extended Market in the taxable account and sell it in the IRA. Still 10% equities sold, and the taxable account remains all equities.

Doing the Roth conversion cost you nothing if you are going to withdraw that amount from the IRA anyway. You pay 28% taxes if you withdraw from the IRA. You pay the same 28% taxes by characterizing that withdrawal as a Roth conversion. It's the same taxes either way, you're just calling it a Roth conversion instead of a withdrawal (and shifting the money around a bit differently). Effectively a no cost transfer from your taxable account to a Roth account.
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Roth conversion
Old 12-06-2013, 05:03 PM   #26
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Roth conversion

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Sell the equities as outlined in post 19, that sells the 10% equities. On top of that, buy the Extended Market in the taxable account and sell it in the IRA. Still 10% equities sold, and the taxable account remains all equities.
Ok I get what you are saying now. Yes, that might work. I need to play with it to see what that does to the international. The only bad thing is having to buy Strategic Income in my 401k since it has a .98 ER. (A couple of years ago Vanguard did a plan for us and at the time they put some of my 401k in the Strategic Income fund so they at at least thought it was the least worst option).

Quote:
Doing the Roth conversion cost you nothing if you are going to withdraw that amount from the IRA anyway. You pay 28% taxes if you withdraw from the IRA. You pay the same 28% taxes by characterizing that withdrawal as a Roth conversion. It's the same taxes either way, you're just calling it a Roth conversion instead of a withdrawal (and shifting the money around a bit differently). Effectively a no cost transfer from your taxable account to a Roth account.
I get that. Why I haven't done it is that I didn't see much point in doing a conversion if I was just going to turn around and immediately withdraw the converted money.

I guess what I could do is do the conversion early in the year and withdraw the converted money throughout the year and leave the earnings from it in there which would ultimately be able to withdrawn tax-free. Is that the reason to do this now?

Edit: Well I'm not sure the above works. This seems to say that if you withdraw in the same year you do the conversion then as to the amount withdrawn it is as if you never converted.

Quote:
If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions.
Publication 590 (2012), Individual Retirement Arrangements (IRAs)
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Old 12-06-2013, 08:48 PM   #27
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Ok I get what you are saying now. Yes, that might work. I need to play with it to see what that does to the international. The only bad thing is having to buy Strategic Income in my 401k since it has a .98 ER. (A couple of years ago Vanguard did a plan for us and at the time they put some of my 401k in the Strategic Income fund so they at at least thought it was the least worst option).
Unless you want to have an over abundance of S&P 500, I think you'll have to take some kind of hit like that.

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I get that. Why I haven't done it is that I didn't see much point in doing a conversion if I was just going to turn around and immediately withdraw the converted money.

I guess what I could do is do the conversion early in the year and withdraw the converted money throughout the year and leave the earnings from it in there which would ultimately be able to withdrawn tax-free. Is that the reason to do this now?

Edit: Well I'm not sure the above works. This seems to say that if you withdraw in the same year you do the conversion then as to the amount withdrawn it is as if you never converted.



Publication 590 (2012), Individual Retirement Arrangements (IRAs)
You don't want to withdraw from the Roth in the same year you contribute. You want to use the Roth just like you were going to use the taxable account. Save it for many years unless you need to make a sudden expenditure without a tax hit, or you need a little tax-free income to keep your taxable income down. Look at the taxable account plus the Roth account as two parts of the same thing. They both serve the same purpose for you.

Example balances at the beginning of 2014:

IRA: $100k
401k: $100k
Taxable: $100k + Roth: $0k = Total $100k

Goal: need to withdraw $10k from IRA and use $2.5 for taxes, $7.5k for expenses

Action: Roth convert $10k from IRA to Roth, pay $2.5k taxes from taxable account
Action: Use $7.5k from taxable account for expenses

Example balances at end of 2014:

IRA: $90k ($10k transferred to Roth)
401k: $100k (untouched)
Taxable: $90k + Roth: $10k = Total $100k (spent $10k taxable, replaced it with $10k to Roth from IRA)

So you have removed $10k from the IRA, paid $2.5k taxes, spent $7.5k, and left $100k in your 401k and $100k in the combination of taxable plus Roth.

