Should I start doing Roth Conversions and if so

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Topic Author
Shaneman
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Should I start doing Roth Conversions and if so

Post by Shaneman » Fri Apr 19, 2019 2:22 pm

Should I start doing Roth Conversions and if so does it matter whether I start converting IRA, SEP, Solo410(K) first?

Before saying YES another issue to factor in is I receive over $300K ordinary dividends annually. So any Roth Conversions will result is an additional 3.8 percent Net Investment Income Tax (NIIT). I presently live in Massachusetts that has a 5.1% state income tax but plan to move to Florida by the end of the year. So I would wait until my domicile is Florida so there is no state income tax on the Roth conversions.

I have been blessed with the ability to save for retirement, gainful employment and a successful business selling specialized test equipment for 20 years.

The business has ran its course and the internet has devoured the business. In addition, the manufacturer's I represented are all selling online direct.

So I will shutdown the business and join the FIRE movement at 55 years old.

Over the years I have amassed total deferred retirement plans of $4,460,000

$40,000 - State Deferred Compensation before-tax 457 plan
$480,000 - Traditional IRA
$905,000 - SEP IRA
$2,135,000 - DBP
$900,000 - Solo410(k) + PSP

If I leave everything alone when RMD's are required the taxes will be humongous. So I have from age 55 to 70 1/2 to mitigate taxes with Roth conversions.

My Defined Benefit Plan is presently overfunded and will probably need to keep the DBP plan going for another 3-4 years for time to progress until the actuary calculates the DBP is not overfunded and then I will roll the DBP to an IRA.

I do plan at age 70 1/2 to make direct contributions from an IRA up to $100,000 annually to Vanguard donor-advised fund.

So for the Bogleheads what do you recommend for a roadmap to lessen the tax burden?

Thank you for reading this post.
Last edited by Shaneman on Fri Apr 19, 2019 8:38 pm, edited 1 time in total.

aristotelian
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Re: Should I start doing Roth Conversions and if so

Post by aristotelian » Fri Apr 19, 2019 2:26 pm

Where is the $300K of dividends coming from?

I say yes, not knowing anything other than SS and RMD's are coming so your taxes have nowhere to go but up.

Topic Author
Shaneman
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Re: Should I start doing Roth Conversions and if so

Post by Shaneman » Fri Apr 19, 2019 2:30 pm

Yes $300K are qualified dividends.

So if Bogleheads agree I should start doing Roth Conversions then the question is how much each year since one never knows if the gov't will stop doing Roth Conversions.

Thus I could convert say $94,500 to Roth and expect to pay $14,089.50 in federal taxes (94,500 - 12,000 standard deduction = $82,500 which is the end of the 22% tax bracket).

Or should I do $169,500 and expect to pay $32,089.50 in federal taxes (169,500 - 12,000 standard deduction = $157,500 which is the end of the 24% tax bracket).

The issue I also need to consider is I have $300K in ordinary dividends. So on Form 8960 every dollar converted from traditional tax-deferred retirement accounts to Roth will increase my MAGI and be taxed 3.8% for Net Investment Income Tax. I file Single so for line 14 of Form 8960 the threshold is $200,000. So even if I don't do any IRA > Roth conversion I have to pay 3.8% on $100K for NIIT.

Single filers
Tax rate Taxable income bracket Tax owed
10% $0 to $9,525 10% of taxable income
12% $9,526 to $38,700 $952.50 plus 12% of the amount over $9,525
22% $38,701 to $82,500 $4,453.50 plus 22% of the amount over $38,700
24% $82,501 to $157,500 $14,089.50 plus 24% of the amount over $82,500
32% $157,501 to $200,000 $32,089.50 plus 32% of the amount over $157,500
35% $200,001 to $500,000 $45,689.50 plus 35% of the amount over $200,000
37% $500,001 or more $150,689.50 plus 37% of the amount over $500,000
Last edited by Shaneman on Fri Apr 19, 2019 2:38 pm, edited 1 time in total.

Dantes
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Re: Should I start doing Roth Conversions and if so

Post by Dantes » Fri Apr 19, 2019 2:34 pm

[ deleted - question about dividends answered above ]

ByThePond
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Re: Should I start doing Roth Conversions and if so

Post by ByThePond » Fri Apr 19, 2019 2:56 pm

Have you run calculations on tools like i-orp (https://www.i-orp.com/bequest/index.html ). or RPM ( https://www.bogleheads.org/wiki/Retiree_Portfolio_Model ) ? I'm sure other members can give more detailed advice than I, but these were good places for my initial analyses.
RPM in particular yields an avalanche of detailed information, but is difficult to set up. It literally analyzes your inputted data and makes Yes/No conversion recommendations for specific 5 or 6 areas of concern, with an overall recommendation. Fiddling with your conversion numbers lets you zero in on your best course of action.
My Roth conversion schedule is based closely on this modeler.

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Fri Apr 19, 2019 3:27 pm

How much of your traditional IRA is composed of non-deductible contributions?

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Fri Apr 19, 2019 3:30 pm

About what ball park will your living expenses be? Any dependents?

Carl53
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Re: Should I start doing Roth Conversions and if so

Post by Carl53 » Fri Apr 19, 2019 3:44 pm

Shaneman wrote:
Fri Apr 19, 2019 2:22 pm

I do plan at age 70 1/2 to make direct contributions from an IRA up to $100,000 annually to Vanguard donor-advised fund.
You possibly will be better served by making QCDs (qualified charitable distributions) with your RMDs of up to $100,000 annually. QCDs will come off the top of your income, while donor-advised funds are a deduction, only on top of other deductions that in total need to exceed your standard deduction. BTW, QCDs cannot be used to fund DAF.

Topic Author
Shaneman
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Re: Should I start doing Roth Conversions and if so

Post by Shaneman » Fri Apr 19, 2019 3:53 pm

ByThePond - Thanks for those links I will try running the calculations. They seem like very good tools

retiredjg - How much of your traditional IRA is composed of non-deductible contributions? Everything from 457, tIRA, SEP, DBP, Solo401(k), PSP are deductible contributions. I never made any non-deductible contributions and never could do a Roth since my income was always too high

About what ball park will your living expenses be? $120K per year

Any dependents? none

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Fri Apr 19, 2019 4:11 pm

Shaneman wrote:
Fri Apr 19, 2019 3:53 pm
retiredjg - How much of your traditional IRA is composed of non-deductible contributions? Everything from 457, tIRA, SEP, DBP, Solo401(k), PSP are deductible contributions. I never made any non-deductible contributions and never could do a Roth since my income was always too high
I find it hard to believe that with your high income you could have a traditional IRA that large without non-deductible contributions. However, I suppose if it were a rollover from an earlier work plan it could be pre-tax. Is that, or something like that, what happened?

Topic Author
Shaneman
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Re: Should I start doing Roth Conversions and if so

Post by Shaneman » Fri Apr 19, 2019 4:36 pm

retiredjg wrote:
Fri Apr 19, 2019 4:11 pm
Shaneman wrote:
Fri Apr 19, 2019 3:53 pm
retiredjg - How much of your traditional IRA is composed of non-deductible contributions? Everything from 457, tIRA, SEP, DBP, Solo401(k), PSP are deductible contributions. I never made any non-deductible contributions and never could do a Roth since my income was always too high
I find it hard to believe that with your high income you could have a traditional IRA that large without non-deductible contributions. However, I suppose if it were a rollover from an earlier work plan it could be pre-tax. Is that, or something like that, what happened?
I got out of college and worked for Raytheon 8 years. I think it was 6% me and company matched 3%. Left in 1996 and rolled Raytheon sponsored 401K to Vanguard IRA. So that is the $480,000 - Traditional IRA

Then I went to work for the State of Massachusetts for 2 years and that is the 457 money. So that is $40,000 - State Deferred Compensation before-tax 457 plan

Learned I did not want to work for the State so I left and started my own business.

Started business in the beginning used the SEP.

Later learned about using DBP along with Solo401(K) + PSP allowed me to defer a lot lot more $$$. Many years the deferred compensation was over 6 figures.

For the last 3 years my DBP has been overfunded and I have contributed nothing to the DBP. Even with no DBP contribution I was able deferred $61K in FY2018 (36.5K PSP, 18.5K Solo401(k) +$6K for catchup on solo401(k) since I am over 50)

Yes everything was deductible contributions.

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sat Apr 20, 2019 8:27 am

Ok. Thanks for the update.

It appears you have about $4.5 million (rounded for simplicity) in tax-deferred accounts. I'm guessing you have about $15 million (?) in a taxable account to generate the $300k in dividends. Please clarify about the dividends - you have called them "ordinary" in a couple of places and "qualified" in one place. I'm assuming the dividends are qualified.

