Roth IRA Money Market Account for living expenses?

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Philx
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Joined: Sun Apr 18, 2021 6:34 am

Roth IRA Money Market Account for living expenses?

Post by Philx »

I am 60, retired and taking annual distributions from my IRA for living expenses. The distribution is moved into a brokerage money market account and it is drawn on throughout the year. The dividends earned on the funds are taxed and I would like to avoid that.

If I were to open a money market account within my existing Roth IRA and convert the funds to a Roth Money Market could the funds be used like the brokerage account described above, while earning a tax free dividend? My understanding is there are no restrictions or waiting periods after 59.5 years of age.

Thanks for your feedback
Phil
KlangFool
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Re: Roth IRA Money Market Account for living expenses?

Post by KlangFool »

OP,

You are missing the big item for the taxes. The distribution. It is not the dividend that cause the most taxes.

Please provide more details if you want to optimize your withdrawal.

KlangFool
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kardan
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Re: Roth IRA Money Market Account for living expenses?

Post by kardan »

KlangFool wrote: Tue May 14, 2024 6:43 am OP,

You are missing the big item for the taxes. The distribution. It is not the dividend that cause the most taxes.

KlangFool
How is there tax on a distribution from a Roth?

OP,

Yes, you could open a money market in your Roth account. Instead of one Roth distribution a year, you would do them periodically as the money is needed.
KlangFool
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Re: Roth IRA Money Market Account for living expenses?

Post by KlangFool »

kardan wrote: Tue May 14, 2024 7:21 am
KlangFool wrote: Tue May 14, 2024 6:43 am OP,

You are missing the big item for the taxes. The distribution. It is not the dividend that cause the most taxes.

KlangFool
How is there tax on a distribution from a Roth?

OP,

Yes, you could open a money market in your Roth account. Instead of one Roth distribution a year, you would do them periodically as the money is needed.
kardan,

How do you know that the distribution is from a Roth IRA? It is most likely not.

KlangFool
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RyeBourbon
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Re: Roth IRA Money Market Account for living expenses?

Post by RyeBourbon »

I plan to do a Roth conversion at the beginning of each year, hold T-bills and MM in Roth and spend that down during the year. It will allow me to control my AGI (which will not necessarily match my spending) and avoid taxes on the interest accrued during the year. Any funds I don't expect to spend during the year will go into Total Stock Index (FZROX).
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 70/0/30
Silk McCue
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Re: Roth IRA Money Market Account for living expenses?

Post by Silk McCue »

We do what the OP proposes.

In our 4th year of retirement ages 63/65. In January we converted funds to Roth that will be drawn down and spent throughout 2024 and placed them in the Money Market fund. Its growth is tax free. I learned about this approach from others here.

At age 59.5 and with the first ever Roth opened 5 years or more there are no limitations on withdrawals from Roth. If those conditions are not met there are implications to be considered.

Cheers
kardan
Posts: 118
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Re: Roth IRA Money Market Account for living expenses?

Post by kardan »

KlangFool wrote: Tue May 14, 2024 7:33 am
kardan wrote: Tue May 14, 2024 7:21 am
KlangFool wrote: Tue May 14, 2024 6:43 am OP,

You are missing the big item for the taxes. The distribution. It is not the dividend that cause the most taxes.

KlangFool
How is there tax on a distribution from a Roth?

OP,

Yes, you could open a money market in your Roth account. Instead of one Roth distribution a year, you would do them periodically as the money is needed.
kardan,

How do you know that the distribution is from a Roth IRA? It is most likely not.

KlangFool
KlangFool,

The OP stated they are taking distributions from their IRA and moving the funds to their brokerage money market for LIVING EXPENSES. It is irrelevant if the funds are coming from a Roth or traditional since the OP will be transferring them for living expenses regardless.
KlangFool
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Re: Roth IRA Money Market Account for living expenses?

Post by KlangFool »

kardan wrote: Tue May 14, 2024 8:06 am
KlangFool wrote: Tue May 14, 2024 7:33 am
kardan wrote: Tue May 14, 2024 7:21 am
KlangFool wrote: Tue May 14, 2024 6:43 am OP,

You are missing the big item for the taxes. The distribution. It is not the dividend that cause the most taxes.

KlangFool
How is there tax on a distribution from a Roth?

OP,

Yes, you could open a money market in your Roth account. Instead of one Roth distribution a year, you would do them periodically as the money is needed.
kardan,

How do you know that the distribution is from a Roth IRA? It is most likely not.

KlangFool
KlangFool,

The OP stated they are taking distributions from their IRA and moving the funds to their brokerage money market for LIVING EXPENSES. It is irrelevant if the funds are coming from a Roth or traditional since the OP will be transferring them for living expenses regardless.
It matters because distribution from Trad IRA generates taxable income. And, that is a bigger taxable amount than the dividend.

KlangFool
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Silk McCue
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Re: Roth IRA Money Market Account for living expenses?

Post by Silk McCue »

KlangFool wrote: Tue May 14, 2024 8:12 am
kardan wrote: Tue May 14, 2024 8:06 am
KlangFool wrote: Tue May 14, 2024 7:33 am
kardan wrote: Tue May 14, 2024 7:21 am
KlangFool wrote: Tue May 14, 2024 6:43 am OP,

You are missing the big item for the taxes. The distribution. It is not the dividend that cause the most taxes.

KlangFool
How is there tax on a distribution from a Roth?

OP,

Yes, you could open a money market in your Roth account. Instead of one Roth distribution a year, you would do them periodically as the money is needed.
kardan,

How do you know that the distribution is from a Roth IRA? It is most likely not.

KlangFool
KlangFool,

The OP stated they are taking distributions from their IRA and moving the funds to their brokerage money market for LIVING EXPENSES. It is irrelevant if the funds are coming from a Roth or traditional since the OP will be transferring them for living expenses regardless.
It matters because distribution from Trad IRA generates taxable income. And, that is a bigger taxable amount than the dividend.

KlangFool
I suggest you reread their post including the second paragraph. It is crystal clear that their intent is to convert to Roth and then withdraw from Roth including returns from the money market fund.

As posted above, this is what we do as well as some other Bogleheads from whom I got the idea.

Cheers
avalpert1
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

Why bother with the added step of moving funds from the IRA to a Roth - just put your anticipated living expenses for the year in a money market fund in the IRA and withdraw as needed, that has the added benefit of not creating more taxable income then you end up needing.
avalpert1
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

RyeBourbon wrote: Tue May 14, 2024 7:37 am I plan to do a Roth conversion at the beginning of each year, hold T-bills and MM in Roth and spend that down during the year. It will allow me to control my AGI (which will not necessarily match my spending) and avoid taxes on the interest accrued during the year. Any funds I don't expect to spend during the year will go into Total Stock Index (FZROX).
How does doing a Roth conversion at the beginning of each yead allow you to control your AGI? By doing it at the beginning you are locking in income before you know what other income you might have (from say taxable dividends and interest). Wouldn't you be able to control it more by withdrawing from your IRA as you spend and doing a conversion at the end of the year (or not) of whatever amount of additional taxable income you want to generate for the year?
RyeBourbon
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Re: Roth IRA Money Market Account for living expenses?

