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Old 08-24-2012, 11:39 PM   #21
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IMO, I do not see being able to pay less than the 15% tax bracket... so I would be willing to pay the 15% now and nothing on the future earnings...

If for some magical reason, the tax bracket is less than 15%, I think I would still be ahead not paying taxes on the gains.. if wrong, it is not like it would be that much money...

But, if you do not convert and have to pay in a higher tax bracket.... it could be a lot higher....
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Old 08-25-2012, 03:11 AM   #22
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Originally Posted by Animorph View Post

RetireBy90, ejman, if you withdraw from a pre-tax account over and above any RMD and have a taxable account, you have an opportunity to move an equal amount of that taxable account money into a Roth with no impact on taxes by doing a Roth conversion instead. Placing taxable money into a Roth is as close to a free lunch as you can get.
This is not correct. A Roth conversion requires payment of income taxes on the amount converted. It is not tax-free. It's true that if you convert $100 from a TIRA to a Roth Ira you can end up with $100 more in the Roth, but you would also have had to pay the fed and state income tax on the $100 from another pocket.
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Old 08-25-2012, 05:34 AM   #23
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In Oregon the tax rate for a couples income is 9 % on income over $15,500. When I add that 9 % to the federal tax rate of 15% which starts at taxable income of $17,000 for couples I get a 24 % combined tax rate. I don't have a lot of deductions so the standard deduction will have to do. I'm not quite understanding how I can spend from my taxable account and have a tax free conversion from my IRA to a Roth that would not add income at a combined rate of 24% but I certainly would like to learn how this is done.

I very simplistically thought that a dollar converted from my IRA to a Roth would be taxed at 24% combined Federal and State. Again if this is not so then obviously I need to reevaluate.
Woa - 9% I hope the state cleans the house for ya!!!

After the shock wears off I will be following this to see how 0% can be done.
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Old 08-25-2012, 06:58 AM   #24
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....I very simplistically thought that a dollar converted from my IRA to a Roth would be taxed at 24% combined Federal and State. Again if this is not so then obviously I need to reevaluate.
That is consistent with my understanding and if there is a workaround to avoid taxes I would be interested as well.

Wow, 9% on income over $15,500 is extreme.

In addition to federal and state income taxes, I am trying to factor the implications of property tax relief and Obamacare health insurance subsidies into the decision. For property tax relief and Obamacare subsidies, benefits decrease as income increases from Roth conversions so the loss of benefits is an additional economic "cost" of the Roth conversion. For the latter, my understanding is that the 2014 subsidies are likely to be based on 2012 tax return filings (at least provisionally).

It looks like the real constraint on Roth conversions for me in 2012 will be to keep my total income slightly below 400% of the federal poverty level (~$60k for a household of 2). If I do that, in 2014 I would get a premium subsidy of ~ 50% (worth about $9k). If I take additional Roth conversions in 2012 that cause my income to exceed 400% of FPL then the $9k goes away, so the cost of those additional conversions is extremely high. Of course, all this assumes that ObamaCare is still in place come 2014. Are others coming to similar conclusions?
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Old 08-25-2012, 10:52 AM   #25
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Ejman, maybe a mitigating factor is your deductions? Is the Oregon tax applied to the income or the income minus deductions and exemptions (as in Federal)?

In California the marginal rate is 2% on $15k taxable income.
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Old 08-25-2012, 11:06 AM   #26
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Ejman, maybe a mitigating factor is your deductions? Is the Oregon tax applied to the income or the income minus deductions and exemptions (as in Federal)?
I took a quick look at the OR form and it looks like TI equals federal AGI - federal taxes - SS taxes paid - US interest - federal govt pension income - itemized deductions +/- a host of special items that probably don't have a big effect to most people.

so I understand the higher rate but I'm not sure the additional soutractions offset the sky-high rate.
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Old 08-25-2012, 11:47 AM   #27
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ORP tells me to convert up to the top of the 0% tax bracket, but then calculates that incorrectly. If I use TurboTax to see how much I can convert and pay zero in taxes, it is a much larger number. I don't see that as a fault of ORP because it doesn't know my exact tax situation such as all the tax credits I get.

