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

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

Post by BigJohn » Sun Jul 10, 2016 9:58 am

cherijoh wrote:I was mere bemoaning the fact that I have one more variable to take into account in an already complex analysis.

Unfortunately our tax code is so complex that there are many of these breakpoints and discontinuities. I've got 10 years of conversions before RMDs and SS and started off thinking that I could put together a spreadsheet that would tell me the "right" answer (see links in my post above). After a few months working on this I realized that the uncertainty in the assumptions swamps any hope of getting very precise on how much to convert. It's not just the tax code assumption and potential changes, you need to predict your rate of return as well as your children's future tax rate. Ultimately I decided that the best approach was one in which my conversions for the next 10 years were about equal to my RMDs + 85% of SS. This keeps my taxable income fairly level and is not a huge bet on either higher or lower tax rates. It also has the nice outcome of leaving about 50% of the assets in a tIRA and moving 50% to a Roth which gives me diversification to manage some of the opportunities mentioned above.

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

Post by cherijoh » Sun Jul 10, 2016 2:38 pm

BigJohn wrote:
cherijoh wrote:I was mere bemoaning the fact that I have one more variable to take into account in an already complex analysis.

Unfortunately our tax code is so complex that there are many of these breakpoints and discontinuities. I've got 10 years of conversions before RMDs and SS and started off thinking that I could put together a spreadsheet that would tell me the "right" answer (see links in my post above). After a few months working on this I realized that the uncertainty in the assumptions swamps any hope of getting very precise on how much to convert. It's not just the tax code assumption and potential changes, you need to predict your rate of return as well as your children's future tax rate. Ultimately I decided that the best approach was one in which my conversions for the next 10 years were about equal to my RMDs + 85% of SS. This keeps my taxable income fairly level and is not a huge bet on either higher or lower tax rates. It also has the nice outcome of leaving about 50% of the assets in a tIRA and moving 50% to a Roth which gives me diversification to manage some of the opportunities mentioned above.


Hmm, that sounds like an interesting approach - so did you use the initial RMD amount or some blended level based on your life expectancy? I don't have children or grandchildren, so that simplifies the picture somewhat..

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

Post by dodecahedron » Sun Jul 10, 2016 3:05 pm

So many variables, so much unpredictability.

I have done a fair amount of opportunistic Roth conversions in the past, to the point where I now have slightly more in Roth than in traditional retirement funds. In addition,I have a taxable account greater than the sum of my Roth and traditional, so I am pretty tax diversified. At the moment (still in early 60s), my decision process about further conversions is simplified because my traditional retirement funds have all been rolled into a 403b invested in TIAA-CREF traditional, paying a very good return on safe, mostly liquid fixed income. Until such time as my employer allows in-plan Roth conversions, my only option for Roth conversion would force me to give up that return for a lower return on my fixed income.

My current plan when RMDs combine with SS is to bunch planned charitable contributions opportunistically into years when my effective marginal tax rate is high. But the point at which RMDs will begin for me is quite uncertain, since I might continue working part-time for my current employer well past 70 1/2. I may not need to take RMDs until I am at a point in life when I may have high deductible medical expenses (due to LTC costs), which will mitigate the tax costs. And since I am planning significant charitable bequests, funds remaining in my traditional account and not needed for LTC are earmarked for those bequests.

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

Post by SGM » Sun Jul 10, 2016 3:50 pm

This thread has motivated me look more closely at my completed conversions. The real advantage will happen at age 70 1/2 when I will not have to take RMDs and the Roth will grow tax free until I choose to spend from the Roth or if it is inherited. But there is a current and future advantage prior to age 70 1/2 in not paying taxes on the taxable account that went to the IRS and the state.

The taxes I paid that lowered my taxable income is currently an advantage. As I have stated earlier the Roth conversion has the same buying power as a traditional IRA and a taxable account. For example $100k in a Roth and 0 in taxable will buy the same amount of goods as $100k in traditional + $25k in taxable at the time of conversion assuming you are in the 25% bracket.

Assuming you don't do the conversion, if the $25k in taxable produces say $500 in dividends yearly that is $100 in taxes yearly, if you are in the dividend tax rate of 20%. Also assuming that all funds are invested in a similar fashion and double in value at the time of sale you will have to pay future capital gains on the additional $25k of gain at some point from the taxable account.

Of course if you eventually converted $400k into a Roth as the OP is considering then the yearly tax savings by lower taxable dividends would be four times greater and possibly more if it eventually lowered ones Medicare premium a notch or if it kept ones income below the level where ACA taxes would kick in.

One still needs to look closely at federal and state taxes before and after retirement and SS etc. in making the decision to convert. This is all a fait accompli for us, but I enjoy reading the opinions of fellow BHs. It has helped me to be more accurate concerning the appropriateness of my decisions since 2010 about conversions.

In summary we are reaping current and future benefits of prior conversions by lowering taxable income while maintaining and actually slightly increasing buying power by the elimination of yearly taxation of dividends. At age 70 1/2 we will not be forced to take any RMDs.

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

Post by BigJohn » Sun Jul 10, 2016 4:24 pm

cherijoh wrote:Hmm, that sounds like an interesting approach - so did you use the initial RMD amount or some blended level based on your life expectancy? I don't have children or grandchildren, so that simplifies the picture somewhat..

Again not worth trying to be too precise but I looked at RMDs + 85% of SS from age 70 to 80 and at real returns of 2% thru 5%. This gives a fairly large range but I wanted to understand the high/low boundaries. Settled on a middle ground between 3% and 4% and mid-70's as my initial target. Running 2016 cases now using 2015 tax software to map both my incremental and total effective tax rates to try to avoid any big jumps up in marginal rates. Early results are such that I may do slightly less than my initial target but not finished yet so that could change.

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

Post by NMJack » Sun Jul 10, 2016 5:08 pm

SGM wrote: and possibly more if it eventually lowered ones Medicare premium a notch or if it kept ones income below the level where ACA taxes would kick in.


Thanks for the post. It is nice to hear from somebody who has "been there, done that." I fully expect the benefits of a low AGI (medicare premiums, ACA subsidies, etc.) to only increase in the future. In fact, I wouldn't be surprised to see SS benefits be adversely affected by high AGI in the future (beyond the unfavorable tax treatment already imposed).

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Re: ACA Subsidies

Post by celia » Sun Jul 10, 2016 6:20 pm

cherijoh wrote: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. :?: :?: :?:

I would first work on deciding "to take" or "not to take" the subsidy first. After you decide on that, you will have one less variable to worry about and it may make it easier to go with "minimal" or "maximum" conversions (whatever that means in your case).

