Out-to-Lunch
Thinks s/he gets paid by the post
But don't BOTH scenarios result in $70k less in your IRA?
Opps, Margined my LTCGs, now what?
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But don't BOTH scenarios result in $70k less in your IRA?
In a previous post I detailed it like this.
"Yes, I don't need to, I probably could stay in the 12% bracket, problem is I can't predict tax rates in the future. What I can predict is I could have almost a double in my tax deferred accounts by the time the wife and I are 72. That puts our RMDs over $100,000 add $50k for two SS checks and dividends on the taxable accounts, and our tax bracket is high? So, maybe 22% isn't so bad."
Maybe, but I don't expect to ever touch my Roths, between SS and RMDs, I expect it to be way more than our spending.
Long term tax modeling, I'd like to, but not sure how. It seems it would involve a lot of guessing, Re: market growth and future tax rates.
As said about $150k of SS and RMDs, if we have no great market upheaval.
If it's a wash, then I see the advantage that I reduced my RMDs. First year RMD $70k x 6 years growth x 3.65%. At 7% that is $105k x 3.65% = $3,832.
If lucky the tax bracket stays at 22% I pay $843 in taxes. If the market is good and tax rates go even higher, (I expect this) Then it could $1200. This is not huge, but converting over the next 10 years it gets bigger and the RMD percentage goes up every year. I have a friend at 12.3% RMD, he's 96!
Agreed, just looking for the best financially. All I'm doing is optimizing for my kids, and I hope it makes no difference to their finances. Hopefully they will be in their 50s and financially secure.
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ivinsfan
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I missed that post but I can tell from first hand experience from a couple still generating work income at 73, that we made the mistake of thinking the 12% bracket was a good thing.
NW-Bound
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A margin interest of 1.06% is super low. I have accounts at Schwab and MerrillEdge, and they charge around 6 to 7%. I have no need to borrow money, nor to buy stocks on margin, but just curious to see what it would cost.
I learned about low margin rates at IBKR from MMM. Pete wanted to buy a house for a friend and found very cheap money at IBKR. He detailed the process here.
https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-review/
After 6 months of my kids trying to get a closing on a fixer upper, I decided to get set up with IBKR, just in case they needed it. Through no fault of their own, at 8 months the house still hadn't closed. So I pulled the trigger and borrowed to buy the home and mortgage it with them. It had multiple inspections, pass then fail, failing required a different type of mortgage and applying for the second mortgage with a new appraisal. This was all HUD related, then, the closing agents company merged with another and they stopped closings until everything merge related had been finished. When it was finished, they had trouble hiring an office manager. It was just problem after problem.
In a post to Pete's blog, I mentioned I setup a HELOC just in case I needed to cover the 50% margin. He recommended I get the Heloc loan and pay down the margin just in case there was a flash crash. So I did that, I have 6 months with a teaser 0.99% rate.
After I retired, I didn't care about being able to borrow, didn't think I'd ever have the need. Things happen!
Interesting sit down with the banker, I'd like to see about a Heloc, Oh, I'm not working, I don't have any income, and I'm not sure what my credit score is.
ERD50
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
I'm with Out-to-Lunch on this, what's the advantage to also doing the conversion? I'll add the numbers in case I'm missing something.
- Take $70K out of IRA to spend = $X in taxes. >>> [IRA is $70K lower, Roth is the same]
- Take $70K out of ROTH to spend = 0 in taxes + Convert $70K out of IRA to Roth = $X in taxes. >>> [IRA is $70K lower, Roth is the same]
Why convert?
-ERD50
We're close enough that I'd look at spreading any extra withdrawals into next year to avoid a tax spike into a higher tax bracket this year. Considering the taxes for both years of course.
A significant benefit of a Roth conversion is paying the taxes using money from a taxable account, allowing the entire tIRA withdrawal to be Roth converted. It effectively moves the amount of the taxes from the taxable account into the Roth, avoiding future taxes for the duration of the Roth. Not having that option makes the conversion benefit less appealing, and is effectively making that margin loan more expensive. Which is frequently the case in the conversion process.
