Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 08-16-2021, 08:20 PM   #21
Thinks s/he gets paid by the post
 
Join Date: Jul 2005
Posts: 4,358
I can transfer shares from my IRA to my Roth online in less than 5 minutes. Nothing to worry about there. The tax paperwork is not bad for me.

Income leveling with IRA withdrawals to avoid higher tax rates will work whether you have a taxable account or not. It just doesn't give you the added benefit of essentially transferring some of the taxable account (the amount paid in taxes) to the Roth. $1000 withdrawn from an IRA is $1000 you can put in a Roth. If you pay $250 of that in taxes, then you are missing some of the benefit of the Roth by depositing only $750 into it.

Mathematically, if tax rates were flat and constant, say 25%, a Roth conversion would be a wash. The IRS owns 25% of your IRA. They take a portion of their 25% with every IRA withdrawal you make. There is no tax advantage for delaying taxes due on your IRA. In reality, tax rates are progressive and will hit harder if a big RMD forces you into a higher tax bracket. There is also the possibility of future tax increases/cuts, but those are harder to predict.

Decide what makes sense for your yearly IRA withdrawals in terms of reducing lifetime IRA withdrawal taxes. Use what you need for expenses or taxes and Roth convert the rest. If you can avoid the higher tax brackets by leveling your income now and during RMD's you should save some on taxes.
Animorph is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-16-2021, 08:36 PM   #22
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
Quote:
Originally Posted by Out of Steam View Post
We are also near the bottom of the 22% bracket, and I've begun a modest Roth conversion with a monthly transaction. Taxes are coming out of the IRA funds at our overall tax rates, rather than using the Federal marginal rate.
How is this possible? A Roth conversion is marginal income, that is, income on top of everything else you have. So it has to be taxed at the marginal rate.

Do your taxes with and without your Roth conversion. The increase in taxes due over your converted amount is the marginal rate they are taxed at. It doesn't matter if you spread the conversion out over 12 months. And paying taxes out of your IRA means you have both a conversion and a withdrawal that you wouldn't have had without converting, so you have to pay a little more income tax on the extra amount you took from your IRA to pay your taxes.
RunningBum is offline   Reply With Quote
Old 08-16-2021, 08:39 PM   #23
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
Quote:
Originally Posted by Midpack View Post
You're right to be concerned, I'd be seriously evaluating Roth conversions in your shoes. I'm in year 3 of 7 doing Roth conversions to the top of the 22% bracket and it will save us over $400K in taxes over our lifetimes if taxes don't go up (TCJA then revert to 2018 brackets). And I don't believe there's any chance Fed tax rates will stay the same for the next 20-30 years, in which case we'll save even more.
That's incredible! You must have a huge tIRA to save that much.

Let's hope you-know-who doesn't see this and try to tell you how much your net worth has been dropping with these conversions!
RunningBum is offline   Reply With Quote
Old 08-16-2021, 08:52 PM   #24
Full time employment: Posting here.
 
Join Date: Oct 2020
Posts: 557
Contrary to conventional wisdom, I'm finding that if I have to sell highly appreciated assets in taxable to pay the taxes on the Roth Conversion, that it's no worse and in some cases slightly better to pay the conversion taxes from tax deferred. The reason seems to be that the taxes if using taxable are new lifetime (and beyond) taxes since taxable will get a step up basis on death, whereas paying the taxes using tax deferred is accelerating taxes that will have to paid anyway.

Of course this conclusion rests on the step-up basis surviving and it may not and like everything else about Roth conversions, the answers depend greatly on individual circumstances.
Exchme is offline   Reply With Quote
Old 08-16-2021, 09:09 PM   #25
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
Quote:
Originally Posted by Exchme View Post
Contrary to conventional wisdom, I'm finding that if I have to sell highly appreciated assets in taxable to pay the taxes on the Roth Conversion, that it's no worse and in some cases slightly better to pay the conversion taxes from tax deferred. The reason seems to be that the taxes if using taxable are new lifetime (and beyond) taxes since taxable will get a step up basis on death, whereas paying the taxes using tax deferred is accelerating taxes that will have to paid anyway.

Of course this conclusion rests on the step-up basis surviving and it may not and like everything else about Roth conversions, the answers depend greatly on individual circumstances.
It also relies on not ever selling those highly appreciated assets. Otherwise, you might as well have sold them earlier so that you could put more into the Roth. It also relies on not needing to control MAGI. 100% of the tax is MAGI if you pay tax with conversions money. Selling a highly appreciated asset is going to be less than 100% income on the sale proceeds since there has to be some basis.

