Roth > Taxable > tIRA

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grayfox
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Re: Roth > Taxable > tIRA

Post by grayfox » Tue Aug 06, 2019 6:25 am

If, may, could, in some cases...

These sound like reasons someone would bring up who desperately want to convince you to do something. Like the salesman wants you to buy his product because it benefits him. But he gives a list of reasons that seem like it is for your benefit. But none of them apply to you, or the benefit to you is small, but to the salesman great. They don't want people to Roth convert because it reduces AUM. Everyone puts their own self interest first.

Like I said, I have yet to hear a good reason to keep anything in tIRA.

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TomatoTomahto
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Re: Roth > Taxable > tIRA

Post by TomatoTomahto » Tue Aug 06, 2019 7:32 am

Like I said, I have yet to hear a good reason to keep anything in tIRA.
If your non-RMD income doesn’t use up your 0% tax space, that’s one reason. If your tax rate now is higher than it will be during RMDs, that’s another reason (to not do conversions).

I wish that I had the cojones to do large conversions; I don’t. But, even if I did, I wouldn’t empty out the traditional space; I would just trim it to a reasonable level.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Roth > Taxable > tIRA

Post by marcopolo » Tue Aug 06, 2019 8:10 am

TomatoTomahto wrote:
Tue Aug 06, 2019 7:32 am
Like I said, I have yet to hear a good reason to keep anything in tIRA.
If your non-RMD income doesn’t use up your 0% tax space, that’s one reason. If your tax rate now is higher than it will be during RMDs, that’s another reason (to not do conversions).

I wish that I had the cojones to do large conversions; I don’t. But, even if I did, I wouldn’t empty out the traditional space; I would just trim it to a reasonable level.
I don't think it even has to be at 0% tax space. To empty a reasonable sized tIRA, one probably has to convert well into 22% bracket. Now, you are wasting all the 0% and 12% space that could have been utilized to take RMDs at a lower tax rate than the conversions.
Last edited by marcopolo on Tue Aug 06, 2019 8:21 am, edited 1 time in total.
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Re: Roth > Taxable > tIRA

Post by Chip » Tue Aug 06, 2019 8:16 am

grayfox wrote:
Tue Aug 06, 2019 6:25 am
Like I said, I have yet to hear a good reason to keep anything in tIRA.
Are your fingers stuck in your ears preventing hearing? :D

ALL of the reasons I mentioned apply to me, though obviously there is no certainty about LTC expenses.

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Re: Roth > Taxable > tIRA

Post by smitcat » Tue Aug 06, 2019 8:25 am

grayfox wrote:
Tue Aug 06, 2019 6:25 am
If, may, could, in some cases...

These sound like reasons someone would bring up who desperately want to convince you to do something. Like the salesman wants you to buy his product because it benefits him. But he gives a list of reasons that seem like it is for your benefit. But none of them apply to you, or the benefit to you is small, but to the salesman great. They don't want people to Roth convert because it reduces AUM. Everyone puts their own self interest first.

Like I said, I have yet to hear a good reason to keep anything in tIRA.
"Like I said, I have yet to hear a good reason to keep anything in tIRA."

If your personal situation makes these items apply then it WILL be better to leave funds in a TIRA:
1.Balancing future income for taxes hardy ever requires converting the entire amount. Leaving enough such that the RMD's do not measurably affect your taxes is typically the best solution when you add up all the years and solve for 'spendable' dollars> How do your future RMD's and taxes look in this comparison.
2. larger medical payments including long term care can be deductible rendering the TIRA account withdrawals somewhat painless. A certain amount left in the TIRA may actually come out a winner if one of these become a future event. How have you planned for larger medical and long term care for you and your spouse?
3. In some cases an inheritance will get low or no tax treatments on an inherited TIRA. Considering the likelihood of the tax treatment on inheritances could be another reason. How does your inheritance plan look and will your heirs suffer from additional tax burdens or not?

Your current situation was somewhat avoidable if you had utilized a best fit plan - now that you have less choices it would be prudent to see how you fit in within these possibilities.

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Re: Roth > Taxable > tIRA

Post by grayfox » Wed Aug 07, 2019 5:05 am

If insurance salesman reasons apply to you, go ahead and buy the policy. For me, I'm choosing simplicity. I don't see myself at 90 years old running spreadsheets to optimize taxes, moving money from this account to that account, keeping track of IRS paperwork for every medical bill and charitable donation, explaining to the IRS why this tIRA withdrawal should not be taxed as ordinary income. I'm setting things up ahead of time, so things will be as simple as possible.

I'm reading a thread where a lot of people are getting some kind of CP2000 letters from the IRS saying they owe taxes on tIRA withdrawals, when the rules say it's not taxable. But most of the IRS workers don't even not their own rules.

I don't want to deal with stuff like CP200 letters when I'm 90. I'd rather get all the tax issues out of the way now while I have the ability to deal with it, and have very simple taxes when I am too old to deal with it.

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Re: Roth > Taxable > tIRA

Post by grayfox » Wed Aug 07, 2019 6:05 am

Here's something that happened to me one time. Back in the 1980s, I started a small business on the side and bought some test equipment for the business. Instead of depreciating the equipment over so many years, they had a Section-179 deduction where you could expense the equipment the year you bought it. So I did that. It was all in their rules in Publication 17 Your Federal Income Tax .

The IRS flagged it. When I called up the IRS, guess what? Nobody at the IRS had ever heard of Section-179! They don't even know their own rules. It was like talking to DMV bureaucrats. I had to hire a CPA, who went to the meeting with the IRS. When the CPA came back, the IRS ended up owing me $600! But then I had to pay the CPA about $1,000, so net I was out $400. Plus dozens of wasted hours.

