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02-21-2020, 01:39 PM
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#21
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2012
Posts: 6,098
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Quote:
Originally Posted by target2019
We'll look at Roth conversions each year. We'll stop when I'm no longer comfortable with the extra tax payments.
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+1
We are never going to be in a tax bracket below 22% or whatever the current 22% range gets changed to... so my current plan to to convert but stay within the tax bracket and below the desired income limit to not impact other deductions we can take. I will just reevaluate this every year. When we choose to take SS will certainly impact how much we can convert. But this issue is not keeping us awake at night.
__________________
FIREd date: June 26, 2018 - "This Happy Feeling, Going Round and Round!" (GQ)
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02-21-2020, 02:15 PM
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#22
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2008
Location: On a hill in the Pine Barrens
Posts: 9,669
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Quote:
Originally Posted by jollystomper
+1
We are never going to be in a tax bracket below 22% or whatever the current 22% range gets changed to... so my current plan to to convert but stay within the tax bracket and below the desired income limit to not impact other deductions we can take. I will just reevaluate this every year. When we choose to take SS will certainly impact how much we can convert. But this issue is not keeping us awake at night.
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We are in "the 12" for the next three years at least. I'm leaving it open as to whether to cross over into "the 22" or not. We'll re-enter the 22 or 24% bracket in 5 years.
Participating in these conversion discussions has been enlightening. Starting to wonder about extra consulting income (is it worth it), and either of us taking SS early. Just have to sit down and look at these thing for 2020 once 2019 taxes are done.
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02-21-2020, 02:20 PM
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#23
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Recycles dryer sheets
Join Date: Feb 2014
Posts: 118
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There are dozens of posts per day discussing income tax brackets. But what if CG rates change? The current political climate seems to be targeting only high earners, say, 200K+ or even 400K+.
Changing the CG rates could upend my current strategy. Maybe I don't need to consider that for a while, if ever, but that might be my tax black swan.
A week or 2 ago I went to a tax presentation at a local AAII meeting. The CPA, age 50, was really hammering down on converting as much as possible. Personally, I think he said he was putting all his savings into Roth401K, while his wife was doing all 401k (or IRA). It's a hedge on what might happen to tax rates going forward.
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02-21-2020, 02:57 PM
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#24
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Dec 2008
Location: On a hill in the Pine Barrens
Posts: 9,669
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Community needs a decision tree for Roth conversions...
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02-21-2020, 03:23 PM
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#25
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Recycles dryer sheets
Join Date: Feb 2014
Posts: 118
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Quote:
Originally Posted by target2019
Community needs a decision tree for Roth conversions...
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Lol, and a 72 inch OLED monitor to display it on!
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02-21-2020, 04:19 PM
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#26
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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 thefist
There are dozens of posts per day discussing income tax brackets. But what if CG rates change? The current political climate seems to be targeting only high earners, say, 200K+ or even 400K+.
Changing the CG rates could upend my current strategy. Maybe I don't need to consider that for a while, if ever, but that might be my tax black swan.
A week or 2 ago I went to a tax presentation at a local AAII meeting. The CPA, age 50, was really hammering down on converting as much as possible. Personally, I think he said he was putting all his savings into Roth401K, while his wife was doing all 401k (or IRA). It's a hedge on what might happen to tax rates going forward.
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You’re going to have to decide what you think is most likely. No one can tell you what will happen or when, and there’s no foolproof approach. My conversions are based on what we know for sure now and then what I expect to happen, and broadly when WRT, tax rates and LTCG.
__________________
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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02-21-2020, 04:57 PM
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#27
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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 thefist
There are dozens of posts per day discussing income tax brackets. But what if CG rates change? The current political climate seems to be targeting only high earners, say, 200K+ or even 400K+.
Changing the CG rates could upend my current strategy. Maybe I don't need to consider that for a while, if ever, but that might be my tax black swan.
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What do you think would change, and how much do you think it would affect you? Would it really be a black swan event that totally upends your strategy?
I'm not worrying for now about anything that doesn't seem very likely to happen. A reduction in SS benefits seems fairly likely, so I factor that in, along with 100% taxing of SS benefits. I've already factored in a 15% tax on CGs even though some of them will likely avoid a tax. If they are all taxed as regular income, that will hurt, but not crush me. Maybe you are more reliant on 0% CGs?
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02-23-2020, 07:09 AM
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#28
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Thinks s/he gets paid by the post
Join Date: Oct 2019
Posts: 3,652
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I'm almost 65, my wife is a young 61. we expect to delay SS until 70, at least for me.
