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Post by FD1000 on Apr 13, 2023 4:03:28 GMT
Fearchar , Thanks for the spreadsheet but 1) Why a $305,500 conversion? it's a strange number. Can you do $250K for me? 2) Taxes are not correct and too high. Example: first line taxable=$365,500 using( link) gets you only $65,712 in taxes instead of $74824, which is about 9K less than yours. But, since we didn't calculate GA taxes, we miss $16K taxes. On $250K+60K SS, GA TAX is about $13K. 3) I would not use inflation because the annual performance is reduced by it. You need to see the real totals that goes from year to year. Sure, we know it's worth less after inflation To make it clear, suppose performance is 5% and inflation is 5% and I start with $100K. After one year it grows to $105K, if you deduct 5%, the portfolio will just be $100K. You may have another column of what it's worth after inflation. Then, SS also needs to be adjusted for inflation. I would just kill the inflation thing. So, 1) Conversion of $250K this year will show me the real effect and how the future looks like. 2) The portfolio should be reduced to under one million at age 73. At age 73-4, I will know a lot more. How taxes look like and based on that, if I need another 1-2 years of conversion. 3) If you don't convert, the problem gets worse. Your RMD is added to your taxable and your taxable grows more every year. So you pay tax on the RMD and you keep paying taxes on the money that was transferred to your taxable account.
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Post by FD1000 on Apr 13, 2023 19:41:33 GMT
To be sure., I created another fake tax payer profile, on top of my regular tax (I can't make changes to mine because I file it). This way I can play with the numbers all year around and know how much tax to pre-pay during the years. I found the answer for NIIT. It doesn't tax the conversion. It looks at AGI, if it's greater than $250K, then it looks how much you converted more and compare it to your CG+distributions and take the lower one. I tested $60K CG with against $250K + $500K conversation. The NIIT was the same $60K * 3.8% = $2280K, see attachment. I also found that converting $500K have total taxes for Fed + GA at about 29% from the AGI, while converting only 250 have a total tax of about 22%. It's meaningful enough to convert just $250K, and paying 22% total tax for only 7 years, and after that about 10-12% isn't bad at all. Attachments:
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Post by retiredat48 on Apr 14, 2023 0:31:09 GMT
FD1000 ,...FD. Someday I will read this thread in its entirety...and then post my detail conclusions. But for me, I find it incredible that you would consider doing conversions and paying 24% or more in taxes to the government now, to moderate/reduce tax liabilities in the far future. First, you are forfeiting that future tax laws/rules may change, and some may be beneficial to seniors. Seniors are squawking a lot, and reductions in tax impact severaty may be coming. Instead of focusing on RMD withdrawals/Income, consider total income. That is, what if you have bona-fide investments targeted to lose money in the high tax years...to keep deferring. Like buying fixer-upper, high deduction real estate (losses in first couple years). There is an entire industry of accountants developing methods to reduce the impact on inherited IRAs whereby the recipients have to include lump sums withdrawals of the entire inherited Trads in 10 years. This income is added on to regular income. Wait awhile and see what evolves in tax mitigation along these lines.. If you make major conversions and pay a lot in taxes now, and you die, you have just handed the gvt huge sums for very little in return. How will your spreadsheet account for events such as the gvt completely suspending RMDs for an entire year, such as covid yr 2020? No RMDs, no income, no tax due. And so on. You have the ability to get creative and minimize these future taxes, then. Just Do it! R48
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Post by Fearchar on Apr 14, 2023 1:32:35 GMT
FD1000, liftlock, Thank-you for the comments and feedback. I've made some improvement. Earlier, by mistake I used $89,450 for 22% bracket when it should have been $87,450 Also, as you both noticed, I did not include a standard deduction. So have now subtracted $29,200 with the the taxable column; just didn't re-label it. So, the taxable column is now the amount after the $29,200 deduction. With those corrections I got Fed Income tax of $67,512 when converting $305,500. This is close to FD's link which appears to be showing $68,552 for MFJ and a $29,200 deduction. The delta is due to a $1,040 surcharge for Medicare that I was not including either. Looked at this link 2023 IRMAA to see what I am missing. Problem is that I'm just not seeing how to arrive at $1,040 value. Looks to me to be $428.6. But my understanding of IRMAA is low. Anyhow, added columns to include the IRMAA charges according to the link I found. So, with room for improvement, I ran a few more iterations. Here is the summary of result for total taxes vs various conversions: The above represents approximate total taxes thru age 119 vs various levels of conversion levels. The sweet spot appears to be near $325,000. Also, I'll have to noodle this a bit to see if it really makes sense to consider taxes out to age 119. That's obviously isn't something anybody should be really planning for. Anyhow, here is screenshot of the sheet with $250,000 converted for the initial few years: FD1000, about inflation... The tax rate calculation is based on 2023 tax rate tables. Tax Rate tables are adjusted based on inflation and inflation is guaranteed by FED policy. So, I need to include it.
