pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Fixed it. Thanks for the heads up.
Question about which account to draw funds from
- Thread starter FREE866
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You can model your situation at https://i-orp.com/Inflate/extended.html
It will take a few hours to read and understand all of the inputs and the outputs, but once you get your footing, you can operate the levers (change assumptions) and see what it does to your available spend. It considers SS, Roth converting, PPACA, and of course taxes. Those are not perfectly modeled, but very close in most cases.
What I've found out is that you can improve the spend a little bit, but by optimizing these kinds of moves isn't going to move you from Greyhound to Lear jet, hehehe!
One caveat I always say is to keep the model focused on taxes, and not on which tax buckets get better expected return rates, make the equity allocation the same across all tax buckets.
It will take a few hours to read and understand all of the inputs and the outputs, but once you get your footing, you can operate the levers (change assumptions) and see what it does to your available spend. It considers SS, Roth converting, PPACA, and of course taxes. Those are not perfectly modeled, but very close in most cases.
What I've found out is that you can improve the spend a little bit, but by optimizing these kinds of moves isn't going to move you from Greyhound to Lear jet, hehehe!
One caveat I always say is to keep the model focused on taxes, and not on which tax buckets get better expected return rates, make the equity allocation the same across all tax buckets.
For single filers in 2020 ( https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/ ):
Long-term capital gains tax rate Your taxable income
0% $0 to $40,000
15% $40,001 to $441,450
20% $441,451 or more
* Short-term capital gains are taxed as ordinary income according to federal income tax brackets.
Roughly, if your taxable income (regular + capital gains) stays within the 12% bracket your capital gains tax is 0%. If capital gains put you over the 12% bracket the amount over the bracket is taxed at 15%. The 12% bracket and 0% capital gains bracket have been decoupled now, so they are a little different. Try your situation with an online tax calculator to see how it works for you.
For me it looked best to Roth convert until about 10 years away from my first Roth withdrawal, allowing plenty of time for the tax free growth to accumulate. Within the 10 years before my first Roth withdrawal (next year) I'll fill just the 10% bracket with a small Roth conversion and dividends and make sure I have enough capital gains to fill the 0% capital gains bracket.
So I spoke to my accountant finally on this. Based on my expected tax situation for 2020 I would be looking at a total tax payment of 10K if I transferred 40K from my traditional IRA to a Roth IRA. I'm really conflicted what to do here.
Sure, it would be nice at age 70 to have an account that is all tax free , but to shell out 10K in taxes every year for like 15 years( assuming I transfer 40K a year and tax situation is similar) is a sizeable amount.
Sure, it would be nice at age 70 to have an account that is all tax free , but to shell out 10K in taxes every year for like 15 years( assuming I transfer 40K a year and tax situation is similar) is a sizeable amount.
aja8888
Moderator Emeritus
Well. you can bite the bullet and pay the taxes later when you must take RMd's, and maybe at a higher tax rate.
I know. Im gonna owe taxes on it eventually anyway. I'm just curious does it make sense purely from a tax perspective. I do have the money sitting in cash. If I don't do it, I'm gonna get really hit hard with taxes at 70---as of today I will get close to 40k a year from SS and that will grow a bit each year with COLA.. If I then am throwing 20-30K on top of that as a required RMD. I'm looking at 70K a year in income I'll be paying out like 17K in taxes at that point.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
So to be clear... absent a Roth conversion your tax would be ~$0.... and if you add a $40k Roth conversion your tax will be $10k? If so then the effective rate on the conversion is 25%?
Is that just Federal or both Federal and state (and city if applicable)?
yes, and heres why---here is note from my accountant.
you would have 0 tax liability for the IRS and $959 due to NYS/NYC.
If you take $30,000 out of an IRA to convert, you will owe the IRS $2,217 and $3,911 to NYS/NYC.
If you take $40,000 out of an IRA to convert, you will owe the IRS $4,917 and $4,905 to NYS/NYC.
If you take $50,000 out of an IRA to convert, you will owe the IRS $7,617 and $5,901 to NYS/NYC.
I have dividends in my regular account and long term gains this year of ~22K
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
So combined 17% effective rate on that first $30k, 37% on the next $10k and 37% on the next $10k.
So it looks like the first $30k isn't so bad.... 7% Federal and 10% state. But then 27% Federal and 10% state after that.
I'm guessing that the 27% Federal is 12% ordinary and 15% on qualified income pushed from 0% to 15%.
So it looks like the first $30k isn't so bad.... 7% Federal and 10% state. But then 27% Federal and 10% state after that.
I'm guessing that the 27% Federal is 12% ordinary and 15% on qualified income pushed from 0% to 15%.
