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Conversion from Tax Deferred to Taxable
Old 11-06-2012, 02:30 PM   #1
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Conversion from Tax Deferred to Taxable

Here is my situation. Wife and i are both 58 and HAPPILY retired.

Income = $84k

Debt = ZERO. (Only current month charges on M/Card!)

Income is $55.5 California Public Employees, with a max 5% COLA
and $28.5 Social Security Disability.

Investments are...

Old Employer §457 Plan = $70k
IRA (rolled from 401(k) Plan = $305k
After Tax Brokerage Acct = $150k

WIth that income level, STD deduction (no MTG interest ) we have a taxable income of around $63k - FIRMLY in the (current) 15% bracket. My plan is to GRADUALLY shift over funds from the §457 Plan first, then the IRA to the brokerage acct. I figger that 15% is a cheap cost to convert. AND, for THAT matter, the next bracket, 25% ain't THAT bad. I **HATE** to have to pay the tax, but EVENTUALLY it has to be paid. AND, in the event that DW and I both pass it makes the Estate much easier NOT having tax deferred issues. AND if I pass, it would just generally make life easier for HER to not have to deal with tax issues.

QUESTION.... am I NUTS? Or is this a reasonably sound plan?
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Old 11-06-2012, 05:34 PM   #2
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Have you examined and used the calculator at www.i-orp.com which can help you with conversions to Roth IRA?

You did not mention Roth IRA, so I guess you are NUTS.
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Old 11-06-2012, 08:07 PM   #3
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Yeah, if your moving out of tax deferred accounts just to save on taxes, do a Roth conversion. No future taxes that way. The traditional IRA will probably be simpler tax-wise for heirs than a taxable account anyway. No capital gains tax calculations every year or step-up basis. I'm looking forward to spending down my taxable accounts over the next decade or so.
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Old 11-06-2012, 09:08 PM   #4
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I agree with the others. I would do Roth conversions up to the 15% bracket until the 457 and IRA are exhausted. I would also consider rolling the 457 over to the IRA for simplicity and to get more investment options.

One thing to keep in mind is that in 2012 you don't want to exceed the top of the 15% bracket because it would increase the tax rate on your capital gains and qualified dividends from 0% to 15%.
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Old 11-08-2012, 10:12 AM   #5
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Any withdrawal from IRA or 457 will add to your taxable income. So if you want to stay in the 15% bracket for 2012 you must keep your total taxable income below $70.7k. If you don't need to spend that income I would roll it over into a ROTH IRA and pay the tax from your current income or taxable accounts.
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Old 11-08-2012, 06:41 PM   #6
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Thank you all for the input. For some silly reason I had totally failed to consider rolling the 457 and IRA into a Roth. I have a great spreadsheet set up projecting our asset status thru age 90. I think I will add a new tab and look at a Roth impact. Seems to make sense. Nice to be retired and have the time to DO tinkering like that. When I was still w*rking (I try not to use the "W" word in mixed company...) it was hard to find the time to sit and PLAY with projections.
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Old 11-08-2012, 08:51 PM   #7
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I just added a switch to take Roth conversions out of my calculations. It caused a big drop in estimated yearly income (well, maybe 10%). I'll definitely be converting during retirement.
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Old 11-08-2012, 11:17 PM   #8
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Ya... THAT was the problem while working... shrug...
Had to do what I had to do. AND cannot change yesterday.



Quote:
Originally Posted by Animorph View Post
I just added a switch to take Roth conversions out of my calculations. It caused a big drop in estimated yearly income (well, maybe 10%). I'll definitely be converting during retirement.
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