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Post by Fearchar on Apr 14, 2023 12:23:49 GMT
R48; good point. As mentioned earlier, minimizing taxes thru age 119 impresses me as extreme. So, adjusted my speadsheet and sought out total tax hit thru age 85. Sweet spot is about $58,000 conversion/yr for 7 years. Doing so basically fills up the 12% tax bracket while converting and then allows one to stay in the 22% bracket for a long while. That may be a better approach. It will take me a while to tweek my spreadsheet to account for the opportunity lost factor. Meanwhile, here's what I have:
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Post by Fearchar on Apr 14, 2023 12:57:50 GMT
Here's an update in an attempt to address R48's point. I ran a zero conversion case and saved that into a column labeled "Base Taxes". Then calculated the amount of excess taxes which were being paid. However, notice that this eventually turns negative after one stops converting. In other words, there is a tax savings. I then created a running total and adjusted it at the assumed rate of return minus inflation. Notice how the "lost opportunity" turns negative around age 89. That'd be the age at which this begins to make economic sense! I'll have to iterate a bit to figure out what's optimal.
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Post by Fearchar on Apr 14, 2023 13:25:43 GMT
Optimal is $0 conversion. Converting just a $1,000 results in opportunity lost thru age 89. Converting $75,000 results in opportunity lost thru age 93. Convert more and the age just keeps going up.
I recall FD linking to a new insurance product permitted by recent laws. Of course, there are always fees involved with insurance products. My impression is that while that would be appealing to many people, do it yourself types of investors would be better served by avoiding such a product.
Might be worth while to explore it, but I'm skeptical.
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Post by FD1000 on Apr 14, 2023 13:52:07 GMT
I'm not sure because
I still think that inflation should not be accounted as part of the calculation. Inflation should be another column, it is just to reflect the purchasing power. If I start with 2 million and get 7% annually for 15 years I get to 5.5 million. If I use only 4% (inflation is 3%), I get to just 3.6 million. That's almost 2 million difference. My account will show 5.5 million, not 3.6 million.
You forget that I have another million. $600K in taxable, I have to pay taxes on this one. It gets a lot worse at age 73. Converting 58K doesn't get me much. Let's use only 5% growth (because I do small rollover) for the Rollover. The taxable also grow by 5% (because I pay taxes and use a small % beyond SS). I get to 3.6 million, about 2.8 in rollover and $800K in taxable. During the 7 years, I paid about 13% taxes around 23K annually, based on $60K conversion + 60K SS + 60K CG. If I convert $250K, I will pay about $50K more. For 7 years I will pay $350K.
What happens at age 73 when I start RMD? Converting only $60K: at age 73, taxes start to go up. At about 8-10 years, maybe earlier you catch up, after 10 years conversion are at 200K + taxable has a lot of money and all the conversion go to taxable. This means in less than 10 years you catch up. RMD conversion will reach 1.7 million(which is what I converted if I did $250M) in about 11 years. Pay low rates for PART-B + D for 7 years, then higher rates for the rest of my life. That can be another $5K annually for 2 people.
Converting $250K, I will pay about $350K more until age 73. The Rollover will be much lower, taxable will be down. I will probably stay in 10-13% tax all the way to death. Basically at age 80-82, this option is ahead. Pay higher for PART-B + D for 7 years, the rest of my life at the lowest rate
What happens if I die? you still have to pay taxes on the rollover, there is no step-up.
Converting 60K = most of the money ends in taxable. Converting $250K = most of the money end in Roth and less headache about what to do. My wife is 3 years younger and usually women live longer. If she lives to 90, that is 20 years since my 73.
BTW, does anybody think taxes or better breaks are coming in the next 20 years when the debt is so high?
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Post by retiredat48 on Apr 14, 2023 15:37:34 GMT
Fearchar,...thanks. Perhaps this weekend I can review your work. It is tax time however!! R48
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Post by Fearchar on Apr 14, 2023 19:52:11 GMT
FD1000 , Taxes are indexed for inflation. If I were to not account for inflation within the growth of the accounts, then to be accurate I'd have to index the tax brackets. Intuition tells me that it should be a wash. Of course our political leaders may have other thoughts, but I can't see modeling them. Anyhow, I did add columns for a $600K taxable account with returns in line with the OP. It adds to the total taxes bill paid. My impression is that the taxable account will/should be used to supplement spending. So, I guessed at $50K/year. At this rate, the taxable account is depleted by Age 85. However, the IRA has fully appreciated less the RMDs. I'm thinking the RMDs are spent too, but of course that doesn't need to be. I should probably make a column for total spending, but that will be later. I base lined taxes to no withdrawals from the Taxable accounts. So, withdrawing creates negative opportunity costs. That is there is a benefit of sorts to spending down the taxable account. Pretty sure this is all correct, but perhaps there is another way to look at it too.