N02L84ER
Thinks s/he gets paid by the post
Each $10000 increase results in another $2700 in FED taxes from 30K to 40K and from 40K to 50K. So, it looks like those amounts are fully in the "27%" tax bracket (12% + 15%). The first $2217 is less than 27%, so not all of the conversion is at the "27%" tax bracket. How much FED tax would you pay on a $20K Roth conversion?
yeah--his first sentence of "you would have 0 tax liability for the IRS and $959 due to NYS/NYC."
applies if I do no conversion at all.
I didn't ask him that. My thinking is 20K a year would be too low if I want to have most if not all of money fully converted to Roth by the time I'm 70--16 years away. That is why i asked about higher amounts.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
IMO 17% combined federal and state on the first $30k of conversion is pretty good, at 17% likely a lot less than you (or your heirs) will pay later if you don't convert.
So are you suggesting I do only a 30K transfer into a Roth?
So I would pay ~6K in taxes.
N02L84ER
Thinks s/he gets paid by the post
+1
I am converting between $22K and $33K each year because I am filling up the 0% FED tax bracket and going slightly into the 10% bracket (deductions + tax credits cancel out most of the conversion). I too get around $22K in capital gains and dividends from my taxable account. I will be doing these conversions for the next 12 years. It will not get all of my IRAs converted to Roth. I expect to have around $300K still in the traditional IRAs which should start my RMDs at less than $12,000 per year instead of the $44K plus that I calculated when I started doing conversions. Every little bit helps.
N02L84ER
Thinks s/he gets paid by the post
why are you subtracting 959?
I see where you get that number, but that is amount I owe IF I do no conversion at all.
If I'm paying ~$6100 in taxes--2217 +3911 on what is a total of 52K ( 30K for Roth + 22K cap gains and dividends) isnt that like ~12% effective tax rate?
N02L84ER
Thinks s/he gets paid by the post
It is the effective tax rate on the $30K of Roth conversions. You are correct that your total effective tax rate is closer to 12%.
Gotcha. Thank you so much your input. So you're a little older than me, but you are doing a similar thing?
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Nailed it.
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Yes, while you'll be paying $6,128, it is only $5,169 as a result of the $30,000 Roth conversion... or 17% on the $30k. If you don't convert and wait as late as possible then you'll pay a lot more in tax won't you ... because you'll have 85% of SS additionally in income.
Your effective federal rate on a $30k conversion would be 7% [(2,217-0)/30,000=7%]... to me it is better to pay 7% now than 22% later. And then you have that pesky state tax. Now if you plan to move to a no-tax state sometime soon then the advice might be different.
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Got it. Thank you so so much for your help. I really appreciate it. Ideally I'd like to have it all in Roth by the time I'm 70, but even at 30 K annually for 16 years its a good chunk of a tax free pocket to pull from.
So from a tax perspective you would opt for the 30K a year and not the higher amounts?
pb4uski
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I would go to the top of the 0% qualified income tax bracket... which for 2020 is $40,000 for a single... then add in the standard deduction of $12,400 and that is $52,400 of total income.... then subtract out your non-Roth conversion income to get your Roth conversion amount. At that amount, all your qualified income would be at 0% tax and you would be converting the maximum amount possible at 12% or less.
What you'll find it that these Roth conversions might not reduce your Roth as much as you think because of growth... sort of like a dog chasing its tail.
So for example, let's say you have $500k in a Roth and convert $30k a year for 16 years... if the Roth grows at 5% a year even if your conversions increase 3% a year beacuse tax brackets increase with inflation, after 16 years you would still have over $200k.
What you'll find it that these Roth conversions might not reduce your Roth as much as you think because of growth... sort of like a dog chasing its tail.
So for example, let's say you have $500k in a Roth and convert $30k a year for 16 years... if the Roth grows at 5% a year even if your conversions increase 3% a year beacuse tax brackets increase with inflation, after 16 years you would still have over $200k.
| Earnings @ 5% | Roth conversions | Balance | |
| 0 | 500,000 | ||
| 1 | 24,250 | -30,000 | 494,250 |
| 2 | 23,940 | -30,900 | 487,290 |
| 3 | 23,569 | -31,827 | 479,032 |
| 4 | 23,132 | -32,782 | 469,382 |
| 5 | 22,625 | -33,765 | 458,242 |
| 6 | 22,043 | -34,778 | 445,506 |
| 7 | 21,380 | -35,822 | 431,064 |
| 8 | 20,631 | -36,896 | 414,799 |
| 9 | 19,790 | -38,003 | 396,586 |
| 10 | 18,851 | -39,143 | 376,293 |
| 11 | 17,807 | -40,317 | 353,782 |
| 12 | 16,651 | -41,527 | 328,906 |
| 13 | 15,376 | -42,773 | 301,510 |
| 14 | 13,974 | -44,056 | 271,428 |
| 15 | 12,437 | -45,378 | 238,487 |
| 16 | 10,756 | -46,739 | 202,504 |
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