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Old 01-19-2012, 11:24 AM   #21
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We also have a joint taxable account invested very tax efficiently.
Good point. All the discussion of IRA's and 401k's sometimes draws attention from our taxable funds. Tax efficient investing can be a real help here.
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Old 01-19-2012, 11:25 AM   #22
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Higher for everyone as a group? definately.

Higher for people moving from employment to retirement? Much fuzzier.

An awful lot of retiree's have pretty modest realized incomes in retirement compared to their saving years. If you're in a pretty high tax bracket now, I doubt it will be a huge mistake for most people to fund a 401k.

Of course, if you are in that high tax bracket, it makes sense to be funding the 401k, the Roth, and some after tax savings as well.



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The more articles I see, the more I am convinced a tax-efficient individual brokerage account is the way to go.

Assuming the same tax rates 20 years into the future is not helpful. After 9/11, our taxes were slashed to the lowest rates since the early 20th century. Anyone who thinks taxes are NOT going to be higher in the future, well, I'd like to hear that Magic 8 ball reasoning............
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Old 01-19-2012, 12:31 PM   #23
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That joint taxable account will allow us to convert our traditional 401(k)s to Roth IRAs when we leave our jobs. The conversion will occur mostly in the 0% tax bracket. The way I see it, 0% tax is much better than 33% tax.

I can see our situation as unusual, but I do not see it as unique.
I plan to retire this year at age 52. I'm debating whether I should begin my $60K/yr pension this year or wait until age 60 when it will be $100K/yr (plus COLA between now and then). This decision has a lot of variables/uncertainties such as health insurance. But one factor that favors waiting until age 60 is that I'd have 8 years to convert some of my traditional 401(k) funds to a Roth at a very low, possibly 0%, tax rate. Back of the envelope calculations suggest I could save $100K in taxes by doing this. This is not chump change.
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Old 01-19-2012, 08:21 PM   #24
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Problems?? It does not take into account that the Roth has no RMD. And, I wonder about the wisdom of changing capital gains to regular income when it comes to taxing the withdrawals from the regular IRA.
For most people without a pension, RMD isn't a problem because they will need to withdraw the money for income anyway. Your changing capital gains to regular income logic ignores the up-front deduction. The tax on withdrawals is making up for the up-front deduction. The capital gains in the traditional 401k is free from taxes. It beats capital gains tax at any rate above 0%.
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Old 01-19-2012, 08:40 PM   #25
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For most people without a pension, RMD isn't a problem because they will need to withdraw the money for income anyway. Your changing capital gains to regular income logic ignores the up-front deduction. The tax on withdrawals is making up for the up-front deduction. The capital gains in the traditional 401k is free from taxes. It beats capital gains tax at any rate above 0%.
another good example demonstrating why the real answer is in the numbers and not in intuition, at least until the intuition is trained .............
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Old 01-19-2012, 10:20 PM   #26
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I plan to retire this year at age 52. I'm debating whether I should begin my $60K/yr pension this year or wait until age 60 when it will be $100K/yr (plus COLA between now and then). This decision has a lot of variables/uncertainties such as health insurance. But one factor that favors waiting until age 60 is that I'd have 8 years to convert some of my traditional 401(k) funds to a Roth at a very low, possibly 0%, tax rate. Back of the envelope calculations suggest I could save $100K in taxes by doing this. This is not chump change.
Ah, to be in your shoes...
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Old 01-19-2012, 11:58 PM   #27
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Originally Posted by Shawn