After that, I kept my tax return ultra-simple. No deductions for anything. Nothing in my return they can question that requires documentation. No obscure loopholes that no one at the IRS knows about.

:arrow: I just can't see taking tIRA distributions, that are normally taxed as ordinary income, and then having to prove that they should not be taxed because of some rule that they probably never heard of.

You will be getting CP2000 letters when you are 90. Good luck with that.

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Re: Roth > Taxable > tIRA

Post by marcopolo » Wed Aug 07, 2019 7:52 am

grayfox wrote:
Wed Aug 07, 2019 5:05 am
If insurance salesman reasons apply to you, go ahead and buy the policy. For me, I'm choosing simplicity. I don't see myself at 90 years old running spreadsheets to optimize taxes, moving money from this account to that account, keeping track of IRS paperwork for every medical bill and charitable donation, explaining to the IRS why this tIRA withdrawal should not be taxed as ordinary income. I'm setting things up ahead of time, so things will be as simple as possible.

I'm reading a thread where a lot of people are getting some kind of CP2000 letters from the IRS saying they owe taxes on tIRA withdrawals, when the rules say it's not taxable. But most of the IRS workers don't even not their own rules.

I don't want to deal with stuff like CP200 letters when I'm 90. I'd rather get all the tax issues out of the way now while I have the ability to deal with it, and have very simple taxes when I am too old to deal with it.
You seem to keep moving the goal posts every time people point out that your stated position may not necessarily be true.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Roth > Taxable > tIRA

Post by TomatoTomahto » Wed Aug 07, 2019 8:22 am

marcopolo wrote:
Wed Aug 07, 2019 7:52 am
grayfox wrote:
Wed Aug 07, 2019 5:05 am
If insurance salesman reasons apply to you, go ahead and buy the policy. For me, I'm choosing simplicity. I don't see myself at 90 years old running spreadsheets to optimize taxes, moving money from this account to that account, keeping track of IRS paperwork for every medical bill and charitable donation, explaining to the IRS why this tIRA withdrawal should not be taxed as ordinary income. I'm setting things up ahead of time, so things will be as simple as possible.
I'm reading a thread where a lot of people are getting some kind of CP2000 letters from the IRS saying they owe taxes on tIRA withdrawals, when the rules say it's not taxable. But most of the IRS workers don't even not their own rules.
I don't want to deal with stuff like CP200 letters when I'm 90. I'd rather get all the tax issues out of the way now while I have the ability to deal with it, and have very simple taxes when I am too old to deal with it.
You seem to keep moving the goal posts every time people point out that your stated position may not necessarily be true.
OP, It’s your thread and I guess you’re entitled to have your way with it, but I have to admit that I’ve lost the plot a few times.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Roth > Taxable > tIRA

Post by GrowthSeeker » Wed Aug 07, 2019 2:14 pm

Re: using tIRA money to pay medical expenses.

I’m 67. Not having an early withdrawal penalty doesn’t apply to me.
I’m not going to buy LT care insurance.
I’m unclear on on what money coming out of tIRA would not be taxed. Is it any medical care, or just long term nursing home expenses or just long term care insurance premiums?
Is it only the amount over 10% (or 7.5% if older than 65) of AGI?
Does 85% of SS plus all dividends except for munis count towards AGI?
Are there other hoops to jump through, forms to fill out, doctor’s signatures needed, or a requirement to be disabled for these medical payments made from IRA to be tax free?
Just because you're paranoid doesn't mean they're NOT out to get you.

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Re: Roth > Taxable > tIRA

Post by Chip » Wed Aug 07, 2019 2:35 pm

GrowthSeeker wrote:
Wed Aug 07, 2019 2:14 pm

I’m unclear on on what money coming out of tIRA would not be taxed. Is it any medical care, or just long term nursing home expenses or just long term care insurance premiums?
Is it only the amount over 10% (or 7.5% if older than 65) of AGI?
So we're talking about using large medical itemized deductions to offset the income from IRA withdrawals. So saying it's not taxed isn't technically correct, just shorthand for what's happening. So you have to be itemizing deductions, and your total medical expenses have to exceed 10% of your adjusted gross income (AGI). Note that IRA withdrawals directly increase your AGI, so as you withdraw more from the IRA the higher the 10% "floor" is in dollars. The list of medical expenses that qualify as deductible is lengthy, but normal medical care, medical insurance premiums, nursing home expenses and nursing home premiums (up to a limit) are all allowed. Note that the previous 7.5% floor no longer exists. Everyone is subject to 10%.
Does 85% of SS plus all dividends except for munis count towards AGI?
Are there other hoops to jump through, forms to fill out, doctor’s signatures needed, or a requirement to be disabled for these medical payments made from IRA to be tax free?
Non-muni dividends and taxable social security count towards AGI. Whether the amount of SS taxed is 85% or some lesser number depends on your other income.

You just need to be able to document the expenses (receipts, etc.). There are specific requirements for deducting nursing home expenses, but I would think nearly anyone in a skilled nursing facility would meet those requirements. One would have to be diligent to make sure the requirements were met for assisted living and memory care facilities. Again, note that the payments aren't "tax free", they are just offset to some degree by the medical (and other itemized) deductions.

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Re: Roth > Taxable > tIRA

Post by trueblueky » Wed Aug 07, 2019 4:45 pm

Chip wrote:
Tue Aug 06, 2019 6:06 am
grayfox wrote:
Tue Aug 06, 2019 5:33 am
I, too, am planing on large Roth Conversions. My intention at this time is to convert the entire tIRA to Roth, so that I end up with everything in Roth and nothing in tIRA. I have yet to hear a good reason to keep anything in tIRA.
1. Because of the standard deduction, tIRA withdrawals of 27k or less are tax-free for couples age 65 or over with no other sources of ordinary income. The amount is larger for those with >27k of itemized deductions.

