ROTH IRA conversion approaches for Over-saved T-IRA

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DSBH
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ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

Hello Bogleheads - I am looking for comments/advices on the ROTH IRA conversion approaches that I am modelling - as I learned from many ROTH IRA Conversion threads such as viewtopic.php?t=285584, viewtopic.php?p=5351376, viewtopic.php?t=194462, and viewtopic.php?f=1&t=319359 among others.

Scenario:
MFJ, both 63 and retired in TX with no debt.
Current total pension and SS ~=55k/yr, ~=103K projected 7 years from now when higher earning spouse plans to take SS.
160k/yr budgeted expenses inc. 52k/yr in donations and IRMAA where applicable, not counting federal income taxes.
6M in combined T-IRA (mostly Total Bond Index).
4M Taxable account (mostly Total Stock Index).

I used RPM for a 28-yr study (63-90) with the objective of passing on the most after-tax dollars to heirs. 5% average annual return for stock, 1% for bond are assumed. For modelling simplicity, no QCD/charity donation is included in RPM studies.

Option 1 - no ROTH IRA Conversion except 1 in year #28 when all T-IRA holdings are converted to ROTH IRA - default do-nothing option.

Option 2 - convert all T-IRA holdings to ROTH IRA in year X - will consider if the gift tax exemption is reduced to 3.5 mil/person in year X.

Option3 - convert to ROTH IRA annually while keeping the MFJ AGI (Ordinary income/dividend + ROTH conversion AMT + RMD + pension + 0.85*SS) roughly constant over the next:
--------3A - 28 years (63-90). MFJ AGI ~=315K, in 24% then 28% tax bracket after 2025 - note: optimistically assumed MFJ for all 28 years.
--------3B - 18 years (63-80). MFJ AGI ~=435K, in 32% then 35% tax bracket after 2025 - note: model for average life expectancy.
--------3C - 09 years (63-71). MFJ AGI ~=765K, in 37% then 40% tax bracket after 2025 - note: no plan for RMD, or even significant taxes after 71.

The portfolio after-tax values are not drastically different between option 1 and options 3A/B/C if all MFJ. My current thinking w/o tax law changes:

1) Use option 3B - 18 years (63-80) - convert 1/4 of the planned amount around estimated tax-prepaid last days (mid Jan/Apr/Jun/Sep), and

2) If stock market is doing real well (or real bad ... yes it's subjective) compared to assumptions in year X, consider converting more up to 3C amount and sell stocks (or bonds) to pay for additional taxes,

3) The year a spouse passes away first, consider converting all remaining T-IRA that same year.

Thank you in advance for all your comments/recommendations .

[Edited to clarify Taxable account, AGI calculation, and IRMAA impact].
Last edited by DSBH on Sat May 29, 2021 9:10 pm, edited 2 times in total.
John C. Bogle: "Never confuse genius with luck and a bull market".
LuckyGuy
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by LuckyGuy »

Option 3B stuck out at me for being a reasonable balanced approach. If you have enough in taxable for the conversions, that’s awesome.

I am in a similar situation, however most of my taxable is highly appreciated mutual funds so I need to consider that as I determine my conversion plans.

I’m very interested in seeing what others have to say.
hppycamper
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by hppycamper »

Following. I'm a little younger. I've been thinking ahead and trying to model Roth conversion scenarios. I'm very interested in what advice others have as well.
cas
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by cas »

Three very quick thoughts:

1. You say that you will pay taxes for the Roth conversions out of taxable, so there must be a substantial taxable account. But I don't see any income from this taxable account mentioned in your AGI/marginal tax rate calculations. ??? (Having a mix of ordinary and qualified dividend/long term capital gain income can do odd things to your marginal tax rate.)

2. This is probably small potatoes in the general scheme of things, but I don't see IRMAA included in your calculations. (That will also cause some increase in marginal tax rate.)

3. I have no idea how this would turn out, but ... Since charitable giving is important to you, I'm wondering what would happen if you front loaded the Roth conversions a bit and combined it with substantial contributions to a DAF to get your taxable income back down. (enough contributions to DAF to cover charitable contributions for the 7 years before you can do QCDs.)
Exchme
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by Exchme »

I think there is so much money involved that OP should hire someone that specializes in estate planning to make a plan. There are limits to what people should try to DIY.
drzzzzz
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by drzzzzz »

Exchme wrote: Sat May 29, 2021 6:15 pm I think there is so much money involved that OP should hire someone that specializes in estate planning to make a plan. There are limits to what people should try to DIY.
I find this to be good advice, but find it more difficult to hire someone who does this modelling. Any ideas from the folks on here?
bsteiner
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by bsteiner »

If you're in Texas, the estate tax doesn't matter. Your estate or beneficiaries will get an income tax deduction for the estate tax on any traditional IRA benefits, at the marginal rate.

How much do you have in your taxable account that isn't highly appreciated?
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WoodSpinner
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by WoodSpinner »

OP,

1. I would NOT target a goal to convert all funds from your TIRA. These funds can be very useful for paying Medical Costs (e.g. LTC) and for supporting your Charitable donations via QCDs after 70 1/2.

1A. Who will inherit your estate? If a portion will go to charity, leave that in an IRA since they will not pay taxes. If your beneficiaries are in a lower tax bracket than you are consider not converting and letting them pay the taxes. If they are in the same or higher than continue to convert.

2. I would consider the IRMAA implications in your analysis as others have pointed out up-thread. I would lay out an expected IRMAA conversion tier plus identify a max tier I would target if I wanted to temporarily ramp up conversions.

3. I like your approach for Option-3 to keep your AGI relatively level. This works well in Texas since there is no state income taxes (as opposed to California). Overall, Inthink 3B is a good approach.

4. During significant market declines I would be prepared to act sooner (as opposed to quarterly conversions) and increase conversions (and my AGI target) in the hopes that the market will recover and I am getting a discount on the conversions.

5. I would consider bunching my charitable donations to a DAF (before 72) and targeting highly appreciated stock. This should reduce your overall yearly expenses (since you aren’t donating directly and allow you to maintain a more consistent donation level via your DAF. Much will depend on your tax situation which wasn’t provided.

6. Query, are you planning on Converting in-kind? Or via cash and reinvestment? I would make sure your plan includes your target AA and tax efficient fund placement.

Lastly, I look at this planning as an iterative model and will update my conversion targets yearly as I gain more insights into how the market performs, tax changes etc.

Best of luck!

WoodSpinner
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DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

cas wrote: Sat May 29, 2021 4:18 pm Three very quick thoughts:

1. You say that you will pay taxes for the Roth conversions out of taxable, so there must be a substantial taxable account. But I don't see any income from this taxable account mentioned in your AGI/marginal tax rate calculations. ??? (Having a mix of ordinary and qualified dividend/long term capital gain income can do odd things to your marginal tax rate.)

2. This is probably small potatoes in the general scheme of things, but I don't see IRMAA included in your calculations. (That will also cause some increase in marginal tax rate.)

