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Old 12-18-2019, 09:18 AM   #341
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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.
Great question. The answer is revealing:

100% conversion:

$258,730 total taxes paid

0% conversion:

$234,497 total taxes paid

Not nearly as big a difference. Something to consider.
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Old 12-18-2019, 09:25 AM   #342
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Originally Posted by corn18 View Post
Great question. The answer is revealing:

100% conversion:

$258,730 total taxes paid

0% conversion:

$234,497 total taxes paid

Not nearly as big a difference. Something to consider.
So LESS taxes paid with 0% conversion?
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Old 12-18-2019, 09:28 AM   #343
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Have not read all 17 pages of thread, but this is an interesting link to historical tax rates going back from 1913 - 2013. The early to late 90's, pretty scary.


https://taxfoundation.org/us-federal...sted-brackets/
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Old 12-18-2019, 09:28 AM   #344
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So LESS taxes paid with 0% conversion?
You are right, I didn't even notice that! Hmmmm.... That is VERY interesting.

I just ran some scenarios where I die early and it always results in paying less total taxes if I do no conversions. This is assuming we are both dead @ 80. Need to rethink this whole conversion thing.
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Old 12-18-2019, 09:30 AM   #345
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Thanks, Corn18. We're back to the same ole' question. When will I die? Personally, I doubt I'll even make it to 80+, but who knows.

Last year I converted well into the 22% bracket. This year, I think I've talked myself out of it and will convert to the top of the 12% bracket. My taxable account is getting low, so I might just start taking withdrawals instead of conversions starting next year.
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Old 12-18-2019, 09:31 AM   #346
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There is no 8.5% tax bracket. You have to compare the marginal rates; your tax brackets at the two different times.
Ray.... you are right that there is no 8.5% tax bracket.

But you are wrong in comparing ONLY the marginal tax rate (though that does work in many cases so your error is understandable).

8.5% is the effective incremental rate that I paid on the $386k of Roth conversions that I did over the last 7 years... with the rate calculated as (tax after conversion less tax before conversion) divided by the conversion amount.... and is appropriate since the conversion crosses a number of tax brackets.... some is 0% because it is offset by the standard deduction, some is at 10% and the rest is at 12% (formerly 15%).

Once I start SS at 70 and RMDs start at 70 1/2 we will be solidly in the 22% tax bracket so if I did no Roth conversions that money would end up in higher RMDs and would be taxed at 22%... and DW alone or my heirs will be in the 22% bracket... so the savings will be the difference between what I pay on current Roth conversions and 22% (and 28%+ if compared to what I saved when I deferred that income). And if tax rates revert to 2017 levels or higher as many people expect then those savings are 3% higher.

If our future tax rate is 22% I have saved over $50k compared not converting, almost $64k if the future tax rate is 25%.... hardly an exercise in futility.
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Old 12-18-2019, 09:32 AM   #347
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Yes. An exercise in futility. It largely depends on future tax brackets---which is impossible to predict.

Which is reducing a cost that is immaterial.
The goal is to have the most money (after tax), not to pay the least taxes.
This thread is about optimizing income so in that narrow sense the goal is indeed to have the most money. But the broader goal - at least for me - is maximizing enjoyment in retirement. Will I care about having saved extra 100-200k
in taxes - or having the most money - when I'm 90? Not particularly. As long as I have enough to take care of myself the amount of money I leave behind is irrelevant.
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Old 12-18-2019, 09:34 AM   #348
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Great question. The answer is revealing:

100% conversion:

$258,730 total taxes paid

0% conversion:

$234,497 total taxes paid

Not nearly as big a difference. Something to consider.
But don't forget, someone still needs to pay the tax on the money left in the IRA in the 0% conversion case, unless you bequeath it to charities. Some may say their heirs should be grateful for anything they get, taxed or not. I think it's foolish not to do some estate planning to reduce heirs taxes. Also, you died with money left in a tax deferred account that you couldn't spend from, so it's not like you optimized your own situation.

