Roth multi-year conversion plan: inputs requested

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
Counterpoint
Posts: 54
Joined: Sun Jun 05, 2016 1:42 pm

Roth multi-year conversion plan: inputs requested

Post by Counterpoint » Thu Mar 08, 2018 10:51 am

I’m looking at our first conversions from a TIRA to Roth IRA and have a few questions (first of all, my gratitude to the forum members for all that I’ve learnt here, and especially to Celia re: conversions and to BigFoot48 for the RPM).

Our situation:
- Spouse and I are early retirees in our late 50s.
- We have an inflation-indexed pension sufficient for our current and future spending needs.
- So our investment portfolio is primarily for transfer to our kids/grandkids over time, maybe for purchasing a second condo near our kids, and for unexpected needs. We have $450K in a TIRA and somewhat more than that in taxable assets (all in Vanguard stock index funds, except for a cash reserve).
- We’re currently in the 24% tax bracket
- Will have the same income (in real terms) for 10 years till age 70, when Soc Sec and RMDs kick in. The SS alone, combined for both of us, would put us into the border of the 32% tax bracket even if tax rates stay the same. (If tax rates revert in 2025 to pre-2018 brackets, we will likely be near the 28%-33% bracket border starting 2025 depending on how itemized deductions are treated, and definitely in 33% territory after age 70.)

Our plan and reasoning:
- Since our real income will not decrease (and we believe tax brackets are unlikely to decrease), our tax brackets in the future are highly likely to be either the same or higher (when we hit 70).
- Even if our future tax bracket stays the same, by converting (while staying in the 24% bracket) we would get the benefits of (1) increasing the after-tax amount of assets that can compound tax-deferred, both because we’re converting amounts from pre-tax to Roth, and because of lower RMDs in the future; and (2) greater flexibility post-70 to either withdraw for gifts/needs, or continue compounding tax-free for later bequests.
- Our kids are likely to be in the (fingers crossed) 22% or 24% brackets. Their state tax rates may end up being lower than ours, but potentially slightly lower rates for them (if we bequeath a TIRA instead of Roth) does not appear to be a good enough reason to forgo the benefits of conversion.
- So it seems a no-brainer to convert enough from TIRA to Roth IRA each year to fill up our 24% bracket. We would have about $70K of space in 2018, and we would have the same amount of space (in real terms) for 10 years, till the first of us gets to 70.
- I don’t think it’s worthwhile to convert into the 32% bracket yet. We can wait to see (1) if most of the TIRA gets converted over time within the 24% bracket (depending on how much the TIRA amount increases - hopefully - because of stock market performance), and (2) if there are going to be tax increases at some point (although that would only provide a 1-year window for action).
- To pay for the taxes, we’d use annual income that would otherwise have been invested in the stock market anyway.

Questions:
(1) Does the above plan make sense (in particular staying within the 24% bracket for conversion)?
(2) In terms of implementation, I’m thinking of spreading out each 70K conversion over the year (to diversify the market price at which we’re making the conversion, same as dollar cost averaging), in 2-4 chunks depending on how much work it is. How onerous is it to effect each conversion? (It would be nice to have an auto-conversion, similar to auto-investment.)
(3) Is there any reason to not combine the new Roth amounts with a small existing Roth account?
(4) Anything to watch out for as we convert over the next 10-12 years? In terms of triggers: We’re already into NIIT territory, we will be paying taxes on 85% of SS. From what I’ve read on the forum, I believe we should look at the Medicare IRMAA tier around age 63? Anything else?
(5) My understanding is that even if we mis-estimate our income for a given year and go over into the 32% bracket by a bit after conversion, the effect is just on the small amount that’s within the 32% category (i.e. there is no trigger effect that would have a bigger impact).
(6) Is there a good place to look for or post Q&A on the Retiree Portfolio Model? It was very useful, but there are some aspects that I don’t quite get, even after looking at the ReadMe section of the model.

Thanks for any comments.

mhalley
Posts: 7782
Joined: Tue Nov 20, 2007 6:02 am

Re: Roth multi-year conversion plan: inputs requested

Post by mhalley » Thu Mar 08, 2018 11:08 am

I am in the process of doing my roth conversions before age 70. I used I-orp to help guide how Much to convert each year, but I was uncomfortable doing as much as they suggest, but it is a place to try in addition to the spreadsheet.
https://www.i-orp.com/dividend/extended.html
As the general trend of the market is up, in most years the multiple conversions would result in more money being converted at a higher price, but the mechanism of conversion is pretty easy so you can do it either way.
With the loss of recharacterization then combining roths is fine.
How is your health insurance being bought now? If your insurance is being subsidized as part of your retirement benefits, then Irma might make a difference, but if you are paying for it out of pocket then even if you pay the maximum amount in Medicare premiums the price will drop dramatically when Medicare kicks in.
The only other tax I can think of is the increase in cap gains at high brackets.
Last edited by mhalley on Thu Mar 08, 2018 11:53 am, edited 1 time in total.

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Roth multi-year conversion plan: inputs requested

Post by itstoomuch » Thu Mar 08, 2018 11:28 am

Counterpoint wrote:Questions:
(1) Does the above plan make sense (in particular staying within the 24% bracket for conversion)?
yes
(2) In terms of implementation, I’m thinking of spreading out each 70K conversion over the year (to diversify the market price at which we’re making
the conversion, same as dollar cost averaging), in 2-4 chunks depending on how much work it is. How onerous is it to effect each conversion? (It would be nice to have an auto-conversion, similar to auto-investment.)
sounds OK
(3) Is there any reason to not combine the new Roth amounts with a small existing Roth account?
None, however, for bookkeeping and performance review, we opened separate Roths
(4) Anything to watch out for as we convert over the next 10-12 years? In terms of triggers: We’re already into NIIT territory, we will be paying taxes on 85% of SS. From what I’ve read on the forum, I believe we should look at the Medicare IRMAA tier around age 63? Anything else?
unknown, we didn't have this problem at the low end of 15%
(5) My understanding is that even if we mis-estimate our income for a given year and go over into the 32% bracket by a bit after conversion, the effect is just on the small amount that’s within the 32% category (i.e. there is no trigger effect that would have a bigger impact).
marginal tax. Only the amount over the lessor bracket is taxed higher bracket
(6) Is there a good place to look for or post Q&A on the Retiree Portfolio Model RPM? It was very useful, but there are some aspects that I don’t quite get, even after looking at the ReadMe section of the model.
remember this is essentially a Vanguard site. Vanguard specializes in MF and Indexes. YRPMMV
Last edited by itstoomuch on Thu Mar 08, 2018 11:30 am, edited 1 time in total.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

User avatar
dodecahedron
Posts: 4917
Joined: Tue Nov 12, 2013 12:28 pm

Re: Roth multi-year conversion plan: inputs requested

Post by dodecahedron » Thu Mar 08, 2018 11:29 am

Some kind of conversion plan makes sense to me. Another factor in favor of conversion is that after one of you dies, the surviving spouse may face higher brackets due to single filing status.

You are right to think about IRMAA considerations starting at age 63. Also look into how AGI might influence your eligibility for senior citizen real estate tax breaks on your home.

