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Old 10-09-2021, 09:38 PM   #21
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I don’t know the details of your situation, but for us, we have substantial funds in an after tax brokerage account, so we prefer to use this to fund our cash flow needs right now. Down the road, we’ll tap into IRA’s as well as take pension and SS income, but right now we have more options if we keep our ordinary income as low as we can. YMMV
We’re in the same boat. ~10% of funds in IRAs. When I model it out, even with the IRAs in bonds, the tax consequences of not pulling from them early are significant. The RMDs are deadly by the time we get to our 70s.
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Old 10-09-2021, 11:48 PM   #22
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We’re in the same boat. ~10% of funds in IRAs. When I model it out, even with the IRAs in bonds, the tax consequences of not pulling from them early are significant. The RMDs are deadly by the time we get to our 70s.


So are you doing Roth conversions?
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Old 10-10-2021, 05:05 AM   #23
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Old 10-10-2021, 07:41 AM   #24
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We’re in the same boat. ~10% of funds in IRAs. When I model it out, even with the IRAs in bonds, the tax consequences of not pulling from them early are significant. The RMDs are deadly by the time we get to our 70s.

I have a friend that is 76, every year he complains about how much the tax
is on his RMDs. His solace is, "at least the government lets me keep 75% of my money."
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Old 10-10-2021, 07:59 AM   #25
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So are you doing Roth conversions?
Not sure yet. We’re still trying to figure out the best option. If we have to take the money out and pay taxes on it, I’m not sure why we wouldn’t just use it for living expenses. I think I’m missing the magic of the Roth conversions…
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Old 10-10-2021, 08:17 AM   #26
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Not sure yet. We’re still trying to figure out the best option. If we have to take the money out and pay taxes on it, I’m not sure why we wouldn’t just use it for living expenses. I think I’m missing the magic of the Roth conversions…


Yes, I understand your dilemma. In our case, we need to convert a meaningful amount or it won’t make any real difference down the road. But converting a sizable chunk requires paying lots of taxes now. The tax-free growth of the money over time will eventually make up for today’s tax bite, but in our case, the projection is that we don’t break even until we’re almost 80.
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Old 10-10-2021, 09:23 AM   #27
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That’s a long time for a break even... Are you using a cfp to help model or diy?

My current plan has us drawing down our tIRAs for living expenses in large chunks up front, until a smaller drawdown rate outpaces growth. But I think we really need to have someone get our plan.
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Old 10-10-2021, 09:33 AM   #28
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We are so heavily tax deferred (60 pct) that Roth conversions will make little difference in our lifetimes. We have still done some and will continue to but likely only in the low brackets.
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Old 10-10-2021, 10:24 AM   #29
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Not sure yet. We’re still trying to figure out the best option. If we have to take the money out and pay taxes on it, I’m not sure why we wouldn’t just use it for living expenses. I think I’m missing the magic of the Roth conversions…
Part of the magic is that if you do a Roth conversion and pay for the taxes with taxable funds, you end up effectively being able to end up with the taxable account money in the Roth, where it is tax-free for life.

So for example, let's say I have $10k in a tIRA and $2k in taxable.... if I convert at the end of the day I end up with $10k in a Roth where it is tax-free for life... and $2k of that $10k in the Roth is money that would have otherwise been subject to tax.

For our situation, out tax is $0 with no Roth conversions, my pension, DW SS and taxable account income is about equal to the standard deduction. OTOH, once my SS starts and DWs SS is increased for spousal benefits we'll be deep into the 12% tax bracket.... add RMDs to that and we'll be in the 22% tax bracket. So for us, it is paying a combination of 10%/12% now (11.5% weighted average for 2021) vs paying 12%/22% in 6 years when I am 72.

I'm willing to take a risk on paying 11.5% now as I'm pretty sure that either me, DW or our kids will pay more than 11.5% later and the real benefit of Roth conversions is tax rate arbitrage.
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Old 10-10-2021, 10:28 AM   #30
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Part of the magic is that if you do a Roth conversion and pay for the taxes with taxable funds, you end up effectively being able to end up with the taxable account money in the Roth, where it is tax-free for life.

So for example, let's say I have $10k in a tIRA and $2k in taxable.... if I convert at the end of the day I end up with $10k in a Roth where it is tax-free for life... and $2k of that $10k in the Roth is money that would have otherwise been subject to tax.

For our situation, out tax is $0 with no Roth conversions, my pension, DW SS and taxable account income is about equal to the standard deduction. OTOH, once my SS starts and DWs SS is increased for spousal benefits we'll be deep into the 12% tax bracket.... add RMDs to that and we'll be in the 22% tax bracket. So for us, it is paying a combination of 10%/12% now (11.5% weighted average for 2021) vs paying 12%/22% in 6 years when I am 72.

I'm willing to take a risk on paying 11.5% now as I'm pretty sure that either me, DW or our kids will pay more than 11.5% later and the real benefit of Roth conversions is tax rate arbitrage.
But of course it is unlikely to make much difference in your lifetimes.

