Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

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EdNorton
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Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by EdNorton » Tue Jan 08, 2019 2:43 pm

I like to get the thoughts of this community. Trying to decide which would be best, moving money to a Roth @ 12% tax rate or take long term capital gains at a 0% tax rate.

My income should be about $25k in pensions, $3K in part time job at golf course, $2K misc, so roughly $30K in regularly taxed income. I'm also projecting $12K in qualified dividend income. If I take $60K in long term capital gains, for 2019, I would have the following tax situation:

Pensions, misc income $30,000
Qualified Dividends $12,000
L/T Cap Gains $60,000
=========
AGI $102,000

Tax on
Regular Income $600
Div and Cap Gains 90
========
Total Fed Inc Tax $690

If instead of $60K in LTCG, I move $60K to my Roth from my IRA, the tax would be as follows:

Pensions, misc income $30,000
Qualified Dividends $12,000
IRA Distribution $60,000
=========
AGI $102,000

Tax on
Regular Income $7,484
Div and Cap Gains $0
========
Total Fed Inc Tax $7,484

For 2018, I went with the taking the LTCG tax free as my tax situation was almost the same example as above.

The above examples were for MFJ and standard deduction. I used a tax calculator at www.moneychimp.com.

I have about $1,000,000 in IRA's and about the same in taxable investments with unrealized gains of about $300K, so I could do thid for a few years.

Thanks for any input I get.
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02nz
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by 02nz » Tue Jan 08, 2019 3:07 pm

How long before RMDs? How many years before you get SS? If either/both are looming within the next 5-10 years, I'd tilt toward drawing/converting out of the tIRA to lower RMD amounts and reduce exposure of SS benefits to income taxes. Otherwise, it may be better to take more taxable first, since these otherwise have some tax drag (how much really depends on your specific investments). But taxable investments are more flexible, so if you plan to do something like a Roth conversion ladder you'll want to hold onto some of your taxable money for living expenses while the Roth conversions are in their five-year "seasoning" window (which doesn't apply once you reach age 59.5 - so these answers really depend on your circumstances and plans).

Topic Author
EdNorton
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by EdNorton » Tue Jan 08, 2019 3:24 pm

Good question, I should have mentioned that. I will have to take RMD's in 2027 and the wife the following year.

I haven't factored in SS. Based on a calculator I found on this board, We would be better off if the wife takes early, but that only factors in SS, not everything.
Outside a dog, a book is man's best friend, inside a dog, it's too dark to read - Groucho

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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by aristotelian » Tue Jan 08, 2019 3:35 pm

How much unrealized gains do you have in taxable account?

I would also be inclined to do Roth conversions. Money in the IRA will be subject to RMD's. You can let the gains sit in your taxable account in perpetuity and the basis will step up for your heirs, whereas RMD's will all be taxed as long as you are alive, and would be taxable for your heirs as well.

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EdNorton
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by EdNorton » Tue Jan 08, 2019 3:42 pm

As I said on OP, I have about $300K in unrealized cap gains. I'm leaning toward moving money to a Roth. I can always offset some gains against taxable losses if I have some.

For now, I think I will do the Roth conversion, not sure what the tax law or rates will be after 2020.
Outside a dog, a book is man's best friend, inside a dog, it's too dark to read - Groucho

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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by Meg77 » Tue Jan 08, 2019 3:46 pm

It's unclear how much you spend, but it sounds like you don't need any IRA distributions to live off. If you leave the IRA alone and it grows at 5% a year for 9 years, you'll have around $1.55MM when you are 70.5 and have to start taking RMDs. Based on today's calculators, that means your RMD will be around $59k in year one (it'll increase from there for a decade or so though if you only withdraw the minimum, peaking around $125k). Interestingly, at the start that's about the same amount you're considering converting to a Roth each year. In a way, you could look at this action as taking your RMDs nearly a decade earlier than you have to.

If tax rates stay the same (a big IF), you're looking at being in the same tax rate in your 70s when you're taking RMDs as you are now, barring the impact of social security. But it appears you'll be taxed on 85% of your SS benefits, so you're likely to be bumped up a tax bracket even if rates stay the same if you don't do Roth conversions now - unless you've drawn down taxable enough to substantially reduce your dividend/interest income by then.

