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Old 12-20-2020, 12:51 PM   #141
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How about taking out a mortgage for a new home?

Since the deduction for interest paid on home-equity loans is eliminated, the remaining option is take out a new mortgage albeit the mortgage-interest deduction will be limited to interest on the first $750,000 of debt.
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Don't Ignore Income Based Medicare Taxes (IRMAA)
Old 01-04-2021, 03:55 PM   #142
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Don't Ignore Income Based Medicare Taxes (IRMAA)

I scanned though this thread and didn't see any reference to the (substantial) IRMAA Medicare income based taxes that can accrue to those with (modest to large) tax-deferred balances.

Perhaps the best reason to do Roth conversions is to avoid/minimize such taxes.

The (advanced) I-ORP calculator takes them into account when modeling decumulation.

Also note that the sweet-spot for Roth conversions tax-wise (the 10 and 12 % brackets) is almost exactly the same sweet-spot for $0 federal capital gains taxes on taxable accounts (ie same 10 and 12 % brackets). So depending on your asset location, doing Roth conversions sort of precludes taking "free" capital gains distributions.

Michael Kitces says it better than I ever could:

https://www.kitces.com/blog/navigati...h-conversions/
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Old 01-04-2021, 04:59 PM   #143
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IRMAA taxes as well as other cliffs have been mentioned in the thread, as a reason for doing Roth conversions to decrease RMDs. But it never hurts to reemphasize it.

However, I suspect the sweet spot mentioned isn't of that much use in the limiting RMD conversation, because the 0% CG brackets have such low AGI values that doing Roth conversions in those amounts won't make a significant impact on the tIRA values. If your tIRAs are small enough for that to make an impact then your RMDs aren't going to be that big either. If I was in that range and had harvestable CGs I'd do that instead of the Roth conversions. But since I'm already in the 22% bracket I can convert to the top, taking into account things like IRMAA and such.
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Old 01-04-2021, 05:38 PM   #144
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Admittedly, I did not read all 8 pages, yet, of this thread, but I do have a desire to answer the question which is the title of this thread;
Should RMD's really scare you?

I have my own financial situation to examine and I have my father's, who I was his POA after he was diagnosed with Alzheimers, to examine in retrospect.

For myself, I have all my income need satisfied with my pension. I also started my SS at 62 and my wife started hers last month and back dated it to February when she turned 64. As background, I was diagnosed with cancer in July of 2020, 6 months ago. Firstly, I'm glad I started SS early as I probably won't outlive the actuarial tables even if I survive cancer. The treatments simply will age me quicker than if I hadn't had the disease. Secondly, starting my wife's SS sooner afforded a longer time line of double SS benefits. All calculators indicated that she start sooner rather than later based on my lifespan being shortened by 10 years.
We use the SS funds for those things that enhance our quality of life while the pension covers the necessities. The house is paid for, worth at least $750,000. Medical is 100% covered by my pension as well.
Which leaves our retirement investments. Right now, they stand at $600,000. Not a lot but a whole lot more than most who live solely on their investments when one considers I don't really have a need for any of it. But just because I don't need it doesn't mean I don't want to preserve or grow it. Which brings me to the OP's question regarding RMD's as it applies to me.
I'm in the 22% tax bracket, gross income around $100,000. The bracket tops out at $171,000 for 2021. I theoretically could roll over about $70,000 at a cost of 22% or about $15,400 per year in reduced value to my savings. But what how much would my RMD be on my retirement savings of $600,000? RMD calculators tell me that I would be drawing $37,000 at age 72. That's well within the already 22% tax bracket I would roll the tIRA funds over to a ROTH.
I think, financially, it would be better to let that 22% continue to grow for the next 7 years than to take the hit now and reduce my total worth over the timeline laid out.
I'm unaware of a calculator that would allow me to plug in these numbers for comparison, so I'm not sure, but if anyone can point out some misunderstanding on my part of not taking the conversion hit now and pay the taxes at RMD later, I'd appreciate it.

