Thanks for ALL the responses! I selected (and redacted) a few for further comment. I am all about avoiding and postponing paying taxes (not evading). When I look at my Roth and it is nearly exactly what I need, and not incurring a tax liability at the same time, it is tempting. We are simply not "spendy" and not likely to ever be. This said, 99% chance our Roth will not ever be touched BUT if I buy a house with it that house will likely pass to my son (only heir at this time) tax free just as the Roth would have. Would the house value grow as fast as an invested Roth? Maybe not, but it keeps ~$100k that I didn't pay in taxes invested, probably for the next 30 years.
Does this thinking change anything? Thanks again.
First of all, you cannot convert RMDs into ROTH. Is your "borrow on margin" like borrowing against your equities in your taxable account?
I actually was thinking an RMD to ROTH would be doable, but not really up on the rules since it's 10 years away. Realistically the RMD alone will likely put me in the highest brackets. Yes, margin my taxable accounts, would be at ~7% in my Interactive Broker account.
Strongly agree on not touching the Roth money. Having multiple income sources (taxable, TIRA, Roth) down the road gives you flexibility in managing both your investments and taxes.
For anything other than a home purchase I doubt I'd draw on the roth vs traditional. I doubt I'd draw from either until RMD's force me anyway. They are both invested in similar ETF's. We live off dividends and forced LTCG (mutual fund) now and haven't drawn SS yet.
You are correct. Once you are subject to RMDs you must first take your RMD withdrawals before doing any Roth conversions.
Roth dollars are arguably the most valuable dollars in any portfolio due to their tax preferences. I would touch them last.
Keep in mind it would be very unlikely I would ever touch Roth except to buy a house. For the benefit of my son, my only heir, and under current rules, he would get the house or the Roth untaxed.
That would only be the case if you had near zero basis and your LTCGs were taxed at 20% + some NIIT. Is this the case? If it is, this is the asset I would try to preserve for you heirs to inherit and get stepped up basis rather than not touch the Roth. If not, recalculate the tax on the actual gains of selling those holdings so you know what you are actually dealing with.
The big drawback to using the Roth is that your Roth is a great source of emergency money with no income to be taxed. Is this the emergency you really want to use it for? I might try to save $100K of it for other uses. I don't believe it should never be touched. You saved money to spend in retirement, and sometimes a Roth is the best place to spend from.
We don't have zero basis but my ~$1mm cash includes ~$200k of high basis, "easy sell" equities and the next $500k is low basis and taxed at over 30%. I doubt ever needing our Roth for emergency or anything. My limiting budget for our house is <20% of net worth.
Yes, this. You said the holdings are highly appreciated, so maybe you would owe $100K but it's worth getting an exact number if you don't already have one.
But also, if you've had a home in San Diego for 20 yrs and it's worth $1M now, your profit is likely to exceed the $500K that's excludable, so you will have long-term cap gains tax on that as well. Of course it depends on how much you originally paid for it and how much you've spent or will spend on improvements, but that's some more math to do. See IRS Pub 523 for some very useful worksheets.
If you do have to realize income from both events, it might be worth trying to do it in two different years to minimize the amounts that would be taxed at the highest rates. Even if you're not ready to buy right now, it might make sense to sell something like two-thirds of the appreciated assets this year and the other one-third plus the old house next year.
Very good points (and I did think of all of them
. I have a spreadsheet that is 90% correct on the numbers I enter but those are still big variables. I might owe $100k, or maybe just $90. I'm conservative so for now it is $100 and hope for better.
For the sale I have two years to report the exchange and not pay capital gains.
The two years could be 2025 and 2026. Not being contingent it might make sense to buy in 2025 and sell in 2026. A stock market crash could be a factor for example.
Would you qualify for a HELOC on the existing home?
I'm sure I would qualify but a simple margin borrow against my taxable equities seems the best option. I could get that money tomorrow at ~7%.
I think people are missing that RMDs do not start for 10 years... they can do conversions for that long...
You did not say how much in taxable accounts... IOW, what paper gains do you have there?
I will do conversions every year until RMD's some years minimal, more in other years, depends on market advance/declines. Taxable accounts are over $4MM.
Have you mapped out all the costs involved in switching homes? You'll need cash for that as well. Realtor fees, moving costs, furniture and such for the new place?
How did you come to have a million in cash? Does spending that money on a house mean you have no cushion for other expenses.
Oh yes. I mentioned our home purchase will not exceed 20% of net worth, my personal comfort limit and leaves a huge cushion. $500k in cash is from a 33 year owned rental I sold in 2022 mostly sitting in 5% MM accounts. Even with $80k loss carry forwards that sale cost me almost $100k in taxes. The balance is other cash and high basis equities.
I would see if there is any tax loss harvesting available in your taxable account and depending on your income,
Zero tax harvesting available at this time.
