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Old 02-11-2021, 07:34 AM   #21
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I tried to look beyond the numbers to net benefits of massive conversions at a higher tax bracket that I was used to.

By moving a lot I made sure almost all the capital gain would be in the roth with fixed income and annuities in the regular iras.

Currently the distribution from the lifetime annuities are considered my Required Minimum Distributions and the fixed income is in a laddered time sequence so some come due each year to take care of other withdrawals or taxes. Roth's are near or beyond the 5 year existence withdrawal rules so trappable when we will need them.

Moving a lot hurt our Medicare costs for only one year. It hurt to see the net worth decline when the tax money went out, but have made almost all of that back this year alone.

I had also looked at how many years of investing it would take to cover that tax and minimized the estimated taxes in the future compared to the likely hood that at least one of us might live another 20 years. I suspected it would be less than 3-5 years at the time I started it.

Finally I looked at tax rates in other countries for what could be the tax on withdrawals in the future if a wealth tax is imposed on regular ira withdrawals directly.
Yep, I can see how it would feel a little defeating to see one's NW drop by paying the taxes on the big conversions. Just have to remind yourself its tax free.

You make another good point for perhaps biting the bullet and going bigger sooner of the conversions as the Roth balances have that much more time to grow.

I will keep running the traps. All good stuff. Thanks.
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Old 02-11-2021, 08:20 AM   #22
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Yep, I can see how it would feel a little defeating to see one's NW drop by paying the taxes on the big conversions. Just have to remind yourself its tax free.
Net Worth does not decrease after a Roth conversion. The mistake made was inflating your net worth by counting 100% of tax deferred as part of it. Your tax deferred accounts have $6M, but that's not all yours.
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Old 02-11-2021, 08:25 AM   #23
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Net Worth does not decrease after a Roth conversion. The mistake made was inflating your net worth by counting 100% of tax deferred as part of it. Your tax deferred accounts have $6M, but that's not all yours.
I get your point, but visually itís never fun to see our balances take a drop(for any reason), especially when itís self inflicted!
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Old 02-11-2021, 08:29 AM   #24
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I get your point, but visually itís never fun to see our balances take a drop(for any reason), especially when itís self inflicted!
So do what was suggested earlier, discount your deferred tax balance by an estimate of what taxes you'll pay on it. Or include deferred taxes as a liability. Then when you convert, this balance won't drop at all, unless you underestimated taxes.
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Old 02-11-2021, 08:32 AM   #25
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DawgMan, I was having heartburn at converting above the 22% bracket until I added a line to my spreadsheet so I see total in tIRA and then a line that shows 72% of the total (22% for fed tax and 6% for state). Now I see how much is really there for us and how much the man has in our accounts.
This is what I was referring to. You would include the 72% part in your net work, not the 100%. Substitute 72% for whatever %of your tIRA you would get after taxes.
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Old 02-11-2021, 08:52 AM   #26
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Weíre in a similar situation to you. Weíre also considering that todayís tax rates will end after 2025, reverting to the previous tax rates in 2026. So we are converting well into the 33% right now.
Weíre also looking at the possibility of a survivor having to pay taxes at the single rate. Another reason to move more sooner.
There is also the possibility of Federal Estate taxes and capital gains taxes going up. While this will require changes in legislation and may never happen, the two combined would be a major hit on your heirs, which can be lessened by using your taxable funds to pay the taxes on more conversions.
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Old 02-11-2021, 09:11 AM   #27
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If you are trying to reduce overall taxes I think in this case some consideration of heirs' likely tax rates is appropriate.

Not sure I would voluntarily pay taxes in the higher brackets since you are not going to reduce RMDs much and are already in high brackets. But the surviving spouse issue is a large consideration.

Quite a few moving parts here.
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Old 02-11-2021, 09:47 AM   #28
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OP has mentioned having "run the math". What are the actual numbers from that?

From what I understand, you'll have 14 years to do conversions before RMDs. I'm guessing you have room to convert ~$300K to the top of the 24% bracket. That depends on how much other regular income you have, and what deductions you can take. It may be more than $300K.

14 years of that means you can convert $4.2M. That's a pretty darned good chunk! The tIRA will be growing as you convert. Does your math include a spreadsheet showing growth of the tIRA while you convert? You could model a few different assumptions on growth.

Once you've run this it should be pretty easy to compare it to doing no conversions, and seeing how large the tIRA grows that way. It will be quite a bit more. People seem to get hung up with not really making progress on converting a large tIRA, but if you compare it to doing no conversions you'll see what progress you really are making.

