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Old 06-02-2020, 11:27 AM   #61
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I am one of the people that has non-deductible IRA contributions and I fill out the 8606 form every year for my conversions to determine how much of it is taxable. The first year I did a conversion over 4% was tax free. This year, thanks to growth in the IRAs, only 1.24% will be tax free. It is an extra form, but not too hard to fill out.
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Old 06-02-2020, 03:34 PM   #62
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I skimmed this thread and I didn't see the mention of this

The other Big reason to spend down the Qualified money (401ks, IRAa) is that once you start taking Medicare you can get hit with highly punitive IRMAA means-tested taxes on your (and spouses) Medicare per your income level.

Early Roth conversions are a great way around this.

I also concur with spending some time with the advanced version of the Optimal retirement Planner (I-Orp.com) to model the outcome.
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Old 06-02-2020, 05:52 PM   #63
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Congress can change rules, so beware of assuming Roth advantages are fixed for all time. I think some folks, who were playing the Roth conversion game, got burned after the Trump tax cut.
I think it only makes sense to pay taxes NOW if you can predict the future—and nobody can.
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Old 06-02-2020, 06:24 PM   #64
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..... I think some folks, who were playing the Roth conversion game, got burned after the Trump tax cut. ...
Care to elaborate how people were burned?
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Old 06-02-2020, 08:40 PM   #65
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My guess is the reference is to when the 15% tax rate became 12%, the 28% rate became 25%, etc. I realized some LTCG the last year the lowest tax rate was 5%, the next year it was 0%. Not a huge tax bill, but it could have been smaller. I still would have paid state taxes regardless.
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Old 06-02-2020, 08:53 PM   #66
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My guess is the reference is to when the 15% tax rate became 12%, the 28% rate became 25%, etc. I realized some LTCG the last year the lowest tax rate was 5%, the next year it was 0%. Not a huge tax bill, but it could have been smaller. I still would have paid state taxes regardless.
How does one get burned by tax rates being reduced? That's a new one on me!
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Old 06-02-2020, 08:55 PM   #67
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I find it hard to imagine tax rates being reduced from the current tax brackets given the deficits that we currently have.
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Old 06-02-2020, 09:07 PM   #68
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I wasn't agreeing that it was a burn, just guessing what the reference was.
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Old 06-03-2020, 05:25 AM   #69
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I wasn't agreeing that it was a burn, just guessing what the reference was.
Agree with your guess.
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Old 06-03-2020, 06:49 AM   #70
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This whole discussion makes perfect sense from the mathematical angle but only if you believe that having more money in the future is preferable than spending more now.

So first, we must assume that we will live long enough to even see RMDs kicking in. That's very personal: with my crappy genes and the first heart attack in March I'm safer to assume that I will die early rather than at 95. Which is actually preferable given the history of dementia in my family (did I mention crappy genes? lol). So time right now has for me a lot more value than time in the future and 10k I can spend on myself this year makes more sense than a potential 20k tax liability 20 years from now.

Secondly, a lot depends on the amount of money you start this retirement journey with. I already know that whether I'm in this or that tax bracket I'll have enough to live the life I want. And if the travel doesn't come back, I'll have way more than I could ever need.

Then there's the issue of estate. If one of your objectives is to leave a substantial one, then conversion math makes perfect sense. I have no heirs and can't even figure out my will so leaving behind a large pile of cash is not my prerogative.

Lastly - and this will be controversial for some of you - when I stopped working I ended up on Medicaid (I had no income except for some dividends and interest). It came as a surprise but I ended up liking it a lot so I structure my income to stay on it. ROTH conversions would pushed me into marketplace and those plans are simply awful compared to what Medicaid offers. For everyone that thinks it's free: when I'm dead my state will go after my estate and will handsomely reimburse itself for every tylenol they pay for right now. To the tune of thousands of dollars. So it's simply a deferred payment.
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Old 06-03-2020, 07:13 AM   #71
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This whole discussion makes perfect sense from the mathematical angle but only if you believe that having more money in the future is preferable than spending more now.

So first, we must assume that we will live long enough to even see RMDs kicking in. That's very personal: with my crappy genes and the first heart attack in March I'm safer to assume that I will die early rather than at 95. Which is actually preferable given the history of dementia in my family (did I mention crappy genes? lol). So time right now has for me a lot more value than time in the future and 10k I can spend on myself this year makes more sense than a potential 20k tax liability 20 years from now.

Secondly, a lot depends on the amount of money you start this retirement journey with. I already know that whether I'm in this or that tax bracket I'll have enough to live the life I want. And if the travel doesn't come back, I'll have way more than I could ever need.

Then there's the issue of estate. If one of your objectives is to leave a substantial one, then conversion math makes perfect sense. I have no heirs and can't even figure out my will so leaving behind a large pile of cash is not my prerogative.

Lastly - and this will be controversial for some of you - when I stopped working I ended up on Medicaid (I had no income except for some dividends and interest). It came as a surprise but I ended up liking it a lot so I structure my income to stay on it. ROTH conversions would pushed me into marketplace and those plans are simply awful compared to what Medicaid offers. For everyone that thinks it's free: when I'm dead my state will go after my estate and will handsomely reimburse itself for every tylenol they pay for right now. To the tune of thousands of dollars. So it's simply a deferred payment.



