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Old 09-12-2018, 11:36 PM   #41
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Thanks for trying it. Actually that was my first concern. Is this a reliable estimate? I will eventually plug it all into Turbotax, but I was only looking for a ball park, and didn't want to get down in the weeds.
It gets generally good comments (with a few caveats) at https://forum.mrmoneymustache.com/ta...32/#msg2135032 and the post following that one.
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Old 09-13-2018, 06:39 AM   #42
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I feel for you, seriously. Because of my RMD's my SS is taxed at 85% ....
RMDs will cause my SS to be taxed at 85% too.

However, it is unreasonable to have expected SS not to be partially taxed. If you saved for retirement in a non-deductible tIRA and the bought a SPIA or saved in a deferred annuity and then annuitized it, a portion of the benefits representing growth/inside build up would be taxed. Comparing what I will receive to what I paid, 75% would be taxed, so 85% isn't all that far off.
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Old 09-13-2018, 11:38 AM   #43
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I've pretty much given up on the thought of paying tax on less than 85% of SS. Last time I ran the SS calculations using "future" dollars, our combined SS at age 70 (in 10 years) would be over $100K ($73K in todays dollars). With RMD's and other taxable income, the taxable SS by itself will throw us out of the 10% bracket.

Oh well, maybe I'll take it at 62, instead. But, even those smaller SS payments will still probably end up being 85% taxed.
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Old 09-13-2018, 05:06 PM   #44
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You might consider changing the conversions up to top of 22% bracket. If most will pass, then you can pass more tax free. I also believe that income tax rates will rise within the near future. For me, it is the certainty and freeing up the $$ from other restrictions. In the Roth I can take it all tomorrow if I wanted, without any worry about taxes.
My first reaction to your post was: Why bother?

Today I ran a few scenarios. If I delay SS to 70, and convert to the top of the 24% bracket, we can convert virtually all of my tIRA (depending on growth) at an effective tax rate of about 18%. With no RMD's, our taxes after 71 will be minimal (< $1000/year). Of course, this would mean paying about $50,000 a year in taxes for the next 6 years!

If one of us lives into their late 80's, or if I want to maximize the future value of DS's inheritance, this makes some sense.

At this point I am seriously thinking about consulting with a tax expert to look at the pros and cons of the various options. It might be a thousand dollars well spent.
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Old 09-13-2018, 05:21 PM   #45
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For a couple under 65 and claiming just the standard deduction, going to the top of the 24% bracket means drawing $339K from IRA/401k. This also assumes no other income besides the IRA/401k withdrawal, such as after-tax dividend and cap gain.

The federal tax on that amount is $64,179. That leaves you with $275K, unless you use after-tax money to pay the tax. And then you need some money to live on, plus something to pay the state tax. So, you can stuff perhaps only $200K/year into Roth.

Do that for 6 years, and you deplete $2034K out of your IRA/401k. You gain $1200K into Roth.

If you have enough after-tax money to live on, and to be able to stuff the whole $275K into Roth, you will have $1650K in Roth, but your after-tax pile shrinks by $450K.

PS. Forget about the money to live on, which one needs to do anyway. Just looking at the tax loss, the conversion loss is 64179/339000 = 19%.
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Old 09-13-2018, 05:54 PM   #46
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NW-Bound: I hear you. I don't think I could pull the trigger on this, but intend to look at it.

Any way I look at it, the tax man is going to get his pound of flesh from me and/or my heirs (and I have no real problems with that. After all I have not paid any taxes on it yet). My gut tells me to pay as little as possible until I need to pay more. Just want to be sure that is the right approach (though I will continue to convert to the top of the 12% bracket until we take SS).
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Old 09-13-2018, 07:16 PM   #47
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I have the same problem you have. I was just thinking out loud.

To convert up to the top of 12% should be a no-brainer. You can transfer $104K from IRA to Roth each year. The tax will be $8907, which is more palatable.

Now, you need to spend after-tax money to pay that tax, and also to live on. I think it is OK to spend after-tax money to gain more in Roth.

It's because $1 in Roth > $1 in after-tax > $1 in tax-deferred.

But with $104K each year, it does not make that big a dent in the IRA/401k till RMD hits at 70. Nice problem to have, eh?