My thinking over the last couple of years has been to do Roth conversions up to the 12% bracket. My thinking could be skewed as I have always paid a low amount in taxes. Many years my total federal tax burden was 2, 3, or 4%. I never really new what bracket I was in, but I'm sure it was lower.
We have for easy number $1M in tax deferred accounts and $500k in taxable accounts.
I'm wondering if we should bite the bullet and do Roth conversions up to the 22% bracket?
I added some growth to the accounts for the numbers below. (6%)
I expect our SS will be about $35k and another $10k+ of VTSAX dividends,
before we start to add RMDs which could be $29k first first 3 or 4 years and then jump to $49k.
So for 4 years, income is about $75k and then jumps to $95k, if we do not do Roth conversions.
Do these numbers look like Roth conversions in the 22% bracket would be a wise move?
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02-23-2020, 07:26 AM
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#29
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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 Time2
I'm almost 65, my wife is a young 61. we expect to delay SS until 70, at least for me.
My thinking over the last couple of years has been to do Roth conversions up to the 12% bracket. My thinking could be skewed as I have always paid a low amount in taxes. Many years my total federal tax burden was 2, 3, or 4%. I never really new what bracket I was in, but I'm sure it was lower.
We have for easy number $1M in tax deferred accounts and $500k in taxable accounts.
I'm wondering if we should bite the bullet and do Roth conversions up to the 22% bracket?
I added some growth to the accounts for the numbers below. (6%)
I expect our SS will be about $35k and another $10k+ of VTSAX dividends,
before we start to add RMDs which could be $29k first first 3 or 4 years and then jump to $49k.
So for 4 years, income is about $75k and then jumps to $95k, if we do not do Roth conversions.
Do these numbers look like Roth conversions in the 22% bracket would be a wise move?
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Based on the numbers you’re providing I doubt converting to 22% would be financially beneficial (there are other reasons once you pass away that you may/not care about). Cocktail napkins numbers you’ll be at about $70K taxable ($95K-$24.8 std deduction) and you don’t get into 22% rates until $80.25K in 2020.
Very broadly speaking you want to keep your lifetime tax rate level, taxes while converting and after RMD and SS start. But it’s worthwhile to examine your exact numbers and assumptions for most people versus a rule of thumb if for no other reason than knowing for sure. Once you are 72 and beyond, you can’t correct if you find yourself in a (much) higher bracket than before, especially if effective tax rates increase, could easily be 20+ years.
__________________
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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02-23-2020, 07:44 AM
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#30
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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 would consider some things that may change as your journey continues.
First is the rates when one of you is gone and the single tax rates kick in. This change will hit most at some point will cost more taxes. Just that simple.
Second consider where tax rates will be in near future. Current rates are scheduled to revert after 2025 and would then raise your tax bite. Lots of things could happen by then or after. What is your best guess. It may be considered a gamble by some but you are in that game and not considering your best guess of tax rates in 5, 10, or 20 years won’t keep changes from happening.
Personally I’m converting to 22% and may add another $35K in 24% bracket to lower my TIRA by 2028 when I turn 72 and RMDs kick in. At that point we are thinking of using QCDs for charitable contributions rather than our current self directed fund.
Each situation is unique with many factors to consider ( including ACA limits and Medicare IRMAA levels). Good hunting
__________________
FIRE 31 Aug, 2018 - Always leave every place better than you found it, always give more than expected or Due
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02-23-2020, 08:02 AM
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#31
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Full time employment: Posting here.
Join Date: Nov 2019
Location: Jersey City
Posts: 518
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Quote:
Originally Posted by Midpack
You’re going to have to decide what you think is most likely. No one can tell you what will happen or when, and there’s no foolproof approach. My conversions are based on what we know for sure now and then what I expect to happen, and broadly when WRT, tax rates and LTCG.
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I'm a total outlier as far as conversions go because I don't think about my tax burden and focus on my yearly budget. As long as my planning software tells me my expenses are covered I'm happy. We don't know what's going to happen to tax rates and how political climate will affect our financial situation. I also have no clue how long am I going to live. The only thing I do know is that my health will deteriorate and I'll have to stop being as active as I am now.
So while I'll do the no-brainer conversions or capital gain harvesting (0 or 12% tax) I decided to focus more on age related enjoyable spending and less on intelligent saving. It's the complete opposite of my pre-FIRE MO and goes a bit against my nature but that's what I'm doing. It just tells you that there's not one good answer to the OPs question.
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02-23-2020, 08:22 AM
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#32
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Thinks s/he gets paid by the post
Join Date: Jan 2006
Posts: 4,172
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Quote:
Originally Posted by Time2
.................................................. ............
