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Old 02-26-2016, 04:41 PM   #21
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No, in the hypothetical to keep it simple and just focus on the tax savings I assumed no withdrawals..... that the couple was living on other after-tax funds. The purpose is to get an idea of the direction and relative magnitude, not a full-scale model.

Now that you mention that I guess that one could argue that the after-tax accounts return should be an after-tax return but for now we'll assume that it is all qualified dividends and capital gains in the interest of simplicity.
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Old 02-26-2016, 04:47 PM   #22
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Agreed, YMMV. For me/us, so much depends on investment performance and if/when my retirement income (pensions, SS, RMD) push us above the top of the 15% bracket. If that happens early and "robustly", then conversions would have been smart. But if it doesn't happen at all and investments go down or stay largely flat, then I'll be sorry I converted anything.
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Old 02-26-2016, 06:08 PM   #23
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Would you be sorry or just indifferent? In my case, the most likely scenario (using what I believe to be reasonable assumptions) suggest it will be beneficial. If investment performance is lower than expected then I would be indifferent in that I will have arguably prepaid tax at the same rate but also received the benefit of tax-free returns on converted amounts. Investment performance would have to be what I believe to be unlikely in order for conversions to be a bad decision. And if investment performance is really good then my tax rate will most likely be 25% which is actually lower than what it would be if I leaked into the 25% tax bracket now. IOW, in my situation the scenarios in which it will have been a bad decision are very unlikely.
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Old 02-26-2016, 06:42 PM   #24
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I never would have done this without the folks here; I love this place! Sometimes stress is added, sometimes reduced. I'm going to RDWHAHB.

The investment returns seem to be down there in the noise category (at least with my situation). The image is quickie from i-orp, checking and unchecking the Roth conversions box.

I think the bigger factor is the likelihood of federal income tax rate increase or (more likely) rules changes (so they can claim they didn't increase rates).
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Old 02-26-2016, 06:45 PM   #25
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Would you be sorry or just indifferent? In my case, the most likely scenario (using what I believe to be reasonable assumptions) suggest it will be beneficial. If investment performance is lower than expected then I would be indifferent in that I will have arguably prepaid tax at the same rate but also received the benefit of tax-free returns on converted amounts. Investment performance would have to be what I believe to be unlikely in order for conversions to be a bad decision. And if investment performance is really good then my tax rate will most likely be 25% which is actually lower than what it would be if I leaked into the 25% tax bracket now. IOW, in my situation the scenarios in which it will have been a bad decision are very unlikely.
For me, I'd definitely be sorry if investment performance is lower than expected because that scenario can adversely affect my quality of life (particularly so if we're hit by negative returns just as I'm taking my RMDs).

It's the scenario where I go up in tax bracket where I'd be indifferent because in that case, I'd just have more money than I know what to do with.

Mind, I'm single, currently in 25% federal and 9.3% state marginal and expect to be in the same tax bracket upon retirement hence, I'm in no hurry to prepay my taxes.
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Old 02-26-2016, 08:09 PM   #26
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Would you be sorry or just indifferent?

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Originally Posted by hnzw_rui View Post
For me, I'd definitely be sorry if investment performance is lower than expected because that scenario can adversely affect my quality of life (particularly so if we're hit by negative returns just as I'm taking my RMDs).

It's the scenario where I go up in tax bracket where I'd be indifferent because in that case, I'd just have more money than I know what to do with.
+1. That describes my situation, too. Prepaying taxes now and finding our portfolio is heading toward the X-axis in 15 years and I could use the dough I gave the IRS would be a cause of regret.
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IOW, in my situation the scenarios in which it will have been a bad decision are very unlikely.
Yes, it would be unlikely for us, too (thankfully). But if it happens, it'll be a doozy and I'll be looking for all the flexibility that some extra $$ in the portfolio might provide.
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Old 02-26-2016, 11:42 PM   #27
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My plan is to do a little bit every year until I'm 70. I'm waiting to see what's going to be after this year. Much clear picture.


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Old 02-27-2016, 03:12 AM   #28
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...Mind, I'm single, currently in 25% federal and 9.3% state marginal and expect to be in the same tax bracket upon retirement hence, I'm in no hurry to prepay my taxes.
If you're single and expect to be in the same tax bracket in retirement then there is no compelling reason to convert and pay earlier unless you have a strong belief that tax rates will increase.
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Old 02-27-2016, 03:36 AM   #29
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....Yes, it would be unlikely for us, too (thankfully). But if it happens, it'll be a doozy and I'll be looking for all the flexibility that some extra $$ in the portfolio might provide.
I guess that I'm looking at it differently but my situation may be different.

Using the example, the "investment" made by paying taxes early is ~$75k and the potential benefits exceed the investment by a good margin. The financial return is a 13.5%/year after-tax return (the $141,501 difference in value at the end of 10 years in relation to prepayments of $7,500/year for 10 years). (Revised sensitivity table added below).

That return is only 8.7% if my nominal investment return is 0% but is 18.3% if my nominal investment return is 10%. I can't get anywhere close to that elsewhere so I'll prepay the taxes. The only way that I get screwed is if my tax rate in my 70s is lower than 10% and given potential increases in taxes, the possibility of one of us dying and our tax rate being even higher, etc. I don't see a tax rate lower than 10% as a possibility.

In any event, a $75k prepayment of taxes isn't going to lead to financial ruin in my case no matter how bad things get.

