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Old 05-12-2014, 06:05 PM   #41
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I've been worrying about this too (52).

My issue is that we have 10 rental properties that will be funding 60% of our retirement income needs. The income from those will limit any Roth conversion options. Makes it confusing as to whether it makes sense to take SS early, consider selling the properties now (and absorb a 6 digit CG hit) or just bite the bullet when the time comes. ACA plays into it too. Too many things to try and model and too far away from now which makes possible governmental change likely anyway.
I am in a similar situation with rental incomes, though I am 57 y/o now. I have rental property incomes that will provide 100% of retirement income needs as long as we hold them. Then there will likely be a large Cap Gains to deal with at time of sale (not sure when that will occur). I have a lot of 401k and taxable IRA funds that I plan to use after that. I "think" we'll be in a lower tax bracket after the rentals are disposed of, but it's a big guess at this point...
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Old 05-12-2014, 06:09 PM   #42
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Poor baby!

I have to do the same Steve and try to remind myself that not having the income, and resulting tax responsibility, would be less desireable than having the income and paying the taxes.

When 70ish comes around, finding yourself in a HIGHER tax bracket than you were in your earlier retirement years is the result of our own previous decisions, so look in the mirror and meet the guy who is responsible for it happening!
I totally agree, it is better to have the income than not... but it still stings and it's difficult to somehow minimize that sting. and yes, a higher FIT bracket at age 70 is not bad news, but... ouch... another sting!!!
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Old 05-12-2014, 06:42 PM   #43
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Not to worry. Over the next three decades the Federal income tax will be repealed to be replaced by a Federal Value added tax. Tax advantages of IRA's, Roths, 401K's etc will disappear.






And then I woke up....
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Old 05-12-2014, 06:59 PM   #44
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I think I'll just significantly increase my charitable gifting if I make it to 70.

Only 10% of our investments are in tax-deferred accounts, so it's not that onerous.
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Old 05-12-2014, 08:16 PM   #45
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One of my favorite questions, I've asked several times (posted a tax torpedo article), but no easy answers. Right or wrong, I've begun to think the best broad strategy is to try to keep annual taxable income constant (inflation adjusted) throughout retirement irrespective of age, regardless of spending. For me at least that seems to mean withdrawing from taxable and deferred throughout (before and after age 70), and much more from our portfolio before we start SS and RMDs. Depleting taxable first and delaying deferred, as is often suggested, doesn't appear to make sense for us. If we do that, our RMDs project to be higher than our spending needs, so we get whacked on RMD and SS taxes. It's a complex question thanks to sequence of returns, future rates relative to now, Roth conversions, spending (inflation) projections and a host of other variables. It never seems to get easier...but maybe I'm missing the forest for the trees.
Midpack, you've mentioned elsewhere that you've used ESPlanner previously. Did you try modelling it there? I tried and spending taxable vs. non-taxable first didn't seem to make a difference. Yes, I agree sequence of returns, particularly in the first 5 years, can complicate things, as can one's viewpoint regarding future tax increases. Still, my plan (for now) is to convert up to the 15% tax bracket. We'll see what that looks like when the time comes (i.e., a market crash could derail those plans significantly).
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Old 05-12-2014, 10:29 PM   #46
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Actually the end $ amount is the same whether you invest after tax dollars outside a tIRA or defer taxes via a tIRA. Uncle Sam gets his cut either way, and once you pay the tax the end $ value you have is identical.
Could you provide a numerical example to demonstrate this?
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Old 05-12-2014, 10:48 PM   #47
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Actually the end $ amount is the same whether you invest after tax dollars outside a tIRA or defer taxes via a tIRA. Uncle Sam gets his cut either way, and once you pay the tax the end $ value you have is identical.
That's not true if you pay any capital gains taxes or dividend taxes for your taxable account. Which is possible, but only at very low incomes.
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Old 05-12-2014, 11:13 PM   #48
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That's not true if you pay any capital gains taxes or dividend taxes for your taxable account. Which is possible, but only at very low incomes.
Whoops, I had posted too quickly, it's the Roth vs. tIRA that are identical. In the case of IRA vs. non-IRA the IRA does leave you with more after tax $ if you earn enough that you must pay some CG tax on the non-IRA. Sorry for the confusion.
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Old 05-13-2014, 12:55 AM   #49
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............ it's the Roth vs. tIRA that are identical. ..................
The Roth and TIRA are only identical if the available funds are limited. If the Roth and TIRA are maxed out, the Roth is somewhat better.
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Old 05-14-2014, 11:49 AM   #50
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Right.

And converting from tIRA to ROTH, if you pay the taxes with outside (non-IRA) funds, the ROTH gets bigger. In essence you are adding the amount of the tax to the ROTH.
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Old 05-14-2014, 09:17 PM   #51
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Great discussion. Should be a sticky. The accumulation phase toward ER is what everyone most often discusses, but the draw-down phase is equally, if not more important as a mistake here can be disastrous with the inability to earn more to correct the error.

Had not thought about the IRA to ROTH conversion strategy at age 59.5 so as to avoid a potential MWD tax hit at age 70.5.... thats excellent input for those who have sizeable pre-tax retirement savings and plan/hope to live a long time (dont we all...)

