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Old 12-17-2019, 08:44 AM   #321
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I think this is mostly an exercise in futility. No matter how clever your software is, it won't be able to come up with a strategy to put 10 pounds of potatoes into a 5 pound bag. The best it can do is help you put 4.9999 pounds instead of 4.95.

The IRS has a claim on X% of the money in your IRA/401K. And the richer you are, the stronger their claim and the larger X is going to be.

The deeper I get in retirement, the more I realize that all that I was doing was just shuffling money around, and changing the timing of *when* I paid the taxes.

The biggest tax-related thing is when one spouse of a married couple dies and the survivor gets shifted to the Single Filing Status. That shifts the start of the 22% rate from $79K to $40K, thus exposing up to $39K that will be taxed at 22% instead of 12%. That's another $3900 in tax.

That's the main reason to do Roth conversions. And none of the clever software in the world can do anything about that.

The main benefit of these software products is to advise you not to do stupid stuff. Okay. But you can figure that out for free.
I don't agree that it is an exercise in futility Ray.

Over the last 7 years we have done $386k of Roth conversions and tIRA withdrawals and paid about 8.5% in federal tax. I'm pretty darn sure that once SS starts that we'll be in the 22% tax bracket (or 25% if the tax law reverts to 2017 tax brackets) and our beneficiaries are also in the 22% tax bracket... so I'm pretty sure that I have saved $52-64k by taking that money out now while I am in a low tax bracket rather than later.

So at least for that $386k, we have reduced the IRS claim from 22% or 25% (or more is one of us were to die prematurely) to 8.5%.
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Old 12-17-2019, 08:55 AM   #322
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Another false narrative or common misconception.... it is all about tax rates if you pay for taxes from the tIRA with a minor benefit if you pay taxes with after-tax funds.

Example: $10k in tIRA, $2k in taxable funds, 20% tax rate, 7% return, 30 years

Do nothing: $10k tIRA grows to $76,123, $2k grows to $10,255 after 30 years... withdraw $76,123 and pay $15,225 in taxes... leaving $71,153 to spend.

Roth conversion and pay taxes from Roth: $8k in Roth grows to $60,898 and taxable account grows to $10,255... leaving $71,153 to spend

Roth conversion and pay taxes from taxable account: $10k in tIRA grows to $76,123

So at most, the benefit of conversion if tax rates are the same is not having to pay tax on the taxable funds for 30 years... benefit is $76,123 - $71,153 or $4,970 (7%)..... the difference between the growth of $2k with no taxes ($2,000*(1+7%)^30) and the growth of $2k with taxes ($2,000*(1+(7%*(1-20%)))^30).
Excellent math! Thanks!

The big reason for us to convert early and often is for survivor planning. Much higher tax bracket for either myself or my wife if we are doing large RMD's after 70. The worst case scenario is if my wife predeceases me and I have large RMDs happening after age 70. I can convert @ 12%/15% between 55-70 or pull RMDs well into the 28% single tax bracket. Ouch.
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Old 12-17-2019, 09:00 AM   #323
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We're in the 22% bracket now before SS, but we are taking withdrawals from 401k. If one of us croaks, we lose some income, but still in 22,24 or 32% bracket. I gave up trying to put funds from one pocket to another because it's going to be picked either way. Not a complaint in anyway, but at least the commonwealth and the local guvmint aren't involved. We do donate to the local fire and police departments.
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Old 12-17-2019, 09:03 AM   #324
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Aren't their actually two different types of tax arbitrage in play here? The first is the difference between your marginal tax rate when you put the money in your IRA and your rate when you remove it. The second is the difference between your marginal tax rate now and your rate when you are required to take RMDs. We can know the first with certainty, but we can only take a guess at the second.

