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Old 10-11-2021, 09:31 PM   #41
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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.
Well, what if you spent the now-spendable Roth funds later that day. Would you view that as a negative cash flow for several hours, and zero cash flow after several hours?
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Old 10-11-2021, 10:10 PM   #42
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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.
I concede that it is a negative cash flow. But... are you really prepaying taxes or simply paying off a liability in advance... like paying down your mortgage.

Both are negative cash flows... one reduces net worth and the other one doesn't ... in fact it might increase net worth if the liability is settled for less than book value (settled at 12% vs 22%).
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Old 10-11-2021, 10:36 PM   #43
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I concede that it is a negative cash flow. But... are you really prepaying taxes or simply paying off a liability in advance... like paying down your mortgage.

Both are negative cash flows... one reduces net worth and the other one doesn't ... in fact it might increase net worth if the liability is settled for less than book value (settled at 12% vs 22%).
Thanks for that. If we can't simply acknowledge things that are factually true, it is hard for a discussion to go further.

Paying a bill before it is due is commonly called prepaying it. Paying off a liability in advance is also prepaying it. I do not see a difference there.

Paying a bill before it is due may have a future financial benefit, as you note, and as I have stated with Roth conversions.

I don't find it similar to prepaying a mortgage. If you want to know why, then send me a PM and I will respond. I appreciate the discussion but I think we get far afield from the OPs question.

Again, thanks.
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Old 10-11-2021, 10:40 PM   #44
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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.


I had our CPA model it as well as Fidelity.
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Old 10-11-2021, 10:50 PM   #45
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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, if you’re taking funds out of a taxable brokerage account to pay the tax on a Roth conversion, you’re definitely generating a negative cash flow vs just leaving the funds in a tIRA, allowing taxes to continue to be deferred, and allowing taxable brokerage funds to continue to grow. It’s hard for me to understand why you wouldn’t see this as a negative cash flow.

The only way it becomes a positive is that over time, the tax-free growth of a Roth eventually makes up for the hit of paying taxes when the conversion is made. In our case, it’s projected to take 16 years. If we were 40 or 50, that would seem to be more palatable than when we’re in our 60’s. But YMMV.
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Old 10-12-2021, 07:23 AM   #46
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Well, if you’re taking funds out of a taxable brokerage account to pay the tax on a Roth conversion, you’re definitely generating a negative cash flow vs just leaving the funds in a tIRA, allowing taxes to continue to be deferred, and allowing taxable brokerage funds to continue to grow. It’s hard for me to understand why you wouldn’t see this as a negative cash flow.
Because the taxes are a fraction of the cash you've made available for spending. I pay a little out of my taxable account to get a lot in my Roth. One of the benefits of doing Roth conversions is that you make that money available for spending. If I have a major expense, over $100K say, I can take money out of the Roth tax-free. If I take it out of the tIRA I take a major tax hit because I pushed my taxable income up a couple of brackets. So I have better cash flow after conversions.

So far nobody else sees it my way, so I won't prolong the discussion. Probably I'm bending the definition of cash flow too much.

At the very least this should be seen as a neutral transaction in my net worth. I'm removing a liability by the amount of asset I reduced by paying the taxes.
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Old 10-12-2021, 07:58 AM   #47
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I just want to add a consideration for the Roth conversions in that a surviving spouse will be in a much higher tax bracket.
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Old 10-12-2021, 10:31 AM   #48
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Well, if you’re taking funds out of a taxable brokerage account to pay the tax on a Roth conversion, you’re definitely generating a negative cash flow vs just leaving the funds in a tIRA, allowing taxes to continue to be deferred, and allowing taxable brokerage funds to continue to grow. It’s hard for me to understand why you wouldn’t see this as a negative cash flow.

