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Tax consideration for IRA withdral
Old 06-13-2021, 11:54 AM   #1
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Tax consideration for IRA withdral

Are there any tools that can help with tax consideration when withdrawing or rolling over to Roth IRA.
It will be few years before we will start getting SS.
So I would like to take opportunity to get the funds form IRA for these years to minimize mandatory withdrawals later. Are there any tools available that can help with this?
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Old 06-13-2021, 12:58 PM   #2
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https://i-orp.com/Plans/index.html

Many people say it's too aggressive about converting. But I also hear people, presumably not using this tool's recommendations, say they aren't getting anywhere with their conversions because the IRA continues to grow. So, it probably does pay to be aggressive with conversions.
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Old 06-13-2021, 01:06 PM   #3
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The Roth IRA conversion - Bogleheads wiki article mentions a couple of spreadsheets that may be useful.
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Old 06-13-2021, 01:15 PM   #4
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I used https://incomestrategy.com/, cost me $20, and I’m in my third year of Roth conversions. It takes some effort, but I wasn’t willing to voluntarily pay taxes now without seeing the complete details. I was not able to get that with any free calculators.

I could be out of date (maybe the latest version is different?), and I don’t want to run down a great free resource, but I wasn’t satisfied with i-ORP because it assumes “die broke” spending for you (far more than we plan to spend, residual is a possible workaround), and returns,etc. are all linear (though there is a Monte Carlo feature in extended i-ORP).
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Old 06-13-2021, 03:39 PM   #5
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I'll report that I finally bought into converting to roth this year, and it feels great to see that higher roth account value. Being 60, I think I'll do large conversions for another couple of years at least. I had a very generous 401k match at w*rk, and I want to get my roth balance more in sync with (now) traditional ira account that currently is much higher to have more flexible withdrawal options for whatever tax changes may happen.
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Old 06-13-2021, 06:40 PM   #6
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For basic tax situations, I-orp is a good option as it will do a whole plan, find the word Extended and click that for a more full featured analysis than the I-orp "Essential". The 3 PEAT option can do historical and Monte Carlo modeling as well. Last I checked, one of the tax shortcomings was it didn't use income at age 63 for determining IRMAA (medicare taxes) for age 65, it was always using income in the concurrent year. The government does a two year look back so they have a firm basis. I like its balance of small input and valuable output, but didn't like the tax shortcuts.

The Boglehead's Retiree Portfolio Manager (free at their Wiki) is a spreadsheet that has a more thorough tax treatment than I-orp. It's a very powerful spreadsheet, but the user experience is harder to set up (if you start at the top and go down, you sometimes get errors and have to scroll down to somewhere else to enter data to allow input above). For Roth conversions, you have to go to the first year and enter possible Roth conversion amounts, watching the benefit until you find the maximum and then go to the next year. Also, when evaluating Roth conversion plans, I suggest multiplying the Heir Tax Benefit by 10 as the program only reports the first year tax benefit, but your heirs will do conversions for 10 years to get the money out of inherited IRA's and suffer the tax consequences of similar size every year. Tax wise, it can handle most everything, but I got frustrated as it didn't understand non-deductible IRA contributions or pre-existing Long Term Capital Gains.

The top of the line financial tool in the consumer market that I've run across is Pralana Gold ($99 1st year, $49/yr updates, requires MS-Excel, no substitute spreadsheets). That has an excellent tax package that includes everything I can think of from deduction phaseouts to AMT, it knows your state's tax rate, etc. It has a powerful Roth optimizer, many different withdrawal strategies, a Social Security optimizer tuned to your returns and tax situation, historical and Monte Carlo modeling and a lot of things I never even looked at. Very thorough so takes time to learn, but has good menus and a good manual. I won't go back to the free tier unless they catch up!

Note that in all programs, you have to use the same stock/bond asset allocation in all types of accounts (Roth, taxable, tax deferred) or the program will favor the account that has the highest stock allocation, mixing the benefits of a Roth with higher average return of holding more stock. So even though you should hold stocks in Roth and bonds in tax deferred, you can't really model it that way.
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Old 06-13-2021, 06:44 PM   #7
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Quote:
Originally Posted by Innajl View Post
Are there any tools that can help with tax consideration when withdrawing or rolling over to Roth IRA.
It will be few years before we will start getting SS.
So I would like to take opportunity to get the funds form IRA for these years to minimize mandatory withdrawals later. Are there any tools available that can help with this?
No tools per se. I did use income strategy for a couple months and it just confirmed what my own spreadsheets were telling me so I dropped my subscription.

