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Old 11-05-2019, 03:04 PM   #221
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I signed up and have been playing with Income Strategy today.

One frustrating thing... no matter what strategy I select it wants to immediately sell all of my highly appreciated stock, incur the tax and reinvest the proceeds so it shows a big tax bill in the first projection year.... I don't want to sell since those gains will be zero if I just hold them until the basis gets stepped up! But I can't find a way to keep it from doing it.

Also, after I do that the program wants me to live off roth first and then tax-deferred and then taxable... what they call Opposite Conventional Wisdom.

Not impressed so far, but it is early.
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Old 11-05-2019, 03:21 PM   #222
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Based on this thread, I just made a spreadsheet for retirement taxes. It also calculates the amount of my SS that will be taxable. I can vary a lot of things, but it revealed that I can keep things simple. I can convert my 401k to the top of the 12% bracket (changing to 15% in 2025) and have enough income between my taxable account and pension to cover all my expenses. I have retiree health insurance, so ACA is not a factor. And it looks like I can convert all of my 401k before SS kicks in. Effective tax rate over my entire retirement stays fairly flat at 8-9%. This surprised me and really helps with planning.
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Old 11-05-2019, 04:25 PM   #223
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Quote:
Originally Posted by pb4uski View Post
I signed up and have been playing with Income Strategy today.

One frustrating thing... no matter what strategy I select it wants to immediately sell all of my highly appreciated stock, incur the tax and reinvest the proceeds so it shows a big tax bill in the first projection year.... I don't want to sell since those gains will be zero if I just hold them until the basis gets stepped up! But I can't find a way to keep it from doing it.

Also, after I do that the program wants me to live off roth first and then tax-deferred and then taxable... what they call Opposite Conventional Wisdom.

Not impressed so far, but it is early.
That was my first and biggest reservation as well. IMO no one in their right might would wholesale sell all their holdings and buy other holdings (some in the same asset classes), much less in one fell swoop - the cap gains tax hit is mind boggling of course.

It took me almost two weeks to figure out how to stop that “feature,” so I can save you some time, though there may be a better way.

Sounds like you have your initial profile, inputs and settings done.

Go to Manage>Investment Management. You'll see four top level options - Premium, Vanguard, Custom and None. Just choose None and your holdings will remain as is throughout your retirement, only selling to meet spending, tax and distribution-conversions $ needs if any.

That's still not ideal, but it stops the silly first year cap gains taxes.

Premium and Vanguard are set portfolios designed by Income Strategy and Vanguard respectively for an investor who wants extreme guidance. Vanguard for example has six risk tolerance levels and three portfolios for each, small, medium and large (number of holdings) - so 18 permutations. These are there for novice customers who don’t have any idea what they’re doing frankly. There are people like that as you know.

What's most desirable IMO is Custom. You can set exactly what you want for each and every holding. So select Custom and you'll see Create a Model Portfolio. You can choose any risk level-asset allocation you want with whatever holdings you choose. And you can create as many model portfolios as you'd like. If for example, you create a custom portfolio that's exactly what you already hold, it has the same effect as choosing None.

That could still be a horrible cap gains event if you create a portfolio to go to that's radically different than your current holdings.

When you're creating a new custom portfolio, there's a drop down at the top called Phase Count. You can choose up to 5 transitional or intermediate portfolios to get from where you're starting to where you want to end up. And you can set when you want each transition to occur.

So the best answer to me is to create a custom portfolio that mirrors your current holdings, that will be your Phase 1. Then choose up to 4 more phases, where the phase 5 is what you want to move your asset allocation and holdings to - and phases 2, 3 and 4 are intermediate or transitional phases moving assets as radically or conservatively as you'd like. You make each phase a year apart, 5 years apart, variable periods or whatever you'd like.

I would have just preferred it if the software made a gradual transition from where I am to where I say I want to end up. But you can get pretty close with the above method.

There may be a better way, but that's the best I could come up with. Not planning on it, but if I do another formal help session, I may ask if there's a way to do a gradual transition.

FWIW.
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Old 11-06-2019, 09:40 PM   #224
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Thanks! It worked... I chose None and no longer have those first year capital gains.
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Midpack: Question for you.
Old 11-18-2019, 01:39 AM   #225
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Midpack: Question for you.

Midpack: thank you for initiating this thread. It's very informative and I've spent 1.5 hours reading all 200+ posts.