Other considerations that suggest some reasons for caution in going too far with Roth conversions:
  • if you have major charitable giving plans, then QCDs from your traditional account can be tax efficient ways to give after 70 1/2
  • if either of you develops a condition requiring large unreimbursed medical expenses (e.g., Long Term Care), then taking distributions in those years can be tax efficient
I worry that you seem very focused on your "tax bracket," but your effective marginal tax rate can often be quite different. Your tax bracket is based on your taxable income, but Roth conversions affect your AGI as well as your taxable income. You mentioned "trigger effects". Trigger effects primarily come from things that affect your MAGI (defined in different ways for different purposes, but always taking AGI as starting point, not taxable income.)

Essentially, Roth conversion when you believe tax rates are temporarily relatively low is like "buying taxes when they are on sale," and is qualitatively similar to decisions about stocking up on paper goods when you see those going "on sale". To take another analogous example, I bought "electricity on sale" last year when I bought solar panels in a community solar farm. Just as there is no way to know FOR SURE whether electricity or paper goods might not be available at even deeper discount sale prices down the road, (e.g., if some new technology is invented that makes renewables even cheaper in the future), the same is true for taxes.

Just as you might not want to go "whole hog" and buy a lifetime supply of paper products when you see them on sale, you may want to exercise caution in how much you convert. It is not an exact science. Personally, I am a believer in tax diversification.

itstoomuch
Posts: 5343
Joined: Mon Dec 15, 2014 12:17 pm
Location: midValley OR

Re: Roth multi-year conversion plan: inputs requested

Post by itstoomuch » Thu Mar 08, 2018 11:43 am

PS: the second condo:
If the condo is to be financed, retirees have special hurdles to jump over.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

User avatar
Peter Foley
Posts: 5014
Joined: Fri Nov 23, 2007 10:34 am
Location: Lake Wobegon

Re: Roth multi-year conversion plan: inputs requested

Post by Peter Foley » Thu Mar 08, 2018 11:52 am

A few things to consider:

As mentioned, income too high affects Medicare premiums. It may be to your advantage to do slightly more prior to age 63.

The Roth has to grow for a number of years to pay for the cost of conversion. Therefore I think converting earlier is better if you are going to tap the funds later in retirement. Converting for heirs' benefit is a different matter. I've not thought that through. Stretch IRA give heirs the opportunity to defer tax and perhaps use the proceeds/income to fund their own retirement.

I-orp recommends larger earlier conversions than RPM. In running scenarios with both programs I found i-orp to be more helpful when the TIRA is not a disproportionate component of one's portfolio. RPM is my preferred calculator, but as you mention the outputs are complex and it takes time and running of various scenarios to understand them.

I don't think one should convert all of one's TIRA. The possibility of large medical expenses in a year or need for assisted living late in life would present opportunities to withdraw from TIRA in a low tax year(s).

When we start RMD's we intend to migrate all our charitable giving to RMD distributions (QDCs).

MtnBiker
Posts: 208
Joined: Sun Nov 16, 2014 4:43 pm

Re: Roth multi-year conversion plan: inputs requested

Post by MtnBiker » Thu Mar 08, 2018 12:07 pm

Without digging into any details, your planning makes sense to me. We are in our mid-60s and have been converting for a number of years. At this point our taxable account is spent down and we will soon be starting social security (no pension). I originally used I-ORP to create a generally near-optimal plan and more recently used RPM to fine tune the details including the effects of the new tax law.

My present plan is to gradually convert as required to keep RMDs essentially constant (in real terms) over time. As the percentage takeout required by RMDs goes up with age, the TIRA balance declines accordingly (and balances in Roth and taxable increase). This will require a lower level of conversions after age 70.5 ( to continue for 8-10 years in addition to RMDs). In our case all this can be done within the 12-15% federal bracket.

User avatar
FIREchief
Posts: 3799
Joined: Fri Aug 19, 2016 6:40 pm

Re: Roth multi-year conversion plan: inputs requested

Post by FIREchief » Thu Mar 08, 2018 1:47 pm

There has been a lot of great advice in this thread. :sharebeer

IRMAA is a very important variable. The thresholds for higher Medicare premiums (both Part B and Part D), for married filing jointly, are $170K, $214K, $267K, and $320K. If your AGI crosses $170K and goes only halfway to $214K; then IRMAA adds over 7% to your marginal tax rate (assuming both spouses have Medicare for all 12 months). Go all the way to $214K, and IRMAA adds 3.68%. Now let's look at the next tier. Go from $214K to $267K and IRMAA has added 4.57% to your marginal tax rate. Also, since you've crossed the $250K NIIT threshold, you're going to pay 3.8% additional taxes on your investment income up to $17K. So, even if your marginal bracket is 24%, you're paying 32.37%% on those dollars from $250K to $267K (assuming you have at least $17K in interest, dividends and capital gains). Stop at $250K, and you eliminate NIIT but IRMAA has added 6.73% to your marginal rate, because you've only used up part of the "tier." Filling the next IRMAA tier to $320K mitigates the NIIT add by spreading it out over a larger pool of AGI. Go over $320K and you'll likely go through the 32% bracket and into the 35% bracket before bringing the final added IRMAA premium down into an acceptable marginal rate.

For all of these reasons, I see the $214K and $320K AGI levels as the two "sweet spots" for planning Roth conversions after age 63. If the first to turn 65 spouse's birthday is late in the year, you may choose to ignore the IRMAA premium concerns until the next year (i.e. the year you start at age 63), since only a few months will be impacted. If one spouse reaches 65 several years before the other, then there are even more variables to consider.

Finally, as another poster mentioned, there is the key variable of how long before the first spouse dies. The IRMAA costs won't change much (surviving spouse pays only one Medicare premium instead of two, but the income thresholds are cut in half); however that spouse is now in a higher tax bracket due to filing as a single person (after year of death). This one is really subjective, and there is no way to know. If a couple is already in their late fifties, and there are no serious health issues, then it may be reasonable to just assume both spouses will live until 80 and plan conversions accordingly. Stretching conversions out over twenty years versus ten years can save a lot of taxes; especially if long term care or other significant medical expenses are encountered which will allow high medical deductions against tIRA withdrawals (essentially, tax free withdrawals).

Good luck.
Last edited by FIREchief on Fri Mar 09, 2018 12:42 am, edited 1 time in total.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

Topic Author
Counterpoint
Posts: 54
Joined: Sun Jun 05, 2016 1:42 pm

Re: Roth multi-year conversion plan: inputs requested

Post by Counterpoint » Thu Mar 08, 2018 4:56 pm

Thanks very much for all the great advice!

dodecahedron wrote:
Thu Mar 08, 2018 11:29 am
Some kind of conversion plan makes sense to me. Another factor in favor of conversion is that after one of you dies, the surviving spouse may face higher brackets due to single filing status.

You are right to think about IRMAA considerations starting at age 63. Also look into how AGI might influence your eligibility for senior citizen real estate tax breaks on your home.

Other considerations that suggest some reasons for caution in going too far with Roth conversions:
  • if you have major charitable giving plans, then QCDs from your traditional account can be tax efficient ways to give after 70 1/2
  • if either of you develops a condition requiring large unreimbursed medical expenses (e.g., Long Term Care), then taking distributions in those years can be tax efficient
I worry that you seem very focused on your "tax bracket," but your effective marginal tax rate can often be quite different. Your tax bracket is based on your taxable income, but Roth conversions affect your AGI as well as your taxable income. You mentioned "trigger effects". Trigger effects primarily come from things that affect your MAGI (defined in different ways for different purposes, but always taking AGI as starting point, not taxable income.)