Sensitivity table  
 $ extraFinancial return
0% 112,500 8.7%
2% 123,184 10.6%
3% 128,969 11.6%
4% 135,069 12.5%
5% 141,501 13.5%
6% 148,284 14.5%
8% 162,974 16.4%
10% 179,296 18.3%
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Old 02-27-2016, 04:59 AM   #30
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If you're single and expect to be in the same tax bracket in retirement then there is no compelling reason to convert and pay earlier unless you have a strong belief that tax rates will increase.
Are you taking into account the possible effects of taxable vs non-taxable SS here?

Even if you are in the same tax bracket, your marginal tax rate can be close to twice as much due to this effect.

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Old 02-27-2016, 08:34 AM   #31
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No. There is no need to as I was commenting in response to a post where the poster indicated that they will be in the 25% tax bracket before and after retiring so if they have that much income then most likely all there SS will be 85% taxable.

But I see your point in situations where once SS starts between 1/2 your SS and RMDs you are flirting with the combined income limits.
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Old 02-27-2016, 10:11 AM   #32
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While I agree that if investment experience is good and RMDs pushing you into a higher tax bracket that you have the resources to pay the taxes, but I would prefer to do conversions and have those savings go to my kids than to the government.
Ignoring other choices of course, such as donating to charity to stay within the 15% bracket.

As I mentioned in other threads, this is as much a lifestyle decision as it is a financial one. You either want to leave a large legacy or you don't, given that your portfolio will be enough to live on regardless of whether you do conversions. And as sam has mentioned in the event of sequence of return risks early on you are keeping more money that can be spent in your early retirement years as needed. And you can spend down your tax-deferred money from 60-70 (staying within the bracket) and possibly avoid a lot of the torpedo.

There is no right or wrong answer here, there are a ton of variables including tax-deferred portfolio size, whether you want to max out ACA subsidies, local/state tax rates, leaving a legacy etc. Highly YMMV.
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Old 02-27-2016, 10:34 AM   #33
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I wasn't necessarily ignoring charity and agree that is an option to stay in the 15% bracket. For us, whatever's left will go to our kids and charity (in the case of charity on top of what we already give), we just haven't yet decided how much is going to each. To some extent it will depend on how the kids are doing.
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Roth Conversions.
Old 02-27-2016, 10:38 AM   #34
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Roth Conversions.

I agree with previous poster that it's a lifestyle choice. I will have 3 pots of money when I'm in my 80s and 90s, IRA, Roth IRA and taxable account. The longer my husband and I live as a couple, the larger the taxable account. We no longer contributing to IRA, so that pot will be getting smaller as we age, with RMDs and all. My IRA account will not be used for 15 years so it's best to convert to Roth as much as it makes sense. The taxable account, there is not much I can do about it. I have to look for ways to invest to minimize tax. But eventually it will be the largest pot.


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Old 02-27-2016, 12:44 PM   #35
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Beside the reasons already mentioned, you may also want to consider any effect on any money left over once you're gone.

If your heirs inherit a tIRA, they will be required to withdraw AND PAY TAXES ON required RMDS. The RMD schedule will be longer than your original RMD schedule, but they will still have RMDs and will have to pay those additional taxes.

If your heirs inherit a Roth, their withdrawals will be tax free


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Old 02-27-2016, 10:35 PM   #36
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So far, delayed gratification has worked well in my life, so I'm delaying SS and converting tIRA to RIRA from retirement day until RMDs start. At the top of the 15% bracket, for Married Filing Jointly, the effective tax rate is 10.8%. Probably won't get any better than that, although the tax brackets do rise with the level of inflation.

Look at the amount of extra tax paid, it is not much in the big picture. Consider how much your portfolio value fluctuates daily. Since it is tax, retirees are hyper sensitive about it, but it is not large amounts of money if converting in the 15% bracket. The goal is to have plenty of money in the long run, not necessarily paying less tax for two in their 60s then her paying substantially more tax in her 80s as a widow filing as a single taxpayer.

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Old 02-27-2016, 10:40 PM   #37
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I couldn't agree more. Exactly what my strategy is but I concede that it does not fit all.
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Old 02-28-2016, 03:26 PM   #38
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Ignoring other choices of course, such as donating to charity to stay within the 15% bracket.
Donating to qualified charitable organizations as a tax strategy probably means increasing expenditures/withdrawal rate, too. Possibly by significantly more than what taxes would have otherwise cost if someone doesn't have a lot of other itemized deductions.

Another thing, as a single filer you need considerably less income to be in the 25% bracket compared to married filing jointly. Reducing taxable income to $38K gets you down to the 15% bracket but if planning to do Roth conversions of, say, $20K a year at 15%, that leaves you with just $18K of income available for expenses. You would need to make up the shortfall using taxable savings or liquidation of assets with high cost basis.

As I've previously mentioned, I don't plan on doing any oversized Roth conversions. At most, I'd likely do conversions up to the top of the 25% bracket for the purpose of tax smoothing. If returns are good enough that RMDs push me into 28% and get hit by IRMAA then that's fine. If returns are extremely good that yield from taxable accounts and RMDs are high enough to push me into the 33% bracket or higher, then I'll just thank my lucky stars and probably give a huge chunk of the excess RMDs as charitable donations and gifts.
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Old 03-01-2016, 09:14 AM   #39
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That is incorrect, you can use qualified IRA charitable distros to satisfy RMDs. You don't have to force them up to the itemized bracket to get tax reductions.

IRA Qualified Charitable Contributions Reinstated, Made Permanent
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Old 03-01-2016, 10:20 AM   #40
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That is incorrect, you can use qualified IRA charitable distros to satisfy RMDs. You don't have to force them up to the itemized bracket to get tax reductions.

IRA Qualified Charitable Contributions Reinstated, Made Permanent
That's at age 70 1/2 though. I don't think that's an option for someone retiring at 55 and planning to do Roth conversions in order to reduce RMDs.
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