CPA advice--does this make sense??

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fmhealth
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CPA advice--does this make sense??

Post by fmhealth » Sat May 11, 2019 3:29 pm

I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.

Is this a sound approach or are there strategies that can produce a material tax savings? Thanks in advance for any actionable insights.

Be Well,
fmhealth

mhalley
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Re: CPA advice--does this make sense??

Post by mhalley » Sat May 11, 2019 3:46 pm

Retired and in highest tax bracket sounds like a wonderful "problem". If money is coming from investments such as dividends and interest, you might be able to adjust by going to munis or passive or tax managed funds, otherwise not mych room for tax management. HSA MAYBE?

MrBobcat
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Re: CPA advice--does this make sense??

Post by MrBobcat » Sat May 11, 2019 4:13 pm

fmhealth wrote:
Sat May 11, 2019 3:29 pm
I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.

Is this a sound approach or are there strategies that can produce a material tax savings? Thanks in advance for any actionable insights.

Be Well,
fmhealth
Well if you make less income, you'll save taxes but have even less money than if you'd earned more an paid the taxes.

i.e. say you earned $1,000 more and paid $350 worth of income taxes on that $1000 you'd have $650 more than going the route of not earning that $1000.

pepperz
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Re: CPA advice--does this make sense??

Post by pepperz » Sat May 11, 2019 5:27 pm

How will this income make its way to you- Are you a business owner and it’s profit / distributions? Are you a W2 employee of someone else’s business? Are you a 1099 contractor working for someone else? Etc.

Having a business is a great way to defer taxes by reinvesting into your business. I’ll tell you more about that if you’re interested.

pepperz
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Re: CPA advice--does this make sense??

Post by pepperz » Sat May 11, 2019 5:58 pm

Also do you need the after-tax dollars for some specific / short term reason that you wouldn’t want it tied up in investments?

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Wiggums
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Re: CPA advice--does this make sense??

Post by Wiggums » Sat May 11, 2019 6:04 pm

mhalley wrote:
Sat May 11, 2019 3:46 pm
Retired and in highest tax bracket sounds like a wonderful "problem". If money is coming from investments such as dividends and interest, you might be able to adjust by going to munis or passive or tax managed funds, otherwise not mych room for tax management. HSA MAYBE?
My father gave me this advice many years ago. He said, better to make a lot of money and complain about the taxes than to need money and not have it.

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Re: CPA advice--does this make sense??

Post by pkcrafter » Sat May 11, 2019 6:15 pm

fmhealth wrote:
Sat May 11, 2019 3:29 pm
I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.

Is this a sound approach or are there strategies that can produce a material tax savings? Thanks in advance for any actionable insights.

Be Well,
fmhealth
Some important information missing. How much $$ are we talking about. How long have the current investments been held.

Can you provide names and tickers of some of the taxable funds?

Bottom line is I would not deal with a CPA who wouldn't make any effort to increase tax efficiency.

Yes, there are tax-managed funds and funds that are quite tax efficient.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

Paul
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nedsaid
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Re: CPA advice--does this make sense??

Post by nedsaid » Sat May 11, 2019 8:07 pm

fmhealth wrote:
Sat May 11, 2019 3:29 pm
I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.

Is this a sound approach or are there strategies that can produce a material tax savings? Thanks in advance for any actionable insights.

Be Well,
fmhealth
Your CPA is both right and wrong. Right in that people sometimes get too obsessed with reducing their tax burden. In lower tax brackets, a taxable bond fund will likely produce a greater after tax return than a muni fund. Sometimes people get too obsessed with such things as ROTH conversions, not always as advantageous as people think. Wrong in that in the highest tax bracket, muni funds are likely to produce higher after tax income than taxable bond funds with the higher yields. Wrong in that at above a certain point, you get hit with the Net Investment Tax, which you can avoid with munis. Wrong in that tax loss harvesting can be a valuable strategy when dealing with Capital Gains. Wrong in that State Income taxes are a consideration too. For example, US Treasury instruments are State Income Tax Free.

Your CPA was being lazy. In some cases, he might be correct but you have to do the math. Sometimes just paying the tax is the best strategy. But there can be substantial tax savings to be had if you organize your investments in a tax efficient manner. But we know little about your personal situation so hard to say more than that. You might want to look for another CPA.
A fool and his money are good for business.

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fmhealth
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Re: CPA advice--does this make sense??