2. If significant medical expenses are incurred (think uninsured LTC expenses), itemized deductions can get very large. It wouldn't be unusual to for 80k of tax-free withdrawals to be possible. I've seen this multiple times in my AARP tax work.

3. If one is only taking RMDs, death is almost certain before emptying it. Then it's the tax rate of the IRA beneficiary that matters. In my case it's a charity with a 0% tax rate.

4. QCDs offer a tax-free way to move IRA assets to charities post age 70.5.
As a TaxAide volunteer, I too have seen large tax-free withdrawals from tIRA because of LTC expenses. If one has a tIRA, using it for this can be better than using a taxable account.

That plus QCD makes me want a mix of traditional, taxable and Roth. Currently in the phase where we convert to Roth up to the top of 12%. That phase will end before all is converted.

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Re: Roth > Taxable > tIRA

Post by grayfox » Thu Aug 08, 2019 4:56 am

Holy cow! That medical deduction for tIRA sounds complicated. Exactly what I want to avoid when I am old. Simple taxes after age 70 is a requirement for me. That includes not getting CP2000 letters. I would not make use of that tax loophole, so that is not a reason for me to keep money in an tIRA. I'll be paying my medical bills out of my Roth, which is tax free without jumping though hoops.

A tIRA distribution is normally taxed as ordinary income. Maybe there are some loopholes. But when you don't pay the tax, the IRS wants to know why. Maybe they send you a CP2000 saying you owe $13,000 or $20,000 in taxes. Often the people at the IRS don't know their own rules. Then you have to fight the IRS which could go on for months and months. That's not how I intend to spend my old age. If you feel differently, have fun! And, remember, this is when you are in a nursing home.

Don't believe me? Search Bogleheads for CP2000.

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Re: Roth > Taxable > tIRA

Post by firebirdparts » Thu Aug 08, 2019 5:52 am

I would have lost a lot of money betting on how long this thread would stay active. You guys are arguing with somebody who doesn’t have any interest in the zero tax bracket. He’s not interested. You’re not going to get him interested.

Chip
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Re: Roth > Taxable > tIRA

Post by Chip » Thu Aug 08, 2019 3:27 pm

firebirdparts wrote:
Thu Aug 08, 2019 5:52 am
I would have lost a lot of money betting on how long this thread would stay active. You guys are arguing with somebody who doesn’t have any interest in the zero tax bracket. He’s not interested. You’re not going to get him interested.
Good point.

Some are willing to give up tens of thousands of dollars* in the interest of simplicity. That's okay, it's their money.

* That was the tax benefit my mother received from deducting her assisted living expenses -- about 10k per year in federal and state taxes.

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Re: Roth > Taxable > tIRA

Post by grayfox » Fri Aug 09, 2019 5:26 am

Chip wrote:
Thu Aug 08, 2019 3:27 pm

* That was the tax benefit my mother received from deducting her assisted living expenses -- about 10k per year in federal and state taxes.
I am going to guess that your mother is fortunate enough to have a son who is a professional CPA or CFP or similar, amiright?

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Re: Roth > Taxable > tIRA

Post by Chip » Fri Aug 09, 2019 6:19 am

grayfox wrote:
Fri Aug 09, 2019 5:26 am
I am going to guess that your mother is fortunate enough to have a son who is a professional CPA or CFP or similar, amiright?
No, you're wrong. I have had no professional tax training.

If you're concerned about having your taxes done correctly as you age I suggest getting them done for free by AARP Tax-Aide.

I would also note that of the many discussions here about CP2000 notices, I would guess that more than half are from people who received them in connection with a Roth conversion. So if that's your metric you probably shouldn't be doing Roth conversions at all. :D

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Re: Roth > Taxable > tIRA

Post by grayfox » Fri Aug 09, 2019 6:22 am

Chip wrote:
Fri Aug 09, 2019 6:19 am

No, you're wrong. I have had no professional tax training.
But you help your mother with her taxes, right?
Chip wrote:
Fri Aug 09, 2019 6:19 am

I would also note that of the many discussions here about CP2000 notices, I would guess that more than half are from people who received them in connection with a Roth conversion. So if that's your metric you probably shouldn't be doing Roth conversions at all. :D
Except that I am doing Roth conversion now, while I can still deal with the IRS, if necessary. At this time, I can still read my computer screen, get and read my mail, email, talk on the phone, do computations. Unless you die early, everyone reaches a point where they can't do those basic things.

My goal is simple finances and taxes, after age 70.

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Re: Roth > Taxable > tIRA

Post by Chip » Fri Aug 09, 2019 7:49 am

grayfox wrote:
Fri Aug 09, 2019 6:22 am
But you help your mother with her taxes, right?
I did, until she died. However, she could have easily had her return completed by Tax-Aide in the building where she lived.
Except that I am doing Roth conversion now, while I can still deal with the IRS, if necessary. At this time, I can still read my computer screen, get and read my mail, email, talk on the phone, do computations. Unless you die early, everyone reaches a point where they can't do those basic things.
My goal is simple finances and taxes, after age 70.
I won't do any Roth conversions after age 70, either. Not for simplicity reasons but because it almost certainly won't make economic sense in my situation.

I would suggest that if you can't do those things you mentioned, you won't be able to manage a simple portfolio or complete a simple tax return.

Have you quantified how much you are paying for the simplicity you seek?

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Re: Roth > Taxable > tIRA

Post by grayfox » Sat Aug 10, 2019 6:15 am

When it comes time to get tax help, it would still be better to have simple taxes. It would take the helper 5 minutes to do your taxes. "Let's see, you have $1000 per month pension, $2000 per month Roth distribution, $400 per month income as Walmart Greeter, $2000 per month social security. Standard deduction. You owe zero taxes!"