To show you an analogy, look at this thread as an outsider and without doing any calculations, would you recommend the OP pursue the Opportunity Tax Credits or not? (Please do not post your answer as WildBill has to make that decision based on his own circumstances.) To me, you and WildBill need to make an up-front decision after doing rough calculations for Roth conversion scenarios. Then after the up-front decision has been made, you can refine your calculations with one less variable (purposely restricting your income) to worry about.
viewtopic.php?f=1&t=194882

Thank you for posting when you did. Your above post, although simple, jumped out to me as a different kind of "initial decision" to be made that was hindering my thought process in writing a response to WildBill. So now I should be able to refocus (when I get time tonight) to finish my soon-to-be post to him.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by Small Law Survivor » Mon Jul 11, 2016 9:34 am

For those who have read this far, the issues addressed in this post are continued in the post:

Strategy for conversion of $1.8 million IRA
viewtopic.php?t=194882

Small Law Survivor

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Epsilon Delta
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Re: ACA Subsidies

Post by Epsilon Delta » Mon Jul 11, 2016 10:03 am

celia wrote:
cherijoh wrote: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. :?: :?: :?:

I would first work on deciding "to take" or "not to take" the subsidy first. After you decide on that, you will have one less variable to worry about and it may make it easier to go with "minimal" or "maximum" conversions (whatever that means in your case).

I strongly disagree with this. There is a best solution taking the subsidy and a different best solution not taking the subsidy. You can't know which is better without considering both. Sometimes you can't tell which is better even after you've considered both.

Local optimization does not work reliably in a non-linear world, if you do not look at alternatives you are unlikely to find the best solution. Giving up because the problem is hard is a council of despair.

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celia
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Re: ACA Subsidies

Post by celia » Mon Jul 11, 2016 12:51 pm

Epsilon Delta wrote:
celia wrote:
cherijoh wrote: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. :?: :?: :?:

I would first work on deciding "to take" or "not to take" the subsidy first. After you decide on that, you will have one less variable to worry about and it may make it easier to go with "minimal" or "maximum" conversions (whatever that means in your case).

I strongly disagree with this. There is a best solution taking the subsidy and a different best solution not taking the subsidy. You can't know which is better without considering both. Sometimes you can't tell which is better even after you've considered both.

We agree! (I disagree with you disagreeing with me. :D )

I meant to say to do enough conversion analysis to figure out if it is worth keeping or dropping the ACA subsidy. After that is decided, you can refine your conversion analysis accordingly.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by drzzzzz » Tue Dec 06, 2016 7:12 pm

Does anyone have a recommendation for an accountant or hourly financial planner who is familiar with roth conversions so that they can play with the numbers and give an estimate of the best way to currently take advantage of roth conversions between retirement and the beginning of RMD and social security benefits?

2015
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by 2015 » Thu Dec 15, 2016 4:16 pm

celia wrote:
<snip>

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.


Bumping this thread to get greater clarity on these "Conversion notes" portion. I am about to do my second round of roth conversions in 2017*. For 2016, I simply did the "horse race" method with 3 conversions into 3 separate roths, which I recharacterized last week (kept in the same year for simplicity reasons).

Celia, forgive me for being dense, but could you please provide greater clarity with respect to steps 5 and 6? I've underlined where my confusion lies. In step 5, do you mean if for example one were to do 3 separate roth conversions in January, then later in the year if markets dropped by 15% or more, do 3 more conversions, then in December recharacterized the winner? I'm not sure what you mean by "high-priced" conversion?

With respect to step 6, one wouldn't need to put the recharacterizations into a new tIRA if say, he recharacterized on December 5 and didn't do new conversions until January 6 of the next year (abiding by the no new conversions in 30 days/same year rule), correct?

*I have been meaning to post this for a while, but I just completed my very first "horse race" recharacterizations this month and they went off without a hitch. It was very satisfying to have been able to have completed this without issue. I am deeply grateful to Celia, Livesoft, Firechief, BSteiner, and many others who participated in several conversion/recharacterization threads, as I would never have had the courage to have done this on my own. Many thanks to all!

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

Post by celia » Thu Dec 15, 2016 5:35 pm

2015 wrote:In step 5, do you mean if for example one were to do 3 separate roth conversions in January, then later in the year if markets dropped by 15% or more, do 3 more conversions, then in December recharacterized the winner? I'm not sure what you mean by "high-priced" conversion?

Recharacterize the "losers". The high-priced conversion is the one that had the more expensive shares at conversion time (if you keep converting from the same fund). The losers are also known as the conversions that have the biggest percentage loss (or smallest percentage gain).

Without looking at this verbage, you should be able to look at the conversions themselves and tell. If you converted 3 times in January and 3 times in the summer after the market declined, compare today's value of each conversion with the value at time of conversion (which will be used in calculating taxes). Divide each account's current value by its conversion value and keep the ones with the largest value. If they are greater than 1, they made a profit. If less than 1, they lost value.

For example, if every conversion was for $10K, keep the accounts now worth $15K (1.5 ratio), $11K (1.1), and maybe the $9.8K (.98) and pay taxes on the $30K conversion. Recharacterize those worth $9K (.9), $7K (.7), and $5K (.5) since you wouldn't want to pay taxes on $30K to keep them. Note that if they are still worth that much the following January, you might want to convert them again.

With respect to step 6, one wouldn't need to put the recharacterizations into a new tIRA if say, he recharacterized on December 5 and didn't do new conversions until January 6 of the next year (abiding by the no new conversions in 30 days/same year rule), correct?

Correct! You only need to use a new TIRA if NOT doing so would mess up your ability to do more conversions for that year. For example, in the example discussed above, if the market dropped 15%, it is likely (but not guaranteed) that the January conversions would be recharacterized. You could recharacterize them back to TIRA #2, then do conversions again from your primary TIRA. But since I prefer to keep my options open for longer, I wouldn't recharacterize early. What if my volitile Precious Metals fund had lost half by summer? Maybe it would quadruple by December, then I would be sorry. :annoyed

I am deeply grateful to Celia, Livesoft, Firechief, BSteiner, and many others who participated in several conversion/recharacterization threads, as I would never have had the courage to have done this on my own. Many thanks to all!

You can now consider yourself one of the experienced successful converters! Congratulations. Glad we could help.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by user5027 » Thu Dec 15, 2016 6:18 pm

2015 wrote: For 2016, I simply did the "horse race" method with 3 conversions into 3 separate roths, which I recharacterized last week (kept in the same year for simplicity reasons).


After going to the trouble of starting the "horse race" I would not end the race before the finish line. A lot can happen between now and Oct 2017. Your winner could be another horse.

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

Post by celia » Thu Dec 15, 2016 6:24 pm

drzzzzz wrote:Does anyone have a recommendation for an accountant or hourly financial planner who is familiar with roth conversions so that they can play with the numbers and give an estimate of the best way to currently take advantage of roth conversions between retirement and the beginning of RMD and social security benefits?

From conversations here and in person, I don't think there are many of these folks who think like we do in understanding conversions and how they impact tax brackets and can figure out how much to convert to reach the top of each bracket. The folks on this board tend to think ahead ("what if I...", then we answer from various viewpoints). Many tax preparers tend to think in the past. They receive a stack of papers when the year is done and rarely can anything be done to change the data for that year. (Converting to an IRA before April 15 and recharacterizing are the only things I can think of that can be done to impact a year that has just closed.)

