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02-07-2020, 04:57 PM
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#41
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Full time employment: Posting here.
Join Date: Mar 2006
Posts: 524
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Quote:
Originally Posted by Gumby
You can't Roth convert an RMD. You can convert an amount over and above your RMD.
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And, you can use part/all of what's left of the RMD after taxes to pay part/all of the taxes on the conversion.
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02-07-2020, 05:10 PM
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#42
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Administrator
Join Date: Apr 2006
Posts: 22,922
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Quote:
Originally Posted by Kwirk
And, you can use part/all of what's left of the RMD after taxes to pay part/all of the taxes on the conversion.
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Also a good point.
__________________
Living an analog life in the Digital Age.
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02-08-2020, 06:48 AM
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#43
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Thinks s/he gets paid by the post
Join Date: Dec 2014
Posts: 2,509
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Quote:
Originally Posted by Midpack
I guess this is an asset placement thread now...
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perspective is a very personal thing and is partially dependent on the different situation we find ourselves in. You did a lot of analysis to come up with the plan you are trying to follow. Has anything changed? Did the the law changes cause changes in your plan?
Have you found a flaw in your plan?
You should monitor and adjust your plan as need be... cold feet -- put on warmer socks.
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02-08-2020, 07:01 AM
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#44
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2006
Location: Washington, DC
Posts: 11,314
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On the asset placement side of this thread I keep only equities in taxable all bonds in tax deferred plus the equities needed to archive my AA. But I read a recent article about the tax implications of asset placement that pointed out some nuances to consider.
__________________
Idleness is fatal only to the mediocre -- Albert Camus
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02-08-2020, 07:17 AM
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#45
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jan 2008
Location: NC
Posts: 21,150
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Quote:
Originally Posted by bingybear
perspective is a very personal thing and is partially dependent on the different situation we find ourselves in. You did a lot of analysis to come up with the plan you are trying to follow. Has anything changed? Did the the law changes cause changes in your plan?
Have you found a flaw in your plan?
You should monitor and adjust your plan as need be... cold feet -- put on warmer socks.
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My analysis was two months ago. I’ll be converting for 6-7 years, so I can reconsider and stop converting annually. Of course I’ll also reconsider any substantial change in tax laws or other regs, though higher tax rates only make converting more attractive.
__________________
No one agrees with other people's opinions; they merely agree with their own opinions -- expressed by somebody else. Sydney Tremayne
Retired Jun 2011 at age 57
Target AA: 50% equity funds / 45% bonds / 5% cash
Target WR: Approx 1.5% Approx 20% SI (secure income, SS only)
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02-08-2020, 07:26 AM
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#46
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,184
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Quote:
Originally Posted by donheff
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Unless I missed it, this article talks about asset allocation between taxable and a Roth only. It briefly mentions the tIRA instead of a Roth by saying that you'd have to deduct the taxes, but doesn't do any calculations or analysis on that.
There are other nuances not pointed out, like the stepped up basis that heirs will get upon your death, and that charities would get if you donated those assets rather than case.
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02-08-2020, 11:27 AM
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#47
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Thinks s/he gets paid by the post
Join Date: Jan 2018
Location: Elyria, OH
Posts: 1,937
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Quote:
Originally Posted by Midpack
I guess this is an asset placement thread now...
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I just want to say that I appreciate all the analysis you do and your willingness to share with us.
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02-08-2020, 12:34 PM
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#48
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,184
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Quote:
Originally Posted by bingybear
I'm in my third year of higher conversions as previously planned and still under 59.5... recent law changes have made me consider changing my plan. I expect there will be some adjustments.
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Which changes specifically have you considering adjustments, and why?
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02-08-2020, 05:37 PM
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#49
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Moderator
Join Date: Oct 2010
Posts: 10,621
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Nice thread topic (OP, not the OT drift). So many other posts on Roth conversions were centered on 'bird in the hand' tax minimizing. Lots of people not going with the earlier tax payments that i-orp was saying was better. I'm 'making' so much on PTC, I'm not doing aggressive conversions, but will go there when that ends.