In this world nothing can be said to be certain, except death and taxes. --Benjamin Franklin

But if you have all your wealth in a Roth IRA, you can be free from federal taxes for the rest of your life. And if you live in a state with no state income tax, then no state income tax either.* Plus some states also have no sales tax**. The only tax left is property tax.

So it seems that one can be mostly free from taxes. That is something to look forward to in old age.

Maybe next I will find a way to cheat death and prove Franklin wrong.

* Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming
**Alaska, Delaware, Montana, New Hampshire, and Oregon

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TomatoTomahto
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Re: Roth > Taxable > tIRA

Post by TomatoTomahto » Sat Aug 10, 2019 6:21 am

Grayfox, you are being silly. If it takes 5 minutes for the tax preparer to do your taxes without a tIRA, it will take 7 minutes with a tIRA. I have a too-large tIRA, so I get the desire to do Roth conversions, but it’s silly to empty out the traditional.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Roth > Taxable > tIRA

Post by grayfox » Sat Aug 10, 2019 7:29 am

You say it is silly to have zero federal income tax liability in old age. Is it also silly for me to move to a state with no state income tax, and have zero state income tax liability?

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Re: Roth > Taxable > tIRA

Post by TomatoTomahto » Sat Aug 10, 2019 7:42 am

grayfox wrote:
Sat Aug 10, 2019 7:29 am
You say it is silly to have zero federal income tax liability in old age. Is it also silly for me to move to a state with no state income tax, and have zero state income tax liability?
No, that's not silly. But, it is silly to pay more in taxes now to "simplify" your tax situation later, if it's not really materially simplifying it.

More is not always more. Reduce your tIRA, but eliminating it is silly unless you can do the conversions at a reasonable tax rate.

Whatever. I am moving on to other topics elsewhere.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Roth > Taxable > tIRA

Post by grayfox » Sat Aug 10, 2019 7:50 am

Well, moving to another state to eliminate state income taxes is hard. You have to pick up everything, sell the house, and move lock, stock and barrel far away. It may be worthwhile, but it is hard and a huge change in your life.

Moving to a Roth to have no federal taxes in old age is easy. It just involves moving money from one account to another. A few mouse clicks. Sure, you pay big taxes now, and the balance in your Roth will be less than what was the balance in your tIRA. But it's just numbers on the screen. There's really no change in your lifestyle. That's what this whole thread is about: how a smaller Roth is effectively the same as a bigger tIRA.

So the question is, how much to move? You say not all. Then how much? What criteria to decide?
Run i-ORP, and whichever has the highest Disposable Income?

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Re: Roth > Taxable > tIRA

Post by TravelforFun » Sat Aug 10, 2019 10:34 am

My random thoughts on this:

1) I've been kicking myself for years for putting too much money in tIRA and not enough traditional or Roth. I essentially saved 15% income tax in my younger working years to pay 24% income tax in my retirement years.

2) My inheritance will mostly go to my adult kids who are in high tax brackets so they will probably pay more taxes on their inherited IRA than I pay.

3) I had thought about converting a large sum of tIRA to Roth but couldn't bring myself to do it because:
a) it's hard to swallow a large tax bill.
b) there is always a chance we face large medical bills in our retirement years and those bills will offset the RMD and hence, lowering our taxes for that year.
c) there are ways to reduce the tIRA amount without paying income taxes on it in one fell swoop. This year I bought a $250K annuity (SPIA) using tIRA money. I only have to pay taxes on the monthly annuity payments I received and not the entire $250K I withdrew. The $250K amount was selected because my state, Texas, only guarantees up to that amount. My wife will buy another one next year.

4) grayfox's concerns about messing around with taxes and the IRS in our 90s are valid. Missing or withdrawing insufficient RMD would bring you potentially large penalties.

TravelforFun

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Re: Roth > Taxable > tIRA

Post by TravelforFun » Sat Aug 10, 2019 10:34 am

My random thoughts on this:

1) I've been kicking myself for years for putting too much money in tIRA and not enough traditional or Roth. I essentially saved 15% income tax in my younger working years to pay 24% income tax in my retirement years.

2) My inheritance will mostly go to my adult kids who are in high tax brackets so they will probably pay more taxes on their inherited IRA than I pay.

3) I had thought about converting a large sum of tIRA to Roth but couldn't bring myself to do it because:

a) it's hard to swallow a large tax bill.
b) there is always a chance we face large medical bills in our retirement years and those bills will offset the RMD and hence, lowering our taxes for that year.
c) there are ways to reduce the tIRA amount without paying income taxes on it in one fell swoop. This year I bought a $250K annuity (SPIA) using tIRA money. I only have to pay taxes on the monthly annuity payments I received and not the entire $250K I withdrew. The $250K amount was selected because my state, Texas, only guarantees up to that amount. My wife will buy another one next year.

4) grayfox's concerns about messing around with taxes and the IRS in our 90s are valid. Missing or withdrawing insufficient RMD would bring you potentially large penalties.

TravelforFun

Chip
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Re: Roth > Taxable > tIRA

Post by Chip » Sat Aug 10, 2019 12:55 pm

TravelforFun wrote:
Sat Aug 10, 2019 10:34 am
grayfox's concerns about messing around with taxes and the IRS in our 90s are valid. Missing or withdrawing insufficient RMD would bring you potentially large penalties.
It may be a valid concern but there is an entire minefield of "valid concerns" once cognitive decline sets in. I don't believe it's possible to arrange and simplify one's entire life such that it can be on autopilot for the rest of one's life. A lot of us are likely to need help. That doesn't mean that efforts at simplification are useless, just that there are too many issues, both known and unknown, that are bound to crop up.

