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Old 03-03-2021, 07:39 AM   #61
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In lieu of making Roth conversions, we're just making withdrawals. I've run countless calculators and nothing is convincing. Final portfolio is maybe 2% more, taxes up 10%more. Maybe we'll knock Robbie of as king of the BTD! Kids will still end up with sizeable estate.
Unless you aren't able to withdraw Roth conversions at any time (haven't had the account open for 5 years yet, under 59.5), I can't see any way that a withdrawal could work out better than a conversion, unless you lose money. Few of the things we do are huge difference makers, but smaller things add up.
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Old 03-03-2021, 08:15 AM   #62
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.... And lastly, I care about the money of course - just not about the amount that exceeds my needs or gets left behind when I die.
OK, I get it. PM me and I'll give the the name and address of where to send the check for that pesky amount in excess of your needs so it doesn't get left behind when you die.
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Old 03-03-2021, 08:39 AM   #63
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.... Roth conversions seem gimmicky to me. Financial companies, advisors and tax preparers benefit. The investor allegedly benefits to the extent an income tax bracket can be filled up with the conversion.

The question is - what is the quantified advantage in dollars, for performing the gimmicky gymnastics?

I am married with heirs. If things go as hoped we will have a surplus of financial resources. I am against paying the government now when I could pay them later.

If there is a net present value advantage to Roth conversions, I think the age at breakeven is fairly advanced (old) and the number of dollars of “benefit” or “advantage” are very small in the grand scheme of things. Roth conversions seem a little like something to do for someone who needs more to do.
But it isn't "paying the government now when I could pay them later"... it is paying the government less now rather than paying them more later

For us it was a very simple calculation.... once my pension and Social Security are online we projected that we would be in the 12% tax bracket before RMDs and in the 22% tax bracket with RMDs... the effective tax rate on the RMDs was ~15% (increase in tax with/without RMD divided by RMD).

But there is a 14-year period of time between when I retired and when my SS starts that our tax rate is 0% before Roth conversions because out ordinary income is less than the standard deduction so it would be foolish not to take advantage of those low tax brackets to get money out of tIRAs which will be taxed at ~15% later.

Over the past 7 years I've done ~$390k of Roth conversions and paid ~8.5%.... and saved $25k for just moving money from one pocket to another and paying the tax at a lower rate.
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Old 03-03-2021, 08:48 AM   #64
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I agree. Having both a tIRA and Roth allow us to game the system as follows: My wife and I withdraw from a tIRA up to the taxible threashold for a married couple of $24,800 which is your standard deduction 2020. After $24,800, I withdraw from my Roth. Hence $24,800 of tIRA income is tax free due to the standard deduction. Having 100% Roth does not allow you to game the system this way.

I do have to take into account other income such as SS...but you get the idea. I use Turbo tax from the previous year to determine the maximum tIRA income before I enter the next tax bracket. People who rollover to 100% Roth may not be taking advantage of the $24,800 standard deduction for a married couple. For single people the standard deduction is $12,400 which is still a lot of money that is not taxible.
And it wouldn't be unusual for early retirees who are living off of taxable account savings until pensions and SS start to have ordinary income that is less than the standard deduction so it would be foolish not to withdraw or convert at least the amount needed to fill up that 0% tax bracket.... and then if you expect to be in the 22% tax bracket later once SS and RMDs hit then to fill up the 10% and 12% tax brackets is also an easy decision.
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Old 03-03-2021, 09:14 AM   #65
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But it isn't "paying the government now when I could pay them later"... it is paying the government less now rather than paying them more later

For us it was a very simple calculation.... once my pension and Social Security are online we projected that we would be in the 12% tax bracket before RMDs and in the 22% tax bracket with RMDs... the effective tax rate on the RMDs was ~15% (increase in tax with/without RMD divided by RMD).

But there is a 14-year period of time between when I retired and when my SS starts that our tax rate is 0% before Roth conversions because out ordinary income is less than the standard deduction so it would be foolish not to take advantage of those low tax brackets to get money out of tIRAs which will be taxed at ~15% later.

