Your input on options for 2021 income

[tb001]

Quote:

Originally Posted by Scuba 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.

[Scuba]

Quote:

Originally Posted by tb001 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?

[DrRoy]

Roth Conv.

[Time2]

Quote:

Originally Posted by tb001 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."

[tb001]

Quote:

Originally Posted by Scuba 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…

[Scuba]

Quote:

Originally Posted by tb001 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.

[tb001]

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.

[Montecfo]

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.

[pb4uski]

Quote:

Originally Posted by tb001 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.

[Montecfo]

Quote:

Originally Posted by pb4uski 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.

[RunningBum]

Quote:

Originally Posted by Montecfo 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.

[pb4uski]

Quote:

Originally Posted by Montecfo 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 value	Roth conv value	Roth advantage		No conv	Roth conv value	Roth advantage
64	10,000	10,000	0		11,200	10,000	-1,200
65	10,690	10,700	10		11,974	10,700	-1,274
66	11,428	11,449	21		12,801	11,449	-1,352
67	12,216	12,250	34		13,686	12,250	-1,436
68	13,059	13,108	49		14,632	13,108	-1,524
69	13,960	14,026	65		15,644	14,026	-1,618
70	14,924	15,007	83		16,725	15,007	-1,718
71	15,954	16,058	103		17,881	16,058	-1,824
72	15,325	17,182	1,857		18,967	17,182	-1,785
73	16,361	18,385	2,024		20,110	18,385	-1,725
74	17,459	19,672	2,213		21,313	19,672	-1,641
75	18,622	21,049	2,426		22,578	21,049	-1,530
76	19,855	22,522	2,667		23,908	22,522	-1,386
77	21,160	24,098	2,938		25,306	24,098	-1,207
78	22,542	25,785	3,243		26,774	25,785	-988
79	24,004	27,590	3,586		28,315	27,590	-724
80	25,550	29,522	3,972		29,932	29,522	-410
81	27,184	31,588	4,404		31,628	31,588	-40
82	28,911	33,799	4,888		33,406	33,799	393
83	30,735	36,165	5,430		35,269	36,165	896
84	32,661	38,697	6,036		37,220	38,697	1,477
85	34,693	41,406	6,713		39,263	41,406	2,143
86	36,837	44,304	7,467		41,402	44,304	2,902
87	39,097	47,405	8,308		43,642	47,405	3,763
88	41,480	50,724	9,244		45,985	50,724	4,739
89	43,991	54,274	10,283		48,436	54,274	5,839
90	46,635	58,074	11,438		51,001	58,074	7,072
91	49,420	62,139	12,719		53,688	62,139	8,451
92	52,351	66,488	14,137		56,499	66,488	9,989
93	55,436	71,143	15,706		59,442	71,143	11,700
94	58,682	76,123	17,441		62,528	76,123	13,594
95	62,096	81,451	19,355		65,764	81,451	15,687
96	65,687	87,153	21,466		69,159	87,153	17,994
97	69,463	93,253	23,791		72,721	93,253	20,532
98	73,433	99,781	26,348		76,461	99,781	23,320
99	77,608	106,766	29,158		80,396	106,766	26,370
100	81,998	114,239	32,242		84,538	114,239	29,702
101	86,613	122,236	35,623		88,901	122,236	33,335
102	91,467	130,793	39,325		93,499	130,793	37,294
103	96,572	139,948	43,376		98,356	139,948	41,593
104	101,943	149,745	47,802		103,487	149,745	46,258
105	107,593	160,227	52,634		107,701	160,227	52,526

[Montecfo]

Quote:

Originally Posted by pb4uski 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 value Roth conv value Roth advantage   No conv Roth conv value Roth advantage 64 10,000 10,000 0   11,200 10,000 -1,200 65 10,690 10,700 10   11,974 10,700 -1,274 66 11,428 11,449 21   12,801 11,449 -1,352 67 12,216 12,250 34   13,686 12,250 -1,436 68 13,059 13,108 49   14,632 13,108 -1,524 69 13,960 14,026 65   15,644 14,026 -1,618 70 14,924 15,007 83   16,725 15,007 -1,718 71 15,954 16,058 103   17,881 16,058 -1,824 72 15,325 17,182 1,857   18,967 17,182 -1,785 73 16,361 18,385 2,024   20,110 18,385 -1,725 74 17,459 19,672 2,213   21,313 19,672 -1,641 75 18,622 21,049 2,426   22,578 21,049 -1,530 76 19,855 22,522 2,667   23,908 22,522 -1,386 77 21,160 24,098 2,938   25,306 24,098 -1,207 78 22,542 25,785 3,243   26,774 25,785 -988 79 24,004 27,590 3,586   28,315 27,590 -724 80 25,550 29,522 3,972   29,932 29,522 -410 81 27,184 31,588 4,404   31,628 31,588 -40 82 28,911 33,799 4,888   33,406 33,799 393 83 30,735 36,165 5,430   35,269 36,165 896 84 32,661 38,697 6,036   37,220 38,697 1,477 85 34,693 41,406 6,713   39,263 41,406 2,143 86 36,837 44,304 7,467   41,402 44,304 2,902 87 39,097 47,405 8,308   43,642 47,405 3,763 88 41,480 50,724 9,244   45,985 50,724 4,739 89 43,991 54,274 10,283   48,436 54,274 5,839 90 46,635 58,074 11,438   51,001 58,074 7,072 91 49,420 62,139 12,719   53,688 62,139 8,451 92 52,351 66,488 14,137   56,499 66,488 9,989 93 55,436 71,143 15,706   59,442 71,143 11,700 94 58,682 76,123 17,441   62,528 76,123 13,594 95 62,096 81,451 19,355   65,764 81,451 15,687 96 65,687 87,153 21,466   69,159 87,153 17,994 97 69,463 93,253 23,791   72,721 93,253 20,532 98 73,433 99,781 26,348   76,461 99,781 23,320 99 77,608 106,766 29,158   80,396 106,766 26,370 100 81,998 114,239 32,242   84,538 114,239 29,702 101 86,613 122,236 35,623   88,901 122,236 33,335 102 91,467 130,793 39,325   93,499 130,793 37,294 103 96,572 139,948 43,376   98,356 139,948 41,593 104 101,943 149,745 47,802   103,487 149,745 46,258 105 107,593 160,227 52,634   107,701 160,227 52,526

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.

[Out-to-Lunch]

Quote:

Originally Posted by tb001 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.

[pb4uski]

Quote:

Originally Posted by Montecfo 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.

[Montecfo]

Quote:

Originally Posted by pb4uski 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.

[RunningBum]

Quote:

Originally Posted by Montecfo 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.

[Montecfo]

Quote:

Originally Posted by RunningBum 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.

[RunningBum]

Quote:

Originally Posted by Montecfo 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.

[Montecfo]

Quote:

Originally Posted by RunningBum 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.