Depending on how much you have, it may still drive down the RMD enough, such that when added to the SS you take at 70, you are still inside the 12% bracket. A lot depends on the individual circumstance.
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Old 09-13-2018, 07:35 PM   #48
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I have the same problem you have. I was just thinking out loud.

To convert up to the top of 12% should be a no-brainer. You can transfer $104K from IRA to Roth each year. The tax will be $8907, which is more palatable.

Now, you need to spend after-tax money to pay that tax, and also to live on. I think it is OK to spend after-tax money to gain more in Roth.

It's because $1 in Roth > $1 in after-tax > $1 in tax-deferred.

But with $104K each year, it does not make that big a dent in the IRA/401k till RMD hits at 70. Nice problem to have, eh?

Depending on how much you have, it may still drive down the RMD enough, such that when added to the SS you take at 70, you are still inside the 12% bracket. A lot depends on the individual circumstance.
FWIW, we are limited to about $70k in conversions (in the 12% bracket), due to poor tax planning with tax inefficient after tax accounts. Never thought about it before, and too late now without taking a cap gains tax hit. At that pace, we will be lucky to convert enough to simply not have a higher balance than we do now. So, yeah, nice problem to have.

In the grand scheme of things, I am not complaining. We were more successful saving than we needed to be, and have little concern about running out unless there is an unthinkable black swan event, and then we we would be toast no matter what we had done.
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Old 09-13-2018, 07:56 PM   #49
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Ditto here, and we have state income taxes too, at around 4.3%, so almost 15% projected effective tax on Roth conversions for 2018.

IF once we start Medicare we redomesticate to a no tax state, I may convert to the top of the 22% tax bracket until we start RMDs.
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Old 09-18-2018, 07:34 PM   #50
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My solution is to Roth convert everything I can up to 24% level till 70. This will clean a huge amount from my TIRA. Presently I'm living on cash. My total cost of conversion is $256k over 4 years. My analysis is this money belongs to the government anyway. The taxes will only continue to accrue as the portfolio grows and RMD on top of SS will eat you alive. You won't be in the 12% bracket for long. My analysis is at first the TIRA portfolio grows faster than the Roth but so do the taxes. Eventually the value of the Roth conversion is paid for by a low tax life and once that happens the 2 portfolios diverge in favor of the Roth. A significant problem is when one spouse dies. The tax write off is cut in half and there is often a 2 level increase in bracket. SS from one spouse is lost as well. So if your at top of 12% as a couple you can easily reach into 24% as a single depending on the RMD. Basically one spouse dies and Uncle Sam climbs into the bed with the remaining spouse to drain the account.

This is avoided to large extent with a Roth. Living on cash is also a good deal. If the market crashes my portfolio is closed to SORR and I don't need to sell anything as my hamburgers are already paid for till age 70. At 70 I start SS so my need to access the portfolio is reduced thereby decreasing SORR a 4% withdrawal has a much larger failure rat than a 2% withdrawal. I'm not taking SS till 70. I have the larger SS. My wife is younger and when she reaches 66 She will take and I will claim spousal. When I reach 70 I will take and she will claim spousal which is larger than her SS. When I die she will take survivor. It works out to about 175K extra SS over the years. There are calculators to analyze this and each situation is unique but this maximizes our payout. You have to figure out your particular situation. I analyzed nearly an extra million bucks in end portfolio value doing the Roth conversion + SS ju-jitsu and the picture is MUCH better for a spouse that is widowed.

If the market is only going to pay 4% for the next decade, why would you give up a guaranteed 8% return on your SS? I think part of the problem with NW-Bounds analysis is he forgot both Roth and TIRA continue to grow and as the conversion happens and TIRA is emptied the growth is reduced while as Roth is filled it's growth increases dramatically. Once 70 is reached SS kicks in and the need for portfolio money goes down but if you're forced to RMD taxes continue to grow basically forever and more money is coming out of the portfolio than needed. I analyzed top of 24% top of 22% and top of 12%. The conversion order for me was top 24% best, somewhere between 24% and 22% second best, top 22% third best, and 12% barely made any difference.
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Old 09-19-2018, 01:16 AM   #51
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... A significant problem is when one spouse dies. The tax write off is cut in half and there is often a 2 level increase in bracket. SS from one spouse is lost as well. So if your at top of 12% as a couple you can easily reach into 24% as a single depending on the RMD. Basically one spouse dies and Uncle Sam climbs into the bed with the remaining spouse to drain the account...
I forgot this tax increase when one spouse dies. OK, this is going to make it more complicated.