You are using 2018 tax bracket numbers in your post. Here are the 2019 numbers I think might be needed for your decision.
  • Standard Deduction - $12,200

    Top of 22% bracket - $84,199 (taxable income, not MAGI)

    Top of 24% bracket - $160,724 (taxable income)

    Where 20% LTCG tax starts - $434,500 (taxable income)

I think doing Roth conversions is probably a good idea. Since tax rates are scheduled to revert to the old higher numbers in a few years, I'd convert up to the top of the 24% tax bracket (or maybe just under that if you want to avoid pushing any of the LTCG into the 20% rate). If/when tax rates do revert, you can reevaluate then.

I think converting at 24% is reasonable for your situation because your first RMD (if your balance does not grow at all) would be about $164,000 which would be about the 24% tax bracket today (which may revert to 28% in a few years). Since you are probably going to pay about/at least 24% anyway, paying it today instead of later is a wash or a good thing.

Since you are not yet 59.5 years old, you must pay the taxes out of savings (presumably the taxable account) instead of the IRA in order to avoid an early withdrawal penalty. There are two ways to do this.
  • You can send in an estimated payment at the end of the quarter in which you do the conversion.

    Or you can have a percentage withheld from the IRA when you do the conversion - but you MUST then make that up by contributing (from savings) the same amount to your Roth IRA within 60 days. If you do this, your receiving custodian must know this is a 60 day rollover contribution, not an ordinary contribution.

Some things you can do to reduce your tax torpedo when you reach 70.5.
  • Invest all the tax-deferred accounts into lower yield asset classes such as bonds.

    Don't take your SS. Some people would consider it just a nuisance.

    Start making large donations each year to a donor advised fund or straight to a charity. This would be an ordinary deduction and would be more than the standard deduction. I don't think you can donate from an IRA at your age, so it would have to be from the taxable account. You can donate shares instead of cash. That way you do not have to pay any capital gains tax.

    When you reach RMDs, you can send a certain amount of your RMD ($100k?) to charity (QCD - qualified charitable donation) instead of taking the RMD and paying tax on it.

    Just not worry about it and pay the high taxes when you reach 70.5 and beyond.

I have no understanding of AMT in the new tax law and do not know if it needs to be considered or not. You should find out if you do not know.
Last edited by retiredjg on Sat Apr 20, 2019 9:07 am, edited 1 time in total.

cas
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Re: Should I start doing Roth Conversions and if so

Post by cas » Sat Apr 20, 2019 8:38 am

retiredjg wrote:
Sat Apr 20, 2019 8:27 am
It appears you have about $4.5 million (rounded for simplicity) in tax-deferred accounts. I'm guessing you have about $1.5 million in a taxable account to generate the $300k in dividends.
I don't think this changes your analysis, but $1.5 million x approx 2% dividend yield generates $30,000 in dividends. So ... add a 0 to approx taxable account value, I think...

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grayfox
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Re: Should I start doing Roth Conversions and if so

Post by grayfox » Sat Apr 20, 2019 8:56 am

Shaneman wrote:
Fri Apr 19, 2019 2:22 pm
Should I start doing Roth Conversions and if so does it matter whether I start converting IRA, SEP, Solo410(K) first?

...

So I will shutdown the business and join the FIRE movement at 55 years old.

Over the years I have amassed total deferred retirement plans of $4,460,000

$40,000 - State Deferred Compensation before-tax 457 plan
$480,000 - Traditional IRA
$905,000 - SEP IRA
$2,135,000 - DBP
$900,000 - Solo410(k) + PSP

If I leave everything alone when RMD's are required the taxes will be humongous. So I have from age 55 to 70 1/2 to mitigate taxes with Roth conversions.
So basically you have about 15 years to ROTH convert $4.46 million. With no growth, that would require about $297K conversion per year. With 2.5% growth (Prime MMF), you would have to convert $360,000 per year.

Also, aren't the lower taxes going to expire in 2025? It might be a good idea to get everything converted by 2025, so that would be only 7 years. With no growth, 4.46M would be 637K per year for 7 years.

Another poster recommended converting up to the top of the 24% tax bracket, which he said is $160,724 in 2019.
Even with no growth, at $160K per year, it would take over 27 years to convert 4.46M.
At age 70, you would still have $2 Million to convert. (3.6M with 2.5% growth)
$160K conversion barely makes a dent.

It seems to me that, to make any headway, you just have to bite the bullet and make big conversions.
Something like 500K - 1M conversion each year. (To get it converted by 2025, with 2.5% growth, convert $700K per year)
What is the top bracket in 2019, 37 percent?

:idea: The way I look at it, you own only part of any tax-deferred accounts. Uncle Sam owns part of it. Exactly how much Uncle Sam owns is not known until you withdraw. Uncle Sam gets maybe 1/4 for small withdrawals, and 1/3 for large withdrawals. In the future, Uncle Sam's cut may be 1/2 or 3/4. I would want to get it converted while tax rates are known and low.
Last edited by grayfox on Sat Apr 20, 2019 9:38 am, edited 2 times in total.

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sat Apr 20, 2019 9:06 am

cas wrote:
Sat Apr 20, 2019 8:38 am
retiredjg wrote:
Sat Apr 20, 2019 8:27 am
It appears you have about $4.5 million (rounded for simplicity) in tax-deferred accounts. I'm guessing you have about $1.5 million in a taxable account to generate the $300k in dividends.
I don't think this changes your analysis, but $1.5 million x approx 2% dividend yield generates $30,000 in dividends. So ... add a 0 to approx taxable account value, I think...
Thank you. I did miss a zero. I think it puts things in a different light. Something to ponder.

elainet7
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Re: Should I start doing Roth Conversions and if so

Post by elainet7 » Sat Apr 20, 2019 9:27 am

its a good problem to have

WildBill
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Re: Should I start doing Roth Conversions and if so

Post by WildBill » Sat Apr 20, 2019 9:44 am

Howdy

Here is a thread with a discussion of a similar situation. I started it several years ago, and got excellent advice. Your situation is similar to mine, essentially multiplied by 2 or 2.5.

viewtopic.php?f=1&t=194882&start=50


One item that was unclear was the income you are expecting from your taxable portfolio. If it is indeed 300k per year in dividends there may be limited reasonable opportunity for Roth conversions. You will likely be converting at the maximum bracket. The idea of Roth conversions as you clearly understand is that you convert at or below your anticipated bracket when taking RMDs. You will likely not be doing that, and you will be pushing a portion of your qualified dividends into a higher bracket.

Other circumstances, including unexpected income from a consulting business I started has limited my own ability to do meaningful Roth conversions. This sort of sucks, but it is also about as clear an example of a first world problem as I can imagine.

The portfolio modeling tool the Senor Bigfoot has created is an excellent tool. Have a look for modeling scenarios.

Donor advised funds are not eligible for QCDs.

Good luck

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sat Apr 20, 2019 9:47 am

I have to admit I have not fully figured this out. Some thoughts about your comments.
grayfox wrote:
Sat Apr 20, 2019 8:56 am
So basically you have about 15 years to ROTH convert $4.46 million. With no growth, that would require about $297K conversion per year. With growth, you would have to convert more than that.
I don't think there is a need to convert all of it. It would be helpful to reduce it though. The way to prevent a lot of growth is not to invest in stocks in the tax-deferred accounts.

Let's say our poster arrives at 70.5 with $4 million in tax-deferred accounts (combination of reducing return and converting some to Roth). The first RMD will be in the neighborhood of $150k. The $150k is taxed at ordinary income rates - 24% or 28% if taxes revert. Converting a lot now will put Shaneman in the 32%, 35%, or 37% bracket now. At this point (and I'm open to being convinced otherwise), it does not make sense to me to pay a higher rate now than would be paid later.

Also, in the above scenario, Shaneman can QCD $100k of that $150k RMD and pay an even lower rate (maybe 12% or 15%) on what is left over.

I think it is important to keep in mind that only the Roth conversions and RMDs, not the total income, will be taxed at ordinary tax rates for this poster. Paying 24% now and 24% later results in the same amount of money in the bank. Paying 37% now instead of something less later (28%?) results in less money in the bank.

$160K conversion barely makes a dent.
I agree it doesn't make a great dent. But going higher than that pushes an even larger portion of the $300k qualified dividends from a 18.8% rate to a 23.8% rate, a case of doing more having diminishing returns.

It seems to me that, to make any headway, you just have to bite the bullet and make big conversions.
Something like 500K - 1M conversion each year.
What is the top bracket in 2019, 37 percent?
The top bracket is currently 37%.


:idea: The way I look at it, you own only part of any tax-deferred accounts.
Yes. Uncle owns part of the tax-deferred accounts. Big conversions now would raise the tax rate on the conversion to 35% or 37% accompanied by and additional 5% on the dividends. It just does not make sense to me. Smaller conversions keep both the ordinary tax rate lower and the cap gains rate lower.