3. I have no idea how this would turn out, but ... Since charitable giving is important to you, I'm wondering what would happen if you front loaded the Roth conversions a bit and combined it with substantial contributions to a DAF to get your taxable income back down. (enough contributions to DAF to cover charitable contributions for the 7 years before you can do QCDs.)
Thank you for your thoughts.

1. I have edited the original post to show that the Taxable account mostly has Total Stock so mostly QDI distributions, and RPM as far as I know does not model LTCG tax.

2. RPM does provide an option to model IRMAA, I have edited the original post.

3. For modeling simplicity purpose, I did not include/study various charitable contribution strategies, at least for now.
Last edited by DSBH on Sat May 29, 2021 9:45 pm, edited 1 time in total.
John C. Bogle: "Never confuse genius with luck and a bull market".
Topic Author
DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

Exchme wrote: Sat May 29, 2021 6:15 pm I think there is so much money involved that OP should hire someone that specializes in estate planning to make a plan. There are limits to what people should try to DIY.
drzzzzz wrote: Sat May 29, 2021 6:35 pm I find this to be good advice, but find it more difficult to hire someone who does this modelling. Any ideas from the folks on here?
Thank you for your advice. I may do just that, but would like to do some homework first so hopefully when the time comes I can ask relevant questions.
John C. Bogle: "Never confuse genius with luck and a bull market".
Topic Author
DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

bsteiner wrote: Sat May 29, 2021 6:45 pm If you're in Texas, the estate tax doesn't matter. Your estate or beneficiaries will get an income tax deduction for the estate tax on any traditional IRA benefits, at the marginal rate.

How much do you have in your taxable account that isn't highly appreciated?
Thank you for your comments. The Taxable account has approximately 4M in mostly Total Stock Index, with somewhat significant LTCG.
John C. Bogle: "Never confuse genius with luck and a bull market".
Topic Author
DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

WoodSpinner wrote: Sat May 29, 2021 8:01 pm OP,

1. I would NOT target a goal to convert all funds from your TIRA. These funds can be very useful for paying Medical Costs (e.g. LTC) and for supporting your Charitable donations via QCDs after 70 1/2.
I’ll have homework to do on this one, perhaps leaving 500k in T-IRA for at least LTC purpose.
1A. Who will inherit your estate? If a portion will go to charity, leave that in an IRA since they will not pay taxes. If your beneficiaries are in a lower tax bracket than you are consider not converting and letting them pay the taxes. If they are in the same or higher than continue to convert.
Not sure how many grandkids we will have so I don’t model charity donation yet, but am aware of QCD option.
2. I would consider the IRMAA implications in your analysis as others have pointed out up-thread. I would lay out an expected IRMAA conversion tier plus identify a max tier I would target if I wanted to temporarily ramp up conversions.
Yes my RPM models have this option turned on.
3. I like your approach for Option-3 to keep your AGI relatively level. This works well in Texas since there is no state income taxes (as opposed to California). Overall, Inthink 3B is a good approach.

4. During significant market declines I would be prepared to act sooner (as opposed to quarterly conversions) and increase conversions (and my AGI target) in the hopes that the market will recover and I am getting a discount on the conversions.

5. I would consider bunching my charitable donations to a DAF (before 72) and targeting highly appreciated stock. This should reduce your overall yearly expenses (since you aren’t donating directly and allow you to maintain a more consistent donation level via your DAF. Much will depend on your tax situation which wasn’t provided.
I’ll have homework to do on #4 and #5.
6. Query, are you planning on Converting in-kind? Or via cash and reinvestment? I would make sure your plan includes your target AA and tax efficient fund placement.

Lastly, I look at this planning as an iterative model and will update my conversion targets yearly as I gain more insights into how the market performs, tax changes etc.

Best of luck!

WoodSpinner
Yes mostly cash and reinvestment, I’d like to maintain a 50/50 AA target and intend to periodically review/rework the plans.

Thanks so much for your time and comments.
John C. Bogle: "Never confuse genius with luck and a bull market".
Exchme
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by Exchme »

DSBH wrote: Sat May 29, 2021 9:09 pm Thank you for your thoughts.

1. I have edited the original post to show that the Taxable account mostly has Total Stock so mostly QDI distributions, and RPM as far as I know does not model LTCG tax.

2. RPM does provide an option to model IRMAA, I have edited the original post.

3. For modeling simplicity purpose, I did not include/study various charitable contribution strategies, at least for now.
Correct, RPM does not handle existing capital gains/losses. As I recall, it also doesn't do include phaseout of deductions at high income or AMT, those could affect you too. I also have some non-deductible contributions to my IRA, RPM doesn't do those either. (Not knocking the program, before finding Bogleheads, I had tried building my own and RPM is light-years better)

I switched to Pralana Gold ($99/1st year, $49/yr for updates and requires MS Excel, no substitutes). It handles all those tax nuances and many other cool features. The other feature that was key to me was I wanted to model optimum asset location my Roth calculations. It's best to keep bonds in the t-IRA and stocks in Roth and taxable. As you build your Roth with 100% stocks, the bond fraction in your t-IRA needs to increase to keep you in balance. That's important to Roth planning since that will help control growth of your t-IRA.

Pralana Gold shows you your overall asset allocation each year and lets you change allocations in the different account types four times. I think they included that to allow a glide path (like a bond tent), but I use it instead to model optimal asset location. So while it is a lot of manual fiddling, I am able to roughly model a realistic asset location plan. Say I want 80/20 overall, so I might start with at 77/23 and over the next few years that rises to 83/17 and then I adjust back to below my target and let it rise again in the next time period. Each time, I leave the Roth 100% stocks and increase bonds in the t-IRA.

I rate the outcomes of different scenarios by the "effective $" reported in the Roth conversion module, which de-rates money remaining in the t-IRA by the average marginal tax rate on it during your lifetime, basically assuming your heirs will have a similar tax rate to take the money out as you did. It's still not quite right as $ in the t-IRA should be de-rated for taxes in the asset allocation calculations too, but that may be hard to program. I wish the modeling was more convenient, but this at least allows you to get the math about right and I can't find anything else in the consumer market that touches on this at all.

During your life your NW might double 2-3 times, so could be tens of millions of $ by then. It's good to go through these DIY exercises so you intimately understand the issues and can shop for a pro, but if a pro could get you a couple percent better results, that's a lot of dough.
bsteiner
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by bsteiner »

DSBH wrote: Sat May 29, 2021 9:25 pm
bsteiner wrote: Sat May 29, 2021 6:45 pm If you're in Texas, the estate tax doesn't matter. Your estate or beneficiaries will get an income tax deduction for the estate tax on any traditional IRA benefits, at the marginal rate.

How much do you have in your taxable account that isn't highly appreciated?
Thank you for your comments. The Taxable account has approximately 4M in mostly Total Stock Index, with somewhat significant LTCG.
If you have to sell the appreciated assets to raise the money to pay the tax on the conversion, you'll incur some capital gains tax. That will add a few points to the tax rate on the conversion.

However, it seems that you have some unused low bracket space, and will continue to have some unused low bracket space until Social Security and RMDs begin. So it may still make sense to convert as much as you can each year without going into too high a bracket.

