O
olah
Guest
Hi Everyone,
Conversions of Traditional IRA's to Roth IRA's are on a lot of people's minds these days, what with this year's Federal tax legislation encouraging them, and the fact that there are a lot of folks who think that gradually converting your Traditional IRA to a Roth IRA is basically a sound idea that puts you ahead later in life.
So, I was wondering: does anybody have any ideas on how to use Firecalc to take into account the future value of the benefit you see later that is created by the loss you take now caused by such conversions? Please consider the followinig scenario as an example:
Let's say I choose to convert $70K from my Traditional IRA to my Roth IRA every year going forward, this causes me to have to pay, say, $20K in additional taxes each year because of having to report the $70K conversion as ordinary income in each year (which is what happens when you make such conversions). I would do this conversion every year for 10 years until I reach the age of 70 1/2, at which time my Traditional IRA's minimum required distributions will kick in, and I'd stop.
Now, I know that Firecalc does not purport to deal with taxes in any way, and that all annual tax payments are considered part of the annual withdrawal, period. It's all just spending.
However, this particular annual 20K tax payment, which would come out of my after-tax money, is not like regular annual spending or normal tax payments where the withdrawn money is just gone, never to return. This particular 20K tax payment is like an investment cost of sorts, a tax loss that I am electing to voluntarily take now because of the value of the following future tax benefits:
#1 - the fully taxable minimum required distributions from my Traditional IRA will be much less when they kick in at age 70 1/2 than they would be otherwise, and this effect will be come more and more pronounced as the MRD's increase in proportion to the Traditional IRA balance as you get into your 80's and beyond (I can't believe I'm planning for this). This is because I'll have decreased the balance in this IRA by well over $1M ($700K + the compounded growth over 10 years) and,
#2 - that $1M + of annual converted amount of $70K continues to grow tax-free in the Roth year-over-year AFTER age 70 1/2 too, and that compounded Roth balance can be withdrawn completely tax-free at any time in any amount later in life - no restrictions and no requirements.
The question is: is there any way to use Firecalc to factor in the future added value of the above-listed tax benefits (#1 and #2) that such voluntary current 20K tax payments are creating? Yes, on the one hand, the 20K is money out-of-pocket every year as an additional withdrawal. Money going out is money going out. But, on the other hand, this 20K going out every year is creating value much larger than that later on in life. So, this 20K conversion tax going out every year is not lost forever like normal withdrawal spending or tax payments are.
The problem is, if I were to count this 20K as an additional withdrawal, it would push me out of the 95% SWR zone. And I don't want that to happen. But it shouldn't have to happen, because I don't think it should count as a normal withdrawal for all the reasons set forth above. It's something different, isn't it? It's another form of investment that I'd be electing to do. The question is: how can I use Firecalc to account (or offset) for all this?
Does anyone have any Firecalc tricks or hints or just plain good advice on how to do this? Is it even possible? Maybe I'm missing something, but it doesn't seem obvious to me. Dory?
Thanks in advance for any and all ideas . . .
Conversions of Traditional IRA's to Roth IRA's are on a lot of people's minds these days, what with this year's Federal tax legislation encouraging them, and the fact that there are a lot of folks who think that gradually converting your Traditional IRA to a Roth IRA is basically a sound idea that puts you ahead later in life.
So, I was wondering: does anybody have any ideas on how to use Firecalc to take into account the future value of the benefit you see later that is created by the loss you take now caused by such conversions? Please consider the followinig scenario as an example:
Let's say I choose to convert $70K from my Traditional IRA to my Roth IRA every year going forward, this causes me to have to pay, say, $20K in additional taxes each year because of having to report the $70K conversion as ordinary income in each year (which is what happens when you make such conversions). I would do this conversion every year for 10 years until I reach the age of 70 1/2, at which time my Traditional IRA's minimum required distributions will kick in, and I'd stop.
Now, I know that Firecalc does not purport to deal with taxes in any way, and that all annual tax payments are considered part of the annual withdrawal, period. It's all just spending.
However, this particular annual 20K tax payment, which would come out of my after-tax money, is not like regular annual spending or normal tax payments where the withdrawn money is just gone, never to return. This particular 20K tax payment is like an investment cost of sorts, a tax loss that I am electing to voluntarily take now because of the value of the following future tax benefits:
#1 - the fully taxable minimum required distributions from my Traditional IRA will be much less when they kick in at age 70 1/2 than they would be otherwise, and this effect will be come more and more pronounced as the MRD's increase in proportion to the Traditional IRA balance as you get into your 80's and beyond (I can't believe I'm planning for this). This is because I'll have decreased the balance in this IRA by well over $1M ($700K + the compounded growth over 10 years) and,
#2 - that $1M + of annual converted amount of $70K continues to grow tax-free in the Roth year-over-year AFTER age 70 1/2 too, and that compounded Roth balance can be withdrawn completely tax-free at any time in any amount later in life - no restrictions and no requirements.
The question is: is there any way to use Firecalc to factor in the future added value of the above-listed tax benefits (#1 and #2) that such voluntary current 20K tax payments are creating? Yes, on the one hand, the 20K is money out-of-pocket every year as an additional withdrawal. Money going out is money going out. But, on the other hand, this 20K going out every year is creating value much larger than that later on in life. So, this 20K conversion tax going out every year is not lost forever like normal withdrawal spending or tax payments are.
The problem is, if I were to count this 20K as an additional withdrawal, it would push me out of the 95% SWR zone. And I don't want that to happen. But it shouldn't have to happen, because I don't think it should count as a normal withdrawal for all the reasons set forth above. It's something different, isn't it? It's another form of investment that I'd be electing to do. The question is: how can I use Firecalc to account (or offset) for all this?
Does anyone have any Firecalc tricks or hints or just plain good advice on how to do this? Is it even possible? Maybe I'm missing something, but it doesn't seem obvious to me. Dory?
Thanks in advance for any and all ideas . . .