But you are correct, it could be better to pay tax from the conversion in that case. When faced with a choice like this I tend to optimize as if I am going to spend all of my funds, in case I actually do. If it makes little difference, then I optimize for heirs.
RunningBum is offline   Reply With Quote
Old 08-16-2021, 11:58 PM   #26
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Koolau's Avatar
 
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 10,942
Quote:
Originally Posted by bob boag View Post
This jogged my memory. I recall when I was ERing ten years ago that the conventional wisdom claimed it was a bad idea (from a notional and mathematical point of view) to pay the taxes on a Roth conversion with money from inside my tIRA.

The thing is, I basically *have* no money outside my IRAs. I would have to pay it from my tax-deferred money.

In the scheme of things is this a significant consideration?
I agree that there are advantages IF you can pay the taxes on your Roth conversion from money NOT in an IRA (or 401(K)). Gumby points out that he effectively ends up with a "contribution" to his Roth by doing so - even though he is no longer w*rking. BUT, if you don't have the funds, I think there is still a very good reason to get "rid" of tIRA money - EVEN if you keep some in a taxable account. 1) Reducing RMDs in the future but also 2) If you should NEED a big chunk of cash someday (who knows what for) you won't find yourself double dipping from your tIRA and causing even higher tax bracket(s). At retirement, I always felt uncomfortable having HALF my stash in a 401(k)/tIRA. Having virtually ALL of it in a tIRA would be something I'd be working on as soon as possible. Even if you have to pay a tax person to sit down with you and figure the ins and outs, it might be well worth it if you don't feel comfortable with Turbo Tax or whatever. Keep in mind, you have a "good" problem as problems go. YMMV
__________________
Ko'olau's Law -

Anything which can be used can be misused. Anything which can be misused will be.
Koolau is offline   Reply With Quote
Old 08-18-2021, 10:28 AM   #27
Thinks s/he gets paid by the post
Out of Steam's Avatar
 
Join Date: Mar 2017
Posts: 1,197
Quote:
Originally Posted by Gumby View Post
I pay taxes on Roth conversions from my after tax account. It is like getting an extra Roth contribution even though I have no earned income.
That would be attractive, but the major weakness in our retirement plans was not having saved significant money outside retirement accounts. Pretty lucky to be able to have taxes withheld at our overall tax rate instead of the marginal rate on the Roth conversion.
Out of Steam is offline   Reply With Quote
Old 08-18-2021, 10:43 AM   #28
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
Quote:
Originally Posted by Out of Steam View Post
That would be attractive, but the major weakness in our retirement plans was not having saved significant money outside retirement accounts. Pretty lucky to be able to have taxes withheld at our overall tax rate instead of the marginal rate on the Roth conversion.
I asked you before, just a few posts above. How is this possible? I don't think it is.

EDIT: Ok, you said withheld. That has nothing to do with the taxes you actually pay on the Roth conversion though. It's pretty meaningless really.
RunningBum is offline   Reply With Quote
Old 08-18-2021, 10:47 AM   #29
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Koolau's Avatar
 
Join Date: Jul 2008
Location: Leeward Oahu
Posts: 10,942
Quote:
Originally Posted by RunningBum View Post
I asked you before, just a few posts above. How is this possible? I don't think it is.
Deductions on Roth conversions:

I don't know about others, but when I take my RMDs, my 401(k) allows me a Federal dedication of (IIRC) a standard 20% OR lets me set my own rate. YMMV
__________________
Ko'olau's Law -

Anything which can be used can be misused. Anything which can be misused will be.
Koolau is offline   Reply With Quote
Old 08-18-2021, 10:54 AM   #30
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 19,487
Quote:
Originally Posted by Out of Steam View Post
That would be attractive, but the major weakness in our retirement plans was not having saved significant money outside retirement accounts. Pretty lucky to be able to have taxes withheld at our overall tax rate instead of the marginal rate on the Roth conversion.
My hope and expectation is that my after tax accounts will be able to carry the tax burden of Roth conversions until RMDs hit. Once RMDs start, those tIRA/401k withdrawals must by law go to the after tax account, which will replenish it. If I run out of after tax money (outside of Roths) before RMDs, then I'll start paying the Roth conversion taxes out of the conversion itself (i.e. withholding).
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 08-18-2021, 10:58 AM   #31
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
Quote:
Originally Posted by Koolau View Post
Deductions on Roth conversions:

I don't know about others, but when I take my RMDs, my 401(k) allows me a Federal dedication of (IIRC) a standard 20% OR lets me set my own rate.
As I added to my post, that's meaningless. If you chose not to have any taxes withheld, would you be feeling lucky that your withdrawal or conversion was tax-free? Of course not. It gets resolved at tax time. When evaluating how much of one's IRA to convert to a Roth, you should be looking at the taxes that will actually be added due to the conversion, not how much was withheld.
RunningBum is offline   Reply With Quote
Old 08-18-2021, 11:16 AM   #32
Thinks s/he gets paid by the post
 
Join Date: May 2008
Posts: 4,938
I imagine having too much in the tax-deferred accounts is a problem for many people here. (I don't have as much as you, but I have well over 1M in 401K/IRA.) I should have bit the bullet while I was still w*rking by not maxing out my 401K every year and just investing more with my after-tax money. My thought was to do a Roth conversion every year in a lower tax bracket after retirement.

But then I moved to Canada. Canada will cancel out the benefits of Roth IRA (the tax-free feature) if I add any money to it, so that's not an option for me. Plus, just by withdrawing $55K from my 401K (which raises my overall income to $80,000 with interests, dividends, a small company pension, etc), my combined marginal tax bracket (federal and provincial) shoots up to 43.7%. I don't want to think about what happens with my tax burden when SS starts or when I have to take RMD.

My goal now is to take the 43% hit now so things won't get exponentially worse when my SS and RMD start.

So if you have a way to take some beating now, I would do it. Like you said, you don't know how the tax treatments (brackets) will have changed in 7 years.
tmm99 is offline   Reply With Quote
Old 08-18-2021, 11:18 AM   #33
Thinks s/he gets paid by the post
Out of Steam's Avatar
 
Join Date: Mar 2017
Posts: 1,197
Quote:
Originally Posted by RunningBum View Post
How is this possible? A Roth conversion is marginal income, that is, income on top of everything else you have. So it has to be taxed at the marginal rate.

Do your taxes with and without your Roth conversion. The increase in taxes due over your converted amount is the marginal rate they are taxed at. It doesn't matter if you spread the conversion out over 12 months. And paying taxes out of your IRA means you have both a conversion and a withdrawal that you wouldn't have had without converting, so you have to pay a little more income tax on the extra amount you took from your IRA to pay your taxes.
We're having only enough withheld from the converted funds to cover the taxes at our overall rate, meaning that the other 30% or so of the tax liability of the conversion is coming out of our current income.

Other funds are having withholding taken out at a similar rate, so we shouldn't owe at the end of the year. I'm doing the monthly conversion so as not to bet on the market at a specific time.
Out of Steam is offline   Reply With Quote
Old 08-18-2021, 11:29 AM   #34
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
Quote:
Originally Posted by Out of Steam View Post
We're having only enough withheld from the converted funds to cover the taxes at our overall rate, meaning that the other 30% or so of the tax liability of the conversion is coming out of our current income.

Other funds are having withholding taken out at a similar rate, so we shouldn't owe at the end of the year. I'm doing the monthly conversion so as not to bet on the market at a specific time.
OK, so you're paying ~70% of the conversion taxes out of the tIRA, and ~30% out of taxable money. Not as beneficial as paying 100% out of taxable, but it sounds like you're doing what you can.
RunningBum is offline   Reply With Quote
Old 08-18-2021, 12:08 PM   #35
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 32,240
Quote:
Originally Posted by Koolau View Post
I agree that there are advantages IF you can pay the taxes on your Roth conversion from money NOT in an IRA (or 401(K)). Gumby points out that he effectively ends up with a "contribution" to his Roth by doing so - even though he is no longer w*rking. BUT, if you don't have the funds, I think there is still a very good reason to get "rid" of tIRA money - EVEN if you keep some in a taxable account. 1) Reducing RMDs in the future but also 2) If you should NEED a big chunk of cash someday (who knows what for) you won't find yourself double dipping from your tIRA and causing even higher tax bracket(s). At retirement, I always felt uncomfortable having HALF my stash in a 401(k)/tIRA. Having virtually ALL of it in a tIRA would be something I'd be working on as soon as possible. Even if you have to pay a tax person to sit down with you and figure the ins and outs, it might be well worth it if you don't feel comfortable with Turbo Tax or whatever. Keep in mind, you have a "good" problem as problems go. YMMV
Agree....here are a few examples of the economics of using taxable account money to pay the tax... or not. Starting point is a tIRA with $10k and a taxable account with $2k and assumes 20% tax rate. Assume 7% return for 10 years.

