$400,000 Roth Conversions Between Ages 66-69?

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JW-Retired
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by JW-Retired » Sun Jul 03, 2016 11:11 am

livesoft wrote:^Right. $1 of extra Roth conversion gets taxed at 15% and shifts $1 of LTCG into the 15% tax rate for a combined 15% + 15% = 30% tax rate at the margin (and not 25% marginal). However, $1 of extra qualified dividend income and no extra ordinary income (such as a Roth conversion) just gets taxed at 15%.
More complications. :oops:
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JW-Retired
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by JW-Retired » Sun Jul 03, 2016 12:12 pm

JW-Retired wrote: With $55k of SS and the $30k of taxable account income, plus a $38k tIRA RMD, Taxcaster says he would owe federal tax of $11,592. Incrementing the RMD by $1k increases tax to $11892, or a 30% marginal phase-in rate.
As livesoft pointed out, the 30% marginal rate is because the extra RMD $1 causes a cap gains (or qual dividends) to move into the 25% bracket and causing an extra cap gains dollar to be taxed at 15%. The ss is already phased-in.

If we change the RMD amount to $32k with $55k SS, and the same $30k taxable income mix one gets a tax of $9166. Increase RMD by $1k to $33k the tax increases to $9720, i.e., the famous 55.4% marginal tax rate due to both SS phase-in and the cap gains taxation threshold. :beer
JW
I think recall the 55.4 number but not exactly how it happens. :confused
1.85x25 = 46.25, +9.15??
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BigJohn
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by BigJohn » Sun Jul 03, 2016 1:09 pm

livesoft wrote:^Right. $1 of extra Roth conversion gets taxed at 15% and shifts $1 of LTCG into the 15% tax rate for a combined 15% + 15% = 30% tax rate at the margin (and not 25% marginal). However, $1 of extra qualified dividend income and no extra ordinary income (such as a Roth conversion) just gets taxed at 15%.
There are a lot more of these types of discontinuities than just this example. Your actual marginal tax rate is likely to jump around a good bit. Taxcaster is not designed to pickup many of these issues so the only way I know to really understand your situation is to use last year's tax program and run a bunch of case (I did $10K increments of conversion). Here are several discussions that get into other breakpoints and phase-in/out limits.
viewtopic.php?p=2645133
viewtopic.php?p=2570101

Also a great graphic here that demonstrates the issue viewtopic.php?p=2925834

ralph124cf
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by ralph124cf » Sun Jul 03, 2016 2:03 pm

celia wrote:OP has already stated that half of his assets are in taxable. Can we get back to the potential conversions he is asking about?

OP, I came up with the following data for you:

Image

I assume that you are eligible for the maximum SS of $28K at age 66 but if you wait until age 70, you can get $36K/year. I will also assume your wife can collect half of your FRA amount which gives her $14K/year. (If these are not correct, I will tell you how to make changes in this chart later.) I also assume you have no non-deductible contributions in your tax-deferred accounts. Your itemized deductions of 16K are a little higher than the Standard Deduction, so I used them. Medical deductions have a floor of 7.5% of Adjusted Gross Income (total of the values in rows 5 to 11) before they can start to be itemized. So they are ignored here.

Column B shows what will happen if you do nothing until you are both on SS and RMDs kick in. Your income is high enough that 85% of your SS will be taxable, which would be taxable income of 30,600 for you and 11,900 for your wife. (California does not tax SS at all.) The RMD for a 70yo who has 1.5M in tIRAs will be $54,745. This is 3.64% of the account value at the end of the previous year. The following year your RMD will be more, if the investments grow by at least 3.64%. The following year, you will need to take out 3.77% of the age 70 end-of-year balance. The tIRA will continue to grow until the amount you take out becomes greater than the growth in the account. Let's use this column as the "baseline" for other columns to compare against it.

Small Law, You already know you want to do some conversions before age 70, but don't know how much to convert and what the tax implications would be. So columns C thru H show some choices. Column C is a no-brainer minimum as this sample has your taxes going to the top of the 15% bracket. (Colored cells refer to the top of a tax bracket.)

The important number to keep your eye on in this chart is the Taxable Income in row 14. In C14, the value of $75,300 is the exact top of the 15% bracket. If you should have one dollar more in income, your qualified dividends and LTC gains of 25,000 would then become taxable. The tax rate for the column C example is in cell C18. If the Taxable Income pushes you into the next bracket, only the amount above the last tax bracket ceiling will be taxed at the next higher rate. However, the 10% and 15% brackets are "special" in that Qualified Dividends and LTC gains are not taxed at all if the Taxable Income stays in one of these brackets. If I were to be near the 15% vs 25% border, I might want to recharacterize a little bit of my conversion to save a pretty good amount on taxes. (OP, if you should have a need to take a lot more LTC gains before age 70 than usual, you could choose to stay in the 15% bracket that one year, while bunching up more conversions in other years.)

The last 3 columns show what happens after you both start SS and where you reach the top of each tax bracket. I "reverse-engineered" the data in this table by 1) looking at the 2016 top of each bracket and working backwards, 2) first adding back your exemptions and itemized/standard deductions. Then I 3) subtracted known incomes shown in rows 5 to 11. The amount remaining is how much can be converted while staying in each tax bracket. So if you want to change any numbers in this chart, you can do the same thing. For example, if you find that 85% of your SS is now $500 higher and your LTC gains are $2,000 more, you would subtract that much more and find that you are left with $2,500 less room for the conversion amount.

If I had your portfolio, I would see that if I do "nothing" before age 70, I would owe no taxes until that year, but would then be in the 25% bracket. To me, it makes sense to do conversions to fill up the 25% bracket, and since the 28% is only 3% more, I would fill up that bracket too. So in 4 years, I would convert 225K in each of the first 3 years and allow a year for taking, say, an additional 30K in LTC gains in taxable while staying in the 15% bracket.

Conversion notes:
1. Always do each conversion into an empty Roth account to make possible recharacterizations "clean".
2. Convert each asset (fund) into a separate empty Roth. If you convert Fund A and Fund B into the same account and Fund A goes up while Fund B goes down, you won't be able to recharacterize just Fund B as the whole account is considered co-mingled.
3. During your early conversion years, do multiple conversions early in the year, so you can see them grow differently in the Roths. Then before the end of the year, recharacterize the one(s) that didn't grow as much.
4. Start by converting the assets most likely to grow the most so they can take advantage of more compounding time while in the Roth.
5. If the markets should drop by more than 15%, forget the conversions you already did that year (as you won't want to pay taxes on conversions that are now worth less). Leave those conversions to be recharacterized later. But start your conversions for that year over. Think of it as not just "stocks are on sale", but also "conversion taxes are on sale", since the taxes are based on the value that was converted. In December you can recharacterize the high-priced conversions.
6. Once you recharacterize into the tIRA, the account is "locked" for further conversions for the rest of the year to prevent the same (co-mingled) dollar from being converted again. To prevent this, you could put the recharacterizations into a new tIRA.
Hi Celia.