Essentially, Roth conversion when you believe tax rates are temporarily relatively low is like "buying taxes when they are on sale," and is qualitatively similar to decisions about stocking up on paper goods when you see those going "on sale". To take another analogous example, I bought "electricity on sale" last year when I bought solar panels in a community solar farm. Just as there is no way to know FOR SURE whether electricity or paper goods might not be available at even deeper discount sale prices down the road, (e.g., if some new technology is invented that makes renewables even cheaper in the future), the same is true for taxes.

Just as you might not want to go "whole hog" and buy a lifetime supply of paper products when you see them on sale, you may want to exercise caution in how much you convert. It is not an exact science. Personally, I am a believer in tax diversification.
FIREchief wrote:
Thu Mar 08, 2018 1:47 pm
There has been a lot of great advice in this thread. :sharebeer

IRMAA is a very important variable. The thresholds for higher Medicare premiums (both Part B and Part D), for married filing jointly, are $170K, $214K, $267K, and $320K. If your AGI crosses $170K and goes only halfway to $214K; then IRMAA adds over 7% to your marginal tax rate (assuming both spouses have Medicare for all 12 months). Go all the way to $214K, and IRMAA adds 3.68%. Now let's look at the next tier. Go from $214K to $267K and IRMAA has added 4.57% to your marginal tax rate. Also, since you've crossed the $250K NIIT threshold, you're going to pay 3.8% additional taxes on your investment income up to $17K. So, even if your marginal bracket is 24%, you're paying 32.37%% on those dollars from $250K to $267K (assuming you have at least $17K in interest, dividends and capital gains). Stop at $250K, and you eliminate NIIT but IRMAA has added 6.73% to your marginal rate, because you've only used up part of the "tier." Filling the next IRMAA tier to $320K mitigates the NIIT add by spreading it out over a larger pool of AGI. Go over $320K and you'll likely go through the 32% bracket and into the 35% bracket before bringing the final added IRMAA premium down into an acceptable marginal rate.

For all of these reasons, I see the $214K and $320K AGI levels as the two "sweet spots" for planning Roth conversions after age 63. If the first to turn 65 spouse's birthday is late in the year, you may choose to ignore the IRMAA premium concerns until the next year (i.e. the year you start at age 63), since only a few months will be impacted. If one spouse reaches 65 several years before the other, then there are even more variables to consider.

Finally, as another poster mentioned, there is the key variable of how long before the first souse dies. The IRMAA costs won't change much (surviving spouse pays only one Medicare premium instead of two, but the income thresholds are cut in half); however that spouse is now in a higher tax bracket due to filing as a single person (after year of death). This one is really subjective, and there is no way to know. If a couple is already in their late fifties, and there are no serious health issues, then it may be reasonable to just assume both spouses will live until 80 and plan conversions accordingly. Stretching conversions out over twenty years versus ten years can save a lot of taxes; especially if long term care or other significant medical expenses are encountered which will allow high medical deductions against tIRA withdrawals (essentially, tax free withdrawals).

Good luck.

Several great points - thanks.
I have some follow-up thoughts on QCDs and Medical Expenses - would appreciate thoughts on my logic.

Use of QCDs

Excellent point that I’d forgotten about. An alternative is contributing to a DAF with highly appreciated securities (which is what we did at the end of last year). The DAF is not as tax-efficient as the QCD, I think, since you lose the value of the standard deduction in the year you make a big DAF contribution (with the DAF you do also avoid capital gains on the donated securities, but the value of this capital gains saving depends on when we’d sell the securities, and the value would be 0 if we ended up bequeathing them since the basis would step-up then).
Not sure how easy QCDs are to use versus DAF.

It may be worth evaluating this before snuffing out the last bit of TIRA. If we wanted to be highly tax-efficient from a QCD perspective, we could keep just enough TIRA that the RMDs are about the same as our charitable donations, and then use the QCDs for all of the RMDs.

Use of TIRA for medical expenses

Another good point that I had not considered. I tried to think through how it would apply to our specific situation, and this is what I came up with.

Let’s assume one of us has a couple of years of large nursing home expenses (the main uninsured risk for us).
(1) Assuming this is after we’re both 70 (we are in good health - touch wood), our total taxable income (all looked at in today’s dollars) would be much higher because of Soc Sec (and I’m assuming no RMDs for now) and we’d be at the very top of the 24% bracket. Plus the first 10% of AGI will not be deductible. As a result, our total medical expenses would have to be over $175K in order for Taxable Income to get down to the 22% bracket. We have good medical coverage with a maximum out of pocket, so we’d have to exceed about $165K that year in nursing home expenses (in today’s dollars) which I doubt is likely.
(2) Let’s say the nursing home expenses occurred at age 80 for us. Even if we had over $175K in medical expenses to benefit from the lower tax rate of 22%, it would mean that we would have had 10 years of taking RMDs from the TIRA - and all those amounts had not benefited from being “Rothified”.

Given the two points above, it seems like in our situation episodic large medical expenses in the future are not a significant reason to restrict conversion to Roth.



@FIRECHIEF (and others who mentioned IRMAA):

Excellent explanation of IRMAA/NIIT etc. and how it affects one’s effective marginal tax rate. Your IRMAA numbers scared me enough that I scurried to check my medical coverage (I have subsidized coverage through my former employer). Very fortunately we get reimbursed for the Medicare Part B standard premium and the IRMAA amounts - so I believe I’m insulated from the premia increase and their impact on our effective marginal tax rates. But your explanation is still very helpful for NIIT, and I’m sure your IRMAA explanation will be of help to others.


mhalley wrote:
Thu Mar 08, 2018 11:08 am
I am in the process of doing my roth conversions before age 70. I used I-orp to help guide how Much to convert each year, but I was uncomfortable doing as much as they suggest, but it is a place to try in addition to the spreadsheet.
https://www.i-orp.com/dividend/extended.html

The only other tax I can think of is the increase in cap gains at high brackets.
Thanks for the i-orp suggestion. I tried it out, and like RMP, it suggests that I convert all of the TIRA to Roth as soon as possible while staying within the 24% bracket. (Caveat: It does not take into account QCDs or future large medical expenses, discussed above.)

On the increase in cap gains at high brackets, sadly we will not have the problem of a 20% capital gains tax bracket.


itstoomuch wrote:
Thu Mar 08, 2018 11:28 am
Counterpoint wrote:Questions:
(3) Is there any reason to not combine the new Roth amounts with a small existing Roth account?
None, however, for bookkeeping and performance review, we opened separate Roths
(5) My understanding is that even if we mis-estimate our income for a given year and go over into the 32% bracket by a bit after conversion, the effect is just on the small amount that’s within the 32% category (i.e. there is no trigger effect that would have a bigger impact).
marginal tax. Only the amount over the lessor bracket is taxed higher bracket
Thanks for your answers, including confirmation of the above. I know my question (5) was a duh about how marginal rates are assessed, but having not done any conversions before, I just wanted to make sure there was nothing different in the taxation of conversions from that of ordinary income.