Paying tax on 100 percent of the Roth conversion now versus tax on 3-4 percent of that same number when you are 72...

Not saying it doesn't make sense. Just that you won't see a cash flow benefit for a very long time.
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Old 10-10-2021, 10:47 AM   #31
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Originally Posted by Montecfo View Post

Not saying it doesn't make sense. Just that you won't see a cash flow benefit for a very long time.
But you can spend more now, knowing that you'd have that benefit now.

And really, your current cash flow is greatly improved doing a Roth conversion. You've moved money from an account you can't spend from to an account you can. Maybe that's a reach, but so is the implication that you can't benefit from a conversion until your 90s, or whenever this so-called break even is.
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Old 10-10-2021, 12:56 PM   #32
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But of course it is unlikely to make much difference in your lifetimes.

Paying tax on 100 percent of the Roth conversion now versus tax on 3-4 percent of that same number when you are 72...

Not saying it doesn't make sense. Just that you won't see a cash flow benefit for a very long time.
I guess it depends on how you look at it. The below assumes that you start with $10,000 in an IRA and $1,200 in a taxable account... your tax rate until RMDs is 12% and after RMDs is 22% and a 7% rate of return.

If you look at the after-tax values then assuming that your tax rate today is lower than your tax rate once RMDs begin then the Roth conversion is beneficial from day 1... the benefits are initially modest (basically avoiding taxes on taxable account earnings).

If you look at nominal values, then with the Roth conversion you are out for the $1,200 taxes paid and then start benefitting once RMDs begin and you avoid paying 22% taxes on RMDs and taxable account earnings.

Since our heirs are currently and will likely be at 12% or higher it is an easy decision for us.

 After-tax values   Nominal values  
 No conv after-tax valueRoth conv valueRoth advantage No convRoth conv valueRoth advantage
6410,00010,0000 11,20010,000-1,200
6510,69010,70010 11,97410,700-1,274
6611,42811,44921 12,80111,449-1,352
6712,21612,25034 13,68612,250-1,436
6813,05913,10849 14,63213,108-1,524
6913,96014,02665 15,64414,026-1,618
7014,92415,00783 16,72515,007-1,718
7115,95416,058103 17,88116,058-1,824
7215,32517,1821,857 18,96717,182-1,785
7316,36118,3852,024 20,11018,385-1,725
7417,45919,6722,213 21,31319,672-1,641
7518,62221,0492,426 22,57821,049-1,530
7619,85522,5222,667 23,90822,522-1,386
7721,16024,0982,938 25,30624,098-1,207
7822,54225,7853,243 26,77425,785-988
7924,00427,5903,586 28,31527,590-724
8025,55029,5223,972 29,93229,522-410
8127,18431,5884,404 31,62831,588-40
8228,91133,7994,888 33,40633,799393
8330,73536,1655,430 35,26936,165896
8432,66138,6976,036 37,22038,6971,477
8534,69341,4066,713 39,26341,4062,143
8636,83744,3047,467 41,40244,3042,902
8739,09747,4058,308 43,64247,4053,763
8841,48050,7249,244 45,98550,7244,739
8943,99154,27410,283 48,43654,2745,839
9046,63558,07411,438 51,00158,0747,072
9149,42062,13912,719 53,68862,1398,451
9252,35166,48814,137 56,49966,4889,989
9355,43671,14315,706 59,44271,14311,700
9458,68276,12317,441 62,52876,12313,594
9562,09681,45119,355 65,76481,45115,687
9665,68787,15321,466 69,15987,15317,994
9769,46393,25323,791 72,72193,25320,532
9873,43399,78126,348 76,46199,78123,320
9977,608106,76629,158 80,396106,76626,370
10081,998114,23932,242 84,538114,23929,702
10186,613122,23635,623 88,901122,23633,335
10291,467130,79339,325 93,499130,79337,294
10396,572139,94843,376 98,356139,94841,593
104101,943149,74547,802 103,487149,74546,258
105107,593160,22752,634 107,701160,22752,526
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Old 10-10-2021, 05:30 PM   #33
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I guess it depends on how you look at it. The below assumes that you start with $10,000 in an IRA and $1,200 in a taxable account... your tax rate until RMDs is 12% and after RMDs is 22% and a 7% rate of return.

If you look at the after-tax values then assuming that your tax rate today is lower than your tax rate once RMDs begin then the Roth conversion is beneficial from day 1... the benefits are initially modest (basically avoiding taxes on taxable account earnings).

If you look at nominal values, then with the Roth conversion you are out for the $1,200 taxes paid and then start benefitting once RMDs begin and you avoid paying 22% taxes on RMDs and taxable account earnings.

Since our heirs are currently and will likely be at 12% or higher it is an easy decision for us.