I'm open to the idea that I'm overlooking something though. :happy

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grayfox
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Re: Should I start doing Roth Conversions and if so

Post by grayfox » Sat Apr 20, 2019 10:17 am

It seems to me that most of the questions and advice for Roth Conversion is suitable for small IRAs. The discussion will be about ROTH-converting $50,000 IRA. Solution, convert up to the top of the 12% bracket which is like $9,000 per year. So you are converting maybe 20% per year.

That may be good advice to minimize taxes for $50,000 IRA,. But does it make sense for $4.46M IRA? $160K is only 3.67% per year. The portfolio will probably grow faster than that. At 4% growth, by age 70, there will still be $4.8M. Nothing accomplished.

You mention preventing growth in IRA by not investing stocks. Sure, one could invest in Prime MMF and get just 2.5%. Why would I want a plan that requires limiting my return. I would rather get the funds into ROTH ASAP so they can be in stocks getting 5.5% return.

Suppose you converted all 4.46M in this year, paid 37% taxes, leaving only 2.92M in ROTH, invested in stocks.
After 15 year at 5.5%, that would be over $6M in ROTH IRA. All yours.

:idea: A $3M ROTH is better than a 4.46M Traditional IRA.

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sat Apr 20, 2019 10:30 am

Why would I want a plan that requires limiting my return.
I can think of a few reasons. However, only Shaneman's goals matter here and we have no idea what they are.

I would rather get the funds into ROTH ASAP so they can be in stocks getting 5.5% return.
You would pay a lot more to get there, but it is true that once there, investing in stocks could make up some or all of the difference.


I certainly agree that this is a different, and much harder problem, than Roth converting something smaller. :happy

cas
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Re: Should I start doing Roth Conversions and if so

Post by cas » Sat Apr 20, 2019 11:03 am

retiredjg wrote:
Sat Apr 20, 2019 9:47 am
I'm open to the idea that I'm overlooking something though. :happy
This comment is in the realm of an academic-exercise, nit-picking kind of thing, so it isn't really pointing out something being overlooked, but ... just for discussion purposes (or something):

On retiredjg's comments, with the "convert what you can up through 24% bracket, even if it won't end up converting the whole thing" pespective:

With that big chunk of (assuming qualified?) dividends, the 3.8% NIIT gets added on every time a Roth conversion dollar is added, so the 22% and 24% nominal brackets become 25.8% and 27.8%.

Plus, assuming no other income other than $300K qualified dividends and Roth conversions, the "shadow" tax brackets *below* the 22% are have even higher marginal "shadow" rates:

0% nominal bracket turns into 18.8% "shadow" marginal bracket (0% (nominal on new Roth dollar) + 15% (QDiv/LTCG being pushed from 0% to 15%) + 3.8% (QDiv being pushed over NIIT threshold)

10% nominal bracket turns into 28.8% (10% + 15% + 3.8%)

12% nominal bracket turns into 30.8% (12% + 15% + 3.8%)

But all those marginal rates are still lower than 32% to 37%. Whether the savings would add up to anything significant in the overall picture of the overall level of assets ... I didn't do the math. (Assuming there isn't some other marginal tax oddity that pops up at higher income levels that I'm not aware of in the new tax law. PEP and Pease phase-outs caused marginal tax increases in the pre-2018 tax law (about another 4% if I recall correctly), so those could come back eventually. But they aren't in effect now.)

On greyfox's perspective of "Might as well do really big Roth conversions now":

If I recall correctly, OP is filing single? Looks like AMT exemption phase-out kicks in at $500,000 (don't remember if that's taxable income or MAGI, but that doesn't substantially matter in this case, probably.) Far be it for me to fully understand or predict all the effects of AMT, but pre-2018 (when AMT exemption phase-out kicked in at much, much lower income) even 5-digit amounts of qualified dividends (e.g. $30,000, nevermind $300,000) interacted badly with the AMT exemption phase-out. I suspect AMT would probably kick in around that $500,000 taxable income for the OP. During that whole AMT exemption phase-out range, marginal tax rates would be at least

ordinary income: 28% AMT + 7% AMT phase-out effect + 3.8% NIIT + 5% (pushing QDiv from 15% rate to 20% rate*) = 43.8% marginal (and I might be leaving out some more items)

QDiv/LTCG: 20% QDiv/LTCG + 7% AMT phase-out effect + 3.8% NIIT = 30.8% marginal

*At some point all the QDiv will be pushed into the 20% QDiv bracket, so the extra 5% will cease.

Although ... thinking out loud ... at about $200,000 (NIIT threshold) + 300,000 Qdiv = $500,000 , all the Qdiv would be pushed above the NIIT threshold, so you would probably lose the addition of the 3.8% NIIT to each new dollar.

In any case, I again didn't do the math, but I'm not sure you end up saving much (and quite possibly losing some) in the overall context of the overall size of the portfolio by taking the "big Roth conversions" approach either. My gut feel is that retiredjg's "moderate Roth conversion" would save more in an absolute sense ... but not sure it would be much percentage-wise compared to the size of the whole portfolio.

But ... big disclaimer ... this a bigger portfolio and bigger annual income than any I deal with, so I could be missing something big. I would highly recommend running any plans through tax sofware ahead of time to see if some other odd marginal tax effect shows up.

Over in the thread that WildBill linked, livesoft eventually chimed in with his typically succinct assessment:
I doubt Roth conversions are going to be something that WildBill will be doing in a big way. Maybe a small amount every year, but not a big amount. At some point one is just so wealthy that they are stuck paying taxes.
I didn't do the math, so I don't know for sure, but I kinda sorta suspect that livesoft may have hit that on the nose.

There might be some QCD and charitable approaches that would direct more $ towards causes OP wishes to support and less $ toward Uncle Sam, but that is an issue beyond pure dollars and cents (and also beyond my knowledge level).
Last edited by cas on Sat Apr 20, 2019 12:10 pm, edited 2 times in total.

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sat Apr 20, 2019 12:08 pm

cas wrote:
Sat Apr 20, 2019 11:03 am
With that big chunk of (assuming qualified?) dividends, the 3.8% NIIT gets added on every time a Roth conversion dollar is added, so the 22% and 24% nominal brackets become 25.8% and 27.8%.
I was speaking of them separately in my post, but I agree. Your way is easier to understand.

It also points to a possible reason not to go higher than the 24% nominal bracket. The next bracket is 32% which would really be 35.8%....which sort of eliminates much possibility of paying a lot lower rate now than later.

Plus, assuming no other income other than $300K qualified dividends and Roth conversions, the "shadow" tax brackets *below* the 22% are have even higher marginal "shadow" rates:

0% nominal bracket turns into 18.8% "shadow" marginal bracket (0% (nominal on new Roth dollar) + 15% (QDiv/LTCG being pushed from 0% to 15%) + 3.8% (QDiv being pushed over NIIT threshold)

10% nominal bracket turns into 28.8% (10% + 15% + 3.8%)

12% nominal bracket turns into 30.8% (12% + 15% + 3.8%)
Took awhile to wrap my brain around this concept, but I have to agree.

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FiveK
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Re: Should I start doing Roth Conversions and if so

Post by FiveK » Sat Apr 20, 2019 12:25 pm

Shaneman wrote:
Fri Apr 19, 2019 2:22 pm
Should I start doing Roth Conversions...?
Probably.

Have you compared your current marginal rate to what you expect it will be at age 70+? Yes, NIIT, IRMAA, possibly AMT, SS benefits, etc., will affect you. You can generate a chart of your marginal rates that includes all those by using the personal finance toolbox Excel spreadsheet.

Until you have that rate comparison, flipping a coin is as good a way to decide as any.

bsteiner
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Re: Should I start doing Roth Conversions and if so

Post by bsteiner » Sat Apr 20, 2019 12:29 pm

If you have $300,000 of dividend income, you probably have about $12 million to $15 million of stocks, in addition to your $4.5 million of retirement benefits and whatever other assets you might have So you'll probably always be in a high bracket.

One possibility is to leave your retirement benefits to charity. Ignoring the benefit of the stretch (that's actually a significant benefit, but I'm ingoring it to keep the math simple), Once you move to Florida, if the income tax is 40% (the top rate is scheduled to revert to 39.6% in 2026) and the estate tax is 40%. the combined tax is 64% (net of the deduction for one against the other), whereas charity will get your retirement benefits tax-free.

If your objective is to leave your retirement benefits for your family rather than charity, you might want to convert all of your retirement benefits now, or between now and 2025 before the pre-2018 tax rates return in 2026. You'll be in a high income tax bracket whatever you do. Your traditional retirement benefits are effectively 60% yours and 40% the government's, with the income and gains on your share being tax-free. By converting now, and paying the income tax on the conversion out of other assets, your benefits will be all yours. See my articles on this in Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... r_ATRA.pdf, https://www.kkwc.com/wp-content/uploads ... ations.pdf.

