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Questions on Roth conversions and when to spend
07-24-2018, 08:50 PM
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#1
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Thinks s/he gets paid by the post
Join Date: Jul 2004
Posts: 1,558
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Questions on Roth conversions and when to spend
I have been writing REWahoo about my situation and he suggested I post here. I had gone to several financial managers seeing if I should have them manage my portfolio or 'roll-my-own.' He convinced me to do it myself and I now have a spreadsheet for my IRA to Roth conversion plan as well as projected income streams.
I am semi-ER and am in a gap situation (6 years) before I receive a nice pension. I have played around with ORP and with several scenarios (I use age 100 as the end). Bottom line, I will see a significant increase in my yearly spend rate ability if I convert my IRAs to Roths. In ORP they show a 'bite the bullet' approach with transitioning the IRA to Roth in two years before I receive the pension with a large tax consequence of course. They then show the spending done out of the Roth at the end of my life.
So, my questions - in the ORP model they show me spending my Roth at the end of my life and not earlier. Do you know the reason for that? I can't find a good consistent reason in my research. My next question, I am planning on smoothing out the IRA to ROth conversion over the six years and maybe a bit more into my pension stage - does that make sense?
Lastly, has anyone come up with a good AA? I am sort of in Nords situation where with the upcoming pension being a big bond, so I could be a lot more risky in my portfolio. I currently use the offered 'lifestrategy-like' funds with later end dates (2040 or so).
Thanks in advance for your ideas...BTW, I am a long time user of this board, just was gone for awhile. I helped Nords write his book a long time ago on the Reservist chapter.
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Deserat aka Bridget
“We sleep soundly in our beds because rough men stand ready in the night to visit violence on those who would do us harm.”
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07-24-2018, 09:17 PM
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#2
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Recycles dryer sheets
Join Date: Jul 2008
Location: .
Posts: 398
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Deserat. I am going the same route as you.
I am also considering a big IRA->Roth conversion. I put together a draft spreadsheet. Comparing conversion to non-conversion showed a slight advantage to conversion (especially for heirs). Of course, if my assumptions are off none of that matters.
I am 4 years from Medicare and DH already has Medicare. The big expense that is driving my decision is the high-income Medicare premium. I think it would be best to bite the bullet now. If I convert to the higher% tax now, I think it could save future tax pain.
Once DH takes SS and we are both on medicare and RMDs kick in, we won't have any options. We have pensions and rentals, along with investment income.
I didn't feel that iorp considered the Medicare premium for high incomes.
Any critiques on my plan are welcome.
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"If things go wrong, don't go with them" -Roger Babson
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07-24-2018, 09:25 PM
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#3
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Thinks s/he gets paid by the post
Join Date: Jul 2004
Posts: 1,558
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Quote:
Originally Posted by Doribe
I am 4 years from Medicare and DH already has Medicare. The big expense that is driving my decision is the high-income Medicare premium. I think it would be best to bite the bullet now. If I convert to the higher% tax now, I think it could save future tax pain.
Once DH takes SS and we are both on medicare and RMDs kick in, we won't have any options. We have pensions and rentals, along with investment income.
I didn't feel that iorp considered the Medicare premium for high incomes.
Any critiques on my plan are welcome.
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You've highlighted some areas I have been ignoring - I am cynical about SS, and yet, if I include it, it adds even more pension income. I am frankly aghast at even the low number of amount of spending after taxes that ORP shows (no IRA to Roth conversion). Even in this gap situation, it shows I can spend much more than I do now.
I am not yet comfortable with trusting that. The earning and saving habit is severely ingrained.
I will have TRICARE as my insurance - although your point about Medicare and the premium for higher incomes is spot on. I tend to think the SS will also have a premium if anyone has some other means.
And RMDs - that's why I want to get the Roth conversion done before I am 70.
We shall see - prepare for the worst and hope for the best or somewhere in between :-)
__________________
Deserat aka Bridget
“We sleep soundly in our beds because rough men stand ready in the night to visit violence on those who would do us harm.”
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07-24-2018, 09:28 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,227
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I am also trying to finish converting my tIRA to Roth by 70.
If I see I'm going to pass on some assets, which is likely, I will spend Roth before highly appreciated assets in taxable, since my heirs will get a new basis for those stocks. But I will sell stocks that have little or no gain before spending from the Roth.
If I had to, I would even break into my Roth now if it kept me in a favorable tax position, namely to keep the ACA subsidy. So far that hasn't been needed.
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07-24-2018, 09:36 PM
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#5
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Recycles dryer sheets
Join Date: Jul 2008
Location: .
Posts: 398
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We shall see - prepare for the worst and hope for the best or somewhere in between :-)
I plan to convert half of my 2018 IRA->Roth now and the remainder for 2018 in December. I am splitting it because the tax bite is big and if something changes I have the hedge. I also will have time to tweek the conversion to the 2018 tax scenario.