I understand your reasoning for converting up to the 22% bracket. My question is what account will you pay for the conversion with. Will it be taxable account or the IRA account itself?

I've got ~ 65% of my assets in either tIRA or previous employer 401K accounts. I can convert either or both of these account assets on an annual basis. My taxable account is approximately 90% in stocks with substantial LTCG and 10% in cash. I can use the small amount of cash to pay for the tax the first year of conversions but will have to sell stocks and incur LTCG's for subsequent years. I seem to remember in the thread that you had a significant quantity of LTCG's. How are you paying for these conversions?

Great thread. Thanks in advance for your reply!
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Old 11-18-2019, 05:44 AM   #226
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Originally Posted by damonhowatt View Post
I understand your reasoning for converting up to the 22% bracket. My question is what account will you pay for the conversion with. Will it be taxable account or the IRA account itself? I seem to remember in the thread that you had a significant quantity of LTCG's. How are you paying for these conversions?
Indeed I am sitting on a large chunk of LTCGs, but I also have a sizeable cash allocation. So I’m paying taxes from taxable cash to maximize what remains in IRAs. If you have to sell assets from taxable and generate capital gains to pay estimated taxes, you’ll have to see how the math works out versus paying taxes from your IRA.

Quote:
Originally Posted by Fido & many others
It's usually considered a good idea to avoid using the funds that are being converted from within your Roth to pay the tax on a conversion. By doing so, you will have less left in the account to potentially grow tax-free and, if you are under 59, you'll also incur the 10% penalty on the amount you don't convert to the Roth IRA.
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Old 11-18-2019, 06:51 AM   #227
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Midpack and others, I've been thinking of the accepted wisdom of using taxable accounts to pay the taxes on Roth conversions. I'm about 90% of the way to accepting this as part of my conversion plans. However, my goal is to reduce future tax liability. To accomplish this, I want to reduce the TIRA accounts before RMD and before potential tax rates of 2026. Given this, if I pay taxes from IRA withdraws this will reduce the amounts subject to RMDs and future taxes. So on the one hand this will require more taxes today but less in the future.
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Old 11-18-2019, 08:15 AM   #228
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I think if you are doing Roth conversions to reduce future RMDs, and your taxable investments are limited, and you are older than 59.5, then paying taxes from the conversion is certainly an option. It doesn’t matter so much if you haven’t optimized your Roth returns. You have to take the size of your taxable accounts and other incurred taxes into account too.
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Old 11-18-2019, 09:06 AM   #229
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It seems to me if you have enough money to pay taxes from taxable, and are limited in how much you can convert to Roth each year (because of MAGI limits for subsidy or trying to keep under the top of a certain tax bracket), you should convert all you can, rather than convert most and withdraw some for paying taxes.

Withdrawing money from a tIRA to pay taxes on the conversion is the same as converting the full amount, and then withdrawing some of that converted money from the Roth to pay the taxes. Why would you withdraw from a Roth to pay taxes if you have enough money in your taxable account to pay them?
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Old 11-19-2019, 06:53 AM   #230
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It seems to me if you have enough money to pay taxes from taxable, and are limited in how much you can convert to Roth each year (because of MAGI limits for subsidy or trying to keep under the top of a certain tax bracket), you should convert all you can, rather than convert most and withdraw some for paying taxes.

Withdrawing money from a tIRA to pay taxes on the conversion is the same as converting the full amount, and then withdrawing some of that converted money from the Roth to pay the taxes. Why would you withdraw from a Roth to pay taxes if you have enough money in your taxable account to pay them?

Just to come clean, my IRAs are 89% of total liquid investments and TIRA is about 70% of total IRA assets. I could pay taxes from taxable assets and probably will for a couple years at least, but I'm concerned a bit about drawing down too much from taxable to pay the taxes and then be left with only the Roth IRA. So where is the problem I ask myself. No good answer at this time


Just lots of things bouncing around my head. I certainly want to get the IRAs into Roth by 2025 if I can accomplish reasonably.
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Old 11-19-2019, 07:12 AM   #231
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Just to come clean, my IRAs are 89% of total liquid investments and TIRA is about 70% of total IRA assets. I could pay taxes from taxable assets and probably will for a couple years at least, but I'm concerned a bit about drawing down too much from taxable to pay the taxes and then be left with only the Roth IRA. So where is the problem I ask myself. No good answer at this time


Just lots of things bouncing around my head. I certainly want to get the IRAs into Roth by 2025 if I can accomplish reasonably.
Just to amplify Runningbum's point, you could withdraw your Roth funds tax-free in the future if needed, rather than, in effect, withdrawing them now by paying taxes from TIRA funds.
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Old 11-19-2019, 08:10 AM   #232
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Just to amplify Runningbum's point, you could withdraw your Roth funds tax-free in the future if needed, rather than, in effect, withdrawing them now by paying taxes from TIRA funds.