There are a plethora of other factors that others have pointed out, but they may not be significant in this context.

It may be worth spending a few hours, or having someone spend a few hours, running some numbers on this, making reasonable assumptions as to investment returns in the IRAs and net of income taxes in the taxable account, and making your best guess as to future tax laws.

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sat Apr 20, 2019 12:33 pm

cas, your "shadow" bracket point has caused me to think about another approach. Just thinking out loud here.

What if Shaneman contributes $160,724 to charity in 2019 (which would be fully deductible) and Shaneman also converts $160,724 to Roth IRA?

There would be $0 income subject to ordinary income rates (no tax on the Roth conversion). The 18.8%, 28.8% and 30.8% marginal tax rates in the 0%, 10% and 12% brackets would disappear. And the increased NIIT on the qualified dividends over $200k would also disappear.

The only taxable income would be the $300k in qualified dividends and the first $39,374 of that would be taxed at 0%. :happy

For that matter, what if Shaneman contributes $500k to charity in 2019 and converts $500k to Roth IRA? I guess that would not work since only 60% of AGI can be deducted for charity, but there must be some number in between that is "just right".

Is this nuts?

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FiveK
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Re: Should I start doing Roth Conversions and if so

Post by FiveK » Sat Apr 20, 2019 12:52 pm

retiredjg wrote:
Sat Apr 20, 2019 12:33 pm
...but there must be some number in between that is "just right".

Is this nuts?
Sure hope not, because we did something very much like that in 2017. :)

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Re: Should I start doing Roth Conversions and if so

Post by cas » Sat Apr 20, 2019 1:33 pm

retiredjg wrote:
Sat Apr 20, 2019 12:33 pm
What if Shaneman contributes $160,724 to charity in 2019 (which would be fully deductible) and Shaneman also converts $160,724 to Roth IRA?

There would be $0 income subject to ordinary income rates (no tax on the Roth conversion). The 18.8%, 28.8% and 30.8% marginal tax rates in the 0%, 10% and 12% brackets would disappear. And the increased NIIT on the qualified dividends over $200k would also disappear.

The only taxable income would be the $300k in qualified dividends and the first $39,374 of that would be taxed at 0%. :happy
Hmmm ... I really shouldn't be doing this marginal tax stuff in my head, but that is an interesting idea. I have minimal experience with incomes up in this range, so it is difficult for me to picture the "bar chart"* rising and falling and pushing QDiv over various thresholds in my head. (*bar chart: https://thefinancebuff.com/reset-cost-b ... gains.html )

(Is the thought process on the $160,724 because it is the $200,000 NIIT threshold - the $39,374 threshold where QDiv start being taxed at 15%?)

The Pease limitation used to limit with this type of thing at high incomes to some degree, but Pease Limitation is currently gone. Not sure if there is anything else that is a gotcha at high income and high charitable deduction.

But ... with OP's 300K in QDiv ... and filing as single ...

- QDiv 15% tax rate kicks in at $38,374 (I'm counting on you to have looked that up :wink: - I didn't!) .... so even "pulling back" the bar chart $160,726 (charitable donation) into 0% nominal tax bracket ... the $300K QDiv still "sticks up above" the 15% threshold by $100,000, and every dollar of Roth conversion would cause an additional dollar of QDiv to move from 0% to 15% rate, so the "shadow" tax bracket is still 15% initially (pre-NIIT threshold being hit).

- NIIT threshold is $200,000 AGI. $300,000 QDiv - $160,000 charitable = $140,000 AGI. So, even after the charitable donation, there is only $60,000 worth of Roth conversions that can be done before the 3.8% NIIT gets added on the 15% "shadow" bracket effect to get a 18.8% "shadow" bracket effect. (Math detail: $60,000 space without 3.8% NIIT = $200,000 NIIT threshold - $140,000 AGI before Roth conversions,but after charitable donation.)

Granted, either 15% or 18.8% marginal doesn't sound bad in this context. But I think the Roth conversion still incurs some tax? But I'm doing this in my head, which is fraught with peril.

(Plus, bsteiner may well have a point that at this level of assets - and considering estate tax effects - OP's decisions about what he wants to happen to assets that outlast him (charity? family?) may be the primary consideration determining an approach. )

But your "charitable donation" approach - especially now that Pease Limitation is (temporarily) gone - is certainly an interesting thought experiment. I hadn't thought about dealing with the shadow tax brackets in that way before. I'll have to ponder the implications for lower incomes/assets where some level of shadow tax bracket still exists.

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Re: Should I start doing Roth Conversions and if so

Post by celia » Sat Apr 20, 2019 1:35 pm

Shaneman wrote:
Fri Apr 19, 2019 2:22 pm
So any Roth Conversions will result is an additional 3.8 percent Net Investment Income Tax (NIIT).
I would just ignore this in your decision-making process since you are going to pay it on your tax-deferred accounts whether you convert, withdraw or take RMDs. The money you gift as QCDs will not have this applied, however.


I would approach your situation through a different angle. Because you own more than $11.2M in assets and that is the federal estate tax limit (for 2018, subject to change any year), I think estate taxes are a bigger concern for you than RMDs. If you haven't done estate planning yet, you should see an estate planning lawyer. Estate laws are very state-dependent, so if you will be moving to Florida, you should do your planning according to their laws using a lawyer there.

I am not an expert on this but know estate taxes on the wealth over the exemption amount can be onerous. And every dollar in a tax-deferred account will be counted the same as if it was in a taxable account, yet part of the tax-deferred account can be considered the income taxes on the account that have not yet been paid!

Let's say you want to convert $1,000 from tax-deferred to Roth. Even if you are in the highest tax bracket and pay 37% + 3.8% (using taxable money) to convert that $1,000, you would pay $370+$38 from taxable to put $1,000 in the Roth. The Roth will continue to grow tax-free while you are alive (and after you die). Then your estate would only have to consider $1,000 as assets instead of $1,000+$370+38.

If you will be leaving part of your estate to people, they should get the Roths where they can stretch out the RMDs (which would be tax-free to them). If you will be leaving part of your estate to charity, they should get the tax-deferred. Your taxable can go to either as it will get a step-up in value.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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FiveK
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Re: Should I start doing Roth Conversions and if so

Post by FiveK » Sat Apr 20, 2019 1:43 pm

cas wrote:
Sat Apr 20, 2019 1:33 pm
Hmmm ... I really shouldn't be doing this marginal tax stuff in my head....
Agreed - that's what spreadsheets are for. ;)

Single filer age 55 with $300K qualified dividends:
Image

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Re: Should I start doing Roth Conversions and if so

Post by cas » Sat Apr 20, 2019 1:52 pm

FiveK wrote:
Sat Apr 20, 2019 1:43 pm
cas wrote:
Sat Apr 20, 2019 1:33 pm
Hmmm ... I really shouldn't be doing this marginal tax stuff in my head....
Agreed - that's what spreadsheets are for. ;)

Single filer age 55 with $300K qualified dividends:
That's for $300K QDiv, but no charitable deductions, right? THANKS! A picture is worth 1000 words. (At least that shows more or less what I came up with doing it in my head.)

What's it look like if a $160,000 charitable deduction is added in? (Says the person who is leary about downloading Personal Financial Toolbox off the internet to my PC. Don't intend to be giving you more work! Only if it interests you.)
Last edited by cas on Sat Apr 20, 2019 1:56 pm, edited 1 time in total.

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sat Apr 20, 2019 1:54 pm

cas wrote:
Sat Apr 20, 2019 1:33 pm
(Is the thought process on the $160,724 because it is the $200,000 NIIT threshold - the $39,374 threshold where QDiv start being taxed at 15%?)
No, it is because $160,725 is where the next tax bracket (32%) starts. I had not noticed the other relationship. Seems unlikely to be a coincidence, doesn't it?

But ... with OP's 300K in QDiv ... and filing as single ...

- QDiv 15% tax rate kicks in at $38,374 (I'm counting on you to have looked that up :wink: - I didn't!)
In 2019, the 15% rate kicks in at $39,375.

The rest of your numbers don't make sense to me, but it could be because my brain is tired and doesn't work as well in the afternoon. I'll give it more thought in the morning.

My example was supposed to arrange it so that the Roth conversion is completely offset by the charitable donation, leaving only the $300k in qualified dividends as taxable income.

First $39,374 taxed at 0%
From there up to $200k taxed at 15%
The rest taxed at 18.6% (including NIIT)

cas
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Re: Should I start doing Roth Conversions and if so

Post by cas » Sat Apr 20, 2019 2:01 pm

retiredjg wrote:
Sat Apr 20, 2019 1:54 pm

The rest of your numbers don't make sense to me, but it could be because my brain is tired and doesn't work as well in the afternoon.
Completely understandable! My brain doesn't work well in the afternoon either, and I'm yapping away, picturing bobbing bar charts in my head and expecting other people to follow along.