Post by fmhealth » Sat May 11, 2019 9:53 pm

Thanks go out to everyone for their thoughtful,rapier-like and sage insights. Much appreciated! At this point I would rather not get into specifics as my strategy is one that I'm comfortable with but would not lend itself for discussion on this venue. As a matter of fact in runs contrary to many Boglehead beliefs.

In any event it shows there are numerous profitable & innovative approaches seeking the same end. Making money on a consistent basis.Thanks again.


Be Well,
fmhealth

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mlebuf
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Re: CPA advice--does this make sense??

Post by mlebuf » Sat May 11, 2019 10:54 pm

Consider what marginal tax bracket you are in. For example let's assume you are in the 24 percent marginal tax bracket. For every extra dollar you take out of your tax deferred accounts, you pay 24 cents more to the IRS and perhaps more to the state. For big purchases it might be less taxing in the long run to borrow the money, pay a bank 5 percent interest and pay it off over several years than to pay a big chunk of extra money to the government all at once. For the record, I am not a CPA.
Best wishes, | Michael | | Invest your time actively and your money passively.

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celia
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Re: CPA advice--does this make sense??

Post by celia » Sun May 12, 2019 4:59 am

If you’re in the highest tax bracket now and will also be in retirement, then you should start doing some Roth conversions. You will pay the big tax now, but all future growth will be tax free. If you instead allow your tax-deferred accounts to grow more, you will pay the highest tax (in the future) on a higher value.

This will also lower your taxable estate (by spending money on taxes) should your assets be worth more than the exemption is (currently $11.4M per person) at the time you die.

In addition, tax rates are at historic lows, meaning today’s highest rate is likely lower than the future highest tax rate.
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: CPA advice--does this make sense??

Post by The Wizard » Sun May 12, 2019 6:01 am

celia wrote:
Sun May 12, 2019 4:59 am
If you’re in the highest tax bracket now and will also be in retirement, then you should start doing some Roth conversions...
OP says he is already retired...
Attempted new signature...

is50xenough
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Re: CPA advice--does this make sense??

Post by is50xenough » Sun May 12, 2019 6:29 am

nedsaid wrote:
Sat May 11, 2019 8:07 pm
fmhealth wrote:
Sat May 11, 2019 3:29 pm
I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.

Is this a sound approach or are there strategies that can produce a material tax savings? Thanks in advance for any actionable insights.

Be Well,
fmhealth
Your CPA is both right and wrong. Right in that people sometimes get too obsessed with reducing their tax burden. In lower tax brackets, a taxable bond fund will likely produce a greater after tax return than a muni fund. Sometimes people get too obsessed with such things as ROTH conversions, not always as advantageous as people think. Wrong in that in the highest tax bracket, muni funds are likely to produce higher after tax income than taxable bond funds with the higher yields. Wrong in that at above a certain point, you get hit with the Net Investment Tax, which you can avoid with munis. Wrong in that tax loss harvesting can be a valuable strategy when dealing with Capital Gains. Wrong in that State Income taxes are a consideration too. For example, US Treasury instruments are State Income Tax Free.

Your CPA was being lazy. In some cases, he might be correct but you have to do the math. Sometimes just paying the tax is the best strategy. But there can be substantial tax savings to be had if you organize your investments in a tax efficient manner. But we know little about your personal situation so hard to say more than that. You might want to look for another CPA.
Can you elaborate on these comments. Particularly the Roth one

EdNorton
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Re: CPA advice--does this make sense??

Post by EdNorton » Sun May 12, 2019 7:37 am

I'm a retired CPA, if you don't give the specifics of your income, we can't tell you if your CPA is right or wrong. :oops:
Outside a dog, a book is man's best friend, inside a dog, it's too dark to read - Groucho

billfromct
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Re: CPA advice--does this make sense??

Post by billfromct » Sun May 12, 2019 8:03 am

mhalley, you say "HSA MAYBE?"

I'm assuming HSA is health savings account.

How do you open a health savings account if you're retired & on MC? I'm also assuming when the OP says he is paying "increased MC health premiums", that he is on Medicare.

I'm retired as well & on Medicare. I would like to know if a health savings account (HSA) is possible for me.

bill

jackets320
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Re: CPA advice--does this make sense??

Post by jackets320 » Sun May 12, 2019 9:15 am

Can’t contribute to HSA if on Medicare

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nedsaid
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Re: CPA advice--does this make sense??