I don't think its really a choice between "more money now or later", rather it's just financial planning. If I end up paying out 5K a year in taxes for conversion it's not a decision to spend now or later as I have a chunk in a "cash bucket" if you will for my expenses.
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Old 06-03-2020, 07:25 AM   #72
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I don't think its really a choice between "more money now or later", rather it's just financial planning. If I end up paying out 5K a year in taxes for conversion it's not a decision to spend now or later as I have a chunk in a "cash bucket" if you will for my expenses.
Whether you call it "financial planning" or "money now or later" it's about making decisions how to spend what we have. I think ROTH conversions are great and I'm not advocation for not doing them. It's all about the objectives and priorities.
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Old 06-03-2020, 07:35 AM   #73
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Whether you call it "financial planning" or "money now or later" it's about making decisions how to spend what we have. I think ROTH conversions are great and I'm not advocation for not doing them. It's all about the objectives and priorities.

I hear you, but not to sound like a jerk 5K isn't a lot of money to "spend now" in the big picture. It's coming from my "cash bucket" in my portfolio that I have for total expenses. If I can most likely save myself a decent amount on taxes in future by using this strategy why not? I won't be affecting my lifestyle now whatsoever.
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Old 06-12-2020, 07:49 AM   #74
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So I finally bit the bullet and did a conversion of 30 K from my reg IRA to my Roth IRA. It definitely stinks having to pay taxes on this next year , but I think in the big picture it makes sense and I intend to do so every year going forward. Thank you to everyone who provided salient information and guidance.
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Old 06-12-2020, 08:43 AM   #75
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My opinion is that unless one can predict what future tax rates will be, there is a risk one will be better off NOT doing the conversion, and not paying taxes today. Alternatively, one could get “burned” by paying taxes on the conversion today, then having Congress decide in the future—with a vote and stroke of a pen—to tax Roth IRAs, nullifying the move. Only two things are certain in life, Death & Taxes, right?
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Old 06-12-2020, 08:44 AM   #76
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The other Big reason to spend down the Qualified money (401ks, IRAa) is that once you start taking Medicare you can get hit with highly punitive IRMAA means-tested taxes on your (and spouses) Medicare per your income level.

Early Roth conversions are a great way around this.
Please explain the bold area. Are you saying if we can keep our income low that will benefit us regarding Medicare means testing? We're 62. When Medicare kicks in we'll have a higher income than now as SS and Pension start (if we take SS at that time). But we can keep our income lower and take SS at 70. We can use our I bonds and cash to supplement expenses.

Simply asking how does income affect Medicare? What year do they base the MAGI on? Does it change as your income changes in the future?
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Old 06-12-2020, 08:52 AM   #77
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My opinion is that unless one can predict what future tax rates will be, there is a risk one will be better off NOT doing the conversion, and not paying taxes today. Alternatively, one could get “burned” by paying taxes on the conversion today, then having Congress decide in the future—with a vote and stroke of a pen—to tax Roth IRAs, nullifying the move. Only two things are certain in life, Death & Taxes, right?
Well,even if tax rates stay where they are I'm still looking at being at a higher rate in 16 years as I will be receiving SS which that alone immediately puts me in a higher tax bracket than I'm am in now.



Yeah, I guess they could start to tax Roth IRA's but I wouldn't say that is a very likely situation. Presently 25 million households have Roth IRAs and that number is growing. That group is very tax sensitive ( which is why they created a Roth for themselves) so I doubt a majority of elected officials would agree on such a politically silly thing to do.
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Old 06-27-2020, 10:07 AM   #78
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One more question on this.
and thank you all so much for your help with this. I think I finally grasped the whole thing and wanted to run it again for confirmation if that is OK
I am going to use rounded numbers for simplicity:
LTCG tax rate for single with total income under 40 K is 0%
Tax rate for single under 40K is 12%
The standard deduction is 12K


If my Dividends and LTCGs are 22K then the ideal number to convert to Roth is 30K correct?
My logic is that if the ideal number is 52K before deduction then a 30K roth conversion + 22 K in LTCGs and dividends is the breaking point to keep me at the lowest tax rate.Similarly if my LTCGs and dividends were 27K then the ideal Roth conversion number would be 25K.



Is that right?
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Old 06-27-2020, 11:30 AM   #79
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One more question on this.
and thank you all so much for your help with this. I think I finally grasped the whole thing and wanted to run it again for confirmation if that is OK
I am going to use rounded numbers for simplicity:
LTCG tax rate for single with total income under 40 K is 0%
Tax rate for single under 40K is 12%
The standard deduction is 12K


If my Dividends and LTCGs are 22K then the ideal number to convert to Roth is 30K correct?
My logic is that if the ideal number is 52K before deduction then a 30K roth conversion + 22 K in LTCGs and dividends is the breaking point to keep me at the lowest tax rate.Similarly if my LTCGs and dividends were 27K then the ideal Roth conversion number would be 25K.



Is that right?
Yes, I think so... broadly speaking (assuming ACA subsidies are not a factor):

Dividends and LTCG............$22k
Roth conversion...................30k
Total income........................52k
Standard deduction.............(12k)
Taxable income.....................40k

Ordinary income...................18k...........~$2k of tax
Preferenced income...............22k...............0k of tax
Taxable income.....................40k..............$2k of tax on $30k Roth conversion or about 7% of conversion amount
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Old 06-27-2020, 11:39 AM   #80
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Yes, I think so... broadly speaking (assuming ACA subsidies are not a factor):

Dividends and LTCG............$22k
Roth conversion...................30k
Total income........................52k
Standard deduction.............(12k)
Taxable income.....................40k

Ordinary income...................18k...........~$2k of tax
Preferenced income...............22k...............0k of tax
Taxable income.....................40k..............$2k of tax on $30k Roth conversion or about 7% of conversion amount

Great..thank you PB. Yeah, I'm 53 now, so Medicare is years away. Or, I should say, I am on my partners health care plan and her plan is better than if I went on my own and purchased insurance. Really appreciate your help with this! It's funny, because in general I'm pretty good with numbers, but this took me so long to finally grasp.
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