If we're lucky, FiveK will be beneficent and produce one of his (Personal Financial Toolbox) "a picture is worth 1000 words (or bobbing bar charts pictured in one's head)" marginal tax rate images.

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Shaneman
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Re: Should I start doing Roth Conversions and if so

Post by Shaneman » Sat Apr 20, 2019 2:01 pm

Wow the feedback in mindboggling - Thanks to all that contributed.

I wasn't planning on turning on my PC over the weekend but when I checked the post on my phone I had to turn the computer on while these great boggleheads provide their insight.
retiredjg wrote:
Sat Apr 20, 2019 8:27 am
It appears you have about $4.5 million (rounded for simplicity) in tax-deferred accounts. I'm guessing you have about $15 million (?) in a taxable account to generate the $300k in dividends.
Let me provide answers to some of the questions addressed.

Taxable is $18.8M I own over $2M BRK.B, $719K in ORLY, $170K in DORM, $75K in SRCL that pay no dividends.
retiredjg wrote:
Sat Apr 20, 2019 8:27 am
Please clarify about the dividends - you have called them "ordinary" in a couple of places and "qualified" in one place. I'm assuming the dividends are qualified.
Sorry for the confusion - Yes almost all "qualified". Looking at 2018 tax returns

3a Qualified dividends $297K

3b Ordinary dividends $305K
grayfox wrote:
Sat Apr 20, 2019 8:56 am
Also, aren't the lower taxes going to expire in 2025?
Yes TCJA ends in 2025. If TCJA is not extended beginning in 2026, the statutory rates will be 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent
grayfox wrote:
Sat Apr 20, 2019 8:56 am
It seems to me that, to make any headway, you just have to bite the bullet and make big conversions.
Yes I am thinking the need would be at least $500K
grayfox wrote:
Sat Apr 20, 2019 8:56 am
:idea: The way I look at it, you own only part of any tax-deferred accounts. Uncle Sam owns part of it. Exactly how much Uncle Sam owns is not known until you withdraw. Uncle Sam gets maybe 1/4 for small withdrawals, and 1/3 for large withdrawals. In the future, Uncle Sam's cut may be 1/2 or 3/4. I would want to get it converted while tax rates are known and low.
100% agree here. Uncle Sam own a large chuck of my deferred accounts and with government deficits always growing higher taxes are on the way.

WildBill wrote:
Sat Apr 20, 2019 9:44 am
One item that was unclear was the income you are expecting from your taxable portfolio. If it is indeed 300k per year in dividends there may be limited reasonable opportunity for Roth conversions. You will likely be converting at the maximum bracket. The idea of Roth conversions as you clearly understand is that you convert at or below your anticipated bracket when taking RMDs. You will likely not be doing that, and you will be pushing a portion of your qualified dividends into a higher bracket.
Yes ideally one wants to do Roth conversions at or below your anticipated bracket when taking RMDs. Problem is I built a tax time bomb. I knew 100% what I was doing and I still feel it was the right choice.

For the last 20 years I had a very successful business selling specialized test equipment. During that time even with making huge contributions to qualified retirement plans the net business profit was never lower than $400K, peaked at $900K and I would say the 20 year average was $525K. Thus I was always in the top marginal tax bracket and the more I put into the qualified retirement plans less Uncle Sam got at top marginal rate.

I do have another tax time bomb - my taxable investments.

The value is $18.8M, my cost is $7.99M, I have an unrealized capital gains of $10.9M

Sure it might sound crazy but I was busy making money from my business. I knew eventually my niche business would come to an end due to competition in the marketplace resulting in margin compression and when I felt like walking away I would. So that day has came and I am in the works of shutting down my business and retiring.

Oh I also presently live in a state with an income tax of 5.1%, oh I think for 2019 they lowered it to 5.05%. My plan always was to harvest CG and do Roth conversions when I move out to Florida. Yes Florida where there is no tax on dividends, interest, capital gains and no estate tax.

And yes I do want to setup some charitable trusts but did not want to do this until my domicile was Florida. I need a clean exit from Massachusetts before I setup any trusts.

Now during retirement I need to figure out how best to release the tax time bomb. At first I thought working on those unrealized capital gains and harvesting $500K a year. I know some people will roll their eyes on this but the problem is the taxable account generates $300K a year. So yes I get banged with the 3.8% NIIT on any realizes CG. In some ways I feel I don't care now about harvesting CG and just take the dividend they throw off and just focus on the tax deferred accounts and moving them into a Roth. I do have $1M separately in Vanguard Municipal Money Market Fund that I could to pay taxes on Roth conversions but the $1M is really kept for 7 years living expenses so I never get in a crunch to sell assets in a down market.

So although I am retiring early I have a full time job building out a tax roadmap to mitigate Uncle Sam piece of the pie.

Thank you to everyone that read this post and those that contributed. Have a blessed and holy Easter. Be safe, enjoy family and friends.

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FiveK
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Re: Should I start doing Roth Conversions and if so

Post by FiveK » Sat Apr 20, 2019 2:10 pm

cas wrote:
Sat Apr 20, 2019 1:52 pm
FiveK wrote:
Sat Apr 20, 2019 1:43 pm
cas wrote:
Sat Apr 20, 2019 1:33 pm
Hmmm ... I really shouldn't be doing this marginal tax stuff in my head....
Agreed - that's what spreadsheets are for. ;)

Single filer age 55 with $300K qualified dividends:
That's for $300K QDiv, but no charitable deductions, right? THANKS! A picture is worth 1000 words. (At least that shows more or less what I came up with doing it in my head.)

What's it look like if a $160,000 charitable deduction is added in? (Says the person who is leary about downloading Personal Financial Toolbox off the internet to my PC. Don't intend to be giving you more work! Only if it interests you.)
Easy enough to do:
Image

Reluctance to download from some random link is understandable. In this case, it appears the thread where updates to that spreadsheet are documented has been read over 64,000 times. No idea what fraction of those resulted in a download, but I've used many of the versions with no problem and haven't heard of anyone else who had a problem - other than using something other than Excel (Sheets, Libre, etc.) isn't as fully functional.

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celia
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Re: Should I start doing Roth Conversions and if so

Post by celia » Sat Apr 20, 2019 2:14 pm

FiveK wrote:
Sat Apr 20, 2019 1:43 pm
cas wrote:
Sat Apr 20, 2019 1:33 pm
Hmmm ... I really shouldn't be doing this marginal tax stuff in my head....
Agreed - that's what spreadsheets are for. ;)
I think the best way to look at it is for Shaneman to get tax software and play with it. There are other things that might be triggered that we don't think about.

Although Florida might not have a state estate tax, the federal government does. That is a separate issue from income tax.

cas
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Re: Should I start doing Roth Conversions and if so

Post by cas » Sat Apr 20, 2019 2:19 pm

Thank you, FiveK!

Hmm... that shows an 18.8% marginal tax rate as the Roth conversions works through the whole $160,000 charitable deduction. (Whereas my in-my-head bobbing bar chart said it was 15% for the first $60,000 of Roth conversions then rising to 18.8% for the next $100,000.) I'll have to think about where my reasoning is wrong.

Edit: Ah ha ... got it. The $200,000 threshold for NIIT is based on MAGI rather than taxable income, so itemized deductions don't affect it. (Muttering to myself ... that also explains why the 43.8% top marginal rate that is seen in the first graph (no charitable deductions) never appears in the second graph: the whole $300K QDiv has been pushed up above the $200K NIIT threshold *before* AMT kicks in.)
Last edited by cas on Sat Apr 20, 2019 2:33 pm, edited 3 times in total.

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sat Apr 20, 2019 2:27 pm

Shaneman wrote:
Sat Apr 20, 2019 2:01 pm
Sorry for the confusion - Yes almost all "qualified". Looking at 2018 tax returns

3a Qualified dividends $297K

3b Ordinary dividends $305K
I believe you have misinterpreted line 3 on your tax form.

You have $297k that is taxed as qualified dividends (at long term cap gains rates) and an additional $305k that is taxed as ordinary dividends (at the higher ordinary income rate).

Using the standard deduction, the ordinary dividends alone put you into the 35% tax bracket even if you do no Roth conversions. So my idea of converting small amounts IS NOT going to work for you at all.

:oops: Edit - I was the one misunderstanding line 3 on the tax form.



I do have another tax time bomb - my taxable investments.

The value is $18.8M, my cost is $7.99M, I have an unrealized capital gains of $10.9M
I would not worry about harvesting capital gains. What's the point? You will never be forced to take any capital gains except from the parts you want/need to sell.