I plan to retire this year at age 52. I'm debating whether I should begin my $60K/yr pension this year or wait until age 60 when it will be $100K/yr (plus COLA between now and then). This decision has a lot of variables/uncertainties such as health insurance. But one factor that favors waiting until age 60 is that I'd have 8 years to convert some of my traditional 401(k) funds to a Roth at a very low, possibly 0%, tax rate. Back of the envelope calculations suggest I could save $100K in taxes by doing this. This is not chump change.
I am not recomending anything, I just like to play with numbers in my head. Disregarding taxes, immediate need of money, etc., I look at those numbers and think, wow wait 8 more years, you got 67% more starting pension pay and jump to $100k, no brainer to wait. But when you put the numbers together and add an assumed 3% cola at the 60 base with a 8 year head start, it still takes many many years in retirement to catch up in "total dollars received" by delaying and taking the larger pension. I know taxes and 401k distributions all come into play, but if the pension was one of those type that dies when you die, my greedy fingers would be wanting to grab " my pension money" no matter what my rational thinking brain had decided. Good problem to have though!
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Old 01-20-2012, 06:56 AM   #28
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Originally Posted by Shawn View Post
I plan to retire this year at age 52. I'm debating whether I should begin my $60K/yr pension this year or wait until age 60 when it will be $100K/yr (plus COLA between now and then). This decision has a lot of variables/uncertainties such as health insurance. But one factor that favors waiting until age 60 is that I'd have 8 years to convert some of my traditional 401(k) funds to a Roth at a very low, possibly 0%, tax rate. Back of the envelope calculations suggest I could save $100K in taxes by doing this. This is not chump change.
.......... Scenario ..........Total Payment Present Value

60K Age 52 – 95 Discounted @6% $2,640,000. $ 922,990.92

................Discounted @4% $2,640,000 $1,232,930.48
100K Age 60 –95 Discounted @6% $3,600,000. $ 917,338.82
................Discounted @4% $3,600,000.$1,381,609.64

Conclusion- based on present values, it's 6 of one and a half dozen of the other IF you expect to live for more than 40 years.
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Old 01-20-2012, 12:56 PM   #29
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I have a tiny Roth IRA and never jumped through the hoops to convert my Traditional IRA. I will most likely defer SS and draw down my Traditional IRA first, maybe that will lower the tax bite when the RMD kick in. Sounds good any way
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Old 01-20-2012, 03:10 PM   #30
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Originally Posted by Shawn View Post
I plan to retire this year at age 52. I'm debating whether I should begin my $60K/yr pension this year or wait until age 60 when it will be $100K/yr (plus COLA between now and then). This decision has a lot of variables/uncertainties such as health insurance. But one factor that favors waiting until age 60 is that I'd have 8 years to convert some of my traditional 401(k) funds to a Roth at a very low, possibly 0%, tax rate. Back of the envelope calculations suggest I could save $100K in taxes by doing this. This is not chump change.
Shawn, this does sound like an enviable situation. If I may be so nosey, what source of income will you draw upon to bridge the time from age 52 to 60 if you decide to wait for the pension? I found myself in sort of a "trap" when I decided to wait for SS until 70. To do so, I have to draw out some of my tIRA money or 401(k) money (which is taxable). If I also make Roth conversions now, I could push myself into a higher tax bracket. I essentially ran out of after-tax money (lived on that for 5 years, but now it's mostly gone). I'm currently cutting back on my Roth conversions as a result.

Just wondering how you will manage to "live" and also make Roth conversions if you are not receiving your pension. Again, just nosey.
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Old 01-20-2012, 09:10 PM   #31
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Can a person withdrawl funds from a Roth for living expenses and also convert funds from tIRA to Roth in the same year, as long as they stay 5 years ahead of their conversions?
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Old 01-20-2012, 09:17 PM   #32
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Shawn, this does sound like an enviable situation. If I may be so nosey, what source of income will you draw upon to bridge the time from age 52 to 60 if you decide to wait for the pension? I found myself in sort of a "trap" when I decided to wait for SS until 70. To do so, I have to draw out some of my tIRA money or 401(k) money (which is taxable). If I also make Roth conversions now, I could push myself into a higher tax bracket. I essentially ran out of after-tax money (lived on that for 5 years, but now it's mostly gone). I'm currently cutting back on my Roth conversions as a result.