__________________
__________________________________________
"If things go wrong, don't go with them" -Roger Babson
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07-24-2018, 10:52 PM
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#6
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,370
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My long-term plan shows us being in the 22% tax bracket once SS and RMDs start.... I don't see much advantage on converting at 22% now... but I may consider it for a couple years once we are no longer paying state income taxes.
RMDs don't scare me... pay 22% later vs 22% now.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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07-24-2018, 11:27 PM
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#7
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Thinks s/he gets paid by the post
Join Date: Jun 2016
Posts: 4,663
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Quote:
Originally Posted by deserat
I have been writing REWahoo about my situation and he suggested I post here. I had gone to several financial managers seeing if I should have them manage my portfolio or 'roll-my-own.' He convinced me to do it myself and I now have a spreadsheet for my IRA to Roth conversion plan as well as projected income streams.
I am semi-ER and am in a gap situation (6 years) before I receive a nice pension. I have played around with ORP and with several scenarios (I use age 100 as the end). Bottom line, I will see a significant increase in my yearly spend rate ability if I convert my IRAs to Roths. In ORP they show a 'bite the bullet' approach with transitioning the IRA to Roth in two years before I receive the pension with a large tax consequence of course. They then show the spending done out of the Roth at the end of my life.
So, my questions - in the ORP model they show me spending my Roth at the end of my life and not earlier. Do you know the reason for that? I can't find a good consistent reason in my research. My next question, I am planning on smoothing out the IRA to ROth conversion over the six years and maybe a bit more into my pension stage - does that make sense?
Lastly, has anyone come up with a good AA? I am sort of in Nords situation where with the upcoming pension being a big bond, so I could be a lot more risky in my portfolio. I currently use the offered 'lifestrategy-like' funds with later end dates (2040 or so).
Thanks in advance for your ideas...BTW, I am a long time user of this board, just was gone for awhile. I helped Nords write his book a long time ago on the Reservist chapter.
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Our CPA said usually Roth dollars are the last to be spent, because people leave money in Roths since the growth is tax-free. Therefore many times Roths end up mainly benefitting the heirs.
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07-24-2018, 11:28 PM
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#8
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Thinks s/he gets paid by the post
Join Date: Jun 2016
Posts: 4,663
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Quote:
Originally Posted by pb4uski
My long-term plan shows us being in the 22% tax bracket once SS and RMDs start.... I don't see much advantage on converting at 22% now... but I may consider it for a couple years once we are no longer paying state income taxes.
RMDs don't scare me... pay 22% later vs 22% now.
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This is why we aren’t doing conversions. We may have a year or two when we could do very small conversions but it hardly seems worth it to convert 0.3% of our net worth to a Roth.
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07-25-2018, 08:55 AM
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#9
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Thinks s/he gets paid by the post
Join Date: Aug 2013
Location: North
Posts: 4,043
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Quote:
Originally Posted by Scuba
Our CPA said usually Roth dollars are the last to be spent, because people leave money in Roths since the growth is tax-free. Therefore many times Roths end up mainly benefitting the heirs.
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Agreed. Main benefit is inheritance. The alternative is to face the RMD if you live that long and pay the taxman, in return you get to blow the dough...as opposed to watching the dough rise.
__________________
Time > $$$ ~ 100% equities ~ FIRE @2031
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07-25-2018, 10:22 AM
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#10
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,227
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Let's say you have $2M left: $1M in taxable, with $500K basis, and $1M in Roth. Say you will only spend $1M.
If you spend from taxable, and your cap gains are taxed at 15% (because of SS and pension benefits, perhaps), you will pay $75K in fed taxes on that $500K LTCG. Possibly more in state taxes. So you must pull an additional $75K out of your Roth. Your heir gets $925K in an inherited Roth. Gains on this account for your heir will be tax free, but MRDs are required and it will eventually wind up in taxable, where gains will be taxed.
If you spend from the Roth, the Roth is gone, but you don't have to dip into taxable. Your heir gets $1M in a taxable account, with $1M in basis. Future gains will be taxed.
I'm not really sure which is better to inherit. I suppose the heir could probably make more that $75K in tax free investment gains in the Roth to make up the difference, before the Roth gets converted? I thought I was making a case for using the Roth first, but maybe I'm wrong, and it's better to leave the Roth for last, even over highly appreciated taxable holdings?
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07-26-2018, 07:37 AM
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#11
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Recycles dryer sheets
Join Date: Jul 2008
Location: .
Posts: 398
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Quote:
Originally Posted by pb4uski
My long-term plan shows us being in the 22% tax bracket once SS and RMDs start.... I don't see much advantage on converting at 22% now... but I may consider it for a couple years once we are no longer paying state income taxes.
RMDs don't scare me... pay 22% later vs 22% now.