I will need to look into this some more. Even after the conversion to the top of 24% and more than 1/4 million bucks in taxes, I would still have a lot left in tax-deferred. But will the balance be low enough at RMD time? And for a single payer? Guess I need to look into it.
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Old 09-19-2018, 04:31 AM   #52
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It's not just getting the TIRA down, but taxable assests also can contribute the the tax problem when one spouse passes. We've seen that with DMIL. And if you inherit from a non-spouse (TIRA) then you have TIRA that can't be converted.

you can help the problem by sandbagging your investment performance, but in the long run that lowers tax buy stiffing investment returns.

I'm guessing that you have not been doing the conversions for the tax on SS, but the tax on TIRA withdraws in general. Am I interpreting this correctly
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Old 09-19-2018, 09:58 AM   #53
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I’m with Doc0, I love the line, when one spouse dies and Uncle Sam climbs into bed. That’s why I plan to reduce some from TIRA, at least minimize its size for RMDs purpose. This ties back to when to take SS.
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Old 09-19-2018, 10:48 AM   #54
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My solution to taxable accounts was to tax loss harvest during downturns. I have about 400K of tax loss available to use against capital appreciation. Here is an article I wrote explaining some of these ideas. Tax loss harvest plus taxable appreciated stock is how I generate my bankroll to live on. There is no tax consequence to selling this stock. I call it my rich man's Roth

https://www.dadsdollarsdebts.com/201...ptimize-taxes/

I've done more work since with commercial software but my numbers and the professional numbers are pretty close. If nothing else it tells you how to think about things. This is analyzed around a 1.5M TIRA and 4 years of conversion. If I had say 2.5M I'd move to a 6 or 7 year conversion. I also did more work after this article fine tuning SS payout
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Old 09-19-2018, 12:05 PM   #55
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The conversion is not to adjust taxes by minimizing SS taxes but to adjust overall life long tax burden and try to lock that in as a knowable expense both as a single and as as married. I view retirement as a series of epochs not as one continuous thing. I'm in "Roth conversion epoch" right now and I've optimized my financial situation for this epoch. Next will come my wife's SS and me taking spousal epoch. Then will come my taking SS and her taking spousal and my taking any residual RMD epoch. Then will come her taking any residual RMD epoch. You can tune each epoch for max benefit, and you can project onto the next epoch/s what will be the best maneuver today to maximize the benefit in the future. Example I tax loss harvested over 3 recessions. It was something I could do and it's paid off decades into the future. There will be another recession so even if retired you can tax loss harvest tax lots underwater and bank the loss for the future and then use the loss as needed. Another way to manage too much RMD is as you close on death consider gifting the TIRA to a kid. If you have more than you can spend get rid of some instead of paying taxes.
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Old 09-19-2018, 12:33 PM   #56
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Another way to manage too much RMD is as you close on death consider gifting the TIRA to a kid. If you have more than you can spend get rid of some instead of paying taxes.
Can you really do this? Has it changed since this article from 2014, that says

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So if you have a traditional IRA, the short answer is no, you can't avoid paying income taxes on a withdrawal by making it a personal gift.
https://www.schwab.com/resource-cent...amily-tax-free
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Old 09-19-2018, 12:53 PM   #57
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You don't gift a payment you jettison IRA ownership.
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Old 09-19-2018, 01:07 PM   #58
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Other than through a divorce decree, I've found nothing that says you can do this before you die. Do you have a source that says you can?
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Old 09-19-2018, 02:12 PM   #59
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I like to know as well, but how about what does it mean by jettison IRA ownership. New vocabulary for me.
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Old 09-19-2018, 03:30 PM   #60
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I forgot this tax increase when one spouse dies. OK, this is going to make it more complicated.
If I died the last day of this year, my husband's income would drop by 19% and his taxes would increase by 47%. The overall decrease in after tax income would be 25%.
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