There are enough moving parts that you may want to create a spreadsheet comparing some choices, making some reasonable assumptions as to investment returns and tax rates. You have to run it through the year when your beneficiaries are expected to exhaust your retirement benefits (in other words, the tenth year after the end of the joint and survivor life expectancy of you and your spouse).
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DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

Exchme wrote: Sun May 30, 2021 6:43 am
Correct, RPM does not handle existing capital gains/losses. As I recall, it also doesn't do include phaseout of deductions at high income or AMT, those could affect you too. I also have some non-deductible contributions to my IRA, RPM doesn't do those either. (Not knocking the program, before finding Bogleheads, I had tried building my own and RPM is light-years better)

I switched to Pralana Gold ($99/1st year, $49/yr for updates and requires MS Excel, no substitutes). It handles all those tax nuances and many other cool features. The other feature that was key to me was I wanted to model optimum asset location my Roth calculations. It's best to keep bonds in the t-IRA and stocks in Roth and taxable. As you build your Roth with 100% stocks, the bond fraction in your t-IRA needs to increase to keep you in balance. That's important to Roth planning since that will help control growth of your t-IRA.

Pralana Gold shows you your overall asset allocation each year and lets you change allocations in the different account types four times. I think they included that to allow a glide path (like a bond tent), but I use it instead to model optimal asset location. So while it is a lot of manual fiddling, I am able to roughly model a realistic asset location plan. Say I want 80/20 overall, so I might start with at 77/23 and over the next few years that rises to 83/17 and then I adjust back to below my target and let it rise again in the next time period. Each time, I leave the Roth 100% stocks and increase bonds in the t-IRA.

I rate the outcomes of different scenarios by the "effective $" reported in the Roth conversion module, which de-rates money remaining in the t-IRA by the average marginal tax rate on it during your lifetime, basically assuming your heirs will have a similar tax rate to take the money out as you did. It's still not quite right as $ in the t-IRA should be de-rated for taxes in the asset allocation calculations too, but that may be hard to program. I wish the modeling was more convenient, but this at least allows you to get the math about right and I can't find anything else in the consumer market that touches on this at all.

During your life your NW might double 2-3 times, so could be tens of millions of $ by then. It's good to go through these DIY exercises so you intimately understand the issues and can shop for a pro, but if a pro could get you a couple percent better results, that's a lot of dough.
If I understand correctly your comments on Pralana Gold (inc. some very useful here viewtopic.php?f=1&t=347671&p=5981885#p5981885) users can manually change the AAs for different account types 4 times for a study period (e.g. 4 times in a 28-yr study period), and users need to manually iterate to approximate an automatic rebalancing across account types in order to maintain a desired portfolio AA on an annual basis.

When I first used RPM, I set up the same AA for each account type - e.g. 50/50 for taxable and 50/50 for ROTH and 50/50 for T-IRA. As I wanted to maintain as much as possible a portfolio AA of say 50/50 while keeping as much as possible (e.g. 100%) bonds in T-IRA and (100%) stocks in Taxable/Roth, I decided to add custom logic to RPM to automatically rebalance across different account types (Taxable/ROTH/T-IRA) every year in order to maintain as close as possible to my desired 50/50 (or any other stock/bond combo) AA for the whole portfolio. With this custom logic the model came up with much lower ROTH conversion amounts relative to the model without custom logic, since the conversion mostly comes from bonds in T-IRA, assuming that the additional logic works properly.

So for the time being I'll stick with RPM with the custom logic, until/unless something definitely more convincing shows up. I'll accept the deficiency in taxes as you pointed out in exchange for the benefit of annual rebalancing across account types.

Thanks so much for your time and feedback.
John C. Bogle: "Never confuse genius with luck and a bull market".
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DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

bsteiner wrote: Sun May 30, 2021 9:05 am
DSBH wrote: Sat May 29, 2021 9:25 pm
bsteiner wrote: Sat May 29, 2021 6:45 pm If you're in Texas, the estate tax doesn't matter. Your estate or beneficiaries will get an income tax deduction for the estate tax on any traditional IRA benefits, at the marginal rate.

How much do you have in your taxable account that isn't highly appreciated?
Thank you for your comments. The Taxable account has approximately 4M in mostly Total Stock Index, with somewhat significant LTCG.
If you have to sell the appreciated assets to raise the money to pay the tax on the conversion, you'll incur some capital gains tax. That will add a few points to the tax rate on the conversion.
Yes, for instance with a 400K conversion resulting in a ~100K tax bill, selling 100K of stocks to pay for the tax would result in additional LTCG tax on about ~30K.
However, it seems that you have some unused low bracket space, and will continue to have some unused low bracket space until Social Security and RMDs begin. So it may still make sense to convert as much as you can each year without going into too high a bracket.

There are enough moving parts that you may want to create a spreadsheet comparing some choices, making some reasonable assumptions as to investment returns and tax rates. You have to run it through the year when your beneficiaries are expected to exhaust your retirement benefits (in other words, the tenth year after the end of the joint and survivor life expectancy of you and your spouse).
These are actually 38-yr study period in the models where T-IRA are fully converted after 28/18/9 years, to model the tax impact at least 10 years after heirs' inheritance of all after-tax holdings. Obviously I have no idea what the heirs' tax rates are going to be, so big assumptions here.

As I ponder through different options 1/2/3A-B-C, the big unknown is when we can no longer file taxes as MFJ - our key driver to decide for ROTH IRA conversions (both parents of one spouse passed away in their very early 70's). We just tried to pick scenarios that are neither too optimistic nor too pessimistic.

Thanks so much for your time and feedback.
John C. Bogle: "Never confuse genius with luck and a bull market".
Exchme
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by Exchme »

DSBH wrote: Sun May 30, 2021 11:57 am I decided to add custom logic to RPM to automatically rebalance across different account types (Taxable/ROTH/T-IRA) every year in order to maintain as close as possible to my desired 50/50 (or any other stock/bond combo) AA for the whole portfolio. With this custom logic the model came up with much lower ROTH conversion amounts relative to the model without custom logic, since the conversion mostly comes from bonds in T-IRA, assuming that the additional logic works properly.
Yes, that's what I'm getting at, you just can't get a reasonable estimate of Roth Conversions needed unless you either do something custom like you've done or do the adjustments I described in Pralana Gold. As I said in another thread, the good thing at least in my case was that there was a broad, flat optimum in Roth Conversions, so you can miss perfection by quite a bit and still not be too bad.

Kind of surprising that something so fundamental to retirement planning is so difficult to implement in retirement planning calculators!
Lee_WSP
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by Lee_WSP »

DSBH wrote: Sun May 30, 2021 12:18 pm
bsteiner wrote: Sun May 30, 2021 9:05 am
DSBH wrote: Sat May 29, 2021 9:25 pm
bsteiner wrote: Sat May 29, 2021 6:45 pm If you're in Texas, the estate tax doesn't matter. Your estate or beneficiaries will get an income tax deduction for the estate tax on any traditional IRA benefits, at the marginal rate.