It might be a toss up, and I'm interested to see what others have to say. Personally I think I wouldn't be doing Roth conversions now given the market is still near all time highs at the end of a historical bull run. If/when there's a 20% correction, that might be a good year to start conversions so you can get more shares converted to Roth with fewer dollars being taxed. But until then, harvesting your gains in the 0% tax bracket seems like a great idea. By doing so and buying at today's prices, you're also setting yourself up to be able to harvest losses when the market inevitably corrects. So when there is a correction, you'll be able to harvest some losses to offset even more gains and possibly eliminate all your accumulated gains - then there's only the ongoing Roth conversion to consider. At that point (by your mid 60s) I think I'd at least fill the 12% tax bracket with Roth conversions.

You're doing great either way though. :beer
"An investment in knowledge pays the best interest." - Benjamin Franklin

marcopolo
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by marcopolo » Tue Jan 08, 2019 5:45 pm

Meg77 wrote:
Tue Jan 08, 2019 3:46 pm
It's unclear how much you spend, but it sounds like you don't need any IRA distributions to live off. If you leave the IRA alone and it grows at 5% a year for 9 years, you'll have around $1.55MM when you are 70.5 and have to start taking RMDs. Based on today's calculators, that means your RMD will be around $59k in year one (it'll increase from there for a decade or so though if you only withdraw the minimum, peaking around $125k). Interestingly, at the start that's about the same amount you're considering converting to a Roth each year. In a way, you could look at this action as taking your RMDs nearly a decade earlier than you have to.

If tax rates stay the same (a big IF), you're looking at being in the same tax rate in your 70s when you're taking RMDs as you are now, barring the impact of social security. But it appears you'll be taxed on 85% of your SS benefits, so you're likely to be bumped up a tax bracket even if rates stay the same if you don't do Roth conversions now - unless you've drawn down taxable enough to substantially reduce your dividend/interest income by then.

It might be a toss up, and I'm interested to see what others have to say. Personally I think I wouldn't be doing Roth conversions now given the market is still near all time highs at the end of a historical bull run. If/when there's a 20% correction, that might be a good year to start conversions so you can get more shares converted to Roth with fewer dollars being taxed. But until then, harvesting your gains in the 0% tax bracket seems like a great idea. By doing so and buying at today's prices, you're also setting yourself up to be able to harvest losses when the market inevitably corrects. So when there is a correction, you'll be able to harvest some losses to offset even more gains and possibly eliminate all your accumulated gains - then there's only the ongoing Roth conversion to consider. At that point (by your mid 60s) I think I'd at least fill the 12% tax bracket with Roth conversions.

You're doing great either way though. :beer
Didn't we just have a 20% correction?
Once in a while you get shown the light, in the strangest of places if you look at it right.

noraz123
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by noraz123 » Tue Jan 08, 2019 6:04 pm

I'm curious to hear what others say. I'd lean towards the traditional IRA-->Roth Conversion. Eventually, someday, someone will be pay taxes on the money that comes out of the IRA. Not necessarily with the taxable account.

For example, if you have kids and more than enough money to last through retirement, then your children could inherit an IRA and will taxes. If they inherit equities in a taxable account, they get a step up in basis.

Also, there are other options available to you to avoid capital gains tax: (1) donate appreciated shared and (2) offset with potential tax loss harvesting. You would lose out on these options if you focused on harvesting gains vs. converting IRA.

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EdNorton
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by EdNorton » Tue Jan 08, 2019 8:37 pm

No kids to leave our money.

We've not had to take any withdrawals from our IRA's. We live on approximately $50k after tax per year. We have no debts at all.
Outside a dog, a book is man's best friend, inside a dog, it's too dark to read - Groucho

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FiveK
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by FiveK » Wed Jan 09, 2019 1:28 am

Depends on the specific circumstances, but more often than not the tIRA->Roth conversion wins in the long run.