The only way it becomes a positive is that over time, the tax-free growth of a Roth eventually makes up for the hit of paying taxes when the conversion is made. In our case, it’s projected to take 16 years. If we were 40 or 50, that would seem to be more palatable than when we’re in our 60’s. But YMMV.
That 16 years is consistent with the right column of the analysis that I provided at post #32, which was 17 years... the negative cash flow of paying the tax is offset each year by avoiding tax on what was effectively transferred from the taxable account to the Roth. The disadvantage grow a little each year until RMDs begin at which point it is recovered over about 10 years.
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Old 10-12-2021, 11:11 AM   #49
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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…

I'm sure there is disagreement, but say MFJ and you are now living on $70k, you have $1.5M in IRAs and you have 8 years until RMDs start. It is very conceivable that when you start RMDs your IRAs will have grown to $3M. In that 8 years you also started SS, Say, that's $45k for the couple. Your RMDs will be $110k, SS, $45K, you probably have some dividends from a taxable account $20k, $110+$45k+$20k =$175k, That puts you in the 22% bracket, another $16k and you are in the 24% bracket. If one spouse dies and you are filing as a qualified widow(er) then you are still in the 22% bracket. (it's not as bad as I expected) These numbers are at today's rates, which are expected to go up in 2025.

I can only see pay if you can convert in the 12% bracket, and that limits you to say $10k of dividends and $90k of IRA withdrawals allowing $30K to go into your Roth conversion. That $90k withdrawal most likely does not even match the growth of your IRA. Your IRA still just keeps getting bigger along with the RMDs when they come due.
Did I mention it is complicated? Making it difficult to know what the right thing to do is.
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Old 10-12-2021, 12:03 PM   #50
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As I mentioned earlier, given the long runway to get a return on your investment in prepaid taxes, assumptions made over the planning horizon affect the results in powerful ways.

I have noticed that folks doing that math fairly consistently seem to assume large market returns between the conversions and RMD time. It is human nature: assume current conditions will continue.

However, many analysts are projecting lower than typical market returns from here, given our current rising rate environment and reversion to the mean.

That should be a consideration when evaluating the many moving parts, in my view.
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Old 10-12-2021, 01:36 PM   #51
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That 16 years is consistent with the right column of the analysis that I provided at post #32, which was 17 years... the negative cash flow of paying the tax is offset each year by avoiding tax on what was effectively transferred from the taxable account to the Roth. The disadvantage grow a little each year until RMDs begin at which point it is recovered over about 10 years.
That's comforting to at least confirm that the timeline Fidelity is suggesting seems reasonable. I went back into i-Orp and ran the model, and it's now suggesting that Roth conversions up to the 24% bracket will give us a slight advantage vs no Roth conversions. It won't even run the numbers for us at any lower brackets - I get a model error message. While it shows a small advantage for partial conversions, it isn't a compelling, life-changing advantage. Interestingly, a summary of i-Orp's research says that on average, Roth conversions yield about a 1% benefit vs not converting. I'm surprised it is so small.

Some missing things in the model analysis:
- As far as I can see, it doesn't allow one to compare the advantages of Roth conversions vs generating LTCG income in a taxable account.
- I've assumed we both live a similar life span so I suppose results would be different if I assumed one of us meets with an early demise. OTOH, since we already have plenty to fund our lifestyle for the rest of our lives based on the assumptions, if only one person were left, there may be a higher tax rate, but there would be lower expenses too.
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Old 10-12-2021, 01:43 PM   #52
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Because the taxes are a fraction of the cash you've made available for spending. I pay a little out of my taxable account to get a lot in my Roth. One of the benefits of doing Roth conversions is that you make that money available for spending. If I have a major expense, over $100K say, I can take money out of the Roth tax-free. If I take it out of the tIRA I take a major tax hit because I pushed my taxable income up a couple of brackets. So I have better cash flow after conversions.

So far nobody else sees it my way, so I won't prolong the discussion. Probably I'm bending the definition of cash flow too much.

At the very least this should be seen as a neutral transaction in my net worth. I'm removing a liability by the amount of asset I reduced by paying the taxes.