Post by nedsaid » Sun May 12, 2019 10:29 am

is50xenough wrote:
Sun May 12, 2019 6:29 am
nedsaid wrote:
Sat May 11, 2019 8:07 pm
fmhealth wrote:
Sat May 11, 2019 3:29 pm
I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.

Is this a sound approach or are there strategies that can produce a material tax savings? Thanks in advance for any actionable insights.

Be Well,
fmhealth
Your CPA is both right and wrong. Right in that people sometimes get too obsessed with reducing their tax burden. In lower tax brackets, a taxable bond fund will likely produce a greater after tax return than a muni fund. Sometimes people get too obsessed with such things as ROTH conversions, not always as advantageous as people think. Wrong in that in the highest tax bracket, muni funds are likely to produce higher after tax income than taxable bond funds with the higher yields. Wrong in that at above a certain point, you get hit with the Net Investment Tax, which you can avoid with munis. Wrong in that tax loss harvesting can be a valuable strategy when dealing with Capital Gains. Wrong in that State Income taxes are a consideration too. For example, US Treasury instruments are State Income Tax Free.

Your CPA was being lazy. In some cases, he might be correct but you have to do the math. Sometimes just paying the tax is the best strategy. But there can be substantial tax savings to be had if you organize your investments in a tax efficient manner. But we know little about your personal situation so hard to say more than that. You might want to look for another CPA.
Can you elaborate on these comments. Particularly the Roth one
Regarding ROTH IRAs vs. Traditional IRAs, if your tax bracket while you are working and when you retire are the same, the tax effect of a Roth vs. a Traditional account is a wash. This also applies to workplace savings accounts like 401(k)'s. If your tax bracket is lower in retirement than when working, the Traditional IRA and 401(k) is the winner. The ROTH accounts only win when your tax rate is higher in retirement than when you were working. In that light, ROTH conversions from Traditional accounts are less attractive than believed. Most people will be in the same or a lower tax bracket in retirement than when they were working.

You have to understand the taxability of investments. Capital gains tax rates for assets held for one year or more are lower than ordinary income tax rates. Also, qualified dividends from stocks receive capital gains tax treatment. So it is more tax efficient to hold stocks in taxable accounts as much as possible. Anything coming out of Traditional IRA or Workplace savings accounts are taxed at ordinary income tax rates and are not eligible for capital gains tax treatment. More tax inefficient investments like Bonds, TIPS, and REITs should be held in Tax Deferred accounts where possible.

People like me, and I suspect most Bogleheads, have the great majority of their savings in tax deferred Workplace Savings Plans and IRAs. Folks like that should invest their retirement accounts for maximum return because their taxable accounts are relatively small. It boils down to this, do you want a larger paycheck in retirement or a smaller paycheck? A retirement account too conservatively invested will deliver a smaller paycheck. If you have both large taxable and large tax deferred accounts, allocating assets as described in the paragraph above makes a great deal of sense. What I tell folks is that if you have both large taxable and tax deferred accounts, make your taxable accounts more stock heavy and your tax deferred accounts more bond heavy. You need emergency money in taxable accounts and you don't want to doom your retirment accounts to very low returns by having them hold only bonds.

As far as bonds in taxable accounts, you have to do the math to figure out if you are further ahead holding Taxable Bonds or Federal Tax Free Municipal Bonds. Federal Bonds are State Income Tax-Free and Muni Bonds are taxable by States. You can buy Muni bonds issued in your own State which would be both Federal and State Income Tax Free. Municipal bonds also avoid the Net Investment Tax. Better yet, you could live in a State that has no income tax.
A fool and his money are good for business.

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Re: CPA advice--does this make sense??

Post by Valuethinker » Sun May 12, 2019 12:16 pm

fmhealth wrote:
Sat May 11, 2019 3:29 pm
I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.

Is this a sound approach or are there strategies that can produce a material tax savings? Thanks in advance for any actionable insights.

Be Well,
fmhealth
In truth it's not bad advice in terms of avoiding bad investment decisions.

However as a tax planner there are things one could advise a client (not that I am a CPA nor US based). Hypothetical ones include timing of when you take capital gains and whether you hold tax free municipal bonds or US Treasury bonds.

That's the sort of advice a CPA can and should give.

Avoid investments that are sold primarily by their tax shelter claims.

NotWhoYouThink
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Re: CPA advice--does this make sense??

Post by NotWhoYouThink » Sun May 12, 2019 12:49 pm

Are you making your charitable contributions through Qualified Charitable Distributions from your IRA/401k accounts? If you are giving to charity but not doing this then you can do more to save on taxes and should find a better CPA. You can afford it.

