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Old 04-04-2012, 09:04 AM   #21
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If anyone is ambitious enough to wade through it, there is some interesting info in this current article.

Tax-Efficient Retirement Withdrawal Planning Using a Comprehensive Tax Model
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Old 04-04-2012, 01:26 PM   #22
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Originally Posted by HiIRA View Post
I'm considering this strategy: retire early, do not take SS or employer pension for a couple of years, buy rental real estate, use the negative income it can create for a partial conversion of t-ira to roth. thoughts,comments, anyone?
Let me first say I'm not an expert, and I've heard conflicting advice on this...so proceed with caution.

I own two rentals, and we're filing our first return under that scenario this week. A few notes for you:

1) Having a business that creates "negative income" in perpetuity is not one the IRS will stand for. Sure, you may lose money at times, but IMO any business that loses money, even if on paper, in the long term...is not worth doing.

2) Depending on how you set up your business (LLC? Split of ownership of the LLC? Inc? No LLC so put on Schedule E?), you may or may not be able to write off the losses. Since there is a passivity rule for rental income, you first must determine whether the losses for you are passive or active. If passive, you cannot write off active income against those losses (this is where I got conflicting advice...some people say yes you can up to $25k/year, others say you cannot write off any...I'm still confused).

3) Don't assume rentals are "no work" investments. They come with significant risks and loads of work...I'm living it now. IMO the first few years are rough...and then as you learn, build equity, pay off loans, and get the properties up to a robust level in terms of repair....things get easier. Of course that assumes you "do things right"....not using duct tape on everything that's broken. If you do, there will be no time when your properties are "up to a robust level". In 2011 I've put on two roofs, ceramic tile floors, built new walls, completed gutted a bathroom and rebuilt it (including the floor joists), completely rewired two houses (that means every single inch of wire, every light fixture, every switch, a new breaker box, riser, meter box..etc.), patched more drywall holes than Amelda Marcos has shoes, sanded and polyurethaned hardwood floors, rodent-proofed two crawlspaces, and much more. IMO this will pay off in spades 5 years from now...but the workload has been immense to this point.

4) Depending on your income level, having "negative income" may not be very valuable. It's great if you're in a 30%+ tax bracket..but at lower levels is it really worth it?
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Old 04-04-2012, 01:32 PM   #23
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Originally Posted by ronin View Post
If anyone is ambitious enough to wade through it, there is some interesting info in this current article.

Tax-Efficient Retirement Withdrawal Planning Using a Comprehensive Tax Model
Ok, I must admit I did not read every word...too long lol. However, below I've quoted what I see as the key aspect...at least as it applies to those with relatively high annual spending in FIRE.

"The other five informed strategies follow the same pattern, but the initial tax-deferred withdrawal is increased to fill to the top of the different tax brackets: (E) 10 percent, (F) 15 percent, (G) 25 percent, (H) 28 percent, and (I) 33 percent. "

Many of the "experts" simply say "save your tax-deferred for last"...but I don't think that's the right answer in my case...I prefer the above.
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Old 04-04-2012, 01:53 PM   #24
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This thread was started 2 years ago, but in the mean-time ... nothing much has changed.

But for more completeness, we might as well link the ZERO taxes in retirement thread: Bogleheads • View topic - How to pay ZERO taxes in retirement with 6-figure expenses
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Old 04-04-2012, 08:29 PM   #25
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Originally Posted by HiIRA View Post
I'm considering this strategy: retire early, do not take SS or employer pension for a couple of years, buy rental real estate, use the negative income it can create for a partial conversion of t-ira to roth. thoughts,comments, anyone?
So, you're going to lose a little on each piece of real estate and make it up on Roth IRA conversions?

Once you're done exploiting these sucky money-losing investments (which presumably won't be hard to find) what will you do with them then? Sell them for a huge profit?

What about buying good rental real estate, making a profit from operating it, and using the profit to pay the taxes on your Roth IRA conversions? I think I'd rather pay the taxes on a $10K profit, and then use the leftovers to pay the taxes on the conversion, than to deduct a $10K loss to offset the tax due on the same conversion. When you're all done with the conversion you'd still have income-producing rental real estate.
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Old 04-08-2012, 07:32 PM   #26
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Read on the topic at Fairmark.com. If your TIRA is not large, or you do not have longevity, you will have less of a tax problem with RMDs. Years ago, Scott Burns wrote about the "torpedo tax" on income of pension, plus SS, plus RMDs, so run the numbers to see what happens to your income tax starting after age 70.

Having retired at 55, and prior to starting SS, I have been doing partial conversions of my TIRA to RIRA each year.

In 2012, for Married Filing Jointly, 7600 of deductions, 11900 of exemption, and 70700 to the top of the 15% bracket, totals 90200 of income with 9735 of tax due, is an average tax rate of 10.8%. As others mentioned, do you think that rate will be less in the future?

If you guess slightly too high on the conversion amount, you pay only a little more tax when your income barely spills into the next higher tax bracket.

As Nords noted, your conversion must be done prior to the end of the calendar year, not the April 15th due date for IRA contributions. Your estimated tax payment on the conversion is due a couple of weeks after the end of the quarter, in this case, the end of year.

Someone wrote that Roth conversions are a form of tax loss harvesting of tax sheltered accounts. You can choose to convert shares of whatever is down the most, or whatever has the most expected long term growth.