Post by RyeBourbon »

avalpert1 wrote: Tue May 14, 2024 9:01 am
RyeBourbon wrote: Tue May 14, 2024 7:37 am I plan to do a Roth conversion at the beginning of each year, hold T-bills and MM in Roth and spend that down during the year. It will allow me to control my AGI (which will not necessarily match my spending) and avoid taxes on the interest accrued during the year. Any funds I don't expect to spend during the year will go into Total Stock Index (FZROX).
How does doing a Roth conversion at the beginning of each yead allow you to control your AGI? By doing it at the beginning you are locking in income before you know what other income you might have (from say taxable dividends and interest). Wouldn't you be able to control it more by withdrawing from your IRA as you spend and doing a conversion at the end of the year (or not) of whatever amount of additional taxable income you want to generate for the year?
The plan would be to do about 75% at the beginning of the year and then the rest in 4th quarter when the numbers are clearer. We won't have much in the way of taxable interest and dividends.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 70/0/30
dkturner
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Re: Roth IRA Money Market Account for living expenses?

Post by dkturner »

KlangFool wrote: Tue May 14, 2024 8:12 am
kardan wrote: Tue May 14, 2024 8:06 am
KlangFool wrote: Tue May 14, 2024 7:33 am
kardan wrote: Tue May 14, 2024 7:21 am
KlangFool wrote: Tue May 14, 2024 6:43 am OP,

You are missing the big item for the taxes. The distribution. It is not the dividend that cause the most taxes.

KlangFool
How is there tax on a distribution from a Roth?

OP,

Yes, you could open a money market in your Roth account. Instead of one Roth distribution a year, you would do them periodically as the money is needed.
kardan,

How do you know that the distribution is from a Roth IRA? It is most likely not.

KlangFool
KlangFool,

The OP stated they are taking distributions from their IRA and moving the funds to their brokerage money market for LIVING EXPENSES. It is irrelevant if the funds are coming from a Roth or traditional since the OP will be transferring them for living expenses regardless.
It matters because distribution from Trad IRA generates taxable income. And, that is a bigger taxable amount than the dividend.

KlangFool
The OP is going to start taking distributions from an EXISTING Roth IRA.
avalpert1
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

RyeBourbon wrote: Tue May 14, 2024 9:04 am
avalpert1 wrote: Tue May 14, 2024 9:01 am
RyeBourbon wrote: Tue May 14, 2024 7:37 am I plan to do a Roth conversion at the beginning of each year, hold T-bills and MM in Roth and spend that down during the year. It will allow me to control my AGI (which will not necessarily match my spending) and avoid taxes on the interest accrued during the year. Any funds I don't expect to spend during the year will go into Total Stock Index (FZROX).
How does doing a Roth conversion at the beginning of each yead allow you to control your AGI? By doing it at the beginning you are locking in income before you know what other income you might have (from say taxable dividends and interest). Wouldn't you be able to control it more by withdrawing from your IRA as you spend and doing a conversion at the end of the year (or not) of whatever amount of additional taxable income you want to generate for the year?
The plan would be to do about 75% at the beginning of the year and then the rest in 4th quarter when the numbers are clearer. We won't have much in the way of taxable interest and dividends.
Still not sure I understand the advantage to doing it that way rather than just withdrawing from the IRA as you go - all you are doing is adding a transaction for no apparent benefit.
RyeBourbon
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Re: Roth IRA Money Market Account for living expenses?

Post by RyeBourbon »

avalpert1 wrote: Tue May 14, 2024 9:09 am
RyeBourbon wrote: Tue May 14, 2024 9:04 am
avalpert1 wrote: Tue May 14, 2024 9:01 am
RyeBourbon wrote: Tue May 14, 2024 7:37 am I plan to do a Roth conversion at the beginning of each year, hold T-bills and MM in Roth and spend that down during the year. It will allow me to control my AGI (which will not necessarily match my spending) and avoid taxes on the interest accrued during the year. Any funds I don't expect to spend during the year will go into Total Stock Index (FZROX).
How does doing a Roth conversion at the beginning of each yead allow you to control your AGI? By doing it at the beginning you are locking in income before you know what other income you might have (from say taxable dividends and interest). Wouldn't you be able to control it more by withdrawing from your IRA as you spend and doing a conversion at the end of the year (or not) of whatever amount of additional taxable income you want to generate for the year?
The plan would be to do about 75% at the beginning of the year and then the rest in 4th quarter when the numbers are clearer. We won't have much in the way of taxable interest and dividends.
Still not sure I understand the advantage to doing it that way rather than just withdrawing from the IRA as you go - all you are doing is adding a transaction for no apparent benefit.
Thanks for your input.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 70/0/30
Silk McCue
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Re: Roth IRA Money Market Account for living expenses?

Post by Silk McCue »

avalpert1 wrote: Tue May 14, 2024 8:58 am Why bother with the added step of moving funds from the IRA to a Roth - just put your anticipated living expenses for the year in a money market fund in the IRA and withdraw as needed, that has the added benefit of not creating more taxable income then you end up needing.
With current money market rates we have an extra $1200 or so spend without taxes due using this approach. We fill the 12% bracket intentionally so there is no harm no foul if we don’t spend it all.

Cheers
avalpert1
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

Silk McCue wrote: Tue May 14, 2024 9:12 am
avalpert1 wrote: Tue May 14, 2024 8:58 am Why bother with the added step of moving funds from the IRA to a Roth - just put your anticipated living expenses for the year in a money market fund in the IRA and withdraw as needed, that has the added benefit of not creating more taxable income then you end up needing.
With current money market rates we have an extra $1200 or so spend without taxes due using this approach. We fill the 12% bracket intentionally so there is no harm no foul if we don’t spend it all.

Cheers
You get the same tax free growth if you put it in a money market in the traditional IRA (since you are managing your tax bracket you know the income tax rate on future withdrawal will be identical).
RyeBourbon
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Re: Roth IRA Money Market Account for living expenses?

Post by RyeBourbon »

avalpert1 wrote: Tue May 14, 2024 9:26 am
Silk McCue wrote: Tue May 14, 2024 9:12 am
avalpert1 wrote: Tue May 14, 2024 8:58 am Why bother with the added step of moving funds from the IRA to a Roth - just put your anticipated living expenses for the year in a money market fund in the IRA and withdraw as needed, that has the added benefit of not creating more taxable income then you end up needing.
With current money market rates we have an extra $1200 or so spend without taxes due using this approach. We fill the 12% bracket intentionally so there is no harm no foul if we don’t spend it all.

Cheers
You get the same tax free growth if you put it in a money market in the traditional IRA (since you are managing your tax bracket you know the income tax rate on future withdrawal will be identical).
tax-deferred, not tax-free
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avalpert1
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

RyeBourbon wrote: Tue May 14, 2024 9:37 am
avalpert1 wrote: Tue May 14, 2024 9:26 am
Silk McCue wrote: Tue May 14, 2024 9:12 am
avalpert1 wrote: Tue May 14, 2024 8:58 am Why bother with the added step of moving funds from the IRA to a Roth - just put your anticipated living expenses for the year in a money market fund in the IRA and withdraw as needed, that has the added benefit of not creating more taxable income then you end up needing.
With current money market rates we have an extra $1200 or so spend without taxes due using this approach. We fill the 12% bracket intentionally so there is no harm no foul if we don’t spend it all.

Cheers
You get the same tax free growth if you put it in a money market in the traditional IRA (since you are managing your tax bracket you know the income tax rate on future withdrawal will be identical).
tax-deferred, not tax-free
No, the gains are tax free... all you pay taxes on are the original income, whether you pay 12% taxes up front with a Roth or 12% later when you withdraw with Traditional - in the latter case you also happen to pay the gains on that 12% of original income, but you still don't pay any taxes on the 88% of original income that you keep after income taxes.
Silk McCue
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Re: Roth IRA Money Market Account for living expenses?

