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Old 06-12-2019, 05:26 AM   #21
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Thank you all for this discussion. It helped me decide to do a small roth conversion now that I am fully retired and before I start my RMDs, whenever that is, hopefully in 7 years and not in 5 years.

I am living the life due in part to this forum. Thanks oh wise ones!!
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Old 06-12-2019, 05:47 AM   #22
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Just curious how others think about sequence of returns risk during their first years of FIRE before RMDs start? I’m open to Roth conversions but there also seems comfort in keeping as much money invested as possible in those first 10 years of FIRE vs. paying it out in taxes. I know everyone’s financial situation and risk tolerance and ACA management is different.
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Old 06-12-2019, 05:54 AM   #23
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^^^ You got it. I'm just curious... were you talking with your Vanguard advisor about doing Roth conversions now while you are still working or once you retire?
I'm curious too. I don't have an ongoing Vanguard advisor, but I did take them up on their free "review with a pro" offer a few years ago.

He totally endorsed the Roth conversion idea during the gap between ER and taking SS.
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Old 06-12-2019, 05:55 AM   #24
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Markola, I may be missing something but I think it just comes down to taxes (unless ACA subsidies or other items are in play). If you can pay less now than in the future, conversions make sense. In fact, a major market downturn could help with taxes. Lower total taxes will be due on the conversion and when the market recovers, your remaining investments will be tax free and you will have paid taxes on the smaller conversion amount.
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Old 06-12-2019, 06:39 AM   #25
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Originally Posted by Markola View Post
Just curious how others think about sequence of returns risk during their first years of FIRE before RMDs start? I’m open to Roth conversions but there also seems comfort in keeping as much money invested as possible in those first 10 years of FIRE vs. paying it out in taxes. I know everyone’s financial situation and risk tolerance and ACA management is different.
I guess I view Roth conversions and SOR as separate issues... SOR is less of an issue for my Roth conversions as when I do conversions I reinvest in the same ticker as I sold/exchanged in my tIRA.

I'm paying ~8% federal tax on my conversions vs 22% later so that 14% savings can cover a lot of SOR risk.

Finally, in our case Roth conversions are finetuning... a little more than 2% of the total portfolio each year.... federal taxes paid out on Roth conversion are ~0.16% each year.
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Old 06-12-2019, 07:40 AM   #26
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Originally Posted by Markola View Post
Just curious how others think about sequence of returns risk during their first years of FIRE before RMDs start? I’m open to Roth conversions but there also seems comfort in keeping as much money invested as possible in those first 10 years of FIRE vs. paying it out in taxes. I know everyone’s financial situation and risk tolerance and ACA management is different.
I'm probably not a good one to respond because I never altered any strategy due to SORR, but even if I did, I don't think I would've done anything different for Roth conversions. As pb4 says, the tax advantage for many of us, myself included, makes up for most possible losses. And while it'd be nice to do a conversion at lower prices if a downturn happens, the more likely prospect is that the market will generally go higher, which means I'm going to be paying more taxes later on the gains.
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Old 06-12-2019, 08:44 AM   #27
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^^^ You got it. I'm just curious... were you talking with your Vanguard advisor about doing Roth conversions now while you are still working or once you retire?
I brought it up as a general question. I really didnt specify. He doesn't think it is a good idea for most people
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Old 06-12-2019, 08:59 AM   #28
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I brought it up as a general question. I really didnt specify. He doesn't think it is a good idea for most people
Send him a link to this thread.
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Old 06-12-2019, 09:23 AM   #29
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I am currently less than 4 yrs from retirement. I am doing a lot of reading about withdrawal strategies and it sounds like Roth conversions are a big part of the picture for many people.

I don't understand what the factors are that make a Roth conversion make sense and when it doesn't. I would appreciate any help. Thanks!
Roth conversions make the most sense if you expect to be in a higher tax bracket after retirement. Pay the taxes now at a lower rate, so you won't have to pay them later when you're at a higher rate.

In my case, I'm just over four years from retiring and am doing annual Roth conversions now while we're still working and have extra money to pay the taxes. We're in the 12% bracket now and expect to be in the same 12% bracket in retirement. So there's no advantage to converting from that point of view. However, tax rates are low today and will most likely increase in the future. I would rather pay today's tax rate instead of tomorrow's tax rate.