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celia
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Re: CPA advice--does this make sense??

Post by celia » Mon May 13, 2019 12:01 am

nedsaid wrote:
Sun May 12, 2019 10:29 am
Regarding ROTH IRAs vs. Traditional IRAs, if your tax bracket while you are working and when you retire are the same, the tax effect of a Roth vs. a Traditional account is a wash. This also applies to workplace savings accounts like 401(k)'s.
This is true when you are only looking at the tax rate between now and then. But if you look AT THE VALUE of the accounts, if you convert and pay more in taxes now (even at the highest tax rate), you can lower your future tax (amount), just because you already moved a lot of the money to a Roth (where it GROWS TAX-FREE instead) and, thus, have less left in the tax-deferred. When the amount taxed goes down, so does the tax, even at the same high tax rate.

Look at this example I created for a claim I made in another thread that the amount of taxes you would save by doing early Roth conversions would be more than the OP's spouse (in the other thread) would forgo in SS benefits. You can ignore SS when just looking for the cumulative amount taxed
viewtopic.php?f=10&t=272601&p=4383374#p4383374

In the most extreme example, suppose your $1M tIRA is converted all in one year. The top tax rate currently is 37%. That would incur $370,000 in taxes but, even if you withheld the taxes from the Roth conversion (which isn't recommended since it is better that the taxes be paid from taxable to maximize how much goes into the Roth), compare that to the tax that would be owed on the $1.6M in the conversion part of the referenced thread. This would allow, at least, the remaining $630,000 to compound in the tax-free Roth to $2M if earning 6% over 20 years or $3M if earning 8% over the same 20 years.

An alternate could depend on how much other taxable income you have. If you converted just enough in the first year to allow future conversions to be taxed at lower rates, that could also save you money (ie, 37% for a big chunk now and lower tax rates later on).
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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nedsaid
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Re: CPA advice--does this make sense??

Post by nedsaid » Mon May 13, 2019 1:23 pm

celia wrote:
Mon May 13, 2019 12:01 am
nedsaid wrote:
Sun May 12, 2019 10:29 am
Regarding ROTH IRAs vs. Traditional IRAs, if your tax bracket while you are working and when you retire are the same, the tax effect of a Roth vs. a Traditional account is a wash. This also applies to workplace savings accounts like 401(k)'s.
This is true when you are only looking at the tax rate between now and then. But if you look AT THE VALUE of the accounts, if you convert and pay more in taxes now (even at the highest tax rate), you can lower your future tax (amount), just because you already moved a lot of the money to a Roth (where it GROWS TAX-FREE instead) and, thus, have less left in the tax-deferred. When the amount taxed goes down, so does the tax, even at the same high tax rate.

Look at this example I created for a claim I made in another thread that the amount of taxes you would save by doing early Roth conversions would be more than the OP's spouse (in the other thread) would forgo in SS benefits. You can ignore SS when just looking for the cumulative amount taxed
viewtopic.php?f=10&t=272601&p=4383374#p4383374

In the most extreme example, suppose your $1M tIRA is converted all in one year. The top tax rate currently is 37%. That would incur $370,000 in taxes but, even if you withheld the taxes from the Roth conversion (which isn't recommended since it is better that the taxes be paid from taxable to maximize how much goes into the Roth), compare that to the tax that would be owed on the $1.6M in the conversion part of the referenced thread. This would allow, at least, the remaining $630,000 to compound in the tax-free Roth to $2M if earning 6% over 20 years or $3M if earning 8% over the same 20 years.

An alternate could depend on how much other taxable income you have. If you converted just enough in the first year to allow future conversions to be taxed at lower rates, that could also save you money (ie, 37% for a big chunk now and lower tax rates later on).
You do raise a good point about doing ROTH conversions early but it seems like many who do the conversion early wind up cashing out the accounts anyway. It also seems that a lot of Roth conversions are done later and partly for estate planning purposes. Is there data out there about ROTH conversions, the ages at which people convert them? Is there data regarding cash out of conversions done earlier?

The thing is, if you do a ROTH conversion earlier in life, why not contribute to the ROTH accounts in the first place? Many employers are providing both Traditional and ROTH 401(k)'s. When folks have asked me about this, I tell them to do some ROTH and some Traditional. The future is unknowable so one can't go too wrong hedging their bets.
A fool and his money are good for business.

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nedsaid
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Re: CPA advice--does this make sense??