Great chart. One minor quibble. Assuming spouse is the same age, then the spouse should start taking spousal SS at age 66.

Ralph

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by bsteiner » Sun Jul 03, 2016 3:08 pm

There are more factors to consider:

1. In what state do they live?

2. Might they move to another state with a higher or lower or no state income tax?

3. Are there any applicable state estate or inheritance taxes? This would increase the value of the Roth conversion.

4. By paying the tax on the conversion out of other assets, the investment income in subsequent years would be reduced.

5. There are no required distributions from a Roth after 70 1/2. This adds substantial value to the Roth conversion, especially here where he has other money to live on.

6. If he or his wife live long enough, and the children might not need all the money, they could leave some or all of the Roth IRA to or in trust for the grandchildren, so as to get a longer stretch. This is more valuable in the case of a Roth, since it's not reduced by required distributions after 70 1/2.

7. Do they plan to provide for their children (or grandchildren) in trust rather than outright, to keep their inheritances out of their estates, and to protect it against their creditors and spouses? Trusts reach the top income tax bracket at $12,400 of income. However, distributions from a Roth IRA are tax-free. This makes the Roth conversion more valuable.

8. The annuity adds additional complexity. Keeping the annuity continues the expenses of the annuity, and converts the future income and gains in the annuity to ordinary income. Cashing it in all at once bunches the income. Cashing in the annuity competes with the Roth conversion for space in the lower brackets. I've never analyzed whether it's better to cash in the annuity first or do the Roth conversions first.

9. Are they in the alternative minimum tax (AMT)? The AMT often operates in strange ways. Someone in the AMT but above the AMT exemption phaseout is in the 28% AMT rate, and might convert to the top of the AMT, before the higher regular rates apply.

There are so many factors to consider that it would take a good deal of effort to analyze this. However, Roth conversions generally add substantial value. Someone not fully comfortable with Roth conversions might convert up to the top of the 15% bracket. Someone more comfortable with Roth conversions might convert up to the top of the 28% bracket, leaving behind enough traditional IRA or annuity so as not to waste the 15% bracket in later years. If you can create a spreadsheet that takes all of the factors into account, or most of them, that would be ideal. However, if you can't, do the best you can. Don't let the perfect be the enemy of the good.

Many accountants don't understand the benefits of the Roth conversion. So if you have one who does, that may be helpful.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by NMJack » Sun Jul 03, 2016 3:14 pm

Small Law Survivor wrote: I have about $1.5MM in my traditional IRA, $500,000 in Roth IRAs/Roth 401Ks, and $2.1MM in my taxable account (40% stock/60% bonds/cash). I have another $400,000 in a Vanguard variable annuity with a very low basis, but that's for another day.

Small Law Survivor
I think there is a case to be made for pulling out all the stops. The following is over simplified just to illustrate a point. It purposely doesn't address all details.

Convert all 1.5M tIRA to Roth over six years. That will add $250K to AGI and, for sake of example, let's assume the OP is also pulling money out of taxable for $100K living expenses (let's assume 50% appreciated, so this adds 50K to AGI). That gives us an initial $300K AGI.. Subtracting exemptions and standard deduction brings us to $279,300, creating a tax liability of $67,582 (ignoring LTCG benefits and potential AMT liabilities). OP is going to need cash to pay the tax, so we need to iterate our numbers.

We'll now plan to pull $180K from after tax. That ups the AGI to $340K. Subtracting exemptions and standard deduction brings us to $340,000 with taxes of $80,782. This is in the neighborhood. After paying the taxes, we have $99,218 left for living expenses. So, the effective federal tax rate is 23.76%.

So, after six years, we've eliminated the tIRA and have $2M in Roth with no RMD and no current or future tax liability. We've withdrawn ($180K x 6) about $1.1M from taxable leaving $1M hopefully generating only LTCG and eligible for step up basis. We'll ignore the annuity. OP is now in strong control of annual AGI and can manipulate it to minimize (or totally avoid) taxes on SS and to obtain the most desirable medicare rates.

Just food for thought.....
Last edited by NMJack on Sun Jul 03, 2016 3:37 pm, edited 1 time in total.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by NMJack » Sun Jul 03, 2016 3:20 pm

bsteiner wrote:There are more factors to consider:

3. Are there any applicable state estate or inheritance taxes? This would increase the value of the Roth conversion.

4. By paying the tax on the conversion out of other assets, the investment income in subsequent years would be reduced.

5. There are no required distributions from a Roth after 70 1/2. This adds substantial value to the Roth conversion, especially here where he has other money to live on.

6. If he or his wife live long enough, and the children might not need all the money, they could leave some or all of the Roth IRA to or in trust for the grandchildren, so as to get a longer stretch. This is more valuable in the case of a Roth, since it's not reduced by required distributions after 70 1/2.

7. Do they plan to provide for their children (or grandchildren) in trust rather than outright, to keep their inheritances out of their estates, and to protect it against their creditors and spouses? Trusts reach the top income tax bracket at $12,400 of income. However, distributions from a Roth IRA are tax-free. This makes the Roth conversion more valuable.

9. Are they in the alternative minimum tax (AMT)? The AMT often operates in strange ways. Someone in the AMT but above the AMT exemption phaseout is in the 28% AMT rate, and might convert to the top of the AMT, before the higher regular rates apply.
All excellent points Bruce. These are the types of facts that form the background to my thinking in my post above about pulling out the stops.

I particularly appreciate your mention of the AMT "sweet spot" (I've heard it called that, but not sure if that reference is widespread). I will add that once in the AMT, the AMT "overrides" the exemption and itemized deduction phase outs, so those do not again become a concern until a person exceeds the top of the AMT.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by bsteiner » Sun Jul 03, 2016 3:46 pm

NMJack wrote:
Small Law Survivor wrote: I have about $1.5MM in my traditional IRA, $500,000 in Roth IRAs/Roth 401Ks, and $2.1MM in my taxable account (40% stock/60% bonds/cash). I have another $400,000 in a Vanguard variable annuity with a very low basis, but that's for another day.
I think there is a case to be made for pulling out all the stops. ...

Convert all 1.5M tIRA to Roth over six years.
...
I particularly appreciate your mention of the AMT "sweet spot" (I've heard it called that, but not sure if that reference is widespread). I will add that once in the AMT, the AMT "overrides" the exemption and itemized deduction phase outs, so those do not again become a concern until a person exceeds the top of the AMT.
Without creating a spreadsheet, I'm not sure I'm not sure whether it would be better to convert the entire IRA over six years, or to convert to the top of the 28% bracket each year.

I hadn't heard the term "AMT sweet spot" before but it's a good description, since at that point you're in a lower bracket (28%) than you would otherwise be in. I'm not sure the exemption phaseout or the itemized deduction reduction (each of which is really just a hidden tax rate hump) is a major factor. The loss of the deduction for state income taxes could be significant for someone in a high tax state.

While there are many factors, the default should be that Roth conversions are generally advantageous to the extent you can convert at a tax rate less than, equal to, or not too much higher than the tax rate that would otherwise apply to the distributions, assuming you have other money with which to pay the tax on the conversion (Ideally without having to sell highly appreciated assets to raise the money).