The '0% LTCG or t->R' tab in the personal finance toolbox spreadsheet may be useful to assess your specific circumstances.

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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by Meg77 » Thu Jan 10, 2019 2:07 pm

marcopolo wrote:
Tue Jan 08, 2019 5:45 pm
Meg77 wrote:
Tue Jan 08, 2019 3:46 pm
It's unclear how much you spend, but it sounds like you don't need any IRA distributions to live off. If you leave the IRA alone and it grows at 5% a year for 9 years, you'll have around $1.55MM when you are 70.5 and have to start taking RMDs. Based on today's calculators, that means your RMD will be around $59k in year one (it'll increase from there for a decade or so though if you only withdraw the minimum, peaking around $125k). Interestingly, at the start that's about the same amount you're considering converting to a Roth each year. In a way, you could look at this action as taking your RMDs nearly a decade earlier than you have to.

If tax rates stay the same (a big IF), you're looking at being in the same tax rate in your 70s when you're taking RMDs as you are now, barring the impact of social security. But it appears you'll be taxed on 85% of your SS benefits, so you're likely to be bumped up a tax bracket even if rates stay the same if you don't do Roth conversions now - unless you've drawn down taxable enough to substantially reduce your dividend/interest income by then.

It might be a toss up, and I'm interested to see what others have to say. Personally I think I wouldn't be doing Roth conversions now given the market is still near all time highs at the end of a historical bull run. If/when there's a 20% correction, that might be a good year to start conversions so you can get more shares converted to Roth with fewer dollars being taxed. But until then, harvesting your gains in the 0% tax bracket seems like a great idea. By doing so and buying at today's prices, you're also setting yourself up to be able to harvest losses when the market inevitably corrects. So when there is a correction, you'll be able to harvest some losses to offset even more gains and possibly eliminate all your accumulated gains - then there's only the ongoing Roth conversion to consider. At that point (by your mid 60s) I think I'd at least fill the 12% tax bracket with Roth conversions.

You're doing great either way though. :beer
Didn't we just have a 20% correction?
I guess it depends what he's invested in. The S&P 500% appears to be appx 11.5% off it's high as of right now. Definitely not the worst time to sell if you need the funds, but technically the bull market is still going. It came close but I don't think it officially dipped 20% from peak to trough last month.
"An investment in knowledge pays the best interest." - Benjamin Franklin

marcopolo
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by marcopolo » Thu Jan 10, 2019 3:27 pm

Meg77 wrote:
Thu Jan 10, 2019 2:07 pm
marcopolo wrote:
Tue Jan 08, 2019 5:45 pm
Meg77 wrote:
Tue Jan 08, 2019 3:46 pm
It's unclear how much you spend, but it sounds like you don't need any IRA distributions to live off. If you leave the IRA alone and it grows at 5% a year for 9 years, you'll have around $1.55MM when you are 70.5 and have to start taking RMDs. Based on today's calculators, that means your RMD will be around $59k in year one (it'll increase from there for a decade or so though if you only withdraw the minimum, peaking around $125k). Interestingly, at the start that's about the same amount you're considering converting to a Roth each year. In a way, you could look at this action as taking your RMDs nearly a decade earlier than you have to.

If tax rates stay the same (a big IF), you're looking at being in the same tax rate in your 70s when you're taking RMDs as you are now, barring the impact of social security. But it appears you'll be taxed on 85% of your SS benefits, so you're likely to be bumped up a tax bracket even if rates stay the same if you don't do Roth conversions now - unless you've drawn down taxable enough to substantially reduce your dividend/interest income by then.

It might be a toss up, and I'm interested to see what others have to say. Personally I think I wouldn't be doing Roth conversions now given the market is still near all time highs at the end of a historical bull run. If/when there's a 20% correction, that might be a good year to start conversions so you can get more shares converted to Roth with fewer dollars being taxed. But until then, harvesting your gains in the 0% tax bracket seems like a great idea. By doing so and buying at today's prices, you're also setting yourself up to be able to harvest losses when the market inevitably corrects. So when there is a correction, you'll be able to harvest some losses to offset even more gains and possibly eliminate all your accumulated gains - then there's only the ongoing Roth conversion to consider. At that point (by your mid 60s) I think I'd at least fill the 12% tax bracket with Roth conversions.