Nothing wrong with the 22% tax bracket if your RMD's will be taxed at a higher rate.
I make tIRA withdrawals as needed to minimize lifetime income/wealth. It's the one big "income" source I can control. Currently I have enough in taxable accounts to fund our expenses, so all of the tIRA withdrawal is Roth converted. Later in retirement we do use tIRA withdrawals for income, after the taxable accounts run dry. We'll still optimize tIRA withdrawals the same as before, and add Roth withdrawals if we need more income.
There is no benefit to Roth converting at the same time as withdrawing from a Roth, as far as I know. It would allow you to move some Roth money from one spouse's account to the other's if you both have tIRA's as well. But that's not much use to us. Just keep what you need from the tIRA and convert the rest.
A significant benefit of a Roth conversion is paying the taxes using money from a taxable account, allowing the entire tIRA withdrawal to be Roth converted. It effectively moves the amount of the taxes from the taxable account into the Roth, avoiding future taxes for the duration of the Roth. Not having that option makes the conversion benefit less appealing, and is effectively making that margin loan more expensive. Which is frequently the case in the conversion process.
Nothing wrong with the 22% tax bracket if your RMD's will be taxed at a higher rate.
I make tIRA withdrawals as needed to minimize lifetime income/wealth. It's the one big "income" source I can control. Currently I have enough in taxable accounts to fund our expenses, so all of the tIRA withdrawal is Roth converted. Later in retirement we do use tIRA withdrawals for income, after the taxable accounts run dry. We'll still optimize tIRA withdrawals the same as before, and add Roth withdrawals if we need more income.
There is no benefit to Roth converting at the same time as withdrawing from a Roth, as far as I know. It would allow you to move some Roth money from one spouse's account to the other's if you both have tIRA's as well. But that's not much use to us. Just keep what you need from the tIRA and convert the rest.
SecondCor521
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
The only reason I can think of to do the Roth conversion and Roth withdrawal rather than the simpler "just withdraw from the traditional" approach, is if OP is not sure they're going to spend the full $70K in the desired time frame.
If they only spend $50K, then the Roth conversion plus Roth withdrawal leaves the leftover $20K in the Roth. The "just withdraw from traditional" would mean that $20K is in taxable. Probably not the end of the world either way.
If they only spend $50K, then the Roth conversion plus Roth withdrawal leaves the leftover $20K in the Roth. The "just withdraw from traditional" would mean that $20K is in taxable. Probably not the end of the world either way.
Someone said I have options.
Here a few.
This has got so convoluted I’m not sure what I’m after anymore. But I’m sure I want to reduce my IRA, and Sep/IRA balances to reduce future RMDs.
Let’s start with my Original Post where my only withdrawal was from an IRA. I have modified the number slightly, because I found more Income.
I have interest, dividends and a LTC loss, that total to allow me to withdraw $186k from my IRA and stay in the 22% bracket.
I need $95k to pay spending, tuition and the taxes due. That leaves $91k to Roth Convert. Taxes are $28,700 or 14.6% of my total income, if that has any bearing.
The effect, I removed $186,000 from our tax deferred accounts, paying $28,700 in taxes.
Or,
I withdraw $96,000 from my IRA putting me at the top of the 12% bracket and pay $8,252 in taxes. I have $1000 extra I could put in the Roth conversion.
But I miss out on converting the other $90,000 at the tax cost of an additional $20,448.
$20,448 tax on $90,000 on the face of it seems bad but it’s about 22%.
OR,
I can withdraw $23,000 out of my IRA and $72,000 out of my Roth and pay $0 tax.
Or,
I can withdraw $23,000 out of my IRA and $62,000 out of my Roth and $10,000 from HSA and pay $0 tax.
sigh.
Here a few.
This has got so convoluted I’m not sure what I’m after anymore. But I’m sure I want to reduce my IRA, and Sep/IRA balances to reduce future RMDs.