Crazylegs
Posts: 35
Joined: Fri Dec 29, 2017 4:46 pm

Re: Roth multi-year conversion plan: inputs requested

Post by Crazylegs » Thu Mar 08, 2018 5:15 pm

I too am considering multi-year conversions. Tax situations slightly different but many of the same rationale in regard to paying taxes at the current low bracket and filling that bracket. My additional thoughts are the tax free benefits for my heirs, if we don't spend it all...lol, and the benefit of no RMDs on those funds thereby helping in keeping taxable income to a minimum and not having the adverse effect on SS taxation. I like your plan and will be moving in a similar direction very soon.

User avatar
FIREchief
Posts: 3799
Joined: Fri Aug 19, 2016 6:40 pm

Re: Roth multi-year conversion plan: inputs requested

Post by FIREchief » Thu Mar 08, 2018 6:28 pm

Krcameron wrote:
Thu Mar 08, 2018 5:15 pm
My additional thoughts are the tax free benefits for my heirs, if we don't spend it all...lol, and the benefit of no RMDs on those funds thereby helping in keeping taxable income to a minimum and not having the adverse effect on SS taxation.
This is an important point. Roth funds are easily the best assets for leaving to heirs. The RMDs for inherited Roth accounts will not generate taxable income. They are especially valueable if a person wishes to leave them in an accumulation trust for asset protection (or other) important reasons.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
FIREchief
Posts: 3799
Joined: Fri Aug 19, 2016 6:40 pm

Re: Roth multi-year conversion plan: inputs requested

Post by FIREchief » Thu Mar 08, 2018 6:45 pm

Use of TIRA for medical expenses

Another good point that I had not considered. I tried to think through how it would apply to our specific situation, and this is what I came up with.

Let’s assume one of us has a couple of years of large nursing home expenses (the main uninsured risk for us).
(1) Assuming this is after we’re both 70 (we are in good health - touch wood), our total taxable income (all looked at in today’s dollars) would be much higher because of Soc Sec (and I’m assuming no RMDs for now) and we’d be at the very top of the 24% bracket. Plus the first 10% of AGI will not be deductible. As a result, our total medical expenses would have to be over $175K in order for Taxable Income to get down to the 22% bracket. We have good medical coverage with a maximum out of pocket, so we’d have to exceed about $165K that year in nursing home expenses (in today’s dollars) which I doubt is likely.
(2) Let’s say the nursing home expenses occurred at age 80 for us. Even if we had over $175K in medical expenses to benefit from the lower tax rate of 22%, it would mean that we would have had 10 years of taking RMDs from the TIRA - and all those amounts had not benefited from being “Rothified”.

Given the two points above, it seems like in our situation episodic large medical expenses in the future are not a significant reason to restrict conversion to Roth.
I think you may have missed an important point. Let's say that somebody has $500K in a tIRA at 70. They take the RMDs for a few years (around $20K per year and either pay taxes on them or use them for QCDs). Then they go into a skilled nursing facility at 73 and spend three years. Let's say the facility costs $100K per year. If they take $100K per year out of their tIRA to pay for the costs, the portion of the tIRA that exceeds 7.5% of their AGI will be deductible. If they normally take the standard deduction, and have $10K of SALT, then they'll lose $14K of the standard deduction by itemizing. If they're capping AGI at $170K to avoid IRMAA at that point, then they'll lose another $12,750 of deductibility of the $100K. That leaves $73,250 of the tIRA withdrawal that will be tax free. That is the benefit. Had they converted all tIRA funds to Roth previously, then they wouldn't be able to take advantage of this "savings."

Alternatively, if their tIRA is exhausted, but they have a lot of very highly appreciated after-tax investments, they will still save some taxes due to the large medical deduction, but it won't be nearly as advantageous as having tIRA funds to withdraw. Hopefully that all makes sense.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

User avatar
BigFoot48
Posts: 2760
Joined: Tue Feb 20, 2007 10:47 am
Location: Arizona

Re: Roth multi-year conversion plan: inputs requested

Post by BigFoot48 » Thu Mar 08, 2018 10:46 pm

Counterpoint wrote:
Thu Mar 08, 2018 10:51 am
(6) Is there a good place to look for or post Q&A on the Retiree Portfolio Model? It was very useful, but there are some aspects that I don’t quite get, even after looking at the ReadMe section of the model.
Sorry about that! If it's a general question that you think other users might benefit from reading about, post it in the RPM thread: viewtopic.php?f=1&t=97352&p=1405885#p1405885 Or PM me if you wish.

The update I am working on will include, if I'm successful, in an enhanced IRMAA calculation since many people have indicated an interest in that, and the ability to make IRA contributions for those in the pre-retirement years.
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 14-time loser

Topic Author
Counterpoint
Posts: 54
Joined: Sun Jun 05, 2016 1:42 pm

Re: Roth multi-year conversion plan: inputs requested

Post by Counterpoint » Thu Mar 08, 2018 11:22 pm

BigFoot48 wrote:
Thu Mar 08, 2018 10:46 pm
Counterpoint wrote:
Thu Mar 08, 2018 10:51 am
(6) Is there a good place to look for or post Q&A on the Retiree Portfolio Model? It was very useful, but there are some aspects that I don’t quite get, even after looking at the ReadMe section of the model.
Sorry about that! If it's a general question that you think other users might benefit from reading about, post it in the RPM thread: viewtopic.php?f=1&t=97352&p=1405885#p1405885 Or PM me if you wish.

The update I am working on will include, if I'm successful, in an enhanced IRMAA calculation since many people have indicated an interest in that, and the ability to make IRA contributions for those in the pre-retirement years.
Thanks for your response, BigFoot, and even more for the incredible model you've put together. :sharebeer
It's already been hugely useful in providing directional guidance on my Roth conversion decision.
My questions are doubtless because I've not spent enough time getting to know the nuances of the model. I will try to do so and if I still have questions, I'll do as you suggest.


FIREchief wrote:
Thu Mar 08, 2018 6:45 pm
Use of TIRA for medical expenses

Another good point that I had not considered. I tried to think through how it would apply to our specific situation, and this is what I came up with.

Let’s assume one of us has a couple of years of large nursing home expenses (the main uninsured risk for us).
(1) Assuming this is after we’re both 70 (we are in good health - touch wood), our total taxable income (all looked at in today’s dollars) would be much higher because of Soc Sec (and I’m assuming no RMDs for now) and we’d be at the very top of the 24% bracket. Plus the first 10% of AGI will not be deductible. As a result, our total medical expenses would have to be over $175K in order for Taxable Income to get down to the 22% bracket. We have good medical coverage with a maximum out of pocket, so we’d have to exceed about $165K that year in nursing home expenses (in today’s dollars) which I doubt is likely.
(2) Let’s say the nursing home expenses occurred at age 80 for us. Even if we had over $175K in medical expenses to benefit from the lower tax rate of 22%, it would mean that we would have had 10 years of taking RMDs from the TIRA - and all those amounts had not benefited from being “Rothified”.

