Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 12-10-2013, 12:03 AM   #21
Moderator
Alan's Avatar
 
Join Date: Jul 2005
Location: Eee Bah Gum
Posts: 21,146
Quote:
Originally Posted by jebmke View Post
If most of your TIRA is non-deductible (after tax), why wouldn't conversion be pretty easy to justify?

+1

Suppose you have an IRA worth $100k, of which $70k is non-deductible contributions. ROTH convert it at 25% tax bracket and you pay $7,500 in tax leaving you with a ROTH of $92,500.

Assuming tax rate remains the same and in x years time your money has increased 10% and you then cash it out.

$92,500 is now cash in hand of $101,750

$100,000 rises to $110,000, cash it out, pay tax on $40k and you have $100,000 cash in hand.
__________________

__________________
Retired in Jan, 2010 at 55, moved to England in May 2016
Now it's adventure before dementia
Alan is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 12-10-2013, 08:09 AM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,983
Quote:
Originally Posted by Options View Post
Is this the spreadsheet posted by BigFoot48? He supposedly has created a spreadsheet modelling taxes considering the impact of RMD's and SS.
Yep. He debugged it (13 iterations?) with feedback from the Boglehead community and it's probably great. But I need to pick it apart to understand what assumptions are made before I can have confidence in the results - so far I haven't had the patience.

Quote:
Originally Posted by truenorth418 View Post
Where is the online calculator that figures all of this out??
That's what I'm saying. Hard to believe no one has. I'd pay for the chance to run a few scenarios through it as long as I could see all the assumptions with the results...

All the simple online calculators like Vanguard among others, tell me it's basically a push for us to convert, which would be a good thing if I could be sure it's true. BUT they don't factor in Soc Sec taxes and when Soc Sec is taken, and the results all appear to hinge almost entirely on the users future tax assumptions (higher taxes=convert, lower taxes=don't, same taxes=toss up). Problem for me is I want to assume same taxes (inflation adjusted) and see Soc Sec tax impact.
__________________

__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 12-10-2013, 09:06 AM   #23
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,485
Does ESPlanner handle these? I don't own it but have looked at it here and there and it seemed pretty comprehensive the last time I looked at it.

What I have done is take my base plan without any Roth conversions in Quicken Lifetime Planner and look at my QLP projected income in the year I turn 70 (based on today's values) and compare it to today's tax table. I include pensions, SS, RMDs and 2.5% of the prior year taxable account balance (for as a proxy for dividends on the taxable portfolio) less deductions less exemptions. Based on that I would be solidly in the 25% bracket at 70.

Then I change the projection to include a negative contribution from IRAs from now to age 70 equal to the Roth conversions I could do today to bring me to the top of the 15% bracket and add an annual special expense for the taxes on that amount (with no inflation). The I recompute my projected taxable income at age 70 based on that scenario. With this Roth conversion adjustment, I am still in the 25% bracket at age 70, but substantially less so.

My RMDs are ~60% of what they would be absent the Roth conversions.

I realize it is a bit crude, but it is a starting point to get a sense for how Roth conversions would change your RMDs and taxes.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-10-2013, 09:13 AM   #24
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,983
Quote:
Originally Posted by pb4uski View Post
Does ESPlanner handle these? I don't own it but have looked at it here and there and it seemed pretty comprehensive the last time I looked at it.
Good thought, and I bought ESPlanner+ in the mid 00's but I've let mine lapse out of date. I was going to resubscribe to see Roth conversion and Soc Sec tax impact. Unfortunately last time I looked a few months ago, ESPlanner does not really handle Roth conversions. They offered up a workaround in 2009, that's cumbersome and not accurate by their own admissions, and they've promised to add that functionality for several years now, but it hasn't been done yet that I know if.

Roth IRA Conversion - The effects of taxation on this decision. | ESPlanner Inc.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 12-10-2013, 09:40 AM   #25
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,696
I do a personal tax table each year with TurboTax. Nowadays the table bumps up IRA withdrawals in 10k increments and shows the marginal tax rates we will pay. So the columns are IRA withdrawal, SS taxed, Fed tax, State tax, Fed + State marginal rate, Roth spent (depends on IRA withdrawal), oveall tax rate.

Basically I key on the marginal rates. For us the picture is that it is about 13% at low IRA withdrawals, ramps up to 33%, and then flattens out at around 26%. When we eventually hit RMD's there is no way to avoid the 26% rate (or the 33% bump due to SS).

So any Roth conversions I made in previous years at lower then 26% were well done. Also the Roth money is what helps us now to get into the low 13% bracket until RMD's happen. ORP suggested high Roth withdrawals and I took the hint after doing my personal tables.