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by BigFoot48 » Sun Jul 03, 2016 4:04 pm

A Roth Conversion spreadsheet to use until you can create your own: Retiree Portfolio Model
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by SGM » Sun Jul 03, 2016 8:11 pm

I converted all my traditional accounts to Roth's over 5 years. At least one of those years I was in the ATM sweet spot where the taxes were 28%. I may have just lucked into it. I was convinced that the advantages of not having RMDs and still being in a high tax bracket after age 70 even without RMDs and the long term tax free compounding was worth converting it all rather quickly. The growth of the converted amount has been very high too.. an added bonus from lucky timing.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by NMJack » Mon Jul 04, 2016 12:49 am

bsteiner wrote: Without creating a spreadsheet, I'm not sure I'm not sure whether it would be better to convert the entire IRA over six years, or to convert to the top of the 28% bracket each year.
I just ran some scenarios for somebody in the OPs situation and near the top of the SS payments. That IRS SS worksheet is one of the harder ones to wrap one's head around. That said, it looks like as one approaches the top of the 10% bracket, the effective marginal rate is 18.5%. This makes intuitive sense, as the 10% bracket plus 85% of each additional dollar (10% * .85 = 8.5%) equals 18.5%. Once over the 10% bracket max ($18,550 taxable income), the marginal rate becomes 27.5% (again 15% plus 15% * .85 = 27.5%). So, foregoing some conversions to utilize the 10% bracket in later years would seem to be clear cut (unless other income such as the OP's annuity or remaining taxable will consume that space). Conversely, there is little compelling case to reserve funds to max out the 15% bracket, as the effective rate is essentially 28%. This is in the 28% to 33% marginal bracket that we're talking about for a total, six year Roth conversion. I haven't included reduced medicare costs as a side benefit of making oneself intentionally "AGI poor."

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by NMJack » Mon Jul 04, 2016 12:52 am

SGM wrote:I converted all my traditional accounts to Roth's over 5 years. At least one of those years I was in the ATM sweet spot where the taxes were 28%. I may have just lucked into it. I was convinced that the advantages of not having RMDs and still being in a high tax bracket after age 70 even without RMDs and the long term tax free compounding was worth converting it all rather quickly. The growth of the converted amount has been very high too.. an added bonus from lucky timing.
Yours is the first report I've seen of actually executing this strategy, and it sounds like it has worked out well. :sharebeer

Thanks for posting it. Hopefully it will inspire others to run the numbers for their own situations. It is not a trivial exercise. I've met some people who just categorically refuse to consider Roth conversions saying things like "why should I give the government my money now when I can give it to them later." In many situations, that is 100% emotion and 0% math. :annoyed

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by celia » Mon Jul 04, 2016 4:56 am

livesoft wrote:Column D tax does not make sense on the Federal taxes as $1 more in income does not shift all of the LTCG and QDI out of the 0% tax rate. Instead, the $1 shifts $1 of LTCG and QDI out of the 0% tax rate.
I agree. I will delete column D. Sorry for the oversight.
SGM wrote:You might want to check out Medicare premiums for different incomes when considering how much conversions you want to make in a particular year. See https://www.ssa.gov/pubs/EN-05-10536.pdf
Does anyone know if the Medicare premiums, Medicare premium surcharge, and surcharge for a drug plan can be itemized under medical? While glancing through the referenced document, I would think OP and his wife would each pay another $3,000 per year.
cherijoh wrote:OP is likely to have maximum SS taxed no matter what he does.
I agree. By looking at the age 70 example in column B and not converting during ages 66 to 70, the OP will have $103K of Taxable Income if he withdraws the RMD and nothing else. I regard this as the baseline. The tIRA will continue to grow more each year even if RMDs are taken out whenever the market gives gains more than the RMDs. (The RMDs start at 3.64% and don't reach 5% until age 78.) Therefore, he should not only convert as much as he can before age 70, but also continue with conversions each year after that, which he can do AFTER the year's RMD is withdrawn.
JW-Retired wrote: Disagree that he will pay tax on 85% of SS payments regardless. If he converts $0.5M or $1M of the tIRA he will still be in the SS tax phase-in region when he takes his $55k/yr SS. With $55k of SS and the $30k of taxable account income, he would need another $47k of RMD to get taxation of SS payments fully phased-in.

SS taxation doesn't phase-in based on fixed $32k & $44k thresholds, which I think are being being misunderstood. It is just incorrect that "above $44k 85% of SS will be taxed". It depends on the ratio of SS income to other income and phaseing in goes much higher.

In the OP case he will still be below the threshold of 85% taxed if he is taking RMDs from even a $1M tIRA. That means his marginal tax rate on the last dollar of the RMD will be a high taxation phase-in number. With $55k of SS and the $30k of taxable account income, plus a $38k tIRA RMD, Taxcaster says he would owe federal tax of $11,592. Incrementing the RMD by $1k increases tax to $11892, or a 30% marginal phase-in rate.
Tell you what. I'll run all the scenarios through my 2015 tax software before posting an updated spreadsheet. Did you also notice these scenarios did not take preferential treatment for qualified dividends and LTC gains into account, per the note at the bottom of the spreadsheet? I just grabbed the tax from the table that shows when you jump to the next bracket and it says "the tax is $xx,xxx plus y% of the amount over $zz,zzz". I just plugged all the $xx,xxx into my chart. Software will be more accurate (but time consuming).
bsteiner wrote:There are more factors to consider:

1. In what state do they live?

2. Might they move to another state with a higher or lower or no state income tax?
I originally though OP lives in California, but that comment was posted by someone else. If OP lives in a state with a state income tax, the previous year's state income tax should also be added to the itemized deductions.

NMJack makes a good point about converting everything. But whether that happens or not, taxes should be paid from taxable instead of the conversion (to not lose any tax-free space). But does the OP have to sell taxable assets to pay the tax, thus “releasing” more LTC gains?
BigFoot48 wrote:A Roth Conversion spreadsheet to use until you can create your own: Retiree Portfolio Model
BigFoot, I had trouble using your original tool and I think you stated then that my data was an anomoly. But if you or someone else want to try it with the updated data Law Survivor provides, that would be good to confirm if we are in the same ballpark, taxwise.


Small Law Survivor wrote:Celia, this is an awesome spreadsheet - thank you so much!

I need to study this, and your comments, but one thing I noticed is that you seem to be including ss income starting at age 66 in the first column - you are right that I am going to wait until age 70 (and my wife will as well). At age 70 my ss (wife 1/2 my full retirement amt. plus mine), would be $4,600/month (based on today's value - would be higher if ss does COLAs in the next four years). So, the ss numbers you have in the first column can be cut (although I do see that you do not carry them across the row).

[Edit: oh, never mind, I see why you included ss - I hadn't focused on far right of the spreadsheet, where you added in soc security at age 70. But, the soc security numbers should reflect the higher amounts I have noted above (although I note that the amount soc security is telling he I would receive at age 70 - ~$42,000 - is higher than the $36K you mention)]

Thank you again, I'll return after I study this. Also, sent you a direct message.