Post by Silk McCue »

:twisted:
avalpert1 wrote: Tue May 14, 2024 10:21 am
RyeBourbon wrote: Tue May 14, 2024 9:37 am
avalpert1 wrote: Tue May 14, 2024 9:26 am
Silk McCue wrote: Tue May 14, 2024 9:12 am
avalpert1 wrote: Tue May 14, 2024 8:58 am Why bother with the added step of moving funds from the IRA to a Roth - just put your anticipated living expenses for the year in a money market fund in the IRA and withdraw as needed, that has the added benefit of not creating more taxable income then you end up needing.
With current money market rates we have an extra $1200 or so spend without taxes due using this approach. We fill the 12% bracket intentionally so there is no harm no foul if we don’t spend it all.

Cheers
You get the same tax free growth if you put it in a money market in the traditional IRA (since you are managing your tax bracket you know the income tax rate on future withdrawal will be identical).
tax-deferred, not tax-free
No, the gains are tax free... all you pay taxes on are the original income, whether you pay 12% taxes up front with a Roth or 12% later when you withdraw with Traditional - in the latter case you also happen to pay the gains on that 12% of original income, but you still don't pay any taxes on the 88% of original income that you keep after income taxes.
Your argument/example does not apply to the situation that I described and which the OP is discussing.

Had I not converted to the top of the 12% as described for our additional spending money in the current tax year we would have to pay 22% taxes on the $1200 growth upon withdrawal as it would have occurred in the IRA this year vs the Roth.

You appear to be discussing a broader generic situation comparing converting and paying taxes versus not converting in the same tax bracket.

Cheers
Last edited by Silk McCue on Tue May 14, 2024 11:10 am, edited 3 times in total.
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celia
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Re: Roth IRA Money Market Account for living expenses?

Post by celia »

avalpert1 wrote: Tue May 14, 2024 10:21 am
RyeBourbon wrote: Tue May 14, 2024 9:37 am
avalpert1 wrote: Tue May 14, 2024 9:26 am You get the same tax free growth if you put it in a money market in the traditional IRA (since you are managing your tax bracket you know the income tax rate on future withdrawal will be identical).
tax-deferred, not tax-free
No, the gains are tax free... all you pay taxes on are the original income, whether you pay 12% taxes up front with a Roth or 12% later when you withdraw with Traditional - in the latter case you also happen to pay the gains on that 12% of original income, but you still don't pay any taxes on the 88% of original income that you keep after income taxes.
Every dollar in the Traditional IRA is tax-deferred (unless you have made non-deductible contributions along the way). Every dollar removed from the tIRA will be taxed as it is withdrawn (except for QCDs after age 70.5). And this is all independent of which tax bracket you are in.



Returning to the original question, you could put your expected expenses in the Roth until the money is actually needed, but only until RMDs start. Once you are subject to them, the RMD must be put in a taxable account (or donated as a QCD). And the RMD must be from the first dollars withdrawn before any Roth conversions are done.

So OP could do as proposed for a few years, but not forever. If married, and the spouse was born in a different year, the couple needs to pay attention to which TiRA needs to first take an RMD.
Last edited by celia on Tue May 14, 2024 11:13 am, edited 1 time in total.
avalpert1
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

celia wrote: Tue May 14, 2024 11:06 am
avalpert1 wrote: Tue May 14, 2024 10:21 am
RyeBourbon wrote: Tue May 14, 2024 9:37 am
avalpert1 wrote: Tue May 14, 2024 9:26 am You get the same tax free growth if you put it in a money market in the traditional IRA (since you are managing your tax bracket you know the income tax rate on future withdrawal will be identical).
tax-deferred, not tax-free
No, the gains are tax free... all you pay taxes on are the original income, whether you pay 12% taxes up front with a Roth or 12% later when you withdraw with Traditional - in the latter case you also happen to pay the gains on that 12% of original income, but you still don't pay any taxes on the 88% of original income that you keep after income taxes.
Every dollar in the Traditional IRA is tax-deferred (unless you have made non-deductible contributions along the way). Every dollar removed from the tIRA will be taxed as it is withdrawn (except for QCDs after age 70.5). And this is all independent of which tax bracket you are in.
Again, that isn't really what is happening - and that misunderstand leads to an overvaluation of Roth relative to Traditional. In both cases growth is tax free, the only difference is when you pay taxes on the income (and thus potentially at what marginal rate). That is why, with the same marginal rate Roth and Traditional post-tax outcomes are identical.
avalpert1
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

Silk McCue wrote: Tue May 14, 2024 11:02 am :twisted:
avalpert1 wrote: Tue May 14, 2024 10:21 am
RyeBourbon wrote: Tue May 14, 2024 9:37 am
avalpert1 wrote: Tue May 14, 2024 9:26 am
Silk McCue wrote: Tue May 14, 2024 9:12 am

With current money market rates we have an extra $1200 or so spend without taxes due using this approach. We fill the 12% bracket intentionally so there is no harm no foul if we don’t spend it all.

Cheers
You get the same tax free growth if you put it in a money market in the traditional IRA (since you are managing your tax bracket you know the income tax rate on future withdrawal will be identical).
tax-deferred, not tax-free
No, the gains are tax free... all you pay taxes on are the original income, whether you pay 12% taxes up front with a Roth or 12% later when you withdraw with Traditional - in the latter case you also happen to pay the gains on that 12% of original income, but you still don't pay any taxes on the 88% of original income that you keep after income taxes.
Your argument/example does not apply to the situation that I described and which the OP is discussing.

Had I not converted to the top of the 12% as described for our additional spending money in the current tax year we would have to pay 22% taxes on the $1200 growth upon withdrawal as it would have occurred in the IRA this year vs the Roth.
That is true if you indeed plan to spend the extra interest (which is another way of saying that the amount you are withdrawing from your portfolio is more than the amount you can withdraw from an IRA and stay in the 12% bracket) and don't have money from other post-tax sources to fund that spending.
You appear to be discussing a broader generic situation comparing converting and paying taxes versus not converting in the same tax bracket.
Yes, that particular response was to Rye's broader generic statement.
Silk McCue
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Re: Roth IRA Money Market Account for living expenses?

Post by Silk McCue »

avalpert1 wrote: Tue May 14, 2024 11:09 am
celia wrote: Tue May 14, 2024 11:06 am
avalpert1 wrote: Tue May 14, 2024 10:21 am
RyeBourbon wrote: Tue May 14, 2024 9:37 am
avalpert1 wrote: Tue May 14, 2024 9:26 am You get the same tax free growth if you put it in a money market in the traditional IRA (since you are managing your tax bracket you know the income tax rate on future withdrawal will be identical).
tax-deferred, not tax-free
No, the gains are tax free... all you pay taxes on are the original income, whether you pay 12% taxes up front with a Roth or 12% later when you withdraw with Traditional - in the latter case you also happen to pay the gains on that 12% of original income, but you still don't pay any taxes on the 88% of original income that you keep after income taxes.
Every dollar in the Traditional IRA is tax-deferred (unless you have made non-deductible contributions along the way). Every dollar removed from the tIRA will be taxed as it is withdrawn (except for QCDs after age 70.5). And this is all independent of which tax bracket you are in.
Again, that isn't really what is happening - and that misunderstand leads to an overvaluation of Roth relative to Traditional. In both cases growth is tax free, the only difference is when you pay taxes on the income (and thus potentially at what marginal rate). That is why, with the same marginal rate Roth and Traditional post-tax outcomes are identical.
This thread is not about the generic Roth conversion vs Traditional in the same tax bracket. This is about converting this years spending money to Roth in January, putting the funds into a money market and having the benefit this year on not paying taxes on the growth and spending it. For us that provides an additional $1200 tax free spending this year vs not converting this year as described.