Post by nedsaid » Mon May 13, 2019 1:31 pm

Another reason I tell people not to overdo the Roth conversions is you want to make sure you use the remaining space for the tax bracket you are in. To me, it just makes no sense to do a ROTH conversion only to find out you have put yourself in a higher tax bracket.

I recall when these conversions became popular. People converted, paid the big tax up front, and then experienced a stock market crash. Folks paid a big tax on a depleted balance and then recharacterized their account back from ROTH to Traditional. Just not a big fan of getting too fancy with this stuff. Not sure you can do the recharacterization anymore, I will have to check on that.

The other thing that gets missed is this, when you do a ROTH conversion, you generate a tax bill and potentially a hefty one. What is forgotten is the amount that the money paid in taxes could have earned had no conversion been performed. Presumably, when you do a ROTH conversion, you are paying the tax from another source than the IRA account itself. I still think that a Traditional IRA compared to a ROTH IRA is a wash if your tax bracket is the same when working as when you are retired. You will just have to do the math. If there is a benefit to early ROTH conversions in this scenario, my guess is that it will be far less than you think.
A fool and his money are good for business.

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nedsaid
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Re: CPA advice--does this make sense??

Post by nedsaid » Mon May 13, 2019 1:34 pm

Valuethinker wrote:
Sun May 12, 2019 12:16 pm
fmhealth wrote:
Sat May 11, 2019 3:29 pm
I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.

Is this a sound approach or are there strategies that can produce a material tax savings? Thanks in advance for any actionable insights.

Be Well,
fmhealth
In truth it's not bad advice in terms of avoiding bad investment decisions.

However as a tax planner there are things one could advise a client (not that I am a CPA nor US based). Hypothetical ones include timing of when you take capital gains and whether you hold tax free municipal bonds or US Treasury bonds.

That's the sort of advice a CPA can and should give.

Avoid investments that are sold primarily by their tax shelter claims.
The amen corner is shouting in agreement. Lots of folks got burned with tax shelter strategies like Limited Partnerships. The IRS revoked status on a lot of these and folks who thought they had a big tax shelter instead got stuck with a big tax bill. Be careful out there.
A fool and his money are good for business.

JoeRetire
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Re: CPA advice--does this make sense??

Post by JoeRetire » Mon May 13, 2019 1:36 pm

fmhealth wrote:
Sat May 11, 2019 3:29 pm
I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.

Is this a sound approach or are there strategies that can produce a material tax savings? Thanks in advance for any actionable insights.
There are many, many potential strategies that produce material tax savings, if that's your primary goal. But a good CPA will lay them out for you and help you make an informed decision. Perhaps your CPA has already concluded (based on knowing you well) that none of these strategies would be amenable to you.

Did you ask "Are there strategies that can produce a material tax savings?" Sometimes you have to be specific and ask for what you want.

That said - don't let the tax tail wag the dog.

MichCPA
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Re: CPA advice--does this make sense??

Post by MichCPA » Mon May 13, 2019 2:21 pm

EdNorton wrote:
Sun May 12, 2019 7:37 am
I'm a retired CPA, if you don't give the specifics of your income, we can't tell you if your CPA is right or wrong. :oops:
Too long didn't read version- Don't do anything unless a market dip gives you a chance to harvest some losses and make changes at a lower tax rate.

+1, The arm chair accountants are out in force, but if the OP is already retired the savings options are limited. The overwhelming likelihood is that you would need to wait for a big market drop to create losses that allow for selling out of disadvantageous investments or conversion opportunities at lower tax rates.

These are the likely current constraints: (based on almost no information)

1. Probably no 401k or IRA contribution eligibility. (retired)
2. Converting existing IRA or 401k balances to Roth would be at the highest tax rate
3. Given the large income for a retired person, the OP has likely accumulated balances over many year and has large gains that make selling into munis or tax managed funds less advantageous.
4. A retiree is likely to be on Medicare and ineligible for HSA contributions.

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celia
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Re: CPA advice--does this make sense??

Post by celia » Mon May 13, 2019 7:57 pm

nedsaid wrote:
Mon May 13, 2019 1:23 pm
You do raise a good point about doing ROTH conversions early but it seems like many who do the conversion early wind up cashing out the accounts anyway. It also seems that a lot of Roth conversions are done later and partly for estate planning purposes. Is there data out there about ROTH conversions, the ages at which people convert them? Is there data regarding cash out of conversions done earlier?
The only cases I've noticed in this forum about someone wanting to cash out their Roth is from someone young who didn't have much in it and had other financial stress in their life (house purchase, avoiding debt). Can you show me someone on this board who is retired who cashed out? OP has plenty of other income if her/his other income is producing Medicare IIRMA surcharges and putting them in the highest tax bracket.