 After-tax values   Nominal values  
 No conv after-tax valueRoth conv valueRoth advantage No convRoth conv valueRoth advantage
6410,00010,0000 11,20010,000-1,200
6510,69010,70010 11,97410,700-1,274
6611,42811,44921 12,80111,449-1,352
6712,21612,25034 13,68612,250-1,436
6813,05913,10849 14,63213,108-1,524
6913,96014,02665 15,64414,026-1,618
7014,92415,00783 16,72515,007-1,718
7115,95416,058103 17,88116,058-1,824
7215,32517,1821,857 18,96717,182-1,785
7316,36118,3852,024 20,11018,385-1,725
7417,45919,6722,213 21,31319,672-1,641
7518,62221,0492,426 22,57821,049-1,530
7619,85522,5222,667 23,90822,522-1,386
7721,16024,0982,938 25,30624,098-1,207
7822,54225,7853,243 26,77425,785-988
7924,00427,5903,586 28,31527,590-724
8025,55029,5223,972 29,93229,522-410
8127,18431,5884,404 31,62831,588-40
8228,91133,7994,888 33,40633,799393
8330,73536,1655,430 35,26936,165896
8432,66138,6976,036 37,22038,6971,477
8534,69341,4066,713 39,26341,4062,143
8636,83744,3047,467 41,40244,3042,902
8739,09747,4058,308 43,64247,4053,763
8841,48050,7249,244 45,98550,7244,739
8943,99154,27410,283 48,43654,2745,839
9046,63558,07411,438 51,00158,0747,072
9149,42062,13912,719 53,68862,1398,451
9252,35166,48814,137 56,49966,4889,989
9355,43671,14315,706 59,44271,14311,700
9458,68276,12317,441 62,52876,12313,594
9562,09681,45119,355 65,76481,45115,687
9665,68787,15321,466 69,15987,15317,994
9769,46393,25323,791 72,72193,25320,532
9873,43399,78126,348 76,46199,78123,320
9977,608106,76629,158 80,396106,76626,370
10081,998114,23932,242 84,538114,23929,702
10186,613122,23635,623 88,901122,23633,335
10291,467130,79339,325 93,499130,79337,294
10396,572139,94843,376 98,356139,94841,593
104101,943149,74547,802 103,487149,74546,258
105107,593160,22752,634 107,701160,22752,526
You don't benefit from day 1 in a cash flow sense.

You are making a balance sheet case. My question regards the lifetime cash flow view.

And yes, it does depend how you look at it and especially on what assumptions you make.
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Old 10-10-2021, 11:03 PM   #34
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Our IRAs are all currently in bonds and are about 15% of our assets.
Without knowing the details of your situtation, I would hazard a guess that Roth conversions won't make much difference for you one way or the other. If your RMDs from 15% of your portfolio are large enough to be significant, than you have serious first-world problems!

EDIT: I did not originally see the next page of posts, where you explicitly state "The RMDs are deadly by the time we get to our 70s" Well, if ~30% of 15% of your portfolio going to taxes is "deadly" to you, well, I take my hat off to you.
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Old 10-11-2021, 05:36 AM   #35
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You don't benefit from day 1 in a cash flow sense.



You are making a balance sheet case. My question regards the lifetime cash flow view.



And yes, it does depend how you look at it and especially on what assumptions you make.
It sort of hard to benefit from day 1 if one is paying something now to avoid paying more later... the benefit can't happen until later by definition. Like buying something on sale or deferring SS.
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Old 10-11-2021, 08:56 AM   #36
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It sort of hard to benefit from day 1 if one is paying something now to avoid paying more later... the benefit can't happen until later by definition. Like buying something on sale or deferring SS.
Yes. And that is my point. It has a negative cash flow effect which will take time to overcome, decades in fact. It is like an investment.
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Old 10-11-2021, 11:13 AM   #37
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Yes. And that is my point. It has a negative cash flow effect which will take time to overcome, decades in fact. It is like an investment.
Except you have zero cash flow on a tIRA until you pay the tax.
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Old 10-11-2021, 08:18 PM   #38
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Except you have zero cash flow on a tIRA until you pay the tax.
This is true but it is not relevant to the point I was making.

But if it were relevant I would point out that zero cash flow bests negative cash flow, which is what you get when you prepay taxes by doing Roth conversions.

This does not mean Roth conversions are bad. It is just part of understanding their nature.
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Old 10-11-2021, 08:33 PM   #39
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This is true but it is not relevant to the point I was making.

But if it were relevant I would point out that zero cash flow bests negative cash flow, which is what you get when you prepay taxes by doing Roth conversions.
No, you've taken money that couldn't be spent (in a tIRA) and moved it to a place where it could be spent (in a Roth, subject to age and 5-yr limitations). Seems like positive cash flow to me.

I don't see how anyone can think a Roth conversion has negative cash flow. No matter though. You view them as you see fit, I'll do the same.
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Old 10-11-2021, 09:20 PM   #40
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No, you've taken money that couldn't be spent (in a tIRA) and moved it to a place where it could be spent (in a Roth, subject to age and 5-yr limitations). Seems like positive cash flow to me.

I don't see how anyone can think a Roth conversion has negative cash flow. No matter though. You view them as you see fit, I'll do the same.
Well, hmm, it is just a fact. You prepay taxes, it is negative cash flow. By definition.

Now it may be overcome over time. But it is what it is. And viewing it differently doesn't change that.
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