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Old 02-11-2020, 03:46 PM   #61
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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 ?
Through 2019 I carried a 5% allocation to cash in an online savings account so it wasn't of a consideration. At the end of 2019 I used that cash allocation to pay off our mortgage and small auto loan.

For 2020 it'll probably come from cash just sitting around or perhaps from tIRA withdrawals with 100% withholding that I do in lieu of paying estimated taxes. Since money is fungible it's not a big worry.
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Old 02-11-2020, 03:51 PM   #62
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Originally Posted by MasterBlaster View Post
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 ?
I have not yet started conversions, but this is my plan:

1. Decide how much I can convert (i.e - to keep AGI under the IRMAA Level 1 Surcharge level). For the sake of this exercise, assume that is $75k.

2. Calculate the taxes on that amount of conversion. In my case, 22% federal and 6% state. Using the assumption of $75k conversion, that is $21k in taxes (16.5 fed, 4.5 state).

3. Direct Vanguard to convert $54k directly from tIRA to Roth.

4. Direct Vanguard to distribute from tIRA $21k, and withhold $16.5k to the feds and 4.5k to the state. i.e. - All withheld; I get no cash in hand.
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Old 02-11-2020, 03:57 PM   #63
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Originally Posted by MasterBlaster View Post
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 ?
taxable account.. much of it is from distributions that I don't reinvest
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Old 02-11-2020, 04:06 PM   #64
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It's part of cash flow planning. Just like I have to have cash available to pay for groceries, gas, utilities, etc, I know this is coming and make a plan to have cash for that. In the past I've sold investments in advance to make sure I'd have cash when the tax bill came. Now I've got a pretty good stash available in MMs and a CD ladder that I should be able to go a few years without selling more investments.
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Old 02-11-2020, 04:41 PM   #65
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I held off on any Cap Gains/rebalancing in 2019 and then rolled a chunk of my 401k in December to fill up the 24% tax bracket. I am at the top of my asset allocation threshold right now, so I will hold off till later in the year to figure out how much I will need to rebalance and/or roll over from my 401k to the Roth.
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Old 02-11-2020, 04:44 PM   #66
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For a source of funds for taxes, (and I’m only 2nd year into doing conversions) I’ve been using after tax funds. I have some CDs that were in case I messed up my budget and needed more income that I’ve been using.
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Old 02-11-2020, 04:52 PM   #67
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The reason I am taking a simultaneous tIRA withdrawal to pay the conversion taxes is because a withholding is considered to occur throughout the year, so I won't have to pay estimated taxes in advance of my end of year Roth conversion.
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Old 02-11-2020, 06:55 PM   #68
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I have not yet started conversions, but this is my plan:

3. Direct Vanguard to convert $54k directly from tIRA to Roth.

4. Direct Vanguard to distribute from tIRA $21k, and withhold $16.5k to the feds and 4.5k to the state. i.e. - All withheld; I get no cash in hand.
Are you sure that taking money out of a taxable IRA to pay conversion to a Roth is a step ahead. You are then paying taxes at the highest marginal rate.

I suppose you lock in the 22% federal tax rate. That could be a good thing. Or not.

The way I look at it, is that when I take taxable IRA money out it (what I take out plus SS) gets taxed at an average rate that is likely far less that your now marginal rate.

Good luck predicting future marginal and average tax rates though. The trend isn't looking so good considering all that debt and unfunded obligations. Still I'm betting that my future average tax rates will be less than current marginal rates.
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Old 02-11-2020, 07:31 PM   #69
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Are you sure that taking money out of a taxable IRA to pay conversion to a Roth is a step ahead. You are then paying taxes at the highest marginal rate.

I suppose you lock in the 22% federal tax rate. That could be a good thing. Or not.

The way I look at it, is that when I take taxable IRA money out it (what I take out plus SS) gets taxed at an average rate that is likely far less that your now marginal rate.

Good luck predicting future marginal and average tax rates though. The trend isn't looking so good considering all that debt and unfunded obligations. Still I'm betting that my future average tax rates will be less than current marginal rates.
This certainly illustrates the thought process of an early retiree living solely off of assets with no pension/SS. It's a bit of a mental exercise to come to grips that everything you buy is price + (income tax). The tough one is when it's Tax + Tax, even though you are making a trade off of 15% vs 22% or higher.
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Old 02-11-2020, 08:19 PM   #70
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Are you sure that taking money out of a taxable IRA to pay conversion to a Roth is a step ahead. You are then paying taxes at the highest marginal rate.

I suppose you lock in the 22% federal tax rate. That could be a good thing. Or not.

The way I look at it, is that when I take taxable IRA money out it (what I take out plus SS) gets taxed at an average rate that is likely far less that your now marginal rate.

Good luck predicting future marginal and average tax rates though. The trend isn't looking so good considering all that debt and unfunded obligations. Still I'm betting that my future average tax rates will be less than current marginal rates.
Our marginal rate will never, ever be less than 22%.
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Old 02-11-2020, 08:21 PM   #71
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I have not yet started conversions, but this is my plan:

1. Decide how much I can convert (i.e - to keep AGI under the IRMAA Level 1 Surcharge level). For the sake of this exercise, assume that is $75k.

2. Calculate the taxes on that amount of conversion. In my case, 22% federal and 6% state. Using the assumption of $75k conversion, that is $21k in taxes (16.6 fed, 4.5 state).

3. Direct Vanguard to convert $54k directly from tIRA to Roth.

4. Direct Vanguard to distribute from tIRA $21k, and withhold $16.5k to the feds and 4.5k to the state. i.e. - All withheld; I get no cash in hand.
+1 but you said it clearer.