The same thing happens in 2015 and 2016, or until your entire taxable balance is in the Roth.
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Old 12-06-2013, 10:17 PM   #28
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...
You don't want to withdraw from the Roth in the same year you contribute...
A contribution or conversion amount is locked out for 5 years, unless the account holder does not mind paying a 10% tax penalty. IRS Pub 590 contains the following.
Are Distributions Taxable?
You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s).
What Are Qualified Distributions?
A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

1. It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and

2. The payment or distribution is:
a. Made on or after the date you reach age 59,
b. Made because you are disabled (defined earlier),
c. Made to a beneficiary or to your estate after your death, or
One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).
Additional Tax on Early Distributions
If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.

Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions , later, to determine the recapture amount, if any.

The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions , earlier.

For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2012, and makes a regular contribution for 2011 on the same date, the 5-year period for the conversion begins January 1, 2012, while the 5-year period for the regular contribution begins on January 1, 2011.
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Old 12-07-2013, 01:10 PM   #29
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I think other threads have concluded that if you are over 59.5 there is no tax penalty. Here is a quote from Publication 590 (2012):

Publication 590 (2012), Individual Retirement Arrangements (IRAs)

"
Additional Tax on Early Distributions


If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs.
Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover. See Ordering Rules for Distributions , later, to determine the recapture amount, if any.
The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. See What Are Qualified Distributions , earlier.
For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2012, and makes a regular contribution for 2011 on the same date, the 5-year period for the conversion begins January 1, 2012, while the 5-year period for the regular contribution begins on January 1, 2011.
Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover.
You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions.

Other early distributions. Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions.

Exceptions. You may not have to pay the 10% additional tax in the following situations.
  • You have reached age 59.
  • You are totally and permanently disabled.
  • You are the beneficiary of a deceased IRA owner.
  • You use the distribution to buy, build, or rebuild a first home.
  • The distributions are part of a series of substantially equal payments.
  • You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
  • You are paying medical insurance premiums during a period of unemployment.
  • The distributions are not more than your qualified higher education expenses.
  • The distribution is due to an IRS levy of the qualified plan.
  • The distribution is a qualified reservist distribution.

Most of these exceptions are discussed earlier in chapter 1 under Early Distributions . "

So a <5 year withdrawal is not a "qualified distribution", but using the age 59.5 exception it also does not incur a tax penalty, I think. Lots of "may" qualifications in there confusing the issue. I think Ed Slott had a better summary, but my quick search did not find it.
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Old 12-10-2013, 09:54 AM   #30
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...
Most of these exceptions are discussed earlier in chapter 1 under Early Distributions . "

So a <5 year withdrawal is not a "qualified distribution", but using the age 59.5 exception it also does not incur a tax penalty, I think. Lots of "may" qualifications in there confusing the issue. I think Ed Slott had a better summary, but my quick search did not find it.
Thanks for pointing this out. I did not read far enough to see the exceptions.

The 59.5 age exclusion makes it a lot more convenient to use Roth conversions to average out taxes from IRA withdrawals. I myself have plenty of after-tax savings to live on before I need to tap IRAs and 401k's, but can use some conversions and still stay inside the 15% tax bracket for a married couple.

I have read that the deadline for Roth conversion for the year ends at Dec 31, and not April 15 of the next year as with normal contributions. But I have yet to find the exact wording in Pub 590. I will do some Roth conversion before the end of the year to be sure.

Our tax laws are ridiculously complicated.
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Old 12-10-2013, 03:32 PM   #31
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[QUOTE=NW-Bound;1389204]I have read that the deadline for Roth conversion for the year ends at Dec 31, and not April 15 of the next year as with normal contributions. But I have yet to find the exact wording in Pub 590. I will do some Roth conversion before the end of the year to be sure.QUOTE]

That's correct.

If you do several smaller conversions, each with a different fund or asset type in it, you can then choose to recharacterize individual conversions on (or after) April 15. So you can convert more than your target amount in the conversion year and then trim the amount later. That also lets you select equities that have risen in value during the subsequent year (your taxes will be smaller than if converted later) and discard the ones that have dropped (you would be paying too much in taxes).
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Old 12-20-2013, 04:50 PM   #32
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Just to do a final followup on this.