But you can build a spreadsheet yourself. Set up the top half like I did for Small Law. Fill in rows corresponding to the lines of Form 1040 that apply to you trying to change only one variable at a time. All the "inputs" are the fields above the "Taxable Income" line. Enter these values into tax software and the rest will be outputs that you can add to the spreadsheet. I found it easiest to save pages 1-2 of Form 1040 as a .pdf for each example (naming the file with the amount of the conversion). This is the best way to learn what will happen.

The Lazy Person's method is to just calculate the number of years until SS/RMDs start, convert an amount equal to their TIRA divided by the number of years into an empty Roth, and have the tax preparer calculate your taxes. Then you should say "OMG, I'll be broke with that tax bill! Could you tell me how much of that conversion (which is NOT the same as today's value) to put back so I stay in the "x" bracket (or pay up to $y in taxes)?". The answer she gives you is what you write down on your recharacterization form.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by protagonist » Thu Dec 15, 2016 7:44 pm

I'm struggling with the same issue . Age 64, retired at 55....most of my savings (80% or so) are in taxable. The remainder is in an IRA, Until I am eligible for Medicare I have resisted IRA conversion to avoid high health insurance costs.

This article (from bankrate.com) seems to suggest that converting might not be so wise. I would be interested to hear other's take on their Reason 2 to NOT convert if you are over 60:

"Here are five situations that would dictate against doing a Roth conversion:

2. You're close to retirement
The return you earn in a Roth IRA before withdrawing the money should compensate you for the money you lost when you paid the taxes for conversion. But if you're going to withdraw the money soon, you won't have time to rack up large returns.
Advisers say you generally need to hold the Roth IRA for 15 to 20 years to make it pay off. So they generally don't recommend conversion for anyone over age 60.

"If you're going to hold the IRA for less than 10 years, you definitely don't want to do it," says Tom Wiggins, a Certified Financial Planner at Rehmann, a business consulting and financial advising firm in Farmington Hills, Mich."
http://www.bankrate.com/finance/retirem ... nse-1.aspx


Assuming an annual investment return of 6 percent, it would take someone in the top tax bracket 18 years to break even on the conversion, estimates Richard Rampell, chief executive of Rampell & Rampell accounting firm in Palm Beach, Fla."

So if this is correct, if you are currently 65, assuming an annual investment return of 6%, your break even point might be age 83.

And assuming an annual investment return of 6% might be generous, especially if your main goal is to preserve rather than to grow your wealth. If you keep your stocks in taxable and CDs or conservative bonds in your IRA, and if you are reducing your stock exposure with advancing age, your returns may be much less than 6% by the time you get into your late 70s and 80s if not sooner (assuming you make it that far). And if the market crashes in the not-too-distant future, you will have less money invested since you paid hefty tax bills on the conversion when it was booming. That could leave you more vulnerable to a market crash- not great for a retiree, even if most scenarios predict you winning with a conversion.

And if taxes decrease in the future in your bracket that would make it even less wise (of course, they could potentially go the other way).

Just lots of "ifs".

I am presenting this argument, not because I support it, but rather for discussion.

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

Post by FIREchief » Thu Dec 15, 2016 8:37 pm

protagonist wrote:

Advisers say you generally need to hold the Roth IRA for 15 to 20 years to make it pay off. So they generally don't recommend conversion for anyone over age 60.

"If you're going to hold the IRA for less than 10 years, you definitely don't want to do it," says Tom Wiggins, a Certified Financial Planner at Rehmann, a business consulting and financial advising firm in Farmington Hills, Mich."

Assuming an annual investment return of 6 percent, it would take someone in the top tax bracket 18 years to break even on the conversion, estimates Richard Rampell, chief executive of Rampell & Rampell accounting firm in Palm Beach, Fla."


Nonsense. Financial advisors who are paid a percentage of AUM (i.e. most of them), don't like Roth conversions for the simple fact that although the portfolio may be worth the same or more in future purchasing power after conversion, their commission is less. There is more silliness in there, but I just picked out the highlight. 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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

Post by 2015 » Thu Dec 15, 2016 9:22 pm

celia wrote:
2015 wrote:In step 5, do you mean if for example one were to do 3 separate roth conversions in January, then later in the year if markets dropped by 15% or more, do 3 more conversions, then in December recharacterized the winner? I'm not sure what you mean by "high-priced" conversion?

Recharacterize the "losers". The high-priced conversion is the one that had the more expensive shares at conversion time (if you keep converting from the same fund). The losers are also known as the conversions that have the biggest percentage loss (or smallest percentage gain).

Without looking at this verbage, you should be able to look at the conversions themselves and tell. If you converted 3 times in January and 3 times in the summer after the market declined, compare today's value of each conversion with the value at time of conversion (which will be used in calculating taxes). Divide each account's current value by its conversion value and keep the ones with the largest value. If they are greater than 1, they made a profit. If less than 1, they lost value.

For example, if every conversion was for $10K, keep the accounts now worth $15K (1.5 ratio), $11K (1.1), and maybe the $9.8K (.98) and pay taxes on the $30K conversion. Recharacterize those worth $9K (.9), $7K (.7), and $5K (.5) since you wouldn't want to pay taxes on $30K to keep them. Note that if they are still worth that much the following January, you might want to convert them again.

With respect to step 6, one wouldn't need to put the recharacterizations into a new tIRA if say, he recharacterized on December 5 and didn't do new conversions until January 6 of the next year (abiding by the no new conversions in 30 days/same year rule), correct?

Correct! You only need to use a new TIRA if NOT doing so would mess up your ability to do more conversions for that year. For example, in the example discussed above, if the market dropped 15%, it is likely (but not guaranteed) that the January conversions would be recharacterized. You could recharacterize them back to TIRA #2, then do conversions again from your primary TIRA. But since I prefer to keep my options open for longer, I wouldn't recharacterize early. What if my volitile Precious Metals fund had lost half by summer? Maybe it would quadruple by December, then I would be sorry. :annoyed

I am deeply grateful to Celia, Livesoft, Firechief, BSteiner, and many others [Edited to add KevinM] who participated in several conversion/recharacterization threads, as I would never have had the courage to have done this on my own. Many thanks to all!

You can now consider yourself one of the experienced successful converters! Congratulations. Glad we could help.


Ugh! I screwed up the question regarding Conversion note 5! I meant "loser" when I used the phrase "then in December recharacterized the winner". :oops:

Thanks so much, Celia! Following your excellent explanation, and my intention to only convert a total of $20K/year using only VTSAX, VBTLX, AND VTIAX, does the following sound right?