Oh, and I forgot my father's situation. And it applies to me and probably a whole lot of others. At some point we may need long term health care. Certainly more of our costs in the future will be for health care than now simply because growing older causes more medical issues. My father, towards the end, paid nothing in income taxes because all his income was offset as medical expenses while he was in a memory care facility. As we get older and if long term care is required, the medical cost for that care is written off on taxes, right? So this pot of money I have, the retirement savings I don't have need of today, will fund my and DW's long term medical care and it won't cost us a dime in taxes when it does. So paying the tax to roll to a ROTH is likely to really be the wrong move if it is used for medical needs. Right?
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Old 01-04-2021, 05:47 PM   #145
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I cannot grasp the concept of a 10 or 12% bracket. The 22% bracket starts at $80K
for MFJ. I guess it is not because I was not an ER. If you are ER and do not have SS and/or a pension, and live off savings, it can be done.
I guess the Roth ship sailed for me many years ago.
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Old 01-04-2021, 06:05 PM   #146
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Quote:
Originally Posted by skipro33 View Post
I'm in the 22% tax bracket, gross income around $100,000. The bracket tops out at $171,000 for 2021. I theoretically could roll over about $70,000 at a cost of 22% or about $15,400 per year in reduced value to my savings. But what how much would my RMD be on my retirement savings of $600,000? RMD calculators tell me that I would be drawing $37,000 at age 72. That's well within the already 22% tax bracket I would roll the tIRA funds over to a ROTH.
skipro, you've been facing your cancer situation bravely, so I feel like I can say this and not come off as insensitive. If you die early, what tax bracket will your wife be in? Probably 24%, which is only 2% higher, for now. But those rates may not be renewed in 2026 or whatever year the rate drop expires.
Quote:
I think, financially, it would be better to let that 22% continue to grow for the next 7 years than to take the hit now and reduce my total worth over the timeline laid out.
It's been posted time and time again that if your current and future tax rates are the same, letting money grow in an IRA does no better than doing the conversion and paying the tax now. And it does better in the Roth if you convert the whole amount and pay taxes from taxable. It's very easy to see in a spreadsheet, or you can just find one of the many times that pb4uski has posted the proof.
Quote:
if long term care is required, the medical cost for that care is written off on taxes, right? So this pot of money I have, the retirement savings I don't have need of today, will fund my and DW's long term medical care and it won't cost us a dime in taxes when it does. So paying the tax to roll to a ROTH is likely to really be the wrong move if it is used for medical needs. Right?
Yes, but...you'll have to pay RMDs for all those years from 72 until you are incapacitated enough to need LTC. And there is a criteria to meet, namely: that the person is a danger to themself, or is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

Not everyone in the 80s or even 90s will meet this criteria.
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Old 01-04-2021, 07:22 PM   #147
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Originally Posted by RunningBum View Post
skipro, you've been facing your cancer situation bravely, so I feel like I can say this and not come off as insensitive. If you die early, what tax bracket will your wife be in? Probably 24%, which is only 2% higher, for now. But those rates may not be renewed in 2026 or whatever year the rate drop expires.
It's been posted time and time again that if your current and future tax rates are the same, letting money grow in an IRA does no better than doing the conversion and paying the tax now. And it does better in the Roth if you convert the whole amount and pay taxes from taxable. It's very easy to see in a spreadsheet, or you can just find one of the many times that pb4uski has posted the proof.
Yes, but...you'll have to pay RMDs for all those years from 72 until you are incapacitated enough to need LTC. And there is a criteria to meet, namely: that the person is a danger to themself, or is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

Not everyone in the 80s or even 90s will meet this criteria.
Yes! Thanks! I certainly appreciate the frank discussion. I have cash available to pay the taxes on the conversion to the max 22% tax rate of $171,000.
I have an adjusted gross income $91,500 for 2020, standard deduction of $24,800 for a Taxable income of $66,700. So I should be able to convert $104,300 the difference of $171,000 and $66,700. The taxes, at 22%, will be $23,000 (rounded up).
Am I still able to do this for 2020 taxes since it's after the first of the year? And if so, can I also do this year's taxes of 2021 and convert another $104,300 (assuming my income remains the same). I have cash to pay those taxes now as well.
Do I just contact Fidelity where my tIRA is and have them create the ROTH and roll the funds?

I really appreciate the advice. Especially that I pay the taxes out of my current, post tax funds I have in checking, keeping the full IRA invested.

****EDIT****

One new wrinkle that could come into play, pretax money gets added to your income and if that puts you over the 75,000 (single) or 150,000 (married) adjusted gross income, you may be costing yourself future stimulus money. (If there is one based upon 2020 income)
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Old 01-04-2021, 07:39 PM   #148
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Unlike contributions, conversions have a 12/31 deadline, so it's too late for 2020.

I don't know the process for Fidelity, but I think I recall for VG I had to open the Roth first before doing the conversion.
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Old 01-04-2021, 07:43 PM   #149
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Unlike contributions, conversions have a 12/31 deadline, so it's too late for 2020.

I don't know the process for Fidelity, but I think I recall for VG I had to open the Roth first before doing the conversion.
No worries, I still have time to convert all my tIRA to ROTH by age 72 based on my current and predicted income. It also solves any issue with stimulus money based on 2020's income level.
If I understand right, I can open a ROTH IRA as soon as possible, let my new account grow all year, and keep the 22% in cash I have for the tax in my checking account until I do my 2021 taxes.

