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Roth Conversion Tax Part 2
Old 11-22-2006, 11:29 AM   #1
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Roth Conversion Tax Part 2

Please Check out the "Roth Conversion Tax" thread in the "Fire and Money" Board for the background to this post:

Hi ESR Bob

Thanks you for your reply and for sharing your opinions - they really do address my concerns.

One thing you say that is a bit unclear to me is:

"simply leave the taxes your pay out of your budget, SWR calcs etc. as a one-time transaction"

Do mean to not count the yearly conversion tax payment as part of your annual SWR spending amount? And what do you mean when you say to somehow treat it as a "one-time transaction?" I'm planning a partial conversion every year for the next 10 years unti1 I reach age 701/2, so that's a "TEN-time" transaction for me. What am I not understanding ab0ut what your saying here? Could you please clarify it?

Let's say you do count your total TIRA balance as part of your net worth, with the understanding that MRD taxes will have to be paid starting at age 70 1/2. And let's say that you decide to reduce these tax payments by paying a smalller conversion tax every year starting age 60. Woudnt those conversion tax payments have to part of your annual SWR spending under these assumptions?

The good news is that if you ask Firecalc to project a 30-year plan, and include in it a yearly tax payment that stops after the first 10 years (as a "spending increase" for years 1 - 10 and then a "spending decrease" of the same amount for years 11 - 20), the calcuator reduces your annual SWR by an amount that is roughly HALF of the tax payment.

If the effect on annual SWR spending is only about half of the nominal amount, you'd actually have to reduce your annual inflation-adjusted spending by much less (around 1/2) than the actual tax payment. This is because the conversion plan stops 10 years into the 30-year plan. Do I have this right? It makes a significant difference in the conversion tax's effect on your future purchasing power! If 10 years of tax payments only reduces your SWR by 1/2 the annua1 tax payment amount spread over 30 years, that really makes a much stronger case to go forward with this sort of conversion program, doesn't it? I go into this in more detail in this thread:

Is this a correct use of Firecalc? Thanks for any and all feedback on this Roth Conversion issue and the way I'm using the Fireca1c here.
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