Given the two points above, it seems like in our situation episodic large medical expenses in the future are not a significant reason to restrict conversion to Roth.
I think you may have missed an important point. Let's say that somebody has $500K in a tIRA at 70. They take the RMDs for a few years (around $20K per year and either pay taxes on them or use them for QCDs). Then they go into a skilled nursing facility at 73 and spend three years. Let's say the facility costs $100K per year. If they take $100K per year out of their tIRA to pay for the costs, the portion of the tIRA that exceeds 7.5% of their AGI will be deductible. If they normally take the standard deduction, and have $10K of SALT, then they'll lose $14K of the standard deduction by itemizing. If they're capping AGI at $170K to avoid IRMAA at that point, then they'll lose another $12,750 of deductibility of the $100K. That leaves $73,250 of the tIRA withdrawal that will be tax free. That is the benefit. Had they converted all tIRA funds to Roth previously, then they wouldn't be able to take advantage of this "savings."

Alternatively, if their tIRA is exhausted, but they have a lot of very highly appreciated after-tax investments, they will still save some taxes due to the large medical deduction, but it won't be nearly as advantageous as having tIRA funds to withdraw. Hopefully that all makes sense.
Thanks much for taking the time to discuss this, Firechief.

I think though that my situation is somewhat different from the one you describe. My overall point is that one can still get the medical expense deduction without a tIRA, if there is enough other income to offset it against. And in that situation (which applies to us), because the tIRA would push us into a higher marginal tax rate and result in a smaller deduction amount, using a tIRA would actually be worse than having converted to a Roth earlier.

I’m going to use numbers that are close to my situation to illustrate, and you can point out if I’m still missing something.

Case 1
Our AGI when we’re in our 70s would be around $325K (pension + taxable SS + small inv income, all numbers are in today’s dollars).
Assume no tIRA, and the skilled nursing facility expense you described of $100K.
So the deductible portion of medical expenses is about $76K ($100K - 7.5% x $325K).
Our taxable income would come down by $76K as a result to $249K, with a resulting federal tax benefit at the 24% marginal rate (we would of course give up the tax benefit on the $14K portion from the standard deduction that you described in your example - as we also would in Case 2 below with the tIRA).
So even without a tIRA, we get the benefit of the medical deduction, because we have other income we can offset the deduction against.

Case 2: If we had a tIRA and chose to withdraw $100K from it
Our AGI would go up from $325K to $425K that year (we cannot choose to “limit” our AGI - none of the major components of our income can be controlled).
We could deduct $68K ($100K - 7.5% x $425K).
Our Taxable Income would be $357K.

Compared to Case 1 (taxable income of $249K), we end up paying taxes on an extra $108K, with $42K at a 32% rate (the amount above $315K) and the remaining $66K at 24%.

In Case 1 we would have instead paid taxes on $100K of a Roth conversion, at 24%.

The higher taxes in Case 2 are a result of (1) being forced into a higher marginal tax rate by adding the tIRA to AGI, and (2) having a smaller deduction amount as a result of higher AGI.

And that doesn’t include the other benefits of Roth conversion (greater use of tax deferred space, not being forced to take other RMDs on the nursing home expenses of $100K from 70.5 till the time they are incurred).

So it seems that at least in our case, maintaining a tIRA does not provide an advantage when it comes to large medical expenses.
I’m happy to be corrected if I missed something - I’m just trying to understand the various pros and cons of the Roth conversion, hopefully before I start the process. :wink:

User avatar
FIREchief
Posts: 3799
Joined: Fri Aug 19, 2016 6:40 pm

Re: Roth multi-year conversion plan: inputs requested

Post by FIREchief » Fri Mar 09, 2018 12:38 am

Counterpoint wrote:
Thu Mar 08, 2018 11:22 pm
So it seems that at least in our case, maintaining a tIRA does not provide an advantage when it comes to large medical expenses.
I’m happy to be corrected if I missed something - I’m just trying to understand the various pros and cons of the Roth conversion, hopefully before I start the process. :wink:
Okay, that makes sense now. I didn't realize you would be dealing with such a large AGI at that point, even without Roth conversions. Your situation is obviously in the small minority. Certainly with that high of an AGI in the out years, earlier Roth conversions are something very worthy of consideration. :sharebeer

These strategies would be much easier to formulate if we all new how long we (and our spouses) were going to live, what Washington will do for the next 50 years and what our future health and long term care expenses will be. Obviously, we don't know any of those so we just have to make some reasonable assumptions and proceed. 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.

User avatar
dodecahedron
Posts: 4917
Joined: Tue Nov 12, 2013 12:28 pm

Re: Roth multi-year conversion plan: inputs requested

Post by dodecahedron » Fri Mar 09, 2018 6:44 pm

Counterpoint wrote:
Thu Mar 08, 2018 4:56 pm
I have some follow-up thoughts on QCDs and Medical Expenses - would appreciate thoughts on my logic.

Use of QCDs

Excellent point that I’d forgotten about. An alternative is contributing to a DAF with highly appreciated securities (which is what we did at the end of last year). The DAF is not as tax-efficient as the QCD, I think, since you lose the value of the standard deduction in the year you make a big DAF contribution (with the DAF you do also avoid capital gains on the donated securities, but the value of this capital gains saving depends on when we’d sell the securities, and the value would be 0 if we ended up bequeathing them since the basis would step-up then).
Not sure how easy QCDs are to use versus DAF.

It may be worth evaluating this before snuffing out the last bit of TIRA. If we wanted to be highly tax-efficient from a QCD perspective, we could keep just enough TIRA that the RMDs are about the same as our charitable donations, and then use the QCDs for all of the RMDs.
As far as the "ease of use" of QCDs vs. DAF, I think it depends on your custodians. I find donations of appreciated securities in my Schwab taxable account to my Schwab DAF to be exceptionally easy, just a few mouseclicks and typing in the number of shares I want to donate. Since I have six years to go before I can make QCDs, I don't have any experience (yet!) but I understand that some IRA custodians (like Fidelity?) will just let you use your check-writing capabilities on your IRA account to write your own checks to charities for QCDs.

Pros and cons of QCD vs taking the RMD and donating appreciated assets to a charity get a great discussion on Michael Kitces blog here:

https://www.kitces.com/blog/ira-qualifi ... ecurities/

A major advantage of a QCD vs. taking the RMD and mitigating the tax hit by donating appreciated securities to a DAF is that the QCD reduces both your AGI and your taxable income, while the other approach only reduces your taxable income.

Another nice thing to keep in mind is that remaining funds in your traditional retirement accounts make very tax efficient bequests to charity while the appreciated securities that remain in your taxable account are tax efficient bequests to your taxable heirs, since they will get the step-up in basis at your death.

Topic Author
Counterpoint
Posts: 54
Joined: Sun Jun 05, 2016 1:42 pm

Re: Roth multi-year conversion plan: inputs requested

Post by Counterpoint » Fri Mar 09, 2018 10:40 pm

@Firechief: Thanks for your help, including the example which enabled me to work through my situation.

dodecahedron wrote:
Fri Mar 09, 2018 6:44 pm

As far as the "ease of use" of QCDs vs. DAF, I think it depends on your custodians. I find donations of appreciated securities in my Schwab taxable account to my Schwab DAF to be exceptionally easy, just a few mouseclicks and typing in the number of shares I want to donate. Since I have six years to go before I can make QCDs, I don't have any experience (yet!) but I understand that some IRA custodians (like Fidelity?) will just let you use your check-writing capabilities on your IRA account to write your own checks to charities for QCDs.

