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Old 01-07-2017, 08:06 PM   #21
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Yes, I posted that $2 of every $3 is in taxable, so my strategy works for me. You don't have to convert a substantial portion of your IRA to roth, but again, if you don't find it worth your time, then that's that. Good for you for feeling you've won the game.
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Old 01-07-2017, 09:29 PM   #22
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We have no pensions and no rentals. Our only income comes from our taxable accounts because we are under 59 y.o. and have no need for tapping our IRAs. We believe our financial situation may become the norm for early retirees (readers of this forum) although with the much larger allowed contributions to 401Ks and IRAs, future early retirees may not be forced to save in taxable accounts like we were.
When we first ran i-orp many years ago, they recommended completely converting all of our IRAs over a 5 year period and paying the taxes. We decided that would be unwise since we would then have 0 taxable income for over a decade to offset exemptions and deductions.
When my DH retired 11 years ago, we had 2.3% in Roth, 32.2% in IRA, and 65.5% in taxable accounts. Similar to Options, $2 of every $3 was in taxable. We did small Roth conversions for the next 6 years while I continued to work part time, averaging 11K per year in conversions. When I retired almost 5 years ago, we bumped up the Roth conversions to around 33K per year to match our exemptions and deductions. We have now converted 263K and paid a total of $646 in federal taxes, which is only a 0.25% effective tax rate. Our state does not tax conversions. As long as the tax laws do not change, we expect to continue converting approximately 33K per year for another 12 years. By the time we are both 70, our projections show 85% in Roth and 15% in IRAs. This will result in no RMD tax torpedo. So, in our situation, partial Roth conversions make a lot of sense.
When we ran i-orp in 2012, their projections had changed to show more moderate Roth conversions until our taxable accounts were depleted, but since they expected us to spend a lot more than we do, it still didn't/doesn't match what we are doing.
YMMV.
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Old 01-07-2017, 10:49 PM   #23
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...We have now converted 263K and paid a total of $646 in federal taxes...By the time we are both 70, our projections show 85% in Roth and 15% in IRAs...
Emphasis added

Brilliant! $646 total taxes on $263K in conversions. Sweet. This also means by age 70 fully 85% of your PF will be tax-free while simultaneously shielded from the negative impact of future tax reform (except perhaps for forced RMD's on roths at 70, which is a reform possibility that's been discussed but even those consequences will be minimal). It rarely gets any better than what you've accomplished.

I am behind you in terms of total converted but my plan is about the same. Great job!
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Old 01-07-2017, 11:57 PM   #24
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We convert to the top of the 15% bracket. But this is a relatively small figure due to 2 pension annuities and rental income. It's a bit bigger every other year due to "bunching" deductions. But over 15 years, we will only convert about 15% of our tax-deferred balances. So for us, there is no avoiding 25% RMD tax (assuming reasonably "normal" market behavior over the next 15 years). The small conversions we're doing just reduce the amount of RMDs taxed at 25% and create some tax/withdrawal flexibility down the road.

Regarding i-ORP, the system previously recommended huge, early conversions into the 25% and even 28% brackets, with a very small single-digit percentage increase in lifetime spending capacity. No way. One optimal scenario and countless ways it could go horribly wrong. Dropping the conversion option from the system may actually buy-back some lost credibility. It wasn't just panicky novices who scoffed at those numbers.
+1
I feel exactly the same way, I'll do some, but not as intensely as iorp suggested.
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Old 01-08-2017, 04:29 AM   #25
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Sounds familiar [url]http://www.early-retirement.org/forums/f28/i-orp-no-longer-includes-roth-conversion-83927.html[/url
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Sorry I missed your thread a few months back. You beat me to it.
No worries. Wasn't meant to discourage your thread, only for additional reading on your topic.
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Old 01-08-2017, 08:18 AM   #26
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I do not see how iOrp deals with cap gain and dividend in taxable accounts, which depends on how one invests. One can choose to not realize cap gains in order to have room to do Roth conversion. This is perhaps what earlier posters did to convert Roth with such low taxes paid, if one considers that the personal exemptions and standard deduction for a married couple are at least $20.7K already.