1) Convert from TIRA VBTLX $20K each into VTSAX for roth 2, VBTLX for roth 3, and VTIAX for roth 4. I am intentionally not converting into any other funds as my PF is a simple 3 fund.
2) I will do this conversion on 1/5/17 as I just recharacterized roths 2-4 back into the TIRA on 12/5/16 and combined roth 2 (the horse race winner!) into my main roth 1. Roths 2-4 are currently empty as a result.
3) Per your example above, should the market decline in summer 2017 by 15% or more, I again convert $20K apiece from my TIRA each into new roths 5 (VTSAX/$20K), 6 (VBTLX/$20K), and 7 (VTIAX/$20K) separately (in fact, duplicating the process I followed in January).
4) Then on 12/5/17, I keep only the fund that gained the most and recharacterize the other 5 conversions back into my TIRA, and again combine whichever horse race winner into my main roth 1. I am aware that I have until October of the year following the conversions to recharacterize but I want to keep things as simple as possible and am willing to pay the price for such simplicity.
5) I start the whole process all over again on 1/5/18.

Thank you for all of your guidance! It feels great to feel like I'm getting the hang of this while knowing I am managing my taxes as effectively as possible.

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

Post by 2015 » Thu Dec 15, 2016 9:24 pm

user5027 wrote:
2015 wrote: For 2016, I simply did the "horse race" method with 3 conversions into 3 separate roths, which I recharacterized last week (kept in the same year for simplicity reasons).


After going to the trouble of starting the "horse race" I would not end the race before the finish line. A lot can happen between now and Oct 2017. Your winner could be another horse.


Yes, I know, but as I just noted I want to keep the process as simple as possible (i.e., I don't want to file for a tax extension) and am willing to pay the price for the simplicity.

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

Post by protagonist » Thu Dec 15, 2016 9:53 pm

FIREchief wrote:
protagonist wrote:

Advisers say you generally need to hold the Roth IRA for 15 to 20 years to make it pay off. So they generally don't recommend conversion for anyone over age 60.

"If you're going to hold the IRA for less than 10 years, you definitely don't want to do it," says Tom Wiggins, a Certified Financial Planner at Rehmann, a business consulting and financial advising firm in Farmington Hills, Mich."

Assuming an annual investment return of 6 percent, it would take someone in the top tax bracket 18 years to break even on the conversion, estimates Richard Rampell, chief executive of Rampell & Rampell accounting firm in Palm Beach, Fla."


Nonsense. Financial advisors who are paid a percentage of AUM (i.e. most of them), don't like Roth conversions for the simple fact that although the portfolio may be worth the same or more in future purchasing power after conversion, their commission is less. There is more silliness in there, but I just picked out the highlight. 8-)



Thank you for explaining that. I was also quick to observe that the two quoted "authorities" were a financial advisor and an accountant. I figured the financial advisor might be displaying self-interest, and I was a bit skeptical of the authority of an accountant from a firm I was unaware of in Florida. But I would still like to hear a rebuttal to that claim with statistics demonstrating that it is wrong.

I would like to see a careful analysis of where the "break-even point" (in terms of age) is for various scenarios, as exists for social security planning (which is, admittedly, simpler). I have yet to come across anything like that.

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

Post by FIREchief » Thu Dec 15, 2016 11:41 pm

protagonist wrote:
I would like to see a careful analysis of where the "break-even point" (in terms of age) is for various scenarios, as exists for social security planning (which is, admittedly, simpler). I have yet to come across anything like that.


I don't think you will. There are no absolutes with making Roth conversion decisions (there are some no-brainers at the extremes, but not for most of us). In order to make an informed decision, one needs to consider many potential future scenarios. Do both spouses live to 100? Does one die next year and the other live on much longer? Do they both die soon and leave the tIRA assets to a) a child who can stretch the payments at much lower tax brackets, b) a charity that will pay no taxes or c) a beneficiary that for whatever reason will need to withdraw the assets over five years (at possibly much higher tax rates). Then there is the question of RMDs. Do the tIRA assets create a high risk of significant RMDs driving higher taxes? Or, are they relatively modest and of little concern. Does the tIRA owner wish to leave a legacy or spend down assets over their remaining life? Then, of course there are comparisons to be made regarding taxes paid now (aggressive conversions) versus later (delayed or no conversions). This all just scratches the surface.

Depending upon wealth, family situation, expected longevity, estate plans, etc. etc. a person may decide to be very aggressive or very conservative with conversions. Rather than try to find the exact right answer for your situation (it doesn't exist), it is likely better to continue to educate yourself on taxes, financial strategies, estate strategies and other related topics. This forum is one of the best sources of info, and just reading threads on these topics invariably teaches you new things or exposes you to new perspectives.

I do have a very specific lifetime Roth conversion strategy, but have spent years to develop it. Good luck! :sharebeer
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by celia » Fri Dec 16, 2016 12:41 am

user5027 wrote:After going to the trouble of starting the "horse race" I would not end the race before the finish line. A lot can happen between now and Oct 2017. Your winner could be another horse.

Although that may give you the optimal result, the factor that makes the biggest difference is the share price on the date of conversion. If you converted 100 shares of fund X on two different dates, the "winner" in December of year of conversion will also be the "winner" the following October. It is only if the assets do not correlate with each other (eg, US stocks vs Intl stocks) that a longer wait may be beneficial. In that case if there is a change in whichever is stronger during the year after conversion, given another year, it is possible that the other one could catch up and become stronger.

This is another way of implying that you shouldn't worry that much about the short term growth. It is long term that really matters.

It is likely that the original intent of the recharacterization rules was to avoid having to pay taxes on something that is later worth so much less. But we can take advantage of the same rules to score a bargain. If a second conversion means you can convert more shares for the same tax bill, most of us will jump at the chance.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by celia » Fri Dec 16, 2016 1:38 am

2015, These comments (that refer to a post about 5 postings back) are meant not just for you, but for anyone trying to understand Roth conversions and Recharacterizations. A lot of this is small details but you seem to "get it" now.

2015 wrote:2) I will do this conversion on 1/5/17 as I just recharacterized roths 2-4 back into the TIRA on 12/5/16.

I'm sure you meant you recharacterized 2 of the 3 conversions (not all 3).

3) Per your example above, should the market decline in summer 2017 by 15% or more, I again convert $20K apiece from my TIRA each into new roths 5 (VTSAX/$20K), 6 (VBTLX/$20K), and 7 (VTIAX/$20K) separately (in fact, duplicating the process I followed in January).

Instead of waiting for a "market decline", you only care about the funds you own. You might want to convert when some of your funds decline in value during a market up-tick. You will never re-convert a fund whose shares cost more than when you originally converted since the new value is already a "loser".

There is nothing special about a 15% decline. I just made that number up so people would get a sense of when to convert. I wouldn't re-convert for a 1% or 2% decline. And I wouldn't automatically convert at a 15% or 25% decline. If the market was falling quickly, I would wait until it settled down a bit. It also depends on the time of the year. If it was December and I hadn't re-converted the same fund again after a 5% drop, I would probably do it. But I wouldn't do it for the same circumstances if it happened a week after I first converted. (Some people here will say I'm market timing, but I don't see it that way as I still own the same assets, but in another location. I'm mainly trying to save on "conversion taxes".)