How much do you have in your taxable account that isn't highly appreciated?
Thank you for your comments. The Taxable account has approximately 4M in mostly Total Stock Index, with somewhat significant LTCG.
If you have to sell the appreciated assets to raise the money to pay the tax on the conversion, you'll incur some capital gains tax. That will add a few points to the tax rate on the conversion.
Yes, for instance with a 400K conversion resulting in a ~100K tax bill, selling 100K of stocks to pay for the tax would result in additional LTCG tax on about ~30K.
If you have more than five years worth of contributions greater than the tax bill, you can simply withdraw Roth contributions at no penalty.

Or if your past the withdrawal age, just convert and withdraw.
KlangFool
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by KlangFool »

OP,

Some high level thinking that may be helpful.

A) With 6 millions in the tax-deferred account, if you do not Roth convert at an amount greater than annual growth, the problem will just get bigger. Let's assume that the bond is growing at 2% per year, your Roth conversion needs to be larger than 120K per year in order to reduce the tax-deferred account size.

B) You have more money than you need. Why won't you give out some right now? 30K per year to each heir is a good way to reduce your estate problem.

C) Roth convert to what? Would you be Roth converting the bond in the tax-deferred account into stock in the Roth IRA? By moving/reducing the stock in the taxable account, you reduce future capital gain.

D) If the stock is not doing, your bond might be doing very well.

E) It looks like large and aggressive Roth conversion in the earlier year is needed. A number between 3 (B) and 3 (C) plus annual 30K gift to heir.

KlangFool
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DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

Lee_WSP wrote: Sun May 30, 2021 3:19 pm
DSBH wrote: Sun May 30, 2021 12:18 pm Yes, for instance with a 400K conversion resulting in a ~100K tax bill, selling 100K of stocks to pay for the tax would result in additional LTCG tax on about ~30K.
If you have more than five years worth of contributions greater than the tax bill, you can simply withdraw Roth contributions at no penalty.

Or if your past the withdrawal age, just convert and withdraw.
Thanks for your comments.
John C. Bogle: "Never confuse genius with luck and a bull market".
Topic Author
DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

KlangFool wrote: Sun May 30, 2021 4:18 pm OP,

Some high level thinking that may be helpful.

A) With 6 millions in the tax-deferred account, if you do not Roth convert at an amount greater than annual growth, the problem will just get bigger. Let's assume that the bond is growing at 2% per year, your Roth conversion needs to be larger than 120K per year in order to reduce the tax-deferred account size.
Absolutely correct. If somehow Total Bond Index returns say 8% in year X I will adjust the conversion plan accordingly.
B) You have more money than you need. Why won't you give out some right now? 30K per year to each heir is a good way to reduce your estate problem.
We do if there is a somewhat good reason so they don't feel entitled to annual tax free gift (they don't). We also financially support older parent.
C) Roth convert to what? Would you be Roth converting the bond in the tax-deferred account into stock in the Roth IRA? By moving/reducing the stock in the taxable account, you reduce future capital gain.
Well the goal for the RPM models is to leave the largest possible after-tax portfolio to heirs, and the biggest unknown is when MFJ becomes Single for tax filing purpose. So I think that ROTH conversion from T-IRA bonds to ROTH stocks while trying to maintain a comfortable portfolio AA are consistent with that goal.
D) If the stock is not doing, your bond might be doing very well.
It might happen that way every now and then, but I wanted bonds mainly to reduce portfolio volatilities, especially as current retirees.
E) It looks like large and aggressive Roth conversion in the earlier year is needed. A number between 3 (B) and 3 (C) plus annual 30K gift to heir.

KlangFool
So we plan for 3B and, if market opportunities present, up to 3C - but try not to be too aggressive.

Thanks so much for your time and feedback.
John C. Bogle: "Never confuse genius with luck and a bull market".
KlangFool
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by KlangFool »

DSBH wrote: Sun May 30, 2021 9:00 pm
We do if there is a somewhat good reason so they don't feel entitled to annual tax free gift (they don't). We also financially support older parent.
DSBH,

This is a very strange statement. It has nothing to do with the reality.

A) You have too much money.

B) They would inherit most of your money.

Hence, you have only two choices:

1) Give some away while you are alive.

2) Let them get the whole lump sum when you are not around.

Doing (1) allow you to observe and monitor how they handle your gift. You have an opportunity to adjust your plan. Doing (2) means that you have ZERO flexibility to mend any possible failing.

The amount does not have to be 30K per year.

KlangFool
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

KlangFool wrote: Sun May 30, 2021 9:10 pm
DSBH wrote: Sun May 30, 2021 9:00 pm
We do if there is a somewhat good reason so they don't feel entitled to annual tax free gift (they don't). We also financially support older parent.
DSBH,

This is a very strange statement. It has nothing to do with the reality.

A) You have too much money.

B) They would inherit most of your money.

Hence, you have only two choices:

1) Give some away while you are alive.

2) Let them get the whole lump sum when you are not around.

Doing (1) allow you to observe and monitor how they handle your gift. You have an opportunity to adjust your plan. Doing (2) means that you have ZERO flexibility to mend any possible failing.

The amount does not have to be 30K per year.

KlangFool
Well first we don’t want the current heirs to think that 30K (or X) will just automatically show up every year (they don’t). They should expect to have just what they earned and then may be some (they do).

Second, we don’t know how many future heirs (e.g. grandkids) we’re going to have, and at 63 hopefully we’ll have a lot of opportunities to have grandkids.

And third, they should not assume that they will inherit whatever we leave behind - hopefully they don’t, and they don’t know how much we have.

Thanks so much for your feedback.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by celia »

Another way to look at Roth conversions during retirement is to follow my links in this thread to get the big picture of what you’re working with and to build a plan using my spreadsheet method. I would probably leave $1M to $2M in the TIRA for long-term care expenses and convert to the top of the 35% tax bracket for all your income. The problem with converting everything in one year is that most of the conversion taxes will be at 37% whereas if you convert over 5 to 10 years, you will have the converted amount fall into various tax brackets (since we have a progressive income tax, not a flat tax).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

celia wrote: Sun May 30, 2021 10:45 pm Another way to look at Roth conversions during retirement is to follow my links in this thread to get the big picture of what you’re working with and to build a plan using my spreadsheet method. I would probably leave $1M to $2M in the TIRA for long-term care expenses and convert to the top of the 35% tax bracket for all your income. The problem with converting everything in one year is that most of the conversion taxes will be at 37% whereas if you convert over 5 to 10 years, you will have the converted amount fall into various tax brackets (since we have a progressive income tax, not a flat tax).
Thank you Celia for the very informative big picture viewtopic.php?f=1&t=336886&p=5746261#p5746261 and your spreadsheet method. I will download it from viewtopic.php?f=1&t=323551&p=5462812#p5462812 and study it - and thanks Sahara for the downloaded spreadsheet.

[Edited with quick update] - the spreadsheet calculations are generally consistent with RPM so thanks.
Last edited by DSBH on Mon May 31, 2021 11:19 am, edited 1 time in total.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by bsteiner »

DSBH wrote: Sun May 30, 2021 12:18 pm
bsteiner wrote: Sun May 30, 2021 9:05 am ... you have some unused low bracket space, and will continue to have some unused low bracket space until Social Security and RMDs begin. So it may still make sense to convert as much as you can each year without going into too high a bracket.

