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Old 10-21-2019, 03:55 PM   #141
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This isn't like social security though. Not at all. With social security, the payments stop with your death, so the breakeven point matters as to whether taking early or late is better.

With conversions, you money lives on after your death and any unconverted pre-tax funds continue to get taxed. It doesn't matter that you have to reach far into the future, the important thing is to try to pay the least amount of taxes over the duration of the pre-tax funds, until they are drained.

The important things about retirement money is to not run out in your lifetime, to leave as much as you can to heirs, and/or to be able to spend more, right?

With social security, the breakeven is important because if you die before the breakeven it would be better wrt the above things to have started SS early, but if you die past the breakeven it would be better to start SS late.

Now let's look at the conversion of pre-tax to Roth issues. Spending is not a factor because you can't spend pre-tax money. You have to withdraw or convert it to be able to spend it. If you defer conversion, and die before the so-called breakeven, you may leave your heirs a larger dollar amount, but you also leave them a larger tax liability. So it really doesn't matter which side of the break even you die on, because with any pre-tax money you pass on, you also pass on the tax liability on it. What you really want to do is for the least amount of taxes to be paid over the duration of the pre-tax fund. If that means converting aggressively early because other things such as SS and pensions push it into a high tax rate later, do it.

The exception to this is if your heirs will be in a lower tax bracket than you are, and leaving them as much as possible is your priority and you figure it is very unlikely you will run out. In this case, converting less aggressively works out better.

The other thing that favors aggressive conversion is the death of a spouse, which puts you into the higher tax rates of a single filer.
It is like social security only in the way I stated.
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Old 10-21-2019, 03:59 PM   #142
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Let me try one more time to say why it doesn't matter how long you live.

Let's say I figure out what my optimal conversion plan is if I live to be 100, but I actually die tomorrow.

If I do my yearly conversion today, my heirs get a little less because I've paid the taxes, but they also have a lower tax liability so the net after tax is, they inherit the same amount as they would if I had planned to do my conversion next week, and didn't do it before I died.

See? The breakeven point just doesn't matter, because the tax liability gets passed on with the pre-tax money. If I convert today and die tomorrow, I've paid more taxes in my lifetime, so I didn't "break even", but I'm dead, so it doesn't matter. My heirs come out the same because even though they inherited a little less money, they have a smaller tax liability because I paid the tax on the converted amount.
There is no misunderstanding about that on my part. I'm just making a different point. My point is that the benefit you're describing, if any, goes to your heirs not to you if you die before it is realized by you.

People may differ on whether lower potentially lower taxes to heirs are an important consideration. That has been Illustrated in this thread.
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Old 10-21-2019, 04:03 PM   #143
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+1. A lot of good insights here. Some apply to us, some don't - but all worthy of consideration to decide what each of us prioritize.

And to reiterate, my charts are based on future tax rates (Soc Sec & Medicare benefits) that I believe are overly optimistic as well (revert to prior tax code on TCJA expiration). I believe taxation will get worse, but I wouldn't know how or when specifically. IOW, the total tax savings from Roth conversions will probably be greater than my posts state.
You make several very good points here. In my mental analysis, I have assumed static rates.

I tend to believe that perhaps the greatest reason to do Roth conversions is as a hedge against the death of one spouse, and the resulting higher single tax rates. I think it is the most compelling reason because we know tax rates will be much higher in that case, even if other tax rates do remain static as I have assumed in my mental analysis.
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Old 10-21-2019, 04:04 PM   #144
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And just to make it even harder on myself, the difference in final portfolio ending balance at DW age 97 is less than 6% higher with aggressive Roth conversions vs NO Roth conversions at all and the unofficial "breakeven age" is 90! After over 40 years accumulating toward a higher portfolio value, the idea of voluntarily siphoning off a big chunk upfront is a mental challenge for me at least. And the overriding goal is to maximize the portfolio, not minimize taxes. Huge difference in taxable to heirs, but again not a priority for us.

For anyone who didn't see the tax summary, overall taxes were reduced by 31% and the breakeven age was about 84.

It's never easy, though the widow tax benefit and the likelihood of (much) higher future tax/CG rates, and secondarily the heir/charity tax benefits are worthwhile considerations.
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Old 10-21-2019, 04:11 PM   #145
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And just to make it even harder on myself, the difference in final portfolio ending balance at DW age 97 is less than 6% higher with aggressive Roth conversions vs NO Roth conversions at all and the unofficial "breakeven age" is 90! After over 40 years accumulating toward a higher portfolio value, the idea of voluntarily siphoning off a big chunk upfront is a mental challenge for me at least.

For anyone who didn't see the tax summary, overall taxes were reduced by 31% and the breakeven age was about 84.