The deferral of SS and then suddenly a "windfall" of SS plus MWD can put someone in a tax-ugly position.

In my 40's I am not thinking along those lines, and of course, rules can and will likely change, but it's important to get this draw-down strategy laid out on a piece of paper or spreadsheet and then run some scenario's....

Perhaps an opportunity for a FIRECALC like tool that simulates after-tax cash impacts of various draw downs .....
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Old 05-14-2014, 10:12 PM   #52
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5 more years. 5 more Long years before we may be in a taxable situation at when we will be +70.5 and annuities begin to mature. I tell you, it sucks to be paying 0 taxes
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Old 05-14-2014, 11:14 PM   #53
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Don't want to be a Debbie downer, but there is always a chance the Roth IRA could be taxed someday.

At one time you didn't have to pay taxes on SS check that you paid into all your life. With 43% of people not working today, the gov. has to get the money somehow to pay them the minimum SS when they reach the age.
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Old 05-15-2014, 10:09 AM   #54
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At one time you didn't have to pay taxes on SS check that you paid into all your life. With 43% of people not working today, the gov. has to get the money somehow to pay them the minimum SS when they reach the age.
More SS taxation is guaranteed simply by the fact that the income threshhold amounts are not indexed for inflation. Right?
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Old 05-15-2014, 10:57 AM   #55
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There are so many moving parts to this. Assumptions about what tax rates will be at age 70. I can see being in a higher bracket at 70 once SS+pension+investment income+RMD all pile up. I'm somewhat happy I didn't max out the 401k ( just enough to get all the matching ).

I'm leaning towards doing partial conversions each year to age 70, to stay in current tax bracket. So how does the 5 year holding apply to partial conversions. Does each conversion have its own 5 year period. Does the holding period go away after 591/2 ?
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Old 05-15-2014, 11:20 AM   #56
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There are so many moving parts to this. Assumptions about what tax rates will be at age 70.
I was just poking at ss.gov and using their calculator and looking at the results where it reports "70 in 2031".

I knew this, but being reminded that if I wait until age 70 for SS, it'll be 2031. That. is. a. long. time. And I'm certain tax policy will change a bit by then...

Of course, this is the EARLY Retirement & Financial Independence Community Forum.
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Old 05-15-2014, 11:21 AM   #57
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I'm leaning towards doing partial conversions each year to age 70, to stay in current tax bracket. So how does the 5 year holding apply to partial conversions. Does each conversion have its own 5 year period. Does the holding period go away after 591/2 ?
see table by kawill from the fairmark.com site: Each conversion has it's own 5 yr clock but after 59.5 , those individual clocks are replaced by a single 5 yr clock monitoring the oldest Roth account opening. Imagine a semi-colon after every yes/no to make sense of this table.

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

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

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

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.
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Old 05-15-2014, 01:22 PM   #58
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see table by kawill from the fairmark.com site:
Very good. I think that is right on target. Some sites seems to say the 5 year holding reset with each conversion even after 59.5. I had been on fairmark earlier but did see the post. I think this is the one

Fairmark Forum :: Retirement Savings and Benefits :: Distributions from RIRA after TIRA transfer
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Old 05-15-2014, 03:06 PM   #59
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In doing a quick calculation I am a bit dubious about the savings. If one were to assume 8% annual return on an annual reduction of 1/10 of a portfolio between 60-70 by age 70 the ROTH conversion and IRA remainder portfolio will have 19% less assets than the IRA portfolio, assuming one pays only 15% tax on the distribution. Since the RMD is less than 4% at age 70 would not this mean that most likely the tax savings would not occur until after age 78-80? Tax planning 20 years out seems to be a bigger risk than RMD to me.

My calculations on a million dollar portfolio converted at 85K per year with 8 percent annual return (.3% less than historical return of 8.3% on 50/50 portfolio from 1926 - 2013 per John Bogle) would be the IRA portfolio would still be leading at age 80.
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Old 05-15-2014, 03:24 PM   #60
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Broadly speaking, there seem to be a couple of camps in the discussion. There are those who will have a very significant amount of assets and/or income who would prefer to keep their taxes as low as possible (mostly 'cause they don't like paying taxes - not so much 'cause it will crimp their living style too much.)

The second camp needs to keep taxes as low as possible just to have enough to FIRE or stay FIRE'd. My guess is that the actual tax "amounts" are relatively small for these folks, but every $ is important when you don't have a lot of them.

I would think I am in the first group and it's probably a good problem to have. Assuming no catastrophe (like rampant inflation) occurs, I'll continue to deplete as much of my "qualified" money at either 15% or even 25% tax rate (either ROTH conversions or living expenses) until I reach 70.5. I'll play it by ear from then on I suppose.

I do hate paying any more taxes than I have to (I don't much like the way the money is spent - but that's another discussion.) Also, I'm pretty much happy with the way we live right now, so when RMDs kick in with SS at 70, I may have to decide whether I prefer to pay Uncle Sam or donate more to charity. Right now, I think I'm gonna get more generous in my old age. YMMV
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