Please reread the original post and my post and replies.

Cheers
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celia
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Re: Roth IRA Money Market Account for living expenses?

Post by celia »

avalpert1 wrote: Tue May 14, 2024 11:09 am Again, that isn't really what is happening - and that misunderstand leads to an overvaluation of Roth relative to Traditional.
Are you saying that a million dollars in an IRA is worth the same as a million in Roth, because it is not.
In both cases growth is tax free, the only difference is when you pay taxes on the income (and thus potentially at what marginal rate).
At any point in time, the money (including growth) in the traditional IRA is tax-deferred since the taxes have not yet been paid. At the same time, the money in Roth can grow tax-free since the taxes were already paid.
That is why, with the same marginal rate Roth and Traditional post-tax outcomes are identical.
That's a different issue entirely, not part of the discussion as I understand it.
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.
avalpert1
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

Silk McCue wrote: Tue May 14, 2024 11:18 am
avalpert1 wrote: Tue May 14, 2024 11:09 am
celia wrote: Tue May 14, 2024 11:06 am
avalpert1 wrote: Tue May 14, 2024 10:21 am
RyeBourbon wrote: Tue May 14, 2024 9:37 am
tax-deferred, not tax-free
No, the gains are tax free... all you pay taxes on are the original income, whether you pay 12% taxes up front with a Roth or 12% later when you withdraw with Traditional - in the latter case you also happen to pay the gains on that 12% of original income, but you still don't pay any taxes on the 88% of original income that you keep after income taxes.
Every dollar in the Traditional IRA is tax-deferred (unless you have made non-deductible contributions along the way). Every dollar removed from the tIRA will be taxed as it is withdrawn (except for QCDs after age 70.5). And this is all independent of which tax bracket you are in.
Again, that isn't really what is happening - and that misunderstand leads to an overvaluation of Roth relative to Traditional. In both cases growth is tax free, the only difference is when you pay taxes on the income (and thus potentially at what marginal rate). That is why, with the same marginal rate Roth and Traditional post-tax outcomes are identical.
This thread is not about the generic Roth conversion vs Traditional in the same tax bracket. This is about converting this years spending money to Roth in January, putting the funds into a money market and having the benefit this year on not paying taxes on the growth and spending it. For us that provides an additional $1200 tax free spending this year vs not converting this year as described.
And again, that means you aren't putting this years spending money into the Roth in January, it means you are putting less than this years spending money in the Roth in January. You aren't provided an 'additional $1200 tax free spending' you are withdrawing an additional $1200 post-tax above what you converted from traditional.

Which might make sense if you are converting up to the top of a tax bracket (though I would question whether you know that in January) and that additional $1200 is coincidentally what you needed above that for your spending. Otherwise, how is it any different then putting it in a money market in the IRA and withdrawing what you need as you go?
avalpert1
Posts: 570
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

celia wrote: Tue May 14, 2024 11:31 am
avalpert1 wrote: Tue May 14, 2024 11:09 am Again, that isn't really what is happening - and that misunderstand leads to an overvaluation of Roth relative to Traditional.
Are you saying that a million dollars in an IRA is worth the same as a million in Roth, because it is not.
I'm saying that a million dollars in an IRA is worth the same as the after-tax value of a million dollars converted to a Roth (we could quibble over if you pay the taxes from a taxable account instead, but that doesn't appear to be the case here anyway since all the withdrawals are coming from the Roth for the year's spending).
In both cases growth is tax free, the only difference is when you pay taxes on the income (and thus potentially at what marginal rate).
At any point in time, the money (including growth) in the traditional IRA is tax-deferred since the taxes have not yet been paid. At the same time, the money in Roth can grow tax-free since the taxes were already paid.
At any point in time, the earnings on the post-tax value of the IRA are growing tax-free too. You might not yet know how much the post-tax value is because you haven't yet determined the income tax rate on the withdrawal, but that doesn't change the reality that you are getting tax free growth.
That is why, with the same marginal rate Roth and Traditional post-tax outcomes are identical.
That's a different issue entirely, not part of the discussion as I understand it.
Except it isn't really a different issue - the question of whether the marginal rate would be different if you withdraw from the IRA instead of converting first established whether you should be indifferent to taking that additional step.
Last edited by avalpert1 on Tue May 14, 2024 3:16 pm, edited 1 time in total.
Silk McCue
Posts: 9064
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Re: Roth IRA Money Market Account for living expenses?

Post by Silk McCue »

avalpert1 wrote: Tue May 14, 2024 11:40 am
Silk McCue wrote: Tue May 14, 2024 11:18 am
This thread is not about the generic Roth conversion vs Traditional in the same tax bracket. This is about converting this years spending money to Roth in January, putting the funds into a money market and having the benefit this year on not paying taxes on the growth and spending it. For us that provides an additional $1200 tax free spending this year vs not converting this year as described.
And again, that means you aren't putting this years spending money into the Roth in January, it means you are putting less than this years spending money in the Roth in January. You aren't provided an 'additional $1200 tax free spending' you are withdrawing an additional $1200 post-tax above what you converted from traditional.

Which might make sense if you are converting up to the top of a tax bracket (though I would question whether you know that in January) and that additional $1200 is coincidentally what you needed above that for your spending. Otherwise, how is it any different then putting it in a money market in the IRA and withdrawing what you need as you go?
I am indeed putting/converting this years spending money into the Roth to the top of the 12% bracket in January. My other income is fixed and known. My words are have not been ambiguous in regard to this. As a result I pay taxes to the top of the 12% bracket and have an additional tax free spend from my Roth of $1200 which I would not have without this strategy.

This tax free spend/gain is what the OP is describing as well.

Cheers
calwatch
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Re: Roth IRA Money Market Account for living expenses?

Post by calwatch »

I would tend to favor spending down taxable investments instead, but if those are negligible, pulling funds out of the Roth to be spent is not a bad idea and may help enforce discipline in when to convert.
avalpert1
Posts: 570
Joined: Sat Mar 02, 2024 6:15 pm

Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

Silk McCue wrote: Tue May 14, 2024 11:50 am
avalpert1 wrote: Tue May 14, 2024 11:40 am
Silk McCue wrote: Tue May 14, 2024 11:18 am
This thread is not about the generic Roth conversion vs Traditional in the same tax bracket. This is about converting this years spending money to Roth in January, putting the funds into a money market and having the benefit this year on not paying taxes on the growth and spending it. For us that provides an additional $1200 tax free spending this year vs not converting this year as described.
And again, that means you aren't putting this years spending money into the Roth in January, it means you are putting less than this years spending money in the Roth in January. You aren't provided an 'additional $1200 tax free spending' you are withdrawing an additional $1200 post-tax above what you converted from traditional.