If your heirs seem likely to be in a lower tax bracket than you are in retirement, it may make sense to let them pay the taxes. But now they have to withdraw it all in 10 years, so that will likely bump up their tax bracket if the amount left is significant.
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Old 12-18-2019, 09:36 AM   #349
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Thanks, Corn18. We're back to the same ole' question. When will I die? Personally, I doubt I'll even make it to 80+, but who knows.

Last year I converted well into the 22% bracket. This year, I think I've talked myself out of it and will convert to the top of the 12% bracket. My taxable account is getting low, so I might just start taking withdrawals instead of conversions starting next year.
You are brilliant. I have found an issue with my spreadsheet that allows my Roth balance to go negative, which should not happen. That would require withdrawals from my 401k to keep that from happening (and a taxable event that I am not accounting for). That might explain why the taxes are less. Will explore a fix and report back.
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Old 12-18-2019, 09:40 AM   #350
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This thread is about optimizing income so in that narrow sense the goal is indeed to have the most money. But the broader goal - at least for me - is maximizing enjoyment in retirement. Will I care about having saved extra 100-200k
in taxes - or having the most money - when I'm 90? Not particularly. As long as I have enough to take care of myself the amount of money I leave behind is irrelevant.
That just baffles me. Do you ignore price tags and money issues in everything you do? This is such a simple thing to do to save yourself 100K or more (I'm sure this varies from case to case) I don't know why you would ignore it. Why would you even spend time on a tax planning & income optimization thread if you just don't care? And how can you be sure you have enough? What if you need extended time with in home nursing care, for example?
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Old 12-18-2019, 09:49 AM   #351
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You are right that there is no 8.5% tax bracket, but you are wrong in using ONLY the marginal tax bracket.

8.5% is the effective rate that I paid on the $386k of Roth conversions that I did over the last 7 years... caalculated as (tax after conversion less tax before conversion) divided by the conversion amount.... and is appropriate since the conversion crosses a number of tax brackets.... some is 0% because it is offset by the standard deduction, some is at 10% and the rest is at 12% (was 15%).
I agree with this. You really have to look at the effective tax rate for your own situation and compare effective tax rates now (during conversions) and later when RMD's kick in.

In my own situation, I'm in the marginal 12% bracket now and when I'm taking RMD's I'll be in the marginal 22% bracket. BUT, very little of my income (at age 70) will be in that 22% bracket, the vast majority will be taxed at an effective rate of less than 10%. You really have to look at the actual taxes paid, not just the marginal rate of the last taxed dollar.

I should note, that I won't have pensions or other income other than retirement accounts and SS. I hope to have a decent mix of SS, Taxable, Tax Deferred, and Tax Free, that I can more or less manipulate my withdrawals to pay the least tax possible each year. At least that's the plan.
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Old 12-18-2019, 10:49 AM   #352
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You are brilliant. I have found an issue with my spreadsheet that allows my Roth balance to go negative, which should not happen. That would require withdrawals from my 401k to keep that from happening (and a taxable event that I am not accounting for). That might explain why the taxes are less. Will explore a fix and report back.
Found an error where I allow my Roth to go negative instead of drawing additional (and taxable) amounts from my 401k. That left out some taxes.

Here are the new numbers to age 80:

$250,780 100% conversion
$288,929 0% conversion

The difference is the tax on the 401k withdrawals needed to cover expenses before RMD's. I wasn't accounting for the tax on that amount. Oops. I think I have too many spreadsheets and variable. $1.8M with a paid off house = FAAAT FIRE, that's the only number I need.
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Old 12-18-2019, 11:06 AM   #353
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But don't forget, someone still needs to pay the tax on the money left in the IRA in the 0% conversion case, unless you bequeath it to charities. Some may say their heirs should be grateful for anything they get, taxed or not. I think it's foolish not to do some estate planning to reduce heirs taxes. Also, you died with money left in a tax deferred account that you couldn't spend from, so it's not like you optimized your own situation.