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Post by liftlock on Apr 14, 2023 20:41:09 GMT
Fearchar, A few comments on the latest iterations – prior to your latest post: Inflation: It’s not clear to me how you are using the 2.0% inflation in your calculations. I like FD’s suggestion of setting inflation to zero so that the results can be viewed and evaluated in today’s dollars. That would suggest reducing the nominal investment returns by 2% to reflect the real investment return net of 2% inflation. If you want to keep the inflation in analysis, then the tax brackets and the standard deductions should be adjusted to reflect that they are indexed annually for inflation. As you stated in your latest post, that would make the analysis more complex and why I think avoiding inflation is a good idea. Standard Deduction: You appear to have set the standard deduction at $29,200. I’m not sure how you arrived at that. For 2023, the standard deduction for MFJ is $27,700, plus $3,000 assuming both spouses are older than 65. That would a combined total deduction of $30,700. 22% tax bracket ceiling: Should be $89,450. You had it right the first time before you corrected it to $87,450. I’m not sure what number you are using in your latest analysis. www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023IRMAA Medicare Premium Surcharges – if you want to include those: Tax brackets for calculating Medicare premium surcharges known as IRMAA are indexed to inflation and are published in the fall of each year, along with the Medicare premium surcharges for the following year. 2023 MAGI will be used to calculate the IRMAA Medicare premium surcharges for 2025. The tax brackets for calculating 2025 IRMAA premium surcharges won’t be announced until the fall of 2024. Here are estimates for the IRMAA tax brackets if we assume zero inflation between now and then, along with the 2023 IRMAA Medicare surcharges for a married couple based on them. 2023 MAGI < $206,000 = $0 IRMAA Medicare Premium Surcharge. 2023 MAGI => $206,000 = Annual IRMAA surcharge Part B ($1,582) + Part D ($293) = $1,874 Total 2023 MAGI => $260,000 = Additional Ann. Surcharge Part B ($2,374) + Part D ($463) = $2,837 Total 2023 MAGI => $324,000 = Additional Ann. Surcharge Part B ($2,374) + Part D ($463) = $2,837 Total 2023 MAGI => $388,000 = Additional Ann. Surcharge Part B ($2,374) + Part D ($463) = $2,837 Total 2023 MAGI => $750,000 = Additional Ann. Surcharge Part B ($792) + Part D ($154) = $946 Total Example MAGI income between $260K and $324K = total annual IRMAA surcharge = $4,711 Total Estimated IRMAA brackets are published here: thefinancebuff.com/medicare-irmaa-income-brackets.html/#htoc-2025-0-percent-inflationCalculating 2023 Medicare MAGI from Taxable Income - MFJ: $100,000 Taxable Income (for example) + $30,700 Deductions from Ordinary Income ($27,700 Standard Deduction + $3,000 Age 65 Deduction) = $130,700 Income taxed at ordinary rates + $10,300 Net Investment Income (LT Cap Gains and Qualified Dividends) taxed at capital gains rates. = $141,000 Federal Adjusted Gross Income + $4,000 Tax Exempt Interest = $145,000 Medicare IRMAA MAGI Opportunity Cost: Computing an opportunity cost is a good idea. However, I don’t think the analysis is complete without considering the benefit of having after tax funds in a Roth IRA. One benefit that can be quantified is the tax free growth of funds in a Roth IRA. One other benefit, which is more difficult to quantify, is that Roth IRAs provide a source of funds on which taxes have already been paid. Withdrawing funds from a Roth IRA for an unexpected need doesn’t cause sudden spikes in one’s taxable income. It is a reason I favor having some funds in a Roth. For many retirees, some portion of funds held in a T-IRA will never be withdrawn by the owner of the T-IRA. That raises the question as to why anyone would want to pay taxes early by doing Roth IRA conversions ahead of time. Of course, under the recent tax law changes, T-IRA funds will eventually have to be withdrawn with raises the question as to who will pay the tax and what tax rates may apply. Roth IRA conversions can seem unattractive unless one considers the potential accrued income tax obligation and the after tax value of funds held in a T-IRA. Modeling this requires making assumptions about what tax rates would apply when funds are withdrawn. My analysis of Roth IRA conversions leads me to conclude that there are no advantages or disadvantages to doing Roth Conversions when the marginal tax rates for a conversion are the same as the marginal tax rates that would apply if the funds were held in a T-IRA and subsequently withdrawn at later date. Potential Changes in Tax Rates if the Tax Cuts and Job Act is allowed to expire at the end of 2025. Another potential factor to be considered. 10% Tax Bracket –no change 12% Tax Bracket –increases to 15%. 22% Tax Bracket –increases to 25%. 24% Tax Bracket –increases to 28%. 32% Tax Bracket –increases to 33%. 35% Tax Bracket – no change 37% Tax Bracket –increases to 39.6%.
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Post by Fearchar on Apr 15, 2023 1:42:09 GMT
liftlock, many good points; Thank-you. $89,450 is the 22% bracket ceiling in spreadsheet. Got the error and correction amounts mixed up in my message. Believe FD's wife is under age 65. Didn't notice that this impacted the deduction. So, I've added a column now for the age 65 deduction separate from the standard for MFJ and populated as best as I understand it. You laid out the IRMAA charges very clearly, so updated the sheet accordingly. The opportunity cost is associated with what is paid out to Uncle Sam and thus the owner no longer is able to realize gains on. What is transferred from the IRA to the Roth is assumed to grow at the same rate as if it were still in the IRA. So, there isn't a cost/benefit per se with that portion of the funds. I agree that it's great to have funds in a the Roth for other reasons and also believe most of us already have Roths. Hopefully with enough funds to serve as an emergency account. If somebody had no Roth at all, then yes it'd be a benefit to at least have some funds in it just in case. I didn't realize that details of the tax cut expiration dates/amounts. Let's hope it doesn't happen! When inherited, funds in either Roth or Traditional IRA are required to be withdrawn. Each has their own set of rules. With the traditional IRA, taxes have to be paid as the funds are withdrawn. With the Roth, the funds lose their tax shelter treatment as they are withdrawn. The funds are subject to taxes rates dependent on the tax status of who ever inherits them. So, while it would be great to inherit funds in such accounts, the advantage to the inheritor is somewhat muted in comparison to the original owner. Inheritance by a spouse is a special case. The biggest drawback is that the surviving spouse can no longer file MFJ.