From my point of view, I enjoy taking the money out at a rate less than when I put it in. It means the IRA served its essential purpose. Going forward, Roth conversion may be a wash, as Midpack's charts show, but the likelihood of increased tax rates and the certainty of the widow tax penalty both inspire me to convert to the top of the 22% bracket while I can. (We're already low in the 22% bracket due to pension and social security).
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Old 12-17-2019, 09:08 AM   #325
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I haven't read through the whole thread yet. Has anyone mentioned IRMAA? Next year, having $400 too much income will cost us $2400 per year for the increase in Medicare premiums.

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Old 12-17-2019, 09:39 AM   #326
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I think this is mostly an exercise in futility. No matter how clever your software is, it won't be able to come up with a strategy to put 10 pounds of potatoes into a 5 pound bag. The best it can do is help you put 4.9999 pounds instead of 4.95.

The IRS has a claim on X% of the money in your IRA/401K. And the richer you are, the stronger their claim and the larger X is going to be.

The deeper I get in retirement, the more I realize that all that I was doing was just shuffling money around, and changing the timing of *when* I paid the taxes.

The biggest tax-related thing is when one spouse of a married couple dies and the survivor gets shifted to the Single Filing Status. That shifts the start of the 22% rate from $79K to $40K, thus exposing up to $39K that will be taxed at 22% instead of 12%. That's another $3900 in tax.

That's the main reason to do Roth conversions. And none of the clever software in the world can do anything about that.

The main benefit of these software products is to advise you not to do stupid stuff. Okay. But you can figure that out for free.
I spent $20 initially and did a 1 hour consult for $125 with Income Strategy. It gave me something to play with for a couple of weeks but I have the same conclusion as above and probably should not have spent the money. Besides the question of whether the taxes will be paid under married filing jointly or single, is the question of what will happen with future tax rates. Of course if they go up, you will be better paying more under the lower rates now than in the future after they go up. But who knows if/when that will happen?

For me I have a few years until age 65 so I am managing income to take advantage of ACA tax credits then it is Roth conversions up to 22% until RMDs. Then I hope I am complaining because my RMDs have me and my wife in the 32% tax bracket due to the booming stock market.
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Old 12-17-2019, 09:40 AM   #327
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Aren't their actually two different types of tax arbitrage in play here? The first is the difference between your marginal tax rate when you put the money in your IRA and your rate when you remove it. The second is the difference between your marginal tax rate now and your rate when you are required to take RMDs. We can know the first with certainty, but we can only take a guess at the second.

From my point of view, I enjoy taking the money out at a rate less than when I put it in. It means the IRA served its essential purpose. Going forward, Roth conversion may be a wash, as Midpack's charts show, but the likelihood of increased tax rates and the certainty of the widow tax penalty both inspire me to convert to the top of the 22% bracket while I can. (We're already low in the 22% bracket due to pension and social security).
I think of it as different sides of the same coin.

Most of my contributions were put in at 28% or higher marginal tax rate. So even if we withdraw at 22% after SS starts we will save 6% or more. That is good.

However, if for a brief period of time I can withdraw at 8.5% as I have, I'll save 19.5%+ (28%+ less 8.5%). That is better!

And if marginal tax rates revert in 2025 then the savings are 3% lower across the board.
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Old 12-17-2019, 09:56 AM   #328
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What your tax rate was at the time of contributing to your IRA/401k is really irrelevant. I think of it in the same terms as a sunk cost. It is what your current tax rate is vs your future rate that is relevant.
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Old 12-17-2019, 10:06 AM   #329
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I see where you are going, but the tax rate at the time of contribution to your IRA/401k is relevant to determining whether contributing was a good decision and the amount of any savings as a result of having done so. But you are right in that decision to contribute is sunk.

I like to frame it that if your tax rate in retirement is less than your tax rate while contributing then congratulations... you won and saved money in taxes. If not, then congratulations.. you because you deferred income thinking that you would be in a lower tax rate in retirement and because you are in a higher tax bracket than when you were working means that you have been more financially successful than you expected to be when you deferred that income. So heads you win and tails you win.