Another consideration is that each fund I convert would be considered separately. If I converted 3 separate funds in January but only one of them dropped 15% and the others dropped 2%, I would only re-convert the one fund. (If the others dropped more later on, I would re-consider them then).

4) Then on 12/5/17, I keep only the fund that gained the most and recharacterize the other 5 conversions...

There us nothing special about that date, except that it is the anniversary of when you, 2015, did your first recharacterizations. :D You can use that date if you want or use any other date or wait until the following October 15.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by celia » Fri Dec 16, 2016 4:35 am

The referenced article (above) is not only faulty in its concept, but also the example:

protagonist wrote: Advisers say you generally need to hold the Roth IRA for 15 to 20 years to make it pay off. So they generally don't recommend conversion for anyone over age 60.

"If you're going to hold the IRA for less than 10 years, you definitely don't want to do it," says Tom Wiggins, a Certified Financial Planner at Rehmann, a business consulting and financial advising firm in Farmington Hills, Mich."

Note that this discussion implies that the account owner has more money in the TIRA than he needs to live on (at least for the short term). If he needs it for living expenses, he NEEDS it and conversion is not an option. The question is whether it is worth converting since the "conversion tax" may not be able to be earned back by future growth in the Roth.

FAULTY CONCEPT:
Being able to earn back the paid taxes (or not) shouldn't be the issue. The issue should be if the taxes paid at conversion time will be more than saved in future taxes. That means, if all the conversion taxes (from all the years where conversions are done) total $X, will more than $X be saved in future TIRA withdrawal taxes?

1) Money in the TIRA that is not needed for living expenses will compound the same regardless of which account it is in. Conversions will lower future RMDs and let the future compounding shift to the Roth.
2) The longer you wait to withdraw, the more the TIRA value will grow which implies more taxes will be paid in the future (assuming the same tax bracket--or a higher one if the RMDs/conversions push you into a higher bracket).
3) The account value will continue to grow until distributions become greater than the growth. RMDs start at 3.65% of the account value and stock market returns are more often than not, greater than that.
4) Unneeded money can grow for your heirs, which (hopefully) is a long time away. If they are still working when they inherit, their tax bracket may be higher than yours. They need to start taking RMDs in the year after they inherit, not at 70.5, and the RMDs may push them into a higher bracket.
5) If you will be subject to estate taxes, all assets will be considered as to their dollar value, not their spending value. A dollar in Tax-deferred, in Roth, and in taxable will be subject to the same Estate Tax. The more tax-deferred dollars that can be converted to Roth, the less that will be owed in Estate Taxes, due to fewer taxable dollars remaining. (Some were spent on taxes to convert Tax-deferred dollars to Tax free dollars.)
6) Once SS starts, your tax bracket may increase due to having more taxable income. From 0 to 85% of SS will be taxed depending on your other income sources and their value. So conversions should be done before SS starts.
7) Once RMDs start, they will increase your taxable income.

Assuming an annual investment return of 6 percent, it would take someone in the top tax bracket 18 years to break even on the conversion, estimates Richard Rampell, chief executive of Rampell & Rampell accounting firm in Palm Beach, Fla."

FAULTY EXAMPLE:
This Math does not make sense.

The article was written before 2011 (according to a date reference later in the article) when the top federal rate was 35%. Today it is 39.6%. Let's also assume you live in a high tax state like California, making the highest possible tax rate about 50%. Remember, this is the worst case.

OK, we decide to convert $10,000 and pay the $5,000 in taxes (federal and state).

If we convert $10,000 and pay taxes out of taxable, it will only take 7 years of simple compounded growth of 6% to reach $15,000.

If we convert $10,000 and pay taxes out of the conversion (ouch!), the remaining $5,000 will take 12 years of simple compounded growth of 6% to get back to $10,000.

I can't see any way it takes 18 years to recover the taxes paid. I used their numbers for a worst case that wasn't even as bad tax-wise as it is today.

And most people are nowhere near that tax rate!

Can anyone find anything that makes sense in that article's "Reason 2"?
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by user5027 » Fri Dec 16, 2016 8:01 am

celia wrote:
user5027 wrote:After going to the trouble of starting the "horse race" I would not end the race before the finish line. A lot can happen between now and Oct 2017. Your winner could be another horse.

Although that may give you the optimal result, the factor that makes the biggest difference is the share price on the date of conversion. If you converted 100 shares of fund X on two different dates, the "winner" in December of year of conversion will also be the "winner" the following October.


Converting the same "fund X" on multiple dates is not a "horse race."

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

Post by protagonist » Fri Dec 16, 2016 9:59 am

Thank you for your thorough response, celia.

I do have one obvious issue here:

celia wrote:3) The account value will continue to grow until distributions become greater than the growth. RMDs start at 3.65% of the account value and stock market returns are more often than not, greater than that.


Most of us have tried balancing our accounts such that we hold our stocks in taxable and fixed income in non-taxable. In my case (since the majority of my holdings are in taxable accounts), my IRA is almost entirely invested in CDs. It is extremely difficult to find a CD that pays 3% these days, and those are quite rare (I am aware of one- Andrews FCU). If you are in "safe" bonds. you have the same issue, plus the risk of declining values. On top of which, as we age, many of us shift our AA more towards fixed income. So the idea that one's Roth will grow at over 3.65% of its value at age 70.5 (with a higher threshold at later ages when you are more likely to have a greater %age of fixed income) might be unrealistic.

Another factor is vulnerability to a crash or a bear market if you pay large taxes up front. That is a big deal. This is precisely the kind of risk that most retirees need to avoid. If you are fortunate to have enough, or more than enough, to live comfortably through your retirement, losing some additional growth to taxes averaged over the next 20 or 30 years is no big deal, whereas reducing your principal up front to taxes in your 60s and then suffering a market crash could be much more devastating. And even worse if the amount saved is borderline , which would leave you more vulnerable.

And then there is your personal prediction of the direction of taxes in the future for your bracket. Of course that is a guess. But if they go down, you stand to lose.

(Again, I am not arguing for not converting, but rather playing devil's advocate here. Most members of this forum seem to be strongly in favor of conversion. I'm trying to figure it out and looking at both sides).

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

Post by 2015 » Fri Dec 16, 2016 1:11 pm

celia wrote:2015, These comments (that refer to a post about 5 postings back) are meant not just for you, but for anyone trying to understand Roth conversions and Recharacterizations. A lot of this is small details but you seem to "get it" now.

2015 wrote:2) I will do this conversion on 1/5/17 as I just recharacterized roths 2-4 back into the TIRA on 12/5/16.

I'm sure you meant you recharacterized 2 of the 3 conversions (not all 3).

3) Per your example above, should the market decline in summer 2017 by 15% or more, I again convert $20K apiece from my TIRA each into new roths 5 (VTSAX/$20K), 6 (VBTLX/$20K), and 7 (VTIAX/$20K) separately (in fact, duplicating the process I followed in January).

Instead of waiting for a "market decline", you only care about the funds you own. You might want to convert when some of your funds decline in value during a market up-tick. You will never re-convert a fund whose shares cost more than when you originally converted since the new value is already a "loser".