My suggestion - put $17 million into a foundation of your own creation. Convert some of the tax-deferred money to Roth. Leave your PC off on the weekends. :happy
Last edited by retiredjg on Sun Apr 21, 2019 8:56 am, edited 1 time in total.

cas
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Re: Should I start doing Roth Conversions and if so

Post by cas » Sat Apr 20, 2019 2:31 pm

retiredjg wrote:
Sat Apr 20, 2019 2:27 pm
Shaneman wrote:
Sat Apr 20, 2019 2:01 pm
Sorry for the confusion - Yes almost all "qualified". Looking at 2018 tax returns

3a Qualified dividends $297K

3b Ordinary dividends $305K
I believe you have misinterpreted line 3 on your tax form.

You have $297k that is taxed as qualified dividends (at long term cap gains rates) and an additional $305k that is taxed as ordinary dividends (at the higher ordinary income rate).
I'm sure it is just the "afternoon" effect, but qualified dividends are a subset of ordinary dividends. Or, in other words, qualified dividends + non-qualified dividends = ordinary dividends. So $297K is taxed at the special QDiv/LTCG rates and 8K is taxed as ordinary income.

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FiveK
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Re: Should I start doing Roth Conversions and if so

Post by FiveK » Sat Apr 20, 2019 2:40 pm

celia wrote:
Sat Apr 20, 2019 2:14 pm
FiveK wrote:
Sat Apr 20, 2019 1:43 pm
cas wrote:
Sat Apr 20, 2019 1:33 pm
Hmmm ... I really shouldn't be doing this marginal tax stuff in my head....
Agreed - that's what spreadsheets are for. ;)
I think the best way to look at it is for Shaneman to get tax software and play with it. There are other things that might be triggered that we don't think about.
Agreed - checking any significant result obtained from non-commercial software before taking action is worthwhile. Having said that, the spreadsheet in question does cover a large number of credits/phaseouts/etc., and has matched our filed returns ~exactly (I think there was a $1 rounding difference last year) for several years.

The combination of marginal rate charts to show the layout of "the forest," backed up by commercial software to identify specific trees, works well.

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FiveK
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Re: Should I start doing Roth Conversions and if so

Post by FiveK » Sat Apr 20, 2019 3:05 pm

cas wrote:
Sat Apr 20, 2019 2:19 pm
Edit: Ah ha ... got it. The $200,000 threshold for NIIT is based on MAGI rather than taxable income, so itemized deductions don't affect it.
Yes, that's it.

Apologies if this is belaboring the point, but you seem tax-adept enough that you (and probably many other frequent posters here) would enjoy letting that spreadsheet handle the grunt work so you could look at the "big picture." :)

There was a similar question recently about the Retiree Portfolio Model spreadsheet - see that link for comments. The username supporting the financial toolbox (aka case study) spreadsheet has over 9000 posts in that forum....

retiredjg
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Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sat Apr 20, 2019 3:10 pm

cas wrote:
Sat Apr 20, 2019 2:31 pm
retiredjg wrote:
Sat Apr 20, 2019 2:27 pm
Shaneman wrote:
Sat Apr 20, 2019 2:01 pm
Sorry for the confusion - Yes almost all "qualified". Looking at 2018 tax returns

3a Qualified dividends $297K

3b Ordinary dividends $305K
I believe you have misinterpreted line 3 on your tax form.

You have $297k that is taxed as qualified dividends (at long term cap gains rates) and an additional $305k that is taxed as ordinary dividends (at the higher ordinary income rate).
I'm sure it is just the "afternoon" effect, but qualified dividends are a subset of ordinary dividends. Or, in other words, qualified dividends + non-qualified dividends = ordinary dividends. So $297K is taxed at the special QDiv/LTCG rates and 8K is taxed as ordinary income.
You may be correct, but that's not how I interpret what I'm seeing on the the stupid postcard tax form. Line 3a (qualified dividends) is held separately (presumably to be taxed in a different manner). Line 3b (ordinary dividends) goes into the income column to be added into AGI and later on taxed as ordinary income. That's how it looks to me.

Having said that, I do not have dividends and don't deal with this on my taxes. "How it looks to me" could be wrong. I guess it is possible that, if qualified dividends are a subset of ordinary dividends (instead of a subset of total dividends which is how it seems to me) then how that money gets taxed happens in another place on the tax form or even on another schedule. I have not checked for that.

If you say that is so, I'll believe you.

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FiveK
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Re: Should I start doing Roth Conversions and if so

Post by FiveK » Sat Apr 20, 2019 3:19 pm

retiredjg wrote:
Sat Apr 20, 2019 3:10 pm
cas wrote:
Sat Apr 20, 2019 2:31 pm
retiredjg wrote:
Sat Apr 20, 2019 2:27 pm
Shaneman wrote:
Sat Apr 20, 2019 2:01 pm
Sorry for the confusion - Yes almost all "qualified". Looking at 2018 tax returns

3a Qualified dividends $297K

3b Ordinary dividends $305K
I believe you have misinterpreted line 3 on your tax form.

You have $297k that is taxed as qualified dividends (at long term cap gains rates) and an additional $305k that is taxed as ordinary dividends (at the higher ordinary income rate).
I'm sure it is just the "afternoon" effect, but qualified dividends are a subset of ordinary dividends. Or, in other words, qualified dividends + non-qualified dividends = ordinary dividends. So $297K is taxed at the special QDiv/LTCG rates and 8K is taxed as ordinary income.
You may be correct, but that's not how I interpret what I'm seeing on the the stupid postcard tax form. Line 3a (qualified dividends) is held separately (presumably to be taxed in a different manner). Line 3b (ordinary dividends) goes into the income column to be added into AGI and later on taxed as ordinary income. That's how it looks to me.

Having said that, I do not have dividends and don't deal with this on my taxes. "How it looks to me" could be wrong. I guess it is possible that, if qualified dividends are a subset of ordinary dividends (instead of a subset of total dividends which is how it seems to me) then how that money gets taxed happens in another place on the tax form or even on another schedule. I have not checked for that.

If you say that is so, I'll believe you.
cas is correct: 3a is a subset of 3b.

The Qualified Dividends and Capital Gain Tax Worksheet handles the separate tax calculation.

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Re: Should I start doing Roth Conversions and if so

Post by SoAnyway » Sat Apr 20, 2019 10:45 pm

Shaneman wrote:
Sat Apr 20, 2019 2:01 pm
Wow the feedback in mindboggling - Thanks to all that contributed.

I wasn't planning on turning on my PC over the weekend but when I checked the post on my phone I had to turn the computer on while these great boggleheads provide their insight.
retiredjg wrote:
Sat Apr 20, 2019 8:27 am
It appears you have about $4.5 million (rounded for simplicity) in tax-deferred accounts. I'm guessing you have about $15 million (?) in a taxable account to generate the $300k in dividends.
Let me provide answers to some of the questions addressed.

Taxable is $18.8M I own over $2M BRK.B, $719K in ORLY, $170K in DORM, $75K in SRCL that pay no dividends.
retiredjg wrote:
Sat Apr 20, 2019 8:27 am
Please clarify about the dividends - you have called them "ordinary" in a couple of places and "qualified" in one place. I'm assuming the dividends are qualified.
Sorry for the confusion - Yes almost all "qualified". Looking at 2018 tax returns

3a Qualified dividends $297K

3b Ordinary dividends $305K
grayfox wrote:
Sat Apr 20, 2019 8:56 am
Also, aren't the lower taxes going to expire in 2025?
Yes TCJA ends in 2025. If TCJA is not extended beginning in 2026, the statutory rates will be 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent
grayfox wrote:
Sat Apr 20, 2019 8:56 am
It seems to me that, to make any headway, you just have to bite the bullet and make big conversions.
Yes I am thinking the need would be at least $500K
grayfox wrote:
Sat Apr 20, 2019 8:56 am
:idea: The way I look at it, you own only part of any tax-deferred accounts. Uncle Sam owns part of it. Exactly how much Uncle Sam owns is not known until you withdraw. Uncle Sam gets maybe 1/4 for small withdrawals, and 1/3 for large withdrawals. In the future, Uncle Sam's cut may be 1/2 or 3/4. I would want to get it converted while tax rates are known and low.
100% agree here. Uncle Sam own a large chuck of my deferred accounts and with government deficits always growing higher taxes are on the way.

WildBill wrote:
Sat Apr 20, 2019 9:44 am
One item that was unclear was the income you are expecting from your taxable portfolio. If it is indeed 300k per year in dividends there may be limited reasonable opportunity for Roth conversions. You will likely be converting at the maximum bracket. The idea of Roth conversions as you clearly understand is that you convert at or below your anticipated bracket when taking RMDs. You will likely not be doing that, and you will be pushing a portion of your qualified dividends into a higher bracket.
Yes ideally one wants to do Roth conversions at or below your anticipated bracket when taking RMDs. Problem is I built a tax time bomb. I knew 100% what I was doing and I still feel it was the right choice.

