Roth Conversion Taxes - Perspective (I Needed)

[LRDave]

For people who say they aren't making progress because the tIRA keeps growing, think about how much bigger that tIRA and resulting RMDs would be if you weren't converting at all.

Also, are you keeping most or all of your bonds in the tIRA? The Bogleheads guide says to do this for tax efficiency, and it also slows the growth of your tIRA.

It excites me to have this problem.....

 

[CRLLS]

You can't Roth convert an RMD. You can convert an amount over and above your RMD.

I think you are both saying the same thing... even when you are subject to RMDs you can still do Roth conversions... on top pf RMDs.

True
True

Sorry if I was unclear.

 

[target2019]

True
True

Sorry if I was unclear.

You did say it. I understood you meant that conversion can happen even when subject to RMD.

I'm starting conversion this year. TurboTax what-if worksheet for 2020 is very informative. I found that it helps to set the balance due to zero by adding estimated withholding. Then you can add certain increments of conversion until tax owed is no longer divisible by 12 (for 12% bracket.)

 

[thefist]

Also, are you keeping most or all of your bonds in the tIRA? The Bogleheads guide says to do this for tax efficiency, and it also slows the growth of your tIRA.

In accumulation phase, or age 59.5+, this makes a lot of sense.
If you are young, retired, and living off total return of a portfolio, this isn't practical. An asset allocation to mitigate SORR requires cash/bond/alts for safety.
After reading so much about tax optimization, I wonder if a major point is being missed.

Select your (reasonable) lifestyle, then optimize taxes within it. Don't optimize taxes, then fit your lifestyle to it.

 

[pb4uski]

^^^ I think RB was saying that IF your AA includes an allocation to bonds that it is preferable to have your bond allocation in your 401k or tIRA... I woud think this would apply no matter what your allocation to bonds is.

 

[thefist]

^^^ I think RB was saying that IF your AA includes an allocation to bonds that it is preferable to have your bond allocation in your 401k or tIRA... I woud think this would apply no matter what your allocation to bonds is.

I don't agree with the last statement. If under 59.5, and your bond income is not accessible, you put yourself at greater SORR with a higher allocation to equities in the taxable account. My asset mix is about 70% taxable, 30% IRA/Roth. I'm comfortable with 75/25 AA. However, if the 25% bonds is all deferred, then I'm essentially 100% equity in my available assets. Not good for preventing SORR.

I agree the advice is generically sound, but not universally applicable. It's kinda like the decision the take SS early or wait. In a vacuum, if you think you'll live past age 78, the choice is clear. But that calculation ignores taxes, pensions, etc. The holistic view matters.

 

[pb4uski]

No.... SORR is a principally a function of AA.... placement isn't relevant. Note that FIRECalc and many tools that assess SORR ask for AA but not tax placement.

In your example if you are 75/25 and 75 stocks in taxable and 25 bonds in tax-deferred and stocks take a 20% dive and you need to take 4 to spend then you have 56 in stock and 25 in bonds and 81 in total.

So to rebalance to 75/25 in your tax deferred you would sell 5 of bonds and buy 5 of stocks... you would have 61 in stocks (56 in taxable and 5 in tax-deferred) and 20 in bonds (all tax-deferred).

 

[RunningBum]

I don't agree with the last statement. If under 59.5, and your bond income is not accessible, you put yourself at greater SORR with a higher allocation to equities in the taxable account. My asset mix is about 70% taxable, 30% IRA/Roth. I'm comfortable with 75/25 AA. However, if the 25% bonds is all deferred, then I'm essentially 100% equity in my available assets. Not good for preventing SORR.

I agree the advice is generically sound, but not universally applicable. It's kinda like the decision the take SS early or wait. In a vacuum, if you think you'll live past age 78, the choice is clear. But that calculation ignores taxes, pensions, etc. The holistic view matters.

You start with your bonds in the IRA. If there's a downturn, where you'd want to be selling off bonds rather than depressed stocks, you sell the stocks in your taxable account, and buy them back in your IRA, being careful to stay clear of wash sale rules.

In most cases there won't be such a downturn, so you won't have to do this. But you can, if you have to.

 

[thefist]

Coincidentally, either this morning or last night I was reading a post from earlyretirementnow.com about the best LOCATION for bonds. The very first comment about the article was a request to analyze how to go from 100/0 AA in accumulation phase, to 60/40 retirement income and preservation phase. Ideally this is gradual, but not always, especially for the bond haters

 

[thefist]

You start with your bonds in the IRA. If there's a downturn, where you'd want to be selling off bonds rather than depressed stocks, you sell the stocks in your taxable account, and buy them back in your IRA, being careful to stay clear of wash sale rules.

In most cases there won't be such a downturn, so you won't have to do this. But you can, if you have to.

