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Old 05-15-2018, 05:47 PM   #21
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Well, I am sure there are more complicated and precise ways to figure this, but my thinking is it only matters what tax rate you pay today and what rate you will pay in the future. For example, let’s say you have $100 inan IRA, and pay 20% taxes today and in 9 years when you need the money, and 8% return.
$100 * 20% tax = 80 to Roth. In 9 years at 8% will double to $160
$100 converted to Roth, in 9 years at 8% = $200 * 20% tax leaves $160
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Old 05-15-2018, 06:36 PM   #22
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Originally Posted by bingybear View Post
I did some where I just transferred in kind from TIRA to Roth. There really is little need to sell and buy again. The down side of moving in kind is you may need to pick whole share, but I'm not sure of that requirement.

When you sell and buy again, you could get wash sales if you also sell in taxable accounts.
I described it poorly. I do a conversion transaction... I indicate the $ amount and what fund is to be reduced and in the Roth the fund to be increased by that $ amount.... the shares are based on the $ amount divided by the end of day share price.... I suspect that under the covers it is a sell/transfer/buy because I could indicate a different fund for the increase side than I did for the reduction side.
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Old 05-15-2018, 06:51 PM   #23
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Not quite.

Future withdrawals from tIRA do not have to equate current amounts of annual conversions. They are whatever is needed at the time, or - as a minimum - the RMDs.
Besides, future tax amounts mean little unless you have reasons to assume zero future inflation. What matters is their present value.

The formula could look like:
taxSaved(X) = [present value of ($RMD * futureTaxRt%)] - ($rothConverted * currentTaxRt%)
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Originally Posted by RetireBy90 View Post
Well, I am sure there are more complicated and precise ways to figure this, but my thinking is it only matters what tax rate you pay today and what rate you will pay in the future. For example, letís say you have $100 inan IRA, and pay 20% taxes today and in 9 years when you need the money, and 8% return.
$100 * 20% tax = 80 to Roth. In 9 years at 8% will double to $160
$100 converted to Roth, in 9 years at 8% = $200 * 20% tax leaves $160
All true.... my follow-up question is.... how many angels can dance on the head of a pin?
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Old 05-15-2018, 07:03 PM   #24
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I described it poorly. I do a conversion transaction... I indicate the $ amount and what fund is to be reduced and in the Roth the fund to be increased by that $ amount.... the shares are based on the $ amount divided by the end of day share price.... I suspect that under the covers it is a sell/transfer/buy because I could indicate a different fund for the increase side than I did for the reduction side.
I would call that selling a fund and buying another if you do different funds. I've done it with transfer in kind. But this does make me wonder if I were to sell the same ticker in a taxable account with a loss within 30 days (+/-) with a loss and do either mine or yours conversion transaction using the same ticker if that would create a wash sale.

If you sell a ticker with a loss in a taxable account and buy it within +/-30 days in an IRA, you create a wash sale.
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Old 05-15-2018, 09:06 PM   #25
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Interesting question. Let's say in early December I sell $40,000 of ticker X in my taxable account at a $20,000 loss.

Then in late December, I do a Roth conversion that reduces my holdings of ticker X in my tIRA by $30,000 and simultaneously increases my holding of ticker X in my Roth by $30,000.

Does the Roth conversion create a wash sale. I suspect not but it is an interesting question.

Now if the second part was to just buy $30,000 of ticker X in my Roth then the answer is obviously yes.
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Old 05-15-2018, 11:17 PM   #26
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The advice weíve received from our tax CPA as well as an FA is not to do Roth conversions in our situation. We donít have heirs and what we were told is Roths are great for passing on wealth to heirs but most people never spend the money in their Roth accounts. Also our taxable portfolio is over 60% of our assets with T-IRA assets only about 20-25% of our total so our RMDís wonít be huge. We also have a fair amount of taxable income so far in ER so not worth it to pay the taxes on Roth conversions.