I see what you're getting at now. We use our taxable account for those unplanned major expenditures, not our tIRA's. So in our case, a Roth conversion would significantly reduce our liquidity - if we converted up to the 24% Federal bracket, and we also paid say 12% in state taxes (in CA), then we reduce liquid assets by 36% of the Roth conversion amount.
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Old 10-12-2021, 02:32 PM   #53
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That's comforting to at least confirm that the timeline Fidelity is suggesting seems reasonable. I went back into i-Orp and ran the model, and it's now suggesting that Roth conversions up to the 24% bracket will give us a slight advantage vs no Roth conversions. It won't even run the numbers for us at any lower brackets - I get a model error message. While it shows a small advantage for partial conversions, it isn't a compelling, life-changing advantage. Interestingly, a summary of i-Orp's research says that on average, Roth conversions yield about a 1% benefit vs not converting. I'm surprised it is so small.

Some missing things in the model analysis:
- As far as I can see, it doesn't allow one to compare the advantages of Roth conversions vs generating LTCG income in a taxable account.
- I've assumed we both live a similar life span so I suppose results would be different if I assumed one of us meets with an early demise. OTOH, since we already have plenty to fund our lifestyle for the rest of our lives based on the assumptions, if only one person were left, there may be a higher tax rate, but there would be lower expenses too.
I had the same issue with iORP. When I model doing roth conversions it ends up decreasing our overall tax burden by about 100K, assuming we live to 95, but front loads our spend significantly so we are more subject to SORR.

I believe you're not far from us. If you have a CPA who has been helpful with this, we'd love a referral if you feel comfortable PM'ing me. I've been 100% DIY and really need someone to help me think through it/double check my numbers. We spoke with a vanguard rep about their advisory services and the rep, while very good, told us that given our level of planning he didn't think we would see value from their advisory fee. Nice to have the transparency, but we still need a second set of eyes!
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Old 10-12-2021, 03:41 PM   #54
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I see what you're getting at now. We use our taxable account for those unplanned major expenditures, not our tIRA's. So in our case, a Roth conversion would significantly reduce our liquidity - if we converted up to the 24% Federal bracket, and we also paid say 12% in state taxes (in CA), then we reduce liquid assets by 36% of the Roth conversion amount. [emphasis added]
I suppose it depends on what you are counting as liquid assets? By one definition, once you do the conversion, the full amount of the converted amount becomes liquid.

In my view, doing the conversion has not affected your ability to spend money (from the sum total of your assets).
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Old 10-12-2021, 05:14 PM   #55
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- Do a Roth conversion. We don’t have any Roth IRA’s now. Traditional IRA’s make up about 1/3 of our financial assets. The rest are taxable brokerage accounts and a couple of employer-provided deferred compensation and annuity accounts. We have looked at Roth conversions before using i-Orp and other modeling tools and it has never been particularly advantageous for us. We have no children or heirs we want to leave big bucks to.
I am not quite sure why you want to increase your taxable income.

Based on the bold above, and the fact that you have 2/3's of you assets pre-tax, if it were me (and it is not) I would not do anything to increase income and taxes.

I am making an assumption that your assets are fairly large.

What I would do is live off the after tax income until RMD's hit. I would then give away a significant amount of the RMD to charity. This comes off the top, and does not create a tax increase. I think the limit is around $100k now, others will correct me if I am wrong.