It's never easy, though the widow tax benefit and the likelihood of (much) higher future tax/CG rates, and secondarily the heir/charity tax benefits are worthwhile considerations.
It seems to me that the lower rate Roth conversions should yield both the highest percentage tax savings and the quickest payback. If that is in not in fact the case then there's something I don't understand about the software
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Old 10-21-2019, 04:23 PM   #146
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It seems to me that the lower rate Roth conversions should yield both the highest percentage tax savings and the quickest payback. If that is in not in fact the case then there's something I don't understand about the software
Perhaps it is because the difference between paying 22% vs. 24% is slight, but the amount that can be converted at 24% is so much greater than at 22% that future RMDs at higher rates aren't much affected by the 22% amount compared with the 24% amount.
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Old 10-21-2019, 04:24 PM   #147
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Perhaps it is because the difference between paying 22% vs. 24% is slight, but the amount that can be converted at 24% is so much greater than at 22% that future RMDs at higher rates aren't much affected by the 22% amount compared with the 24% amount.
I was referring to the range from 10-22%.
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Old 10-21-2019, 04:49 PM   #148
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There is no misunderstanding about that on my part. I'm just making a different point. My point is that the benefit you're describing, if any, goes to your heirs not to you if you die before it is realized by you.

People may differ on whether lower potentially lower taxes to heirs are an important consideration. That has been Illustrated in this thread.
That's fine. I just think breakeven is a real issue with SS, but not so with conversions. With SS, if you delay taking it but die early, you lose. You miss out on those early benefits. With conversion, if you convert more early and die early, it's true that you paid more taxes in your own lifetime, but you didn't run out of money, and your heirs get the benefit of taxes being paid. So by converting aggressively, you both protect yourself against longevity (living past the "break-even") and give your heirs the tax benefit. You really are sacrificing nothing by paying the taxes early, so it doesn't really matter whether you have heirs you care about or not.

So while its true that it's like SS in that there's a breakeven point that you personally reap the benefit from if you outlive it, as you said, it's a pretty meaningless aspect for Roth conversions. Nobody loses (financially) if you don't reach the breakeven point
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Old 10-21-2019, 05:17 PM   #149
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Perhaps it is because the difference between paying 22% vs. 24% is slight, but the amount that can be converted at 24% is so much greater than at 22% that future RMDs at higher rates aren't much affected by the 22% amount compared with the 24% amount.
Yep, I can convert almost three times as much at 24% as I can at 22%.
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I was referring to the range from 10-22%.
10% and 12% are non starters for us, so I haven’t modeled either.
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Old 10-21-2019, 07:21 PM   #150
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Yep, I can convert almost three times as much at 24% as I can at 22%.

10% and 12% are non starters for us, so I havenít modeled either.
Ok. That is the part I missed on rates.
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Old 10-21-2019, 08:15 PM   #151
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Midpack, what does your modeling show in terms of conversions if you become single on the near future? Would you continue conversions?
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Old 10-22-2019, 03:17 AM   #152
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Midpack, what does your modeling show in terms of conversions if you become single on the near future? Would you continue conversions?
Good suggestion. I’ll run a couple scenarios with one of us becoming single with and without a Roth conversions.
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Old 10-23-2019, 01:33 AM   #153
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Does the modeling advance the tax brackets by some adjustable amount, or is the assumption that all future dollars will be compensated for equally so everything is in todays dollars? I’m not sure if I am clear on this, so to word it another way, for example : if I have a fixed non COLA income of $100k forever, then my taxable IRA withdrawals will increase every year to COLA. BUT the tax brackets typically increases each year as well, so while my $100k after deductions may be the 22/25 bracket today, in 20 years it would be 15% as well as some portion of the IRA withdrawals.

I’m not even sure this makes much/any difference except in my mind I was thinking “If I do no conversions, and use my Roth early on so my taxable is only $100k, eventually I will run out of Roth, but by then if my tIRA (most or all) is only taxed at 15%, because the brackets have advanced, then it makes no difference and might even be better than converting today at 22(25)% because taxed at 15% in 25 years “

For instance, using the tax calculator on moneychimp, if I input $100k in tax year 2000, my tax is roughly $23k. If I input the inflation equal of $149k in tax year 2019, the tax is still roughly $23k. (I know, bracket percentages have changed as well as levels) Of course, the COLA equal of $23k in 2019 is $15.5k in 2000, so to my year 2000 self, I have paid almost a third less tax by doing nothing except letting the brackets change.
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Old 10-23-2019, 06:04 AM   #154
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Does the modeling advance the tax brackets by some adjustable amount, or is the assumption that all future dollars will be compensated for equally so everything is in todays dollars?
If youíre asking me, there are 5-6 tax options including 2017 inflation adjusted, TCJA then 2017 rates starting in 2026, rising rates, worst case and a couple others. Iíve been using TCJA>2017 even though I donít think itís realistic, rates will get worse. I just started studying the others last night. But as far as I can see, the user canít makeup their own custom future tax scheme.
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Old 10-23-2019, 06:32 AM   #155
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I think Perry is referring to the fact that tax brackets are adjusted annually for inflation and whether the program includes that and if so, if it is user defined or not.
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Old 10-23-2019, 07:46 AM   #156
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Yes, exactly. From what I can tell, some may, & some don’t, since many are just portfolio growth models (like FIRECALC) and leave taxes up to oneself. It is a detail that is really only significant if you have a substantial percentage of your income from fixed, nonCOLA or self directed sources. If your income is entirely COLA income or inflation increased (like the 4% rule) portfolio derived, then it is a wash. In my case, already retired and ages 62 (for all practical purposes) & 67, with a lot of non COLA pensions, the withdrawals increases to compensate for inflation on the original withdrawals plus provide COLA for the non COLA (portion of) pensions.

