New tax law and ROTH

[free2020]

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Originally Posted by RunningBum If you don't need the money for spending, I'd much rather have the money in the Roth. 0% on those dividends and growth instead of 15%.

Me too. Only regret I have is not starting on Roth earlier in life. Albeit the 5 year rule, loading up on Roth before putting any money in after tax brokerage accounts would have been awesome. I didn’t do that. Oh well. Now I try to tell my 20 something’s in my circles to do this.

Compounding is a wonder by itself, tax free compounding is super wonderful

[audreyh1]

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Originally Posted by JoeWras I'm hoping there was some recent reply sarcasm? If one has so much income that they can't do lowest bracket conversions, that's a good problem to have. Just sayin'.

Yeah - pretty much.

[meierlde]

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Originally Posted by RunningBum If you don't need the money for spending, I'd much rather have the money in the Roth. 0% on those dividends and growth instead of 15%.

Of one of the differences is how close to 70.5 you are and do you have anyone to inherit the money? Being 68 this year, it just seems to me better to take it out and pay the 15% on the dividends. (note if you go with 500 or total stock market index funds the dividends paid are about 1.8 percent since they don't throw off a lot of dividends and very few cap gains. meaning the impact is fairly small on taxes, and the IRMMA impact is identical. (Since both show up on the AGI), And as I have but 3 years till rmds are due, it won't make a lot of difference. (If younger more years make a difference).

[RunningBum]

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Originally Posted by meierlde Of one of the differences is how close to 70.5 you are and do you have anyone to inherit the money? Being 68 this year, it just seems to me better to take it out and pay the 15% on the dividends. (note if you go with 500 or total stock market index funds the dividends paid are about 1.8 percent since they don't throw off a lot of dividends and very few cap gains. meaning the impact is fairly small on taxes, and the IRMMA impact is identical. (Since both show up on the AGI), And as I have but 3 years till rmds are due, it won't make a lot of difference. (If younger more years make a difference).

I just don't see any sense at all in paying 15% on the dividends when you could pay 0. I can't see any case for it.

Sure, it's small. If you take $20K, at 1.8% dividends, that's $360 in dividends, or $54 in taxes, but why pay $54 if you can pay 0? Not to mention that any capital gains would be taxed if you sell later.

Some will have a low tax rate and so divs and CGs would be 0%, so it'd be a wash, but I'd still put it in the Roth to make sure your other divs and CGs don't stray above that line to be taxed.

[Winemaker]

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Originally Posted by RunningBum If you don't need the money for spending, I'd much rather have the money in the Roth. 0% on those dividends and growth instead of 15%.

You only have to pay taxes if you sell, if you invest for growth. Divvies are low. Like I said, I'm paying 22% for the next 10 years, qualified divvies 0-15%. Unspent money goes into growth funds, taxed only for capital gains, if I sell. Stepped up basis at death, 0% estate tax because less than $5 mil. 0% state tax to DW, 4.5% state tax upon death to my kids. At this point, I'm still in control.

Would I like the option of a Roth, hell yeah! But I gotta go with plan B because A doesn't show an advantage at this point.

[RunningBum]

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Originally Posted by Winemaker You only have to pay taxes if you sell, if you invest for growth. Divvies are low. Like I said, I'm paying 22% for the next 10 years, qualified divvies 0-15%. Unspent money goes into growth funds, taxed only for capital gains, if I sell. Stepped up basis at death, 0% estate tax because less than $5 mil. 0% state tax to DW, 4.5% state tax upon death to my kids. At this point, I'm still in control. Would I like the option of a Roth, hell yeah! But I gotta go with plan B because A doesn't show an advantage at this point.

I wasn't responding to you or your situation and I have no idea what your plan A or plan B is. All you've said was that no matter how much you convert, even $100K, you are still in the 22% bracket, which I don't believe because the 22% bracket isn't that wide.

Anyway, I was responding to meierlde's post:

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One other way to look at it is if you compare the old and new limits in the old 25 and 28% bracket, depending on how large RMDs will be in a few years, if over 60, is to instead of doing roth conversions, just withdraw the money and save a few percent on taxes. Note if you invest in dividend paying stocks with the withdrawn money you pay 15% (unless in the top bracket) instead of paying whatever rate your dividends inside the non roth 401k pay at based upon the tax bracket.