There are enough moving parts that you may want to create a spreadsheet comparing some choices, making some reasonable assumptions as to investment returns and tax rates. You have to run it through the year when your beneficiaries are expected to exhaust your retirement benefits (in other words, the tenth year after the end of the joint and survivor life expectancy of you and your spouse).
These are actually 38-yr study period in the models where T-IRA are fully converted after 28/18/9 years, to model the tax impact at least 10 years after heirs' inheritance of all after-tax holdings. Obviously I have no idea what the heirs' tax rates are going to be, so big assumptions here.
...
Things may change over the next 38 years. Do the best you can.

While the tax laws will change many times over the next 38 years, you can make some reasonable assumptions.

As to the tax brackets after your death, you have two basic choices, assuming your children are at least 27 or 28 years old (the minimum age requirement for a charitable remainder trust can be either 27 or 28 depending on prevailing interest rates).

Choice 1 is to leave your IRA to them in trust to keep it out of their estates for estate tax purposes (and to protect against their creditors and spouses).
In that case, since your children won't know within 10 years of the deaths of you and your spouse what the size of their estates will be what the estate tax exclusion amount will be when they die, their trusts will probably accumulate the IRA distributions and pay tax at the top rate.

Choice 2, if your children are at least 27 or 28, is to leave your other assets to them in discretionary trusts for the reasons set forth above, and leave your traditional IRA to them in charitable remainder trusts to replicate the stretch. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by is50xenough »

DSBH wrote: Sat May 29, 2021 1:25 pm Hello Bogleheads - I am looking for comments/advices on the ROTH IRA conversion approaches that I am modelling - as I learned from many ROTH IRA Conversion threads such as viewtopic.php?t=285584, viewtopic.php?p=5351376, viewtopic.php?t=194462, and viewtopic.php?f=1&t=319359 among others.

Scenario:
MFJ, both 63 and retired in TX with no debt.
Current total pension and SS ~=55k/yr, ~=103K projected 7 years from now when higher earning spouse plans to take SS.
160k/yr budgeted expenses inc. 52k/yr in donations and IRMAA where applicable, not counting federal income taxes.
6M in combined T-IRA (mostly Total Bond Index).
4M Taxable account (mostly Total Stock Index).

I used RPM for a 28-yr study (63-90) with the objective of passing on the most after-tax dollars to heirs. 5% average annual return for stock, 1% for bond are assumed. For modelling simplicity, no QCD/charity donation is included in RPM studies.

Option 1 - no ROTH IRA Conversion except 1 in year #28 when all T-IRA holdings are converted to ROTH IRA - default do-nothing option.

Option 2 - convert all T-IRA holdings to ROTH IRA in year X - will consider if the gift tax exemption is reduced to 3.5 mil/person in year X.

Option3 - convert to ROTH IRA annually while keeping the MFJ AGI (Ordinary income/dividend + ROTH conversion AMT + RMD + pension + 0.85*SS) roughly constant over the next:
--------3A - 28 years (63-90). MFJ AGI ~=315K, in 24% then 28% tax bracket after 2025 - note: optimistically assumed MFJ for all 28 years.
--------3B - 18 years (63-80). MFJ AGI ~=435K, in 32% then 35% tax bracket after 2025 - note: model for average life expectancy.
--------3C - 09 years (63-71). MFJ AGI ~=765K, in 37% then 40% tax bracket after 2025 - note: no plan for RMD, or even significant taxes after 71.

The portfolio after-tax values are not drastically different between option 1 and options 3A/B/C if all MFJ. My current thinking w/o tax law changes:

1) Use option 3B - 18 years (63-80) - convert 1/4 of the planned amount around estimated tax-prepaid last days (mid Jan/Apr/Jun/Sep), and

2) If stock market is doing real well (or real bad ... yes it's subjective) compared to assumptions in year X, consider converting more up to 3C amount and sell stocks (or bonds) to pay for additional taxes,

3) The year a spouse passes away first, consider converting all remaining T-IRA that same year.

Thank you in advance for all your comments/recommendations .

[Edited to clarify Taxable account, AGI calculation, and IRMAA impact].
Love your post. Have grappled with this Roth conversion question myself. I think from the calculators you simplify by saying you want to max out money to heirs. Otherwise, it gets confusing trying to determine final account balances or total available cash to heirs versus minimizing taxes. From my attempts to answer similar questions, it seems the total dollars are not that different considering the effort put into doing the analysis. What differs is the shift to tax free money in the Roth which is likely account of greatest benefit to heirs.

By my calculations, I approximate that you would be in a 33% or 35% tax bracket at age 72 although this is so hard to predict.

Given that, many would support that leveling is good way to approximate the best approach I would start with 3B but see what happens with tax brackets each year. That would at least slow growth of IRA to minimum given almost total bond investments. Can augment that with charity and gifts while alive if you desire. Not critical if happen to slip into 3c in any given year. I also strongly agree with post about marginal tax brackets doing weird things when mixing capital gains with regular income.

I think as you and wife age, as do your heirs, you can determine if you want to put a plan in place to convert some large amount (akin to option 1) at a more advanced age or just up the annual conversion further.

I think that IRMAA with not be a factor in final balances since it will get lost in the wash even at highest IRMAA brackets.

My sense is that with significant Roth conversions the break even isn't until about age 85 for you and your wife to seem to be ahead in total dollars

Love to have any of my statements fact checked by those with more experience---all comments specifically based on size of Roth conversions being discussed here and may not apply to smaller conversions in 10, 12% marginal tax range

BTW, love to see your numbers that you got from RPM for all these options.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

bsteiner wrote: Mon May 31, 2021 9:15 am
DSBH wrote: Sun May 30, 2021 12:18 pm
bsteiner wrote: Sun May 30, 2021 9:05 am ... you have some unused low bracket space, and will continue to have some unused low bracket space until Social Security and RMDs begin. So it may still make sense to convert as much as you can each year without going into too high a bracket.

There are enough moving parts that you may want to create a spreadsheet comparing some choices, making some reasonable assumptions as to investment returns and tax rates. You have to run it through the year when your beneficiaries are expected to exhaust your retirement benefits (in other words, the tenth year after the end of the joint and survivor life expectancy of you and your spouse).
These are actually 38-yr study period in the models where T-IRA are fully converted after 28/18/9 years, to model the tax impact at least 10 years after heirs' inheritance of all after-tax holdings. Obviously I have no idea what the heirs' tax rates are going to be, so big assumptions here.
...
Things may change over the next 38 years. Do the best you can.

While the tax laws will change many times over the next 38 years, you can make some reasonable assumptions.

As to the tax brackets after your death, you have two basic choices, assuming your children are at least 27 or 28 years old (the minimum age requirement for a charitable remainder trust can be either 27 or 28 depending on prevailing interest rates).

Choice 1 is to leave your IRA to them in trust to keep it out of their estates for estate tax purposes (and to protect against their creditors and spouses).
In that case, since your children won't know within 10 years of the deaths of you and your spouse what the size of their estates will be what the estate tax exclusion amount will be when they die, their trusts will probably accumulate the IRA distributions and pay tax at the top rate.