I doubt there would be any data available for knowing about Roth account cash outs. The IRS may summarize the average amount withdrawn by age or somethings else, but this doesn't say anything about the withdrawals emptying out the accounts, just because large withdrawals are done or even if it is the heirs withdrawing or cashing out.
The thing is, if you do a ROTH conversion earlier in life, why not contribute to the ROTH accounts in the first place? Many employers are providing both Traditional and ROTH 401(k)'s. When folks have asked me about this, I tell them to do some ROTH and some Traditional. The future is unknowable so one can't go too wrong hedging their bets.
Someone reminded me and now I remind you that OP is retired. Apparently all the money was deposited during her working years since the OP is now retired. The reason it was contributed early was probably to lower her tax rate at the time. So taxes in earler years were saved. Now they are due. But OP is lucky in that the top tax bracket now (37%) is less than it was pre-2018 (39.6%). But it is returning to 39.6% in 2026 unless Congress makes the current tax rates permanent.
nedsaid wrote:
Mon May 13, 2019 1:31 pm
Another reason I tell people not to overdo the Roth conversions is you want to make sure you use the remaining space for the tax bracket you are in. To me, it just makes no sense to do a ROTH conversion only to find out you have put yourself in a higher tax bracket.
So, if OP is in the highest tax bracket, I guess you're suggesting she "fill up" the top tax bracket, which has no "top"? :oops: :D
I recall when these conversions became popular. People converted, paid the big tax up front, and then experienced a stock market crash. Folks paid a big tax on a depleted balance and then recharacterized their account back from ROTH to Traditional. Just not a big fan of getting too fancy with this stuff. Not sure you can do the recharacterization anymore, I will have to check on that.
People didn't convert because it was popular. Before 2010, only those with AGI <= $100,000 could convert. Starting in 2010, everyone could convert and convert as much as they wanted.

Recharacterizaions of Roth conversions were not allowed any more for conversions done after 2017. But before that, it was a good strategy to convert more than you could pay taxes on because you had until the following October 15 to do the recharacterization. You could see which of your conversions had the most growth, then recharacterize the rest.

When the market was dropping in 2008, it was a good idea to convert when share prices where half their former value since you could convert twice as many shares for the same tax bill. I was one of these who used the 2008 market crash to my advantage. Every time the market dropped another 5%, I did another Roth conversion. I think I did about 8 of them that year and recharacterized half of them. I would do it again if I had the chance and Roth recharacterizations were still allowed.
The other thing that gets missed is this, when you do a ROTH conversion, you generate a tax bill and potentially a hefty one. What is forgotten is the amount that the money paid in taxes could have earned had no conversion been performed. Presumably, when you do a ROTH conversion, you are paying the tax from another source than the IRA account itself. I still think that a Traditional IRA compared to a ROTH IRA is a wash if your tax bracket is the same when working as when you are retired. You will just have to do the math.
You're going to owe tax on the tax-deferred eventually. Why not pay it now before that tax bill grows (as the account value grows)? Although you will usually pay the taxes out of a taxable account, you are forgetting that you will no longer have to pay taxes on the growth of the amount paid in taxes (since it didn't occur).



The only reason I can think of that the OP SHOULDN'T convert it all, is if part of the tax-deferred account(s) will go to charity when OP dies. The charity can receive the whole amount and neither the OP nor charity will have to pay taxes on it. The OP can start giving up to $100,000 per year to charity now and not pay any taxes on it by making the donation via a Qualified Charitable Distribution (QCD).
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nedsaid
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Re: CPA advice--does this make sense??

Post by nedsaid » Mon May 13, 2019 10:51 pm

I was responding to someone who asked me to elaborate on ROTH conversions which I did. I was not at that point addressing the original poster. When people are doing ROTH conversions, they should look at the remaining space in their tax bracket so they are not inadvertently putting themselves in a higher tax bracket. This is pretty basic tax advice. In the original poster's case, he was already in the highest tax bracket so that is a mute point.

The original poster is retired and I suppose his options for tax savings regarding his investments are likely limited. But we have very little information here.