Let’s start with my Original Post where my only withdrawal was from an IRA. I have modified the number slightly, because I found more Income.
I have interest, dividends and a LTC loss, that total to allow me to withdraw $186k from my IRA and stay in the 22% bracket.
I need $95k to pay spending, tuition and the taxes due. That leaves $91k to Roth Convert. Taxes are $28,700 or 14.6% of my total income, if that has any bearing.
The effect, I removed $186,000 from our tax deferred accounts, paying $28,700 in taxes.
Or,
I withdraw $96,000 from my IRA putting me at the top of the 12% bracket and pay $8,252 in taxes. I have $1000 extra I could put in the Roth conversion.
But I miss out on converting the other $90,000 at the tax cost of an additional $20,448.
$20,448 tax on $90,000 on the face of it seems bad but it’s about 22%.
OR,
I can withdraw $23,000 out of my IRA and $72,000 out of my Roth and pay $0 tax.
Or,
I can withdraw $23,000 out of my IRA and $62,000 out of my Roth and $10,000 from HSA and pay $0 tax.
sigh.
SecondCor521
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
https://www.goodreads.com/quotes/449586-alice-would-you-tell-me-please-which-way-i-ought
I always have to start with my goals first. It's downhill from there. Sometimes a long and complicated downhill, but still down hill.
ETA: I would say that people here are pretty good at providing options, double checking your tax math, and answering questions about options, but you're the only one who can really identify your goals.
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serenity81
Confused about dryer sheets
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I am trying to come up with calculations that will allow me to measure my risk of getting such money-out margin loans. I was able to do a spreadsheet for calculating risk when taking a margin loan to buy securities on same account but not withdraw them as cash. It should be very close I reckon but calculations seem a bit more complex. The ultimate motive behind this is to see how much % wise of my securities total should I take as loan so not to risk being margin called and calculate various scenarios.
I would love somebody knows about this or suggest a formula where I can put the following variables and get a dollar amount that the account (threshold) that it has to get at or below to will trigger a margin call:
Variables:
Initial Account Value $
Loan Amount $
Initial Margin %
Maintenance Margin %
I would love somebody knows about this or suggest a formula where I can put the following variables and get a dollar amount that the account (threshold) that it has to get at or below to will trigger a margin call:
Variables:
Initial Account Value $
Loan Amount $
Initial Margin %
Maintenance Margin %
OP here, Well, I pushed the wrong button and lost a long description of the outcome.
The short story, I withdrew $189k from my IRA half went to the Roth Conversion and half to the bank. I also moved $21k from the HSA to my bank.(receipts) From this I paid $28k in taxes, $26k in Tuition and I gifted $15k.
While doing my taxes, I remembered my wife's Family HSA, so sent $8,200 in for that. Until then I had about a $400 refund, but with the HSA contribution I'm now getting a $2,200 refund. Darn it, I could have put another $10k into my Roth Conversion. So much for my careful tax planning!
If you recall I had a Heloc at 0.99% and a IBKR margin loan at about 1.5%. And the great news, I talked with the kids Mortgage broker and they are scheduled to close April 13th on a new bank mortgage to payoff the mortgage I gave then 8 months ago. When that happens I will pay off the margin loan and the Heloc.
The short story, I withdrew $189k from my IRA half went to the Roth Conversion and half to the bank. I also moved $21k from the HSA to my bank.(receipts) From this I paid $28k in taxes, $26k in Tuition and I gifted $15k.
While doing my taxes, I remembered my wife's Family HSA, so sent $8,200 in for that. Until then I had about a $400 refund, but with the HSA contribution I'm now getting a $2,200 refund. Darn it, I could have put another $10k into my Roth Conversion. So much for my careful tax planning!
If you recall I had a Heloc at 0.99% and a IBKR margin loan at about 1.5%. And the great news, I talked with the kids Mortgage broker and they are scheduled to close April 13th on a new bank mortgage to payoff the mortgage I gave then 8 months ago. When that happens I will pay off the margin loan and the Heloc.