That said, the RMD issue is easy to solve. Set it up with a broker to make it happen automatically, along with an appropriate amount of withholding.

You can still get a notice from the IRS even if you aren't required to file. They might think you are required to file and send you a bill. My mother could have hired a tax attorney to represent her at $400/hour for a lot of hours with the money she saved by itemizing her medical deductions; something grayfox wants nothing to do with.

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Re: Roth > Taxable > tIRA

Post by dodecahedron » Sat Aug 10, 2019 1:08 pm

grayfox wrote:
Mon Jul 29, 2019 8:46 am
Snowjob wrote:
Mon Jul 29, 2019 7:42 am
Honestly I think most people who do not have pensions would benefit from a mix of all three.

I love the flexibility of taxable, doubles as the emergency fund, all sorts of products available, leverage etc. Roth has the tax exempt status, and the tIRA has the tax arb thing going for it.
What can taxable money do that Roth money can't do?


With taxable funds, you have the ability to tax loss harvest, which can somewhat mitigate some of the pain of a major turndown.
If I ended up 100% Roth, I could, at any time, take money out of Roth and put it into my Taxable.
If you are under 59 1/2, there are limits on the extent to which you can do this without paying tax and penalties on the earnings.

The above reservations noted, and particularly as I am now over 59 1/2, I certainly value my Roth holdings more than my taxable account holdings.


That said,

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Re: Roth > Taxable > tIRA

Post by dodecahedron » Sat Aug 10, 2019 1:17 pm

grayfox wrote:
Thu Aug 08, 2019 4:56 am
Holy cow! That medical deduction for tIRA sounds complicated. Exactly what I want to avoid when I am old. Simple taxes after age 70 is a requirement for me. That includes not getting CP2000 letters. I would not make use of that tax loophole, so that is not a reason for me to keep money in an tIRA. I'll be paying my medical bills out of my Roth, which is tax free without jumping though hoops.

A tIRA distribution is normally taxed as ordinary income. Maybe there are some loopholes. But when you don't pay the tax, the IRS wants to know why. Maybe they send you a CP2000 saying you owe $13,000 or $20,000 in taxes. Often the people at the IRS don't know their own rules. Then you have to fight the IRS which could go on for months and months. That's not how I intend to spend my old age. If you feel differently, have fun! And, remember, this is when you are in a nursing home.

Don't believe me? Search Bogleheads for CP2000.
Even if you are 100% Roth, there is no guarantee that you will avoid CP2000 letters. Within the last month or so, someone on this forum reported getting a CP2000 because they neglected to report a Roth distribution on the proper form. (They had reasoned that it was a taxfree distribution and did not need to be reported. Correct on the former but not on the latter.)

Although I am in general sympathetic with your goal of keeping my finances down the road simple for my eventual POA-designee to manage, there are limits to my willingness to compromise tax-efficiency for maximal simplicity.

I have converted over half my tax-deferred accounts, but do plan to reserve some TIRA for QCDs, possible LTC expenses, and tax-efficient bequests to charity.

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grayfox
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Re: Roth > Taxable > tIRA

Post by grayfox » Sun Aug 11, 2019 5:54 am

Simple Taxes. Maybe I should say what I think simple taxes are. I think it is when everything on your filed return is already known by the IRS. Then their calculation of what you owe matches what you filed. Examples are:

W2 Income
1099-INT
1099-DIV
1099-B
1099-R
Standard Deduction-same fixed number for everyone.

I think this minimizes your chance of getting audited. They already have everything they want to know. I have been filing my taxes this way for years.

When you have other stuff that doesn't match what the IRS already knows, I think that is when they will question it. They want proof. What I have learned is, if you have items on your return like big Itemized Deductions that nullify tens of thousands of dollars in taxes owed, the IRS will make you jump through hoops to get it. They don't like losing $20,000 in tax revenue. Their job is to collect revenue, not cut you a break or make your life easy.

Autopilot. As far as putting everything on autopilot, I think it is possible. I've been doing it for years. It's simple. All mutual fund interest and dividends go into a MMMF. Then every month a monthly withdrawal is transferred to a checking account. Plus pension, annuity, ss when you start it, etc, all get direct deposited to checking. That's the disposable income. Bills like electric, gas, HOA are paid automatically from checking account. There is no need to buy or sell mutual fund shares, so no realized capital gains or losses.

Also, I have no desire for tax loss harvesting. Just more complexity which I have no need for. And maybe it's another thing that will get you audited for wash sale?

The only thing is, I am doing this now from my taxable account. I think it could continue indefinitely except for looming RMDs. So I feel like I must Roth convert to make that problem go away. Once I have Roth converted most of the tIRA, I can switch the autopilot to the Roth account.

Chip
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Re: Roth > Taxable > tIRA

Post by Chip » Sun Aug 11, 2019 9:13 am

Since you've said that 1099-Rs are okay on your tax return, and RMDs can be automated with most brokers, why are you willing to pay unnecessary taxes to get rid of them?
:shock:

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Re: Roth > Taxable > tIRA

Post by TomatoTomahto » Sun Aug 11, 2019 9:51 am

Chip wrote:
Sun Aug 11, 2019 9:13 am
Since you've said that 1099-Rs are okay on your tax return, and RMDs can be automated with most brokers, why are you willing to pay unnecessary taxes to get rid of them?
:shock:
I don’t think it’s the 1099s OP worries about, but the allowed tax exceptions for them (eg, medical).
Okay, I get it; I won't be political or controversial. The Earth is flat.

