iOrp and Roth Conversions

[NW-Bound]

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.

 

[CardsFan]

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.

 

[Whisper66]

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.

 

[Gotadimple]

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-medicare-costs/part-b-costs/part-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

 

[larrytbm]

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.

 

[user5027]

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.

 

[pb4uski]

Only IF you extend your return.

 

[karen1972]

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.

 

[NW-Bound]

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-federal-tax-rates-personal-exemptions-and-standard-deductions

 

[NW-Bound]

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).

 

[Hermit]

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...

 

[NW-Bound]

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.

 

[Hermit]

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!

 

[Sunset]

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.

 

[NW-Bound]

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!

 

[bingybear]

I couldn't get past conversions with anything but a 0% tax rate. I go from 0% to 30% if I convert too much. I would have shielded some income in my 401k when younger at a tax rate similar to that. You can't do any better than 0% and retiring early lets you do it for more years.
I see the GOP plan has tax rates for dividends as half the income tax rate so that means the 0% rate could well be gone. Standard deduction is going to be bigger at the first tax bracket is 12%. So presumably I might be converting at 6%. I could go for that.

How do you figure converting at 6%?

 

[karen1972]

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-federal-tax-rates-personal-exemptions-and-standard-deductions

Sorry thanks for correcting this, I had already adjusted for my pension and hadn't thought about that when posting.