Then look at what RMDs will be in each situation. This will tell you whether it is worth converting into the 32% bracket. Without seeing assumptions and numbers we're really just guessing on the 32% question. If it's close, I'd be inclined to go to the top of 32% for a few years with the threat of higher taxes resuming in 2026, and dropping back if taxes do go higher.
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Old 02-11-2021, 09:58 AM   #29
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Regarding just taking tIRA distributions versus doing a Roth conversion, I look at my Roth account as a conveyer belt. That is, I pour new conversion money in one end and take tax free money (which has hopefully appreciated) out the other end. I can run the Roth conveyor belt as fast or slow as I like, but the whole time the money is on that belt it is earning on a tax free basis. If I were just to take a tIRA distribution, I don't get that benefit.
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Old 02-11-2021, 10:12 AM   #30
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Running i-orp is always what I recommend in these cases because it models all years in one swell foop. As with any model, it's not going to match reality perfectly, but if you take the time to get the inputs defined properly, it might give you an eye-opening approach that you hadn't thought about. You can then try that approach in your own spreadsheet model and see if you like it or not. As mentioned, the bird in the hand problem (definitely save taxes now vs maybe save taxes later) tends to become a problem when, with the best assumptions, your early conversions are frightfully high.
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Old 02-11-2021, 10:49 AM   #31
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Originally Posted by RunningBum View Post
OP has mentioned having "run the math". What are the actual numbers from that?

From what I understand, you'll have 14 years to do conversions before RMDs. I'm guessing you have room to convert ~$300K to the top of the 24% bracket. That depends on how much other regular income you have, and what deductions you can take. It may be more than $300K.

14 years of that means you can convert $4.2M. That's a pretty darned good chunk! The tIRA will be growing as you convert. Does your math include a spreadsheet showing growth of the tIRA while you convert? You could model a few different assumptions on growth.

Once you've run this it should be pretty easy to compare it to doing no conversions, and seeing how large the tIRA grows that way. It will be quite a bit more. People seem to get hung up with not really making progress on converting a large tIRA, but if you compare it to doing no conversions you'll see what progress you really are making.

Then look at what RMDs will be in each situation. This will tell you whether it is worth converting into the 32% bracket. Without seeing assumptions and numbers we're really just guessing on the 32% question. If it's close, I'd be inclined to go to the top of 32% for a few years with the threat of higher taxes resuming in 2026, and dropping back if taxes do go higher.
I agree with the first part of your post.

Regarding the last paragraph of your post, it's pretty easy to do a rough swag using nominal numbers and the rule of 70/72:

OP appears to have a $6M 401(k). Fourteen/fifteen years and the rule of 70/72 assuming 10% return (people can argue with that assumption, OP should substitute their own opinion) implies two doublings, so that becomes $24M at RMD time.

The new age 72 divisor is 27.4. $24M / 27.4 = $876K. The top of the 35% bracket in 2021 is $523,600. Brackets are adjusted for inflation; at 2% per year (again, OP, make your own assumption) for 15 years that works out to about $705K in 2036.

OP's and his wife's SS will probably more than wipe out OP's standard deduction.

IRMAA makes the situation even worse.

State taxes are probably a wash unless OP plans to move to another state.

The above is a rough estimate, but if I were in OP's shoes, I'd convert to the top of the 32% bracket, especially if I could pay the taxes from the taxable account (which OP looks like they can do).

Logically it might even make sense to convert some into the 35% bracket, although the savings there are probably minimal and harder to make an argument for.
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Old 02-11-2021, 11:00 AM   #32
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OP, another thing that I'll point out in a separate post, which someone else alluded to above.

In addition to the income tax torpedo you're facing, you very well might also be facing an estate tax torpedo.

Today, the estate tax exemption amount is about twice your investable assets. For estate taxes, you'd also add in the value of any homes, cars, or life insurance face value that is owned in your names.

So again, using hand-wavy math and my assumptions from the previous post, your taxable estate will probably pass the exemption amount. Every dollar past that amount costs you 40% in estate taxes.

If you have heirs other than charity, they're losing out on that 40% in taxes.

It gets worse. The current historically large exemption amount is scheduled to drop approximately in half on 1/1/2026. At that point, you'll have about (very hand-wavy) $20M and the exemption amount will be about $7M. $13M times 40% is a $5.2M estate tax bill.

It may get even worse. There is a policy proposal to reduce it sooner to $3.5M and raise the estate tax rate to 45%. If that were to be enacted into law, you've got more like a $6.5M estate tax bill.

Some states pile on with estate taxes and inheritance taxes of their own.

I won't go beyond this into all the ins and outs of estate tax that I've been learning about. I do have some things I'm working on for my own family's situation to help out, and I can share those with you if you want. I'd just close by saying that it's something that may loom large in your future and starting to steer your financial ship now to avoid it is probably a wise option to consider.

Good luck.
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Old 02-11-2021, 12:32 PM   #33
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You guys are killing me!

And I thought it was a good thing to make/save money!
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Old 02-11-2021, 01:23 PM   #34
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You keep shooting messengers, you won't have any left.