There is nothing special about a 15% decline. I just made that number up so people would get a sense of when to convert. I wouldn't re-convert for a 1% or 2% decline. And I wouldn't automatically convert at a 15% or 25% decline. If the market was falling quickly, I would wait until it settled down a bit. It also depends on the time of the year. If it was December and I hadn't re-converted the same fund again after a 5% drop, I would probably do it. But I wouldn't do it for the same circumstances if it happened a week after I first converted. (Some people here will say I'm market timing, but I don't see it that way as I still own the same assets, but in another location. I'm mainly trying to save on "conversion taxes".)

Another consideration is that each fund I convert would be considered separately. If I converted 3 separate funds in January but only one of them dropped 15% and the others dropped 2%, I would only re-convert the one fund. (If the others dropped more later on, I would re-consider them then).

4) Then on 12/5/17, I keep only the fund that gained the most and recharacterize the other 5 conversions...

There us nothing special about that date, except that it is the anniversary of when you, 2015, did your first recharacterizations. :D You can use that date if you want or use any other date or wait until the following October 15.


Excellent, thank you! I now understand all of your points: yes, I did mean I only recharacterized 2 of the 3 2016 conversions; I understand about not recharacterizing for a small decline but waiting until the market settles somewhat after a larger or series of declines as well as taking into account the time of year and only considering the fund that has dropped substantially; and you are right I am recharacterizing on the 12/5 date annually to keep everything simple and consistent every year.

Thank you again!!

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

Post by 2015 » Fri Dec 16, 2016 1:21 pm

protagonist wrote:Thank you for your thorough response, celia.

I do have one obvious issue here:

celia wrote:3) The account value will continue to grow until distributions become greater than the growth. RMDs start at 3.65% of the account value and stock market returns are more often than not, greater than that.


Most of us have tried balancing our accounts such that we hold our stocks in taxable and fixed income in non-taxable. In my case (since the majority of my holdings are in taxable accounts), my IRA is almost entirely invested in CDs. It is extremely difficult to find a CD that pays 3% these days, and those are quite rare (I am aware of one- Andrews FCU). If you are in "safe" bonds. you have the same issue, plus the risk of declining values. On top of which, as we age, many of us shift our AA more towards fixed income. So the idea that one's Roth will grow at over 3.65% of its value at age 70.5 (with a higher threshold at later ages when you are more likely to have a greater %age of fixed income) might be unrealistic.

Another factor is vulnerability to a crash or a bear market if you pay large taxes up front. That is a big deal. This is precisely the kind of risk that most retirees need to avoid. If you are fortunate to have enough, or more than enough, to live comfortably through your retirement, losing some additional growth to taxes averaged over the next 20 or 30 years is no big deal, whereas reducing your principal up front to taxes in your 60s and then suffering a market crash could be much more devastating. And even worse if the amount saved is borderline , which would leave you more vulnerable.

And then there is your personal prediction of the direction of taxes in the future for your bracket. Of course that is a guess. But if they go down, you stand to lose.

(Again, I am not arguing for not converting, but rather playing devil's advocate here. Most members of this forum seem to be strongly in favor of conversion. I'm trying to figure it out and looking at both sides).


Protaganist, isn't it not as simple as this (I am asking, not asserting)? Doesn't it depend on each person's unique situation. In my case, 2 of every 3 dollars are in taxable, so I can live off of that while converting. I do know my taxes are lower now, even while converting, than they will be after delayed SS and RMD's start. Always assuming I could screw things up, my way around optimizing roth conversions to the nth degree is not to convert up to the 15% bracket, but instead to smooth out taxes throughout the remainder of my life. During conversions, I will pay about $600 taxes until age 70, after which I will pay $0 in taxes. Although my TIRA won't be completely depleted, should it be much larger resulting in greater taxes than estimated due to better returns, my PF will be larger so I don't view this as a bad situation to be in. I will also consider continuing with conversions post-70 depending on my situation at that time.

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

Post by Chip » Fri Dec 16, 2016 2:52 pm

user5027 wrote:Converting the same "fund X" on multiple dates is not a "horse race."


Correct. In another thread someone (FIREChief?) suggested calling it "leapfrog". I like the visual.

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

Post by FIREchief » Fri Dec 16, 2016 4:12 pm

Chip wrote:
user5027 wrote:Converting the same "fund X" on multiple dates is not a "horse race."


Correct. In another thread someone (FIREChief?) suggested calling it "leapfrog". I like the visual.


Thanks. I was hoping somebody read that. :sharebeer

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

Post by celia » Fri Dec 16, 2016 5:44 pm

celia wrote:The referenced article (above) is not only faulty in its concept, but also the example:

protagonist wrote: Advisers say...

Note that this discussion implies that the account owner has more money in the TIRA than he needs to live on (at least for the short term). If he needs it for living expenses, he NEEDS it and conversion is not an option.
......

3) The account value will continue to grow until distributions become greater than the growth. RMDs start at 3.65% of the account value and stock market returns are more often than not, greater than that.

I thought I qualified my comments by saying Roth conversions are not for everyone. You are right about CD and bond-based IRAs. But since this thread started out talking about conversions for high net worth individuals and has attracted many of them, that is who I was primarily addressing.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by BigJohn » Fri Dec 16, 2016 11:25 pm

FIREchief wrote:I don't think you will. There are no absolutes with making Roth conversion decisions (there are some no-brainers at the extremes, but not for most of us). In order to make an informed decision, one needs to consider many potential future scenarios. Do both spouses live to 100? Does one die next year and the other live on much longer? Do they both die soon and leave the tIRA assets to a) a child who can stretch the payments at much lower tax brackets, b) a charity that will pay no taxes or c) a beneficiary that for whatever reason will need to withdraw the assets over five years (at possibly much higher tax rates). Then there is the question of RMDs. Do the tIRA assets create a high risk of significant RMDs driving higher taxes? Or, are they relatively modest and of little concern. Does the tIRA owner wish to leave a legacy or spend down assets over their remaining life? Then, of course there are comparisons to be made regarding taxes paid now (aggressive conversions) versus later (delayed or no conversions). This all just scratches the surface.

Great comments by FIREchief. Not only is each persons situation is different, there are so many unknowns that even for an individual or couple there is no "right" answer. I think all you can do is understand the future scenarios and then develop a plan that follows a middle ground. After a lot of calculation and consideration my plan is based on today's tax code, converting ~50% of my t-IRA assets by RMD time and a break even point in my early 70's. I go in understanding that under some future scenarios I might regret doing this year's conversions and under others I'll wish I had done a lot more. I think it's important to understand and acknowledge this uncertainty, especially if you are converting large amounts early in retirement.

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

Post by protagonist » Sun Dec 18, 2016 10:23 am

[deleted-repeat post. sorry.)
Last edited by protagonist on Sun Dec 18, 2016 10:35 am, edited 1 time in total.

