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Old 10-17-2013, 03:58 AM   #21
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Originally Posted by pb4uski View Post
I think it will make a difference and depending on your situation, perhaps enough of a difference that it affects the decision. As you may know, by law the tax brackets will now increase for inflation rather than increase only when Congress feels like increasing them. The top of the 15% tax bracket today is $72,500 for a couple. At the same 2% rate you increase SS, it will be $80,046 when you are 71.

In my case indexing tax brackets makes a difference. If I have no indexing then beginning at age 70 I am in the 25% bracket for the rest of my life. If I index at 2%, I get back into the 15% bracket in my mid-90s. If I index at 2.5% I get back into the 15% bracket in my mid 80s and if I use 3% then I never get into the 25% bracket. YMMV.
That is good to know, P. That will help me convert at 15% before 70.5 and RMDs. I plan to do a detailed investigation with TurboTax every year after I leave this job.
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Old 10-17-2013, 04:09 AM   #22
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All of this tells me that I should be seeking to steadily do conversions every year that I have room in the 15% bracket.
I am glad this helped someone.
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Old 10-17-2013, 07:33 AM   #23
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In reading this thread, I understand the tax brackets are indexed for inflation and will surely increase. However, I thought the standard deduction is also indexed, effectively preventing bracket creep, and thereby keeping the effective tax rate the same?
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Old 10-17-2013, 08:03 AM   #24
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In reading this thread, I understand the tax brackets are indexed for inflation and will surely increase. However, I thought the standard deduction is also indexed, effectively preventing bracket creep, and thereby keeping the effective tax rate the same?
No, what keeps the effective tax rate pretty much the same is income going up with inflation for most people, though not necessarily retirees. The standard deduction increasing actually helps you, because increasing it decreases your net taxable income.
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Old 10-17-2013, 09:13 AM   #25
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ABSOLUTELY! If you have enough time, move it all. I don't have enough time anymore.

This is especially important if you have a spouse. In my case, either I will convert everything to the top of the 25% bracket before 70.5 or to the top of 15% before 70.5 and to the top of 25% after 70.5 (takes 3 more years).
We are both 40 with the bulk of our assets in traditional IRAs. I will hang it up in January and then the tax optimization begins. Since we will qualify for obamacare subsidies things will be complex, but I expect to do a lot of conversion in the next couple decades.
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Old 10-17-2013, 05:14 PM   #26
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As a previous poster mentioned, if you convert $100,000, and pay the tax out of your taxable account, which IMO should always be done, at the 25% rate you have essentially contributed $75k or your IRA funds, and $25K of taxable funds.

I do not consider myself a frequent trader, but my broker does. What I do is to hold any gain in a taxable account at least until it is long term, but in a deferred or better yet a tax free account like a Roth I have no constraint about selling should some stock get way beyond what I consider a fully justified price. I started my Roth with a conversion in Jan 2010, and made one more ending in Mar 2012. But that account has doubled in value, whereas my taxable account has not gained anywhere near as much proportionately.

So, I think if the tax problem does not seem overwhelming there is good reason to do the Roth conversion.

Ha
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Old 10-17-2013, 10:11 PM   #27
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Ha,

This illustrates the differences between people's situations.

You are single and you have assets in a taxable account. I am not and don't.

For me, it makes sense to convert to Roth even if I have to pay taxes out of the distributions from the IRA, even at a 25% rate.

Converting everything no matter what may make sense for you as well, as you are basically in the same situation as a survivor--a high tax situation when taking SS after MRDs start.

Ed
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Update:death of a spouse
Old 12-07-2013, 11:35 PM   #28
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Update:death of a spouse

Holy smoke!

Thanks to RunningBum, I started to investigate consequences of death of a spouse.

The loss of deductions between married, filing jointly and single status produces a BIG hit on the survivor!

I ran a few scenarios where one of us (me) dies at 71 (not impossible if I don't lose a lot of weight soon). When I made the correction for married/single, significantly more taxes were paid. So much more, I am not sure I got it right. Taxes are money that is not working for you.

Still refining this (looking for bone-head errors), but right now it looks like a good strategy is to move our IRA to Roth totally after stopping work and before 70.5 (MRDs begin) and 71 (same tax year) when I start taking SS, regardless of the marginal tax rate. Of course, if we both live to 100, we will have paid more total taxes than if we only converted to the top of, say, 15% marginal rate, but
a) it is highly likely that one of us will not survive the other and by that time it is too late, and
b) total conversion frees us from virtually all income taxes after 71.

Remember, our situation is a lot simpler than most and I am only looking for a strategy by comparing alternatives on the same basis.

I will report back when I am comfortable with the calcs, probably after New Year's some time.

BTW, it looks likely that we will be here another year (which will help a lot), but it is not on paper yet and things are changing daily here.

Cheers from 52F and sunny Baku.

ETG
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