You're doing great either way though. :beer
Didn't we just have a 20% correction?
I guess it depends what he's invested in. The S&P 500% appears to be appx 11.5% off it's high as of right now. Definitely not the worst time to sell if you need the funds, but technically the bull market is still going. It came close but I don't think it officially dipped 20% from peak to trough last month.
It has certainly has recovered a lot. But, at least on peak to trough basis, we did have a 20% correction.
The SP500 hit a high of 2940.91 on 9/21. It hit a recent low of 2346.58 on 12/26. That is a 20.2% drop.
I think the closing prices had a bout a 19.8% drop.

The larger point is that people seem to often be waiting around for a drop, and then don't actually pull the trigger when the drop comes, for whatever reason. If one were waiting for a 20% drop from the peak, it happened, and they missed it. Now what?, they may never see it that low again, or they may see it next week. In general, I think it is a bad idea to try to time the drops. If it makes sense to to do Roth conversion and/or LTCG, go ahead and do it. Waiting for some market action to get better deal on the Roth conversion seems like trying to get a little too cute with the trade. Maybe it will work out, or maybe one missed their chance, and it will just be more costly later.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by TheGreyingDuke » Thu Jan 10, 2019 3:31 pm

Does making qualified charitable distributions factor, if so that should be accounted for?
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by ThrustVectoring » Thu Jan 10, 2019 3:45 pm

Roth conversions are probably better. Long-term capital gains are often taxed at 0% anyhow if the money winds up getting donated to charity or left to heirs at death. Tax-deferred accounts only have the charity exemption, otherwise withdrawals are ordinary income for the heir.
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DrGoogle2017
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by DrGoogle2017 » Thu Jan 10, 2019 4:23 pm

If I were you, I would empty the TIRA by doing Roth conversion. You have about 8 years to empty that $1 Million, if you don’t count on any increase, which is unlikely. So about $125K per year approximately. You may pay about $150k of taxes on that $1 million, which is very good deal.

Edit to add, I’m hoping this $1 million in retirement is for two persons, if not it’s even worse tax situation. I thought about this after I posted the above. I would agressively converting even upto 22% bracket.

marcopolo
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by marcopolo » Thu Jan 10, 2019 7:00 pm

DrGoogle2017 wrote:
Thu Jan 10, 2019 4:23 pm
If I were you, I would empty the TIRA by doing Roth conversion. You have about 8 years to empty that $1 Million, if you don’t count on any increase, which is unlikely. So about $125K per year approximately. You may pay about $150k of taxes on that $1 million, which is very good deal.

Edit to add, I’m hoping this $1 million in retirement is for two persons, if not it’s even worse tax situation. I thought about this after I posted the above. I would agressively converting even upto 22% bracket.
Why empty it?

I would think it would be much more tax efficient to target a level that equalized tax rates before and after RMDs start.
Emptying would likely put OP in lower bracket later after paying higher rate to convert.
Once in a while you get shown the light, in the strangest of places if you look at it right.

DrGoogle2017
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by DrGoogle2017 » Thu Jan 10, 2019 8:09 pm

marcopolo wrote:
Thu Jan 10, 2019 7:00 pm
DrGoogle2017 wrote:
Thu Jan 10, 2019 4:23 pm
If I were you, I would empty the TIRA by doing Roth conversion. You have about 8 years to empty that $1 Million, if you don’t count on any increase, which is unlikely. So about $125K per year approximately. You may pay about $150k of taxes on that $1 million, which is very good deal.

Edit to add, I’m hoping this $1 million in retirement is for two persons, if not it’s even worse tax situation. I thought about this after I posted the above. I would agressively converting even upto 22% bracket.
Why empty it?