I don't know if this helps you Midpack, but maybe it will be something to add to your approach?
__________________
Lsbcal is offline   Reply With Quote
Old 12-10-2013, 11:14 AM   #26
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Feb 2013
Posts: 5,327
Midpack, The Fidelity retirement planner appears to account for taxes and RMDs. They have year by year cash flow detail so you can see the taxes paid each year.

I make my own spreadsheet than validate the numbers against the RIP to make sure I am in the right ball park. The Fidelity RIP assumes higher returns and higher taxes than I do in our master plan, but the end results aren't too far off from each other.
__________________
daylatedollarshort is online now   Reply With Quote
Old 12-10-2013, 12:38 PM   #27
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,936
Quote:
Originally Posted by pb4uski View Post
The additional dilemma that I have is whether I should prioritize 0% capital gains over Roth conversions. I have ~2-3 year of living expenses in unrealized capital gain in taxable accounts and am finding those 0% capital gains hard to pass up but I'm not totally sure that is the best play and whether in the long run I might be better off prioritizing Roth conversions over 0% capital gains.
Have you considered the role of state taxes here? We typically focus on the 0% fed CG rate and neglect the state. Try modeling the state tax as using up a taxable side fund if you do the CG harvest but leaving it if you don't. I think you will find that if the subsequent holding period has "small" gains, the CG harvest comes out ahead. However if the the subsequent gains are large, the no CG harvest comes out ahead. The specific results obviously depend on what assumptions you make but the limited examples I did had 2x for the "small" gain and 10x as the large gain.

Another consideration is that if you never use these appreciated assets,the heirs get a stepup in basis and the CG tax never gets paid. Both of these results might give a slight edge for the Roth conversion but I suspect unless there are dramatic changes in tax rates or huge appreciations , the practical differences will be small.

A boglehead thread also points out that you can push a Roth conversion to the max because you can always recharacterize any undersired overage but you can't do that with CG gain harvesting.
__________________
kaneohe is offline   Reply With Quote
Old 12-10-2013, 03:16 PM   #28
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 3,863
Quote:
Originally Posted by Options View Post
Is this the spreadsheet posted by BigFoot48? He supposedly has created a spreadsheet modelling taxes considering the impact of RMD's and SS. I've not looked at it yet because it won't be a question for me until 2015. I too am delaying SS until 70 which will impact tax levels. I do have a ROTH and 2/3 of PF is after tax, but I'm still going to look at the conversion to maximize my overall tax situation.
Keep in mind that efficient Roth conversion involves converting at the beginning of the year (when equities and bonds are at their lowest valuations on average), and estimating and paying estimated taxes in four equal installments starting in April. Then you can follow that up with additional conversions if your equities decline in value, and recharacterize the excess after you calculate your taxes the following year. So you have about a year to prep.
__________________
Animorph is offline   Reply With Quote
Old 12-10-2013, 05:49 PM   #29
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,485
Midpack, I'm not sure whether to thank you or curse you.

This thread prompted me to recreate my model from the ground up to look at tax optimization - principally the mix of 0% CG harvesting or Roth conversions and including both federal and state income taxes. It took me most of the day. The results may cause me to change course a bit.

I was planning to prioritize 0% CG over Roth conversions but the model suggests that prioritizing Roth conversions is slightly better for me. My nestegg at age 100 is 7% higher prioritizing Roth conversions than prioritizing 0% CG harvesting. While I still end up in the 25% bracket after age 70, it is less so than with the other strategy.

The only thing now bothering me is "is it true"? There are a lot of moving parts. Also, if I prioritize CG harvesting now and there is a downturn, I may then be able to harvest bigger losses because of the step-up in basis and do bigger Roth conversions. I can't easily model such a scenario, but I suspect I am just rationalizing because 0% CGs are so tantalizing.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-10-2013, 05:54 PM   #30
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,485
Quote:
Originally Posted by kaneohe View Post
Have you considered the role of state taxes here? ....
Yes, I am considering state taxes. In my state, taxes are a bit of a push because Roth conversions and CG are both taxed at ordinary rates. The first $5k of CG each year isn't taxed, so there is a imperceptively slight preference to CG vs Roth conversions.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-10-2013, 06:00 PM   #31
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,983
Quote:
Originally Posted by pb4uski View Post
Midpack, I'm not sure whether to thank you or curse you.

This thread prompted me to recreate my model from the ground up to look at tax optimization - principally the mix of 0% CG harvesting or Roth conversions and including both federal and state income taxes. It took me most of the day. The results may cause me to change course a bit.

I was planning to prioritize 0% CG over Roth conversions but the model suggests that prioritizing Roth conversions is slightly better for me. My nestegg at age 100 is 7% higher prioritizing Roth conversions than prioritizing 0% CG harvesting. While I still end up in the 25% bracket after age 70, it is less so than with the other strategy.

