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Old 12-09-2016, 03:16 PM   #21
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My original plan, as commented above, was to convert to the top of the 15% bracket. Now I am having second thoughts about paying an extra $6k in taxes.

At 70, we will be in the 25% bracket. And we will pay taxes on 85% of our SS. Short of a major market downturn that does not come back. So, maybe a good strategy is to minimize taxes for the next 9 years?

At this point, it appears any long term taxes I "save" will be for the benefit of my DS, since we would likely never touch the Roth IRA.

Likely I will compromise and convert less than planned, with the objective still to get the DW's IRA fully converted before RMD's. Like I said above, this is more for simplicity, since only one account will be subject to RMD's.
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Old 12-09-2016, 03:24 PM   #22
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Midpack: I hold a seven-figure amount of Vanguard funds, but on the Schwab platform. I know this is just a hair off-topic (apologies to moderator), but does anyone know if I am or could become flagship even though these funds are custodied at Schwab?
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Old 12-09-2016, 04:32 PM   #23
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My original plan, as commented above, was to convert to the top of the 15% bracket. Now I am having second thoughts about paying an extra $6k in taxes.

At 70, we will be in the 25% bracket. And we will pay taxes on 85% of our SS. Short of a major market downturn that does not come back. So, maybe a good strategy is to minimize taxes for the next 9 years?

At this point, it appears any long term taxes I "save" will be for the benefit of my DS, since we would likely never touch the Roth IRA.

Likely I will compromise and convert less than planned, with the objective still to get the DW's IRA fully converted before RMD's. Like I said above, this is more for simplicity, since only one account will be subject to RMD's.
Are you saying to not even convert to the top of 15%? I would take full advantage of 15% now over 25% later, especially since once converted you can grow it tax free, whereas you've had 9 more years of growth before paying 25%.

If you're saying not to go above 15%, I'd probably agree. It's a guess whether taxes will stay the same in the future, or which direction they'll go for the various income types. Plus, as others have noted, the first part above 15% is usually at 30% rather than 25%.
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Old 12-09-2016, 07:13 PM   #24
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I'm converting to the top of the 15% tax bracket and paying a hair over 2% of the amount I convert in tax.

How's that you ask... I have about $70k of QDI & LTCG that end up not being taxed at all, $8k of ordinary income (interest, unqualified dividends, pension) and $26k of Roth conversion (which is also ordinary income). $20k of itemized deductions and $8k of exemptions reduce the total of $34k of ordinary income to $6k, which is taxed at 10% so a tax of $600 on $26k of Roth conversions... sweet. (Based on MFJ).

Unfortunately, state income taxes increase the 2% to 9%, but still....hard to beat that. I'd be crazy not to convert.
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Old 12-10-2016, 08:04 AM   #25
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The main benefit of a Roth conversion is that all the money in the Roth is yours, but in a tIRA 15%-25% is claimed by the IRS so only 75%-85% is yours.
Which means that if you pay the tax on the conversion from the amount converted, there is no net benefit -- assuming the same tax rate. But if you pay the tax from outside funds, the net effect is that you effectively add money to the Roth.

But if your tax rate later will be more than your tax rate now, it is good to convert now. For example, if you convert now at Joint rate but you think that a withdrawal in the future might be at Individual rate, like if your spouse dies before then. Or if the eventual RMD's will push you into a higher bracket.

But a lot of this tax planning this year may well be moot, if/when (and how much of) Trump's new proposed tax schedule comes to pass.
https://www.kitces.com/blog/end-of-y...me-tax-reform/

Likewise all the planning on optimizing income for ACA subsidy. That is surely going to change bigly, no matter what. Would have had to change no matter how the election turned out.
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Old 12-10-2016, 08:32 AM   #26
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The main benefit of a Roth conversion is that all the money in the Roth is yours, but in a tIRA 15%-25% is claimed by the IRS so only 75%-85% is yours.
Which means that if you pay the tax on the conversion from the amount converted, there is no net benefit -- assuming the same tax rate. But if you pay the tax from outside funds, the net effect is that you effectively add money to the Roth.

But if your tax rate later will be more than your tax rate now, it is good to convert now. For example, if you convert now at Joint rate but you think that a withdrawal in the future might be at Individual rate, like if your spouse dies before then. Or if the eventual RMD's will push you into a higher bracket.....
Agree with all you said other than the 15%-25% part. While those are tax brackets, the reality is that depending on one's facts and circumstances the amount of tax paid on a Roth conversion can be much lower.

