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Old 03-26-2015, 07:38 AM   #41
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Yes, that is the principal reason I am deferring SS and pensions to maximize roth conversions before RMDs begin and pay 15% rather than 25% or more. The longevity insurance aspect of taking SS late is an added bonus.
Is there a penalty (10%?) if these converted Roth monies are withdrawn in less than 5 years? Or, if the Roth IRA was set up 5 years prior, can the monies be withdrawn penalty free immediately?
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Old 03-26-2015, 07:55 AM   #42
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If you are over 59 1/2 and the Roth account is over 5 years old you can withdraw at any time with no penalty. Other than that, it is a bit complicated, see the table below for details.

Quote:
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
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Old 03-26-2015, 08:20 AM   #43
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If you are over 59 1/2 and the Roth account is over 5 years old you can withdraw at any time with no penalty. Other than that, it is a bit complicated, see the table below for details.
I have a question on the following.... (just trying to figure this stuff out myself)


Quote:
OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA
If you have a roth and then roll over an IRA to the Roth later, I think this will restart the 5 year rule even if you are over 59.5 years old. If so, I'd assume you don't have complete penalty free withdraws. However, I think (not sure ... asking here) that in that case one could withdraw all contributions... including the rollover without being taxed. Is this correct?
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Old 03-26-2015, 09:27 AM   #44
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My understanding is if you over 59 1/2 that you can withdraw an amount equal to your contributions and rollovers penalty and tax free. If you are over 59 1/2 the only limitation is that growth/earnings are penalty-free but are taxable unless you have had a Roth account for 5 years.
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Old 03-26-2015, 09:38 AM   #45
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...
I'm deferring pensions and SS as much as possible in favor of Roth conversions to the top of the 15% tax bracket in the hope of avoiding or at least reducing my time in the 25% tax bracket once RMDs begin.
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Also check if converting IRA to Roth before RMDs while delaying SS makes more sense in your case.
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I need to play with the numbers some more. I'd planned to do the Roth conversion up to the top of the 15% tax bracket every year and I can see that taking SS will reduce the amount I can take out of my IRA and convert to a Roth. Too many variables! Fortunately, not a decision I need to make immediately.
I'm sure this has been discussed before, but I need to get on the stick and check this out. Does anyone have a spreadsheet that can help in the decision?

My 401K rollover IRA has really grown, and DW and I have smaller trad IRAs as well. Roughly 2/3rd of our nest egg is deferred, so will be taxed as income when we take it. I turn 60 this year, so 70 1/2 suddenly doesn't seem like some incomprehensibly far-off future event - gotta start planning!

I've done minimal Roth conversions to date, partially because I didn't want to have income above the point where my kid's education credits become limited - but that ends this year anyhow (yeah!). That's a steep slope, and didn't want to risk it, though I could have done more. I recently sold off most of my Hi-Yield bond fund (the ~ 80% that had low cap gains), and bought BRK/B (no dividends) - so now I've substantially reduced my taxable dividends, and that will leave a lot more room for ROTH conversions within the 15% bracket.

Of course, no way to know if trading Hi-Yield for BRK/B is good/bad, but I'll accept that risk.

Are there any other super-low dividend investments?

I'll start a new thread if that is requested, just thought it kind of fit here, and I can probably be pointed to the info.

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Old 03-26-2015, 11:50 AM   #46
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This has been debated enough that I'm quite surprised that an old hand like you isn't all over it.

You can get a pretty good inkling if you'll have an issue by taking a proforma tax return assuming that you are now 71 and include SS, pensions if any and RMDs based on your current tax-deferred balances and see what your marginal tax rate is. If it is 25% or more, then I would think it would typically be beneficial to convert to the top of the 15% bracket. In 2014 my incremental tax on my conversion to the top of the 15% bracket was 10% (incremental federal tax divided by conversion amount... state was 3% on top of that but may not apply to many here) so I save 15% compared to if I wait, which for me is real money (savings are about 10% of our current annual living costs).

The conversions is invested in the same ticker in my Roth as it was in my tIRA so what it is invested in doesn't matter to me.

I have created my own spreadsheet that compares out NW with and without Roth conversions but it is very complicated so I would not be comfortable sharing it but it suggests that our age 100 NW would be 17% higher with Roth conversions versus no Roth conversions.
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Old 03-26-2015, 12:16 PM   #47
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This has been debated enough that I'm quite surprised that an old hand like you isn't all over it. ...
Seems odd, doesn't it? But I have a strong procrastination streak in me, that fights my analytical, 'run the numbers' side. The procrastinator says, 'good idea, but you can do it tomorrow'....