Pros and cons of QCD vs taking the RMD and donating appreciated assets to a charity get a great discussion on Michael Kitces blog here:

https://www.kitces.com/blog/ira-qualifi ... ecurities/

A major advantage of a QCD vs. taking the RMD and mitigating the tax hit by donating appreciated securities to a DAF is that the QCD reduces both your AGI and your taxable income, while the other approach only reduces your taxable income.

Another nice thing to keep in mind is that remaining funds in your traditional retirement accounts make very tax efficient bequests to charity while the appreciated securities that remain in your taxable account are tax efficient bequests to your taxable heirs, since they will get the step-up in basis at your death.

Thanks dodecahedron - good info to chew on. We’ll probably wait till we convert most of our tIRA and once we’re down to our last chunk in 5-10 years, then we’d review the landscape for QCDs vs DAFs vs donated securities etc. Ease of use would definitely be a factor since the one-click anonymous giving from a DAF is very appealing.

On a broader note, I know you were leery in your earlier post about our going full hog on the conversion, and I take your point as well about tax diversification. But my tentative conclusions about conversion (that we’ll do all but what we may need for QCDs) is very much driven by our specific financial situation:
- desire to avoid RMDs since we have no need for them
- we don’t need to hedge our bets on the type of IRA since that’s not our primary source of income
- our likelihood of keeping the IRA for a long time increases the value to us of Roth conversion to maximize tax-deferred space and the attendant compounding
- no incremental value to us of using the tIRA for a medical expense deduction
- odds are in favor of higher marginal effective tax rates for us given our increasing income (and that’s without even taking into account 2025)

Yes, there’s a non-zero possibility that tax rates could drop dramatically enough to wipe out the advantages above. But little in life is certain so I’m comfortable with the odds here - and if we turn out to be wrong, we can cry all the way to the bank with our newer, lighter 1040s instead of rueing our exuberant Roth conversions.

Still, having just become conversant with Roth conversion in the last couple of weeks, I’ll give it some time to sink in and get more comfortable with the takeaways, before starting the conversion process. I really appreciate the time and perspective you and others have provided.

User avatar
celia
Posts: 9988
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Roth multi-year conversion plan: inputs requested

Post by celia » Sat Mar 10, 2018 12:53 am

Counterpoint, It looks like you have all the major concepts covered. So I'll just add a few details.
Counterpoint wrote:
Thu Mar 08, 2018 10:51 am
(2) In terms of implementation, I’m thinking of spreading out each 70K conversion over the year (to diversify the market price at which we’re making the conversion, same as dollar cost averaging), in 2-4 chunks depending on how much work it is. How onerous is it to effect each conversion? (It would be nice to have an auto-conversion, similar to auto-investment.)
Roth conversions are about as "easy" as re-balancing. Just do an "exchange" from a fund in the TIRA to the same or different fund in the Roth. Do not withhold anything for taxes, as that is an unnecessary loss of tax-advantaged space. I read your posts as saying you would pay both the regular taxes and the conversion taxes out of your pension or SS. That would be better that having withholding for taxes or having to sell some taxable holdings.

I would do the conversions about quarterly OR when the markets drop 10% or more. You can either convert more shares for the same tax when the market is down or just pay less in taxes if converting the originally planned number of shares.
(4) Anything to watch out for as we convert over the next 10-12 years? In terms of triggers: We’re already into NIIT territory, we will be paying taxes on 85% of SS. From what I’ve read on the forum, I believe we should look at the Medicare IRMAA tier around age 63? Anything else?
It sounds like you understand the Medicare surcharges as explained in Medicare Premiums: Rules for Higher-Income Beneficiaries. Even though you are lucky that your employer plans to cover your Medicare premiums and surcharges, the surcharges might be the first thing they cut back on if they had to make cuts somewhere.

Another thing to consider is if you or your spouse have parents or other relatives who might leave a TIRA or 401K to you, you may want to get your Roth conversions front-loaded (convert more in the early years). DH and I were ahead of schedule on converting when he inherited part of his parents' TIRA. Even though he was mid-60s when that happened, he had to start RMDs in the year after death. And the RMDs on an Inherited RMD are larger than from your own (or your spouse's) IRA. So that is now using up some of the room we had planned to use for converting our own TIRAs. (Inherited IRAs can't be converted either.)

Then, I'd suggest you stress-test your plan for these scenarios:
* You die next year while spouse lives to 100.
* Your spouse dies next year while you live to 100.
* You both live to 100 and both need LTC from age 95 on.

This is meant to show which pension(s) the survivor would inherit and the higher SS benefit. It should also have you estimate the taxes for the survivor (filing as Single) to see if they can still be paid from current year income.

Lastly, this plan should be written down in some format so that if the survivor or both of you have decreased cognitive skills, your children or others will be able to understand the optimal plan that you have estimated. Of course, you can revise when needed, but our children likely won't understand Medicare rules, RMDs, QCDs, and our tax situations as these don't impact them personally for many more years. (I'm starting to work on this now, too.)

User avatar
FIREchief
Posts: 3799
Joined: Fri Aug 19, 2016 6:40 pm

Re: Roth multi-year conversion plan: inputs requested

Post by FIREchief » Sat Mar 10, 2018 1:05 am

celia wrote:
Sat Mar 10, 2018 12:53 am
Lastly, this plan should be written down in some format so that if the survivor or both of you have decreased cognitive skills, your children or others will be able to understand the optimal plan that you have estimated. Of course, you can revise when needed, but our children likely won't understand Medicare rules, RMDs, QCDs, and our tax situations as these don't impact them personally for many more years. (I'm starting to work on this now, too.)
Amen!
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

cherijoh
Posts: 6379
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Roth multi-year conversion plan: inputs requested

Post by cherijoh » Sat Mar 10, 2018 7:05 am

FIREchief wrote:
Thu Mar 08, 2018 6:45 pm
Use of TIRA for medical expenses

Another good point that I had not considered. I tried to think through how it would apply to our specific situation, and this is what I came up with.

Let’s assume one of us has a couple of years of large nursing home expenses (the main uninsured risk for us).
(1) Assuming this is after we’re both 70 (we are in good health - touch wood), our total taxable income (all looked at in today’s dollars) would be much higher because of Soc Sec (and I’m assuming no RMDs for now) and we’d be at the very top of the 24% bracket. Plus the first 10% of AGI will not be deductible. As a result, our total medical expenses would have to be over $175K in order for Taxable Income to get down to the 22% bracket. We have good medical coverage with a maximum out of pocket, so we’d have to exceed about $165K that year in nursing home expenses (in today’s dollars) which I doubt is likely.
(2) Let’s say the nursing home expenses occurred at age 80 for us. Even if we had over $175K in medical expenses to benefit from the lower tax rate of 22%, it would mean that we would have had 10 years of taking RMDs from the TIRA - and all those amounts had not benefited from being “Rothified”.

Given the two points above, it seems like in our situation episodic large medical expenses in the future are not a significant reason to restrict conversion to Roth.
I think you may have missed an important point. Let's say that somebody has $500K in a tIRA at 70. They take the RMDs for a few years (around $20K per year and either pay taxes on them or use them for QCDs). Then they go into a skilled nursing facility at 73 and spend three years. Let's say the facility costs $100K per year. If they take $100K per year out of their tIRA to pay for the costs, the portion of the tIRA that exceeds 7.5% of their AGI will be deductible. If they normally take the standard deduction, and have $10K of SALT, then they'll lose $14K of the standard deduction by itemizing. If they're capping AGI at $170K to avoid IRMAA at that point, then they'll lose another $12,750 of deductibility of the $100K. That leaves $73,250 of the tIRA withdrawal that will be tax free. That is the benefit. Had they converted all tIRA funds to Roth previously, then they wouldn't be able to take advantage of this "savings."