Roth conversions is prepaying future taxes at a reduced rate. To me, that is not much different than saving job income for retirement spending. It is still delayed gratification with a future benefit.
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Old 04-09-2012, 03:41 AM   #27
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Read on the topic at Fairmark.com. If your TIRA is not large, or you do not have longevity, you will have less of a tax problem with RMDs. Years ago, Scott Burns wrote about the "torpedo tax" on income of pension, plus SS, plus RMDs, so run the numbers to see what happens to your income tax starting after age 70.

Having retired at 55, and prior to starting SS, I have been doing partial conversions of my TIRA to RIRA each year.

In 2012, for Married Filing Jointly, 7600 of deductions, 11900 of exemption, and 70700 to the top of the 15% bracket, totals 90200 of income with 9735 of tax due, is an average tax rate of 10.8%. As others mentioned, do you think that rate will be less in the future?

If you guess slightly too high on the conversion amount, you pay only a little more tax when your income barely spills into the next higher tax bracket.

As Nords noted, your conversion must be done prior to the end of the calendar year, not the April 15th due date for IRA contributions. Your estimated tax payment on the conversion is due a couple of weeks after the end of the quarter, in this case, the end of year.

Someone wrote that Roth conversions are a form of tax loss harvesting of tax sheltered accounts. You can choose to convert shares of whatever is down the most, or whatever has the most expected long term growth.

Roth conversions is prepaying future taxes at a reduced rate. To me, that is not much different than saving job income for retirement spending. It is still delayed gratification with a future benefit.
+1

You have outlined our strategy to a "T". We will be doing this for several years before we reach age 70 and begin receiving SS.....or that is "the plan" until if/when we find a better one. LOL.

I am glad that this thread was revived. I enjoy reading the different perspectives that everyone has to share.

I wonder how many people never pay much attention to strategic tax planning until it is too late and they have no choice but to pay higher taxes.
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Old 04-09-2012, 07:50 AM   #28
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In 2012, for Married Filing Jointly, 7600 of deductions, 11900 of exemption, and 70700 to the top of the 15% bracket . . .
If you are married there's another important reason to push money from a T-IRA to a Roth: When one spouse dies, the other must start filing as a single taxpayer. That drastically lowers the top of the tax bracket they'd been using as a couple and shakes up the whole "we'll be in about the same tax bracket after we retire" assumption. For example, for the couple you cited their 25% taxes would start at an income of $80200. But if the DW is carrying on alone after hubby dies, here's how it looks for DW:
$5950 standard deduction
$3800 personal exemption
$35,350 Top of 15% tax bracket
$45,100 total

So, as a couple they didn't have to worry about hitting the 25% bracket until they earned $80,200, as a single DW now pays 25% on everything over $45,100. But money taken from a Roth doesn't count toward this total, which is a good reason to convert a lot into the Roth earlier if you can do it and stay under your next tax bracket.

The corresponding figures for the beginning of the 15% bracket are:
MFJ: 36,900
Single: 18,450

Probably an obvious point, but it didn't hit home with me until I saw what is happening because of my MIL's MRDs after the death of my FIL.
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Old 04-09-2012, 09:10 AM   #29
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If you guess slightly too high on the conversion amount, you pay only a little more tax when your income barely spills into the next higher tax bracket.

.
...true, tho as someone pointed out somewhere (possibly in another thread),
guessing slightly too high in the 15% bracket will push the some/all of the LTCG/QDIV into the "15+15 =30%" bracket. The fix for this and not having all the numbers in Dec (if you want to bother) is to take your best educated guess in Dec and overconvert In the new yr once you finalize taxes but before you file, you can recharacterize the excess.
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Old 04-09-2012, 10:46 AM   #30
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Originally Posted by kaneohe View Post
...true, tho as someone pointed out somewhere (possibly in another thread),
guessing slightly too high in the 15% bracket will push the some/all of the LTCG/QDIV into the "15+15 =30%" bracket. The fix for this and not having all the numbers in Dec (if you want to bother) is to take your best educated guess in Dec and overconvert In the new yr once you finalize taxes but before you file, you can recharacterize the excess.
Rather than overconvert and recharacterize the excess, I'm thinking that I will do my best estimate as late as possible and then reduce the conversion amount by $1,000. While it is true that I might leave a bit on the table, the $1,000 provides a bit of cushion for estimating error or more importantly if I later get audited and some minor deductions get thrown out and push my TI into the next higher bracket so all my qualified dividends become taxable.

Just a different approach to the same end.
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Old 04-09-2012, 09:38 PM   #31
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Here's another benefit to Roth conversion. Since we now live abroad we do not pay state income taxes on Roth conversions. Although we do not plan to move back to the States, there is always the possibility that we will decide to do so at some point. If that were to happen, the Roth conversions we have done while abroad would never be subject to state income tax. The same would apply to someone who retired to a no-income-tax state, but considered the possibility of moving back to a state with income tax at some point.

Since I have a strong legacy motivation the strategy I have decided on is to convert the max up to the top of our bracket each year between age 62 and 70, when I will start taking SS. Otherwise the combination of RMDs and SS after 70 would have resulted in much higher taxes.
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Old 04-10-2012, 10:07 PM   #32
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Thank you SamClem for the widow/widower tax considerations. I've got longevity and she doesn't, so I do expect to become a Single tax payer starting sometime during the RMD years.
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