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

Post by protagonist » Sun Dec 18, 2016 10:33 am

protagonist wrote:
celia wrote:I thought I qualified my comments by saying Roth conversions are not for everyone. You are right about CD and bond-based IRAs. But since this thread started out talking about conversions for high net worth individuals and has attracted many of them, that is who I was primarily addressing.


How do you define "high net worth", celia?

Because if you adhere to Boglehead AA principles, at age 70, regardless of net worth, you might only be 30% in stock and 70% in fixed income. That would mean, for every million saved, $700,000 would be in fixed income, probably earning 3% or less- 3% is very optimistic. If you are fortunate, most of that would be in a tax-deferred account, but for many of us it is not. Regardless of income, given those parameters, achieving a minimum of 3.65% annual growth, with that threshold growing every year, could be quite a challenge.

The bottom line is, I would probably be considered "high worth" (though I don't know how you are defining that.) Due to a stupid mistake in the past, however, I only have about $430K in my IRA. I am an early retiree, and to date have avoided converting because of eligibility for Romneycare (now Obamacare). That will no longer be an issue when I turn 65 in June. And I am confused as to what to do about this. Most people in this forum seem to advocate conversion, but I see multiple potential arguments against (those I have made above, plus political ones that cannot be discussed here). And 3.65% of 430K is a lot less income than , say, 3.65% of 2M or 5M, with much less tax implications.

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

Post by BarbK » Sun Jul 09, 2017 10:09 am

This is a great thread with a lot of well thought-out advice.

We are 64(me), 60(husband) early retirees at 50(me), 58(H) going through the Roth Conversion process for 2 years now. Only converted to the top of the 15% bracket so far ($134K for the 2 years) but threads like these make me more open for escalating the process.

Was curious what the OP ended up doing for Roth conversions in 2016 and plans for 2017.

Also interested to hear from anyone else who opted for Conversions past the 15% tax rate.

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

Post by Small Law Survivor » Sun Jul 09, 2017 10:46 am

Well, I am the OP.

I was still working in 2016, so I did no Roth conversions in 2016. My original post was a look-ahead to 2017.

This spring I did hire a financial advisor to help me brainstorm this decision. He was much more conservative than many of the BHs on this post - his recommendation was to convert around $75,000 this year.

I haven't converted yet this year, so I'm still thinking about this.

Go figure.

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

Post by FIREchief » Sun Jul 09, 2017 12:24 pm

Small Law Survivor wrote:Well, I am the OP.

I was still working in 2016, so I did no Roth conversions in 2016. My original post was a look-ahead to 2017.

This spring I did hire a financial advisor to help me brainstorm this decision. He was much more conservative than many of the BHs on this post - his recommendation was to convert around $75,000 this year.

I haven't converted yet this year, so I'm still thinking about this.

Go figure.

Small Law Survivor
Is your financial advisor paid a percentage of AUM? If so, he has a strong financial incentive to discourage Roth conversions.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by BarbK » Sun Jul 09, 2017 9:20 pm

Thanks for responding - Definitely do the 75K or to the top of the 15%. That's surprising to hear that a FA would be more conservative than the group here.

Firechief - So you're thinking that AUM would be less b/c of the taxes paid for the conversion or is it something else?

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

Post by PoeticalDeportment » Sun Jul 09, 2017 10:17 pm

Small Law Survivor wrote:Well, I am the OP.

I was still working in 2016, so I did no Roth conversions in 2016. My original post was a look-ahead to 2017.

This spring I did hire a financial advisor to help me brainstorm this decision. He was much more conservative than many of the BHs on this post - his recommendation was to convert around $75,000 this year.

I haven't converted yet this year, so I'm still thinking about this.

Go figure.

Small Law Survivor
What did the financial advisor charge for that recommendation? What were their assumptions?

I think you should call James Lange. I would be interested to hear 1) how much he charges 2) what his recommendation is after "running the numbers".

I am still concerned that the variable annuity will play a larger roll in the outcome than your original post seemed willing to acknowledge.

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

Post by FIREchief » Mon Jul 10, 2017 3:38 pm

BarbK wrote:Thanks for responding - Definitely do the 75K or to the top of the 15%. That's surprising to hear that a FA would be more conservative than the group here.

Firechief - So you're thinking that AUM would be less b/c of the taxes paid for the conversion or is it something else?
That's exactly right.

Example:
I have $100,000 in a tIRA and $100,000 in an after-tax investment with my FA. He's making $2000 a year "managing" my money.
If I pull $25K from the after-tax to pay taxes to Roth convert the tIRA I now have only $175,000 AUM, so my FA is now making $250 less each year from me.

I believe that FA's discouraging Roth conversions for this reason is a very common occurrence and very damaging to clients who would benefit from aggressive Roth conversions.
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by Small Law Survivor » Mon Jul 10, 2017 7:31 pm

I hired the FA to consult with me on the Roth conversion, not to manage my assets, so lower AUM is not a factor. I made it clear I am a DIY investor, and hired him to advise me, period.

Yes, I'm concerned about the variable annuity, but no one -- certainly not the FA -- seemed able to deal with that. The software the FA used to analyze my situation ("eMoney") was unable to deal with this problem. By the way, the FA gave me wide access to the eMoney reports, and frankly I'm a bit iffy on eMoney.

I'm not sure the FA really was able to help me, but at least he was a knowledgeable person I could brainstorm with on this topic.

My "tentative" solution for the variable annuity at present is to hang on to it, and let our daughter inherit it. At that point she will have a choice- sell it over five years, and be taxed on it, or annuitize it. The annuitization is quite complicated - I discussed it with the Vanguard annuity department, and I have a copy of the annuity prospectus. It basically would be annuitized using the RMD schedule - so it would be light at first, and grow as our daughter aged. However, she would have to decide how to invest it to maximize the payout. And, it seems to get complex when you get to second and third generation inheritors - what if (God forbid) out daughter inherited at 50 and died at 55? Who would inherit and on what terms? This became very complicated when I discussed it with with the Vanguard rep. He said that the annuity prospectus would spell this out in detail, but based on my quick review, it doesn't seem to do so. Maybe I just let that go - some things you can't control.

So, the annuity is a white elephant of sorts, for sure. I'm not minimizing it's importance at all, it's just that I don't know how to deal with it. I suppose I could forgo any Roth conversions from ages 66-69 (2017 is the first of those four years), and cash out the $400,000 annuity during those four years, but I don't think that would be as valuable as the Roth conversions these four years. The FA certainly never mentioned that option.

This is tough stuff!

Small Law Survivor

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

Post by Beehave » Wed Jul 12, 2017 12:58 pm

2 comments:

1) Mind SGM's post about impact of income on Medicare fees. It can be significant and should be factored in.

2) I'm kind of new here, but I thought that the Boglehead philosophy generally favored diversifying risk and casting a wary eye on assumptions that past performance is a guarantee of future performance. I'm in favor of Roth IRAs, but a retirement fund is a 20 or thirty or more year deal. We cannot possibly know what tax policies and other policies will be in place (e.g., Medicare) over time. Seems to me diversifying future tax risk would include some balance of pre- and post-tax funds. Yet the preponderance of advice seems to be to get everything into Roths.