Which might make sense if you are converting up to the top of a tax bracket (though I would question whether you know that in January) and that additional $1200 is coincidentally what you needed above that for your spending. Otherwise, how is it any different then putting it in a money market in the IRA and withdrawing what you need as you go?
I am indeed putting/converting this years spending money into the Roth to the top of the 12% bracket in January.
So you aren't converting this year's spending money, you are converting up to the top of the 12% bracket (it would be quite the coincidence if that always aligns with your spending plans).
As a result I pay taxes to the top of the 12% bracket and have an additional tax free spend from my Roth of $1200 which I would not have without this strategy.
Do you not have any other money in the Roth account that could fund that $1200? What happens if interest rates drop, will you have to convert more than the 12% bracket, will you spend less (and is that really what you want driving your spending)?
marcopolo
Posts: 8716
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Re: Roth IRA Money Market Account for living expenses?

Post by marcopolo »

Silk McCue wrote: Tue May 14, 2024 11:50 am
avalpert1 wrote: Tue May 14, 2024 11:40 am
Silk McCue wrote: Tue May 14, 2024 11:18 am
This thread is not about the generic Roth conversion vs Traditional in the same tax bracket. This is about converting this years spending money to Roth in January, putting the funds into a money market and having the benefit this year on not paying taxes on the growth and spending it. For us that provides an additional $1200 tax free spending this year vs not converting this year as described.
And again, that means you aren't putting this years spending money into the Roth in January, it means you are putting less than this years spending money in the Roth in January. You aren't provided an 'additional $1200 tax free spending' you are withdrawing an additional $1200 post-tax above what you converted from traditional.

Which might make sense if you are converting up to the top of a tax bracket (though I would question whether you know that in January) and that additional $1200 is coincidentally what you needed above that for your spending. Otherwise, how is it any different then putting it in a money market in the IRA and withdrawing what you need as you go?
I am indeed putting/converting this years spending money into the Roth to the top of the 12% bracket in January. My other income is fixed and known. My words are have not been ambiguous in regard to this. As a result I pay taxes to the top of the 12% bracket and have an additional tax free spend from my Roth of $1200 which I would not have without this strategy.

This tax free spend/gain is what the OP is describing as well.

Cheers
If you have funds in a taxable account, wouldn't it be better off to convert to the top of the 12%, leave it in the Roth. and spend from the taxable account?

This approach does seem useful if one only has tax-advantaged accounts.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Workinprogress
Posts: 294
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Re: Roth IRA Money Market Account for living expenses?

Post by Workinprogress »

avalpert1 wrote: Tue May 14, 2024 12:51 pm
Silk McCue wrote: Tue May 14, 2024 11:50 am
avalpert1 wrote: Tue May 14, 2024 11:40 am
Silk McCue wrote: Tue May 14, 2024 11:18 am
This thread is not about the generic Roth conversion vs Traditional in the same tax bracket. This is about converting this years spending money to Roth in January, putting the funds into a money market and having the benefit this year on not paying taxes on the growth and spending it. For us that provides an additional $1200 tax free spending this year vs not converting this year as described.
And again, that means you aren't putting this years spending money into the Roth in January, it means you are putting less than this years spending money in the Roth in January. You aren't provided an 'additional $1200 tax free spending' you are withdrawing an additional $1200 post-tax above what you converted from traditional.

Which might make sense if you are converting up to the top of a tax bracket (though I would question whether you know that in January) and that additional $1200 is coincidentally what you needed above that for your spending. Otherwise, how is it any different then putting it in a money market in the IRA and withdrawing what you need as you go?
I am indeed putting/converting this years spending money into the Roth to the top of the 12% bracket in January.
So you aren't converting this year's spending money, you are converting up to the top of the 12% bracket (it would be quite the coincidence if that always aligns with your spending plans).
As a result I pay taxes to the top of the 12% bracket and have an additional tax free spend from my Roth of $1200 which I would not have without this strategy.
Do you not have any other money in the Roth account that could fund that $1200? What happens if interest rates drop, will you have to convert more than the 12% bracket, will you spend less (and is that really what you want driving your spending)?
The extra $1200 that is mentioned here is simply the tax-FREE interest earned on this Roth converted amount, while it sat in the Roth waiting to be spent.

If the money were left in tIRA or sent to taxable, one would pay taxes on this interest gained at some point when it was spent.

Does this restatement help you grasp the concept?
Silk McCue
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Re: Roth IRA Money Market Account for living expenses?

Post by Silk McCue »

marcopolo wrote: Tue May 14, 2024 12:57 pm
If you have funds in a taxable account, wouldn't it be better off to convert to the top of the 12%, leave it in the Roth. and spend from the taxable account?

This approach does seem useful if one only has tax-advantaged accounts.
Thanks for the reply.

Our taxable account has already been spent down and we have no further need of long term Roth conversions having already completed our conversion plan four years ago . Once each of us turns 70.5 (the first in 5 years) IRA funds are planned only to be used for QCDs unless life circumstances dictate otherwise.

It is a useful approach for us. Not earth shattering but simple to implement and gain a modest advantage in todays interest rate environment.

Some folks just can’t see it and didn’t understand what the OP was describing before commenting and went off on a tangent.

Cheers
marcopolo
Posts: 8716
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Re: Roth IRA Money Market Account for living expenses?

Post by marcopolo »

Silk McCue wrote: Tue May 14, 2024 1:31 pm
marcopolo wrote: Tue May 14, 2024 12:57 pm
If you have funds in a taxable account, wouldn't it be better off to convert to the top of the 12%, leave it in the Roth. and spend from the taxable account?

This approach does seem useful if one only has tax-advantaged accounts.
Thanks for the reply.

Our taxable account has already been spent down and we have no further need of long term Roth conversions having already completed our conversion plan four years ago . Once each of us turns 70.5 (the first in 5 years) IRA funds are planned only to be used for QCDs unless life circumstances dictate otherwise.

It is a useful approach for us. Not earth shattering but simple to implement and gain a modest advantage in todays interest rate environment.

Some folks just can’t see it and didn’t understand what the OP was describing before commenting and went off on a tangent.

Cheers
You get this benefit because you are converting to the top of the 12% bracket, so essentially doing a little tax-bracket optimization.
There are just as many people commenting here that don't understand the math and think they are getting free money.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Silk McCue
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Re: Roth IRA Money Market Account for living expenses?

Post by Silk McCue »

Workinprogress wrote: Tue May 14, 2024 1:21 pm
avalpert1 wrote: Tue May 14, 2024 12:51 pm
The extra $1200 that is mentioned here is simply the tax-FREE interest earned on this Roth converted amount, while it sat in the Roth waiting to be spent.

If the money were left in tIRA or sent to taxable, one would pay taxes on this interest gained at some point when it was spent.

Does this restatement help you grasp the concept?
Thanks for posting this. I certainly hope it helps.

Cheers
marcopolo
Posts: 8716
Joined: Sat Dec 03, 2016 9:22 am

Re: Roth IRA Money Market Account for living expenses?

Post by marcopolo »

Workinprogress wrote: Tue May 14, 2024 1:21 pm
avalpert1 wrote: Tue May 14, 2024 12:51 pm
Silk McCue wrote: Tue May 14, 2024 11:50 am
avalpert1 wrote: Tue May 14, 2024 11:40 am
Silk McCue wrote: Tue May 14, 2024 11:18 am
This thread is not about the generic Roth conversion vs Traditional in the same tax bracket. This is about converting this years spending money to Roth in January, putting the funds into a money market and having the benefit this year on not paying taxes on the growth and spending it. For us that provides an additional $1200 tax free spending this year vs not converting this year as described.
And again, that means you aren't putting this years spending money into the Roth in January, it means you are putting less than this years spending money in the Roth in January. You aren't provided an 'additional $1200 tax free spending' you are withdrawing an additional $1200 post-tax above what you converted from traditional.