Roth's don't require RMD's, and also don't count as income for calculation of SS taxes or for Medicare. The money can sit in your Roth account the rest of your life if you wish.

I contribute to my Roth now and only have about $70K left in my traditional IRA. I'm converting about $15-20K per year over the next few years, to stay within our current 12% tax bracket. Then we may have a year or two left on the traditional IRA once we retire.
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Old 06-12-2019, 11:21 AM   #30
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I brought it up as a general question. I really didnt specify. He doesn't think it is a good idea for most people
Any advisor who is paid based upon AUM has a financial incentive to discourage Roth conversions. If I prepay my 22% taxes now, my $78 in the Roth is worth the same to me as that original $100 in my tIRA. However, my AUM-paid advisor just took a 22% pay cut. I've seen many reports of AUM based advisors discouraging Roth conversions for everybody. I believe that this is the primary reason.
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Old 06-12-2019, 01:22 PM   #31
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There is another possible issue with Roth conversions when you have other income sources (e.g. ordinary and capital gains/qualified dividends)...the issue with "bumps" where additional ordinary income (such as comes from a Roth conversion) impacting capital gains/qualified dividend rates:



https://www.kitces.com/blog/long-ter...ase-in-0-rate/

And there are huge potential issues when one is also drawing social security:
[QUOTEChandler and Monica are retired, and thanks to the fact that both had successful careers, are each eligible for nearly $2,400/month in Social Security benefits. And because Chandler is 4 years older, his Social Security benefits have been further increased to $3,168/month with delayed retirement credits.

In addition to their combined $5,568/month ($66,816/year) in Social Security benefits, the couple is also drawing $28,000/year from Chandler’s IRA (due to required minimum distributions), and liquidated another $32,000 in long-term capital gains this year.

...
Accordingly, if the couple were to withdraw another $10,000 from their IRA while they are current in both the Social Security phase-in zone and the capital gains bump zone, not only would their ordinary income increase by $10,000, but the taxable portion of their Social Security would also increase by $8,500, and $10,000 of their long-term capital gains would be pushed up into the 15% zone.
...
Which means their $10,000 of additional income generated $11,526 – $6,531 = $4,995 of additional taxes… or a whopping 49.95% marginal tax rate, due to the combination of Social Security benefits phase-in, plus the capital gains bump zone (and the interaction effect between the two!).
[/QUOTE]
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Old 06-25-2019, 05:05 PM   #32
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One thing I haven't seen anyone mention is the effect of the Trump tax bracket changes. Converting now verses in 2026 would result in a roughly 4% reduction in tax rates. Just doing the conversion now, even if working and everything staying the same, should result in lower taxes.
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Exactly This
Old 06-25-2019, 06:17 PM   #33
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Exactly This

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I retired at age 57 so I guess that's still considered "early." I am doing Roth Conversions from my IRA but actually smaller amounts because I am choosing to keep my taxable income lower (to qualify for ACA subsidies). Every little bit converted to roth helps, just makes sense to do it when you won't get a big tax ding for doing so.
I'm playing this game as well. Retired at 56, doing Roth conversions now while my income is so low. We're basically living off savings and our taxable income is only what's coming out of our taxable accounts. So trying to improve this situation:

Currently at 34/48/18 Taxable/Tax-Deferred/Tax-Free.

The idea is to get that Tax-Deferred amount down while deferring taking SS, which will make the conversions, well, not make any sense. And then at 70.5 we won't have such a big tax burden - trying to keep it in the 12% bracket.

And as you mention, there's the ACA subsidy game, trying to keep that where we want it as well. It's kind of like walking a tightrope while herding cats down the rope, with a hyperactive pitbull joining the party. Fun!
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Old 06-25-2019, 06:20 PM   #34
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I brought it up as a general question. I really didnt specify. He doesn't think it is a good idea for most people
Tell him you don't care about most people. You care about you, and would like a reasoned plan that meets your needs. There are other advisors you know.
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Old 06-25-2019, 06:24 PM   #35
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I brought it up as a general question. I really didnt specify. He doesn't think it is a good idea for most people
Quote:
Originally Posted by pb4uski View Post
Send him a link to this thread.
[edit - I see I cross posted with RockLife - great minds think alike and all! ]

And tell him you don't care if it is or isn't a good idea for most people. You want to know if it is a good idea for you.