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02-09-2020, 06:07 AM
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#50
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Feb 2006
Location: Washington, DC
Posts: 11,314
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Quote:
Originally Posted by sengsational
Nice thread topic (OP, not the OT drift). So many other posts on Roth conversions were centered on 'bird in the hand' tax minimizing. Lots of people not going with the earlier tax payments that i-orp was saying was better. I'm 'making' so much on PTC, I'm not doing aggressive conversions, but will go there when that ends.
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+1 (even though I was one of the OT posters) I have a question about iOrp. When I ran it years ago IIRC it recommended which pot to pull expenses from but I don't recall specific suggestions for Roth conversions. Does iOrp currently offer conversion recommendations.
__________________
Idleness is fatal only to the mediocre -- Albert Camus
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02-09-2020, 06:42 AM
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#51
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Thinks s/he gets paid by the post
Join Date: Feb 2009
Location: Cville
Posts: 1,597
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I’ve been following these threads for couple months now and I’m following midpack’s course. Funny strange that I started thinking on this problem as the threads started. Made an initial conversion last year and looks like it worked like I expected, except I paid too much in estimated taxes.
This year I was looking at Boeing stick that has declined in value, and managed to convert the shares while under $320. That should be most of my conversions for 2020. The one thing I haven’t seen discussed is looking at my TIRA and converting those assets that have had the poorest performance. It also reminded me to look at the individual stocks and assess if they still belong in our portfolio.
Have to agree that the single tax filing rates and potential for higher effective rates are two good reasons to convert. Some of my conversions will be taxed at 24%. We also have the situation where the retirement income we planned for is starting to come in, DW SS in 2019, our rental property is paid off and we have a check from that each month. In a few years I’ll start SS and that will kick up our taxable income. So, taking conversion hits now seems to be a no brainer.
Most importantly, these decisions are unique to each situation. I’ve spent lots of time running different plans and will continue to revisit with each year’s income and tax situation.
__________________
FIRE 31 Aug, 2018 - Always leave every place better than you found it, always give more than expected or Due
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02-09-2020, 07:00 AM
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#52
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Thinks s/he gets paid by the post
Join Date: Sep 2006
Posts: 1,743
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Quote:
Originally Posted by donheff
Does iOrp currently offer conversion recommendations.
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Extended ORP gives you the options under retirement plans to select from 0 conversions to unlimited.
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02-09-2020, 08:53 AM
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#53
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Moderator
Join Date: Oct 2010
Posts: 10,621
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Unlimited will give you the "optimal" plan (in quotes because all models have limitations). But you can run with various levels of limitations on conversions to see how much the earlier conversions are gaining you. So this 'sensitivity analysis' might away you from unlimited if the extra savings are not large enough to justify having a bird in the hand.
And my standard warning is to put the same value (your average equity % allocation) in all three tax buckets, that way taxes drive the model, not expected ROR.
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02-09-2020, 09:21 AM
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#54
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Thinks s/he gets paid by the post
Join Date: Dec 2014
Posts: 2,509
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It looks like IORP won't process the secure act 10 year window on non-spousal inherited IRAs
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02-09-2020, 09:50 AM
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#55
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Thinks s/he gets paid by the post
Join Date: Sep 2006
Posts: 1,743
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Quote:
Originally Posted by sengsational
And my standard warning is to put the same value (your average equity % allocation) in all three tax buckets, that way taxes drive the model, not expected ROR.
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I input my exact equity allocation % per account (taxable, tax deferred and tax free) to get the tool's optimum analysis.
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One Tax strategy with Capital Gains and Roth
02-09-2020, 12:29 PM
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#56
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Full time employment: Posting here.