You did raise a point about early ROTH conversions. I would have to think that through.
Last edited by nedsaid on Tue May 14, 2019 7:01 pm, edited 1 time in total.
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celia
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Re: CPA advice--does this make sense??

Post by celia » Tue May 14, 2019 12:50 pm

nedsaid wrote:
Mon May 13, 2019 10:51 pm
I was responding to someone who asked me to elaborate on ROTH conversions which I did. I was not at that point addressing the original poster. When people are doing ROTH conversions, they should look at the remaining space in their tax bracket so they are not inadvertently putting themselves in a higher tax bracket. This is pretty basic tax advice. In the original poster's case, he was already in the highest tax bracket so that is a mute point.

The original poster is retired and I suppose his options for tax savings regarding his investments are likely limited. But we have very little information here.

You did raise a point about early ROTH conversions. I would have to think that through.

Re-read your post please and you might want to think about editing it. It was pretty condescending.
I didn't pick up on you answering someone else and I was replying for the OP's benefit. I guess that is our main difference. I still think large, early Roth conversions are best for the OP but felt you were trying to talk him/her out of it. I agree that we don't have much to go on here except for knowing that the OP is in the highest tax bracket.

With that said, I don't think it will do anything to edit my previous post since you've quoted the whole thing. I'm sorry for the misunderstanding.
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: CPA advice--does this make sense??

Post by NotWhoYouThink » Tue May 14, 2019 1:13 pm

OP's posting history indicates he is 73 and gives almost identical responses about 5 posts in to any question, then leaves.

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nedsaid
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Re: CPA advice--does this make sense??

Post by nedsaid » Tue May 14, 2019 10:44 pm

celia wrote:
Tue May 14, 2019 12:50 pm
nedsaid wrote:
Mon May 13, 2019 10:51 pm
I was responding to someone who asked me to elaborate on ROTH conversions which I did. I was not at that point addressing the original poster. When people are doing ROTH conversions, they should look at the remaining space in their tax bracket so they are not inadvertently putting themselves in a higher tax bracket. This is pretty basic tax advice. In the original poster's case, he was already in the highest tax bracket so that is a mute point.

The original poster is retired and I suppose his options for tax savings regarding his investments are likely limited. But we have very little information here.

You did raise a point about early ROTH conversions. I would have to think that through.
I didn't pick up on you answering someone else and I was replying for the OP's benefit. I guess that is our main difference. I still think large, early Roth conversions are best for the OP but felt you were trying to talk him/her out of it. I agree that we don't have much to go on here except for knowing that the OP is in the highest tax bracket.
A big reason for ROTH conversions is that future tax rates are unknown. It seems to me that the odds of future tax rates going up from where they are now is higher than the odds of future tax rates going down. It has been said that with Social Security running into funding problems after the trust fund runs out that there would be pressures for additional revenue. Also folks like Ben Stein have said that those of us who saved for retirement will be made to pay for those who don't. So if you believe that scenario, then ROTH conversions are a hedge against future higher tax rates.

If there is a desire to pass tax free money to children, ROTH conversions would help accomplish that as taxes on monies in tax deferred accounts like Traditional IRAs will have to eventually be paid.

ROTH conversions should be considered on a case by case basis. Lots of things to consider. One of which is that you don't want to inadvertently put yourself in a higher tax bracket doing so. It has been drilled into the brains of a lot of people to not pay a tax today that you can pay tomorrow. Accountants have been trained this way. It is counterintuitive to pay a tax today so you don't have to pay it tomorrow. I suppose one reason is that today is known but the future is not. It also has to do with the time value of money.

As far as the original poster, he had a very generic question about tax savings. The question of ROTH conversions came up indirectly but probably still something he ought to consider. The thing is, it didn't sound like he wanted to pay even more taxes. Most states have income taxes, so he would have to consider that as well.

I did wonder if ROTH conversions would trigger the Net Investment Income Tax. I did a Bing search and found this quotation within an article.
Although tax rates are lower now, Roth IRA conversions nevertheless increase income in the year when they take place, resulting in one-time tax hit. Roth conversions are not subject to the 3.8% net investment income tax, but adding the conversion to their income could trigger the tax on other income subject to the 3.8% tax, for the year of the conversion. Again, remind clients to look more at the long-term tax benefits.
The quote comes from an article written by Ed Slott at www.financial-planning.com Here is the link:

https://www.financial-planning.com/news ... onversions

What I am reacting to is that ideas get popular and get pushed hard. People get excited and want to do things like conversions without thinking everything through.