Choice 2, if your children are at least 27 or 28, is to leave your other assets to them in discretionary trusts for the reasons set forth above, and leave your traditional IRA to them in charitable remainder trusts to replicate the stretch. See my article on this in the April 2020 issue of Trusts & Estates: https://www.kkwc.com/wp-content/uploads ... 4_2020.pdf.
FWIW, current heirs are responsible individuals in their mid to low 30’s, and have decent careers. There are so many interesting articles on that web site so I will be a busy reader/learner for a while. Thanks so much for your time and the education.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

is50xenough wrote: Mon May 31, 2021 11:08 am ...
BTW, love to see your numbers that you got from RPM for all these options.
Thank you for your comments. I’ll see what I can do.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

is50xenough wrote: Mon May 31, 2021 11:08 am ...
BTW, love to see your numbers that you got from RPM for all these options.
Below are the results of the RPM models for Option 1 (do nothing but 1 ROTH IRA conversion in year #28 for all T-IRA holdings) and Option 3A (annual ROTH IRA conversion for 28 years while keeping AGI somewhat constant). For each option 2 sets of results are provided: annual stock/bond allocations for different account types (Taxable, ROTH Conversion, T-IRA) and individual account positions + itemized changes for taxable account. These are custom reports that I added to RPM. $ values are in K-$, and the headings should be self-explanatory.

Note that the cost of annual rebalancing are not modelled.

Option 1:

Image

Image

Option 3A:

Image

Image
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by is50xenough »

DSBH wrote: Mon May 31, 2021 10:11 pm
is50xenough wrote: Mon May 31, 2021 11:08 am ...
BTW, love to see your numbers that you got from RPM for all these options.
Below are the results of the RPM models for Option 1 (do nothing but 1 ROTH IRA conversion in year #28 for all T-IRA holdings) and Option 3A (annual ROTH IRA conversion for 28 years while keeping AGI somewhat constant). For each option 2 sets of results are provided: annual stock/bond allocations for different account types (Taxable, ROTH Conversion, T-IRA) and individual account positions + itemized changes for taxable account. These are custom reports that I added to RPM. $ values are in K-$, and the headings should be self-explanatory.

Note that the cost of annual rebalancing are not modelled.

Option 1:

Image

Image

Option 3A:

Image

Image
This is awesome, thanks for sharing.

Few comments:

1. This seems to confirm idea that total balance comparing Roth conversions to no conversions doesn't get ahead for you until mid 80s or later
2. Confirms that total dollars is only about 300k different between the two options, BUT
3. There is huge shift to Roth dollars which as others have pointed out are "worth" the most I've seen other BHs do some calculation like $1 in tax deferred is $1.15 in taxable and $1.25 in Roth, etc
4. I wonder if using larger Roth conversions will get more dollars into more stocks and further increase balance at 38th year despite higher yearly taxes?

Finally, and I know this is against conventional wisdom......you are in situation with little fear of running out of funds for yourself, therefore you are "investing for the heirs". Given this....

5. I wonder if you might run this using higher equity allocation in the IRA? And maybe the taxable as well? This would mean increasing total AA from 50:50 to maybe 70-80:20-30 but with no fear of running out, would you and your heirs be calculated to be in a better position dollar wise at year 38? I wonder/hypothesize that this could have significant impact on final totals rivaling the exact conversion strategies you describe in option 3 above.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

is50xenough wrote: Tue Jun 01, 2021 6:36 am Few comments:

1. This seems to confirm idea that total balance comparing Roth conversions to no conversions doesn't get ahead for you until mid 80s or later
If you compare the 2 cases on an after-tax basis (by discounting T-IRA by say 25%) you may see a different picture.
2. Confirms that total dollars is only about 300k different between the two options, BUT
3. There is huge shift to Roth dollars which as others have pointed out are "worth" the most I've seen other BHs do some calculation like $1 in tax deferred is $1.15 in taxable and $1.25 in Roth, etc
And hence one of the key benefits of ROTH IRA conversion for MFJ is when MFJ becomes Single for tax filing purpose.
4. I wonder if using larger Roth conversions will get more dollars into more stocks and further increase balance at 38th year despite higher yearly taxes?
Not necessarily, at least from what I saw with modelling different options.
Finally, and I know this is against conventional wisdom......you are in situation with little fear of running out of funds for yourself, therefore you are "investing for the heirs". Given this....

5. I wonder if you might run this using higher equity allocation in the IRA? And maybe the taxable as well? This would mean increasing total AA from 50:50 to maybe 70-80:20-30 but with no fear of running out, would you and your heirs be calculated to be in a better position dollar wise at year 38? I wonder/hypothesize that this could have significant impact on final totals rivaling the exact conversion strategies you describe in option 3 above.
Increasing AA stock allocation will generally increase the portfolio totals per the RPM models.

My key concern right now with portfolio AA is the realistic cost of maintaining a portfolio AA throughout the study period. In case 3A, the AA for the Taxable account moves from 100% stock to 100% bond in order to maintain a 50/50 AA for the portfolio throughout the study period. In this study in order to maintain the 50/50 portfolio AA I assigned stock to the ROTH IRA account first before the Taxable account; I will try reversing the priority and assign stock to Taxable before ROTH IRA (and so ROTH IRA account will have more bond holdings) to see if the rebalancing issue in Taxable can be alleviated.

Perhaps with hindsight, the idea of Equal Location or one-fund portfolio for all types of accounts could be a "good enough" alternative.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by is50xenough »

DSBH wrote: Tue Jun 01, 2021 9:54 am

2. Confirms that total dollars is only about 300k different between the two options, BUT
3. There is huge shift to Roth dollars which as others have pointed out are "worth" the most I've seen other BHs do some calculation like $1 in tax deferred is $1.15 in taxable and $1.25 in Roth, etc


And hence one of the key benefits of ROTH IRA conversion for MFJ is when MFJ becomes Single for tax filing purpose.
When I have played around by changing death age of one in a couple I was actually underwhelmed by the changes. Now this does not take into account unknown increases in future tax rates. But for most couples with this level savings and no medical issues seems like the earliest one might put first death into the calculator is about 80 years (barring future health issues that would allow prediction of demise). So only 10 years to get to 90. During this 10 years of filing Single one might expect a change in marginal tax rate at best from 24% to 37% and in your case possibly low 30%'s to 37% and this would be only on "last dollars" of income.

Have you found a big change playing with lifespan numbers?

My only other comment relates to adjusting for taxable vs tax deferred vs tax free. A wise financial guy once told me that at the decumulation phase he can control under what circumstances money comes out. While this is not true for RMDs for owner, there is likely much that could be done across beneficiaries/heirs if there are grandkids in the mix whose tax rates would likely be very very low. So if doing high level planning like you seem to be doing, I wonder if the "curve" between taxable, tax deferred and tax free could be flattened to a great degree.