Am I missing something?
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Old 10-12-2021, 05:42 PM   #56
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I see what you're getting at now. We use our taxable account for those unplanned major expenditures, not our tIRA's. So in our case, a Roth conversion would significantly reduce our liquidity - if we converted up to the 24% Federal bracket, and we also paid say 12% in state taxes (in CA), then we reduce liquid assets by 36% of the Roth conversion amount.
Unless you are sure that you would incur much higher taxes once SS and RMDs start, I don't think I would be doing a lot of Roth conversions at a combined federal/state tax of 36%.
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Old 10-13-2021, 12:13 PM   #57
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I just want to add a consideration for the Roth conversions in that a surviving spouse will be in a much higher tax bracket.
Thank you. This is a very good point that I'll need to consider further.
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Old 10-13-2021, 12:15 PM   #58
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Unless you are sure that you would incur much higher taxes once SS and RMDs start, I don't think I would be doing a lot of Roth conversions at a combined federal/state tax of 36%.
That is why we haven't done it to date. However, I hadn't really thought about the surviving spouse tax rate issue. Do you think that's a good reason to do at least some Roth conversion? I'm not sure we're ever going to be in a lower bracket than we are now, except for "unusual" and unpredictable years where we may have capital losses on certain investments.
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Old 10-13-2021, 02:45 PM   #59
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That is why we haven't done it to date. However, I hadn't really thought about the surviving spouse tax rate issue. Do you think that's a good reason to do at least some Roth conversion? I'm not sure we're ever going to be in a lower bracket than we are now, except for "unusual" and unpredictable years where we may have capital losses on certain investments.
To me it's still the same basic tax arbitrage play no matter what your tax rate is, especially if you can pay taxes out of your taxable account. Along with the financial advantage, you have more flexibility with money in a Roth than in a tIRA.

However, that higher rate opens up more possibilities that taxes won't be lower later.
- Might you move out of California at some point, and stop paying CA income tax?
- You said no heirs, but for anyone else in a similar situation with heirs in a lower tax rate following this it might be better for the heirs to inherit the tax deferred money. Keep in mind that all must be withdrawn within 10 years, but with lots of heirs the pie is cut in smaller pieces.
- As someone else posted earlier, if you charitable giving in mind, taking QCDs out of tax deferred and bequeathing tax deferred money is more efficient.

It's also unlikely that this is a big gainer, especially %wise in your finances either way. For some that means don't bother convert; for me it would mean doing a quick estimate of conversion to the next tax bracket to rid myself of the deferred tax liability and not deal with RMDs, if I can.
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Old 10-13-2021, 04:45 PM   #60
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To me it's still the same basic tax arbitrage play no matter what your tax rate is, especially if you can pay taxes out of your taxable account. Along with the financial advantage, you have more flexibility with money in a Roth than in a tIRA.

However, that higher rate opens up more possibilities that taxes won't be lower later.
- Might you move out of California at some point, and stop paying CA income tax?
- You said no heirs, but for anyone else in a similar situation with heirs in a lower tax rate following this it might be better for the heirs to inherit the tax deferred money. Keep in mind that all must be withdrawn within 10 years, but with lots of heirs the pie is cut in smaller pieces.
- As someone else posted earlier, if you charitable giving in mind, taking QCDs out of tax deferred and bequeathing tax deferred money is more efficient.

It's also unlikely that this is a big gainer, especially %wise in your finances either way. For some that means don't bother convert; for me it would mean doing a quick estimate of conversion to the next tax bracket to rid myself of the deferred tax liability and not deal with RMDs, if I can.

Good point re possibly moving out of CA someday. No plans to do that, but it could certainly happen as we've been known to move rather impulsively before.

The other thing I realized today upon discussing again with our CPA is that based on current tax law, the surviving spouse will get a stepped up basis on our real and financial investments. Assuming this doesn't change for estates such as ours, that would minimize the need for a Roth because the surviving spouse's RMD's from the tIRA's won't be huge, and the rest of the living expenses could be sourced from SS, pension income, and the taxable portfolio with a new higher basis and therefore low capital gains taxes, if any.

I think with everything I've learned up to this point, I'm leaning towards recognizing some LTCG's this year, which can also be used to reallocate assets and replenish our short-term operating funds, and leaving it at that. We can recognize a lot of gains for a 15% federal tax rate.

Thanks to all posters on this thread. Your input has been enlightening and helpful!
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