Which might make sense if you are converting up to the top of a tax bracket (though I would question whether you know that in January) and that additional $1200 is coincidentally what you needed above that for your spending. Otherwise, how is it any different then putting it in a money market in the IRA and withdrawing what you need as you go?
I am indeed putting/converting this years spending money into the Roth to the top of the 12% bracket in January.
So you aren't converting this year's spending money, you are converting up to the top of the 12% bracket (it would be quite the coincidence if that always aligns with your spending plans).
As a result I pay taxes to the top of the 12% bracket and have an additional tax free spend from my Roth of $1200 which I would not have without this strategy.
Do you not have any other money in the Roth account that could fund that $1200? What happens if interest rates drop, will you have to convert more than the 12% bracket, will you spend less (and is that really what you want driving your spending)?
The extra $1200 that is mentioned here is simply the tax-FREE interest earned on this Roth converted amount, while it sat in the Roth waiting to be spent.

If the money were left in tIRA or sent to taxable, one would pay taxes on this interest gained at some point when it was spent.

Does this restatement help you grasp the concept?
Let's work through an actual numerical example:

$50.000 in tIRA

Option 1: Convert to Roth and spend from there
Pay 12% tax on conversion - $6000 paid in taxes
Left with $44,000 in Roth
Earns 5% tax-free - $2200 of tax-free gains

Total available to spend: $46,200


Option 2: Leave it in tIRA
Full $50,000 in tIRA - taxes still due
Same 5% gains - $2500 in taxable gains
Total pre-tax amount: $52,500
Pay 12% tax on withdrawal - $6,300 paid in taxes


Total available to spend: $46,200


Yes, converting results in less taxes paid, but the same after-tax spendable dollars, which is what really matters.

Does this restatement help you grasp the concept?
Once in a while you get shown the light, in the strangest of places if you look at it right.
avalpert1
Posts: 570
Joined: Sat Mar 02, 2024 6:15 pm

Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

Workinprogress wrote: Tue May 14, 2024 1:21 pm
avalpert1 wrote: Tue May 14, 2024 12:51 pm
Silk McCue wrote: Tue May 14, 2024 11:50 am
avalpert1 wrote: Tue May 14, 2024 11:40 am
Silk McCue wrote: Tue May 14, 2024 11:18 am
This thread is not about the generic Roth conversion vs Traditional in the same tax bracket. This is about converting this years spending money to Roth in January, putting the funds into a money market and having the benefit this year on not paying taxes on the growth and spending it. For us that provides an additional $1200 tax free spending this year vs not converting this year as described.
And again, that means you aren't putting this years spending money into the Roth in January, it means you are putting less than this years spending money in the Roth in January. You aren't provided an 'additional $1200 tax free spending' you are withdrawing an additional $1200 post-tax above what you converted from traditional.

Which might make sense if you are converting up to the top of a tax bracket (though I would question whether you know that in January) and that additional $1200 is coincidentally what you needed above that for your spending. Otherwise, how is it any different then putting it in a money market in the IRA and withdrawing what you need as you go?
I am indeed putting/converting this years spending money into the Roth to the top of the 12% bracket in January.
So you aren't converting this year's spending money, you are converting up to the top of the 12% bracket (it would be quite the coincidence if that always aligns with your spending plans).
As a result I pay taxes to the top of the 12% bracket and have an additional tax free spend from my Roth of $1200 which I would not have without this strategy.
Do you not have any other money in the Roth account that could fund that $1200? What happens if interest rates drop, will you have to convert more than the 12% bracket, will you spend less (and is that really what you want driving your spending)?
The extra $1200 that is mentioned here is simply the tax-FREE interest earned on this Roth converted amount, while it sat in the Roth waiting to be spent.

If the money were left in tIRA or sent to taxable, one would pay taxes on this interest gained at some point when it was spent.

Does this restatement help you grasp the concept?
Again, no because you are ignoring the tax-FREE nature of growth in a tIRA too...
marcopolo
Posts: 8716
Joined: Sat Dec 03, 2016 9:22 am

Re: Roth IRA Money Market Account for living expenses?

Post by marcopolo »

Silk McCue wrote: Tue May 14, 2024 1:38 pm
Workinprogress wrote: Tue May 14, 2024 1:21 pm
avalpert1 wrote: Tue May 14, 2024 12:51 pm
The extra $1200 that is mentioned here is simply the tax-FREE interest earned on this Roth converted amount, while it sat in the Roth waiting to be spent.

If the money were left in tIRA or sent to taxable, one would pay taxes on this interest gained at some point when it was spent.

Does this restatement help you grasp the concept?
Thanks for posting this. I certainly hope it helps.

Cheers
deleted
Last edited by marcopolo on Tue May 14, 2024 1:49 pm, edited 1 time in total.
Once in a while you get shown the light, in the strangest of places if you look at it right.
RyeBourbon
Posts: 1341
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

Re: Roth IRA Money Market Account for living expenses?

Post by RyeBourbon »

marcopolo wrote: Tue May 14, 2024 1:42 pm
Workinprogress wrote: Tue May 14, 2024 1:21 pm
avalpert1 wrote: Tue May 14, 2024 12:51 pm
Silk McCue wrote: Tue May 14, 2024 11:50 am
avalpert1 wrote: Tue May 14, 2024 11:40 am
And again, that means you aren't putting this years spending money into the Roth in January, it means you are putting less than this years spending money in the Roth in January. You aren't provided an 'additional $1200 tax free spending' you are withdrawing an additional $1200 post-tax above what you converted from traditional.

Which might make sense if you are converting up to the top of a tax bracket (though I would question whether you know that in January) and that additional $1200 is coincidentally what you needed above that for your spending. Otherwise, how is it any different then putting it in a money market in the IRA and withdrawing what you need as you go?
I am indeed putting/converting this years spending money into the Roth to the top of the 12% bracket in January.
So you aren't converting this year's spending money, you are converting up to the top of the 12% bracket (it would be quite the coincidence if that always aligns with your spending plans).
As a result I pay taxes to the top of the 12% bracket and have an additional tax free spend from my Roth of $1200 which I would not have without this strategy.
Do you not have any other money in the Roth account that could fund that $1200? What happens if interest rates drop, will you have to convert more than the 12% bracket, will you spend less (and is that really what you want driving your spending)?
The extra $1200 that is mentioned here is simply the tax-FREE interest earned on this Roth converted amount, while it sat in the Roth waiting to be spent.

If the money were left in tIRA or sent to taxable, one would pay taxes on this interest gained at some point when it was spent.

Does this restatement help you grasp the concept?
Let's work through an actual numerical example:

$50.000 in tIRA

Option 1: Convert to Roth and spend from there
Pay 12% tax on conversion - $6000 paid in taxes
Left with $44,000 in Roth
Earns 5% tax-free - $2200 of tax-free gains

Total available to spend: $46,200


Option 2: Leave it in tIRA
Full $50,000 in tIRA - taxes still due
Same 5% gains - $2500 in taxable gains
Total pre-tax amount: $52,500
Pay 12% tax on withdrawal - $6,300 paid in taxes


Total available to spend: $46,200


Yes, converting results in less taxes paid, but the same after-tax spendable dollars, which is what really matters.

Does this restatement help you grasp the concept?
Now do it with the extra $2500 taxed at 22%
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marcopolo
Posts: 8716
Joined: Sat Dec 03, 2016 9:22 am

Re: Roth IRA Money Market Account for living expenses?