I expect our SS will be about $35k and another $10k+ of VTSAX dividends,
before we start to add RMDs which could be $29k first first 3 or 4 years and then jump to $49k.
So for 4 years, income is about $75k and then jumps to $95k, if we do not do Roth conversions.
Do these numbers look like Roth conversions in the 22% bracket would be a wise move?
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some confusion in my mind about your numbers..........you say income 75K for yrs........starting from now ? and then jumps to 95K.......when you start SS/RMDs ........but you said RMDs alone would start at 29K, not even considering SS.......so wouldn't jump be bigger?
95K is gross income? If so, taxable would be about 70K- which is still in 12% bracket..........so I don't see converting in 22% bracket to be compelling. Also consider, your marginal tax rate may be even higher if you are pushing QDIV/CGs into higher bracket ........w/ marginal rate of 27%, not 22%.
Complicated issue since you also want to consider that tax rates may go up in future (if old rates come back as scheduled); also single survivor tax rates will be higher.
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02-23-2020, 11:26 AM
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#33
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Thinks s/he gets paid by the post
Join Date: Oct 2019
Posts: 3,652
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Quote:
Originally Posted by kaneohe
some confusion in my mind about your numbers..........you say income 75K for yrs........starting from now ?
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Starting at 72yrs old (RMDs)
Quote:
and then jumps to 95K.......when you start SS/RMDs
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When my wife turns 72 yrs old. (RMDs)
Quote:
........but you said RMDs alone would start at 29K, not even considering SS.......so wouldn't jump be bigger?
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Here's what I said, "I expect our SS will be about $35k and another $10k+ of VTSAX dividends,
before we start to add RMDs which could be $29k first first 3 or 4 years and then jump to $49k."
Sooo... from when we start SS and VTSAX dividends, $35k + $10k= $45k.
Then when I hit 72yrs old, RMDs of $29k, so, $45k + $29k= $74k income, 4 years later when my wife hits 72yrs old, add another $20k of income to make it $94k.
($1k math correction.)
95K is gross income? If so, taxable would be about 70K- which is still in 12% bracket..........so I don't see converting in 22% bracket to be compelling. Also consider, your marginal tax rate may be even higher if you are pushing QDIV/CGs into higher bracket ........w/ marginal rate of 27%, not 22%.
Complicated issue since you also want to consider that tax rates may go up in future (if old rates come back as scheduled); also single survivor tax rates will be higher.[/QUOTE]
The single survivor can turn out to be the biggest reason to max Roth conversions, if you could know death dates.
I threw it out, you brought it back, It's really a guess, we don't know future tax rates, we don't know what the market will do, we don't now who will die when and we don't know future tax changes.
I think I'll do my best in the 12% bracket, if I go over a few bucks in the maximizing, no big problem.
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02-23-2020, 11:44 AM
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#34
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Thinks s/he gets paid by the post
Join Date: Jul 2012
Location: Texas
Posts: 3,024
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Our two pensions and SS will put us solidly into the 22%/25% bracket at 70. Without conversions above the 12%/15% bracket, RMDs would likely push us into the 24%/28% bracket. So we are converting to the top of the 22% bracket with 10-11 years to go.
Depending on growth rates, this will result in most (but probably not all) of our tax-deferred balances being converted to Roth. RMDs on the remainder should be small enough to keep everything well inside the 22%/25% bracket. So that's the baseline plan... we'll stop when I calculate that RMDs on the remaining tax-deferred balance, plus our other known income streams, will fall safely inside the 22%/25% bracket.
I'll let things continue to evolve as situations change. But my mindset on this has definitely changed over the years. I'm much more inclined to settle up with the IRS at current rates rather than leave it to a highly uncertain future.
__________________
Retired at 52 in July 2013. On to better things...
AA: 85/15 WR: 2.7% SI: 2 pensions, SS later
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02-24-2020, 02:44 PM
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#35
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Recycles dryer sheets
Join Date: Feb 2014
Posts: 118
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Quote:
Originally Posted by RunningBum
What do you think would change, and how much do you think it would affect you? Would it really be a black swan event that totally upends your strategy?
I'm not worrying for now about anything that doesn't seem very likely to happen. A reduction in SS benefits seems fairly likely, so I factor that in, along with 100% taxing of SS benefits. I've already factored in a 15% tax on CGs even though some of them will likely avoid a tax. If they are all taxed as regular income, that will hurt, but not crush me. Maybe you are more reliant on 0% CGs?