My point is to do the conversion rather than just withdrawing, so that there's no future taxable income via dividends or cap gains. Sure, cap gains can be avoided if you never sell, but what if you have to for some reason? Do you really know the whole future? And dividends, while perhaps small, are subject to taxes. There's no disadvantage I see to the Roth conversion. At worst case it's a draw, but with potential for taxes on dividend and CGs it's more likely conversion gives an advantage.

Whether you should convert at all is a different question, but not the topic meierdle and I were discussing.

btw, if you are in the 22% bracket, you don't get any 0% on divvies. You might want to take a second look at your tax situation based on these inaccuracies.

No idea what you mean by still being in control. Are you not in control of a Roth?

[meierlde]

I actually managed to create a spread sheet with income and taxes going back to 1976 when I started working. It is interesting that the overall percentage paid (taking the tax due divided by adjusted gross) is about as low has it had been anytime during the history, (all be it I retired and income moved from w-2 to dividends) Last year the overall percentage was about 16%. Given where I will be after 70.5 a litte early withdrawal won't hurt since otherwise the top part of the withdrawal will be at 32% (I am single)

[RunningBum]

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Originally Posted by meierlde I actually managed to create a spread sheet with income and taxes going back to 1976 when I started working. It is interesting that the overall percentage paid (taking the tax due divided by adjusted gross) is about as low has it had been anytime during the history, (all be it I retired and income moved from w-2 to dividends) Last year the overall percentage was about 16%. Given where I will be after 70.5 a litte early withdrawal won't hurt since otherwise the top part of the withdrawal will be at 32% (I am single)

And my point is, if doing early withdrawals give you an advantage, taking them as Roth conversions instead is probably an even bigger advantage, or at worst no difference.

Look, you can do whatever you want with your money, but when you come on here and claim that a withdrawal will save a few percent over a conversion, you ought to be able to defend it, and you haven't done that.

My point is that a withdrawal or a conversion causes the same taxable event with taking money out of your tIRA. It's where you put that money that makes a difference, and putting it in a Roth is better than putting it in a taxable account. The only way it wouldn't be is if you need the money soon, and can't get to the Roth because of the 5 year rule. Tell me where I'm wrong and taking it as a withdrawal and putting it in taxable works better.

[Winemaker]

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Originally Posted by RunningBum I wasn't responding to you or your situation and I have no idea what your plan A or plan B is. All you've said was that no matter how much you convert, even $100K, you are still in the 22% bracket, which I don't believe because the 22% bracket isn't that wide. Anyway, I was responding to meierlde's post: My point is to do the conversion rather than just withdrawing, so that there's no future taxable income via dividends or cap gains. Sure, cap gains can be avoided if you never sell, but what if you have to for some reason? Do you really know the whole future? And dividends, while perhaps small, are subject to taxes. There's no disadvantage I see to the Roth conversion. At worst case it's a draw, but with potential for taxes on dividend and CGs it's more likely conversion gives an advantage. Whether you should convert at all is a different question, but not the topic meierdle and I were discussing. btw, if you are in the 22% bracket, you don't get any 0% on divvies. You might want to take a second look at your tax situation based on these inaccuracies. No idea what you mean by still being in control. Are you not in control of a Roth?

My plan A was to do Roth conversions up to the 15% bracket, but for the past 3 years I was able to just barely keep my total income at the 15% bracket. Any conversion would have gone to the 25% bracket. Enter new tax law, any conversion goes to 22% bracket. I'm currently withdrawing $40k for living expenses.

Plan B, no conversion, but take additional $60k out. I will still pay same amount of income tax if I converted. Living expenses, still the same, except for federal income tax. By control, I mean by purchasing/investing in growth investments that pay no or little dividends. Berkshire, for one example. Or money market. Rinse and repeat. Perhaps plan C would convert every other year, as I would already have the next year's expenses in the money market.