Just wondering how you will manage to "live" and also make Roth conversions if you are not receiving your pension. Again, just nosey.
I have sufficient after-tax funds that could cover my expenses for 8 years. That includes cash equivalents (and principle in muni-bonds) that could be used without incurring much in the way of taxable income or capital gains tax (plus I have a good deal of harvested capital losses to offset any gains, although it's doubtful it would come to that).

It doesn't hurt that I am fairly frugal and wouldn't need more than $100K-$200K over those 8 years, depending on how I handled my existing mortgage and charitable contributions (e.g., I may make a significant contribution to a donor advised fund this year - my last significant income year - and use that to fund charities over the next 8 years).
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Old 01-21-2012, 12:14 AM   #33
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Can a person withdrawl funds from a Roth for living expenses and also convert funds from tIRA to Roth in the same year, as long as they stay 5 years ahead of their conversions?
from a thread at fairmark.com , a table by KAWill
Assuming you are < 59.5yrs old and you allow each conversion to age 5 yrs , you can withdraw contributions and conversions (but not earnings)
w/o tax or penalty.

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM



Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes
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Old 01-21-2012, 04:26 PM   #34
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I have been advised not to take a ROTH (not sure why), so I just have a traditional 401(k) plan.
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Old 01-21-2012, 04:57 PM   #35
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Can a person withdrawl funds from a Roth for living expenses and also convert funds from tIRA to Roth in the same year, as long as they stay 5 years ahead of their conversions?
I tried to come a reason to do this, as I will need some income from retirement funds for 5-6 years. But try as I might, if you withdraw from a Roth then put some back in via conversion, it is the same as just taking what you need from the tIRA, tax wise.

I'm curious, why would you withdeaw then convert in the same year?
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Old 01-21-2012, 05:20 PM   #36
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I tried to come a reason to do this, as I will need some income from retirement funds for 5-6 years. But try as I might, if you withdraw from a Roth then put some back in via conversion, it is the same as just taking what you need from the tIRA, tax wise.

I'm curious, why would you withdeaw then convert in the same year?
If one is converting less than is being withdrawn from the ROTH?
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Old 01-21-2012, 05:29 PM   #37
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I tried to come a reason to do this, as I will need some income from retirement funds for 5-6 years. But try as I might, if you withdraw from a Roth then put some back in via conversion, it is the same as just taking what you need from the tIRA, tax wise.

I'm curious, why would you withdeaw then convert in the same year?
I didn't have any particular reason in mind when I asked. The one thing that comes to mind is that you could basically withdrawl from the tIRA before 59 1/2 without setting up substantially equal periodic payments. As long as you could keep your rollovers 5 years ahead of your withdrawls. I don't know that it would necessarily be worth the effort, though.
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Old 01-21-2012, 05:57 PM   #38
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I like the premise of this thread "Regular vs Roth = No Difference" because I decided not to convert my regular IRA to Roth for the dumbest reason. I'm so reluctant to spend from my IRA nest egg and so dedicated to the LBYM philosophy that I think the only way I'll take money out of it and actually do something with it is if I'm forced to do it.
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Old 01-21-2012, 07:57 PM   #39
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I have been advised not to take a ROTH (not sure why), so I just have a traditional 401(k) plan.
Maybe you were told you earn too much to contribute. Single filers have to earn less than $125,000 in 2012 to be eligible to make any contributions. (that is modified AGI)
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Old 01-22-2012, 06:35 AM   #40
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Because of the required minimum withdrawal a regular ira can put you into a higher tax bracket during retirement, likewise if you need an additional amount due to a large purchase. This is especially true if you have a pension.

With the Roth this isn't an issue.

There is also a benefit for your beneficiaries, instead of adding the inherited IRA onto their income resulting in a large tax byte, with the Roth they can just keep the Roth as their own.

Seems that the best course is a split with some in a standard IRA and the rest in a Roth.
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