For example take a retired married couple with $500k in taxable accounts and $1.0m in tax-deferred accounts and $500k in tax-free accounts. Let's say that the $500k in taxable accounts generate $20k in QDI/LTCG. If they Roth convert to the top of the 15% tax bracket they convert $76k and pay $7,400 in tax... 9.7%.

And for each $1 of itemized deductions in excess of the standard deduction they can Roth convert tax free.

 2016   
TI at top of 15% tax bracket  75,300   
Standard deduction  12,600   
2 exemptions 4,050 8,100   
   96,000   
Qualified dividends and LTCG  (20,000)  
Roth conversion  76,000   
     
     
Deductions and exemptions0% 20,700 -  
$0-$18,55010% 18,550 1,855  
$18,551-$75,30015% 36,750 5,513  
   76,000 7,368  
Effective tax on conversion   9.7%
     
Qualified income0% 20,000 -  
Total tax   7,368  
Total effective tax rate   7.7%
     
Total income  96,000   
Deductions  (12,600)  
Exemptions  (8,100)  
Taxable income  75,300   
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Old 12-10-2016, 12:16 PM   #27
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Agree with all you said other than the 15%-25% part. While those are tax brackets, the reality is that depending on one's facts and circumstances the amount of tax paid on a Roth conversion can be much lower.

For example take a retired married couple with $500k in taxable accounts and $1.0m in tax-deferred accounts and $500k in tax-free accounts. Let's say that the $500k in taxable accounts generate $20k in QDI/LTCG. If they Roth convert to the top of the 15% tax bracket they convert $76k and pay $7,400 in tax... 9.7%.

And for each $1 of itemized deductions in excess of the standard deduction they can Roth convert tax free.

2016
TI at top of 15% tax bracket 75,300
Standard deduction 12,600
2 exemptions 4,050 8,100
96,000
Qualified dividends and LTCG (20,000)
Roth conversion 76,000
Deductions and exemptions 0% 20,700 -
$0-$18,550 10% 18,550 1,855
$18,551-$75,300 15% 36,750 5,513
76,000 7,368
Effective tax on conversion 9.7%
Qualified income 0% 20,000 -
Total tax 7,368
Total effective tax rate 7.7%
Total income 96,000
Deductions (12,600)
Exemptions (8,100)
Taxable income 75,300
I think there is a mistake in the table. Although the point of the analysis is good.

Where you determine the Effective Tax on conversion, the calculation for the 10% tax is correct for a married couple filing jointly. However, the calculation at the 15% rate shows the single rate. Total maximum for married filing jointly is $75,300, not $36,750, so the tax would be $10,368 or 13.6% of $76000.

Have i misread the Income Tax tables?

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Old 12-10-2016, 12:27 PM   #28
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I think there is a mistake in the table. Although the point of the analysis is good.

Where you determine the Effective Tax on conversion, the calculation for the 10% tax is correct for a married couple filing jointly. However, the calculation at the 15% rate shows the single rate. Total maximum for married filing jointly is $75,300, not $36,750, so the tax would be $10,368 or 13.6% of $76000.

Have i misread the Income Tax tables?

Rita
No, you have not misread the tax table, but you have not considered how QDI/LTCG are taxed. Your $10,368 assumes that all income is ordinary income, which is not the case here. If I changed the $20,000 of QDI/LTCG to zero, then I would get the $10,368 that you come up with.

The difference is that the last $20,000 of income is being taxed at 0% rather than 15% since it is tax preferenced... and the difference between your $10,368 and the $7,368 in the table is exactly 15% of $20,000.
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Old 12-10-2016, 12:37 PM   #29
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No, you have not misread the tax table, but you have not considered how QDI/LTCG are taxed. Your $10,368 assumes that all income is ordinary income, which is not the case here. If I changed the $20,000 of QDI/LTCG to zero, then I would get the $10,368 that you come up with.