So my take-home message from this is that you have to double-check what ORP tells you by running real tax software. However in our case it appears that ORP is on the right track of paying zero income taxes to convert 401(k) to Roth IRA. It certainly does not suggest that I pay even 15% in taxes to do the conversion.
If you have time, read some of the background material at the ORP site. In that material James Welch suggests that rather than using the specific numbers the calculator provides, you use the pattern of distribution/movement. That is exactly what you are doing!

If you really like the software, make a small donation on his web site. I think he does a terrific job with it -- it's a great tool, as is Firecalc.

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Old 08-25-2012, 04:27 PM   #28
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This is not correct. A Roth conversion requires payment of income taxes on the amount converted. It is not tax-free. It's true that if you convert $100 from a TIRA to a Roth Ira you can end up with $100 more in the Roth, but you would also have had to pay the fed and state income tax on the $100 from another pocket.

I'm talking about withdrawing from a TIRA when you still have money in a taxable account. Do a conversion instead of a straight TIRA withdrawal.

Start with $200 in TIRA, $200 in taxable account, $0 in Roth.

1) TIRA withdrawal of $100, pay taxes ($20 say) on $100, keep $200-$20 in taxable account. Income $100, Taxes $20, Balances: TIRA $100, taxable $180, Roth $0

2) Roth conversion $100, pay taxes ($20) on $100, Use $120 in taxable account for income and taxes. Income $100, Taxes $20, Balances: TIRA $100, taxable: $80, Roth $100

Same $100 income and $20 in taxes, but with (2) you have moved $100 from your taxable account to your Roth account and from then on won't pay taxes on it, nor have to track capital gains on it.

Seems like a lot of posters on this thread are just planning on taking withdrawals and not doing conversions. If you have a taxable account this seems like a big mistake. That's why ORP is recommending all those Roth conversions.
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Old 08-25-2012, 04:36 PM   #29
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Ejman, maybe a mitigating factor is your deductions? Is the Oregon tax applied to the income or the income minus deductions and exemptions (as in Federal)?

In California the marginal rate is 2% on $15k taxable income.
In my particular case deductions are not a big factor as I have no mortgage and no dependents other than us two. The Oregon tax is generally AGI minus fed tax, SS, Fed interest and a whole bunch of adjustments that don't amount to a hill of beans for most people. Bottom line is that I generally end up paying just as much if not more Oregon than Fed tax. So I understand any Roth conversions would just simply go on top unless Animorph has a special magic wand that could be shared with us.
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Old 08-25-2012, 04:38 PM   #30
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I took a quick look at the OR form and it looks like TI equals federal AGI - federal taxes - SS taxes paid - US interest - federal govt pension income - itemized deductions +/- a host of special items that probably don't have a big effect to most people.

so I understand the higher rate but I'm not sure the additional soutractions offset the sky-high rate.
Yes, this is correct and no, the additional subtractions do not offset the high rate (at least for most people)
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Old 08-25-2012, 05:51 PM   #31
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if you withdraw from a pre-tax account over and above any RMD and have a taxable account, you have an opportunity to move an equal amount of that taxable account money into a Roth with no impact on taxes by doing a Roth conversion instead. Placing taxable money into a Roth is as close to a free lunch as you can get.

.
This was an interesting, but for me, a confusing way to state this.
The more conventional way to state it is that a Roth conversion is beneficial if the tax rate at which you convert is lower than or equal to the tax rate when you make withdrawals (from TIRA) if you pay the conversion taxes from outside (the TIRA) funds. However I do agree with your example.

Another more conventional way to state it is that it is better to live on taxable funds and do a Roth conversion than to live on TIRA withdrawals
(assuming you have adequate taxable funds).
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Old 08-25-2012, 06:45 PM   #32
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I am not familiar with the retirement calculator you used, but when I use Esplanner to do my own projections, it's quite clear that Otar's strategy is the correct one. Among its outputs Esplanner shows the federal and state income taxes for each year of its projections. If I were not to do the Roth conversions between my retirement age of 62 and 70, the RMDs would result in a much larger lifetime tax bill, especially since the SS benefits would then be taxed at a higher rate as well. It's may be a little counter-intuitive, but if your calculator provides details for each year of its projections, then it is easy to see the benefit. If it doesn't, then you should use Esplanner.