Very much enjoying this discussion---appreciated!
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by Lee_WSP »

is50xenough wrote: Tue Jun 01, 2021 1:00 pm

When I have played around by changing death age of one in a couple I was actually underwhelmed by the changes. Now this does not take into account unknown increases in future tax rates. But for most couples with this level savings and no medical issues seems like the earliest one might put first death into the calculator is about 80 years (barring future health issues that would allow prediction of demise). So only 10 years to get to 90. During this 10 years of filing Single one might expect a change in marginal tax rate at best from 24% to 37% and in your case possibly low 30%'s to 37% and this would be only on "last dollars" of income.

Have you found a big change playing with lifespan numbers?
10 years is the average expected additional life of the surviving spouse. Unless the IRA is particularly large, the RMD bump is perfectly manageable, but wouldn't you rather have an extra $10,000 per $200,000 you withdraw? Roth conversions don't *have to* cost anything extra. Conversions on the bubble need to be analyzed on a case by case basis.

*Calculation based on this calculator going from single to MFJ: https://smartasset.com/taxes/income-taxes#cyuso19jiZ

My only other comment relates to adjusting for taxable vs tax deferred vs tax free. A wise financial guy once told me that at the decumulation phase he can control under what circumstances money comes out. While this is not true for RMDs for owner, there is likely much that could be done across beneficiaries/heirs if there are grandkids in the mix whose tax rates would likely be very very low. So if doing high level planning like you seem to be doing, I wonder if the "curve" between taxable, tax deferred and tax free could be flattened to a great degree.

Very much enjoying this discussion---appreciated!
The SECURE act has drastically changed the calculus behind estate planning for retirement accounts. It has changed from a "we'll just stretch out the payments over your lifetime, it'll be great" to simply minimizing the overall tax burden.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

is50xenough wrote: Tue Jun 01, 2021 1:00 pm ...
Have you found a big change playing with lifespan numbers?
Yes, the impact can vary depending on a particular scenario. For instance if you decide to do nothing, then a spouse passes away around the beginning of RMD time, the impact could be quite significant. This is the key driver for our decision to do ROTH IRA conversion.
My only other comment relates to adjusting for taxable vs tax deferred vs tax free. A wise financial guy once told me that at the decumulation phase he can control under what circumstances money comes out. While this is not true for RMDs for owner, there is likely much that could be done across beneficiaries/heirs if there are grandkids in the mix whose tax rates would likely be very very low. So if doing high level planning like you seem to be doing, I wonder if the "curve" between taxable, tax deferred and tax free could be flattened to a great degree.
So hypothetical (or more likely because of my ignorance on estate planning) that it's tough to say. Also, one of the important unknown is whether the step-up basis (upon death) will be maintained or not. Net net, one should make plan so that the plan(s) can be changed :happy
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by Lee_WSP »

DSBH wrote: Tue Jun 01, 2021 1:22 pm So hypothetical (or more likely because of my ignorance on estate planning) that it's tough to say. Also, one of the important unknown is whether the step-up basis (upon death) will be maintained or not. Net net, one should make plan so that the plan(s) can be changed :happy
There is no basis in retirement accounts. Your heirs will vastly prefer inheriting a Roth account over a taxable account and will prefer a taxable account to a trad account.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by J295 »

Not intending to hijack, but hoping someone can help me with the statement upthread that taxable IRA can be helpful in paying for long term care. Can someone help me with a brief explanation. Thank you.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by Lee_WSP »

J295 wrote: Tue Jun 01, 2021 1:33 pm Not intending to hijack, but hoping someone can help me with the statement upthread that taxable IRA can be helpful in paying for long term care. Can someone help me with a brief explanation. Thank you.
Medical bills can be deductible, so if you expect a large amount of medical bills, it is "cheaper" (taxed less) to take massive withdrawals from traditional accounts in years where you have large deductible expenses.

However, this logic can be applied to any deductible recurring or non-recurring expense and Roth conversions. Ie, when you have a large deductible medical expense, you can take the opportunity to both pay the bill with trad dollars and fill up the bracket by doing Roth conversions.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

Lee_WSP wrote: Tue Jun 01, 2021 1:24 pm
DSBH wrote: Tue Jun 01, 2021 1:22 pm So hypothetical (or more likely because of my ignorance on estate planning) that it's tough to say. Also, one of the important unknown is whether the step-up basis (upon death) will be maintained or not. Net net, one should make plan so that the plan(s) can be changed :happy
There is no basis in retirement accounts. Your heirs will vastly prefer inheriting a Roth account over a taxable account and will prefer a taxable account to a trad account.
Yes I am thinking about the Taxable account.

In particular for a desired 50/50 portfolio with 50% in Taxable (Stock Index) and 50% in T-IRA (Bond Index) - ignore tax-deferred impact for now:

A) if T-IRA bond holdings are all (or most) converted to ROTH IRA stock holdings then Taxable should be gradually converted to bonds to maintain a portfolio AA of 50/50, and that carries a cost of rebalancing in Taxable.

B) if T-IRA bond holdings are all (or most) converted to ROTH IRA (mostly) bond holdings then Taxable does not need to be converted to bonds to maintain a portfolio AA of 50/50. The step-up basis would help in this scenario upon death.

Not sure whether A) or B) is better or if there are other alternatives, or whether my reasoning is correct.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by Lee_WSP »

DSBH wrote: Tue Jun 01, 2021 1:37 pm
Lee_WSP wrote: Tue Jun 01, 2021 1:24 pm
DSBH wrote: Tue Jun 01, 2021 1:22 pm So hypothetical (or more likely because of my ignorance on estate planning) that it's tough to say. Also, one of the important unknown is whether the step-up basis (upon death) will be maintained or not. Net net, one should make plan so that the plan(s) can be changed :happy
There is no basis in retirement accounts. Your heirs will vastly prefer inheriting a Roth account over a taxable account and will prefer a taxable account to a trad account.
Yes I am thinking about the Taxable account.

In particular for a desired 50/50 portfolio with 50% in Taxable (Stock Index) and 50% in T-IRA (Bond Index) - ignore tax-deferred impact for now:

A) if T-IRA bond holdings are all (or most) converted to ROTH IRA stock holdings then Taxable should be gradually converted to bonds to maintain a portfolio AA of 50/50, and that carries a cost of rebalancing in Taxable.

B) if T-IRA bond holdings are all (or most) converted to ROTH IRA (mostly) bond holdings then Taxable does not need to be converted to bonds to maintain a portfolio AA of 50/50. The step-up basis would help in this scenario upon death.

Not sure whether A) or B) is better or if there are other alternatives, or whether my reasoning is correct.
You will not be alive when your heirs inherit, therefore it does not benefit you personally to pay more in taxes to shift to an AA that your heirs may or may not prefer.