The difference is that the last $20,000 of income is being taxed at 0% rather than 15% since it is tax preferenced... and the difference between your $10,368 and the $7,368 in the table is exactly 15% of $20,000.
OK, thanks.
Great analysis on a standalone basis. Of course in real life, the total amount to convert might be less if there is other income than QDI/LTCG. The MAGI then would also affect ACA and Medicare premiums for individuals who use those programs. Just one more thing to keep track of when making the decision to do a partial conversion.

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Old 12-10-2016, 02:44 PM   #30
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Yes, non preference income reduces the amount you can convert on a dollar-for-dollar basis.
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Old 12-10-2016, 07:35 PM   #31
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I didn't see anyone chime in with this old refrain: when one of you dies, the survivor will have the same RMD's coming in, but will now be paying at the higher single tax rates. So there may be some benefit to Roth converting a little beyond the financial break even point.
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Old 12-11-2016, 09:07 AM   #32
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I didn't see anyone chime in with this old refrain: when one of you dies, the survivor will have the same RMD's coming in, but will now be paying at the higher single tax rates. So there may be some benefit to Roth converting a little beyond the financial break even point.
Yeah, I said it. But just mentioned in the middle of my longish comment. I realized it a couple years ago when planning our Roth conversions -- which causes you to look closely at the tax tables and seeing the large difference at the top of the 15% bracket for singles & marrieds

Quote:
Agree with all you said other than the 15%-25% part. While those are tax brackets, the reality is that depending on one's facts and circumstances the amount of tax paid on a Roth conversion can be much lower
.

I didn't look too closely at your table but, ceteris paribus, Roth conversions are the last bit of income therefore are generally taxed at your marginal rate.
The reasons for not looking closely are:

1) I've been wrong enough times on complex tax issues that I now know the only way to get it right is to plug the figures into Turbotax and see what it says.
2) Too many people focus on the average tax rate, not (correctly) the marginal tax. (Agreed, people here probably don't often make that mistake.)
3) Too many people like to prove their point by saying "Oh, that's (the bit of income under discussion) not my last bit of income, it's my first bit of income. Therefore it doesn't get taxed at the marginal rate--some other bit of income gets that honor." This is, of course, wrong -- but people still like to believe it.

and finally:
4) I think (but wouldn't bet money until I ran it thru Turbotax) that in virtually all cases the effective tax on a Roth conversion is the marginal bracket you are in.
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Old 12-11-2016, 10:37 AM   #33
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.....Roth conversions are the last bit of income therefore are generally taxed at your marginal rate.
The reasons for not looking closely are:

1) I've been wrong enough times on complex tax issues that I now know the only way to get it right is to plug the figures into Turbotax and see what it says.
2) Too many people focus on the average tax rate, not (correctly) the marginal tax. (Agreed, people here probably don't often make that mistake.)
3) Too many people like to prove their point by saying "Oh, that's (the bit of income under discussion) not my last bit of income, it's my first bit of income. Therefore it doesn't get taxed at the marginal rate--some other bit of income gets that honor." This is, of course, wrong -- but people still like to believe it.

and finally:
4) I think (but wouldn't bet money until I ran it thru Turbotax) that in virtually all cases the effective tax on a Roth conversion is the marginal bracket you are in.
No, QDI and LTCG are taxed last, so Roth conversions are not taxed at the marginal rate. See this webpage and the Total Income by Tax Bracket graphic.

If one had no other ordinary income, then Roth conversions would get the benefit of deductions and exemptions (essentially 0% rate), the 10% bracket and then some at 15%. Or put another way, if your only income was Roth conversions to the top of the 15% tax bracket (a $96,000 Roth conversion in 2016 for MFJ with standard deduction) then you would pay $10,368 in tax, 10.8% of the $96,000 conversion and much less than 15% that you posit. You can easily prove it to yourself in Taxcaster or your favorite tax calculator... which disproves what you suggest in #4 above.

Deductions and exemptions0% 20,700 -  
$0-$18,55010% 18,550 1,855  
$18,551-$75,30015% 56,750 8,513  
   96,000 10,368  
Effective tax on conversion   10.8%
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Old 12-11-2016, 02:14 PM   #34
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For someone with no income and no concern for PPACA, would a reasonable strategy be, if you have LTCG available, take the tax-free step-up in basis for the first 96K each tax year until it runs out? Only after you're done taking your tax-free 96K every year would you start your Roth conversions up to the top of the 15% bracket.