I would think it would be much more tax efficient to target a level that equalized tax rates before and after RMDs start.
Emptying would likely put OP in lower bracket later after paying higher rate to convert.
Because he has similar amount in after tax account. He can take LTCG then and pay 0%. With RMD it’s like noose hang around your neck, you can’t wiggle too much. Plus, if all this person has is SS for income, some states might not even tax you.

marcopolo
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by marcopolo » Thu Jan 10, 2019 8:48 pm

DrGoogle2017 wrote:
Thu Jan 10, 2019 8:09 pm
marcopolo wrote:
Thu Jan 10, 2019 7:00 pm
DrGoogle2017 wrote:
Thu Jan 10, 2019 4:23 pm
If I were you, I would empty the TIRA by doing Roth conversion. You have about 8 years to empty that $1 Million, if you don’t count on any increase, which is unlikely. So about $125K per year approximately. You may pay about $150k of taxes on that $1 million, which is very good deal.

Edit to add, I’m hoping this $1 million in retirement is for two persons, if not it’s even worse tax situation. I thought about this after I posted the above. I would agressively converting even upto 22% bracket.
Why empty it?

I would think it would be much more tax efficient to target a level that equalized tax rates before and after RMDs start.
Emptying would likely put OP in lower bracket later after paying higher rate to convert.
Because he has similar amount in after tax account. He can take LTCG then and pay 0%. With RMD it’s like noose hang around your neck, you can’t wiggle too much. Plus, if all this person has is SS for income, some states might not even tax you.
You are right that given the information, if he emptied his tIRA, he would be paying very little taxes post RMD age. Which precisely why he shouldn't empty it. Some money coming out of tIRA at that time would be taxed at 12%. Why would he want to pay 22% on that money now? He should be converting enough to balance his tax rates before and after RMD and SS kicks in.
Once in a while you get shown the light, in the strangest of places if you look at it right.

DrGoogle2017
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by DrGoogle2017 » Thu Jan 10, 2019 8:59 pm

marcopolo wrote:
Thu Jan 10, 2019 8:48 pm
DrGoogle2017 wrote:
Thu Jan 10, 2019 8:09 pm
marcopolo wrote:
Thu Jan 10, 2019 7:00 pm
DrGoogle2017 wrote:
Thu Jan 10, 2019 4:23 pm
If I were you, I would empty the TIRA by doing Roth conversion. You have about 8 years to empty that $1 Million, if you don’t count on any increase, which is unlikely. So about $125K per year approximately. You may pay about $150k of taxes on that $1 million, which is very good deal.

Edit to add, I’m hoping this $1 million in retirement is for two persons, if not it’s even worse tax situation. I thought about this after I posted the above. I would agressively converting even upto 22% bracket.
Why empty it?

I would think it would be much more tax efficient to target a level that equalized tax rates before and after RMDs start.
Emptying would likely put OP in lower bracket later after paying higher rate to convert.
Because he has similar amount in after tax account. He can take LTCG then and pay 0%. With RMD it’s like noose hang around your neck, you can’t wiggle too much. Plus, if all this person has is SS for income, some states might not even tax you.
You are right that given the information, if he emptied his tIRA, he would be paying very little taxes post RMD age. Which precisely why he shouldn't empty it. Some money coming out of tIRA at that time would be taxed at 12%. Why would he want to pay 22% on that money now? He should be converting enough to balance his tax rates before and after RMD and SS kicks in.
I agree to the last statement but I think it’s best to use a spreadsheet for different way to empty out your TIRA. I modeled 3 different scenarios on my own spreadsheet, not I-orp. You really see it much better. I have no conversion, conversion up until 12%, max conversion up until 22%. But RMD amount increases with age, if I remember correctly, it can be 10%, not sure when. So it could be like $100k on top of SS, pension and everything. $165k is the top of the bracket for 22%, so you don’t have much room. Plus $170k is when IRRMAA is kicked in for the next premium. So google for the exact amount, I’m just typing of my memory here. Plus if one spouse is not alive the bracket for single is a lot lower. This is why it’s best to empty the TIRA.