Chip
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Re: Roth > Taxable > tIRA

Post by Chip » Sun Aug 11, 2019 10:30 am

TomatoTomahto wrote:
Sun Aug 11, 2019 9:51 am
I don’t think it’s the 1099s OP worries about, but the allowed tax exceptions for them (eg, medical).
As I'm sure you know, no one has to take medical deductions (or any other itemized deduction) to which they're entitled. The standard deduction can always be taken. It might cost thousands in extra taxes, but it's absolutely legal.

The OP has yet to say how much this plan is going to cost in extra taxes. If we were to do what he's proposing it would be well into six figures of unnecessary taxes. No thanks.

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Re: Roth > Taxable > tIRA

Post by TomatoTomahto » Sun Aug 11, 2019 11:03 am

I know. OP has locked on a solution, and won’t budge.

As a taxpayer, I guess I should thank him/her.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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grayfox
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Re: Roth > Taxable > tIRA

Post by grayfox » Sun Aug 11, 2019 12:24 pm

I am going to run the numbers. Here is what I am doing:

I'm using Turbotax 2018 to see how much taxes I would have paid if I had made a Roth Conversion in 2018.
I didn't do any Roth conversion in 2018 and had $0 Federal Income Taxes. So whatever the taxes are will be due to the Roth Conversion.

Then I will enter my numbers into the basic i-ORP. This is the simple version that does not do Roth Conversions. I will use the defaults, and only enter my own balances, social security, pension, etc. The base case will be No Conversion.

To see the effect of Roth Conversion, I will subtract the amount converted from tIRA, add that amount to Roth, and subtract the taxes paid from Taxable.

I will look at 0%, 5%, 10%, 20%, 25%, 50%, 75%, 100% Roth Conversion.
The output will be annual Disposable Income.

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Re: Roth > Taxable > tIRA

Post by GrowthSeeker » Sun Aug 11, 2019 12:32 pm

I think that’s a good plan.
Just because you're paranoid doesn't mean they're NOT out to get you.

JBTX
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Re: Roth > Taxable > tIRA

Post by JBTX » Sun Aug 11, 2019 6:44 pm

grayfox wrote:
Tue Aug 06, 2019 6:25 am
If, may, could, in some cases...

These sound like reasons someone would bring up who desperately want to convince you to do something. Like the salesman wants you to buy his product because it benefits him. But he gives a list of reasons that seem like it is for your benefit. But none of them apply to you, or the benefit to you is small, but to the salesman great. They don't want people to Roth convert because it reduces AUM. Everyone puts their own self interest first.

Like I said, I have yet to hear a good reason to keep anything in tIRA.
I have about 40-45% of tax advantaged in Roths. There are many advantages, based on the situation.

I am confused by your statement- the main advantage of a traditional is the up front tax deferral, and the potential that you may be in a lower rate when you take it out or eventually do a Roth conversion.

Once you retire, at least some traditional makes sense if you have no other income, as roughly$25k of income per year is at 0% tax bracket for married filing jointly. So you could have $500-600k and your rmds have virtually no tax, again assuming you have no other income other than social security.

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grayfox
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Re: Roth > Taxable > tIRA

Post by grayfox » Mon Aug 12, 2019 6:29 am

Results:

Code: Select all

ROTH         EFFECTIVE      TOTAL         DISPOSABLE
Conversion   TAX RATE      BALANCE         INCOME
0%                         100.0%          100.0       No Roth Conversion
5%           26.4%          99.1%          100.7
10%          27.0%          98.2%          100.7
20%          31.0%          95.9%          100.7
25%          31.9%          94.7%          101.4
30%          32.8%          93.5%          101.4
35%          33.4%          92.3%          100.7
40%          33.8%          91.1%          100.7
50%          34.5%          88.7%          100.7
75%          35.3%          82.6%          100.0
100%         35.7%          77.0%           97.8   Convert entire tIRA in one year
ROTH Conversion is approximately the percent of tIRA converted to Roth.
EFFECTIVE TAX RATE is the dollar amount of tax divided by the dollar amount converted. Taxes are subtracted from Taxable account.
TOTAL BALANCE is the sum of tIRA, Roth and Taxable account immediately after Roth Conversion.
Disposable Income is the result from basic i-ORP using defaults.

Draw your conclusions.

Chip
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Re: Roth > Taxable > tIRA

Post by Chip » Mon Aug 12, 2019 7:04 am

grayfox wrote:
Mon Aug 12, 2019 6:29 am
ROTH Conversion is approximately the percent of tIRA converted to Roth.
EFFECTIVE TAX RATE is the dollar amount of tax divided by the dollar amount converted, which is subtracted from Taxable account.
TOTAL BALANCE is the sum of tIRA, Roth and Taxable account immediately after Roth Conversion.
Disposable Income is the result from basic i-ORP using defaults.

Basic i-orp doesn't take into account most of what we discussed upthread. It doesn't itemize deductions at all, it knows nothing about QCDs, it defaults all of your accounts to a 60/40 allocation and empties all of your accounts by age 92. And it doesn't account for Medicare IRMAA.

None of those assumptions apply to me, and I suspect there are very few people where all of them apply. I've tried the extended model as well and it's also a straitjacket.
Draw your conclusions.
GIGO

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Re: Roth > Taxable > tIRA

Post by GrowthSeeker » Mon Aug 12, 2019 9:39 am

grayfox wrote:
Mon Aug 12, 2019 6:29 am
Results:

Code: Select all

ROTH         EFFECTIVE      TOTAL         DISPOSABLE
Conversion   TAX RATE      BALANCE         INCOME
0%                         100.0%          100.0       No Roth Conversion
5%           26.4%          99.1%          100.7
10%          27.0%          98.2%          100.7
20%          31.0%          95.9%          100.7
25%          31.9%          94.7%          101.4
30%          32.8%          93.5%          101.4
35%          33.4%          92.3%          100.7
40%          33.8%          91.1%          100.7
50%          34.5%          88.7%          100.7
75%          35.3%          82.6%          100.0
100%         35.7%          77.0%           97.8   Convert entire tIRA in one year
ROTH Conversion is approximately the percent of tIRA converted to Roth.
EFFECTIVE TAX RATE is the dollar amount of tax divided by the dollar amount converted. Taxes are subtracted from Taxable account.
TOTAL BALANCE is the sum of tIRA, Roth and Taxable account immediately after Roth Conversion.
Disposable Income is the result from basic i-ORP using defaults.