For the last 20 years I had a very successful business selling specialized test equipment. During that time even with making huge contributions to qualified retirement plans the net business profit was never lower than $400K, peaked at $900K and I would say the 20 year average was $525K. Thus I was always in the top marginal tax bracket and the more I put into the qualified retirement plans less Uncle Sam got at top marginal rate.

I do have another tax time bomb - my taxable investments.

The value is $18.8M, my cost is $7.99M, I have an unrealized capital gains of $10.9M

Sure it might sound crazy but I was busy making money from my business. I knew eventually my niche business would come to an end due to competition in the marketplace resulting in margin compression and when I felt like walking away I would. So that day has came and I am in the works of shutting down my business and retiring.

Oh I also presently live in a state with an income tax of 5.1%, oh I think for 2019 they lowered it to 5.05%. My plan always was to harvest CG and do Roth conversions when I move out to Florida. Yes Florida where there is no tax on dividends, interest, capital gains and no estate tax.

And yes I do want to setup some charitable trusts but did not want to do this until my domicile was Florida. I need a clean exit from Massachusetts before I setup any trusts.

Now during retirement I need to figure out how best to release the tax time bomb. At first I thought working on those unrealized capital gains and harvesting $500K a year. I know some people will roll their eyes on this but the problem is the taxable account generates $300K a year. So yes I get banged with the 3.8% NIIT on any realizes CG. In some ways I feel I don't care now about harvesting CG and just take the dividend they throw off and just focus on the tax deferred accounts and moving them into a Roth. I do have $1M separately in Vanguard Municipal Money Market Fund that I could to pay taxes on Roth conversions but the $1M is really kept for 7 years living expenses so I never get in a crunch to sell assets in a down market.

So although I am retiring early I have a full time job building out a tax roadmap to mitigate Uncle Sam piece of the pie.

Thank you to everyone that read this post and those that contributed. Have a blessed and holy Easter. Be safe, enjoy family and friends.
OP, CONGRATS!! You are a TRUE BH without even knowing it. You're set for life. And you did it the RIGHT way. You worked hard; lived frugally; learned as you went; ultimately realized that building your own business was the way to go; got all the benefits of doing so. That's the good news. The bad news? As you've realized, in the end we'll all be working for the government (in our case, the taxing authorities). ;) Never mind beating your business competitors; the game's changed. You need to minimize the tax bite.

I'm in the same boat, though nowhere near your level. (Just north of $1MM in tax-deferred to convert in my early 50s - never mind what's in taxable - and at the time of my "A-HA moment", I was a single filer tax-wise and domiciled for tax purposes in the Commonwealth of Massachusetts with no heirs - Ouch!) I followed near-exactly the same path as you over the past decades amongst for profit employers/tax-exempt employer/entrepreneur but I wasn't as quick on the uptake as you. It took me longer to realize that "going indy" was the way to go. On the plus side as a result of my "slow on the uptake", I don't have NEAR the tax headaches you're facing. As of 2020, I'll be a happy full-year resident in my zero-state-income-tax locale and aggressively converting, having left the Commonwealth behind. Consider it all the price of your success, as I do. Answer to your thread title question: YES (emphatically!) to starting Roth conversions.

SoAnyway, I'm grateful to this forum for having helped me see the light. I'm confident it will do the same for you, OP. Just like me when I first showed up here, your OP asks the wrong question. Honest answer IMHO to your OP question: Never mind the order-of-operations among your tax-deferred accounts. (That's "mice nuts".) You need to ditch the business (as you plan to do), move to a no-state-income-tax-state (as you plan to do), and embrace your new career as a "Converter" (as I have done) and maximize the taxable space.

More to the point: "So although I am retiring early I have a full time job building out a tax roadmap to mitigate Uncle Sam piece of the pie." Why do you feel the need to apologize for retiring early, or to establish for a bunch of internet strangers that you are still "working in a full-time job", OP? Dig deep - I had to do the same, and came to the same conclusion as you. Your reasons might be different, but in my case I reached my peace: I'm certain that my parents who would otherwise be disappointed in me if I were "quitting work" without a "next employer lined up" would be proud of the "hard work" I'll be doing in my new career as a "converter" and tax winner. :) To put it another way: What do you feel you need to 'prove' at this point and to whom?

You only have so much time - and unless you have a different plan for healthcare (which might be true at your asset level), your window doesn't end at 70 1/2. It ends at 65. Why? Have you looked into how your AGI (including RMDs) will factor into your Medicare premiums? If not, I recommend you do so. (Candidly, I'm a bit surprised that none of the other BHs have brought it up already since I'm a bit late to the party here - OTOH, maybe I overlooked in my quick skim, but I digress....) Bottom line, OP: That interaction between AGI and Medicare premiums ain't pretty, and it's likely to get worse over the coming years for a variety of healthcare/tax policy reasons that are not permitted to be discussed here for good reason.

FWIW, I was on the fence re. FIRE when I thought that I only had to worry about the impact of RMDs down the road. After all, like you the values of hard work, saving, living frugally, etc. were completely hard-wired into me long before I knew anything about investing, the Boglehead philosophy, tax rules, etc.; I just lived in accordance with the values that I'd been taught. Once this forum helped me realize that (a) Medicare premiums are tied to AGI, and (b) I needed to rearrange things in order to address the coming Medicare-premium issue; and (c) I needed to think seriously about what I would do with $ that I couldn't possible spend in my lifetime (not having EVER deprived myself of anything I want or need) - that changed my timing and order of operations significantly. To put it another way, it suddenly dawned on me that I've never seen a hearse with a U-Haul trailer hitched to the back. With that recognition, it was easy to create the go-forward plan. Good luck, OP! :happy

EDIT: I recognize that these are ALL high-class headaches that many might roll their eyes at, secure in the knowledge that "it must be nice" and problems they'd happily trade places for, OP. I hope they all realize the hard work that went into creating them. More importantly, I hope they realize that "success" brings on yet higher levels of complexity and pain. The pain of one who struggles to make ends meet and pay the bills at end of the month actually isn't much different than suffering the pain of the government's punishment for success. Pain is pain.
Nothing in this post constitutes legal or medical advice. | Consult your attorney or physician to verify if/how anything stated might or might not be applicable to your specific situation.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Should I start doing Roth Conversions and if so

Post by retiredjg » Sun Apr 21, 2019 9:11 am

FiveK wrote:
Sat Apr 20, 2019 3:19 pm
cas is correct: 3a is a subset of 3b.

The Qualified Dividends and Capital Gain Tax Worksheet handles the separate tax calculation.
Thank you cas and FiveK. I worked through the worksheet and now see how the "ordinary dividends" line is eventually removed from being taxed at ordinary tax rates.

This brings me back full circle to thinking that smaller conversions should be considered if one desires to keep the tax rate lower over the years, even into the RMD years. This would have to be accompanied by restricting the growth of the tax-deferred accounts. Otherwise, it won't work.

However, it all boils down to how Shaneman feels about paying taxes and giving to charity and leaving assets to heirs. Some people would just pay the taxes, even at the highest rates, just to have it over and done with. Others might wish to pay the lowest amount in taxes and smooth it out over the years. Others would rather give a lot to charity and a lot less to Uncle Sam. All of the answers are right in some way and perhaps a little less than perfect in other ways.

Topic Author
Shaneman
Posts: 20
Joined: Sun Apr 14, 2019 8:14 pm

Re: Should I start doing Roth Conversions and if so

Post by Shaneman » Mon Apr 22, 2019 11:31 am

Hello to all and thank you for your time and insight. Computer was off all day yesterday

Response to some questions
celia wrote:
Sat Apr 20, 2019 2:14 pm
think the best way to look at it is for Shaneman to get tax software and play with it. There are other things that might be triggered that we don't think about.

Although Florida might not have a state estate tax, the federal government does.
What software do you recommend? I downloaded the Retiree Portfolio Model spreadsheet and will try this out. (I went looking for a youtube video offering a demonstration inputting the variables into RPM but found nothing. If anyone knows of a tutorial video please post the URL. Yes I understand for help hover over cells with the red and black triangles for help)

This shareware RPM spreadsheet seems very detailed, but is there commercial software that a CPA or even tax attorney would use to build a tax roadmap for me? Since once I start on my trip to mitigate the tax burden I don't want to start over again. When my trip starts I am guessing the travel time will be 20 years.
SoAnyway wrote:
Sat Apr 20, 2019 10:45 pm
As you've realized, in the end we'll all be working for the government (in our case, the taxing authorities).
Yes I always knew this. Now it is just a game of chess which will always end with Uncle Sam putting the taxpayer in checkmate. One can play a short game of chess or a long and challenging game and I prefer the latter.
SoAnyway wrote:
Sat Apr 20, 2019 10:45 pm
Have you looked into how your AGI (including RMDs) will factor into your Medicare premiums?
Yes I understand the premiums are based on AGI and yes I understand the way the entitlement is designed those that paid the most in will get the least out. Yes I know some will say the word "entitlement" is wrong, but the point is those that pay into the government whether income taxes, FICA get the least back

I knew that the cost of Medicare is based on AGI but it doesn't seems like a major issue. First off I already pay for my own health insurance and it presently cost me $790 per month (single person) and I have a gold plan with $500 deductible and maximum out of pocket of $7350. I purchase the insurance through a business association I belong to and buy it at https://www.hsainsurance.com

I see the following at https://www.thinkadvisor.com/2018/10/12 ... 0321150657

Medicare Part A coverage, the full premium is $437 per month.