Small Law
Column B shows a married couple, both at age 70 with the maximum SS that one person can have (google results show the result is currently $2639 at FRA for someone retiring now at 66--see https://faq.ssa.gov/link/portal/34011/3 ... it-payable --which could be an outdated page(???)). So a spouse would get half of that. But the higher wage earner will get 32% more (not counting COLA) which would be $3484 if waiting until age 70. That gives a combined max SS of $4803 per month for both of you. (I think the google answer is a little low, as another result showed the maximum for someone turning 66 and retiring last year was $2663.) The only way I can see you getting a combined SS benefit of $4,600/mo is if your wife changed to her own work record at 70.

But then, the "file and suspend" laws were changed late last year. Did you file and suspend before the deadline?

Regardless, I will update the spreadsheet once for you (it took a lot of time) using whatever SS numbers you wish for you and DW. I will check each case to see if 85% of the SS gets taxed. We should also include your wife’s SS starting at age 66 as Ralph pointed out. If you want other changes, let me know at the same time. For example, if you convert a known amount of money in ages 66-69, and you give me your estimated average tIRA growth percent, I can start age 70 calculations with a better RMD number for you. Just PM me when you know the things you want me to change. Do you have an estimate of what your state income tax would be (in dollars) if you currently itemize? (Look at a recent tax return.)

Thanks for all the suggestions, everyone. When done, I think this will be a good example for others to learn from. And thanks to Small Law for sharing some numbers with us.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by jabbahop » Mon Jul 04, 2016 7:15 am

This is a very helpful thread for us as our scenario is somewhat similar - $1.6M in 401K/IRA but a little younger @ 56 and 58. We have substantial taxable as well that we can live can use to pay taxes. I have been of the mindset of wanting to minimize short term taxes and just pay @ 70 but I guess I need to rethink that.

I guess I need to a lot of homework and calculation to determine what we should do. It is complicated by currently qualifying for ACA subsidies due to recently retired and living temporarily off cash savings.

Thanks to everyone that has contributed to the thread. It has been a very big help to us.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by TravelforFun » Mon Jul 04, 2016 7:46 am

celia wrote: 1. Always do each conversion into an empty Roth account to make possible recharacterizations "clean".
What are the reasons for doing this? I convert some of my IRA money every year and put in the same Roth account.

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Small Law Survivor
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by Small Law Survivor » Mon Jul 04, 2016 7:59 am

Thank you Celia, it will take me a little time to provide the information you asked for.

Also -
celia wrote:
1. Always do each conversion into an empty Roth account to make possible recharacterizations "clean".
Travelforfun responded -
What are the reasons for doing this? I convert some of my IRA money every year and put in the same Roth account.
I had the same thought - I did a conversion/recharacterization two years ago using a preexisting Roth account, without any difficulty. It would be distracting to have multiple Roth accounts based on serial conversions.

Small Law
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by SGM » Mon Jul 04, 2016 8:25 am

In a recharacterization strategy you want to keep the winners and get your money back on the losing bets. If you do not put a conversion into a new empty Roth account you cannot segregate the winners from the losers. If you put it all in one account you will have to allocate the losses or gains to each asset pro-ratably. Lange has a chapter in his book on this Roth Launcher aggressive strategy with 3 different Roths with different asset types.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by Small Law Survivor » Mon Jul 04, 2016 8:48 am

Yes, I recall reading this strategy in Lange's book now. (It's been a while)

So, in theory every year you would ask Vanguard to set up a "new" Roth account to handle that year's conversion, and they would have no objection to that? You could end up with quite a few Roth accounts under this system. Would Vanguard consolidate them at some point, just to neaten things up?

Small Law
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TravelforFun
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by TravelforFun » Mon Jul 04, 2016 9:15 am

Small Law Survivor wrote:Yes, I recall reading this strategy in Lange's book now. (It's been a while)

So, in theory every year you would ask Vanguard to set up a "new" Roth account to handle that year's conversion, and they would have no objection to that? You could end up with quite a few Roth accounts under this system. Would Vanguard consolidate them at some point, just to neaten things up?

Small Law
OK. I looked into this. A separate Roth account would be needed if there were a chance you would charge your mind and want to convert from Roth back to IRA.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by trueblueky » Mon Jul 04, 2016 9:43 am

TravelforFun wrote:
Small Law Survivor wrote:Yes, I recall reading this strategy in Lange's book now. (It's been a while)

So, in theory every year you would ask Vanguard to set up a "new" Roth account to handle that year's conversion, and they would have no objection to that? You could end up with quite a few Roth accounts under this system. Would Vanguard consolidate them at some point, just to neaten things up?

Small Law
OK. I looked into this. A separate Roth account would be needed if there were a chance you would charge your mind and want to convert from Roth back to IRA.
Two reasons that I've seen here for this:
1) Convert from tIRA to multiple Roths with different portfolios. Later, reconvert the worst ones and keep the one that did best.
2) you want to convert tIRA to Roth up to the top of a tax bracket, which amount you don't know in advance. You convert twice as much as you expect will be needed, then reconvert the amount above the top of the bracket the next year when you know.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by BigJohn » Mon Jul 04, 2016 10:45 am

Small Law Survivor wrote:So, in theory every year you would ask Vanguard to set up a "new" Roth account to handle that year's conversion, and they would have no objection to that? You could end up with quite a few Roth accounts under this system. Would Vanguard consolidate them at some point, just to neaten things up?
I've talked to VG about this and they are OK with you opening a number of Roths to support this strategy. My adviser told me that is wasn't unheard of for clients to have 10 or more Roths. Once the deadline for recharacterization has passed, I plan to empty the account into a single "permanent" Roth account. Once one of the conversion accounts is empty it can be used again for future conversions.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by SGM » Mon Jul 04, 2016 11:49 am

To keep the terminology straight... you convert a tIRA to a Roth. You recharacterize a Roth to a tIRA up until October 15 of the following year you made the conversion after taking an extension for filing with the IRS. A recharacterized tIRA can be converted at a later date if you choose. If you recharacterize a conversion, you cannot re-convert the same money in the year of the original conversion, nor within 30 days after the recharacterization.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by earlyout » Mon Jul 04, 2016 1:24 pm

BigJohn wrote:
Small Law Survivor wrote:So, in theory every year you would ask Vanguard to set up a "new" Roth account to handle that year's conversion, and they would have no objection to that? You could end up with quite a few Roth accounts under this system. Would Vanguard consolidate them at some point, just to neaten things up?
I've talked to VG about this and they are OK with you opening a number of Roths to support this strategy. My adviser told me that is wasn't unheard of for clients to have 10 or more Roths. Once the deadline for recharacterization has passed, I plan to empty the account into a single "permanent" Roth account. Once one of the conversion accounts is empty it can be used again for future conversions.
This works well with Schwab. I make my Roth conversion in December into an empty Roth account and then the following year, after finishing my taxes and making any needed recharacterization, I combine the conversion account with my main Roth account. The second Roth account is now empty awaiting the conversion in December.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by earlyout » Mon Jul 04, 2016 1:28 pm

Although there are good arguments for converting all of your traditional IRAs to Roth, please make sure you have good LTCI before you convert all of your TIRA to Roth. Long term care expenses are usually tax deductible, so it is good to have some TIRA dollars to use for these expenses should that be necessary.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by NMJack » Mon Jul 04, 2016 1:33 pm

A few adds on the conversion / recharacterization topic:

Not sure about VG, but opening a new Roth (to accept conversions) at Fido takes less than a minute on line (just remember to add or copy beneficiaries). Same effort to open a tIRA to accept recharacterizations. The request to recharacterize is also now an on-line process, but takes a few days to fully process.