A few years ago, a financial advisor recommended that I do ROTH conversions. I decided against it as I had little space left under the 15% Tax Bracket. It wouldn't have taken much to push me into the 25% bracket and coupled with a 9% State Income Tax rate seemed too much. Didn't make sense to me to pay between 24% and 34% of the conversion amount in taxes. I would have wanted to pay the taxes from taxable accounts but I did not want to deplete my emergency funds to do this. As I recall, Congress incentivized ROTH conversions and allowed you to spread the tax over 3 years. The Advisor didn't seem to take into account that I could have been pushed into a higher bracket.

I looked it up, a person could have done a ROTH conversion in 2010 and had the choice of paying the tax all in 2010 or paying half in 2011 and half in 2012. Man, where does the time go? It was a one time thing in the tax code and financial planners were pushing ROTH conversions then.

Yet another factor to consider with ROTH conversions is the taxability of Social Security. ROTH conversions are income that is considered in the formula that determines how much of Social Security is taxed. With the Original Poster, this would not be a factor as he would already be taxed on 85% of his Social Security benefits as he was in the highest income tax bracket. If less that 85% of your Social Security is taxed, a ROTH conversion would most likely trigger taxes on more of your Social Security.

However, money already in a ROTH that is taken out does not affect the taxability of Social Security.

http://money.com/money/4671000/roth-ira ... -security/

Tax law is complex and many things to consider when making certain financial moves like selling a property, selling lots of appreciated stock in a taxable account, ROTH conversions, and other such things. Good idea to run scenarios through tax software to get an idea of the potential tax burden before pulling the trigger. One thing can affect another in a way you wouldn't think.
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FIREchief
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Re: CPA advice--does this make sense??

Post by FIREchief » Wed May 15, 2019 12:22 am

fmhealth wrote:
Sat May 11, 2019 3:29 pm
I'll get right to the point. I will be in the highest tax bracket again this year. My CPA says don't concern myself about the taxes just generate the greatest income possible & simply pay the taxes. Retired with no way to shelter much if any income & somewhat comfortable paying taxes & increased MC health premiums.
High RMDs??
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Re: CPA advice--does this make sense??

Post by Bacchus01 » Wed May 15, 2019 5:26 am

fmhealth wrote:
Sat May 11, 2019 9:53 pm
Thanks go out to everyone for their thoughtful,rapier-like and sage insights. Much appreciated! At this point I would rather not get into specifics as my strategy is one that I'm comfortable with but would not lend itself for discussion on this venue. As a matter of fact in runs contrary to many Boglehead beliefs.

In any event it shows there are numerous profitable & innovative approaches seeking the same end. Making money on a consistent basis.Thanks again.


Be Well,
fmhealth
The information you’ve provided is so vague and pointless that the only logical response to your question is “maybe.”

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Re: CPA advice--does this make sense??

Post by samsoes » Wed May 15, 2019 7:33 am

Bacchus01 wrote:
Wed May 15, 2019 5:26 am
fmhealth wrote:
Sat May 11, 2019 9:53 pm
Thanks go out to everyone for their thoughtful,rapier-like and sage insights. Much appreciated! At this point I would rather not get into specifics as my strategy is one that I'm comfortable with but would not lend itself for discussion on this venue. As a matter of fact in runs contrary to many Boglehead beliefs.

In any event it shows there are numerous profitable & innovative approaches seeking the same end. Making money on a consistent basis.Thanks again.


Be Well,
fmhealth
The information you’ve provided is so vague and pointless that the only logical response to your question is “maybe.”
Very helpful, thanks! :oops:
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Bacchus01
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Re: CPA advice--does this make sense??

Post by Bacchus01 » Wed May 15, 2019 5:30 pm

samsoes wrote:
Wed May 15, 2019 7:33 am
Bacchus01 wrote:
Wed May 15, 2019 5:26 am
fmhealth wrote:
Sat May 11, 2019 9:53 pm
Thanks go out to everyone for their thoughtful,rapier-like and sage insights. Much appreciated! At this point I would rather not get into specifics as my strategy is one that I'm comfortable with but would not lend itself for discussion on this venue. As a matter of fact in runs contrary to many Boglehead beliefs.

In any event it shows there are numerous profitable & innovative approaches seeking the same end. Making money on a consistent basis.Thanks again.


Be Well,
fmhealth
The information you’ve provided is so vague and pointless that the only logical response to your question is “maybe.”
Very helpful, thanks! :oops:
You’re welcome.

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