What we are going to do is sell all the equities in our taxable account soon after the taxable year. We will then use those proceeds to live on in 2014. Between that money, DH's SS, cash already on hand and what I earn from very part-time work we will cover all our 2014 expenses. If we stopped there we would have no taxable income at all. However, what is optimal is to withdraw (or Roth convert) up to the top of the 15% tax bracket, keeping that money for 2015 expenses.

Then in 2015 we will have expenses a little less than 2015. We will spend the money we withdrew (or converted) in 2014 and then will withdraw the balance needed (or convert) up to the top of the 15% tax bracket.

Doing this basically means that after this year we should not be in the 25% tax bracket again. Over the next 3 years this procedure saves us quite a bit in taxes.

I particularly thank Animorph, whose comments really got me to thinking about different alternatives. We hadn't been eligible for Roth IRAs when DH and I were working fulltime and we had been in such a high bracket the last couple of years that conversions weren't appealing. Now that I can arrange to be in the 15% bracket for the next 3 years this all becomes much more interesting.

To do this - spend the taxable money next year - I had to get over my mental barrier to spending it. I liked the idea of having some taxable money in case we needed to make a big purchase unexpectedly (car replacement, new roof, etc.) where I didn't want to have to withdraw money from the IRA and perhaps go into a new tax bracket. What I really had to analyze and realize was that to have that security blanket I was throwing us into the 25% tax bracket when by spending the taxable money we would easily be in the 15% tax bracket and would save enough on taxes to make it worthwhile.

This allow solves my problem of which equities to sell in order to end up with enough set aside for high expenses the next 3 years. Selling the taxable accounts and putting that money in cash basically leaves me with the allocation I am looking for (I will have to tweak it a bit since all of my international is in the taxable account so I will need to figure out how to get that but that is a relatively minor problem).
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Old 12-20-2013, 08:57 PM   #33
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Doing this basically means that after this year we should not be in the 25% tax bracket again. Over the next 3 years this procedure saves us quite a bit in taxes....
To do this - spend the taxable money next year - I had to get over my mental barrier to spending it. I liked the idea of having some taxable money in case we needed to make a big purchase unexpectedly (car replacement, new roof, etc.) where I didn't want to have to withdraw money from the IRA and perhaps go into a new tax bracket. What I really had to analyze and realize was that to have that security blanket I was throwing us into the 25% tax bracket when by spending the taxable money we would easily be in the 15% tax bracket and would save enough on taxes to make it worthwhile.
I think that is smart. With a low taxable income and low after tax assets you may also qualify for financial for your kids for college, depending on the school and the aid formula they use. The FAFSA doesn't factor in retirement accounts, personal residence or businesses under 100 employees.

We are holding off on Roth conversions for now to qualify for ACA subsidies and college aid.
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Old 12-20-2013, 09:02 PM   #34
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I think that is smart. With a low taxable income and low after tax assets you may also qualify for financial for your kids for college, depending on the school and the aid formula they use. The FAFSA doesn't factor in retirement accounts, personal residence or businesses under 100 employees.
That is a good point. Thanks for raising it. We've never applied for financial aid. Back when we were working full-time I filled out the form somewhere online and it said we would be expected to contribute $90k a year. Kids are going to a state university and to CC so not that expensive. Still, it would definitely be a good idea to apply.
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Old 12-20-2013, 09:22 PM   #35
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That is a good point. Thanks for raising it. We've never applied for financial aid. Back when we were working full-time I filled out the form somewhere online and it said we would be expected to contribute $90k a year. Kids are going to a state university and to CC so not that expensive. Still, it would definitely be a good idea to apply.
We were in the same boat a couple of years ago when when DH had a regular job plus we put in more hours on our businesses.

But check out the article and chart below on you new, lower AGI and EFC -

2013 Guide To FAFSA, CSS Profile, Expected Family Contribution (EFC) And College Aid - Forbes

If you have two in college, even half time counts, I believe EFC is the family EFC, and not per student. So the per student amount for two kids is half of the amount in the chart.
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