Quote:
You can get a pretty good inkling if you'll have an issue by taking a proforma tax return assuming that you are now 71 and include SS, pensions if any and RMDs based on your current tax-deferred balances and see what your marginal tax rate is. If it is 25% or more, then I would think it would typically be beneficial to convert to the top of the 15% bracket.
Right, I guess it isn't much (if any) more complex than that.

Quote:
In 2014 my incremental tax on my conversion to the top of the 15% bracket was 10% (incremental federal tax divided by conversion amount... state was 3% on top of that but may not apply to many here) so I save 15% compared to if I wait, which for me is real money (savings are about 10% of our current annual living costs).
Uh-oh, not sure I'm following this. How was the incremental on the conversion less than 15% - or were you starting in the below 15% bracket? I'm already in the 15%, but maybe not now that I removed the dividend paying bond fund.

Good point on state taxes, I'll check those too.

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Old 03-26-2015, 12:49 PM   #48
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....Uh-oh, not sure I'm following this. How was the incremental on the conversion less than 15% - or were you starting in the below 15% bracket? ..
The tax on the conversion ends up being less than 15% because a lot of my income is qualified dividends and LTCG when get taxed at 0% so the Roth conversion gets the benefit of deductions and personal exemptions and the 10% bracket.

So for example, let's say we have $40,000 in qualified dividends and LTCG and take standard deductions. If we do no Roth conversions our tax is nil.

Our income can be as much as $91,400 ($73,800 TI for top of 15% tax bracket + $12,400 std dedn +$7,900 personal exemptions) and still be in the 15% bracket. So after the $40,000 of qualified dividends and LTCG we can do up to $51,400 of Roth conversions. Adding $51,400 of Roth conversions to the $40,000 of qualified dividends and LTCG result in a tax of $4,166 (or 8.1% of the $51,400).

How can this be if we are in the 15% bracket? Because the $51,400 gets some benefit from the standard deduction and personal exemptions and is taxed "first" at lower rates, and the $40,000 is then taxed at 0%.

You can prove this by just taking out the $40,000 but leaving in the Roth conversion... the $4,166 tax doesn't change. Or alternatively, the tax is based on TI of $33,800 ($51,400 Roth conversion - $12,400 std dedn - $7,900 personal exemptions) and applying 10% to the first $18,150 and 15% to the remaining $15,650.

Within a couple bucks anyway.

Sweet, huh!
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Old 03-26-2015, 01:21 PM   #49
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The tax on the conversion ends up being less than 15% because a lot of my income is qualified dividends and LTCG when get taxed at 0% so the Roth conversion gets the benefit of deductions and personal exemptions and the 10% bracket. ....

Within a couple bucks anyway.

Sweet, huh!
Got it, thanks! I'll add these notes to my file.

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Old 03-26-2015, 05:10 PM   #50
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If you are over 59 1/2 and the Roth account is over 5 years old you can withdraw at any time with no penalty. Other than that, it is a bit complicated, see the table below for details.
May we have the table link/reference?
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Old 03-26-2015, 05:12 PM   #51
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May we have the table link/reference?
Fairmark Forum :: Retirement Savings and Benefits :: Distributions from RIRA after TIRA transfer

Starts about 1/2 way down the page.
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Old 05-06-2015, 11:32 AM   #52
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I brought my original topic back, to report some results, before I forget them!
The original issue was that with my big spreadsheet, I was finding that delaying SS till age 70 (versus FRA of age 66), that the investment fund value never recovered in a reasonable lifetime versus taking SS at 66. This was a surprise, and I wanted to know why that was. First, I suspected an error on my part, but could find none.

So I created a new simple spreadsheet just for the purpose of investigating the unexpected effect. I was still wondering if I had an error somewhere in the big spreadsheet.

New Work -- A simple spreadsheet was created, and then added onto iteratively.

Two people, “A” and “B”, exactly alike.
“A” takes SS at their FRA = 66. “B” delays SS till age 70. SS benefit @ 66 set to 100 Units annually. Delaying till age 70 SS benefit set to 132 Units annually (32% more). Both have living expenses of exactly 100 Units annually. No inflation, no COLAs, no other source of income nor investable assets, no taxes. A column for each tracks the accumulated SS benefits over time.


“A”s living expenses exactly match their benefit. “B” has to dumpster dive for age years 66, 67, 68, and 69, as he has no other source of income. But at age 70, he gets 132 Units annually. Looking at the accumulation of benefits paid, crossover occurs at age 82. No surprise, as it deals only with benefit crossover.