I understand that, my concern is rising tax rates to come and paying the tax today and be free to spend without tax concerns. I am in 22% bracket now and will be converting some in the 24% bracket. I will pay now at 24% rather than later at 22% if rates don't change. Seems to me to be a small cost that has a large upside if taxes return to historical rates.
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Old 11-19-2019, 08:27 AM   #233
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It is much easier when you are already 60+ and have no ACA. Convert and pay from AT so there is very little after tax left. Draw from Roth at will as needed.
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Old 11-19-2019, 08:32 AM   #234
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I will pay now at 24% rather than later at 22% if rates don't change. Seems to me to be a small cost that has a large upside if taxes return to historical rates.
Yes, if rates don't change there will have been a cost if you paid the taxes from the IRA.

If the taxes were paid from cash on hand, converting at 24% now might beat converting at 22% later. See discussion about the breakeven future withdrawal tax rate.
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Old 11-19-2019, 09:35 AM   #235
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Yes, if rates don't change there will have been a cost if you paid the taxes from the IRA.

If the taxes were paid from cash on hand, converting at 24% now might beat converting at 22% later. See discussion about the breakeven future withdrawal tax rate.
Great link/read thanks, though mostly about where to put IRA money initially - trad vs Roth, not conversions per se. Some applies, some doesn’t.
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Old 11-19-2019, 10:00 AM   #236
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Just ran the numbers for our projections and it looks like we can be 100% Roth by around 70 if we convert to the top of the 12%/15% bracket. I'm not sure I will let my taxable go to zero, but it's good to see the data.

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Old 11-19-2019, 11:32 AM   #237
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Just ran the numbers for our projections and it looks like we can be 100% Roth by around 70 if we convert to the top of the 12%/15% bracket. I'm not sure I will let my taxable go to zero, but it's good to see the data.
I'm not letting my taxable go to zero as long as I still have money because I have some shares with very large gains, so it'd be better to leave those to my heirs so they can get step-up basis. If not for that, as long as I could start tapping the Roth, it wouldn't bother me to have all my money in a Roth. Why not? It grows tax free, and you can withdraw tax free. You don't have to play any harvesting games or hold onto shares to get LTCG status, or limit what you withdraw because of the tax impact.

Whether it would really make sense to convert everything to Roth in that case is another question, because the long term tax analysis may have you keeping some taxable income of some sort in the later years rather than paying higher taxes earlier. I'm just saying that in general, 100% Roth is not in itself something I'd avoid.
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Old 11-19-2019, 11:41 AM   #238
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It is much easier when you are already 60+ and have no ACA. Convert and pay from AT so there is very little after tax left. Draw from Roth at will as needed.
I have only 1 of the attributes you identify and I find it quite easy to do. It does help when it makes logical or financial sense.

People's situations are different so it is often hard to understand without that knowledge.
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Old 11-19-2019, 12:10 PM   #239
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Met with our FA this past Thursday. One of the objectives was to get estimated tax data in order to make final investment and tax decisions before the end of the year. Our FA is also a CPA with a tax specialty so this helps. Income, capital gains, dividends etc. on a ss with prior year numbers and a discussion about the final numbers.

We always review our situation for tax planning in the current year and the following year. Have done so prior to and after retirement. Don't mind paying taxes, just want to minimize them where possible through good tax planning.
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Old 11-19-2019, 12:49 PM   #240
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I apologize if that was mentioned already - I did go through the entire thread but forgot some details: does Income Strategy have access to my banks/brokerages/CC accounts logins and can update dynamically if I'm subscribed to it? I just watched a demo for the Right Capital software and unless I missed something it requires manual input. A drag. Another thing: of all the financial tracking websites (Personal Capital, Mint etc. my favorite is Fidelity Full View - powered by eMoney - it looks clean and tracks individual holdings within accounts, a great help if you're looking for rebalancing suggestions. Provided Income Strategy can pull the data from outside sources, would that include holdings or just totals?
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