Over the past 7 years I've done ~$390k of Roth conversions and paid ~8.5%.... and saved $25k for just moving money from one pocket to another and paying the tax at a lower rate.
Thanks for the comment. I agree with a previous post that the Roth conversion doesn’t change the game in my eyes. It is a very marginal play. And a play that requires effort, machinations and gymnastics that I don’t see as being worthy of my time and effort.

I have difficulty with accelerating tax payments and also with restrictions on my money, such as a 5 year no-touch rule for a Roth. Don’t like it.

Do Roth conversions benefit estates to greater or lesser degrees, depending on the value of the estate?

For an estate with only SS income, do smaller estates benefit proportionately more than a larger estate does? The question relates to income tax rates, and living expenses as a percentage of portfolio value.

I’m trying to game i-orp into something that looks attractive to me, but so far I haven’t achieved that.
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Old 03-03-2021, 09:29 AM   #66
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Roth conversions seem tailor-made for couples, to reduce the tax torpedo for a surviving spouse. That whole incentive is gone for a single retiree.
We will do it for the reason above, and cruise right at the top of the 12% tax bracket while doing so.
Looking at that info, Roth conversions serve those with modest retirement incomes well.
I agree that the surviving spouse issue is an important planning consideration for married couples.

Single people can also get hit by the tax torpedo, and for someone with heirs, Roth conversions can still make a great deal of sense. Especially with what I would call the SECURE torpedo - my kids might inherit and be required to drain a large traditional IRA in 10 years right during their highest income years. It is a different issue but is similar to the married to single transition you mentioned.
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Old 03-03-2021, 11:10 AM   #67
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Roth conversions are very much a personal decision. As a single filer, the content out here is somewhat lacking. Posts like this is where you learn. When others share what they are doing, it may resonate with others and provide another idea.
If I were to marry a former nun with an $800 net worth, then my conversions would have been a mathematical mistake. Different outcome if the new bride is a retired neurosurgeon with $10M net worth.
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Old 03-03-2021, 12:10 PM   #68
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Do Roth conversions benefit estates to greater or lesser degrees, depending on the value of the estate?
Perhaps, you might want to look at Bigfoot's Retiree Portfolio Model on Roth Conversions to see if your estate will benefit from conversions: https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

In my case, the benefit of conversions is the minimization of the "tax torpedo" arising from RMDs on top of pensions and social security that already place us in the 24% tax bracket, tax bracket creep if one of us passes (we'd go from the 24% bracket (MFJ) to 35% bracket (single) and passing Roths to our children.

The last benefit is the most significant to us especially with the new 10 year distribution rules from the SECURE Act. Two of our children are currently in the 32% bracket and the remaining one is at the 24% bracket. Transferring Roths to them will be of enormous financial value to them.

Seems to me that it is far better to give children a Roth IRA than a tIRA especially if the values of these Roth accounts could trip over $XX million, 20 years from now, even with modest growth rates.
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Old 03-03-2021, 01:43 PM   #69
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Thanks for the comment. I agree with a previous post that the Roth conversion doesn’t change the game in my eyes. It is a very marginal play. And a play that requires effort, machinations and gymnastics that I don’t see as being worthy of my time and effort.

I have difficulty with accelerating tax payments and also with restrictions on my money, such as a 5 year no-touch rule for a Roth. Don’t like it.

Do Roth conversions benefit estates to greater or lesser degrees, depending on the value of the estate?

For an estate with only SS income, do smaller estates benefit proportionately more than a larger estate does? The question relates to income tax rates, and living expenses as a percentage of portfolio value.

I’m trying to game i-orp into something that looks attractive to me, but so far I haven’t achieved that.
Yes, while I haven't run it in quite a while, i-orp ended up recommending much more than I was comfortable with for Roth conversions.

I guess I would disagree that Roth conversions are a very marginal play though it might be in some cases, but not for us. For me it would be a couple hours a year to figure out what my tax situation looks like and how much I should convert and actually do the conversion... so an average of $3,600/year over the last 7 years for a couple hours of work each year is well worth the effort for me.... it is the time needed that is marginal, not the benefits. And I calculate the benefit assuming that we will both live long... if one of us dies and the surviving spouse is filing single then the benefits of having locked in withdrawals at a low tax cost are even better.