First Change -- But this isn’t a helpful comparison, as “B” is destitute for 4 years before starting SS at age 70. So I created an asset fund for each at age 66. $1 million sounds like a relevant fund amount. I wanted to keep everything in “Units”, so I assumed that the annual 100 Units of SS benefit at FRA equated to $27,000 of SS annually. Then took $27,000 divided by 100 Units to get $270 per Unit. So $1 million divided by $270 per unit = 3704 Units. “A” and “B” come into a fund of 3704 Units at age 66. This fund is in effect like an escrow, there is no appreciation or loss.

Remember that living expenses for both are 100 Units, and “A”s benefit exactly matches living expenses, so as the years go by, “A”s Fund remains at 3704 Units. But “B” needs to withdraw 100 Units per year from his Fund for age years 66, 67, 68 and 69 for his 100 Units of living expenses before his SS starts at age 70. So “B”s Fund drops till age 70, when he starts receiving 132 Units annually, of which he uses 100 Units for living expenses, and puts the other 32 Units each year into his Fund. At age 82, the Fund of “B” has finally recovered, and crossover occurs. For each year beyond that, “B” adds another 32 Units to his fund, while “A” remains at the original starting total of 3704 Units.

Second Change
– I changed the Fund from escrow to having a positive return. So both start at age 66 with the same 3704 Units in their respective Funds, but the Fund amounts will appreciate by 1% annually. “A”s Fund, with no withdrawal needed ever, grows each year. But “B” needs to take the 100 Units out for living expenses each year for the first 4 years, so his Fund drops until age 70, then starts to recover. Substituting different Fund return percentages:

With a 1% Fund return, crossover occurs late in the age 82 year.
2%, age 84
3%, age 86
4%, age 88
5%, age 92
6%, late in age 98 year

So as the investment return percentage of the Fund increases, it takes longer and longer for “B”, who delayed taking SS till age 70, to catch up to “A”, who took SS at age 66. Remember, there is no inflation, no COLAs, and no tax brought into this model. Also, I set SS benefits to equal living expenses.

It would seem that there are parallels here to the “sequence of returns” situation. But instead of poor market returns clobbering a just-retired person, “B”s Fund gets hit with early withdrawals for living expenses that are not compensated for by SS. “A” does not.

I am NOT advocating one way or the other here, I just wanted to find out why what I had expected to be an obvious conclusion, that delaying SS till age 70 would be a fund winner in my big spreadsheet, did not occur at all, unless I cranked the expected fund return percentage down. There was no spreadsheet mistake made.
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Old 05-06-2015, 11:59 AM   #53
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That's interesting. It would be also worth looking at taking SS at age 62 and see what happens to someone who retires at, say 55.


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Old 05-06-2015, 04:41 PM   #54
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With a 1% Fund return, crossover occurs late in the age 82 year.
2%, age 84
3%, age 86
4%, age 88
5%, age 92
6%, late in age 98 year

So as the investment return percentage of the Fund increases, it takes longer and longer for “B”, who delayed taking SS till age 70, to catch up to “A”, who took SS at age 66. Remember, there is no inflation, no COLAs, and no tax brought into this model. Also, I set SS benefits to equal living expenses.
Thanks for posting this, Telly. I had already made all of these calculations earlier in this thread. I posted my results for a 3% real rate of return in my post dated 03-25-2015, 08:25 AM. I also calculated, but did not post, results for other real rates of return. I no longer remember the exact numbers, but I do remember that the general trend was for higher returns to delay the break even point for delaying claiming SS from the mid 80s into the 90s and beyond. So it's true that if one makes sufficiently optimistic assumptions about future returns, the crossover point gets delayed for so many years as to make early claiming the clear winner.


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Remember, there is no inflation, no COLAs, and no tax brought into this model. Also, I set SS benefits to equal living expenses.
Inflation and COLAs are irrelevant to the calculation, since SS benefits are inflation adjusted. Your original calculations assumed a 6% rate of return with 3% inflation, which of course is a 3% real return. That's why the crossover point occurs in one's 86th year in both your original 6% returns, 3% inflation scenario and the new 3% returns, 0% inflation scenario.

It's also irrelevant whether the early SS benefit is large enough to pay 100% of expenses. Making the assumption that it does cover 100% of expenses does, however, simplify the calculations somewhat.

Taxes are another story. I believe, but haven't made extensive calculations to prove it, that delaying SS would generally improve one's tax situation by spreading income over more years and hence tend to favor delaying SS until 70. You do, of course, need to take full advantage of the entire 15% tax bracket during the years before you claim in order to make as big Roth conversions as possible. This strategy is well known to the regulars on this board.

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It would seem that there are parallels here to the “sequence of returns” situation. But instead of poor market returns clobbering a just-retired person, “B”s Fund gets hit with early withdrawals for living expenses that are not compensated for by SS. “A” does not.