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Post by FD1000 on Apr 15, 2023 4:18:36 GMT
Fearchar , You did a great job, but using inflation made it all wrong. I used to program financial reports as part of my IT job in Israel. They consisted of the local currency, local currency adjusted to inflation, and Dollar. You can't mix them. Inflation adjusted was by far the most complicated. I suggest you stick with the first one and disregard inflation. This will be the closest one to reality. Just use 6-7% annually, no need to make changes No conversion: 2 million for 7 years at 6% gets you 3.0 million $250K annual conversion + 2 million for 7 years at 6% gets you $783( www.360financialliteracy.org/Calculators/Savings-Distribution-Calculator) $150K annual conversion + 2 million for 7 years at 6% gets you $1.67 million RMD for each of the above, use ( www.dinkytown.net/java/required-minimum-distribution-rmd.html), the first starts at 3 million, the second at 783K. You can see the attachment below. I don't understand why they start a bit higher instead of the above but it's close enough. =========== Taxes: (www.dinkytown.net/java/1040-tax-calculator.html) no conversion: SS=$60K + 6% growth on $600K=$36K. Tax=$3.5 $250K conversion: SS=$60K + 6% growth on $600K=$36K. Tax=$62.4 first year. Second year you pay less taxes because the $600K becomes 538K, let's estimate just $20K(instead of $36) average growth and we pay $58K annual taxes $150K conversion: SS=$60K + 6% growth on $600K=$36K. Tax=$37K first year. Second year you pay less taxes because the $600K becomes 563K, let's estimate just $30K and we pay $35.5Kannual taxes Taxable account starts at $600K growing 6% for 7 years, no conversion, paying 3.5K taxes with 30K withdrawal (need extra on top of SS)=$33.5 ends with $604K. Taxable account starts at $600K growing 6% for 7 years, $250K conversion, paying 58K taxes with 30K withdrawal = $88K ends with $119K. Basically you paid (58-3.5) * 7 = 381.5 more taxes over 7 years Taxable account starts at $600K growing 6% for 7 years, $150K conversion, paying 35.5K taxes with 30K withdrawal = $66.5 ends with $310K. Basically you paid (35.5-3.5) * 7 = 224K more taxes over 7 years I used ( www.360financialliteracy.org/Calculators/Savings-Distribution-Calculator) RMD: Taxes at age 73. no conversion=$113K(RMD) + SS=60K + $36 from taxable = $28K (from taxable will change over the years, but estimates are OK to get the general feel) $250K conversion=$29K(RMD) + SS=60K + $7 from taxable = $3.5K $150K conversion=$63K(RMD) + SS=60K + $19 from taxable = $13.7K Taxes at age 83. no conversion=$196K(RMD) + SS=60K + $36 from taxable = $49K $250K conversion=$51K(RMD) + SS=60K + $7 from taxable = $8.4K $150K conversion=$109K(RMD) + SS=60K + $19 from taxable = $24.9K Taxes at age 90. no conversion=$272K(RMD) + SS=60K + $36 from taxable = $67.7K $250K conversion=$71K(RMD) + SS=60K + $7 from taxable = $12.9K $150K conversion=$152K(RMD) + SS=60K + $19 from taxable = $33.4K You can clearly see that no conversion looks OK but in several years later it gets pretty high + adding SS + taxable account is still big at $604+ adding my wife life time...and now you looking at a possibility of 20 years of high taxes. After 7 years conversion, taxable is low, Rollover starts at $897K, all equal to low taxes for the rest of our life. Until RMD you paid $381.5 less taxes than no conversion In 10 years, no conversion will pay $320K more taxes compared to $250K conversion, I just guesstimate $32K more annually, starting at 28-3.5=24.5 and ending at 49-8.4=40. In just 1-2 more years, you are equal. Basically by age 84 you get to be even paying the extra $381K. In the next 10 years to age 94, no conversion will pay at least $450K more taxes. This is very possible because my wife will be 91 years old. $100K conversion: until RMD you paid 224K taxes more than no conversion and $157K less than $250 conversion. You pay about $130K more than $250K conversion in 10 years. In one more year the gap closed. Basically after 11-12 years at age 84-85, the $250K becomes a winner.Attachments:
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Post by Fearchar on Apr 15, 2023 13:38:19 GMT
FD1000 , While I disagree regarding my handling of inflation, it is a simple task to set inflation to zero within the spreadsheet. When I do so along with assuming 6% growth rate and everything else, a "Base Taxes" can be calculated assuming no conversions. That is then placed into Column AO. I then inputted $250K/year conversion for 7 years. The spreadsheet by the way has grown rather large, so I've hide a number of columns and highlighted key areas. Such a conversion will results in about $60K/year in extra Federal Income taxes. Adding that up and including the lost 6% growth results in ~$511K of Lost Opportunity after 7 years. Marginal taxes during conversion years will be in the 24% category. When RMDs start, they will be in the 12% category. On the surface that sounds good! The benefit is highlighted in Green as there will be less taxes than the base case. However, it's only about $14K for the first year. While that does ramp upward to about $40K/year by age 87, it's no where near enough to recover from the initial lost opportunity. Therefor, the total lost opportunity continues to climb until age 88. At that point, the yearly Benefit will have grown large enough to out weight the missed