I always use new accounts for both steps and track them on a master spreadsheet. This is for potential IRS audit purposes. I want a clean picture of funds always moving forward to new accounts so there can never be a question of violating the restrictions on re-converting dollars too soon. It later takes a phone call to merge the fragments into a consolidated "permanent" Roth.

In the case of the OP, if he were to follow the example in my earlier post ($250K per year for six years), in the first year he would have five opportunities to take advantage of a market drop to repeat his conversion at more advantageous taxation (i.e. more shares converted, same tax).

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by NMJack » Mon Jul 04, 2016 1:36 pm

earlyout wrote:Although there are good arguments for converting all of your traditional IRAs to Roth, please make sure you have good LTCI before you convert all of your TIRA to Roth. Long term care expenses are usually tax deductible, so it is good to have some TIRA dollars to use for these expenses should that be necessary.
This is an excellent point and one I have personally wrestled with. Charitable contributions also fall into this realm.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by BigJohn » Tue Jul 05, 2016 4:15 am

earlyout wrote:Long term care expenses are usually tax deductible, so it is good to have some TIRA dollars to use for these expenses should that be necessary.
I'm not sure I understand this point. Even if these expenses are tax deductible, what's the advantage of having tIRA dollars available. As far as I know, there is no provision for LTCI expense withdrawals from tIRA to be tax free as there is with charitable contributions. As a result, the money to pay LTCI costs will still be a withdrawal that is fully taxable income. The LTCI expenses then may be used as a deduction consistent with all the normal rules and limitations.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by earlyout » Tue Jul 05, 2016 6:50 am

BigJohn wrote:
earlyout wrote:Long term care expenses are usually tax deductible, so it is good to have some TIRA dollars to use for these expenses should that be necessary.
I'm not sure I understand this point. Even if these expenses are tax deductible, what's the advantage of having tIRA dollars available. As far as I know, there is no provision for LTCI expense withdrawals from tIRA to be tax free as there is with charitable contributions. As a result, the money to pay LTCI costs will still be a withdrawal that is fully taxable income. The LTCI expenses then may be used as a deduction consistent with all the normal rules and limitations.
A simplified example:

Bob and Sue are married and both in their 70s. Their combined Soc Sec income is $55,000 per year. They have a million dollars in Roth accounts converted earlier from traditional IRAs at 15% and 25% tax rates. They also have a million dollars in taxable accounts which generate $15,000 of qualified dividends and $5000 of taxable interest each year.

Twenty years ago they decided to self insured for long term care. Bob is now in a nursing home and their total medical expenses for the year are $100,000 and their total itemized deductions are $130,000. Their total annual expenses are $160,000.

They take the $105,000 needed to pay bills from their Roth and taxable accounts. Since their taxable income is limited, the large itemized deductions are wasted. If they had not converted all of their traditional IRAs to Roths, they could use traditional IRA dollars tax free. Remember rule one, only convert if you know that your future rate will be higher than the rate for the conversion.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by BigJohn » Tue Jul 05, 2016 7:01 am

earlyout, thanks for example of using tIRA as income to qualify for medical deduction. I thought you were implying some direct tax free withdrawal method and I was missing the boat somewhere :beer

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by dodecahedron » Tue Jul 05, 2016 7:11 am

celia wrote:
livesoft wrote:Column D tax does not make sense on the Federal taxes as $1 more in income does not shift all of the LTCG and QDI out of the 0% tax rate. Instead, the $1 shifts $1 of LTCG and QDI out of the 0% tax rate.
I agree. I will delete column D. Sorry for the oversight.
It is not just Column D which is in error. It is most obvious in column D, but the tax liabilities in every column except row C are also overstated. In other words, entry C17 is correct but B17, D17, E17, F17, G17, H17, I17, J17, and K17 are all incorrect. Whatever formula you are using to calculate tax liabilities is simply not handling the capital gains and qualified dividends correctly once taxable income goes over $74,900. The marginal rates (as opposed to the statutory bracket rates) are also incorrect.

For accurately modeling tax liabilities in situations like these I highly recommend the National Bureau of Economics Research (NBER) free on-line TaxSim calculator, which you can access here:

http://users.nber.org/~taxsim/taxsim9/

This software is widely used by academic economists as well as research staff at the IRS, Treasury Department, and Congress.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by livesoft » Tue Jul 05, 2016 7:17 am

dodecahedron wrote:It is not just Column D which is in error. It is most obvious in column D, but the tax liabilities in every column except row C are also overstated.
celia said as much in a follow-on post.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by earlyout » Tue Jul 05, 2016 8:45 am

BigJohn wrote:earlyout, thanks for example of using tIRA as income to qualify for medical deduction. I thought you were implying some direct tax free withdrawal method and I was missing the boat somewhere :beer
Now consider the same example but they also have a $500,000 traditional IRA. Should they use any of the large itemized deduction to save taxes on conversion of part of the traditional IRA?

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by celia » Tue Jul 05, 2016 8:30 pm

livesoft wrote:
dodecahedron wrote:It is not just Column D which is in error. It is most obvious in column D, but the tax liabilities in every column except row C are also overstated.
celia said as much in a follow-on post.
I also noted it at the bottom of the spreadsheet. I didn't run the numbers through tax software yet but will put the actual taxes in the updated spreadsheet after Small Law Survivor decides what he wants as inputs.

But you are sharp to recognize the discrepancy! Thanks.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by dodecahedron » Tue Jul 05, 2016 9:26 pm

celia wrote:
livesoft wrote:
dodecahedron wrote:It is not just Column D which is in error. It is most obvious in column D, but the tax liabilities in every column except row C are also overstated.
celia said as much in a follow-on post.
I also noted it at the bottom of the spreadsheet. I didn't run the numbers through tax software yet but will put the actual taxes in the updated spreadsheet after Small Law Survivor decides what he wants as inputs.

But you are sharp to recognize the discrepancy! Thanks.


It was easy for me to check your numbers with TaxSim, because I could just upload a csv file containing a table with the input numbers for all your cases and it then returned a table of tax liabilities and marginal tax rates corresponding to those cases.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by RCL » Wed Jul 06, 2016 12:32 pm

Thanks for the link to the tax Simulator, but it looks like the simulator will only take data up to 2014.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by Small Law Survivor » Wed Jul 06, 2016 2:15 pm

Celia, you are very generous with your time, and it is much appreciated! I cannot tell you how much I have learned and benefited from this thread.