Also, any conversions that I have done have been at a much lower tax rate than DD/DSIL pay and a slightly lower rate than DS pays so it does end up benefiting our heirs too. IOW, if you're working or have other substantial sources of income it is much better to inherit a Roth than to inherit a tIRA.

If you're over 59 1/2 then the 5-year no-touch rule doesn't apply (assumes that you have had a Roth for at least 5 years).
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Old 03-03-2021, 02:34 PM   #70
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Unless you aren't able to withdraw Roth conversions at any time (haven't had the account open for 5 years yet, under 59.5), I can't see any way that a withdrawal could work out better than a conversion, unless you lose money. Few of the things we do are huge difference makers, but smaller things add up.
Why should I convert $X dollars from our tIRAs,403b or 401k and convert to a Roth, when we can just take ($X+$Y) and just spend/save it? Our Roths have been open since they were allowed and we are 62/65. The whole purpose of converting is to lower the balance to reduce future taxation on growth. My calculators show a 2% difference in portfolio growth and 10% more in taxes paid if we convert. At 70, I pick up another $4000/month in SS, and were in the 22% bracket now. Trust me, there's enough in the Roths now for kids.
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Old 03-03-2021, 02:40 PM   #71
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Thanks for the comment. I agree with a previous post that the Roth conversion doesnít change the game in my eyes. It is a very marginal play. And a play that requires effort, machinations and gymnastics that I donít see as being worthy of my time and effort.

I have difficulty with accelerating tax payments and also with restrictions on my money, such as a 5 year no-touch rule for a Roth. Donít like it.

Do Roth conversions benefit estates to greater or lesser degrees, depending on the value of the estate?

For an estate with only SS income, do smaller estates benefit proportionately more than a larger estate does? The question relates to income tax rates, and living expenses as a percentage of portfolio value.

Iím trying to game i-orp into something that looks attractive to me, but so far I havenít achieved that.

I don't want to jump on ya or just repeat what smarter folks than I have already said. I didn't do simulations or complex computations, just took my steady income today and added in my expected SS and then looked at the tax brackets and RMD if I was 70 today (did this couple years ago). The RMD would be taxed at 24% for the rest of our lives. I'm doing conversions into the 24% bracket a bit through 2025 and then will re-assess at that point. I'm able to convert about $80-$90K in 22% bracket and pay the taxes from after tax funds. It will allow me to contribute any remaining RMD via QCD and have about 2/3 of funds in the Roth where I can take out any time or pass to kids tax free.

I recommend you run a excel spreadsheet to compute your total taxable income at age 72. You will be required to take RMD of about 4% first year and pay taxes. What bracket does that RMD in using today's dollars and brackets. If it is higher than your bracket today it will cost more in taxes to wait.

I understand that some will do this and conclude it isn't worth it to me. I would suggest that couple others here enjoy playing with this just as I do, so a couple hours here or there is fun. Others just don't want to think about it any more than necessary. Good to both of them. Me ? I'm doing the calculations couple times a year and enjoying saving a few thousand in taxes. I have a tax liability of about $200K (taxes due if I do nothing) that I hope to get down to about $150-175K, to say nothing of the taxes I'd owe on the gains over next 7 years.
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Old 03-03-2021, 02:44 PM   #72
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Why should I convert $X dollars from our tIRAs,403b or 401k and convert to a Roth, when we can just take ($X+$Y) and just spend/save it? Our Roths have been open since they were allowed and we are 62/65. The whole purpose of converting is to lower the balance to reduce future taxation on growth. My calculators show a 2% difference in portfolio growth and 10% more in taxes paid if we convert. At 70, I pick up another $4000/month in SS, and were in the 22% bracket now. Trust me, there's enough in the Roths now for kids.
When you say "10% more in taxes," what two situations are you comparing?

If you save the excess outside of a Roth, you will pay taxes on the earnings of the excess. If you save the excess inside of a Roth, you will not pay these taxes. Help me understand how the former is preferable?
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Old 03-03-2021, 02:51 PM   #73
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Why should I convert $X dollars from our tIRAs,403b or 401k and convert to a Roth, when we can just take ($X+$Y) and just spend/save it?
Tax free growth in the Roth vs taxes on earnings in your taxable account if you save it.
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Old 03-03-2021, 02:58 PM   #74
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When you say "10% more in taxes," what two situations are you comparing?