As others have said, YMMV.
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Old 05-16-2018, 04:15 AM   #27
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my thinking is it only matters what tax rate you pay today and what rate you will pay in the future. For example, letís say you have $100 inan IRA, and pay 20% taxes today and in 9 years when you need the money, and 8% return.
$100 * 20% tax = 80 to Roth. In 9 years at 8% will double to $160
$100 converted to Roth, in 9 years at 8% = $200 * 20% tax leaves $160
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The advice weíve received from our tax CPA as well as an FA is not to do Roth conversions in our situation. We donít have heirs and what we were told is Roths are great for passing on wealth to heirs but most people never spend the money in their Roth accounts. Also our taxable portfolio is over 60% of our assets with T-IRA assets only about 20-25% of our total so our RMDís wonít be huge. We also have a fair amount of taxable income so far in ER so not worth it to pay the taxes on Roth conversions.
So in the case of Scuba, future tax rate is 0% since if they don't spend it before they leave. Therefore it doesn't make financial sense to pay whatever rate today rather than 0% sometime in the very distant future.
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Old 05-16-2018, 05:25 AM   #28
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Interesting question. Let's say in early December I sell $40,000 of ticker X in my taxable account at a $20,000 loss.

Then in late December, I do a Roth conversion that reduces my holdings of ticker X in my tIRA by $30,000 and simultaneously increases my holding of ticker X in my Roth by $30,000.

Does the Roth conversion create a wash sale. I suspect not but it is an interesting question.

Now if the second part was to just buy $30,000 of ticker X in my Roth then the answer is obviously yes.
Your example is a transfer in kind. I was referring to a transfer not in kind so there is a unique purchase.

So the first is part of the conversion is I do a Roth conversion that reduces my holdings of ticker Y in my tIRA by $30,000 then you are purchasing more X in the over all roth conversion.
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Old 05-16-2018, 06:59 AM   #29
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The advice weíve received from our tax CPA as well as an FA is not to do Roth conversions in our situation. We donít have heirs and what we were told is Roths are great for passing on wealth to heirs but most people never spend the money in their Roth accounts. Also our taxable portfolio is over 60% of our assets with T-IRA assets only about 20-25% of our total so our RMDís wonít be huge. We also have a fair amount of taxable income so far in ER so not worth it to pay the taxes on Roth conversions.

As others have said, YMMV.
Is your goal to maximize post-death charitable contributions? Otherwise I don't see how this makes good sense. If the rationale is based on what "most people" do with a Roth, I don't buy it because most people don't ER and have an ideal time to do partial conversions like many of us do. But maybe there's something else about your situation that makes it work for you.
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Old 05-16-2018, 09:38 AM   #30
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Is your goal to maximize post-death charitable contributions? Otherwise I don't see how this makes good sense. If the rationale is based on what "most people" do with a Roth, I don't buy it because most people don't ER and have an ideal time to do partial conversions like many of us do. But maybe there's something else about your situation that makes it work for you.


The other variable is that our tax bracket has still been high so far in ER.
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Old 05-16-2018, 09:46 AM   #31
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So in the case of Scuba, future tax rate is 0% since if they don't spend it before they leave. Therefore it doesn't make financial sense to pay whatever rate today rather than 0% sometime in the very distant future.
Except that many people here are facing the "tax torpedo" when RMDs start, so taxes will be paid on the IRA money eventually. Roth can reduce that tax torpedo since it has no RMDs.
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Old 05-16-2018, 10:05 AM   #32
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Except that many people here are facing the "tax torpedo" when RMDs start, so taxes will be paid on the IRA money eventually. Roth can reduce that tax torpedo since it has no RMDs.
Your not supposed to give out my secrets. This is my case precisely. At 70 my plan has us not needing any funds from the IRA but required by law to take the RMDs. In my case, I will retire this fall. Then our tax should be in 22% range, so I will be making the Roth conversions. However, each case should be based on projected tax rate now and in the future, along with other criteria unique to you.
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Old 05-16-2018, 11:30 AM   #33
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The other variable is that our tax bracket has still been high so far in ER.
"High" by itself is a meaningless term for this purpose. If it's going to be a higher tax bracket later than it is now, conversions are probably worthwhile.
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Old 05-16-2018, 11:38 AM   #34
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Except that many people here are facing the "tax torpedo" when RMDs start, so taxes will be paid on the IRA money eventually. Roth can reduce that tax torpedo since it has no RMDs.
And especially so if you and your spouse don't kick the bucket at the same time. For many folks who may not expect their bracket to change after RMD arrive may well get hit with a rate increase when they have to file as single.
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Old 05-17-2018, 11:01 AM   #35
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And especially so if you and your spouse don't kick the bucket at the same time.