opportunity's yearly appreciation. The taxable account is also spent down by then. So, while my spreadsheet would need adjustment to accurately simulate the financial situation beyond age 87, the big picture is clear. That is the benefit of conversions is inadequate to over come the opportunity lost. Separately, I have tried varying the amount of conversion and the answer is all pretty much the same. Wishing you the best with this. While my own situation is more complicated with unrealized long term gains and all, I don't feel a need to run a simulation of my own number to know what the outcome will be. That is, I'm going to end up paying a lot in taxes in my later years. That sucks, but the only way I can see impacting my own situation is to manage the taxable portion of my portfolio towards more long term gains. Consequence, this is enough for me to cross off Roth conversions from my own plans. Anyhow, here's the spreadsheet:
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Post by FD1000 on Apr 15, 2023 17:36:45 GMT
Fearchar , I think your last post was pretty good. 1-3 years give or take is close enough. I also see now that using 50-150K conversion leads to a similar result. When I have more time, I will go to a CPA and let him run these numbers. You are also correct about taxability. I should buy and hold. With SS=$60K and ST CG=$60K, taxes are at $8.8K. Same SS + LT CG, taxes are at $1.7K. Just like that I saved $7K. What fund should I use?...mmm...SPY comes to mind first, PRWCX looks better to me, but the distribution % is high. I need to find a fund with good risk/reward with low distribution.
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Post by liftlock on Apr 15, 2023 19:17:40 GMT
FD1000 , While I disagree regarding my handling of inflation, it is a simple task to set inflation to zero within the spreadsheet. When I do so along with assuming 6% growth rate and everything else, a "Base Taxes" can be calculated assuming no conversions. That is then placed into Column AO. I then inputted $250K/year conversion for 7 years. The spreadsheet by the way has grown rather large, so I've hide a number of columns and highlighted key areas. Such a conversion will results in about $60K/year in extra Federal Income taxes. Adding that up and including the lost 6% growth results in ~$511K of Lost Opportunity after 7 years. Marginal taxes during conversion years will be in the 24% category. When RMDs start, they will be in the 12% category. On the surface that sounds good! The benefit is highlighted in Green as there will be less taxes than the base case. However, it's only about $14K for the first year. While that does ramp upward to about $40K/year by age 87, it's no where near enough to recover from the initial lost opportunity. Therefor, the total lost opportunity continues to climb until age 88. At that point, the yearly Benefit will have grown large enough to out weight the missed opportunity's yearly appreciation. The taxable account is also spent down by then. So, while my spreadsheet would need adjustment to accurately simulate the financial situation beyond age 87, the big picture is clear. That is the benefit of conversions is inadequate to over come the opportunity lost. Separately, I have tried varying the amount of conversion and the answer is all pretty much the same. Wishing you the best with this. While my own situation is more complicated with unrealized long term gains and all, I don't feel a need to run a simulation of my own number to know what the outcome will be. That is, I'm going to end up paying a lot in taxes in my later years. That sucks, but the only way I can see impacting my own situation is to manage the taxable portion of my portfolio towards more long term gains. Consequence, this is enough for me to cross off Roth conversions from my own plans. Anyhow, here's the spreadsheet: View Attachment Setting Inflation to zero and return to 4% might provide results that are more conservative and realistic. I agree that Roth IRA conversions in the early years are overly aggressive. I see zero benefit in paying a 24% tax on up front Roth conversions when it appears that the 12% bracket is not being filled at later dates. Smoothing income in the 22% bracket would seem more optimal in FDs case.
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Post by FD1000 on Apr 15, 2023 21:00:03 GMT
Setting Inflation to zero and return to 4% might provide results that are more conservative and realistic. I agree that Roth IRA conversions in the early years are overly aggressive. I see zero benefit in paying a 24% tax on up front Roth conversions when it appears that the 12% bracket is not being filled at later dates. Smoothing income in the 22% bracket would seem more optimal in FDs case. My mistake was not counting for investing the extra tax. SS=60K...conversion=100K...LT CG=$30K by holding one fund in taxable $600K...AGI=181...Fed tax=22640...GA tax=1657 SS=60K... conversion=100K...LT CG=$30K by holding one fund in taxable $600K...AGI=49.6...Fed tax=0...GA tax=0 The above shows that 22640+1657=$24,297 are saved and will be invested. This is about $170K extra saving and making money for 7 years which means I will catch up at age 88-89. Even if I use SS=60K...conversion=100K...ST CG=$40K in taxable $600K...AGI=68.1...Fed tax=4320...GA tax=0 BTW, the lower the return, the less conversion makes sense.