If tax rates do change they are likely to go up, but by the time I have finished my Roth conversions my taxable income will be very low.





I am assuming that tax brackets and rates don't change in a way that would affect
Is this something you buy or can you use it free online? I went to the website but it wasn't obvious to me that you could do anything there.....unlike Taxcaster or Firecalc.........probably blind, I guess.
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Old 08-26-2012, 10:02 AM   #33
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Is this something you buy or can you use it free online? I went to the website but it wasn't obvious to me that you could do anything there.....unlike Taxcaster or Firecalc.........probably blind, I guess.

It's available for purchase, according to their site Our Products | ESPlanner Inc., and there's also a very simplified free version accessible there also.

The free version is (just don't log in) http://basic.esplanner.com/

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Old 08-26-2012, 01:17 PM   #34
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It's available for purchase, according to their site Our Products | ESPlanner Inc., and there's also a very simplified free version accessible there also.

The free version is (just don't log in) Home | ESPlannerBasic

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omni.......thanks for the link.
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Old 08-26-2012, 01:18 PM   #35
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I'm talking about withdrawing from a TIRA when you still have money in a taxable account. Do a conversion instead of a straight TIRA withdrawal.

Start with $200 in TIRA, $200 in taxable account, $0 in Roth.

1) TIRA withdrawal of $100, pay taxes ($20 say) on $100, keep $200-$20 in taxable account. Income $100, Taxes $20, Balances: TIRA $100, taxable $180, Roth $0

2) Roth conversion $100, pay taxes ($20) on $100, Use $120 in taxable account for income and taxes. Income $100, Taxes $20, Balances: TIRA $100, taxable: $80, Roth $100

Same $100 income and $20 in taxes, but with (2) you have moved $100 from your taxable account to your Roth account and from then on won't pay taxes on it, nor have to track capital gains on it.

Seems like a lot of posters on this thread are just planning on taking withdrawals and not doing conversions. If you have a taxable account this seems like a big mistake. That's why ORP is recommending all those Roth conversions.
Anamorphic -thanks for the follow up. If I am going to take a draw of $100 from my TIRA and move it to my taxable account, paying taxes of say $25 and deposit $75 into my taxable acct, the I could wd $31, pay taxes giving $25 to pay taxes on a $100 transfer. It would cost more to pay taxes on amount to pay taxes, bit I would not pay taxes any more on converted $$.

I've thought and read and discussed TIRA to ROTH conversions, and the one big risk I can come up with is what if we start a vat or federal sales or consumption tax. If so, you take a hit today and pay your taxes then pay sales tax making it double taxed. Not enough risk of happening nor is the cost if it happens enough to keep me from converting when it would otherwise make sense but you gotta list the potential risks to make an informed decision
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Old 08-26-2012, 01:38 PM   #36
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Back on my original topic. I am surprised that no one mentioned what was happening to the markets during the 10 years of moving regular IRAs to ROTH IRAs. Most everyione assumed that their tax rates would go up, so it would be cheaper to pay now than later.

The fallacy that I see with the calculator, is that it assumes a constant even growth rate of your assets (You just plug in a number of what percentage they are growing). One of the uncontrollable factors of the withdrawal stage is the sequence of investment returns. In the first 10 years of retirement, a severe market downturn would greatly increase a portfolio's chance of failure. Paying more taxes by moving money from a Regular IRA to a ROTH IRA exacerbates this even further.

My take away from this; If you are in a stable or Up market environment, paying some more in taxes to reduce future tax liability may be good thing. Not so much in a severe market downturn.
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Old 08-26-2012, 04:04 PM   #37
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...(snip)...
My take away from this; If you are in a stable or Up market environment, paying some more in taxes to reduce future tax liability may be good thing. Not so much in a severe market downturn.
Not sure why you are focusing on this as we probably agree we have no crystal ball on future market movements. The current market appears to be about average valuations (based on trailing PE and forward PE estimates).