Once you are in retirement, the equities in Roth rule no longer applies. But to reduce dividend taxes, keeping them in Roth is preferred.
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

Lee_WSP wrote: Tue Jun 01, 2021 1:40 pm You will not be alive when your heirs inherit, therefore it does not benefit you personally to pay more in taxes to shift to an AA that your heirs may or may not prefer.
I am also thinking about the case when heir is the surviving spouse.
John C. Bogle: "Never confuse genius with luck and a bull market".
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by Lee_WSP »

DSBH wrote: Tue Jun 01, 2021 1:48 pm
Lee_WSP wrote: Tue Jun 01, 2021 1:40 pm You will not be alive when your heirs inherit, therefore it does not benefit you personally to pay more in taxes to shift to an AA that your heirs may or may not prefer.
I am also thinking about the case when heir is the surviving spouse.
The secure act has not changed the calculations for surviving spouses. Surviving spouses should more or less be treated as though the marriage continues through the survivor, but the tax brackets become compressed. IMO.
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DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

J295 wrote: Tue Jun 01, 2021 1:33 pm Not intending to hijack, but hoping someone can help me with the statement upthread that taxable IRA can be helpful in paying for long term care. Can someone help me with a brief explanation. Thank you.
Not to hijack my own thread but long ago someone sent me a numerical example as shown below. - hope it helps.

65-year old (or older) Texas couples filing tax jointly and taking itemized deduction (mainly due to medical expenses paid from T-IRA distribution).

Total income of $170000 from following sources: $60000 (SS) + $10000 (dividends/interests/capital gains) + $100000 (T-IRA distribution)

AGI = (0.85 * 60,000) + 10,000 + 100,000 = 161,000 since 85% of SS is taxable in this case
Total Itemized Deductions = 99,125
Medical expense deduction = 100,000 - (7.5% * 161,000) = 87,925
Property tax deduction of $10000
Charity deduction of $1200
Taxable income = 161,000 - 99,125 = 61,875
Assuming that all 10,000 are ordinary dividend, the 2020 tax is 5,830.

You can double check tax calculations with https://www.mortgagecalculator.org/calc ... ulator.php
John C. Bogle: "Never confuse genius with luck and a bull market".
markcoop
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by markcoop »

When I look at some of these spreadsheets (above and elsewhere), I get a bit confused on whether all the units are in today dollars or future dollars, or perhaps some mix that really doesn't make sense. My gut has been that some of these problems are overstated because many of the parts (ie., tax brackets, IRMAA levels) are indexed to inflation (SS taxation is not) but not shown that way in these spreadsheets.
Mark
is50xenough
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by is50xenough »

markcoop wrote: Tue Jun 01, 2021 2:50 pm When I look at some of these spreadsheets (above and elsewhere), I get a bit confused on whether all the units are in today dollars or future dollars, or perhaps some mix that really doesn't make sense. My gut has been that some of these problems are overstated because many of the parts (ie., tax brackets, IRMAA levels) are indexed to inflation (SS taxation is not) but not shown that way in these spreadsheets.
Seems to be today's dollars since starts at described amounts in original posts and rises or decreases in expected fashion. Do you not think that the types of shifts in account balances is overstated?
is50xenough
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by is50xenough »

DSBH wrote: Tue Jun 01, 2021 1:22 pm
is50xenough wrote: Tue Jun 01, 2021 1:00 pm ...
Have you found a big change playing with lifespan numbers?
Yes, the impact can vary depending on a particular scenario. For instance if you decide to do nothing, then a spouse passes away around the beginning of RMD time, the impact could be quite significant. This is the key driver for our decision to do ROTH IRA conversion.
My only other comment relates to adjusting for taxable vs tax deferred vs tax free. A wise financial guy once told me that at the decumulation phase he can control under what circumstances money comes out. While this is not true for RMDs for owner, there is likely much that could be done across beneficiaries/heirs if there are grandkids in the mix whose tax rates would likely be very very low. So if doing high level planning like you seem to be doing, I wonder if the "curve" between taxable, tax deferred and tax free could be flattened to a great degree.
So hypothetical (or more likely because of my ignorance on estate planning) that it's tough to say. Also, one of the important unknown is whether the step-up basis (upon death) will be maintained or not. Net net, one should make plan so that the plan(s) can be changed :happy
Absolutely agree that in event of surprise early death that conversions before 70-72 years will be help to surviving spouse.
Also on board with flexibility. Suspect that input from expert in estate planning might be helpful and worth the dollars in this case. Thus the BSteiner comments very worth studying.

One issue is setting up plan today to take advantage of current estate limits that is flexible enough to not be sorry in future if other unexpected changes occur......

Good luck, love to know what you eventually decide.
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DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

markcoop wrote: Tue Jun 01, 2021 2:50 pm When I look at some of these spreadsheets (above and elsewhere), I get a bit confused on whether all the units are in today dollars or future dollars, or perhaps some mix that really doesn't make sense.
Please refer to the RPM author's comments here - "... The model is designed to show nominal results ..." - viewtopic.php?f=2&t=97352&p=4375227#p4375227
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markcoop
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by markcoop »

DSBH wrote: Tue Jun 01, 2021 3:27 pm
markcoop wrote: Tue Jun 01, 2021 2:50 pm When I look at some of these spreadsheets (above and elsewhere), I get a bit confused on whether all the units are in today dollars or future dollars, or perhaps some mix that really doesn't make sense.
Please refer to the RPM author's comments here - "... The model is designed to show nominal results ..." - viewtopic.php?f=2&t=97352&p=4375227#p4375227
So if it's nominal, then are the columns labeled "Taxes" adjusted for future tax brackets based on inflation?

I wasn't trying to criticize the spreadsheet above. I made my own spreadsheet and my head was spinning trying to keep all things in the same units (real or nominal).

EDIT: Looking at the spreadsheet, which I had downloaded in the past, I think the tax brackets are adjusted for inflation. There's a Tax Tables tab that has a field "Inflation adjustment for future years" and a tax bracket rounding factor.
Mark
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DSBH
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by DSBH »

markcoop wrote: Tue Jun 01, 2021 3:38 pm
DSBH wrote: Tue Jun 01, 2021 3:27 pm
markcoop wrote: Tue Jun 01, 2021 2:50 pm When I look at some of these spreadsheets (above and elsewhere), I get a bit confused on whether all the units are in today dollars or future dollars, or perhaps some mix that really doesn't make sense.
Please refer to the RPM author's comments here - "... The model is designed to show nominal results ..." - viewtopic.php?f=2&t=97352&p=4375227#p4375227
...
EDIT: Looking at the spreadsheet, which I had downloaded in the past, I think the tax brackets are adjusted for inflation. There's a Tax Tables tab that has a field "Inflation adjustment for future years" and a tax bracket rounding factor.
There is an option to do so. below are the comments on that option:

"Enter 'y' to escalate the Federal and state standard deduction and personal exemption amounts, and tax brackets by the historic escalation rate as set in the Tax Tables page and shown here. This is recommended if an inflation rate is also entered for expenses.

Enter 'n' to use the current year deduction and exemption amounts and tax brackets in all years. This may be useful to test a future year's taxable income amounts with other calculation tools, such as Turbotax TaxCaster, to confirm this model's accuracy.

Default: y"
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The Stone Wall
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Re: ROTH IRA conversion approaches for Over-saved T-IRA

Post by The Stone Wall »

I like the idea of more uniform conversions over time rather than waiting to the end. Given your assets, I would not try to maintain/model a 50:50 allocation. You will never run out of money for any of your needs. Bonds should be in the IRA, but once money is tranferred out, it should be in stocks. A model of this scenario will likely show a significant difference in your final totals (for heirs and charities).
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