Join Date: Mar 2016
Location: An island off the coast of Florida. (Ok - if you really need to know it's Vero Beach)
Posts: 633
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One Tax strategy with Capital Gains and Roth
After reading Midpack’s threads, other blogs, IRS publications (snore) and time with lookups and spreadsheats, I developed a personal strategy to fit Roth Conversion with LTCG. All of our cases are unique, but I think there are some elements that apply to most of us doing a Roth conversion, MFJ, and having income streams that can be ‘turned on’, while optimizing Long Term Capital Gains. These may seem obvious to those of you with experience, but the fog only started clearing for me recently. Please critique or add your thoughts.
· Overall strategy is to pay the lowest allowed taxes over a retirement income and maximize assets. Generally, this means converting now to a Roth account at a marginal rate less than or equal to what is otherwise expected for the future desired income level, and letting the Roth grow tax free. Future tax rates are likely to be higher than present. Duh. My preliminary optimization outcome is to convert 40% of my IRA to Roth. That gives me a 17% tax rate during Roth conversions, 4% effective tax rate during LTCG conversion, and 8% effective rate until the bitter end.
· iORP does not model the connection between your capital gains tax rate and your personal income tax to compute your capital gains tax rate! Proves the point to understand the model and tax code; however you can artificially add a tax rate. Additionally, iORP harvests LTCGs at the same time of Roth conversions, which is tax inefficient – these activities should be sequential not concurrent. The IRA is also spent early with no reserves for later. Plus side: iORP does have the utility of ‘is your spreadsheet in the ballpark?’, it shows the time value of money, and SS scenarios.
· Ordinary income includes: pension, wages, SS, SSDI, 401k and IRA withdrawls. Up to the standard deduction of $24,800 this year is taxed at 0%. Therefore, it is desirable to fill up the remaining (if any) shelf space in the standard deduction with IRA withdrawls.
· LTCG ‘floats’ on top of ordinary income. It is tax inefficient to fill any remaining standard deduction shelf space with LTCG since ordinary income can be used at the 0% rate and the $24,800 in LTCG can otherwise be applied to a future tax year (stretching out the LTCG 0% tax rate harvest). IRA withdrawls to the standard deduction amount coupled with LTCG harvesting results in the first $104,000 being tax free (an incredible deal). Therefore, it is not be advantageous to convert all of an IRA to Roth.
· Consider leaving some of the IRA intact for a catastrophic shock medical issues that can be deducted from income at a later at the 0% tax rate. If you convert to Roth prematurely, you may have 22% less resources for the emergency.
· Converting an IRA to a Roth during a year harvesting LTCG is tax inefficient if income exceeds the standard deduction. Every IRA dollar is taxed at ordinary income rates, and above $24,800 pushes a LTCG dollar out of the 0% tax bracket and into the 15% bracket. Every IRA dollar converted above the standard deduction therefore has an effective tax rate of 25, 27 or even 37%. To get full advantage of the LTCG tax rate of 0%, ordinary income must not exceed the standard deduction in that tax year.
· For the same reason, other income streams such as pensions, social security and wages that are collectively more than the standard deduction will result in pushing up the effective tax on LTCG harvesting to 25, 27 or even 37%. The intentional delay of pensions and Social Security that push above standard deduction will optimize the tax utility of LTCG harvesting, potentially increase mortality credits in a pension, and optimize SS income (and reducing future income taxes since SS is taxed at 85%).
__________________
DW and I are 62/62. 100% equities 31 years. FIRE'd August 2019. Non-cola pension cashed out Dec 2022 before segmentation rates reduced balance - rolled to MM fund, max SS for DH and DW at FRA. Mega retiree health available. IRA rollover from 401k Jan 2020 for NUA treatment. LTCG for 3 years. Next few years will be IRA cash withdrawals or until Stock Market recovers. AA 33% stocks, 67% MM and T-Bills. Rising equity glidepath.
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Some other random thoughts, facts, oddball insights
02-09-2020, 12:31 PM
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#57
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Full time employment: Posting here.
Join Date: Mar 2016
Location: An island off the coast of Florida. (Ok - if you really need to know it's Vero Beach)
Posts: 633
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Some other random thoughts, facts, oddball insights
· TheIRS indicates that NUA (Net Unrealized Appreciation) treated gains do not trigger NIIT. I would imagine the stock gain after NUA conversion date is another matter.