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Post by Fearchar on Apr 15, 2023 21:00:16 GMT
liftlock, Converting to the limit of the 12% category is a strategy that does show some promise. It's about an extra $4K in taxes/year in the simulation. Over 7 years that adds up to about $38K in lost opportunity. About $2K/year is saved once RMDs start. By age 87, there is an overall benefit. The amount converted varies every year. Primary reason is the age 65 exemption for his wife. Secondary reason is diminishing taxable income from taxable account. Here's what it looks like: On caveat is that this is with inflation set to 0, which I have my doubts about. When I re-run this using my preferred inflation, the numbers are a little bit different. There is still an overall benefit, but it's reached at age 89.
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Post by FD1000 on Apr 16, 2023 3:46:18 GMT
Fearchar , Can you please explain the following... Let's look at line 10, RMD=98K, taxable account=461K, taxable income=$18.5. You add all of them and you get 577.5 You take out 50K for spending and taxes=22.8 Add them up= 72.8 577.5-72.8= rounding 91K. This means next year taxable should be 461+91=552 Line 11 says that taxable = only 439. Looks to me, you didn't add RMD to taxable. If I'm right we will find that no conversion = rollover stays big, taxable becomes much bigger and both result higher taxes. Big conversion move most of the money to Roth while Rollover and taxable shrink. Can you add another column Roth starting with 400K+6% annually+the conversion or not. Then run again for $250k conversion vs none.
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Post by liftlock on Apr 16, 2023 12:57:40 GMT
Fearchar , Can you please explain the following... Let's look at line 10, RMD=98K, taxable account=461K, taxable income=$18.5. You add all of them and you get 577.5 You take out 50K for spending and taxes=22.8 Add them up= 72.8 577.5-72.8= rounding 91K. This means next year taxable should be 461+91=552 Line 11 says that taxable = only 439. Looks to me, you didn't add RMD to taxable. If I'm right we will find that no conversion = rollover stays big, taxable becomes much bigger and both result higher taxes. Big conversion move most of the money to Roth while Rollover and taxable shrink. Can you add another column Roth starting with 400K+6% annually+the conversion or not. Then run again for $250k conversion vs none. FD, I believe you are correct. The cash flows from RMDs are not being fully accounted for. They should be added to the taxable account. I have lost track as to whether Social Security is being spent or whether it should also be added to the taxable account. Fearchar, I would suggest having a single spending column and then making a separate decision about whether spending is taken from the taxable or the T-IRA account. It may make sense to take spending out the taxable account until RMDs kick in, maximizing opportunities for Roth Conversions. Then use RMDs to fund spending may more more sense once RMDs kick in. See next paragraph as to why. From a tax reduction perspective, my gut tells me FD would be better off by drawing down his T-IRA account and leaving his taxable account alone, especially once RMDs kick in. I say this because it would be possible to invest his taxable account so that the gains are long term and the dividends are qualified which end up being taxed at lower capital gains rates. However, this would require FD to become a long term buy and hold investor, and his current trading style appears to differ from that. Going to cash in his taxable account when the market conditions become unfavorable, is likely to cause his gains to be short term and taxed as ordinary income. If that's the case, it wont matter much whether he draws down his taxable account or his T-IRA account as the taxes would be the same. Only FD can decide whether the tax cost of going to cash and preserving capital provides higher after tax returns. For FD, that may be the case. On advantage of retaining funds in the taxable account is that heir's inherit the funds at a stepped up cost basis and tax is never paid. Finally I don't think one should focus should focus solely on reducing taxes. A better idea is to maximize lifetime after-tax income and the after-tax value of assets at the end of one's financial planning horizon. I would suggest attempting to quantify this. Ideally, the accrued income tax obligation on the undistributed T-IRA balances should be estimated, so that total assets at the end of plan can be evaluated on an after-tax basis. Funds held in T-IRA are less valuable if taxes have to be paid to access them. Funds converted to a Roth IRA or held in a taxable account will look more attractive if this is done. One might simply add lifetime portfolio withdrawals to the after-tax value of assets held at the end of plan to arrive at the total lifetime value of the plan. This can help one decide whether they want to spend and withdraw more or less during their lifetime. These values could be calculated for each year end as the plan goes along. Post Edit comment: If the cash flow from IRA withdrawals including RMDs but excluding Roth IRA Conversions, + Social Security and any other income, including investment income. were added the the taxable account balances, then any cash flow spending could simply be taken from the taxable account. The net difference in cash flows plus unrealized investment growth would dictate whether the taxable account grows or declines. This assumes there is no need or desire to take withdrawals form the Roth IRA.