I suppose you could take not only the 96K LTCG, but also the next 200K (+/-) that would only be taxed at 15%, but what's the hurry? And who has that much LTCG?
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Old 12-11-2016, 02:27 PM   #35
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For someone with no income and no concern for PPACA, would a reasonable strategy be, if you have LTCG available, take the tax-free step-up in basis for the first 96K each tax year until it runs out? Only after you're done taking your tax-free 96K every year would you start your Roth conversions up to the top of the 15% bracket.

I suppose you could take not only the 96K LTCG, but also the next 200K (+/-) that would only be taxed at 15%, but what's the hurry? And who has that much LTCG?
No, at least not exactly that.

The "top of the 15% bracket" people talk about for Roth conversions include LTCGs and dividends. If you take LTCGs to the top of the 15% bracket, and additionally do Roth conversions, every $1 converted pushes $1 of LTCGs into being taxed at 15%. You'll have a little bit at 0%+15% due to exemptions and deductions, then some at 10%+15% due to the 10% bracket, and then 15%+15% until all LTCGs are taxed. At that point in your example you are into the 25% bracket for Roth conversions but you aren't pushing any more LTCGs from 0 to 15%.

Do a sample return and see for yourself. There is a worksheet called something like Qualified Divs and LTCG worksheet that causes this.

The much better strategy is some combination of Roth conversions, dividends, any other income and LTCGs (less deductions and exemptions) where combined they go to the top of the 15% bracket. The Roth conversions are taxed at 15% (less for the first part) and LTCGs aren't taxed. What mix of that you do depends on your circumstances.
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Old 12-11-2016, 03:03 PM   #36
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I'm "glad I don't have LTCG", so I don't need to get too serious about a strategy, lol! My simplified example, I presume no income at all. Just for examination of taking LTCG and Roth conversions.

In my tax software, I put in $96,050 in LTCG and it said I owed $8 in tax. Then I added $100 of Roth conversions and it said I owed $23, so that next $100 was taxed at 15%. Same 15% carried through with Roth conversions up to $20,000 (much more than that, and the rate exceeded 15%, so I didn't explore any farther).

So let's say I had $192K in LTCG (2x96K) and $40K in tIRA (2x20K). In the first tax year, I could do LTGC $96K + Roth Convert $20K. That would cost me $3K in taxes (2.6% overall tax rate). I could repeat that in the second year.

Now let's get the same amount of money out from under the tax man, but spread it out for 4 years. Take 96K LTCG in year one. Tax=$0. Same in year two, tax=$0. Then in year three, I convert $20K, Tax=$0 (because of deductions and exemptions). Year four, convert the last $20K, no tax due.

Maybe one doesn't have that much time, or has "too much" in the tIRA and you'd get slammed by the RMD torpedo, but as good as 3% tax sounds, I like 0% tax better!
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Old 12-11-2016, 03:50 PM   #37
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You'll have a little bit at 0%+15% due to exemptions and deductions,
I guess that "little bit" for your case was $20K. Mine would be right around there if I had a second exemption.
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Old 12-11-2016, 06:45 PM   #38
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I hold a seven-figure amount of Vanguard funds, but on the Schwab platform. I know this is just a hair off-topic (apologies to moderator), but does anyone know if I am or could become flagship even though these funds are custodied at Schwab?
No, my understanding is that you are not flagship and cannot be if your funds are held at Schwab. Flagship is a Vanguard customer service program. You might investigate if Schwab has a corresponding program that you can join. There are steps in the Schwab Private Client program that start at $500,000 portfolio.
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Old 12-11-2016, 06:59 PM   #39
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For someone with no income and no concern for PPACA, would a reasonable strategy be, if you have LTCG available, take the tax-free step-up in basis for the first 96K each tax year until it runs out? ....
I don't think so. I only have a small window of time to do low tax-cost roth conversions and presumably, the 0% QDI/LTCG tax rate will still exist after my window to do low-cost conversions closes. Also, since we are living on taxable funds until SS starts, we are naturally reducing our unrealized gains each year when I sell equities to rebalance cash (which provides for spending).

OTOH, if you had no tax deferred but lots of taxable with unrealized gains, it would be a no-brainer.
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Old 12-12-2016, 10:22 AM   #40
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I get it. Complete flexibility on when to take LTCG, but you gotta make hay with the conversions.
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