· It is risky to maintain a highly appreciated stock position, but the tax benefits of such a brokerage account for tax treatment bears consideration.
· IRMAA for Medicare lookback starts at the year you turn 63; the penalty begins at $174,000. It is advantageous to complete Roth conversions before this age, otherwise risk a premium Medicare charge.
· The 32% income tax bracket starts at $326,600 – which is pretty much the highest conversion point for us mortals. Alternate Minimum Income tax is about that same level of the stratosphere. I wish I had this problem, but sadly no.
· Going from the 22 to 24% tax bracket for conversions may be considered efficient when considering the tax free compounding of the Roth in addition to speculating on future tax rates.
· I ran spreadsheets to look at outcomes for: converting Roth first 2-3 years, harvesting LTCG until 70, finishing off LTCG after mandatory start of SS, Roth withdrawls with SS and IRA withdrawls, death of a spouse at 80 years old.
· The key optimizing trick for me was guestimating my marginal tax rates in my 70’s, to help understand how much IRA to covert to Roth, which turned out to be only 40%.
· Just for fun later on a rainy day, I will see if accelerating LTCG harvest produces better tax harvesting.
Caveat - I don’t have a cited source to tie these elements of a strategy together (have not even seen this all in one sock before), and I am not a CPA. I have not even slept in a Holiday Inn recently.
Great thread Midpack – really got me going on developing a personal strategy for Roth conversions starting next year. I will have to run the recommended pay software to check my spreadsheets and assumptions.
__________________
DW and I are 62/62. 100% equities 31 years. FIRE'd August 2019. Non-cola pension cashed out Dec 2022 before segmentation rates reduced balance - rolled to MM fund, max SS for DH and DW at FRA. Mega retiree health available. IRA rollover from 401k Jan 2020 for NUA treatment. LTCG for 3 years. Next few years will be IRA cash withdrawals or until Stock Market recovers. AA 33% stocks, 67% MM and T-Bills. Rising equity glidepath.
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02-09-2020, 12:34 PM
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#58
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Nov 2010
Location: Sarasota, FL & Vermont
Posts: 36,201
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The other factor to consider is that upon your demise taxable accounts will likely get a stepped up basis and all unrealized gains are effectively untaxed, making any use of the 0% LTCG rate as wasted.
__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.
Retired Jan 2012 at age 56
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02-10-2020, 11:09 AM
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#59
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Moderator
Join Date: Oct 2010
Posts: 10,621
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Quote:
Originally Posted by Corporateburnout
I input my exact equity allocation % per account (taxable, tax deferred and tax free) to get the tool's optimum analysis.
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And that's fine if what you actually will do (in "real life") what the i-orp model is doing when it has those inputs.
The problem that I perceive is that many people won't end up doing what the model does (if they set the model inputs to have different equity percentages in each tax category).
If you periodically rebalance to your target asset allocation across all tax categories, then you're not doing what the model is doing. Since many of us rebalance across all tax categories, the option I always recommend is to take away any "incentive" the model has to spend at a higher rate out of a tax bucket with a lower expected return (generally, the one with the lowest equity allocation), thus leaving only the 'lever' (the one of taxes) for the optimization to work on.
Maybe you have three different sets of asset allocation targets (one set of targets for each one (taxable, tax deferred and tax free), and you periodically rebalance back to those. Then you're doing what the model is doing and your solution is good (reality matching model). But in all of the asset allocation talk here, I don't recall seeing any people reporting that's what they do.
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02-11-2020, 03:39 PM
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#60
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Thinks s/he gets paid by the post
Join Date: Jun 2005
Posts: 4,391
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For those of you doing Roth conversions...
Where do you take the money from to pay the conversion tax. Is it from cash you had sitting around ? Or do you take money out of other investments, pay the tax due on the money you took out, and then use what's left to pay the Roth conversion taxes.
What's the scheme you all use ?
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