If you save the excess outside of a Roth, you will pay taxes on the earnings of the excess. If you save the excess inside of a Roth, you will not pay these taxes. Help me understand how the former is preferable?
Converting or not converting. I am using 86 as my termination date as well as DW, she robbed the cradle.
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Old 03-03-2021, 03:03 PM   #75
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Tax free growth in the Roth vs taxes on earnings in your taxable account if you save it.
Like I mentioned, we may try to give Robbie a run for his BTD title. Or maybe a close 2nd. We just saved too much pre-tax in prior years. BUT, if SS gets means tested, or cut, or we need LTC, we are prepared. First world problems.
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Old 03-03-2021, 03:05 PM   #76
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Well, yeah, if you convert you're going to pay more taxes than if you don't. And you'll have a larger tax liability left. If your heirs are in a lower tax bracket to absorb the rest of the tIRA over 10 years, it's makes sense to leave it to them. If you're one of those people who think there is a "break-even" point on Roth conversions, or don't care about leaving your kids a tax liability, that makes no sense at all to me. And people don't seem interested in discussing the logic in that, so I'm not going to try.
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Old 03-03-2021, 03:11 PM   #77
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Like I mentioned, we may try to give Robbie a run for his BTD title.
I think about that too, so I figure out the best way to manage my money assuming I'm going to spend all of it.
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Old 03-03-2021, 04:29 PM   #78
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But it isn't "paying the government now when I could pay them later"... it is paying the government less now rather than paying them more later

For us it was a very simple calculation.... once my pension and Social Security are online we projected that we would be in the 12% tax bracket before RMDs and in the 22% tax bracket with RMDs... the effective tax rate on the RMDs was ~15% (increase in tax with/without RMD divided by RMD).

But there is a 14-year period of time between when I retired and when my SS starts that our tax rate is 0% before Roth conversions because out ordinary income is less than the standard deduction so it would be foolish not to take advantage of those low tax brackets to get money out of tIRAs which will be taxed at ~15% later.

Over the past 7 years I've done ~$390k of Roth conversions and paid ~8.5%.... and saved $25k for just moving money from one pocket to another and paying the tax at a lower rate.
I agree, though I'd say "pay what is likely to be less now versus more later."

Plus the whole "I'm almost certain my wife will outlive me" concern...she looks like her grandmother, who lived well into her 90s.

I hope to stay within the 12% bracket (plus flat ~5% state) by splitting a ~$150k conversion over 2-3 years.
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Old 03-03-2021, 05:09 PM   #79
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Why should I convert $X dollars from our tIRAs,403b or 401k and convert to a Roth, when we can just take ($X+$Y) and just spend/save it? Our Roths have been open since they were allowed and we are 62/65. The whole purpose of converting is to lower the balance to reduce future taxation on growth. My calculators show a 2% difference in portfolio growth and 10% more in taxes paid if we convert. At 70, I pick up another $4000/month in SS, and were in the 22% bracket now. Trust me, there's enough in the Roths now for kids.
Not sure how you end up paying more in taxes by not converting now if you're currently in the 22% and will be higher once SS kicks in. The other thing to consider is that if you or your DW die earlier then the surviving spouse's RMDs will be in a much higher tax bracket where 22% might look like a screaming deal.
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Old 03-03-2021, 05:25 PM   #80
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I have evolved a little in the conversion philosophy.

I started to the top of the 12% bracket, but that was less than 3% of the tIRA, and not even covering growth.

New philosophy is to convert up to the IRMAA cut off. Even that would not cover past growth, but I can do it with about a 16% effective tax on the conversion. Much less than the 28% I avoided.

For the record, my primary goal is to leave a significant portion of our NW to DS in tax advantaged accounts. Both Roth and after tax with step-up basis (unless that changes).

Without mega-conversions (over $300k/yr), we will still have a tax torpedo, and DS will still have to deal with a significant tIRA.

First world problems.
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