Medicare Part B coverage, the full premium is $460.50 per month.

and it looks like Medicare Part D is $77.40 at https://www.fool.com/retirement/2019/02 ... -2019.aspx

So today it cost a high income earners $975.00 Does this sound correct?
retiredjg wrote:
Sun Apr 21, 2019 9:11 am
Others might wish to pay the lowest amount in taxes and smooth it out over the years.
- Yes that is me.

I have no problem giving a lot to charity and a lot less to Uncle Sam.

I have no need for a dynasty trust and leaving a lot of assets heirs. Sure I have some heirs I would like to leave assets to but the majority in the end will go to charity. The question is when do I start give large charity donation that offer the best help with my tax obligation to Uncle Sam?

bsteiner
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Location: NYC/NJ/FL

Re: Should I start doing Roth Conversions and if so

Post by bsteiner » Mon Apr 22, 2019 11:47 am

Shaneman wrote:
Mon Apr 22, 2019 11:31 am
...
What software do you recommend? ... is there commercial software that a CPA or even tax attorney would use to build a tax roadmap for me? ...

I have no problem giving a lot to charity and a lot less to Uncle Sam.

I have no need for a dynasty trust and leaving a lot of assets heirs. Sure I have some heirs I would like to leave assets to but the majority in the end will go to charity. The question is when do I start give large charity donation that offer the best help with my tax obligation to Uncle Sam?
We use Excel. We used to use Bretnmark's Retirement Plan Analyzer: https://www.brentmark.com/software/reti ... -analyzer/.

If you're planning on giving a good deal to charity, then instead of doing Roth conversions, you might do qualified charitable distributions (QCDs) from your IRA when you reach 70 1/2, and then at your death leave your remaining retirement benefits to charity.

User avatar
FiveK
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Re: Should I start doing Roth Conversions and if so

Post by FiveK » Mon Apr 22, 2019 11:48 am

Shaneman wrote:
Mon Apr 22, 2019 11:31 am
celia wrote:
Sat Apr 20, 2019 2:14 pm
think the best way to look at it is for Shaneman to get tax software and play with it. There are other things that might be triggered that we don't think about.

Although Florida might not have a state estate tax, the federal government does.
What software do you recommend? I downloaded the Retiree Portfolio Model spreadsheet and will try this out.
For real tax software (i.e., those giving an accuracy guarantee for your filed return), any of these 7 Tax Software Programs should give correct answers.

Of the various "tax estimation" programs, the personal finance toolbox spreadsheet appears to cover the most credits, phaseouts, etc., plus it will give you marginal rate charts for any of the inputs it accepts.

The value of those charts depends on how much one thinks a picture is worth. For me, a lot.

cas
Posts: 649
Joined: Wed Apr 26, 2017 8:41 am

Re: Should I start doing Roth Conversions and if so

Post by cas » Mon Apr 22, 2019 12:25 pm

Shaneman wrote:
Mon Apr 22, 2019 11:31 am

Medicare Part A coverage, the full premium is $437 per month.

Medicare Part B coverage, the full premium is $460.50 per month.

and it looks like Medicare Part D is $77.40 at https://www.fool.com/retirement/2019/02 ... -2019.aspx

So today it cost a high income earners $975.00 Does this sound correct?
No.

If you paid Medicare employment taxes for 40 quarters, then your Medicare Part A costs $0, regardless of current income.

The Part B and D premium figures you list are in the ballpark of what you would likely pay, but could be a bit off, depending on some other details. (Plus there is a - usually smallish - additional Part D premium paid to a private insurance company.)

I'd recommend this (short) article (with nice graphics) from Kaiser Family Foundation that explains how IRMAA for Medicare Parts B and D work.

"Medicare’s Income-Related Premiums Under Current Law and Changes for 2019" , Kaiser Family Foundation, October 31, 2018; https://www.kff.org/medicare/issue-brie ... -for-2019/

Topic Author
Shaneman
Posts: 20
Joined: Sun Apr 14, 2019 8:14 pm

Re: Should I start doing Roth Conversions and if so

Post by Shaneman » Mon Apr 22, 2019 12:41 pm

cas wrote:
Mon Apr 22, 2019 12:25 pm
If you paid Medicare employment taxes for 40 quarters, then your Medicare Part A costs $0, regardless of current income.
Nice makes it even less of an issue. It might cost me less for insurance in retirement than it cost me today. Yes I have 40 quarter. Just logged into ssa.gov and it states

your full retirement age (67 years), your payment would be about $3,061 a month
age 70, your payment would be about $3,807 a month
age 62, your payment would be about $2,113 a month

My thoughts were not to take social security until age 70

WildBill
Posts: 478
Joined: Wed Jun 29, 2016 10:47 pm
Location: San Antonio, Texas

Re: Should I start doing Roth Conversions and if so

Post by WildBill » Mon Apr 22, 2019 12:46 pm

Shaneman wrote:
Mon Apr 22, 2019 11:31 am
Hello to all and thank you for your time and insight. Computer was off all day yesterday

Response to some questions
celia wrote:
Sat Apr 20, 2019 2:14 pm
think the best way to look at it is for Shaneman to get tax software and play with it. There are other things that might be triggered that we don't think about.

Although Florida might not have a state estate tax, the federal government does.
What software do you recommend? I downloaded the Retiree Portfolio Model spreadsheet and will try this out. (I went looking for a youtube video offering a demonstration inputting the variables into RPM but found nothing. If anyone knows of a tutorial video please post the URL. Yes I understand for help hover over cells with the red and black triangles for help)

This shareware RPM spreadsheet seems very detailed, but is there commercial software that a CPA or even tax attorney would use to build a tax roadmap for me? Since once I start on my trip to mitigate the tax burden I don't want to start over again. When my trip starts I am guessing the travel time will be 20 years.
SoAnyway wrote:
Sat Apr 20, 2019 10:45 pm
As you've realized, in the end we'll all be working for the government (in our case, the taxing authorities).
Yes I always knew this. Now it is just a game of chess which will always end with Uncle Sam putting the taxpayer in checkmate. One can play a short game of chess or a long and challenging game and I prefer the latter.
SoAnyway wrote:
Sat Apr 20, 2019 10:45 pm
Have you looked into how your AGI (including RMDs) will factor into your Medicare premiums?
Yes I understand the premiums are based on AGI and yes I understand the way the entitlement is designed those that paid the most in will get the least out. Yes I know some will say the word "entitlement" is wrong, but the point is those that pay into the government whether income taxes, FICA get the least back

I knew that the cost of Medicare is based on AGI but it doesn't seems like a major issue. First off I already pay for my own health insurance and it presently cost me $790 per month (single person) and I have a gold plan with $500 deductible and maximum out of pocket of $7350. I purchase the insurance through a business association I belong to and buy it at https://www.hsainsurance.com

I see the following at https://www.thinkadvisor.com/2018/10/12 ... 0321150657

Medicare Part A coverage, the full premium is $437 per month.

Medicare Part B coverage, the full premium is $460.50 per month.

and it looks like Medicare Part D is $77.40 at https://www.fool.com/retirement/2019/02 ... -2019.aspx

So today it cost a high income earners $975.00 Does this sound correct?
retiredjg wrote:
Sun Apr 21, 2019 9:11 am
Others might wish to pay the lowest amount in taxes and smooth it out over the years.
- Yes that is me.

I have no problem giving a lot to charity and a lot less to Uncle Sam.

I have no need for a dynasty trust and leaving a lot of assets heirs. Sure I have some heirs I would like to leave assets to but the majority in the end will go to charity. The question is when do I start give large charity donation that offer the best help with my tax obligation to Uncle Sam?
Howdy

When I read the OPs posting my thought was that he needed to define the objectives he wanted to achieve rather than discuss a collection of tax avoidance tactics. The choices among objectives are in general ; give it away, give it to the government, spend it, leave it to the kids.

I think that given your objective of mainly giving it away the optimum solution is to forget about any major Roth conversions and use QCDs from your accounts starting at age 70. Large Roth conversions would essentially be prepaying taxes to create a more tax efficient estate for heirs. Since you don’t seem to have that as an objective, why not tool up the tax advantaged accounts for growth and plan on maximizing QCDs?

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

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