Let me respond to the questions you asked in various places in this thread.

Social Security - As far as social security goes, I can access my ss account online, and it states:

age 66 - $2,665/m ($31,908/yr)
age 70 - $3562/m ($42,744)

My wife would take 1/2 of my age 66 ss = $1,332/m or $15,990/yr.

So my wife and I would have annual total ss income of $42,744 + $15,990 = $58,734/yr. or $4,894/month, $91 more than the number you included in your post above.

However, my 70th b-day will be May 2021, so 2021 would be a partial year. SS in 2021 would be 8 months x $4,894 = $39,156.

Now, possibly stupid admission: I had thought, because of the change in file/suspend rules, that my lower-earning wife would now also wait until 70 to take ss. We don’t have a social security statement for her. I haven't focused on her ss benefit since the ss rule change, since age 66 for her is more than two years off, and I was planning to research this further when we get closer to that date. If she can receive a benefit based on her own work history at 66 and then change to spousal benefit at age 70, there's plenty of time to determine that. She's never rec'd a SSA statement and I don't recall that we ever checked her benefit online. So, I think the best thing is to simply add her soc security at age 70, per above.

We were not eligible to file/suspend before the rule change deadline.

tIRA Growth Next Four Years - I wish I knew! It's a broadly diversified slice/dice 60/40 portfolio - growth the next four years is anyone's guess, but probably ok to use a conservative 4%/year for this number. My wife has no tax deferred accounts requiring RMDs.

CG Taxes on Sales in Taxable Account - I think you asked me this, but I may be wrong - can't find it now. If you did: the account is approx. 30% CG, 60% after-tax, so to keep that proportion I think it's best to assume that I would keep that ratio, and sell investments in equal proportions across the board to fund living expenses and pay taxes on conversions. Looking at your chart, I think ~$250,000/year would cover this So, I will have additional CG taxes (on top of what you already have in the spreadsheet) of $75,000/yr. Maybe this throws the whole analysis off (!?)

State Taxes - I live in Massachusetts. State taxes are 5.15% on ordinary income and CG, social security and Roth IRA withdrawals are not taxed.

I hope I answered all your questions. Again, thank you!

Small Law Survivor
68 yrs, semi-retired lawyer, 50/40/10 s/b/c, 70/30 dom/int'l. Plan: 4% WR until age 70, 3% after social security kicks in. Boglehead since day 1 (and M* Diehard before that) under various other names

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by celia » Wed Jul 06, 2016 8:37 pm

Small Law Survivor wrote:CG Taxes on Sales in Taxable Account - I think you asked me this, but I may be wrong - can't find it now. If you did: the account is approx. 30% CG, 60% after-tax, so to keep that proportion I think it's best to assume that I would keep that ratio, and sell investments in equal proportions across the board to fund living expenses and pay taxes on conversions. Looking at your chart, I think ~$250,000/year would cover this So, I will have additional CG taxes (on top of what you already have in the spreadsheet) of $75,000/yr. Maybe this throws the whole analysis off (!?)
I think that this says you will withdraw 250,000 yearly from taxable and sell it, with the 30% LTCG ($75,000) being taxed and you would live off whatever is left after taxes. I think this is unreasonable since you would spend all your taxable in 8 years if you did it. Would you then expect to live off the $58,000 SS each year for the rest of your life?

Keep in mind that some assets may never need to be sold during your lifetime. Why pay unnecessary taxes on those that your heirs inherit. They might as well get a big step-up in value instead of a small one.

I will try to equalize your living expenses and tax brackets across all years, although I will start you out at a higher conversion rate so we can knock the tIRA balance down a lot before RMDs start.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by dodecahedron » Wed Jul 06, 2016 8:42 pm

RCL wrote:Thanks for the link to the tax Simulator, but it looks like the simulator will only take data up to 2014.
If you don't care about state income tax, it will actually go all the way through 2023 (assuming no changes in the law.) However, if you specify a state, it will only go through 2014 because the site's maintainers can't stay on top of changes in state tax laws in real time.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by Small Law Survivor » Thu Jul 07, 2016 9:41 am

Celia, you wrote:
I think that this says you will withdraw 250,000 yearly from taxable and sell it, with the 30% LTCG ($75,000) being taxed and you would live off whatever is left after taxes. I think this is unreasonable since you would spend all your taxable in 8 years if you did it.
Would you then expect to live off the $58,000 SS each year for the rest of your life?
Not quite. First, this level of withdrawals would only be from ages 66-69, before social security and tIRA withdrawals kicked in. After that it would fall to a much lower number closer to $150,000/yr. Withdrawals from tIRA and ss would contribute to income from that point on.

Further, we currently have $600,000 equity in our residence, and rising. At some point I anticipate selling our residence and renting, or downsizing. Either way, eventually, this money will end up in our taxable account.

As I've played around with the numbers on this I've assumed a 4% rate of return on our taxable 40/60 portfolio. I think this is reasonable - Vanguard's "Personal Performance" feature says that our return on this account (which has changed very little) has been 4.4% over the last 10 years and five years, and 5.2% over the last three years, so I'm hoping 4% is a conservative number.

This "bucket" (hate that word, right) should last into our early or mid-'80s, maybe 84-85 if we're lucky (enough to live that long and have 4% returns over next 20 years). At that point we would live on the Roth, RMDs and social security. I've done some spreadsheet projections (although I'm nowhere nearly as good at this as you), and if we convert $200,000/yr. ages 66-69, and $100,000 age 70 ($900,000 total), the Roth should be at around $1.6MM by age 70 (again assuming a very conservative/worst-case return of 4%, even though that money would be invested much more aggressively, probably 70/30 until around 5 years before we need it). It could grow for about 15 years before it had to kick in to fill the space left when the taxable account runs out. And, at that point taxes would be so low (based on the $900,000 Roth conversions) that there would even be room to pull money out of the (as of today) $400,000 Vanguard variable annuity (which is the problem child in my investments - a mistake, but I didn't know it at the time).

Lastly, all of this is up for debate. August 31st will be my last day of work, but I only decided that earlier this summer, so I'm still learning. I wasn't even sure that significant partial Roth conversions could be so helpful until I started this thread. I've learned so much already from this thread - wow! I don't have to do anything until next year (and theoretically not until late next year, the first year in which I would implement this plan), so this is all in the nature of brainstorming right now.

Small Law Survivor
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by Electron » Thu Jul 07, 2016 1:55 pm

Here is another article from Michael Kitces that is worth reading.

https://www.kitces.com/blog/why-a-roth- ... he-future/

One issue is that marginal tax rates may change in the future. Tax reform may actually lower marginal tax rates by widening the tax base. That will make it more difficult to evaluate a Traditional IRA versus a Roth Conversion.

In regards to taxable accounts, the tax rate on Capital Gains and Qualified Dividends could also change in the future. That could impact the current 0%, 15%, and 20% CG/QD tax brackets.