Post by marcopolo »

RyeBourbon wrote: Tue May 14, 2024 1:44 pm
marcopolo wrote: Tue May 14, 2024 1:42 pm
Workinprogress wrote: Tue May 14, 2024 1:21 pm
avalpert1 wrote: Tue May 14, 2024 12:51 pm
Silk McCue wrote: Tue May 14, 2024 11:50 am

I am indeed putting/converting this years spending money into the Roth to the top of the 12% bracket in January.
So you aren't converting this year's spending money, you are converting up to the top of the 12% bracket (it would be quite the coincidence if that always aligns with your spending plans).
As a result I pay taxes to the top of the 12% bracket and have an additional tax free spend from my Roth of $1200 which I would not have without this strategy.
Do you not have any other money in the Roth account that could fund that $1200? What happens if interest rates drop, will you have to convert more than the 12% bracket, will you spend less (and is that really what you want driving your spending)?
The extra $1200 that is mentioned here is simply the tax-FREE interest earned on this Roth converted amount, while it sat in the Roth waiting to be spent.

If the money were left in tIRA or sent to taxable, one would pay taxes on this interest gained at some point when it was spent.

Does this restatement help you grasp the concept?
Let's work through an actual numerical example:

$50.000 in tIRA

Option 1: Convert to Roth and spend from there
Pay 12% tax on conversion - $6000 paid in taxes
Left with $44,000 in Roth
Earns 5% tax-free - $2200 of tax-free gains

Total available to spend: $46,200


Option 2: Leave it in tIRA
Full $50,000 in tIRA - taxes still due
Same 5% gains - $2500 in taxable gains
Total pre-tax amount: $52,500
Pay 12% tax on withdrawal - $6,300 paid in taxes


Total available to spend: $46,200


Yes, converting results in less taxes paid, but the same after-tax spendable dollars, which is what really matters.

Does this restatement help you grasp the concept?
Now do it with the extra $1200 taxed at 22%
As i stated above regarding Silk McCue's situation, if this is done at the top of the tax bracket, then the tax-optimization, of course, has benefits.
The post i responded to, and several others, seemed to me to clearly think the benefit comes from "tax-free" growth in Roth vs Tax-deferred growth in tIRA, even in the same tax bracket. It is a common misunderstanding.
Once in a while you get shown the light, in the strangest of places if you look at it right.
Workinprogress
Posts: 294
Joined: Wed Mar 06, 2019 8:25 pm

Re: Roth IRA Money Market Account for living expenses?

Post by Workinprogress »

marcopolo wrote: Tue May 14, 2024 1:42 pm
Workinprogress wrote: Tue May 14, 2024 1:21 pm
avalpert1 wrote: Tue May 14, 2024 12:51 pm
Silk McCue wrote: Tue May 14, 2024 11:50 am
avalpert1 wrote: Tue May 14, 2024 11:40 am
And again, that means you aren't putting this years spending money into the Roth in January, it means you are putting less than this years spending money in the Roth in January. You aren't provided an 'additional $1200 tax free spending' you are withdrawing an additional $1200 post-tax above what you converted from traditional.

Which might make sense if you are converting up to the top of a tax bracket (though I would question whether you know that in January) and that additional $1200 is coincidentally what you needed above that for your spending. Otherwise, how is it any different then putting it in a money market in the IRA and withdrawing what you need as you go?
I am indeed putting/converting this years spending money into the Roth to the top of the 12% bracket in January.
So you aren't converting this year's spending money, you are converting up to the top of the 12% bracket (it would be quite the coincidence if that always aligns with your spending plans).
As a result I pay taxes to the top of the 12% bracket and have an additional tax free spend from my Roth of $1200 which I would not have without this strategy.
Do you not have any other money in the Roth account that could fund that $1200? What happens if interest rates drop, will you have to convert more than the 12% bracket, will you spend less (and is that really what you want driving your spending)?
The extra $1200 that is mentioned here is simply the tax-FREE interest earned on this Roth converted amount, while it sat in the Roth waiting to be spent.

If the money were left in tIRA or sent to taxable, one would pay taxes on this interest gained at some point when it was spent.

Does this restatement help you grasp the concept?
Let's work through an actual numerical example:

$50.000 in tIRA

Option 1: Convert to Roth and spend from there
Pay 12% tax on conversion - $6000 paid in taxes
Left with $44,000 in Roth
Earns 5% tax-free - $2200 of tax-free gains

Total available to spend: $46,200


Option 2: Leave it in tIRA
Full $50,000 in tIRA - taxes still due
Same 5% gains - $2500 in taxable gains
Total pre-tax amount: $52,500
Pay 12% tax on withdrawal - $6,300 paid in taxes


Total available to spend: $46,200


Yes, converting results in less taxes paid, but the same after-tax spendable dollars, which is what really matters.

Does this restatement help you grasp the concept?
Thank you Marcopolo. Obviously, I was mistaken.
Topic Author
Philx
Posts: 18
Joined: Sun Apr 18, 2021 6:34 am

Re: Roth IRA Money Market Account for living expenses?

Post by Philx »

Thanks to everyone for the replies and discussion - all greatly appreciated and informative. I will need to re-read the 40 post's many more times.

My question aligns closely with Silk McCue's description.

Regards, and thank you
Phil
marcopolo
Posts: 8716
Joined: Sat Dec 03, 2016 9:22 am

Re: Roth IRA Money Market Account for living expenses?

Post by marcopolo »

Philx wrote: Tue May 14, 2024 2:28 pm Thanks to everyone for the replies and discussion - all greatly appreciated and informative. I will need to re-read the 40 post's many more times.

My question aligns closely with Silk McCue's description.

Regards, and thank you
Phil
Silk McCue's situation yield some benefit because they are right at the boundary of a tax bracket.
That is, the benefit only exists if the conversion is at a lower bracket than the income the conversion generates.
You have to dial in your conversion very accurately to have the conversion at say the 12% rate, but the income at the 22% rate.
Are you doing that?

If they are both at the same rate 12%, or 22%, then there is no real benefit.
See the example math i posted above.
Once in a while you get shown the light, in the strangest of places if you look at it right.
RyeBourbon
Posts: 1341
Joined: Tue Sep 01, 2020 12:20 pm
Location: Delaware/Philly

Re: Roth IRA Money Market Account for living expenses?

Post by RyeBourbon »

marcopolo wrote: Tue May 14, 2024 1:42 pm
Let's work through an actual numerical example:

$50.000 in tIRA

Option 1: Convert to Roth and spend from there
Pay 12% tax on conversion - $6000 paid in taxes
Left with $44,000 in Roth
Earns 5% tax-free - $2200 of tax-free gains

Total available to spend: $46,200


Option 2: Leave it in tIRA
Full $50,000 in tIRA - taxes still due
Same 5% gains - $2500 in taxable gains
Total pre-tax amount: $52,500
Pay 12% tax on withdrawal - $6,300 paid in taxes


Total available to spend: $46,200


Yes, converting results in less taxes paid, but the same after-tax spendable dollars, which is what really matters.

Does this restatement help you grasp the concept?
I think the point that's being missed here is that those in the thread that are pursuing this strategy are trying to hit a specific AGI/taxable income. You can't withdraw that extra gain from the tIRA without impacting AGI.
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celia
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Re: Roth IRA Money Market Account for living expenses?

Post by celia »

It also makes a difference if you pay the taxes out of Taxable or not. If you are going to convert, why would you want to put only part of the IRA withdrawal into the Roth and give some to the taxman?