Option A: Convert and pay taxes from taxable account... on day 2 Roth is $10k and taxable account is $0... 10 years later the Roth is worth $19,672 [$10,000 *(1+7%)^10]

Option B: Don't convert... in 10 years the tIRA is worth $19,672 and the taxable account is worth $3,449 [$2,000 *(1+7%*(1-20%))^10]... you withdraw from the tIRA and pay $3,934 in tax (20% of $19,672) and at the end of the day have $19,187 to spend.

Option C: Convert but pay tax from tIRA... on day 2 Roth balance is $8,000 and taxable account is $2,000... in 10 years the Roth is worth $15,737 [$8,000 *(1+7%)^10] and the taxable account is worth $3,449 for a total of $19,187... same as not converting.

The $485 benefit is effectively the benefit of not having to pay tax on the taxable account earnings over the 10 years because that money ends up in the Roth if you convert.... $3,934 [$2,000 *(1+7%)^10] vs $3,449 [$2,000 *(1+7%*(1-20%))^10]
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 08-18-2021, 12:18 PM   #36
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 19,487
^^^ excellent illustration of the math!
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Old 08-18-2021, 12:40 PM   #37
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 12,379
Quote:
Originally Posted by pb4uski View Post
Agree....here are a few examples of the economics of using taxable account money to pay the tax... or not. Starting point is a tIRA with $10k and a taxable account with $2k and assumes 20% tax rate. Assume 7% return for 10 years.

Option A: Convert and pay taxes from taxable account... on day 2 Roth is $10k and taxable account is $0... 10 years later the Roth is worth $19,672 [$10,000 *(1+7%)^10]
...
There is an argument in Option A that you may owe taxes (cap gains) to raise the $2K needed for conversion taxes. But this only reduces the advantage, because the basis will be more than $0.
RunningBum is offline   Reply With Quote
Old 08-18-2021, 01:24 PM   #38
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 32,240
^^^ Fair point, but I'm assuming that the taxable are cash-like investments.... and it wouldn't change the decision because the end result needs to be all cash available for spending.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56
pb4uski is offline   Reply With Quote
Old 08-18-2021, 05:43 PM   #39
Full time employment: Posting here.
 
Join Date: Jul 2011
Location: Reading, MA
Posts: 852
Money is "fungible" as they say.
(I don't particularly like the word fungible.)

But let's say I use money from my SS or pension income to pay the tax on a Roth conversion.
And then I take additional money from my tax deferred account to bolster my regular living expenses.

Why is that better than doing the opposite?
TheWizard is offline   Reply With Quote
Old 08-18-2021, 06:00 PM   #40
Administrator
Gumby's Avatar
 
Join Date: Apr 2006
Posts: 19,487
Quote:
Originally Posted by TheWizard View Post
Money is "fungible" as they say.
(I don't particularly like the word fungible.)

But let's say I use money from my SS or pension income to pay the tax on a Roth conversion.
And then I take additional money from my tax deferred account to bolster my regular living expenses.

Why is that better than doing the opposite?
In the case you have outlined, it would be a wash.

But what people have been talking about is paying the conversion tax due by using after tax money that one has already amassed but doesn't actually need to finance current living expenses. In the latter case, you are actually transferring money from an after tax account where realized gains are taxed to a Roth account where they are not.
__________________
Living an analog life in the Digital Age.
Gumby is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Inherited IRA and turbo tax question on RMDs DFW_M5 FIRE and Money 12 02-08-2016 07:26 AM
IRA RMDs bobbee25 FIRE and Money 16 11-21-2014 04:19 PM
SPIA within an IRA and RMDs Richard4444 FIRE and Money 11 04-03-2014 04:51 AM
Roth IRA RMDs, what! veremchuka FIRE and Money 11 11-24-2013 07:17 AM
The Education Bubble starting to deflate? dex Other topics 2 09-05-2010 03:51 PM

» Quick Links

 
All times are GMT -6. The time now is 03:49 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2022, vBulletin Solutions, Inc.