No doubt that we will be paying 22% or more once SS and RMDs start... so I don't mind paying 22% but even with withdrawals to the top of the 22% bracket our effective rate on conversions/withdrawals is ony 17% (a blend of 0%-covered by standard deduction, 10%, 12% and 22%). [Before withdrawals/conversions our ordinary income is my small pension and is well below the standard deduction].

What I have done is limit myself to 12% as long as we have state income tax (about 5% for us) is at play... after that goes away in 2020 I'll increase to the top of the 22% bracket... and if it looks like rates will revert to 2017 levels I may even goose it to the top of the 24% bracket.
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Old 02-11-2020, 09:23 PM   #72
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While everyone's plans are totally viable I decided not to give a **** about conversions - and taxes in general. I already know that however I spend my money I won't have an issue with hitting my budget AND paying taxes. So I stopped caring. No heirs to worry about so whatever happens 30 years from now is of no relevance. Given how random US laws can be when relating to retirement funds I think we should just live in the moment instead of worrying about future tax rates.
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Old 02-11-2020, 09:29 PM   #73
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While everyone's plans are totally viable I decided not to give a **** about conversions - and taxes in general. .... Given how random US laws can be when relating to retirement funds I think we should just live in the moment instead of worrying about future tax rates.
Spoken by someone who has no heirs to plan for.... just sayin'
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Old 02-11-2020, 10:45 PM   #74
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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 ?
If you have money in taxable accounts, you should use those funds to pay the tax on conversion. It is effectively moving more money into the Roth. There is no down side to this.

If you do NOT have cash to spare, you must pay for the taxes out of the converted money. Mathematically (assuming no changes in marginal tax bracket), this is a wash. However, if your marginal rate changes, either from changes in law or filing status or other reasons, it can matter.

Personally, I am planning to convert (~aggressively but not tooo aggressively) on the assumption that DW will be filing as a single taxpayer some day.
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Old 02-12-2020, 09:38 AM   #75
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As a single person, I am at the top of the 22% bracket with pension and SS starting next month. In prior years I took out enough from TIRA to put me at the top of 22%. IRMAA starts at about the same point as the top of 22% bracket. No Roth conversions for me. I will be doing QCDs starting this year for several years which will lower eventual RMDs. I don't think there is much more I can do.
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Old 02-12-2020, 09:43 AM   #76
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While everyone's plans are totally viable I decided not to give a **** about conversions - and taxes in general. I already know that however I spend my money I won't have an issue with hitting my budget AND paying taxes. So I stopped caring. No heirs to worry about so whatever happens 30 years from now is of no relevance. Given how random US laws can be when relating to retirement funds I think we should just live in the moment instead of worrying about future tax rates.
On paper we seem to have excess funds, and no heirs - but there's no way you can be certain. So I'm doing Roth conversions along with managing our nest egg to the best of my ability, just in case. It doesn't take much effort, it's kinda fun and engaging, so why not? And we do have charities we'd like to give generously too in the end. YMMV obviously.
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Old 02-12-2020, 10:43 AM   #77
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True, the conventional advice is to pay the taxes from taxable funds so if you convert $100, $100 ends up in your Roth rather than $80 (or whatever).

When I had cash in taxable accounts and paid estimated taxes from that cash that is what I did.

More recently, after I turned 59 1/2, I have been using tIRA withdrawals with 100% withholdings instead of estimated tax payments.... and I used up all my taxable account cash to pay off my mortgage and car loan.... so from here on out I'll be converting $100, having $20 withheld and sent to pay taxes and $80 will go to the Roth.

If as is our plan out taxable equities pass to heirs tax-free because of stepped up basis, it shouldn't matter because to pay the tax from taxable funds I would have to sell shares and the gain would reduce my headroom for Roth conversions.
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Old 02-12-2020, 12:14 PM   #78
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+1 - 2020 is our first year of FIR (not E) and I ve been doing some tax planning so this thread is helpful. One's plans really do depend on many assumptions and family.
DH and I frequently talk about "If I die first scenarios....." mostly because we want to protect the spouse left behind.

We needed to stay under IRMAA in 2019 but in 2020 have "room" for Roth conversion. We already have 20% of equities in a Roth account (opened >10 years ago).
Based on examples- we still need to stay under IrMAA limits and mentally prepare for the tax "bite"

While assumptions will vary, my assumption is that Tax rates will rise over next 10-20 years. Medical costs are rising (read An American Sickness) and more people who are living into their 90's (like my mom) will use Medicare.

Just my thoughts today
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Old 02-12-2020, 03:24 PM   #79
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If you do NOT have cash to spare, you must pay for the taxes out of the converted money.
There is another asterisk condition that applies for some folks. If you have an inherited IRA, those funds can not be converted to a ROTH. There is also an RMD that must be taken each year. I pull money from the inherited IRA and put most of it towards federal withholding, and the balance against state withholding.
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Old 02-12-2020, 03:49 PM   #80
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I am of the school that, when it comes to Roth Conversions, there is little difference between paying taxes from pretax monies or cash. That is provided paying those taxes from the pretax account doesn't bump you into the next tax bracket. From my situation, the goal is to reduce RMD's and protect a surviving spouse's tax situation. Paying taxes from the tIRA reduces the RMD's. I have to admit I haven't done a detailed analysis. Paying from a cash account (bucket strategy, if I had one) would only mean I have to take more out of tIRA to fill the bucket up again.
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