Do that only if you don't have anything in Taxable. That's where you will see the difference.
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 Money Market Account for living expenses?

Post by Silk McCue »

marcopolo wrote: Tue May 14, 2024 2:35 pm
Philx wrote: Tue May 14, 2024 2:28 pm Thanks to everyone for the replies and discussion - all greatly appreciated and informative. I will need to re-read the 40 post's many more times.

My question aligns closely with Silk McCue's description.

Regards, and thank you
Phil
Silk McCue's situation yield some benefit because they are right at the boundary of a tax bracket.
That is, the benefit only exists if the conversion is at a lower bracket than the income the conversion generates.
You have to dial in your conversion very accurately to have the conversion at say the 12% rate, but the income at the 22% rate.
Are you doing that?

If they are both at the same rate 12%, or 22%, then there is no real benefit.
See the example math i posted above.
This thread is NOT about normal Roth conversions intended for long term growth. It is about performing a Roth conversion for the funds you plan on withdrawing from your Traditional IRA for spending in the current tax year. Allowing that amount to grow tax free while then taking withdrawals throughout the year that would have otherwise come from the Traditional IRA. By doing so any gains that are achieved from holding it in a safe Money Market fund in today’s high interest rate environment will go untaxed.

Even if you weren’t trying to stay in a particular tax bracket and didn’t care if some went into the 22% bracket it would still yield a tax free growth benefit.

The results are not big money but it is real money.

Cheers
Silk McCue
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Re: Roth IRA Money Market Account for living expenses?

Post by Silk McCue »

RyeBourbon wrote: Tue May 14, 2024 2:38 pm
I think the point that's being missed here is that those in the thread that are pursuing this strategy are trying to hit a specific AGI/taxable income. You can't withdraw that extra gain from the tIRA without impacting AGI.
Absolutely correct. Even you didn’t care if you went into the next bracket the tax free growth on the Roth would still exist.

Cheers
avalpert1
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Re: Roth IRA Money Market Account for living expenses?

Post by avalpert1 »

Silk McCue wrote: Tue May 14, 2024 3:57 pm
marcopolo wrote: Tue May 14, 2024 2:35 pm
Philx wrote: Tue May 14, 2024 2:28 pm Thanks to everyone for the replies and discussion - all greatly appreciated and informative. I will need to re-read the 40 post's many more times.

My question aligns closely with Silk McCue's description.

Regards, and thank you
Phil
Silk McCue's situation yield some benefit because they are right at the boundary of a tax bracket.
That is, the benefit only exists if the conversion is at a lower bracket than the income the conversion generates.
You have to dial in your conversion very accurately to have the conversion at say the 12% rate, but the income at the 22% rate.
Are you doing that?

If they are both at the same rate 12%, or 22%, then there is no real benefit.
See the example math i posted above.
This thread is NOT about normal Roth conversions intended for long term growth. It is about performing a Roth conversion for the funds you plan on withdrawing from your Traditional IRA for spending in the current tax year. Allowing that amount to grow tax free while then taking withdrawals throughout the year that would have otherwise come from the Traditional IRA. By doing so any gains that are achieved from holding it in a safe Money Market fund in today’s high interest rate environment will go untaxed.

Even if you weren’t trying to stay in a particular tax bracket and didn’t care if some went into the 22% bracket it would still yield a tax free growth benefit.

The results are not big money but it is real money.

Cheers
And again, you would get the same tax free growth benefit if you left it in the traditional IRA (and withdrew at the same marginal income tax rate).

Traditional IRAs have deferred income tax, growth on your post-tax income is exactly as tax-free as in a Roth. A part of this thread is indeed about a 'normal Roth conversion' because that is what is being done, a normal Roth conversion.
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Re: Roth IRA Money Market Account for living expenses?

Post by RyeBourbon »

avalpert1 wrote: Tue May 14, 2024 4:52 pm
Silk McCue wrote: Tue May 14, 2024 3:57 pm
marcopolo wrote: Tue May 14, 2024 2:35 pm
Philx wrote: Tue May 14, 2024 2:28 pm Thanks to everyone for the replies and discussion - all greatly appreciated and informative. I will need to re-read the 40 post's many more times.

My question aligns closely with Silk McCue's description.

Regards, and thank you
Phil
Silk McCue's situation yield some benefit because they are right at the boundary of a tax bracket.
That is, the benefit only exists if the conversion is at a lower bracket than the income the conversion generates.
You have to dial in your conversion very accurately to have the conversion at say the 12% rate, but the income at the 22% rate.
Are you doing that?

If they are both at the same rate 12%, or 22%, then there is no real benefit.
See the example math i posted above.
This thread is NOT about normal Roth conversions intended for long term growth. It is about performing a Roth conversion for the funds you plan on withdrawing from your Traditional IRA for spending in the current tax year. Allowing that amount to grow tax free while then taking withdrawals throughout the year that would have otherwise come from the Traditional IRA. By doing so any gains that are achieved from holding it in a safe Money Market fund in today’s high interest rate environment will go untaxed.

Even if you weren’t trying to stay in a particular tax bracket and didn’t care if some went into the 22% bracket it would still yield a tax free growth benefit.

The results are not big money but it is real money.

Cheers
And again, you would get the same tax free growth benefit if you left it in the traditional IRA (and withdrew at the same marginal income tax rate).

Traditional IRAs have deferred income tax, growth on your post-tax income is exactly as tax-free as in a Roth. A part of this thread is indeed about a 'normal Roth conversion' because that is what is being done, a normal Roth conversion.
Again, ignoring the AGI issue. It's a second-order optimization, but thanks for your concern.
Retired June 2023. LMP (TIPS Ladder/SS Bridge) 25%/Risk Portfolio 75%, AA = 70/0/30
marcopolo
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Re: Roth IRA Money Market Account for living expenses?

Post by marcopolo »

Silk McCue wrote: Tue May 14, 2024 3:57 pm
marcopolo wrote: Tue May 14, 2024 2:35 pm
Philx wrote: Tue May 14, 2024 2:28 pm Thanks to everyone for the replies and discussion - all greatly appreciated and informative. I will need to re-read the 40 post's many more times.

My question aligns closely with Silk McCue's description.

Regards, and thank you
Phil
Silk McCue's situation yield some benefit because they are right at the boundary of a tax bracket.
That is, the benefit only exists if the conversion is at a lower bracket than the income the conversion generates.
You have to dial in your conversion very accurately to have the conversion at say the 12% rate, but the income at the 22% rate.
Are you doing that?

If they are both at the same rate 12%, or 22%, then there is no real benefit.
See the example math i posted above.
This thread is NOT about normal Roth conversions intended for long term growth. It is about performing a Roth conversion for the funds you plan on withdrawing from your Traditional IRA for spending in the current tax year. Allowing that amount to grow tax free while then taking withdrawals throughout the year that would have otherwise come from the Traditional IRA. By doing so any gains that are achieved from holding it in a safe Money Market fund in today’s high interest rate environment will go untaxed.

Even if you weren’t trying to stay in a particular tax bracket and didn’t care if some went into the 22% bracket it would still yield a tax free growth benefit.

The results are not big money but it is real money.

Cheers
Assuming you are making estimated tax payments as they are due, If instead you took withdrawals from the tIRA throughout the year, you would have the same outcome.

Perhaps you could give a specific numerical example to illustrate your point. I feel like i must be missing something.
Once in a while you get shown the light, in the strangest of places if you look at it right.
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