Regarding a 100% Roth strategy, is there no risk that a VAT is imposed in the future along with decreased income taxes? That would seem to me to be a risk that a wooden shoe could be tossed with nasty effect into a Roth-only strategy that is based on assumption that tomorrow's policies will mimic today's. I'd be interested in comments and thoughts.

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

Post by FIREchief » Wed Jul 12, 2017 4:57 pm

Beehave wrote:2 comments:

1) Mind SGM's post about impact of income on Medicare fees. It can be significant and should be factored in.
Medicare premium increases are a very real concern. I just ran the math the other day, and it is eye opening.

Example:

Married couple with joint income of $170000 (highest income without paying an increased medicare premium) pays $3216 per year in medicare premiums ($134 x 12 x 2). If they withdraw or Roth convert a tIRA to the end of the next Medicare bracket ($214,000), they pay $1284 additional to medicare. This is the equivalent of paying an extra "tax" of 2.9% on that $44000. If they only withdraw/convert $22000, the tax increase is 5.8%. This means that if they think they are in a 25% marginal tax bracket, they are in the equivalent of a 30.8% tax bracket.

It gets worse for higher incomes in 2018 due to compressed Medicare brackets. The third tier ($214000 - $267000 in 2018) will now pay premium increases equivalent to a minimum of 3.6% added "tax."

This provides a significant financial incentive to Roth convert additional tIRA funds before the year a person reaches age 63.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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

Post by FIREchief » Wed Jul 12, 2017 5:06 pm

Beehave wrote: I'm in favor of Roth IRAs, but a retirement fund is a 20 or thirty or more year deal. We cannot possibly know what tax policies and other policies will be in place (e.g., Medicare) over time. Seems to me diversifying future tax risk would include some balance of pre- and post-tax funds. Yet the preponderance of advice seems to be to get everything into Roths.

Regarding a 100% Roth strategy, is there no risk that a VAT is imposed in the future along with decreased income taxes? That would seem to me to be a risk that a wooden shoe could be tossed with nasty effect into a Roth-only strategy that is based on assumption that tomorrow's policies will mimic today's. I'd be interested in comments and thoughts.
There certainly is an argument to be made in favor of tax diversification. Unfortunately, you mention two of the great unknowns in the equation (i.e. a) what Washington is going to do and b) how long a person is going to live). Without getting into politics, I personally have decided to ignore possibilities of flat tax, VAT or any of the other radical changes that have been proposed for our tax system. I may certainly wind up being wrong, but I have to plan based upon some set of assumptions; or otherwise the exercise is impossible.

With respect to Roth conversions, I generally don't buy into the philosophy that one should only Roth convert if they have other (i.e. after-tax) funds to pay the taxes. In many cases, I think it makes perfect sense to sell tIRA assets to pay the taxes required to convert additional tIRA assets to Roth.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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

Post by BarbK » Wed Jul 12, 2017 6:51 pm

There are so many parts to consider and probably everyone's situation is different.

We didn't qualify for ACA subsidies b/c ions ago (over 25+ years) a broker bought many zero coupon municipal bonds. There was no way to know about ACA, Medicare Tax, etc at that time so how are we able to project what will happen in the future.

In our case, I did the Roth Conversions which were basically the entire 10-15% bracket for 2 years. Before the conversions, my tax bill was zero.

Besides losing the 0 tax on qualified dividends, I wouldn't go far into the 25% tax bracket before hitting the $170K for medicare tax. The zeros started maturing in 2016, lots matured in 2017, and heavy maturation in 2018-2019 so hitting the $170K will at least take longer.

So I stayed in the 15% bracket and enjoyed the low taxes for the first time.

For us, I'm still on the fence re ROTH and the ACA premiums. Having paid >$50K in premiums for 3 years, medicare looks like a deal.

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

Post by BigJohn » Wed Jul 12, 2017 7:36 pm

Beehave wrote:I'm in favor of Roth IRAs, but a retirement fund is a 20 or thirty or more year deal. We cannot possibly know what tax policies and other policies will be in place (e.g., Medicare) over time. Seems to me diversifying future tax risk would include some balance of pre- and post-tax funds. Yet the preponderance of advice seems to be to get everything into Roths.
Beehave, I'm in your camp and like my current plans which leaves me at somewhere around 40/60 for pre/post. Even if there is no paradigm shift in tax policy, this has a few advantages. Paying for large medical/LTC expenses, bequests to charity and inheritance to children that might remain in a lower tax bracket than their siblings are all better done from pre-tax funds under the current tax structure. Since my last increments of Roth conversion having diminishing returns, I don't feel like I'm giving up a significant benefit to maintain this future tax diversity.

lepa71
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Re: $400,000 Roth Conversions Between Ages 66-69?

Post by lepa71 » Mon Aug 14, 2017 3:36 pm

I'm not trying to troll.

May be it is a stupid question, but ... Why would one start to convert Traditional IRA to Roth IRA? Is it for saving based on tax bracket?

Thanks

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

Post by Nicolas » Mon Aug 14, 2017 4:09 pm

lepa71 wrote:
Mon Aug 14, 2017 3:36 pm
I'm not trying to troll.

May be it is a stupid question, but ... Why would one start to convert Traditional IRA to Roth IRA? Is it for saving based on tax bracket?

Thanks
Because after the age of 70 1/2 the federal government forces you to take RMDs (Required Minimum Distribution) every year. The amount is calculated based on your age and the amount remaining. If you have significant amounts in your traditional IRA these RMDs could push you up into a higher tax bracket. By converting earlier you pay tax in a lower bracket.

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

Post by The Wizard » Mon Aug 14, 2017 4:55 pm

NMJack wrote:
Fri Jul 01, 2016 5:19 pm
If I had your portfolio, I would convert more like $250K per year. Look at things like:

a) the top of the 28% bracket
b) commencement of AMT (if applicable)
c) the $250K AGI threshold for the IIT

"FIlling" of tax brackets is a somewhat simplistic approach. It's better to model your overall annual situation, and don't stop after those four years. Also, consider the impacts of taxes on SS benefits. If you are aggressive, early with the Roth conversions, you may save a ton of taxes on SS payments.
Completely agree.
Try to project your Taxable Income or AGI for the next decade, year by year.
Then tweak your Roth conversions to approximately levellize it...
Attempted new signature...

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

Post by Emilyjane » Tue Aug 15, 2017 8:23 am

lepa71 wrote:
Mon Aug 14, 2017 3:36 pm
May be it is a stupid question, but ... Why would one start to convert Traditional IRA to Roth IRA? Is it for saving based on tax bracket?
An important consideration for us is attempting to keep our modified adjusted gross income lower than $170,000 for married couple, in order to avoid IRMAA, paying higher rate for Medicare parts B and D. RMDs could put us above that, Roth withdrawals do not add to that.
"Real knowledge is to know the extent of one's ignorance", Confucius

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