If your heirs seem likely to be in a lower tax bracket than you are in retirement, it may make sense to let them pay the taxes. But now they have to withdraw it all in 10 years, so that will likely bump up their tax bracket if the amount left is significant.
Personally, I've done a lot of estate planning, but I might have to draw the line on trying to figure out the tax implications of my bequest to each of my 3 kids (and grandkids). I'm having a hard enough time trying to figure out how much conversions help me (and DW)
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Old 12-18-2019, 11:33 AM   #354
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Personally, I've done a lot of estate planning, but I might have to draw the line on trying to figure out the tax implications of my bequest to each of my 3 kids (and grandkids). I'm having a hard enough time trying to figure out how much conversions help me (and DW)
My thought on that is to just use my own tax rate for the duration of the deferred tax account. That way if I live a long, long time, I've optimized my situation. And if I don't, I've at least acknowledged that they will have some tax on it and converted appropriately. It may or may not be accurate, but at least I haven't totally ignored the inherited tIRA tax implications, without making my calculations any more difficult than it already is.
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Old 12-18-2019, 01:54 PM   #355
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All of this "optimization" discussion is good, but people need to remember: Don't let the tax tail wag the investment dog, and that generally when you have to pay more taxes it means you have been successful. Don't lose site of that while one optimizes their tax situation.
When it comes to Roth conversions, it's really strictly a tax play, isn't it? It's just shuffling money from one account to another to try to reduce taxes. In this case the tax tail is the only factor in play.
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Old 12-18-2019, 02:40 PM   #356
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+1 When I do my Roth conversion it goes into the same ticker that it was in in my tIRA... so no real investment implications.

And you are right.... it is principally a tax arbitrage play, with a minor second-order-effect tax benefit if you use taxable funds to pay for the tax in that that money is tax free from that point onward. I did an example recently and that minor benefit at the end of 30 years at a 7% investment earnings rate and 20% tax rate was about 7%.
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Old 12-18-2019, 02:56 PM   #357
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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.
You might want to look at "amount spendable after tax" rather than "taxes paid."

E.g., Roth will usually look better than traditional if one uses "absolute amount of tax paid" as the measure, because a smaller amount of tax is paid at contribution because the contribution amount is relatively small. When, years later, a traditional withdrawal is made, the absolute tax amount may be higher (due to investment growth and corresponding larger withdrawal amount) but what matters is the amount left after tax.
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Old 12-18-2019, 03:04 PM   #358
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In my own situation, I'm in the marginal 12% bracket now and when I'm taking RMD's I'll be in the marginal 22% bracket. BUT, very little of my income (at age 70) will be in that 22% bracket, the vast majority will be taxed at an effective rate of less than 10%. You really have to look at the actual taxes paid, not just the marginal rate of the last taxed dollar.
Correct, one should not look at the marginal rate on a single dollar unless one is looking at a decision involving only that single dollar.

Given the situation you describe, however, it is indeed the 22% marginal in the future that you should compare with the 12% today.

That's because even if you do nothing now you will be paying 22% on some portion of your income. If you contribute to traditional now and save 12%, your future traditional balance and thus your RMD will increase (compared with doing nothing now), causing you to pay 22% on that increase.

Does that make sense?
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Old 12-18-2019, 03:05 PM   #359
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When it comes to Roth conversions, it's really strictly a tax play, isn't it? It's just shuffling money from one account to another to try to reduce taxes. In this case the tax tail is the only factor in play.
It really is that simple.
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Old 12-18-2019, 03:22 PM   #360
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Correct, one should not look at the marginal rate on a single dollar unless one is looking at a decision involving only that single dollar.

Given the situation you describe, however, it is indeed the 22% marginal in the future that you should compare with the 12% today.

That's because even if you do nothing now you will be paying 22% on some portion of your income. If you contribute to traditional now and save 12%, your future traditional balance and thus your RMD will increase (compared with doing nothing now), causing you to pay 22% on that increase.

Does that make sense?
That makes sense, but I'm not trying to decide if I want to contribute now.

I'm trying to decide if I want to make conversions into the 22% bracket now when potentially only a small amount of RMD's will be taxed at 22% in the future. I suppose if I had other income (non RMD) that takes up the standard deduction and the 10% and 12% brackets when I'm 70, then it would be a no doubter to convert money in the 22% bracket now. That's not the case. We'll only have SS. The standard deduction and the 10% bracket will take care of most of the Social Security income. A large chunk of our RMD's will be taxed at 12% - even if we do nothing.

Of course the widow/widower tax rate is a different problem to figure out.
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