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Post by FD1000 on Apr 16, 2023 13:59:33 GMT
FD, I believe you are correct. The cash flows from RMDs are not being fully accounted for. They should be added to the taxable account. Fearchar, I would suggest having a single spending column and then making a separate decision about whether spending is taken from the taxable or the T-IRA account. From a tax reduction perspective, my gut tells me FD would be better off by drawing down his T-IRA account and leaving his taxable account alone. I say this because it would be possible to invest his taxable account so that the gains are long term and the dividends are qualified which end up being taxed at lower capital gains rates. However, this would require FD to become a long term buy and hold investor, and his current trading style appears to differ from that. Going to cash in his taxable account when the market conditions become unfavorable, is likely to cause his gains to be short term and taxed as ordinary income. If that's the case, it wont matter much whether he draws down his taxable account or his T-IRA account as the taxes would be the same. Only FD can decide whether the tax cost of going to cash and preserving capital provides higher after tax returns. For FD, that may be the case. On advantage of retaining funds in the taxable account is that heir's inherit the funds at a stepped up cost basis and tax is never paid. Finally I don't think one should focus should focus solely on reducing taxes. A better idea is to maximize lifetime after-tax income and the after-tax value of assets at the end of one's financial planning horizon. I would suggest attempting to quantify this. Ideally, the accrued income tax obligation on the undistributed T-IRA balances should be estimated, so that total assets at the end of plan can be evaluated on an after-tax basis. Funds held in T-IRA are less valuable if taxes have to be paid to access them. Funds converted to a Roth IRA or held in a taxable account will look more attractive if this is done. One might simply add lifetime portfolio withdrawals to the after-tax value of assets held at the end of plan to arrive at the total lifetime value of the plan. This can help one decide whether they want to spend and withdraw more or less during their lifetime. My idea of paying a lot more taxes in the next 7 years is to use the taxable after that which will be much smaller. This will also allow me to use my trading or not, because most of the money will be in Roth. See below some numbers, assuming 6% return, need only 30K from taxable, SS=60K. I now realize that I didn't forget After 7 years, at age 73No conversion: Rollover from 2 million to 3 million. Taxable stays around $600 because making 6%=36K and I need 36K(make it even). Roth from $400K to $600K. Total 4.2 million $250K conver: Rollover from 2 million to $783K. Taxable from $600K to $119K. Roth from $400K to 2.83 million. Total 3.7 million $150K conver: Rollover from 2 million to $1.67 mill. Taxable from $600K to $320K. Roth from $400K to 1.936 million. Total 3.9 million. You can see $150K conversion instead of $250K is not good enough. You have 0.2 million more but Roth is only 50% of the total compared to 75% with $250K. By converting I lost about 0.5 million, but at age 73, over 75% is tax free for life in Roth. I don't need to do any thinking, my wife and the kids will have it much easier too. Examples of taxes $250K conversion to none. At age 73, no conversion will pay about 25K more taxes At age 83, no conversion will pay about 40K more taxes. Around age 86-7, I recoup the 0.5 Mil lose At age 90, no conversion will pay about 55K more taxes Until now, I never focused on taxes, just how to make the best risk/reward returns.
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Post by Fearchar on Apr 16, 2023 18:32:19 GMT
FD1000 , Correct about RMDs; my assumption was that you would have spent it! Yes; I know there's already a column for spending. So, I've made the modification and added RMD's to the taxable accounts column. Also created a Roth column on far right side along with a Total worth column. This is a favorable enhancement. Of course, this also means you'll be driving old family van for another 20 years!! Break even with filling up the 12% bracket is a few years sooner; now age 84. Adjusting inflation as recommended pushes it back a few years to ~age 86. So, yes limited conversions appears reasonable. Here is view of current spreadsheet:
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Post by archer on Apr 16, 2023 21:31:49 GMT
A lot of info has been posted in this thread, so forgive me if someone made this point already. In the OP it was stated "to make it simple let's assume RMD's already started". Care must be taken on how to do a roth conversion in the same year as taking RMDs
Important to remember: RMDs and roth conversions can be made in the same year, but, RMDs themselves can't be used for the conversion. So, how to do it in a way that satisfies the IRS: RMDs must be done prior to the conversion so we don't reduce the amount in the tax deferred account bringing down the basis for the RMD.
From Investopedia: How Do You Convert a Roth and Manage an RMD Withdrawal in the Same Tax Year? For account holders who must take an RMD, the withdrawal must occur before the Roth IRA conversion.
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Post by liftlock on Apr 16, 2023 21:59:51 GMT
FD1000 , Correct about RMDs; my assumption was that you would have spent it! Yes; I know there's already a column for spending. So, I've made the modification and added RMD's to the taxable accounts column. Also created a Roth column on far right side along with a Total worth column. This is a favorable enhancement. Of course, this also means you'll be driving old family van for another 20 years!! Break even with filling up the 12% bracket is a few years sooner; now age 84. Adjusting inflation as recommended pushes it back a few years to ~age 86. So, yes limited conversions appears reasonable. Here is view of current spreadsheet: View Attachment Look at that Roth IRA account grow. A small tax bill for Roth IRA conversions between the ages 66 and 73 results in large benefits later on. I like the smoothing of the income taxes starting at age 73. However, income taxes prior to age 73 are very low compared to what they are starting at age 73. It looks like lack of RMDs prior to age 73 is driving part of that, but that doesn't appear to fully explain the low taxes. This suggests room for increasing the Roth IRA conversions prior to age 73. I would consider extending the RMD factors down to age 66 by adding 1 year to the distribution period for each year prior to age 73. Then do Roth IRA conversions equal to the extended RMDs factors instead of taking RMDs for those years. It not clear what FD is actually withdrawing or spending or what taxable income is. Adding a column or two to show that might help to clarify things.