The only thing now bothering me is "is it true"? There are a lot of moving parts. Also, if I prioritize CG harvesting now and there is a downturn, I may then be able to harvest bigger losses because of the step-up in basis and do bigger Roth conversions. I can't easily model such a scenario, but I suspect I am just rationalizing because 0% CGs are so tantalizing.
Like I said earlier it's really mind-boggling if you try to factor in every variable (to me at least)...curse me if it helps in any way.

I will look at Fido RIP tomorrow (as suggested above) and if that doesn't work I'll probably build some crude spreadsheets that fit no ones circumstances but my own to see if I can develop several scenarios and thereby the best answers for us. My first effort was intended to allow other users to input their info and provide results (to share here) but that makes it several orders of magnitude more complex...and I gave up on that several weeks ago.

Thanks to rebalancing on top of DW's income and normal dividends and STCG, we're already up into the 25% bracket so the urgency on Roth conversions this year aren't as great as it will be when DW finally retires among other milestones.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 12-10-2013, 06:03 PM   #32
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 16,485
Quote:
Originally Posted by Midpack View Post
Like I said earlier it's really mind-boggling if you try to factor in every variable...curse me if it helps in any way.

I will look at Fido RIP tomorrow (as suggested above) and if that doesn't work I'll probably build some crude spreadsheets that fit no ones circumstances but my own to see if I can develop answers. My first effort was intended to allow other users to input their info and provide results (to share here) but that makes it several orders of magnitude more complex...
+1 when I started the reconstruction I was hopeful to share something, but I wouldn't dare since it is so specific to me - I wouldn't want to share something that might be dangerous or misleading for someone else.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
pb4uski is offline   Reply With Quote
Old 12-10-2013, 06:03 PM   #33
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,696
One point I thought of, beyond age 80 is it really so important to optimize the tax issues? My feeling is optimization should be primarily for my active spending years. Only secondarily for my heirs.

Past 80 I don't want to have a really bad tax picture, but I won't worry too much about optimization for estate purposes.
__________________
Lsbcal is offline   Reply With Quote
Old 12-10-2013, 06:12 PM   #34
Recycles dryer sheets
ducky911's Avatar
 
Join Date: May 2010
Posts: 397
sorry no help here from me. I have give in this a lot of thought over the years and concluded that any benefit would not out weigh the pain of opening another account. I am trying to simplify things not only for me but for DW if she has to take it over one day.

I am happy , even knowing that I may not have taken the perfect path.

I do think that you could use ezplaner as a base to work around and get your answer.
__________________
You've got to ask yourself one question: Do I feel lucky? Well, do ya, punk?
I hate (despise) loads and fees
Retired July '11 investments 55/45 in very low cost index and mutual funds, balance once a year at best.
ducky911 is offline   Reply With Quote
Old 12-10-2013, 06:12 PM   #35
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Midpack's Avatar
 
Join Date: Jan 2008
Location: Chicagoland
Posts: 11,983
Quote:
Originally Posted by Lsbcal View Post
One point I thought of, beyond age 80 is it really so important to optimize the tax issues? My feeling is optimization should be primarily for my active spending years. Only secondarily for my heirs.
I agree but I'd hate to find out at 80 that we actually would have been better off taking income (Roth conversions among others) earlier and finding we're paying much higher taxes due to RMD and less net Soc Sec from 80 on. Yes, I agree having enough now is what's most important,, but that's no reason to unwittingly pay lots of taxes later/overall than need be.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57

Target AA: 60% equity funds / 35% bond funds / 5% cash
Target WR: Approx 2.5% Approx 20% SI (secure income, SS only)
Midpack is offline   Reply With Quote
Old 12-10-2013, 06:38 PM   #36
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,616
Quote:
Originally Posted by pb4uski View Post
This thread prompted me to recreate my model from the ground up to look at tax optimization - principally the mix of 0% CG harvesting or Roth conversions and including both federal and state income taxes. It took me most of the day. The results may cause me to change course a bit.
. . .
I can't easily model such a scenario, but I suspect I am just rationalizing because 0% CGs are so tantalizing.
Other factors (sorry!):
- Which opportunity is more fleeting/subject to changes in tax law, the Roth Conversion or the 0% CG? If you think one or the other might evaporate, it might make sense to use it now, use the other later.
- Survivor/Filing Single Taxes (sorry pb4uski, I don't recall if this applies to you): Assuming you are in the upper portion of the 15% bracket when MFJ, a surviving spouse would probably have marginal rates well into the 25% range. Under the above conditions:
-- Cap Gains harvesting: Every dollar of basis that is reset higher now saves the survivor 15 cents (for others following along, that's the cap gains tax rate for those in the 25% income tax bracket)
-- Roth Conversion: Every dollar converted to Roth now costs 15 cents in present taxes, but saves the surviving spouse from paying 25 cents in taxes. Net benefit: 10 cents.