I am NOT advocating one way or the other here, I just wanted to find out why what I had expected to be an obvious conclusion, that delaying SS till age 70 would be a fund winner in my big spreadsheet, did not occur at all, unless I cranked the expected fund return percentage down. There was no spreadsheet mistake made.
I agree that there are some interesting parallels to sequence of return risks. But this is also another clear cut reason to delay SS benefits until age 70. Many people on this board refer to delayed SS as "longevity insurance". Sure, it's possible to come out behind by delaying SS benefits, either by dying early or missing out on extremely strong stock market returns, but in return you are eliminating the absolutely worst case scenarios - living so long that your money runs out before you do and the equally grim possibilty that stock market returns may fall in the low end of their historic ranges. In both cases of an extremely long life span and extremely sup par investment performance, the higher delayed SS benefits will be there to make your old age much more comfortable than if you had claimed benefits at either 62 or 66.
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Old 05-06-2015, 04:45 PM   #55
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Fairly intuitive results. I would look at any returns as being real returns since you didn't include inflation or COLAs, so between 82-88 would seem appropriate with a real rate of return depending on the assumed asset mix.

For me, Mom will be 85 this year, Gram lived to 99 and other great aunts in their early 90s and Dad passed at 75, so my plan is to wait until I am 70 as a form of longevity insurance.
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Old 05-06-2015, 05:06 PM   #56
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Taxes are another story. I believe, but haven't made extensive calculations to prove it, that delaying SS would generally improve one's tax situation by spreading income over more years and hence tend to favor delaying SS until 70. You do, of course, need to take full advantage of the entire 15% tax bracket during the years before you claim in order to make as big Roth conversions as possible. This strategy is well known to the regulars on this board.
I think this is complicated but I'm not sure delaying SS would improve the tax situation. It seems more likely to make it where more of SS is taxable. For the individual person this may not be an issue (that is, even early SS may be 85% taxable if other income is high enough).
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Old 05-06-2015, 05:52 PM   #57
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Sure, it's possible to come out behind by delaying SS benefits, either by dying early or missing out on extremely strong stock market return.........
My bold above.

Actually, market returns don't have to be "extremely" strong in order for the SS benefits collected during ages 62 though 69 to build into a large enough kitty to more than compensate for the difference between SS at 62 and SS at 70 payments. As Telly showed above, even moderate returns will do it.

Just saying...... No need to overstate the scenario.
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Old 05-06-2015, 05:58 PM   #58
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My bold above.

Actually, market returns don't have to be "extremely" strong in order for the SS benefits collected during ages 62 though 69 to build into a large enough kitty to more than compensate for the difference between SS at 62 and SS at 70 payments. As Telly showed above, even moderate returns will do it.

Just saying...... No need to overstate the scenario.
Sure, as long as you pull it out of the market after those gains..... So, if you're extremely good at timing the market, take your S.S. early and 'play' the stock market!
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Old 05-06-2015, 06:03 PM   #59
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Sure, as long as you pull it out of the market after those gains..... So, if you're extremely good at timing the market, take your S.S. early and 'play' the stock market!
I try to have all of my investments allocated appropriately per my age and goals. My "SS kitty" is no different.


You don't need to be "extremely" good (as you say) at timing the market. In fact, I've used no market timing at all, just basic AA appropriate to my circumstances. No playing the market involved.
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Old 05-07-2015, 02:40 PM   #60
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With a 1% Fund return, crossover occurs late in the age 82 year.
2%, age 84
3%, age 86
4%, age 88
5%, age 92
6%, late in age 98 year

So as the investment return percentage of the Fund increases, it takes longer and longer for “B”, who delayed taking SS till age 70, to catch up to “A”, who took SS at age 66. Remember, there is no inflation, no COLAs, and no tax brought into this model. Also, I set SS benefits to equal living expenses.

It would seem that there are parallels here to the “sequence of returns” situation. But instead of poor market returns clobbering a just-retired person, “B”s Fund gets hit with early withdrawals for living expenses that are not compensated for by SS. “A” does not.

I am NOT advocating one way or the other here, I just wanted to find out why what I had expected to be an obvious conclusion, that delaying SS till age 70 would be a fund winner in my big spreadsheet, did not occur at all, unless I cranked the expected fund return percentage down. There was no spreadsheet mistake made.
Yes, you've got the math right. Other people have arrived at the same numbers.

The interpretation varies between individuals.

Note that your returns are "real" not "nominal", since you've taken inflation out of both sides. The question becomes how "low" a 1% real return is. Are there past periods when that really was the return, at least in the critical first 10 years?

Another other question is "how old is 86"? What's the probability that I as a healthy, above average income, individual will live past that age?

The third is "Suppose my concern is not maximizing the dollars that my heirs inherit, but rather minimizing the chances that my money runs out before I do, does this math address that concern?"
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