Tax in Retirement

[jebmke]

Quote:

Originally Posted by Loving Life I don't understand this rush to go to ROTH (and yes, I am a CPA) Lets see - pay current dollars for tax now and then pray the rules don't change. Its a fools game

Seems like a long shot that the top tax rate will fall below 30%. If you know your RMD is going to red-line the brackets, some conversion should be low risk.

[bmcgonig]

Quote:

Originally Posted by catotx Here's a illustration from Fidelity https://www.fidelity.com/viewpoints/...oth-conversion

Thank you.

One thing I noticed in that fidelity doc is the following:

Potential benefits
Consider the following simple hypothetical example of an investor who recharacterized because his Roth IRA balance declined after he converted. Richard, looking to take advantage of the potential benefits of a Roth IRA in retirement, converted $50,000 from his traditional IRA to a Roth IRA on March 1. He paid the $12,500 tax on the conversion when he filed his taxes on April 15.


Seems like they're saying that Richard converted in March and then paid the taxes in April. However the conversion just be done before Dec 31 of the previous year, correct?


Sent from my iPad using Early Retirement Forum

[Animorph]

Quote:

Originally Posted by bmcgonig Could you elaborate on that? Also, what do you mean "one fund per new account" ? Sent from my iPad using Early Retirement Forum

I Roth convert by transferring some shares from my tIRA, all from the same fund. As a slice and dicer I have plenty to chose from. At the beginning of the year I Roth convert into maybe 6 new Roth accounts, each holding just the shares of one fund, but all different funds. If any fund loses more than 10% I Roth convert another chunk of those fund shares into a new account, if available. At the end of the year I might convert a little more if the funds have any losses, including a Roth with cash.

At tax time I determine how much I want to Roth convert. I then recharacterize the Roth accounts with the lowest gains until I reach my target. This is possible because you are holding the shares of each fund in a separate Roth account. You can recharacterize a whole account, but you can't recharacterize only specific shares from a combined account. I'll do a partial recharacterization of one account to fine tune the conversion amount to the dollar.

One of the neat instances when you can retroactively decide what you want to do, based on past performance. Kind of a bummer if you Roth convert and the shares are down 10% at the end of the year. This way there are no regrets.

[Animorph]

Quote:

Originally Posted by bmcgonig Thank you. One thing I noticed in that fidelity doc is the following: Potential benefits Consider the following simple hypothetical example of an investor who recharacterized because his Roth IRA balance declined after he converted. Richard, looking to take advantage of the potential benefits of a Roth IRA in retirement, converted $50,000 from his traditional IRA to a Roth IRA on March 1. He paid the $12,500 tax on the conversion when he filed his taxes on April 15. Seems like they're saying that Richard converted in March and then paid the taxes in April. However the conversion just be done before Dec 31 of the previous year, correct? Sent from my iPad using Early Retirement Forum

I haven't read the Fidelity article, but you are right. Maybe he just paid estimated taxes for it?

[kaneohe]

Quote:

Originally Posted by bmcgonig Thank you. One thing I noticed in that fidelity doc is the following: Potential benefits Consider the following simple hypothetical example of an investor who recharacterized because his Roth IRA balance declined after he converted. Richard, looking to take advantage of the potential benefits of a Roth IRA in retirement, converted $50,000 from his traditional IRA to a Roth IRA on March 1. He paid the $12,500 tax on the conversion when he filed his taxes on April 15. Seems like they're saying that Richard converted in March and then paid the taxes in April. However the conversion just be done before Dec 31 of the previous year, correct? Sent from my iPad using Early Retirement Forum

Perhaps just clever/loose writing......note that no year is stated either there or in the accompanying chart for paying the taxes.