Let me ask you; I have $100,000 in a guaranteed savings within my tIRA. I'd like to target those funds to fund the majority of the new ROTH. I've been looking for a time to get that money into play, this could be it. Is there any reason not to time this money going into the ROTH? Is there a strategy for doing so? Equal monthly amounts, all at once as soon as possible, end of year, etc.? Or just time when the market takes some sort of correction and dump it over then? Probably should have the ROTH created and ready for that when the time is right.
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Old 01-04-2021, 08:05 PM   #150
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Tax payments: Not quite. Unless you have a way to get the taxes paid via IRS withholding, you need to make even quarterly estimated payments, or pay as you go. The even quarterly payments can be based on this year's estimated taxes, or last year's actual payments. Look up "safe harbor" rules.

I'm not big on market timing, but if you can catch a downturn and do it then, that would be a good play. Really, whatever way you want to do it is fine. It sounds like you're only dealing with a small part of your investments.
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Old 01-04-2021, 08:11 PM   #151
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Tax payments: Not quite. Unless you have a way to get the taxes paid via IRS withholding, you need to make even quarterly estimated payments, or pay as you go. The even quarterly payments can be based on this year's estimated taxes, or last year's actual payments. Look up "safe harbor" rules.

I'm not big on market timing, but if you can catch a downturn and do it then, that would be a good play. Really, whatever way you want to do it is fine. It sounds like you're only dealing with a small part of your investments.
Yes, I do have a way to pay the taxes via an IRS withholding. I could make monthly IRS Tax payments via my pension or I could make a fixed payment via my SS.

I have H&R Block tax program and can play 'what-if' with that on funding a ROTH and timing the tax payments. I have already started my taxes and I owe a small penalty, $3, because I underpaid by $1,000. But the program asked me if there were circumstances that might be weighed, such as; did you fund a ROTH? So I will test this with this year's tax program to learn about when to time the funding and the tax payments for my best options.
Thanks again for pointing all this out.
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Old 01-05-2021, 10:28 AM   #152
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Michael Kitces says it better than I ever could:

https://www.kitces.com/blog/navigati...h-conversions/

He may have said it better than you, but I still found it very complicated.
I understand it's a tax arbitrage. We are in the low tax bracket now, we expect a higher tax bracket when we start collecting SS and RMDs, that will be phased in starting with my SS Mar 2025, then my RMDs 2027, then Wife's SS in 2029 and her RMDs in 2031.
I was fine until Kitces started the 0% cap gains vs Roth conversion decision. Then got further confused about wealth transfer at death to heirs.
Should I leave more money in taxable accounts, or do Roth conversions for IRAs and have the children as Roth beneficiaries, allowing the transfer tax free to the children at 0% tax with the 5 year rule.
I think I need to know:

Tax rates to non spouse heirs for taxable mutual fund accounts?
Tax rates to non spouse heirs for IRAs and SEPs?
Tax rates to non spouse heirs for Roth IRAs?
And any special rules, (like the Roth account named beneficiary 5 year rule)
My first year of retirement I used all LTCGs at 0% tax.
My second year I decided Roth conversions were better and did enough LTCGs to live on and Roth conversions to the top of the 12% bracket.
This seems to be a work in progress.
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Old 01-05-2021, 10:39 AM   #153
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Generally speaking the income from inherited assets will be the same whether you own it, your spouse inherits it or non-spouses inherit it. Income from taxable mutual fund accounts will be preferenced income or ordinary income depending on the nature of the mutual fund's investments... equity based will generally be preferenced and fixed will be ordinary. Withdrawals from IRAs and SEPs will be ordinary income and Roth withdrawals will be tax-free.

The tax rates will depend on the inherited party's income before this additional income compared to your income before this additional income. For example, DD and DSIL both have good jobs as are solidly in the 15%/22% tax bracket for preferenced/ordinary income which is higher than us. OTOH, DS is in the same tax bracket as us so his tax rate would be the same as ours.
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Old 01-05-2021, 12:11 PM   #154
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I cannot grasp the concept of a 10 or 12% bracket. The 22% bracket starts at $80K
for MFJ. I guess it is not because I was not an ER. If you are ER and do not have SS and/or a pension, and live off savings, it can be done.
I guess the Roth ship sailed for me many years ago.
It's not as low as it seems. For 2021 the "free" capital gains for those married filing jointly goes up to $81050. Then you add in the standard deduction of $24800 that then lets you be tax free for capital gains less than $105850 (sans other income)

So suppose you have a mutual fund/stock that has (on-average) doubled from what you paid for it. You could then take out 2 X $105850 ==> $211700 and spend it all on yourself and pay absolutely no federal income tax (again sans other income). Adjust the numbers for your stash capital gains and personal situation.

So someone that has taxable accounts can live very well. Some people believe that you may want to deplete taxable accounts first, then move on to your tax-deferred accounts, then save your Roth accounts for last. Some believe that you should defer Social Security just so that you can take advantage of those great rates.

Others believe you should do those Roth conversions instead. As I indicated in a previous post Roth conversions and "free" capital gains sort of exclude each other.
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