Between that and going back and forth on trying to be tax efficient and not worrying about it because you have enough no matter what has me wondering why I'm bothering here.
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Old 02-11-2021, 01:40 PM   #35
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Here is something I have been trying to work out related to this thread. Letís say you have a goal to give away a million dollars while you are still alive. How about moving post-tax account appreciated assets into a donor-advised fund (Fidelity and Schwab both have easy ones to use) at the same time as doing large roth conversions. For example, convert $500k 401k to roth in a year, and move $250k taxable (with say a $50k cost basis) to a DAF. You would then have a taxable net of $250k from these conversations. It seems like this might work well and allow you to convert a large amount to roth in a small number of years. But I am not totally sure how to model this out accurately.

Has anyone modeled this type of scenario out?
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Old 02-11-2021, 01:52 PM   #36
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Here is something I have been trying to work out related to this thread. Letís say you have a goal to give away a million dollars while you are still alive. How about moving post-tax account appreciated assets into a donor-advised fund (Fidelity and Schwab both have easy ones to use) at the same time as doing large roth conversions. For example, convert $500k 401k to roth in a year, and move $250k taxable (with say a $50k cost basis) to a DAF. You would then have a taxable net of $250k from these conversations. It seems like this might work well and allow you to convert a large amount to roth in a small number of years. But I am not totally sure how to model this out accurately.

Has anyone modeled this type of scenario out?
This seems barely related to this thread and would be better in a new thread, IMO. Search for DAF in this forum and you might get some answers. If you still have questions, I'll give my experience in a new thread. I got this idea from others on here so you might get other answers. Very short answer, not sure what you are looking for on modeling but it seems like the best way is to do it is to get the largest tax break, so a DAF (with appreciated shares as you say) or QCDs are most likely the top two methods, unless you get into something more complicated like a charitable remainder trust.
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Old 02-11-2021, 01:55 PM   #37
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You keep shooting messengers, you won't have any left.

Between that and going back and forth on trying to be tax efficient and not worrying about it because you have enough no matter what has me wondering why I'm bothering here.
Easy does it, only joking around. Just trying to get my arms around all the moving parts. Your suggestions are appreciated.
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Old 02-11-2021, 01:59 PM   #38
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You guys are killing me!
In the good news department, you'll avoid estate tax issues that way.
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Old 02-11-2021, 02:06 PM   #39
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To get a feel for the answser, you might consider running https://www.i-orp.com/Plans/extended.html . Make sure to check off the option of "IRA to Roth Conversions = 7 Unlimited". The program will suggest optimum Roth conversions if you spent the maximum allowable amount that your savings allow for the life time you input.

I took a shot with my interpretation of your numbers. I-ORP suggests you could spend of~ $590,000 per year (adjusted up each year for cost of living) excluding taxes for the rest of your life. If you actually spent that much yearly and wanted to optimize lifetime conversions, ORP suggests convering into the 37% tax bracket for a couple years, and the 35/33% tax brackets for another 6-7 years.

From your comments, I expect you won't spend 590k / yr so optimum Roth conversions may be higher. Also I expect (IMHO) that tax rates in the future will be higher than the current tax laws so higher Roth conversions today may be beneficial. Note: I-ORP takes into account the current tax rates and the changes when they expire in 2025.

Many have limits on how much tax they are willing to pay today and don't convert as much as I-ORP suggests. I personally have come around to accepting I have to pay sooner or later and might as well try to optimize it as much as I can.

You have a great problem to have, congrats.
I took a shot at IORP as suggested and perhaps I am entering something wrong/differently (probably by more conservative annual returns), but I am getting the following output relative to Roth conversion years...

Age RMD TaxDef AfterTax RothIRA IRA2Roth GuarInc Yield Taxes DI
057 0 516 565 0 516 0 130 224 471
058 0 494 572 0 494 0 121 212 480
059 0 345 525 0 345 0 112 147 490
060 0 364 550 0 364 0 102 152 499
061 0 384 576 0 384 0 91 158 509
062 0 414 628 0 414 0 79 187 520
063 0 225 570 0 225 0 67 107 530
064 0 243 597 0 243 0 55 112 541
065 0 265 636 0 265 0 41 126 551
066 0 286 667 0 286 0 27 131 562
067 0 308 700 0 308 0 11 137 574
068 0 325 458 0 76 0 0 122 585

I'm somewhat new to IORP so may be missing something. Yr1 it's showing $471K in after tax distributions. Can I manipulate the model to only show say $250K in after tax distributions to see what it does to my Roth conversions modeling?
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Old 02-11-2021, 02:47 PM   #40
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I read this thread this morning.
I had my session with our tax prep guy at 1100. I got to experience the NIIT.
We talked about Roth conversions.
As "the poors" with only $1.4M in tIRAs, our life is a bit simpler.
I believe "America is great" because we seem to have the most complicated tax code in the universe.
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