Alternatively, if their tIRA is exhausted, but they have a lot of very highly appreciated after-tax investments, they will still save some taxes due to the large medical deduction, but it won't be nearly as advantageous as having tIRA funds to withdraw. Hopefully that all makes sense.
The drop back to the 7.5% threshold for medical expenses was for 2017 and 2018 only. From this article:
Under the new law, the 7.5 percent medical deduction threshold will be in place only for the 2017 and 2018 tax years. After that, the threshold reverts back to 10 percent of income.

User avatar
dodecahedron
Posts: 4917
Joined: Tue Nov 12, 2013 12:28 pm

Re: Roth multi-year conversion plan: inputs requested

Post by dodecahedron » Sat Mar 10, 2018 9:11 am

Counterpoint wrote:
Fri Mar 09, 2018 10:40 pm
On a broader note, I know you were leery in your earlier post about our going full hog on the conversion, and I take your point as well about tax diversification. But my tentative conclusions about conversion (that we’ll do all but what we may need for QCDs) is very much driven by our specific financial situation:
- desire to avoid RMDs since we have no need for them
- we don’t need to hedge our bets on the type of IRA since that’s not our primary source of income
- our likelihood of keeping the IRA for a long time increases the value to us of Roth conversion to maximize tax-deferred space and the attendant compounding
- no incremental value to us of using the tIRA for a medical expense deduction
- odds are in favor of higher marginal effective tax rates for us given our increasing income (and that’s without even taking into account 2025)
Your specific financial situation (with a very high baseline AGI, on top of which any RMDs would be "stacked") is very different than the one I had in mind when I first posted above. I didn't realize how large your baseline AGI would be at 70 1/2. I would probably be inclined in the same direction as you if I were in your position.

I am 64 now and already have over 50% of my tax-advantaged in Roth at this point, and it will probably be around 65% in Roth by the time I hit 70 1/2. But my baseline AGI (before adding in any RMDs) is much smaller than yours. I would not be able to pay for large LTC out of my regular baseline cash flow. I may also be in a situation where less than the maximal 85% of my SS is taxable creating "hump effects" that won't apply to you. (As you can see from that link, effective marginal tax rates for folks in the "hump" can be much higher than the 24% you state that you currently face, even though their income is much lower than yours.) Basically your baseline AGI is way past the hump and most of the other kinds of "trigger effects" typical Bogleheads posts discuss.

Qualifying for senior citizen real estate tax breaks and Medicare premiums without IRMAA surcharges are considerations for me in ways that they would not be for you. I also have state-specific considerations that do not apply to you (NY treats the first $20K of my annual IRA distributions very generously and also excludes all IRA distributions in determining my eligibility for senior real estate tax breaks.)

On another topic, you also raised the DAF advantage of anonymity over QCDs. That is an important point for me. DAFs also simplify my recordkeeping immensely. I am currently using a DAF (since I am not eligible for QCDs for another six years) and perhaps am getting somewhat "spoiled" by the convenience of using it. Unfortunately, QCDs can't be directed to DAFs, so I may well pursue a policy of diversification in charitable donation sources past 70 1/2 as well. Like you, I will be revisiting this as I age.

Topic Author
Counterpoint
Posts: 54
Joined: Sun Jun 05, 2016 1:42 pm

Re: Roth multi-year conversion plan: inputs requested

Post by Counterpoint » Sat Mar 10, 2018 10:57 am

@ Celia: I was hoping you'd weigh in - thank you "in person" for being a big part of my education on this topic!
celia wrote:
Sat Mar 10, 2018 12:53 am
Counterpoint wrote:
Thu Mar 08, 2018 10:51 am
(2) In terms of implementation, I’m thinking of spreading out each 70K conversion over the year (to diversify the market price at which we’re making the conversion, same as dollar cost averaging), in 2-4 chunks depending on how much work it is. How onerous is it to effect each conversion? (It would be nice to have an auto-conversion, similar to auto-investment.)
Roth conversions are about as "easy" as re-balancing. Just do an "exchange" from a fund in the TIRA to the same or different fund in the Roth. Do not withhold anything for taxes, as that is an unnecessary loss of tax-advantaged space. I read your posts as saying you would pay both the regular taxes and the conversion taxes out of your pension or SS. That would be better that having withholding for taxes or having to sell some taxable holdings.

I would do the conversions about quarterly OR when the markets drop 10% or more. You can either convert more shares for the same tax when the market is down or just pay less in taxes if converting the originally planned number of shares.
Thanks for the info on how to implement. We have a quarterly auto-invest into the TSM index fund, so we'd just replace part of that investment by the amount of taxes we pay for conversion. So no complications from having to sell taxable funds, and the new Roth would stay in the same index funds as the old tIRA amounts. Both our cash investments and the conversions appear to have a similar market timing exposure (i.e. drop in the market makes our investment more attractive), so I may even switch to doing each one every 6 months, but staggered so that a quarterly investment schedule is maintained. And I was thinking of the same 10% guideline - to accelerate intrayear timing of investment if the market drops past 10%.

(As an aside, rather than thinking of these conversion taxes as nasty outflows to the IRS, I'm trying to think of them as the amount that I'm upgrading from taxable to Roth space. This is the only access we have in our current situation to tax-advantaged savings. So we are lucky to have the option to convert, similar to the way that others are lucky to be able to invest in a Roth IRA.)

One aspect that just occurred to me: Not having had (substantial) Roth assets before, we'll now have to think about how to measure our asset allocation across Roth/tIRA/taxable assets, given that the after-tax value of a dollar is different in each of these vehicles. Of course we had that issue earlier between our tIRA and taxable assets - I just didn't think about it. (I have full confidence that BH has dealt with this.)

celia wrote:
Sat Mar 10, 2018 12:53 am

Then, I'd suggest you stress-test your plan for these scenarios:
* You die next year while spouse lives to 100.
* Your spouse dies next year while you live to 100.
* You both live to 100 and both need LTC from age 95 on.

This is meant to show which pension(s) the survivor would inherit and the higher SS benefit. It should also have you estimate the taxes for the survivor (filing as Single) to see if they can still be paid from current year income.

Lastly, this plan should be written down in some format so that if the survivor or both of you have decreased cognitive skills, your children or others will be able to understand the optimal plan that you have estimated. Of course, you can revise when needed, but our children likely won't understand Medicare rules, RMDs, QCDs, and our tax situations as these don't impact them personally for many more years. (I'm starting to work on this now, too.)
Thank you. Yes, we looked at (more or less) the scenarios you mentioned for our overall financial planning, and ended up buying a ladder of term life insurance to cover asymmetries in pension survivor benefits between our pension plans. We looked at but did not buy LTC in our financial situation, but that's a different topic.

We will not inherit IRAs, so won't have that "problem". But interesting points you make about them, that many would benefit from.