FWIW, I too would model on assuming tax brackets increase in rates. I view current rates as a timely opportunity but not sustainable.
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Old 10-23-2019, 08:42 AM   #157
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Midpack, you said "I modeled converting to 12%, 22%, 24% and 32%, each was progressively better than no conversions. But there was no additional in 32%...". Was converting to fill 32% bracket any worse than filling 24% or just no additional benefit ? I had an adviser recommend total conversion in one year no matter how high the tax bracket, as long as paying tax from non IRA account. I would love to be totally out from the tax overhang by converting past the 24% bracket, but right capital software modeling stops at the 24% bracket.
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Old 10-23-2019, 08:48 AM   #158
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Midpack, you said "I modeled converting to 12%, 22%, 24% and 32%, each was progressively better than no conversions. But there was no additional in 32%...". Was converting to fill 32% bracket any worse than filling 24% or just no additional benefit ? I had an adviser recommend total conversion in one year no matter how high the tax bracket, as long as paying tax from non IRA account. I would love to be totally out from the tax overhang by converting past the 24% bracket, but right capital software modeling stops at the 24% bracket.
I didn’t delve into exactly why but 32% was trivially worse than 24%. The software doesn’t seem to optimize, it just brute force fills to the top of the bracket each year until your fully converted. So it converted faster than necessary when I specified 32%. Not ideal? But you can somewhat optimize by trying each bracket given the years to 70, as I did. In practice if I proceed I’ll convert to complete at age 70, the equivalent of a few months slower than the software shows for 24%, the best brute force option for our situation.
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Old 10-23-2019, 09:37 AM   #159
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I went back to i-orp keeping unlimited conversions as the setting. My current situation calls for filling the 24% bracket with conversions. If I increase non IRA asset levels it fills the 32% bracket. So you are likely correct that going into the 32% bracket doesn't hurt much as long as you are paying the tax from non IRA assets. Thank you for your help. Keep posting as you get new info ! It really helps.
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Old 10-23-2019, 12:02 PM   #160
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I had my 1 hour "expert help" session with Income Strategy this morning, best $125 I've ever spent on financial services. It was extremely helpful. I had unlocked some of the tools, but there were others I hadn't found yet - now I am really armed. You can vary almost anything you can think of, including several set future tax rate changes PLUS the rate of change of each as well. I am NOT going to go through every one of the settings, many/all will be self explanatory, but see pic attached below for an idea. And there are other toggles and settings elsewhere, including how you can set how your AA evolves over the course of your retirement in five phases (I hadn't caught that) down to individual holdings vs general asset classes. It handles spending exceptions, income exceptions, pensions, annuities, risk tolerances and it does Soc Sec optimization. It's quite a piece of software, but it takes a while to understand and you have to be a little savvy.

The software allows you to control inflation adjustment very independently, tax inflation, spending inflation, Medicare inflation, SS annual increases, etc.

Every question I asked was well answered, the advisor has done help sessions with "thousands of clients."

To my surprise, the advisor talked about the emotional side of planning as well. For example, he pointed out - though I could maximize our portfolio total value and reduce our taxes considerably by converting to 24% - the difference in portfolio total value in converting to 22% was pretty small, less than 1%, even though taxes alone would be reduced quite a bit. He fully understood why a retiree might want pass on converting everything in 5 years at a much higher tax rate than ever before or after and 'settle' for a slightly less aggressive conversion rate. And in fact the software had already recommended converting to 22% even though portfolio total value was a little higher at 24% - just to smooth out taxes a little. So this is not just software that just blindly spits out the numeric best, though it shows that too you along with more than a dozen other strategies. And the user can build their own unique strategies as well (like I did). Yes, all the data/reports are underlying the software, but the advisor offered more than just a truckload of numbers.

So I am thrilled with my experience with Income Strategy, and the value provided - but I am NOT necessarily recommending it's right for others, that's for each individual to decide. For as little as $20/mo, you can get one hell of a value if you're moderately savvy enough to figure it out. To be honest, I'm probably middle of the road for ER.org - more sophisticated than some here, but (much) less than others (I can name many). If you're a complete novice looking for answers, you'll be lost with the software alone, and I would not recommend it unless you pay for several many hand holding sessions at $125/hour.

He was impressed with how well prepared I was, that's thanks in part to the insights many of you provided here - IRMAA, widow taxes, etc. He told me we'd gotten much further in this first session than he usually gets with most clients.
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