So, looked at from this angle (minimizing taxes to a surviving spouse), the CG loss harvesting has a 5% edge (or, "provides 50% greater benefit!"). Plus, it keeps more money in your account (because you didn't pay those 15% taxes this year), and that's "pad" against uncertainties of the future. Market returns might stink for 20 years: in that case you'll be glad you kept this money in hand AND you'll avoid high taxes after all

And, it matches what your "gut" is telling you.

Caution: I have no idea how this impacts any other issues: PPACA subsidies, SS taxes, etc.
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Old 12-10-2013, 06:40 PM   #37
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,696
Quote:
Originally Posted by Midpack View Post
I agree but I'd hate to find out at 80 that we actually would have been better off taking income (Roth conversions among others) earlier and finding we're paying much higher taxes due to RMD and less net Soc Sec from 80 on. Yes, I agree having enough now is what's most important,, but that's no reason to unwittingly pay lots of taxes later/overall than need be.
We all have different numbers but here is a peek at my projections. Right now we're spending from our retirement accounts maybe 60% from our Roth's to get the low taxes. When RMD's kick in that will drop to less then 50% from Roth's and we'll be forced into much higher marginal rates.

By age 80 my projections are that Roth's will only make up 20% of spending because RMD's will be forcing us to take so much from IRA's. So there is plenty of time for our heirs to get the Roth's bumped up by my sterling investment results from ages maybe 70 to 100.

Hopefully something I've mentioned here helps someone.
__________________
Lsbcal is offline   Reply With Quote
Old 12-10-2013, 06:46 PM   #38
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Lsbcal's Avatar
 
Join Date: May 2006
Location: west coast, hi there!
Posts: 5,696
Quote:
Originally Posted by samclem View Post
...
-- Roth Conversion: Every dollar converted to Roth now costs 15 cents in present taxes, but saves the surviving spouse from paying 25 cents in taxes. Net benefit: 10 cents.
...
I'm not convinced that Roth conversions should stop at 15% marginal tax rates. It depends on what the marginal Fed + State are now and what they might be deep into RMD's or other age cases too. If we didn't have Roth money now, we'd be paying taxes at the combined marginal rates above 26%. Hard to generalize on this.

Like many posters here, I'd take the current tax rates as the lower bound for future rates. Medicare will have to be fixed someday.
__________________
Lsbcal is offline   Reply With Quote
Old 12-10-2013, 06:47 PM   #39
Thinks s/he gets paid by the post
 
Join Date: Jan 2008
Posts: 1,495
Quote:
Originally Posted by Midpack View Post
Yep. He debugged it (13 iterations?) with feedback from the Boglehead community and it's probably great. But I need to pick it apart to understand what assumptions are made before I can have confidence in the results - so far I haven't had the patience.
Yes, the feedback is great, but I know I have no patience to pick apart the assumptions after 13 updates.


Quote:
Originally Posted by Midpack View Post
Good thought, and I bought ESPlanner+ in the mid 00's but I've let mine lapse out of date. I was going to resubscribe to see Roth conversion and Soc Sec tax impact. Unfortunately last time I looked a few months ago, ESPlanner does not really handle Roth conversions. They offered up a workaround in 2009, that's cumbersome and not accurate by their own admissions, and they've promised to add that functionality for several years now, but it hasn't been done yet that I know if.

Roth IRA Conversion - The effects of taxation on this decision. | ESPlanner Inc.
Bad news as I was hoping to use ESPlanner next year to assist with figuring out the conversions. I'd read about the workaround but was under the impression it would have been fixed by now. Looks like there are no easy answers.

Edit: Additionally, what the stock market does and the shape my PF is in (i.e., another 2008 meltdown) may impact/complicate any conversion decisions I make as well. Again, no easy answers.
__________________
Options is offline   Reply With Quote
Old 12-10-2013, 07:00 PM   #40
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,616
Quote:
Originally Posted by Lsbcal View Post
. . . Hard to generalize on this.

Like many posters here, I'd take the current tax rates as the lower bound for future rates. Medicare will have to be fixed someday.
Yes, and the specifics matter a lot. I'd need to run my numbers and have a lot of faith in my assumptions before paying taxes now at the rate of 25% when I'll be safely inside the 15% zone when I retire (soon).

Those fixes to Medicare and other due bills: one idea bandied about is to continue to leave Roth withdrawals untaxed (officially "keeping the promise"), but add those withdrawals for purposes of computing the taxes on other income. So, the Roth withdrawals could force retirees to pay higher rates om the other income sources (tIRAs, taxable accounts, SS, etc). I'm not betting on that proposal, but it would sure sting if somebody had bet everything on the Roth IRA horse.

Nothing's certain but death and taxes--and it turns out nothing is certain about the "how" of either of those!
__________________

__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is online now   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


 

 
All times are GMT -6. The time now is 11:24 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.