Your current and future marginal tax rates are relevant to deciding whether current tIRA withdrawals or Roth conversions are beneficial or not.
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Old 12-17-2019, 02:39 PM   #330
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Putting aside the survivor and heirs tax benefit, it's still not a waste of time to look into Roth conversions for many IME.

I'm not the brightest bulb here but some cocktail napkin calcs in posts above seem to assume you'll be in the same marginal tax bracket no matter what you do (e.g. 20% whether you convert or not). You can't assume that, it won't be the case for everyone by any means. In fact, seeking to balance marginal tax rates before and after age 70 when RMD/Soc Sec kick in is the crux of considering Roth conversions - or so I thought.
  • If your TIRA is substantial, RMD and Soc Sec taxes may be considerable factors. If your TIRA is small, it won't matter much.
  • Almost everyone should convert up to the 12% level, the benefits are greater there. Many here can't avoid higher brackets period (good problem to be sure).
  • And the Roth conversions don't matter advocates assume marginal Fed tax rates and state tax rates will remain largely the same, I don't think that's remotely possible over the long term. Current Fed rates are an anomaly.
My table below is my actual results with everything factored in, real numbers. Assumes TCJA rates to 2025 and then reversion to 2017 tables, overly optimistic IMO. I don't care to share my exact numbers, so I've shown taxes and ending balance 100% for the No Roth conversion case. As you can see it makes a considerable difference in taxes paid.

The rub is it does not make nearly as much of a difference in ending balance (presumably the primary goal), I've touched on why before so I won't repeat it. All these tax savings won't improve my bottom line much.

CaseFed Marg Rate B4 age 70Fed Marg after 70Fed & State TaxesTax ReductionEnding Balance
No Roth conv10-12%25%100% 100%
Conv to 22%22%15%82%-18%101.4%
Conv to 24%24%15%72%-28%102.6%
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Old 12-17-2019, 02:40 PM   #331
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As far as tax rate when we contributed, sure it makes sense to get deduction when you are in higher bracket and draw when you are in lower bracket. However that was like forever ago and mostly it was a good reason to do contributions. I never figured 35 years ago that we would be in financial position we are today. For me, what I would have paid is good for history books. All I can control or influence is today and tomorrow. My reason for converting into 24% bracket is to reduce tax hit when RMDs kick in and having a fund of $$ that I can draw on without having to think about the tax hit.
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Old 12-17-2019, 03:19 PM   #332
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I think this is mostly an exercise in futility. No matter how clever your software is, it won't be able to come up with a strategy to put 10 pounds of potatoes into a 5 pound bag. The best it can do is help you put 4.9999 pounds instead of 4.95.

The IRS has a claim on X% of the money in your IRA/401K. And the richer you are, the stronger their claim and the larger X is going to be.
It depends. I have a significant chunk of assets (1/3) in taxable accounts. MFJ, I can withdraw up to $80K annually in LTCGs, and pay $0 taxes. Since my cost basis is about 60% of the taxable accounts, this means I can withdraw up to $200K annually, and pay no Federal taxes. By doing so for 5 years, I will have escaped paying taxes on something like $400K of LTCGs. At the same time, I'm withdrawing $ from an inherited IRA, at an amount equal to the standard deduction for 2...making the total 'income' ~$225K annually, with no federal tax.
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Old 12-17-2019, 06:19 PM   #333
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My table below is my actual results with everything factored in, real numbers. Assumes TCJA rates to 2025 and then reversion to 2017 tables, overly optimistic IMO. I don't care to share my exact numbers, so I've shown taxes and ending balance 100% for the No Roth conversion case. As you can see it makes a considerable difference in taxes paid.

The rub is it does not make nearly as much of a difference in ending balance (presumably the primary goal), I've touched on why before so I won't repeat it. All these tax savings won't improve my bottom line much.