The AMT Bump Zones and AMT Sweet Spot are discussed in another article by Michael Kitces. Note the comments at the end of the article.

https://www.kitces.com/blog/evaluating- ... -amt-bite/
Electron

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by celia » Sat Jul 09, 2016 6:22 am

Before looking at tax examples, it might be useful to play with tIRA draw-down examples like this:

Image

This shows three withdrawal scenarios, a fast draw down, a slower draw down, and a one year "vacation" from conversions before RMDs start during which LTC gains can be harvested.

You can build this for yourself to try what-if scenarios. For one thing, many people do not take into account that the account value may be growing before they start withdrawals.

You can label the rows and columns as pictured. The pink cells have macros in them, so leave them for now. The IRS Distribution Periods are found at:
https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf and correspond to your age each year, so include them in the table. Some people find it easier to think of Distribution percents, so the formula in cell D13 is:
=1/C13
Copy this macro to cells D15, D17, D19, etc. Format Column D (except the header) to Percentage with as many decimal places as you want. Do you see the 4% in cell D19? That means 4% of the account needs to be withdrawn at age 73. However, dividing by the number in C19 will give a more precise number since my example doesn't have many decimal places in the percent. As long as we are formatting cells for display purposes, select columns E, F, and G (except the header) and Format them as Currency with 0 decimal places.

Since we are at the midpoint of a year (near July 1), lets assume the client converts and removes the RMD mid-year. We will apply a 2% growth factor to each half of the year to give OP his 4% growth and we will make withdrawals near July 1. Put the current account balance in E3. In E4, type the macro:
=E3*1.02-F3-G3
This says to give the amount in cell E3 a 2% increase, then subtract the conversion amount and the RMD. Copy this macro to the rest of the column, as needed. Finally, the macro in G13 is
=E12/$C13
Copy it to the other cells in Column G that correspond to July.

Only put macros in the pink cells, not the empty cells between them. Put the current value of your tIRA in E3 and play with the conversion amounts to see what happens. The Conversion and RMDs will both be taxed. We can build more scenarios in one spreadsheet by copying columns E, F, and G to other columns.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by celia » Sat Jul 09, 2016 6:29 am

Presenting… the long-awaited results of running more accurate data through tax software for Small Law Survivor. Since the spreadsheet is wider than I presented earlier, I cut it in half vertically for posting purposes. I tested this layout, so hopefully you should be able to print this out (starting with this post--using landscape mode) and then put the sheets side by side to see the whole table. Go ahead and tape it together if you wish. :D

Social Security.
In 2019-20, I gave your wife $12,000 in SS.
In 2021, when you have a partial year of SS, I believe you will only collect for 7 full months, so you will have $34,258 of benefits and your wife $12,000.
In 2022-23, you have $42,744 of benefits and your wife has $15,990.
In all cases, I used those numbers as inputs, but you always had 85% of your SS taxed in all the cases shown and those 85% values are shown in the spreadsheet. [edit: When re-checking after everything was done, I’m not sure where the $28,290 came from instead of $29,119 in cell N10.]

Deductions.
At the time I started this chart, I assumed $14,000 of state taxes or additional deductions. Instead of giving you $30,000 of deductions and $8,100 of exemptions, since I used the 2015 version of H&R Block software, it would only allow $8,000 of exemptions, so I put the other $100 in with deductions. This same data was used in all cases (so we wouldn’t have too many variables changing), but the AMT sometimes reduced these values (see orange cells).

Image
[Edit: cell J22 should say 10,113. See Dodecahedron's explanation of deduction/exemption phaseouts below.]

Image

Results:
Ages: Changing your birth years for some cases made no difference since you aren’t taking the standard deduction.

1040 Line 13: There are two cases with extreme capital gains. In Col. C, you have an additional $75K of LTC gains as you requested. But combined with a generous Roth conversion, you fall into the AMT hole with some of your deductions and exemptions denied (in orange) as well as additional tax. If you don’t do a conversion, but max out the LTC gains to stay in the 15% bracket as in Col. H, you don’t owe any tax. If you sell additional taxable assets without doing a conversion, they will be taxed at 15%

Basically, the more LTC gains you have, the less in RMDs or conversions you can do to get the same tax bill. It is a balancing act. :!:

1040 Line 40: Instead of putting Charitable Donations in your deductions (where they might be reduced by AMT), after you are over 70.5, you could give some of your RMDs to charity. Neither you nor the charity would owe anything on the distribution but it could count towards your RMD. There are rules such as the money has to go directly to the charity without going in and out of your personal accounts. The RMDs are defined as the first withdrawals of the year. You must be over 70.5 at the time of withdrawal.

1040 Line 43: Taxable Income over $170K (MFJ) will cause an additional Medicare tax as shown on 1040 Line 62. The calculated taxes on line 44 will come out a little bit different when using 2016 software.

1040 Line 45: Alternative Minimum Tax affects 3 places on these tax examples as shown in the orange cells, by reducing deductions and exemptions and adding additional taxes.

State Tax: Since I live in California and have the California software extension, I picked up the California tax which has a marginal rate of 9.3% in all of these cases, as far as I can tell. Since CA and MA both exempt SS from taxation, I estimate the MA taxes as 55% of what the California taxes would be. This may not end up being true, but you could go with it for now.
dodecahedron wrote:
It was easy for me to check your numbers with TaxSim…
Dodecahedron, could you re-run the examples you already have (if you still have them) through TaxSim for 2014 to see what the CA and MA taxes would be and see if the 55% ratio holds?

[Edited to change printing instructions since moderator didn't allow this to be bumped to top of next page.]
Last edited by celia on Sat Jul 09, 2016 5:42 pm, edited 2 times in total.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by cherijoh » Sat Jul 09, 2016 7:37 am

jabbahop wrote:This is a very helpful thread for us as our scenario is somewhat similar - $1.6M in 401K/IRA but a little younger @ 56 and 58. We have substantial taxable as well that we can live can use to pay taxes. I have been of the mindset of wanting to minimize short term taxes and just pay @ 70 but I guess I need to rethink that.

I guess I need to a lot of homework and calculation to determine what we should do. It is complicated by currently qualifying for ACA subsidies due to recently retired and living temporarily off cash savings.

Thanks to everyone that has contributed to the thread. It has been a very big help to us.
I agree with jabbahop. This is an excellent thread. I'm not yet retired, but looking to do so next year or so. I thought I had the Roth IRA conversion thing figured out until I realized from reading here about the ACA subsidies. I have the added complexity of a DB pension that will hit it's maximum benefit in Jan 2019. (Prior to that I will be penalized for taking it early by 4%/year or 0.333% per month). I'm a numbers person, but even my head is ready to explode when I consider the number of moving parts in this analysis!

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Small Law Survivor
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by Small Law Survivor » Sat Jul 09, 2016 7:43 am

Thank you Celia - I appreciate this immensely. I will study it and return with comments/observations!

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by Chicago60 » Sat Jul 09, 2016 7:55 am

Thank you, indeed. This requires further study.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by NMJack » Sat Jul 09, 2016 1:45 pm

celia wrote:
1040 Line 40: Instead of putting Charitable Donations in your deductions (where they might be reduced by AMT), after you are over 70.5, you could give some of your RMDs to charity.
fyi - I don't believe that the AMT will ever reduce charitable donations. State taxes, yes. Charitable donations, no.