Draw your conclusions.
1. Converting 30% looks optimal, for this scenario, within the strengths and weaknesses of the tool, if you had only one year to do it.
2. The "penalty" for converting huge amounts does not look that big, except maybe at high rates of Roth Conversion.
3. I'm curious how the numbers are at 80%, 85%, 90%, 95%.
4. If you had 3 or 4 or 5 years to make conversions, you might not be in as high a tax bracket for the conversions so the results might be skewed towards higher overall percentages.
Just because you're paranoid doesn't mean they're NOT out to get you.

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Re: Roth > Taxable > tIRA

Post by GrowthSeeker » Mon Aug 12, 2019 10:41 am

Here's what I get with my numbers.
I figured what amount of the Roth conversion would go into each tax bracket and subtracted an appropriate amount of tax from the Taxable account while adjusting the starting values of Roth and IRA to reflect the amount of the one time Roth conversion.

Code: Select all

Converted   Disp. Income
  0%          100.0%
 10%          101.2%
 20%          101.2%   <-- peak  (slightly into 35% bracket)
 30%          100.6%
 40%          100.0%
 50%           98.1%
 60%           96.3%
 70%           93.2%
 80%           89.5%
 90%           85.2%
100%           79.6%
Just because you're paranoid doesn't mean they're NOT out to get you.

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Re: Roth > Taxable > tIRA

Post by bloom2708 » Mon Aug 12, 2019 10:59 am

TravelforFun wrote:
Sat Aug 10, 2019 10:34 am
My random thoughts on this:

1) I've been kicking myself for years for putting too much money in tIRA and not enough traditional or Roth. I essentially saved 15% income tax in my younger working years to pay 24% income tax in my retirement years.
How did you save so much at 15% all those years? That would be a pretty low salary with the old brackets.

Are your sure you aren't mis-remembering? I always paid less "back then" and paying anything now is "too much".

Married or single, your marginal rates would have been higher. If you made very low wages, then it is much harder to save too much.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

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Re: Roth > Taxable > tIRA

Post by FiveK » Mon Aug 12, 2019 11:18 am

bloom2708 wrote:
Mon Aug 12, 2019 10:59 am
TravelforFun wrote:
Sat Aug 10, 2019 10:34 am
1) I've been kicking myself for years for putting too much money in tIRA and not enough traditional or Roth. I essentially saved 15% income tax in my younger working years to pay 24% income tax in my retirement years.
How did you save so much at 15% all those years? That would be a pretty low salary with the old brackets.
Perhaps the point is "...saved 15% income tax in my younger working years."

If one could hop in a time machine for the purpose of adjusting historical t vs. R choices, especially if career earnings were higher than one dreamed when a new graduate, putting money into Roth in those early years might have been best.

But having too much money now isn't a bad problem, and had things not worked out so well the traditional contributions could have been exactly correct.

TravelforFun
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Re: Roth > Taxable > tIRA

Post by TravelforFun » Mon Aug 12, 2019 3:31 pm

bloom2708 wrote:
Mon Aug 12, 2019 10:59 am
TravelforFun wrote:
Sat Aug 10, 2019 10:34 am
My random thoughts on this:

1) I've been kicking myself for years for putting too much money in tIRA and not enough traditional or Roth. I essentially saved 15% income tax in my younger working years to pay 24% income tax in my retirement years.
How did you save so much at 15% all those years? That would be a pretty low salary with the old brackets.

Are your sure you aren't mis-remembering? I always paid less "back then" and paying anything now is "too much".

Married or single, your marginal rates would have been higher. If you made very low wages, then it is much harder to save too much.
As a young civil engineer with a stay-at-home wife, we didn't make that much money and that was how we stayed in the low tax brackets for a long time. The good stocks that I own in my IRA and 401K accounts will keep me in a much-higher tax bracket.

TravelforFun

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Re: Roth > Taxable > tIRA

Post by bloom2708 » Mon Aug 12, 2019 3:39 pm

TravelforFun wrote:
Mon Aug 12, 2019 3:31 pm
As a young civil engineer with a stay-at-home wife, we didn't make that much money and that was how we stayed in the low tax brackets for a long time. The good stocks that I own in my IRA and 401K accounts will keep me in a much-higher tax bracket.
TravelforFun
Good fortune. Paying 24% tax is a deal.

You didn't make much, saved some, had great long careers, are still alive and with the standard deduction, your portfolio is throwing off over $180k per year. Sounds like things have worked out well. Beyond well.

Roth IRA didn't exist back then. Roth 401k didn't exist back then. It was pre-tax or post-tax (no tax breaks). The limits were very small to match salaries of the day.

I am hoping to play the "poor poor me" tax card at retirement age with a mix of pre-tax, Roth, taxable, HSA. I'll defer at 24, 22, 15 and use all my tax advantaged buckets.

That will give us good options. One trend is people hate paying fees of any sort (I get this), but are proud to pay tax now at some pretty high marginal rates (to get Roth dollars). It may not always work out that every dollar is taxed at the rate you want, but some things work out pretty good.
"We are not here to agree with you; we are here to provoke thoughtfulness." Unknown Boglehead

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Re: Roth > Taxable > tIRA

Post by J295 » Mon Aug 12, 2019 4:01 pm

Might I suggest the decision on the proper vehicle is not absolute, but situational? And saying it depends is entirely appropriate ?