And then, after that tax-free $20.7K, a couple has another $18,650 in the 10% tax bracket. If one delays cap gains, can use all this room to stuff Roth accounts while living off his savings.
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Old 01-08-2017, 09:16 AM   #27
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I do not see how iOrp deals with cap gain and dividend in taxable accounts, which depends on how one invests. One can choose to not realize cap gains in order to have room to do Roth conversion. This is perhaps what earlier posters did to convert Roth with such low taxes paid, if one considers that the personal exemptions and standard deduction for a married couple are at least $20.7K already.

And then, after that tax-free $20.7K, a couple has another $18,650 in the 10% tax bracket. If one delays cap gains, can use all this room to stuff Roth accounts while living off his savings.
OK. I see where this is possible, if you have positioned your investments properly, have little or no div/int/cap gains in the after tax account, and have sufficient cash to live on.
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Old 01-08-2017, 09:50 AM   #28
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I do not see how iOrp deals with cap gain and dividend in taxable accounts, which depends on how one invests. One can choose to not realize cap gains in order to have room to do Roth conversion.....
iORP simplifies tax of taxable accounts as shown below from their "Assumptions" page. You are right that it doesn't take into account some of the various ways you can set up taxable accounts. For example, if it's loaded with tax free municipal bonds, I-ORP doesn't know this and still taxes gains at 15% or 20%.


source:https://www.i-orp.com/help/assume.html


  1. After-Tax Account tax rates: Computational simplification is achieved by treating the After-Tax Account separately for tax computation. (ORP computes personal income taxes for distributions from the Tax-Deferred Account using the Federal income tax tables for personal income.) We argue that most After-Tax Accounts are invested in common stocks and are taxed at the capital gains rate, computed separately from the personal income taxes that apply to tax-deferred distributions. Therefore, loss of accuracy caused by this generalization is minimal.
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Old 01-08-2017, 12:26 PM   #29
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I just want to add to this discussion. As said, I-ORP is a great tool that shows 'suggested' patterns of spending, the author clearly states it is patterns, not recommendations.

With Roth Conversions, if one is converting and is many years away from Medicare Part B eligibility - it makes sense to do conversions (any tax bracket IMO). UP UNTIL (emphasis is mine) two years before Medicare eligibility, assuming you are in the 25% tax bracket. There is an income cap after which Medicare Part B premiums increase based on the modified AGI from 2 years prior (Medicare Means Testing). So every year Medicare does look at your income tax filing from 2 years prior to determine your Part B premium.

If you are single and in the 25% bracket, with modified AGI above $85,000, your Part B premium WILL increase significantly more than the normal premium adjustments. See https://www.medicare.gov/your-medica...t-b-costs.html By my calculations the increase is 40% over the regular limited premium increase than when MAGI is lower.

Medicare Part B eligibility begins at age 65, so married or single, one needs to be aware of the modified AGI limit when the premium will increase dramatically - factor that into any future planning.

- Rita
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Old 01-08-2017, 01:36 PM   #30
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By comparison, if one manages to convert near a low in investment value, for example 2009 for equities, huge gains follow from the tax-free growth. How you know when the market has bottomed, so you can ideally time the conversion, is another matter entirely.
Roth conversions have basically a 15 month window to see where the market is at. Make the conversions in January and if you are wrong, re-characterize them in April of the next year. Between 2008 and 2014, I have done 4-6 conversions each year, then letting the market tell me which to keep and which to reverse. The other variables in my tax situation each year also impact my decision. So, I've made $320k worth of conversions that are now worth almost $600k. Some years, the tax impact has been zero or near zero, other years it has been higher but still a beneficial conversion. More important to me is that now only about 1/2 of my assets will be subject to RMDs when I reach 70-1/2, and the amount will be closer to what I will need to withdraw anyway with a 15 yr old fixed pension. I would really like to do more conversions, but if not, I can live with what has been accomplished.
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Old 01-08-2017, 02:09 PM   #31
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Roth conversions have basically a 15 month window to see where the market is at. Make the conversions in January and if you are wrong, re-characterize them in April of the next year.
Actually 21 and 1/2 months until Oct 15th of the following year.
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Old 01-08-2017, 02:12 PM   #32
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Old 01-08-2017, 04:11 PM   #33
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From my simple point of view... Since I'm not working and everyone gets a $6500 exemption, at least I should convert $6500 over every year...no brainer as there are zero taxes on that... the rest I have to wait until I file this year as my first non-working year and see if I missed anything and re-check the numbers as from what I can tell converting $10K over would cost me $1500 in taxes and another $1500 in ACA credit loss, so on $10K I'd be losing $3K, doesn't seem like a good deal to me.
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Old 01-08-2017, 06:03 PM   #34
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A single person gets $6,300 for the standard deduction, plus a personal exemption of $4,050. That means the first $10,350 is tax-free.