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Perhaps "black swan" was a bit dramatic. For the near-mid term, I'm nearly 100% reliant on qualified dividends and capital gains. Certainly a good place to be. Any change to put that rate into the 20's would hurt. But that won't happen overnight, if at all. Since FIRE occurred about 3yrs earlier than plan, some extra selling has been necessary to get that AA and location improved. I'm still wondering what a "normal" tax year will look like.
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02-24-2020, 03:04 PM
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#36
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 16,973
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Quote:
Originally Posted by Time2
I'm almost 65, my wife is a young 61. we expect to delay SS until 70, at least for me.
My thinking over the last couple of years has been to do Roth conversions up to the 12% bracket. My thinking could be skewed as I have always paid a low amount in taxes. Many years my total federal tax burden was 2, 3, or 4%. I never really new what bracket I was in, but I'm sure it was lower.
We have for easy number $1M in tax deferred accounts and $500k in taxable accounts.
I'm wondering if we should bite the bullet and do Roth conversions up to the 22% bracket?
I added some growth to the accounts for the numbers below. (6%)
I expect our SS will be about $35k and another $10k+ of VTSAX dividends,
before we start to add RMDs which could be $29k first first 3 or 4 years and then jump to $49k.
So for 4 years, income is about $75k and then jumps to $95k, if we do not do Roth conversions.
Do these numbers look like Roth conversions in the 22% bracket would be a wise move?
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At those rates, I'd stay in the 12%
I would also harvest some long term capital gains any year you can squeeze them in and pay 0% on them.
__________________
Fortune favors the prepared mind. ... Louis Pasteur
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02-24-2020, 03:10 PM
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#37
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Recycles dryer sheets
Join Date: Feb 2014
Posts: 118
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Over the weekend I did several more runs with i-ORP, being a bit more careful with the input numbers. With closer inspection, the Convert to 22 and Convert to 24 yielded almost identical result of annual spending for me.
in this case, you can be flexible and watchful for downturns.
Take for instance 2018. The December drop that year was a Roth Conversion gift if you were holding at 22%, but willing and able to increase your conversion into 24% opportunistically.
So call it Convert the Dip rather than Buy the dip.
I also tried a couple experiments of maxing out the 24% bracket for 2 or 3 years and stopping. This appeared to produce a meaningfully better result (higher yearly spending). It's worth a closer look for sure. And certainly helps with the fear of writing that big tax check.
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02-24-2020, 03:40 PM
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#38
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Thinks s/he gets paid by the post
Join Date: Oct 2019
Posts: 3,652
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Quote:
Originally Posted by Sunset
At those rates, I'd stay in the 12%
I would also harvest some long term capital gains any year you can squeeze them in and pay 0% on them.
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Ya, I messed up this year and didn't do any Roths. But did withdraw $126k from my taxable account, $78,800 of which were LTCGs. I had about $24K of other income, so, I hope to pay $0 or at least very little tax this year.
This is our first full year retired, so after tax time I'll have a better understanding of it all.
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02-24-2020, 03:49 PM
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#39
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jul 2014
Location: Spending the Kids Inheritance and living in Chicago
Posts: 16,973
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Quote:
Originally Posted by Time2
Ya, I messed up this year and didn't do any Roths. But did withdraw $126k from my taxable account, $78,800 of which were LTCGs. I had about $24K of other income, so, I hope to pay $0 or at least very little tax this year.
This is our first full year retired, so after tax time I'll have a better understanding of it all.
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I'm not sure that is messing up, as there is the possibility that 0% for LTCG will disappear after the election, in which case you are going to look pretty smart
__________________
Fortune favors the prepared mind. ... Louis Pasteur
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Other thoughts to consider in a Roth conversion
02-29-2020, 05:56 AM
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#40
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Confused about dryer sheets
Join Date: Aug 2018
Location: TITUSVILLE
Posts: 1
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Other thoughts to consider in a Roth conversion
Purpose of Partial Roth Conversions - Moving IRA to Roth lowers your RMD
In addition to a lower cumulative tax rate during your retirement, lowering your RMDs may also:
1) decrease the amount of taxes you pay on your social security earnings;
2) decrease the risk of higher Medicare premiums;
3) decrease the risk you’ll get stuck paying IRMAA for Medicare part B and D;
4) decrease your capital gains rate; and
5) leave you less susceptible to the widow/widower tax penalty (lower tax brackets once your spouse dies). If you have enough income deferred, however, it is unlikely you will benefit from any but the last of these potential savings.
The main reason to do partial Roth conversions: you get to keep more of the money you made.
Perhaps equally as important is that you leave a tax-free legacy to your children. Instead of your kids having to take “income” from your tax-deferred accounts–likely at their peak earning years–give them tax-free Roth money to enjoy.
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