I had a chance to not pay any tax until my husband turns 70, but I had to byte the bullet and converting now and I want to do it agressively. Of course it depends on the size of your TIRA, and I also want have hiers to leave money to. I save my after tax money for last because my kids get stepped up value if we pass away.

marcopolo
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by marcopolo » Thu Jan 10, 2019 10:05 pm

DrGoogle2017 wrote:
Thu Jan 10, 2019 8:59 pm
marcopolo wrote:
Thu Jan 10, 2019 8:48 pm
DrGoogle2017 wrote:
Thu Jan 10, 2019 8:09 pm
marcopolo wrote:
Thu Jan 10, 2019 7:00 pm
DrGoogle2017 wrote:
Thu Jan 10, 2019 4:23 pm
If I were you, I would empty the TIRA by doing Roth conversion. You have about 8 years to empty that $1 Million, if you don’t count on any increase, which is unlikely. So about $125K per year approximately. You may pay about $150k of taxes on that $1 million, which is very good deal.

Edit to add, I’m hoping this $1 million in retirement is for two persons, if not it’s even worse tax situation. I thought about this after I posted the above. I would agressively converting even upto 22% bracket.
Why empty it?

I would think it would be much more tax efficient to target a level that equalized tax rates before and after RMDs start.
Emptying would likely put OP in lower bracket later after paying higher rate to convert.
Because he has similar amount in after tax account. He can take LTCG then and pay 0%. With RMD it’s like noose hang around your neck, you can’t wiggle too much. Plus, if all this person has is SS for income, some states might not even tax you.
You are right that given the information, if he emptied his tIRA, he would be paying very little taxes post RMD age. Which precisely why he shouldn't empty it. Some money coming out of tIRA at that time would be taxed at 12%. Why would he want to pay 22% on that money now? He should be converting enough to balance his tax rates before and after RMD and SS kicks in.
I agree to the last statement but I think it’s best to use a spreadsheet for different way to empty out your TIRA. I modeled 3 different scenarios on my own spreadsheet, not I-orp. You really see it much better. I have no conversion, conversion up until 12%, max conversion up until 22%. But RMD amount increases with age, if I remember correctly, it can be 10%, not sure when. So it could be like $100k on top of SS, pension and everything. $165k is the top of the bracket for 22%, so you don’t have much room. Plus $170k is when IRRMAA is kicked in for the next premium. So google for the exact amount, I’m just typing of my memory here. Plus if one spouse is not alive the bracket for single is a lot lower. This is why it’s best to empty the TIRA.

I had a chance to not pay any tax until my husband turns 70, but I had to byte the bullet and converting now and I want to do it agressively. Of course it depends on the size of your TIRA, and I also want have hiers to leave money to. I save my after tax money for last because my kids get stepped up value if we pass away.
Perhaps we are discussing scenarios in different income strata.

Unless one has a large pension, or a very large taxable portfolio throwing off a lot of taxable dividends, I don't see how the math makes it advantageous to convert ALL of your traditional to a Roth at relatively high rates. I am all for converting as much, and as early as possible, to balance tax rates.

Consider a typical scenario, using all real dollars. SS of about 40k, no pension. Taxable portfolio throwing off 20k in taxable dividends. Maybe selling some equities that incur another 10k of capital gains. So, that couple is up to about 70k of taxable income. That still leaves about 30k of space in the 12% bracket. even with a 6% RMD (age 83, 10% RMD is not until age 92), they could leave $500k in the tIRA. I don't see how paying 22% to convert those dollars now would make any sense.

Now, if one expects to be in the 22% bracket with just pensions, SS, and taxable dividends, before taking any RMD amounts, then converting up to top of 22% to empty the tIRA might make sense.

Math does change when one spouse passes.
Once in a while you get shown the light, in the strangest of places if you look at it right.

DrGoogle2017
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by DrGoogle2017 » Thu Jan 10, 2019 10:10 pm

marcopolo wrote:
Thu Jan 10, 2019 10:05 pm
DrGoogle2017 wrote:
Thu Jan 10, 2019 8:59 pm
marcopolo wrote:
Thu Jan 10, 2019 8:48 pm
DrGoogle2017 wrote:
Thu Jan 10, 2019 8:09 pm
marcopolo wrote:
Thu Jan 10, 2019 7:00 pm

Why empty it?