See: https://www.irs.com/articles/2016-fe...ard-deductions
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Old 01-08-2017, 07:39 PM   #35
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So, what does a single person live on after using the $10,350 tax-free allowance to do Roth conversion?

The next $37,650 is taxed at a mixture of 10% and 15%. If that $37,650 comes from dividends or capital gains off an after-tax account, there's no tax. Hallelujah!

Need more than $37,650 because you want to spend a couple of months in Europe? Don't take it out of your IRA. Spend your after-tax principal. It's already been taxed, and all yours now. Spend $100K or $200K, as much as you want (and have).
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Old 01-08-2017, 08:06 PM   #36
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So, what does a single person live on after using the $10,350 tax-free allowance to do Roth conversion?

The next $37,650 is taxed at a mixture of 10% and 15%. If that $37,650 comes from dividends or capital gains off an after-tax account, there's no tax. Hallelujah!

Need more than $37,650 because you want to spend a couple of months in Europe? Don't take it out of your IRA. Spend your after-tax principal. It's already been taxed, and all yours now. Spend $100K or $200K, as much as you want (and have).
That works unless you have a pension and/or SS...
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Old 01-08-2017, 08:30 PM   #37
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True. Each person has a different situation. I have no pension, and am not even of SS age now, and so still have a few years to play with this Roth conversion.

The other problem is I have been spending a lot of money off my after-tax savings (several hundred $K since I stopped work), and I do not want to deplete it too far. Can't have my cake and eat it too.
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Old 01-08-2017, 08:35 PM   #38
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True. Each person has a different situation. I have no pension, and am not even of SS age now, and so still have a few years to play with this Roth conversion.

The other problem is I have been spending a lot of money off my after-tax savings (several hundred $K since I stopped work), and I do not want to deplete it too far. Can't have my cake and eat it too.
I'm not sure which is worse: Spending too much to be comfortable or having so much in income that spending any savings makes the tax bite unbearably painful!
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Old 01-08-2017, 11:48 PM   #39
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I do not see how iOrp deals with cap gain and dividend in taxable accounts, which depends on how one invests. One can choose to not realize cap gains in order to have room to do Roth conversion. This is perhaps what earlier posters did to convert Roth with such low taxes paid, if one considers that the personal exemptions and standard deduction for a married couple are at least $20.7K already.

And then, after that tax-free $20.7K, a couple has another $18,650 in the 10% tax bracket. If one delays cap gains, can use all this room to stuff Roth accounts while living off his savings.
I don't get the delay cap gains part , a couple with 38K conversion and another 30K capital gain pays no tax on the capital gain, as they are within the 15% tax bracket.
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Old 01-09-2017, 02:21 AM   #40
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You are correct. Let me explain myself again.

To pay no taxes, a couple can have "only" $96K of cap gains+qualified dividends. If they do Roth conversion which is counted as normal income, they are limited to $20.7K for Roth, and the tax-free investment income is reduced down to $75.3K. Then, they can increase the Roth conversion further by another $18,650 into the 10% bracket, and reduce the after-tax investment gain down to $56,650.

That was what I meant when I said one reduces the cap gain realization in order to do Roth conversion.

PS. By the way, when a couple starts drawing SS and IRA, they will likely be in the 15% bracket. So, paying 10% now for Roth conversion is a good deal.

PPS. All this talk neglects the effect of the ACA cliff. This changes everything!
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