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According to the current tax scheme, later might be 28%. The 22% tax cuts are only until 2025, then 28% comes back.
The choice is pay 22% now or pay 28% later. Add the increased medicare for two in the future and the risk of conversion now is worth it.
Once two becomes one, the tax bracket will be even higher.
__________________
__________________________________________
"If things go wrong, don't go with them" -Roger Babson
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07-26-2018, 09:17 AM
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#12
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2011
Location: West of the Mississippi
Posts: 17,263
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I am in that situation where Roth conversions are basically break-even on paper based upon today's tax laws.
However, the future is uncertain and I figure it's good to have options. So, I converted some tIRA money to Roth IRA's just in case I have some years where going over a certain amount of income may be a big problem.
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Comparison is the thief of joy
The worst decisions are usually made in times of anger and impatience.
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07-27-2018, 12:20 PM
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#13
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Full time employment: Posting here.
Join Date: Aug 2015
Posts: 987
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The key is for most that are married, the saving Roth for last can be huge when there is only one. Loss of a spouse can be bad enough. But getting to pay double in taxes for it is adding insult to injury. If you are always single, not a consideration really.
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07-27-2018, 02:06 PM
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#14
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,370
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Quote:
Originally Posted by Doribe
According to the current tax scheme, later might be 28%. The 22% tax cuts are only until 2025, then 28% comes back.
The choice is pay 22% now or pay 28% later. Add the increased medicare for two in the future and the risk of conversion now is worth it.
Once two becomes one, the tax bracket will be even higher.
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I think that it is more likely than not that Congress will act to make the 22% permanent before it increases to 25%.... but I understand your point and you are entitled to your opinion.
I may consider converting to the top of the 22% tax bracket if we redomesticate to Florida in 2020 and my current 6.8% state income tax goes away... but I'm not keen on paying 28.8% combined now (22% federal and 6.8% state) vs 22% combined later (or even 25% if you are right in the reversion of the federal tax rate).
And I concede the higher effective tax rate if single vs MFJ but DW and I are both in good health so I'll take my chances on that.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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07-27-2018, 02:10 PM
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#15
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,370
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Quote:
Originally Posted by Perryinva
The key is for most that are married, the saving Roth for last can be huge when there is only one. Loss of a spouse can be bad enough. But getting to pay double in taxes for it is adding insult to injury. If you are always single, not a consideration really.
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I don't get the "saving Roth for last" part.... can you elaborate?
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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07-27-2018, 02:10 PM
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#16
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 38,145
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Quote:
Originally Posted by Doribe
According to the current tax scheme, later might be 28%. The 22% tax cuts are only until 2025, then 28% comes back.
The choice is pay 22% now or pay 28% later. Add the increased medicare for two in the future and the risk of conversion now is worth it.
Once two becomes one, the tax bracket will be even higher.
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Quote:
Originally Posted by pb4uski
I think that it is more likely than not that Congress will act to make the 22% permanent before it increases to 28%.... but I understand your point and you are entitled to your opinion.
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I think the 22% tax bracket becomes 25% if tax brackets revert.
The 24% tax bracket becomes 28%.
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Retired since summer 1999.
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07-27-2018, 02:12 PM
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#17
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Recycles dryer sheets
Join Date: Jul 2008
Location: .
Posts: 398
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Quote:
Originally Posted by audreyh1
I think the 22% tax bracket becomes 25%.
The 24% tax bracket becomes 28%.
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I think you are correct. Thanks for the correction. The principal is the same.
__________________
__________________________________________
"If things go wrong, don't go with them" -Roger Babson
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07-27-2018, 04:24 PM
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#18
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Full time employment: Posting here.
Join Date: Aug 2015
Posts: 987
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Quote:
Originally Posted by pb4uski
I don't get the "saving Roth for last" part.... can you elaborate?
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In that context, I was referring to Roth vs tIRA. When one dies before the other, which is almost always the case, the single left behind now would pay single rate higher taxes on withdrawals from tIRA, vs tax free from Roth.
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07-27-2018, 04:29 PM
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#19
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,227
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Also note you might have lost your 0% window for CGs with the new single status. So for marrieds, that could be a good reason to pull from taxable before Roth.
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07-27-2018, 10:45 PM
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#20
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 17,914
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I think of ROTHs as being more flexible than other savings - thus using them last may make some sense. I'm no expert, but my understanding is that passing assets to the next generation with ROTHs has real advantages in many cases.
There are no taxes involved in withdrawing from ROTHs (flexible, therefore, because one can "titrate" their taxes by withdrawing some funds from taxable and some from ROTHs to avoid exceeding tax brackets.)
I believe one can avoid the Medicare cost trap by the same method.
Also, there are no RMDs for the principal owner of the ROTH. All in all, it seems like you would keep the "best" for last, but YMMV.
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