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10-18-2019, 09:55 AM
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#61
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,227
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Quote:
Originally Posted by CRLLS
Again, assuming a 4% WR, the same amount would be distributed regardless of IRA or Roth. Pb4uski has been over this many times in the past. You said earlier that:
This is not a hard and fast rule. See the just above reply from you. As in anything else, it depends. As pb4uski did show, it makes a small amount of sense to pay tax with after-tax money when you don't touch either the ROTH or the IRA for a period of time.
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I'm not following what your saying. I directly answered your question. You didn't give an option of paying taxes with after-tax money so I didn't consider it for your case.
pb4's calculations doesn't show that it makes a small amount of sense. It shows it clearly makes sense, but there is a limited gain. I concur with this, and add that you should take every small gain you can.
I'll agree that if you're going to convert to a Roth but immediately withdraw the money from a Roth, it doesn't matter. If that's your point, ok, but that seems absurd to even do that. You need to leave the money in the Roth long enough to make some money. That swings the advantage to paying taxes with after-tax money. The more money you make, the bigger the advantage.
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10-18-2019, 11:12 AM
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#62
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 17,087
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Quote:
Originally Posted by pb4uski
^^^ But... the benefit is not horribly significant... the benefit is the growth of the tax money not being taxed because it is in the Roth.... so for example:
$100k IRA + $15k taxable... 15% interest rate, 6% pre-tax earnings rate, 10 year tiem horizon
Conversion tax paid from IRA... $85k Roth grows to $152,222 ($85k * (1+6%)^10) and taxable account grows to $24,667 ($15k * (1+(6%*(1-15%)))^10)... total of $176,889
Conversion tax paid from taxable funds... $100k Roth grows to $179,085 ($100k * (1+6%)^10)
Difference is $2,196 over 10 years.... or difference between $15k accrued at pre-tax return of 6% in IRA or after-tax return of 5.1% in taxable... $15k * (1+6%)^10 vs $15k * (1+(6%*(1-15%)))^10.
$2,196 benefit in relation to $115k of money = 1.9%... that's for 10 years... so benefit is ~.2%/year.
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Thanks for the example, on a complex issue.
It has been a concern of mine, that since a bunch of my $$ is in after tax, by paying out from after tax (via cashing stocks) I'll be missing out on the death benefit (positive thinking here ) of the step up in stock basis to heirs in 20-30 years.
__________________
Fortune favors the prepared mind. ... Louis Pasteur
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10-18-2019, 12:20 PM
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#63
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,361
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Quote:
Originally Posted by Sunset
Thanks for the example, on a complex issue.
It has been a concern of mine, that since a bunch of my $$ is in after tax, by paying out from after tax (via cashing stocks) I'll be missing out on the death benefit (positive thinking here ) of the step up in stock basis to heirs in 20-30 years.
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I pay the tax from my tIRA by doing a withdrawal with 100% withholding (actually only 99% since that is all that Vanguard allows) so I don't have to sell taxable equities.
So if I do a $50k conversion that results in $4k in tax, I do two transactions... a $50k conversion from tIRA to Roth and a $4k tIRA withdrawal with 99% withholding.
__________________
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
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10-18-2019, 12:57 PM
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#64
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Thinks s/he gets paid by the post
Join Date: Aug 2014
Location: Chicago West Burbs
Posts: 3,014
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Quote:
pb4's calculations doesn't show that it makes a small amount of sense. It shows it clearly makes sense, but there is a limited gain. I concur with this, and add that you should take every small gain you can.
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An average of $219.60 per year in pb4uski's example. I believe that he wrote "not a significant difference" and you replied "I didn't say there was a big difference". I did say a small amount. I personally don't feel there is a real difference between the words small, and not significant and not a big difference. You are free to disagree.
Quote:
I'll agree that if you're going to convert to a Roth but immediately withdraw the money from a Roth, it doesn't matter. If that's your point, ok, but that seems absurd to even do that. You need to leave the money in the Roth long enough to make some money. That swings the advantage to paying taxes with after-tax money. The more money you make, the bigger the advantage.
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Perhaps you did not consider the case where people are on the spend down phase of their retirement investments. I originally premised my question as being in the "withdrawal stages of life". I was asking if during this stage makes a difference in the numbers. Making the Roth conversion and paying taxes from the IRA is the only choice I have. And yes, I either take some from the IRA or from the Roth now. So I am trying to understand how that might affect my overall financial position. I really don't know how that conversion could be considered absurd by some. There are other considerations to making a Roth conversion, to which I want to understand the financial implications and balance them against those consideration.
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10-18-2019, 12:58 PM
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#65
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Full time employment: Posting here.
Join Date: Aug 2015
Posts: 987
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Whew! You had me wondering what I was missing. Thanks!
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10-18-2019, 02:12 PM
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#66
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,361
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Quote:
Originally Posted by CRLLS
..... Perhaps you did not consider the case where people are on the spend down phase of their retirement investments. I originally premised my question as being in the "withdrawal stages of life". I was asking if during this stage makes a difference in the numbers. Making the Roth conversion and paying taxes from the IRA is the only choice I have. And yes, I either take some from the IRA or from the Roth now. So I am trying to understand how that might affect my overall financial position. I really don't know how that conversion could be considered absurd by some. There are other considerations to making a Roth conversion, to which I want to understand the financial implications and balance them against those consideration.
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Not sure that it matters much in this case.... by putting it in the Roth and withdrawing from the Roth for spending you save a little bit of tax on the earnings in the Roth... but if you spend $80k a year and earn 2% in an online savings account and are in the 22% tax bracket the savings would only be $176 a year.... good for a couple dinners out I guess.... but then again if you follow RB's view that every little bit helps then it makes sense... I try to not sweat the small stuff.
FWIW, I spend from my online savings account and top it up annually via tIRA withdrawals and then do Roth conversions from there to the top of the 0% capital gaisn tax bracket.... both the tIRA withdrawals for spending and the Roth conversions reduce my tIRA and reducing it as much as possible between now and age 70 is my primary objective at this point.
__________________
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
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10-18-2019, 02:54 PM
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#67
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,227
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$175-200+/yr for virtually no more effort, I'll do that every time. Plenty of people here do more work churning bank and credit card incentive deals for a similar amount.
What I was calling absurd isconverting money from a tIRA to a Roth, and then immediately withdrawing that money from the Roth. That's what I thought your first post in this string had as an option. Rereading that post, you didn't say "immediately", though I did when I called that method absurd.
Since this mostly seems to be miscommunication, I'm just going to step out of it now. I apologize for not taking enough time to fully comprehend what was meant, and for not making myself clear.
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10-19-2019, 08:23 AM
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#68
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Thinks s/he gets paid by the post
Join Date: Aug 2014
Location: Chicago West Burbs
Posts: 3,014
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pb4uski. I too don't sweat the small stuff. Thanks for your continued examples. FWIW, we currently have automatic monthly transfers from our tIRA to our bricks and mortar bank account. We pay all bills from that bank. This way we get "market" returns on our unspent money all year long. I consider that the back-end of dollar cost averaging. Different strokes for different folks, I guess.
RB, while I disagree that the immediate withdrawal from a Roth conversion is 100% of the time absurd, I try to understand every aspect. That may be why I do a 10,000 ft test/check on the replies I get. If I misled, I am sorry. Thanks for your input.
As I said earlier, there are reasons for doing a Roth conversion beyond the short term financial aspect. I am willing to give up $175-200 per year in order to achieve my goals.
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