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Post by liftlock on Apr 16, 2023 22:07:47 GMT
A lot of info has been posted in this thread, so forgive me if someone made this point already. In the OP it was stated "to make it simple let's assume RMD's already started". Care must be taken on how to do a roth conversion in the same year as taking RMDs Important to remember: RMDs and roth conversions can be made in the same year, but, RMDs themselves can't be used for the conversion. So, how to do it in a way that satisfies the IRS: RMDs must be done prior to the conversion so we don't reduce the amount in the tax deferred account bringing down the basis for the RMD. From Investopedia: How Do You Convert a Roth and Manage an RMD Withdrawal in the Same Tax Year? For account holders who must take an RMD, the withdrawal must occur before the Roth IRA conversion. Your point is valid and worthwhile noting. If you look at FearChar's latest spreadsheet you will see that the Roth IRA conversions are done before RMDs begin. I suspect FD may have tried to over simplify things in his original post.
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Post by FD1000 on Apr 16, 2023 22:47:48 GMT
Since I haven't used excel too much, I asked fearchar for it, and he was nice enough to do that. I found another small mistake where total taxes were not taken from taxable account. I fixed it. I also changes the yearly withdrawal from 50K to 30K, if not, taxable goes negative using $250K conversion. For our example, LT $60=SS + $30K is more than enough. I ran both scenarios, and they get to be equal at age 89. Maybe something is still missing, but I can't find it. If that's true, I'm converting nothing. It is also true that converting for 7 years is shifting most of the money to Roth and that is an excellent idea. I can also assume I will quit trading at some point and just let it run. No matter the portfolio total at the end, the wife + the kids will be OK. I also will continue my usual trading, there is no way I let my taxable or any account lose more than 3%, because the performance has been very good. Paying a bit more taxes doesn't bother me. I can't find any fund close to my risk/reward. Going forward looks even worse, stocks will not make anything close to 2010-2021. R48, I also look how Millionaires Avoid Paying Taxes, see this article( link). I don't relate to any of them. I never owned a business or any other real estate and it will not change. If I get to be a 100 years old, each poster will get a car. Attachments:
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Post by retiredat48 on Apr 17, 2023 0:25:20 GMT
FD1000 ,...who just posted: "I ran both scenarios, and they get to be equal at age 89. Maybe something is still missing, but I can't find it. If that's true, I'm converting nothing."----------------------------------------------- OK, R48 premise is still winning out; FD should do nothing! R48
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Post by retiredat48 on Apr 17, 2023 0:33:30 GMT
NEWSFLASH FROM YEAR 2025: The Government today declared "an emergency exists" w/r/t government financing, AND announced today another executive order THAT IMPOSES an annual 5% EXCISE TAX ON ALL ROTH IRAS ABOVE $100,000 IN VALUE.
The gvt stated their is broad support for this tax, and that it was never intended by congress that retirement accounts should grow to large sizes tax free, and have all income be tax free.
Congress has remained silent.
Some reporters noted Brazil did same in late 20-teens.
Accountants and wealth managers are reformulating their spreadsheets to show the negative future impact on current retirees.
R48
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Post by FD1000 on Apr 17, 2023 3:56:56 GMT
NEWSFLASH FROM YEAR 2025: The Government today declared "an emergency exists" w/r/t government financing, AND announced today another executive order THAT IMPOSES an annual 5% EXCISE TAX ON ALL ROTH IRAS ABOVE $100,000 IN VALUE.
The gvt stated their is broad support for this tax, and that it was never intended by congress that retirement accounts should grow to large sizes tax free, and have all income be tax free.
Congress has remained silent.
Some reporters noted Brazil did same in late 20-teens.
Accountants and wealth managers are reformulating their spreadsheets to show the negative future impact on current retirees.R48 Another news flash, anyone with 1+ million in any type of saving will pay annual 5%. There is a lot more money in Rollover and taxable. Interesting stat ( leighbaldwinadvisory.com/how-many-millionaires-are-there-in-america/). 11.89% of all households have a net worth over 1 mil 6.35% of all households have a net worth over 2 mil 4.41% of all households have a net worth over 3 mil Net worth is assets minus liabilities. Assets includes real estate too. Attachments:
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Post by liftlock on Apr 17, 2023 14:11:55 GMT
NEWSFLASH FROM YEAR 2025: The Government today declared "an emergency exists" w/r/t government financing, AND announced today another executive order THAT IMPOSES an annual 5% EXCISE TAX ON ALL ROTH IRAS ABOVE $100,000 IN VALUE.
The gvt stated their is broad support for this tax, and that it was never intended by congress that retirement accounts should grow to large sizes tax free, and have all income be tax free.
Congress has remained silent.
Some reporters noted Brazil did same in late 20-teens.
Accountants and wealth managers are reformulating their spreadsheets to show the negative future impact on current retirees.R48 news.bloombergtax.com/tax-insights-and-commentary/roth-iras-remain-attractive-planning-tools-despite-recent-bills
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