That's the conclusion I reached too. I created a spreadsheet using static returns for equities & bonds, and current tax laws. The amount we saved during our lifetime (to age 90) by starting ROTH conversions now was not a lot. But if one of us were to go first and early, the survivor would get hit hard. We are solidly in the 12% bracket now, but will jump to the 22% bracket when RMDs & SS start (planning to start SS at 70)



My plan is to try for ACA subsidies. If income exceeds that number & there is little I can do to control for that since I use mutual funds, then I'll do a ROTH conversion to the top of the 12% bracket for that year. After we get to 65, we'll do ROTH conversions every year till RMDs hit.
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Old 05-17-2018, 11:28 AM   #36
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What about the length of time that your IRA could be growing tax-free? If you hold it for 10 years, instead of paying taxes today, you could be compounding earnings on the entire amount, rather than a reduced amount. I think it's a bit more complicated than the formula above.
That is why you should pay the taxes from outside the transfer so you still get the advantage of the entire amount rolled over.
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Old 05-17-2018, 11:31 AM   #37
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Another aspect, often missed in such discussions (and I did not see a word about it in this thread), is the cost of opportunity paid during Roth conversions.

The goal of the conversions is not merely to minimize income taxes paid during retiree's lifetime (as many of the more simple-minded individuals wrongly see it), but is instead to maximize the efficiency of one's portfolio.
Which is done by ensuring that most of the portfolio ends up in one's pocket to spend, give away, or simply waste. The money not ending in one's pocket are just friction losses and include portfolio expenses, income taxes paid, and whatnot...

Thus, if the retiree aimed at higher efficiency, (s)he would also take into account that all extra income taxes paid due to conversions are amounts which disappear from one's possession annually, and once each of them does, it is unable to produce any future income.
Were these amounts not spent on income taxes for conversions, they would have been generating future income streams, a very welcome state of affairs.

This cost of the lost opportunity would need to also go into the equation.
Most people ignore it. I don't.
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Old 05-17-2018, 11:47 AM   #38
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Another aspect, often missed in such discussions (and I did not see a word about it in this thread), is the cost of opportunity paid during Roth conversions.

The goal of the conversions is not merely to minimize income taxes paid during retiree's lifetime (as many of the more simple-minded individuals wrongly see it), but is instead to maximize the efficiency of one's portfolio.
Which is done by ensuring that most of the portfolio ends up in one's pocket to spend, give away, or simply waste. The money not ending in one's pocket are just friction losses and include portfolio expenses, income taxes paid, and whatnot...

Thus, if the retiree aimed at higher efficiency, (s)he would also take into account that all extra income taxes paid due to conversions are amounts which disappear from one's possession annually, and once each of them does, it is unable to produce any future income.
Were these amounts not spent on income taxes for conversions, they would have been generating future income streams, a very welcome state of affairs.

This cost of the lost opportunity would need to also go into the equation.
Most people ignore it. I don't.
That's wrong, but since you apparently think you're not simple-minded and we are, I'll let you figure it out.
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Old 05-17-2018, 11:58 AM   #39
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Another aspect, often missed in such discussions (and I did not see a word about it in this thread), is the cost of opportunity paid during Roth conversions.

The goal of the conversions is not merely to minimize income taxes paid during retiree's lifetime (as many of the more simple-minded individuals wrongly see it), but is instead to maximize the efficiency of one's portfolio.
Which is done by ensuring that most of the portfolio ends up in one's pocket to spend, give away, or simply waste. The money not ending in one's pocket are just friction losses and include portfolio expenses, income taxes paid, and whatnot...

Thus, if the retiree aimed at higher efficiency, (s)he would also take into account that all extra income taxes paid due to conversions are amounts which disappear from one's possession annually, and once each of them does, it is unable to produce any future income.
Were these amounts not spent on income taxes for conversions, they would have been generating future income streams, a very welcome state of affairs.

This cost of the lost opportunity would need to also go into the equation.
Most people ignore it. I don't.
The money will be forced out of your account through ever increasing RMD's that you will have to pay taxes on. There is no free lunch.
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Old 05-17-2018, 12:07 PM   #40
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That's wrong, but since you apparently think you're not simple-minded and we are, I'll let you figure it out.
+1

Minus the insult, I might have taken some time to explain the flaw in his reasoning.
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