Rental income can be controlled, also. In my accumulation phase I wanted to keep turnover time to minimum, now I can dial that in. New law also takes 20% off the top tax free.

DW hits FRA in 5 years, me 7 years. We're in control here when we take it. At 70, we lose control, we have to take it and RMDs. RMDs can be gifted away, so some control there. And yes, Roths are in my control, if I need some tax free cash or if I don't.

My spread sheet shows after 30 years with a 55/35/10 mix, a 0.1% difference in final portfolio, with me paying $346,000 more in taxes over 30 years at the current rates. In thirty years, that might be the price of a car.

[Fleur58]

Nobody mentions that you will also owe state taxes on an IRA conversion (in the majority of states). In many states it is significant, mine is 7.5%.

[RunningBum]

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Originally Posted by Winemaker My plan A was to do Roth conversions up to the 15% bracket, but for the past 3 years I was able to just barely keep my total income at the 15% bracket. Any conversion would have gone to the 25% bracket. Enter new tax law, any conversion goes to 22% bracket. I'm currently withdrawing $40k for living expenses. Plan B, no conversion, but take additional $60k out. I will still pay same amount of income tax if I converted. Living expenses, still the same, except for federal income tax. By control, I mean by purchasing/investing in growth investments that pay no or little dividends. Berkshire, for one example. Or money market. Rinse and repeat. Perhaps plan C would convert every other year, as I would already have the next year's expenses in the money market. Rental income can be controlled, also. In my accumulation phase I wanted to keep turnover time to minimum, now I can dial that in. New law also takes 20% off the top tax free. DW hits FRA in 5 years, me 7 years. We're in control here when we take it. At 70, we lose control, we have to take it and RMDs. RMDs can be gifted away, so some control there. And yes, Roths are in my control, if I need some tax free cash or if I don't. My spread sheet shows after 30 years with a 55/35/10 mix, a 0.1% difference in final portfolio, with me paying $346,000 more in taxes over 30 years at the current rates. In thirty years, that might be the price of a car.

Seems like less control to me to put that extra into taxable rather than converting to a Roth. You can buy that Berkshire in Roth just as well as taxable. But once you get a paper profit on it, if you want to sell for any reason--maybe it's no longer a good investment once Buffett is gone, or maybe you unexpectedly need that money after all--you can't sell it unless you're willing to pay taxes on the profit. You've lost some control, from a tax perspective. Compare to a Roth, where you could even sell it after 11 months and withdraw it from that account with no tax consequence. Still full control at all times.

I agree that if you withdraw from the tIRA and put it in a taxable account with investments that pay 0 dividends, and you never sell, you will wind up the same as if you put it in a Roth. But you've really limited yourself with those restrictions, which wouldn't happen in a Roth. I don't know how you can say that locking yourself into investments for the rest of your life puts you in control.

[kgtest]

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Originally Posted by gauss I have been using a "maximize my current bracket" strategy to smooth out my Roth conversions by doing it every year. If I continued this, I will have converted everything by 2025 (when the new/current rates expire). I will be only ~ 60 years old at that time. I have decided, instead, to scale back so that I still have tax diversity in my asset base. I suspect I will only convert 50% between now and 2025. This is definitely an opportunity for those who want to convert everything, or close to it, under the lower, wider tax brackets in effect through 2025. -gauss

I plan to have about 50/50 Roth/IRA when RMD begins. Seems sensible. Should I plan for less/more?

[RunningBum]

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Originally Posted by kgtest I plan to have about 50/50 Roth/IRA when RMD begins. Seems sensible. Should I plan for less/more?

Impossible to answer with virtually no information given. Generally you want to smooth out your tax rates for the rest of your life. You will probably have more income once you start taking SS and perhaps a pension, so that's a reason to avoid MRDs, which you can do by converting the IRA to a Roth. But, you probably don't want to convert at a higher rate now than you will be paying later, so converting it all might not work for your situation. So the first thing is to look at the tax bracket you're in now, how much room you have in that bracket, and estimate what your marginal tax rate will be in retirement.

There are other factors, such as limiting income to get ACA subsidies, taking LTCGs at 0%, or any number of other personal situations such as a plan to leave your tIRA to charity that can make your situation different.