I see what you and pb4 are saying. Its just harder to get there if your asset location doesn't start that way. You do lose a little flexibility as well, if forced to sell highly appreciated stocks out of necessity, taking a bigger tax hit.

Thanks for the discussion.

 

[Midpack]

I guess this is an asset placement thread now...

 

[RunningBum]

It's a guideline, and not a hard and fast rule. But selling high, at a 15% LTCG rate, doesn't seem like a bad thing. Probably better than letting it bloat your IRA and taking it later at 22%, 24%, or maybe even higher.

Unless you're trying for an ACA subsidy. I'm about 5% cash in my taxable account so that I don't have to sell appreciated stock, but I can do that and still keep my tIRA in all bonds, and keep my AA reasonable. You don't want to alter sound investment strategies too much just to get the subsidy while costing yourself more in tax liabilities or investment returns.

 

[RunningBum]

I guess this is an asset placement thread now...

Sorry, but when people were talking about not making a dent in their tIRA with their conversions, I thought it was appropriate to mention keeping bonds in your tIRA. That led to what seems like a useful discussion about the mechanics of that, which is probably drawing to a close.

 

[bingybear]

I guess this is an asset placement thread now...

GOOD, I was wondering where I should have my Bond CEF and equity CEF

 

[Gumby]

Sorry, but when people were talking about not making a dent in their tIRA with their conversions, I thought it was appropriate to mention keeping bonds in your tIRA. That led to what seems like a useful discussion about the mechanics of that, which is probably drawing to a close.

I thought it was a good point. I have been pondering just that allocation issue as I contemplate my Roth conversion strategy. l'll tinker with my new spreadsheet a little.

 

[Kwirk]

You can't Roth convert an RMD. You can convert an amount over and above your RMD.

And, you can use part/all of what's left of the RMD after taxes to pay part/all of the taxes on the conversion.

 

[Gumby]

And, you can use part/all of what's left of the RMD after taxes to pay part/all of the taxes on the conversion.

Also a good point.

 

[bingybear]

I guess this is an asset placement thread now...

perspective is a very personal thing and is partially dependent on the different situation we find ourselves in. You did a lot of analysis to come up with the plan you are trying to follow. Has anything changed? Did the the law changes cause changes in your plan?


Have you found a flaw in your plan?


You should monitor and adjust your plan as need be... cold feet -- put on warmer socks.

 

[donheff]

On the asset placement side of this thread I keep only equities in taxable all bonds in tax deferred plus the equities needed to archive my AA. But I read a recent article about the tax implications of asset placement that pointed out some nuances to consider.

 

[Midpack]

perspective is a very personal thing and is partially dependent on the different situation we find ourselves in. You did a lot of analysis to come up with the plan you are trying to follow. Has anything changed? Did the the law changes cause changes in your plan?


Have you found a flaw in your plan?


You should monitor and adjust your plan as need be... cold feet -- put on warmer socks.

My analysis was two months ago. I’ll be converting for 6-7 years, so I can reconsider and stop converting annually. Of course I’ll also reconsider any substantial change in tax laws or other regs, though higher tax rates only make converting more attractive.

 

[RunningBum]

On the asset placement side of this thread I keep only equities in taxable all bonds in tax deferred plus the equities needed to archive my AA. But I read a recent article about the tax implications of asset placement that pointed out some nuances to consider.

Unless I missed it, this article talks about asset allocation between taxable and a Roth only. It briefly mentions the tIRA instead of a Roth by saying that you'd have to deduct the taxes, but doesn't do any calculations or analysis on that.

There are other nuances not pointed out, like the stepped up basis that heirs will get upon your death, and that charities would get if you donated those assets rather than case.

 

[gwraigty]

I guess this is an asset placement thread now...

I just want to say that I appreciate all the analysis you do and your willingness to share with us.

 

[RunningBum]

I'm in my third year of higher conversions as previously planned and still under 59.5... recent law changes have made me consider changing my plan. I expect there will be some adjustments.

Which changes specifically have you considering adjustments, and why?

 

[sengsational]

Nice thread topic (OP, not the OT drift). So many other posts on Roth conversions were centered on 'bird in the hand' tax minimizing. Lots of people not going with the earlier tax payments that i-orp was saying was better. I'm 'making' so much on PTC, I'm not doing aggressive conversions, but will go there when that ends.

 

[donheff]

Nice thread topic (OP, not the OT drift). So many other posts on Roth conversions were centered on 'bird in the hand' tax minimizing. Lots of people not going with the earlier tax payments that i-orp was saying was better. I'm 'making' so much on PTC, I'm not doing aggressive conversions, but will go there when that ends.

+1 (even though I was one of the OT posters) I have a question about iOrp. When I ran it years ago IIRC it recommended which pot to pull expenses from but I don't recall specific suggestions for Roth conversions. Does iOrp currently offer conversion recommendations.