From a personal example … Close to 50% of our income was taxed when I was working and we used traditional 401(k) and no Roth. … Then I retired early… tax rate is substantially lower now and we have no need to draw out of the traditional 401(k) – – instead we intend only to take RMDs down the road when required and leave those assets to children. ..... seems like the traditional was the appropriate decision for us.

Part 2 ....we have received them some independent contractor income since retiring, and used a solo 401(k) to keep modified adjusted gross income below the Cliff for premium tax credits under the affordable care act, which results in an annual savings of $24,000 in insurance premiums… Had we done Roth during this time we would have had to pay the annual $24,000 premium.

TravelforFun
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Re: Roth > Taxable > tIRA

Post by TravelforFun » Mon Aug 12, 2019 7:45 pm

bloom2708 wrote:
Mon Aug 12, 2019 3:39 pm
TravelforFun wrote:
Mon Aug 12, 2019 3:31 pm
As a young civil engineer with a stay-at-home wife, we didn't make that much money and that was how we stayed in the low tax brackets for a long time. The good stocks that I own in my IRA and 401K accounts will keep me in a much-higher tax bracket.
TravelforFun
Good fortune. Paying 24% tax is a deal.

You didn't make much, saved some, had great long careers, are still alive and with the standard deduction, your portfolio is throwing off over $180k per year. Sounds like things have worked out well. Beyond well.
Our portfolio doesn't throw off that much but combining RMD, social security benefits ($56K for two of us), and an annuity; and subtract out the standard deduction, we're in the 24% bracket.

TravelforFun

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grayfox
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Re: Roth > Taxable > tIRA

Post by grayfox » Tue Aug 13, 2019 6:21 am

GrowthSeeker wrote:
Mon Aug 12, 2019 10:41 am
Here's what I get with my numbers.
I figured what amount of the Roth conversion would go into each tax bracket and subtracted an appropriate amount of tax from the Taxable account while adjusting the starting values of Roth and IRA to reflect the amount of the one time Roth conversion.

Code: Select all

Converted   Disp. Income
  0%          100.0%
 10%          101.2%
 20%          101.2%   <-- peak  (slightly into 35% bracket)
 30%          100.6%
 40%          100.0%
 50%           98.1%
 60%           96.3%
 70%           93.2%
 80%           89.5%
 90%           85.2%
100%           79.6%
Your disposable income drops quickly when converting more than 40%. In my case, the DI was pretty flat out to 75% converted. I guess every case is unique.

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grayfox
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Re: Roth > Taxable > tIRA

Post by grayfox » Tue Aug 13, 2019 6:34 am

grayfox wrote:
Mon Aug 12, 2019 6:29 am
Results:

Code: Select all

ROTH         EFFECTIVE      TOTAL         DISPOSABLE
Conversion   TAX RATE      BALANCE         INCOME
0%                         100.0%          100.0       No Roth Conversion
5%           26.4%          99.1%          100.7
10%          27.0%          98.2%          100.7
20%          31.0%          95.9%          100.7
25%          31.9%          94.7%          101.4
30%          32.8%          93.5%          101.4
35%          33.4%          92.3%          100.7
40%          33.8%          91.1%          100.7
50%          34.5%          88.7%          100.7
75%          35.3%          82.6%          100.0
100%         35.7%          77.0%           97.8   Convert entire tIRA in one year
ROTH Conversion is approximately the percent of tIRA converted to Roth.
EFFECTIVE TAX RATE is the dollar amount of tax divided by the dollar amount converted. Taxes are subtracted from Taxable account.
TOTAL BALANCE is the sum of tIRA, Roth and Taxable account immediately after Roth Conversion.
Disposable Income is the result from basic i-ORP using defaults.

Draw your conclusions.
Here is my analysis: For this example, the curve is flat. Except for the case of converting 100%, Disposable Income varies by less than 1.5%. With all the uncertainties involved, this is down in the noise.

Whether I did partial Roth conversion or no Roth conversion, there's no meaningful difference in Disposable Income. No difference in standard of living or retirement lifestyle.

In other words, there can be a bigger tIRA or a smaller Roth, it doesn't change the amount I can spend. There is not one right answer. The decision to do Roth conversions comes down to personal preference.

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Re: Roth > Taxable > tIRA

Post by grayfox » Wed Aug 14, 2019 5:46 am

Here is the taxes paid at conversion and the taxes owed at age 90, for various Conversion Amounts. The taxes are shown as how many years of the Disposable Income for the base case (no Roth Conversion).

Code: Select all

ROTH        TAXES Paid     TAXES Owed
Conversion  To Convert       AGE 90
(percent)    x D.I. w/ No Conversion     
0%            0.00            0.64       Base case, no conversion
5%            0.19            0.35
10%           0.39            0.26
20%           0.90            0.25
25%           1.16            0.25
30%           1.42            0.25
35%           1.69            0.20
40%           1.96            0.08
50%           2.50            0.07
75%           3.84            0.07
100%          5.06            0.04      100% converted to Roth in one year
Tabe Explained:
If there is no conversion, no taxes are paid this year. But at age 90, 0.64x one's years D.I. are owed.
If 100% is converted, 5x one year's D.I. must be paid this year, but then only 0.04x are owed at 90 years old.
And anywhere in between. E.g. convert 20%, pay 0.9x now, and 0.25x at age 90.

:arrow: The more taxes you pay now, the less taxes are owed in the future.
The less you pay now, the more you owe later.
Pay now or pay later.

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