IMO the only obvious period of a bubble in the last decade was the 2000 growth bubble. Unfortunately, it got a lot more obvious in retrospect.
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Old 08-26-2012, 04:11 PM   #38
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Not sure why you are focusing on this as we probably agree we have no crystal ball on future market movements. The current market appears to be about average valuations (based on trailing PE and forward PE estimates).

IMO the only obvious period of a bubble in the last decade was the 2000 growth bubble. Unfortunately, it got a lot more obvious in retrospect.
What I was focusing on does not require a crystal ball at all.....Example You are year 2 into retirement. Your portfolio plunged about 40% the previous year....The question is do you move assets from a regular IRA into a ROTH up to the 15% tax level. And then pay the taxes with your now diminished portfolio? .....I would not, I would minimize taxes at this point.
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Old 08-26-2012, 04:32 PM   #39
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What I was focusing on does not require a crystal ball at all.....Example You are year 2 into retirement. Your portfolio plunged about 40% the previous year....The question is do you move assets from a regular IRA into a ROTH up to the 15% tax level. And then pay the taxes with your now diminished portfolio? .....I would not, I would minimize taxes at this point.
In 2008 and 2009 I did the Roth conversions. Those conversions grew quite nicely inside the Roth's up to the present. So in that case the market turn was very welcomed. I'm not saying I knew what was coming and planned this. Just that I viewed the conversions (and still do) as a separate decision from market dynamics.

On the other hand, had it been 1999 I think that you have a point. The bubble atmosphere at the end of 1999 was a warning to curtail conversions. I was not doing any conversions in those years but just funding the IRA's.

On the other hand (assume I have 3 hands), if one knows enough to curtail conversions (because you want Uncle Sam to share in your equity losses if they occur) then why not just move the money out of equities? In that case you are then OK with conversions (non-equity to non-equity).
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Old 08-26-2012, 04:34 PM   #40
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The fallacy that I see with the calculator, is that it assumes a constant even growth rate of your assets (You just plug in a number of what percentage they are growing). One of the uncontrollable factors of the withdrawal stage is the sequence of investment returns. In the first 10 years of retirement, a severe market downturn would greatly increase a portfolio's chance of failure. Paying more taxes by moving money from a Regular IRA to a ROTH IRA exacerbates this even further.
ORP does have a Monte Carlo feature.

No tool of this nature is perfect. The ones that are available all seem to have their strengths and weaknesses. They all require the user to make some assumptions, such as length of plan, inflation rate, social security benefit (as there seems to be some uncertainty that we will receive what current SS estimates say we will), do you plan to work in retirement and how much will you make and for how long, etc. The deterministic ones require you to specify returns...

The future is uncertain. You just have to plan for yourself using the assumptions that you think are most likely to materialize, or if you prefer, use worst case assumptions. Either way, you are probably going to be off. If someone strongly believes the first n years of his retirement will see overwhelmingly negative returns, that person might be better off in CD's.

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My take away from this; If you are in a stable or Up market environment, paying some more in taxes to reduce future tax liability may be good thing. Not so much in a severe market downturn.
Roger that.

I think you are trying to put too fine a point on this. Use these tools to establish a general direction, not a precise compass heading. If you don't like what one tool is telling you, then that probably is not the tool for you.

Personally, I use Fidelity RIP, ORP, FireCalc, and Quicken Retirement Planner AKA Lifetime Planner. I generally use 90% of assets, 3% inflation, and 2.5% real return, and do runs with 100% of SS benefits and 75% SS benefits. FireCalc gets four runs, two in deterministic mode, and two in its native mode. My approach is probably opposite from what most people do. I have the tool solve for the amount I can safely spend per year, then decide if my budget can live with that amount. FireCalc and ORP do this effortlessly. With RIP and Quicken I do this by varying the annual expenses until the plan breaks, then back off the expense number a little. Sounds difficult but it takes just a few runs if you use a binary search to home in on the expense number. Summarize this into a little 5x2 spreadsheet and analyze by closing one eye, and squinting with the other eye until the numbers are fuzzy but readable, and usually conclude everything will be OK.

You might consider sending an email to James S Welch Jr. orplanner@gmail.com <orplanner@gmail.com
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