An important thing to get a sense of is what your tax bracket will be once any pensions and SS have started... because if you do no Roth conversions then any RMDs would presumably be at that tax rate or higher.

Also, what is your current tax bracket without any Roth conversions? Do you have a lot of preferenced income (qualified dividends and long-term captial gains).

You want to do as much conversion as you can at a low tax cost between now and when any pensions and SS start while still leaving some tax-deferred money for qualified charitable distributions if you donate to charity.

https://www.irscalculators.com/tax-calculator is a handy calculator to use for these calculations and testing of the tax impact of possible Roth conversions.
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Stock rollover on market correction
Old 06-13-2021, 07:12 PM   #8
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Stock rollover on market correction

Thank you for all the suggestions.
Our income would be very low as most of it comes from real estate rentals and are offset by depreciation for some time.
One of the things I am considering which is of course hard to predict is rolling over stocks when there is a market correction to lower taxes and capture gains with no tax. It is always tempting to do when the market is going down but one has to be quick since the corrections donít last long nowadays as there is still a lot of money on sideline.
We canít do rollover this year but would like to do it starting next year. At some point there should be a nice correction , right ?
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Old 06-15-2021, 07:40 PM   #9
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Originally Posted by Innajl View Post
Are there any tools that can help with tax consideration when withdrawing...............

So I would like to take opportunity to get the funds form IRA for these years to minimize mandatory withdrawals later. Are there any tools available that can help with this?

If you routinely make charitable donations every year, highly valuable "tool" to get money out of your tIRAs is the IRS's QCD--Qualified Charitable Donations.

To use this you must be of an age where RMDs are required. You can donate up to $100,000 a year from your tIRA accounts to qualified 501(c)3 charitable organizations (most churches, Salvation Army, Red Cross, Union Gospel Mission, etc.). The amount you donate this way must be transferred directly from the IRA custodian to the charity (such as by IRA check, or a payment by custodian direct to the charity).

The advantages of using this tool are:

1) Every dollar you take out of IRA this way goes to the charity, no tax withholding first before you donate.
2) Every dollar you donate this way reduces (counts toward) the RMD amount you must make for that year. So, you minimize RMD taxable income for yourself.
3) It gives you flexibility to somewhat tailor your taxable income from one year to the next.
4) It allows you to satisfy your charitable activities you would do anyway.
5) It reduces what is left in your tIRAs, so that future year RMD's are also reduced.

I am now myself trying to shape my own giving, and am contemplating some charities I wish to benefit. Since my RMDs now are near the $100,000 IRS limit, this tool will allow me to make some very impactful donations to some local charities and to my church, which otherwise would come out of my taxed income. And by reducing my taxable income via lower includable RMD amounts each year by whatever amounts I donate, I save tons of income taxes (federal and state).
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Old 06-16-2021, 03:49 AM   #10
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Originally Posted by Innajl View Post
Thank you for all the suggestions.
Our income would be very low as most of it comes from real estate rentals and are offset by depreciation for some time.
One of the things I am considering which is of course hard to predict is rolling over stocks when there is a market correction to lower taxes and capture gains with no tax. It is always tempting to do when the market is going down but one has to be quick since the corrections donít last long nowadays as there is still a lot of money on sideline.
We canít do rollover this year but would like to do it starting next year. At some point there should be a nice correction , right ?
Problem is that the correction doesn't have to happen in the year that's best for you or me.

If you're doing your own taxes the answer is pretty simple to find. Once I identified total stock market as the equity fund to transfer it was very easy to do the rollover.

The perfect plan can be ruined by unexpected income. For example I'm learning that my last employer was sold and I must take a larger than expected payout from employee stock this year. But I have this modeled in a spreadsheet and haven't made the rollover yet. So I can see the impact and make the next decision.
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Old 06-16-2021, 06:03 AM   #11
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Originally Posted by Innajl View Post
Are there any tools that can help with tax consideration when withdrawing or rolling over to Roth IRA.
It will be few years before we will start getting SS.
So I would like to take opportunity to get the funds form IRA for these years to minimize mandatory withdrawals later. Are there any tools available that can help with this?
@Innajl I would build a spreadsheet that calculates the scenarios applicable to your situation. It gives you the opportunity to understand the situation clearly. This site and others can help you tweak and refine your tailored model in Excel.
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Old 06-16-2021, 06:52 AM   #12
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Originally Posted by RetireeRobert View Post
To use this you must be of an age where RMDs are required.
This used to be true but is not true currently.

RMDs were recently changed to start at age 72, but the age to be able to do QCDs is still 70.5.
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