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Old 12-22-2010, 10:36 AM   #41
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Originally Posted by teejayevans View Post
An important consideration is if you have heirs, if they are in the %15 tax bracket, and you won't be spending down your IRA, it would be just as well for them to inherit an IRA and pay 15% as oppose to you paying 25% to do the conversions.
Yes, as long as you don't hit the estate tax. Then you are better off paying the income tax on the conversion if it will bring you down under that cap.

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Old 12-22-2010, 11:48 AM   #42
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Originally Posted by RunningBum View Post
Zero, do you really have $1.5M or thereabouts in your 401K/IRA? Wow, what a great problem to have! Congrats!

Three observations:
1) If you convert $35K each year for 10 years, that's $350K converted at an 18% lower tax bracket, or $63K saved on taxes. It's actually a bit better since some of that conversion is taxed in the 10% bracket, and the part that offsets your deductions+exemption is free.

2) How about converting up to the top of the 28% bracket each year? Converting ~$170K each year for 10 years will bring your IRA down quite a bit. Maybe to the top of 25% is enough. Run your numbers and see how it looks. That amount over the first $350K won't be nearly as good as the 18% gain as the first part, but even if you get a 3% gain on the next million that's another $30K. I'm not sure how your numbers will actually work out but it's worth a look.

I know I talked about that hidden "30%" rate, but you're only looking at $7500 taxed at that rate before you fall back to a real 25% rate since there will be no more of the divs + ltcg block getting pushed above the $34K line.

3) Which tax bracket where you in when you contributed most of the 401K money? Remember that this was taken off the top so that's money that would've been taxed at the highest rate you were at. Now when you convert and withdraw, you are filling in the lower brackets first and finally may peak at 28% or 33%. I don't think you were duped as badly as you think you were.

However, that does make a point that if you are going to have a successful career and have a good income in retirement, it may not make that much sense to slam all you can in a 401K in your early 20s when you are in a lower tax bracket. Just getting the company match may be all you want to do. But how does one know?
Yes, I do have $1.5mil and it's because it's a combo of my 401k rolled into the IRA and a lump sum pension also rolled into the IRA.

I was in various tax brackets over the years and had more deductions, so I'd estimate that I was in a 20% bracket on average.

As you mention, a young person in their 20's really needs to look at this issue carefully. Especially someone in a profession where the progression is slow but sure (say engineering) where they may be able to sock away enough 401k to cause a 33%+ tax at RMD time.

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Old 12-22-2010, 12:01 PM   #43
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Originally Posted by jdw_fire View Post

i took a look at your ira example with the same thought that runningbum stated i.e. that you should do some conversion at higher tax brackets. when i did this i found some things.
1) if you fill up the 25% tax bracket for those years then at in 2020 it looks like you will have less in your ira than you have now and the RMD wont push you out of the 25% tax bracket.
2) if you fill up the 28% tax bracket with conversions over that decade your ira will be almost entirely converted by 2020
3) the numbers you posted as ira balances after 2011 dont show that you are doing the converting you said you did. eg. the 2012 balance is 5% higher than the 2011 balance so no conversion was made.
and my analysis didnt increase the tax brackets for inflation which means that you would be able to convert even more than my analysis did and therefore your ira balance will be even smaller making the RMD smaller also
Woooops, you caught me, I was doing a comparison with and without Roth Conversion and snipped out the wrong portion.

Thanks for the suggestions (you and RB), as I am clearly in need of some creative solutions.

AND, as always I feel like I am playing IRS Roulette wherein they may change the rules at any time.

Here is the IRA growth with $35,000 taken each year for Roth Conversion and a 5% growth.

2010 $1,500,000
2011 $1,538,250
2012 $1,578,413
2013 $1,620,583
2014 $1,664,862
2015 $1,711,355
2016 $1,760,173
2017 $1,811,432
2018 $1,865,253
2019 $1,921,766
2020 $1,981,104
That would reduce the RMD to $80,000.

Maybe having 5-6 children between now and 70 is the answer! OR, a market similar to the last 8 years would solve it.

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