There's also guessing future tax rates compared to current rates. Moving to another state with a different tax rate can also be a factor.

I'm sure there are many other factors I've missed.

[pb4uski]

I agree with RB that in general if one is over 59 1/2 that it makes much more sense to do Roth conversions than withdraw and invest in taxable.... you can invest in the same things and with the Roth you are guaranteed to be tax-free whereas with a taxable you have to carefully structure the character and total income to get that 0% preferenced rate.... much easier in a Roth.

The only exception that I can think of is if the proceeds will be invested in international equities... where the taxable account can be better in some circumstances because of the foreign tax credit.

[Winemaker]

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Originally Posted by Fleur58 Nobody mentions that you will also owe state taxes on an IRA conversion (in the majority of states). In many states it is significant, mine is 7.5%.

Currently PA does not tax SS, pensions, tIRA, 403b, 401k withdrawals. SSSShhh! Please keep this between us before anybody gets that idea.


I agree that converting to a Roth is a great idea. Can anyone give me an optimum number to convert? That is the $364,000 question. Perhaps your spread sheet is better than mine, and if it is, please share.

I am not complaining about my fortunate situation, please understand this. And above all, I'm not trying to brag. I have gone to a few fee paid advisors, and asked them for advice, and NONE have came up with a plan, and none have taken a fee.

[pb4uski]

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Originally Posted by Fleur58 Nobody mentions that you will also owe state taxes on an IRA conversion (in the majority of states). In many states it is significant, mine is 7.5%.

I think the reason that we don't focus on it is that state taxes can vary so widely... from 0% in some states to over 9% in others... and there are also wide inconsistencies in what types of income is taxed and deductions and exemptions.... but you are right... state taxes are an important factor to consider.... and part of the reason that we are only converting to the top of the 12/15% tax bracket.

[kgtest]

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Originally Posted by RunningBum Impossible to answer with virtually no information given. Generally you want to smooth out your tax rates for the rest of your life. You will probably have more income once you start taking SS and perhaps a pension, so that's a reason to avoid MRDs, which you can do by converting the IRA to a Roth. But, you probably don't want to convert at a higher rate now than you will be paying later, so converting it all might not work for your situation. So the first thing is to look at the tax bracket you're in now, how much room you have in that bracket, and estimate what your marginal tax rate will be in retirement. There are other factors, such as limiting income to get ACA subsidies, taking LTCGs at 0%, or any number of other personal situations such as a plan to leave your tIRA to charity that can make your situation different. There's also guessing future tax rates compared to current rates. Moving to another state with a different tax rate can also be a factor. I'm sure there are many other factors I've missed.

You nailed a lot of them.

-Future Tax Rate higher later than today, YES. Currently converting to top of 14% bracket with 13years until FIRE.

-SS Yes 61kyr due in 2052/2053 (provided nothing changes until then this will rise/fall with the tide)

-First RMD Due 2053 $41.4k @46% of portfolio, then 43.7k. 46k, 48k 50.5k

-NonCOlA Pension ($5,000+/yr) in 2046 this could rise if I stay beyond vest.
-Plan to leave tIRA to kids (DS,DD) via separate IRAs as named bene

-Business/Rental income (on glide to own outright a few by FIRE @50 2031) would be positive cash flow of about 50-60k annual with about 1/2 that in deductions?

-LTCG -0% ideal target, will try to minimize with tax harvesting, 1031 exchange, etc.


Plan is to keep low income from 2031-2039 for college tuition low-income qualifications, and perhaps any medSubsidy around then? That's all 13years away. We will likely be wrapping up a republican controlled presidency during that time...if we consider 8year cycles like we have been, bush, clinton, obama, ...

Plus at anytime gifts or inheritance might push my trajectory fwd (both living parents have been 2comma for some time 67/70), or misfortune give headwind?

In any regard if history repeats itself I have a huge tax torpedo just like DF around age 72. By then certainly I would have inherited from two sizable estates both containing properties and portfolios with inherited IRA RMD schedules of their own. Its anybody's guess but I plan for my own.