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ACA Subsidies

Post by celia » Sat Jul 09, 2016 1:58 pm

cherijoh wrote:
jabbahop wrote:This is a very helpful thread for us as our scenario is somewhat similar - $1.6M in 401K/IRA but a little younger @ 56 and 58. We have substantial taxable as well that we can live can use to pay taxes. I have been of the mindset of wanting to minimize short term taxes and just pay @ 70 but I guess I need to rethink that.

I guess I need to a lot of homework and calculation to determine what we should do. It is complicated by currently qualifying for ACA subsidies due to recently retired and living temporarily off cash savings.

Thanks to everyone that has contributed to the thread. It has been a very big help to us.
I agree with jabbahop. This is an excellent thread. I'm not yet retired, but looking to do so next year or so. I thought I had the Roth IRA conversion thing figured out until I realized from reading here about the ACA subsidies.
I encourage both of you to look at your situation with and without the ACA subsidies first. Possibly you should start a new thread on it to attract the attention of posters who are more familiar with it than I am.

It seems as if you are thinking like a "poor person", or at least looking at the short term benefit only . You definitely need to use the conversion/ RMD withdrawal spreadsheet that I posted a few posts back (with the pink cells). I think you are missing the proverbial forest that is looming down the road with the trees that you are looking at this year.

"You can't see the forest for the trees."
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by dodecahedron » Sat Jul 09, 2016 2:45 pm

celia wrote: Dodecahedron, could you re-run the examples you already have (if you still have them) through TaxSim for 2014 to see what the CA and MA taxes would be and see if the 55% ratio holds?
I actually ran the input data from columns C through M of the latest version of your spreadsheet through TaxSim to check for CA and MA taxes (using 2014 tax laws, the latest available for states in that software.)

In columns C through G, my California tax liabilities were consistently pretty close to yours (within a few hundred dollars, which is reasonable since you were using 2015 tax software and I was using 2014, plus TaxSim makes some unknown assumptions about how Federal itemized deductions will translate to state deductions). However, the MA tax liabilities were considerably higher than you estimated, roughly 70% of the California liabilities. I am more familiar with MA tax laws than CA tax laws, but my guess is that the difference could be the presence of inframarginal tax rates for lower tiers of one's income in CA (which doesn't exist in MA) and/or the fact that MA allows very little in the way of deductions.

In columns H through M, I saw some pretty weird stuff going on in your spreadsheet that I can't explain (and that doesn't reconcile with my TaxSim results.) The most obvious discrepancy can be seen by comparing your column I with your column J. Note that AGI, taxable income, and federal tax liability all go up substantially when you go from column I to J but your state liability goes down by a factor of 8!

A few other issues with your analysis:

a) As noted above, not all itemized deductions are subject to AMT. TaxSim handles that by explicitly asking you to give information about the two separate types of deductions, those that are AMT preference items and those that are not AMT preference items. This is apparently not an issue for the CA tax liability computation (since my numbers were quite consistent with yours), but I could make my Federal tax liability numbers change quite a bit depending on how I allocated the assumed Federal itemized deductions between AMT preference items and non-AMT preference items. Also, note that the lower figure for allowed itemized deductions highlighted in cell C13 of your spreadsheet is actually not due to AMT, it is due to the Pease phaseout of deductions. The AMT is potentially a whole additional layer of deduction disallowance.)

b) Federal itemized deductions are actually an endogenous variable, since larger Roth conversions will generally result in large state taxes which in turn will increase itemized deductions (though state taxes ARE an AMT preference item). TaxSim handles this complication automatically but your spreadsheet seems to assume itemized deductions are constant.

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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by celia » Sat Jul 09, 2016 5:53 pm

dodecahedron wrote:In columns H through M, I saw some pretty weird stuff going on in your spreadsheet that I can't explain (and that doesn't reconcile with my TaxSim results.) The most obvious discrepancy can be seen by comparing your column I with your column J. Note that AGI, taxable income, and federal tax liability all go up substantially when you go from column I to J but your state liability goes down by a factor of 8!

Cell J22 should have said 10,113. I hope that puts things more in line.
a) As noted above, not all itemized deductions are subject to AMT. TaxSim handles that by explicitly asking you to give information about the two separate types of deductions, those that are AMT preference items and those that are not AMT preference items. This is apparently not an issue for the CA tax liability computation (since my numbers were quite consistent with yours), but I could make my Federal tax liability numbers change quite a bit depending on how I allocated the assumed Federal itemized deductions between AMT preference items and non-AMT preference items. Also, note that the lower figure for allowed itemized deductions highlighted in cell C13 of your spreadsheet is actually not due to AMT, it is due to the Pease phaseout of deductions. The AMT is potentially a whole additional layer of deduction disallowance.)
I am personally not very familiar with these situations but made a note in the posting to read this. Thank you for this information.
b) Federal itemized deductions are actually an endogenous variable, since larger Roth conversions will generally result in large state taxes which in turn will increase itemized deductions (though state taxes ARE an AMT preference item). TaxSim handles this complication automatically but your spreadsheet seems to assume itemized deductions are constant.
I am aware of this but wanted to keep most things consistent so people could see how the change in conversion amounts alone impacts the taxes. In the columns for 2017 and 2018, only one of those situations would apply each year. Then in columns for 2019 and 2020, only one situation would apply each year, etc.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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Re: ACA Subsidies

Post by cherijoh » Sun Jul 10, 2016 7:36 am

celia wrote:
cherijoh wrote:
jabbahop wrote:This is a very helpful thread for us as our scenario is somewhat similar - $1.6M in 401K/IRA but a little younger @ 56 and 58. We have substantial taxable as well that we can live can use to pay taxes. I have been of the mindset of wanting to minimize short term taxes and just pay @ 70 but I guess I need to rethink that.

I guess I need to a lot of homework and calculation to determine what we should do. It is complicated by currently qualifying for ACA subsidies due to recently retired and living temporarily off cash savings.

Thanks to everyone that has contributed to the thread. It has been a very big help to us.
I agree with jabbahop. This is an excellent thread. I'm not yet retired, but looking to do so next year or so. I thought I had the Roth IRA conversion thing figured out until I realized from reading here about the ACA subsidies.
I encourage both of you to look at your situation with and without the ACA subsidies first. Possibly you should start a new thread on it to attract the attention of posters who are more familiar with it than I am.

It seems as if you are thinking like a "poor person", or at least looking at the short term benefit only . You definitely need to use the conversion/ RMD withdrawal spreadsheet that I posted a few posts back (with the pink cells). I think you are missing the proverbial forest that is looming down the road with the trees that you are looking at this year.

"You can't see the forest for the trees."


I hear you. I didn't mean to suggest that I am focused on trying to get an ACA subsidy; I was mere bemoaning the fact that I have one more variable to take into account in an already complex analysis. :?: :?: :?:

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