And good suggestion to write down our strategy. We actually have on our to-do list to write for our kids (and discuss with them) a "how we'd suggest you should handle our assets" in case spouse and I both get hit by a truck. The first order issue of business is for them to not fall into the clutches of a traditional financial advisor (but instead use an advice-only FA - plus Bogleheads of course). And we do have a letter to our executor and kids that says - don't touch a penny of the IRA you're inheriting till you educate yourself about the tax consequences! So the next order of business may be to give them background on issues such as these, in the tax optimization realm. I think that's also worth doing, but will be more work.

dodecahedron wrote:
Sat Mar 10, 2018 9:11 am

Basically your baseline AGI is way past the hump and most of the other kinds of "trigger effects" typical Bogleheads posts discuss.
That was my sense, but it's good to know so I don't spend too much time down the wrong rabbit hole as I look at topics on BH. I occasionally scan BH to try and find out "what I don't know I don't know", so I can see what I'm missing and then decide what's worth spending more time on.
On another topic, you also raised the DAF advantage of anonymity over QCDs. That is an important point for me. DAFs also simplify my recordkeeping immensely. I am currently using a DAF (since I am not eligible for QCDs for another six years) and perhaps am getting somewhat "spoiled" by the convenience of using it. Unfortunately, QCDs can't be directed to DAFs, so I may well pursue a policy of diversification in charitable donation sources past 70 1/2 as well. Like you, I will be revisiting this as I age.
I recall reading that Vanguard is working to make its QCDs more user-friendly (online instead of phone calls). Let's see how they compare with DAFs in a few years.

User avatar
celia
Posts: 9988
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Roth multi-year conversion plan: inputs requested

Post by celia » Sat Mar 10, 2018 1:10 pm

Counterpoint wrote:
Sat Mar 10, 2018 10:57 am
(As an aside, rather than thinking of these conversion taxes as nasty outflows to the IRS, I'm trying to think of them as the amount that I'm upgrading from taxable to Roth space. This is the only access we have in our current situation to tax-advantaged savings. So we are lucky to have the option to convert, similar to the way that others are lucky to be able to invest in a Roth IRA.)
This is how I think of the taxes. While you were working and contributing to tax-deferred, you agreed to pay the taxes later. The taxes were always TAX-DEFERRED, not tax-free. The account was never all yours. It belonged to you and the IRS and your state. As you invested, you were investing your money, the IRS's money and the state's money. You were the money manager and they were your partners. The money was never all yours to begin with. As you got gains and losses, so did your partners. And as you withdraw from the account, your partners also need to get their shares.

Note that we rarely talk about "tax-advantaged" savings in this forum. We talk about "tax-deferred" and "tax-free"/post-tax accounts. We try to have a clear distinction between Tax-deferred and Roth since they are like opposites of each other. When we break down our portfolios for discussion, we separate taxable, tax-deferred, and Roth, because they all have different spending and tax implications.
One aspect that just occurred to me: Not having had (substantial) Roth assets before, we'll now have to think about how to measure our asset allocation across Roth/tIRA/taxable assets, given that the after-tax value of a dollar is different in each of these vehicles. Of course we had that issue earlier between our tIRA and taxable assets - I just didn't think about it. (I have full confidence that BH has dealt with this.)
Most Bogleheads do not think of these separately but as one portfolio. Especially if you are doing conversions, the values in each type of account will keep changing. And to have a Tax-Efficient portfolio, it is recommended that you put different assets in different locations. (Having your taxable, tax-deferred, and Roth all invested in the same assets in the same percent is not tax-efficient at all.) After you have an Asset Allocation that is appropriate for your needs and the level of risk that you can endure, Tax-efficient Fund Placement should be considered.

Topic Author
Counterpoint
Posts: 54
Joined: Sun Jun 05, 2016 1:42 pm

Re: Roth multi-year conversion plan: inputs requested

Post by Counterpoint » Sat Mar 10, 2018 3:17 pm

celia wrote:
Sat Mar 10, 2018 1:10 pm

Note that we rarely talk about "tax-advantaged" savings in this forum. We talk about "tax-deferred" and "tax-free"/post-tax accounts. We try to have a clear distinction between Tax-deferred and Roth since they are like opposites of each other. When we break down our portfolios for discussion, we separate taxable, tax-deferred, and Roth, because they all have different spending and tax implications.
Good to know the correct lingo. In my mind tax-advantaged included both types of IRAs, but I can see the value of the precision of language you refer to.
celia wrote:
Sat Mar 10, 2018 1:10 pm
Counterpoint wrote:
Sat Mar 10, 2018 10:57 am

One aspect that just occurred to me: Not having had (substantial) Roth assets before, we'll now have to think about how to measure our asset allocation across Roth/tIRA/taxable assets, given that the after-tax value of a dollar is different in each of these vehicles. Of course we had that issue earlier between our tIRA and taxable assets - I just didn't think about it. (I have full confidence that BH has dealt with this.)
Most Bogleheads do not think of these separately but as one portfolio. Especially if you are doing conversions, the values in each type of account will keep changing. And to have a Tax-Efficient portfolio, it is recommended that you put different assets in different locations. (Having your taxable, tax-deferred, and Roth all invested in the same assets in the same percent is not tax-efficient at all.) After you have an Asset Allocation that is appropriate for your needs and the level of risk that you can endure, Tax-efficient Fund Placement should be considered.

I wasn’t being clear. I do think of asset allocation only across all our assets, but the point I was trying to make is that because a Roth dollar, a tax-deferred dollar and a taxable dollar (yes, I can be taught!) are each worth a different after-tax amount, this difference should be taken into account in aggregating amounts for asset allocation across all assets (amazing alliteration!). And I haven't been doing this so far when aggregating the amounts from our taxable and tax-deferred accounts. I just checked and not surprisingly, this already has a BH wiki: https://www.bogleheads.org/wiki/Tax-adj ... allocation

Asset location: In our case, I believe this happens to be straightforward. Given our high tolerance for risk in our investment portfolio (as a result of our pensions meeting our needs), we have 100% in equities (Vanguard TSM index and Vanguard international index). So our tIRA as well as taxable are all in equities, as will the new Roth assets. (We have some cash reserves in MM.) The tIRA is what we’ve been using to rebalance overall asset allocation, since there are no tax consequences, and in the future we can also use the Roth amounts for rebalancing.
Last edited by Counterpoint on Sat Mar 10, 2018 8:37 pm, edited 1 time in total.

User avatar
celia
Posts: 9988
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Roth multi-year conversion plan: inputs requested

Post by celia » Sat Mar 10, 2018 4:31 pm

Counterpoint wrote:
Sat Mar 10, 2018 3:17 pm
I wasn’t being clear.
I understood you completely. I am aware of the wiki page and it is up to you if you want to weight the values or not. Most Bogleheads do not as evidenced by the two polls referenced in the External Links section of that wiki page. I have also now added a disclaimer at the top of the wiki page that most of us do not do it. Follow the links for the polls to see our rationales. (We no longer have polls in the forum.)

Topic Author
Counterpoint
Posts: 54
Joined: Sun Jun 05, 2016 1:42 pm

Re: Roth multi-year conversion plan: inputs requested

Post by Counterpoint » Sat Mar 10, 2018 8:44 pm

Interesting - thanks. But an off-topic issue that I probably shouldn't have brought up in this thread, given its complexity.

Post Reply