It's an interesting way to phrase it. It probably is true, so maybe that helps him say it with a straight face. But it may not be relevant to your situation. The following may explain his hand-waving approach:

Quote:
Originally Posted by FIREchief View Post
Any advisor who is paid based upon AUM has a financial incentive to discourage Roth conversions. If I prepay my 22% taxes now, my $78 in the Roth is worth the same to me as that original $100 in my tIRA. However, my AUM-paid advisor just took a 22% pay cut. I've seen many reports of AUM based advisors discouraging Roth conversions for everybody. I believe that this is the primary reason.
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Old 06-25-2019, 06:25 PM   #36
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Unless you have guaranteed health care from some source other than ACA, you will want to live off of your non-deferred savings until you get to Medicare, otherwise you could end up with very large HI payments. This causes a "no win" situation if you (like me and others) want to both 1) convert as much as possible to Roth and 2) keep your MAGA as low as possible for ACA subsidies.



As far as I have been able to determine, there is *no* way to square this circle. My ACA subsidies are so good that I have decided to hold off on Roth conversions and to try and wait until I reach 65 (currently 63).


The bottom line is, if you are going to FIRE, you almost certainly have enough money to where you will want to have as much as possible in Roths (assuming you live long enough past 71).
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Old 06-25-2019, 06:53 PM   #37
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My ACA subsidies are so good that I have decided to hold off on Roth conversions and to try and wait until I reach 65 (currently 63).
I'm at the same age and trying to do the same thing. But what I recently realized is that my wife being 2 years younger means I still need to play the ACA game until I'm 67 (ACA calculated on household income). This reduces the number of years I can do Roth conversions.

In reading some of the posts here I picked up on the idea of forgoing the subsidies for a year and going to the 22% or 24% (maybe higher) tax bracket to get as much Roth conversion done as possible. I'm still mulling over this idea and trying to figure how to determine the cost benefit based on numbers. As someone else here always says "numbers are hard"!

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Old 06-25-2019, 07:06 PM   #38
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One other advantage to ROTH over traditional is that if you want to make a large or even medium purchase, and you take say $35k from TIRA, you may get jacked into higher marginal tax rate. With the ROTH you can take none or all any time (after 5 year rule) with no tax implications.
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Old 06-25-2019, 08:43 PM   #39
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Good Old Advise

Lots of good replies here. Most all leaving out the Important factor when the OP or anyone else made the decision between Roth VS Traditional IRA

Those that chose the traditional IRA received Tax Benefits for doing so. Isn't that of some value? Of course it is.

Any Roth Conversion is Really agreeing to Pay My Taxes NOW, instead of Later.

Depending upon the age of the account holder, it's NOT always a good idea.

Be Cautious about jumping on the Convert To Roth Bandwagon


Let me say this another way- If you're OLD, don't worry about or consider converting to a Roth IRA.
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Old 06-26-2019, 04:06 AM   #40
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Lots of good replies here. Most all leaving out the Important factor when the OP or anyone else made the decision between Roth VS Traditional IRA

Those that chose the traditional IRA received Tax Benefits for doing so. Isn't that of some value? Of course it is.
It's only a temporary tax benefit. Eventually you'll pay the taxes. The question is, at what rate? Compare to your current rate.
Quote:

Any Roth Conversion is Really agreeing to Pay My Taxes NOW, instead of Later.

Depending upon the age of the account holder, it's NOT always a good idea.

Be Cautious about jumping on the Convert To Roth Bandwagon


Let me say this another way- If you're OLD, don't worry about or consider converting to a Roth IRA.
What does age have to do with it? Please explain. What age is considered OLD for this purpose?

Once you're taking SS and forced to take RMDs, the numbers for conversion probably no longer work, but that's a factor of the numbers, not age. The usual recommendation is to look at the years before then to convert anyway--if the numbers work.

Most of us make the conversion decision based on whether it's financially advantageous to do so, using our best estimates on what future income and taxes would be. It's not a bandwagon, it's sound financial decision making. If you think your "good old advise" is sound, please back it up with some proof and details. Because right now I'm not seeing any.
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