I would think it would be much more tax efficient to target a level that equalized tax rates before and after RMDs start.
Emptying would likely put OP in lower bracket later after paying higher rate to convert.
Because he has similar amount in after tax account. He can take LTCG then and pay 0%. With RMD it’s like noose hang around your neck, you can’t wiggle too much. Plus, if all this person has is SS for income, some states might not even tax you.
You are right that given the information, if he emptied his tIRA, he would be paying very little taxes post RMD age. Which precisely why he shouldn't empty it. Some money coming out of tIRA at that time would be taxed at 12%. Why would he want to pay 22% on that money now? He should be converting enough to balance his tax rates before and after RMD and SS kicks in.
I agree to the last statement but I think it’s best to use a spreadsheet for different way to empty out your TIRA. I modeled 3 different scenarios on my own spreadsheet, not I-orp. You really see it much better. I have no conversion, conversion up until 12%, max conversion up until 22%. But RMD amount increases with age, if I remember correctly, it can be 10%, not sure when. So it could be like $100k on top of SS, pension and everything. $165k is the top of the bracket for 22%, so you don’t have much room. Plus $170k is when IRRMAA is kicked in for the next premium. So google for the exact amount, I’m just typing of my memory here. Plus if one spouse is not alive the bracket for single is a lot lower. This is why it’s best to empty the TIRA.

I had a chance to not pay any tax until my husband turns 70, but I had to byte the bullet and converting now and I want to do it agressively. Of course it depends on the size of your TIRA, and I also want have hiers to leave money to. I save my after tax money for last because my kids get stepped up value if we pass away.
Perhaps we are discussing scenarios in different income strata.

Unless one has a large pension, or a very large taxable portfolio throwing off a lot of taxable dividends, I don't see how the math makes it advantageous to convert ALL of your traditional to a Roth at relatively high rates. I am all for converting as much, and as early as possible, to balance tax rates.

Consider a typical scenario, using all real dollars. SS of about 40k, no pension. Taxable portfolio throwing off 20k in taxable dividends. Maybe selling some equities that incur another 10k of capital gains. So, that couple is up to about 70k of taxable income. That still leaves about 30k of space in the 12% bracket. even with a 6% RMD (age 83, 10% RMD is not until age 92), they could leave $500k in the tIRA. I don't see how paying 22% to convert those dollars now would make any sense.

Now, if one expects to be in the 22% bracket with just pensions, SS, and taxable dividends, before taking any RMD amounts, then converting up to top of 22% to empty the tIRA might make sense.

Math does change when one spouse passes.
Possibly. I used to think it’s no brainer to convert to 12%, but last year I changed my mind. But it’s possible if the IRA is large that one cannot convert all. Maybe half is better than nothing.

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jeffyscott
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Re: Should I take $70K LTCG at 0% tax rate or transfer $70K from IRA to Roth @ 12%?

Post by jeffyscott » Fri Jan 11, 2019 12:39 pm

EdNorton wrote:
Tue Jan 08, 2019 8:37 pm
No kids to leave our money.

We've not had to take any withdrawals from our IRA's. We live on approximately $50k after tax per year. We have no debts at all.
We also have a low spending rate compared to our assets and pension income. I plan to Roth convert as much as possible at 12%, but not higher. Someday when there is one survivor, they will likely move into 22% tax bracket but unlikely that they would move to 24%. So I see no reason to go beyond the 12% bracket voluntarily, since even if my estimates are off it would only mean that some money is someday taxed at 24% rather than 22%.

We don't have a taxable account to speak of, but may have to start increasing that over time now. So I only recently started thinking about what to do with that and it seems to me that just leaving it alone makes the most sense :?: , since there will be a stepped up cost basis on it someday. Initially, I had thought cap gains harvesting at 0% to avoid 15% would make more sense than converting at 12% to avoid 22%, but that changed after learning about stepped up cost basis (especially in marital property state).
Time is your friend; impulse is your enemy. - John C. Bogle

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