CaseFed Marg Rate B4 age 70Fed Marg after 70Fed & State TaxesTax ReductionEnding Balance
No Roth conv10-12%25%100% 100%
Conv to 22%22%15%82%-18%101.4%
Conv to 24%24%15%72%-28%102.6%
If you don't mind, what rate of return did you assume for stocks and bonds?
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Old 12-17-2019, 07:42 PM   #334
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If you don't mind, what rate of return did you assume for stocks and bonds?
Not sure why itís that important but:
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Old 12-18-2019, 05:39 AM   #335
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However, if for a brief period of time I can withdraw at 8.5% as I have, I'll save 19.5%+ (28%+ less 8.5%). That is better!
There is no 8.5% tax bracket. You have to compare the marginal rates; your tax brackets at the two different times.
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Old 12-18-2019, 05:47 AM   #336
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The rub is it does not make nearly as much of a difference in ending balance (presumably the primary goal), I've touched on why before so I won't repeat it. All these tax savings won't improve my bottom line much.
Yes. An exercise in futility. It largely depends on future tax brackets---which is impossible to predict.

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As you can see it makes a considerable difference in taxes paid.
Which is reducing a cost that is immaterial.
The goal is to have the most money (after tax), not to pay the least taxes.
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Old 12-18-2019, 06:45 AM   #337
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Yes. An exercise in futility. It largely depends on future tax brackets---which is impossible to predict.
Impossible to predict yes, but I’m convinced future rates will be higher and I’m acting on that. YMMV

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Which is reducing a cost that is immaterial.
The goal is to have the most money (after tax), not to pay the least taxes.
I agree, but earlier you claimed conversions couldn’t change the taxes you pay, that’s simply not true. You can pay X% or significantly less than X% and I shared exactly how much in my case.

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The IRS has a claim on X% of the money in your IRA/401K. And the richer you are, the stronger their claim and the larger X is going to be.

The deeper I get in retirement, the more I realize that all that I was doing was just shuffling money around, and changing the timing of *when* I paid the taxes.
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Old 12-18-2019, 08:28 AM   #338
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Impossible to predict yes, but Iím convinced future rates will be higher and Iím acting on that. YMMV

I agree, but earlier you claimed conversions couldnít change the taxes you pay, thatís simply not true. You can pay X% or significantly less than X% and I shared exactly how much in my case.

This has been covered and there are those that believe tax rates will go up and those that believe you can't know. I agree with both, I can't know but then I can believe and act on it without seeing it. Either way, I'm converting into 24% bracket now rather than at 70 with my SS income and RMDs. There is a principle that you need to get paid for risk. Thus a 30 year bond with 30 years of risk has higher return than 2 year with less risk. If I pay my tax today there is less risk to my monthly income than if I wait another 8 years. I'm not getting paid for the risk, so why take it ?


Just one opinion, but since it is my $$ it gets 2 votes.
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Old 12-18-2019, 09:00 AM   #339
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My spreadsheet calculates taxes by year out to age 100 and accounts for % SS taxed (it is comprehensive). This tax question is easily answered for my particular situation:

Convert up to top of the 12% and then 15% tax bracket until age 70 (in 2019 dollars):

$444,719 total taxes paid

Do no conversions and let RMDs kick in @ 70:

$626,514 total taxes paid

That is not chump change and makes my decision easy.
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Old 12-18-2019, 09:12 AM   #340
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My spreadsheet calculates taxes by year out to age 100 and accounts for % SS taxed (it is comprehensive). This tax question is easily answered for my particular situation:

Convert up to top of the 12% and then 15% tax bracket until age 70 (in 2019 dollars):

$444,719 total taxes paid

Do no conversions and let RMDs kick in @ 70:

$626,514 total taxes paid

That is not chump change and makes my decision easy.
That's a huge amount of tax savings. Just curious though, how much of that is due to the savings being calculated out to 100, versus a normal life expectancy of 80ish? Thanks.
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