Was not converting to Roth a good idea?

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Lee_WSP
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Re: Was not converting to Roth a good idea?

Post by Lee_WSP »

smitcat wrote: Mon Sep 13, 2021 7:37 am
Lee_WSP wrote: Sun Sep 12, 2021 10:30 am
smitcat wrote: Sun Sep 12, 2021 7:48 am
Lee_WSP wrote: Sat Sep 11, 2021 12:21 pm
wrongfunds wrote: Thu Sep 09, 2021 6:08 pm

If such a prominent person can give this as rationale for choosing the Roth conversion, how would you and I be able to resist their (flawed) logic?

(taken from https://www.kitces.com/blog/navigating- ... nversions/ )
It also shows you/us the marginality of the conversion choice for most people. Even if we take his example as correct (we should, you'd just have to adjust the theoretical pension up by 30k or so), only the income above the 32% threshold would be taxed at 32%. The vast majority of her income would still be taxed at the lower bracket.

So it's really just $10,000 per year taxed at an extra 8%, for a less than jaw dropping benefit of $800/$10,000 taxed at the higher rate.
What would happen in those funds were earmarked for heirs which would drive them into a high Fed plus state tax rate?
As I stated earlier, there are other reasons to convert/have a Roth account. I'm just pointing out that failure to convert will not tank anyone's retirement. But it's still beneficial in nearly every case to convert up to one's income threshold during retirement start to RMD year.

In most cases, they would be no better or worse off than you and they'd have an extra 10 years to make withdrawals and spread out the tax.

If you're somehow able to time your demise perfectly, they'd be able to spread it out right after they FIRE or retire.

If you don't time it perfectly, the absolute worst case scenario is that it's taxed at the highest bracket.

Plus at least five other scenarios within the realm of a normal probability distribution.

All reasons to consult an estate planner because you never know when you're going to die.
Agreed on all points , here is one that you said that caught my eye....
"If you don't time it perfectly, the absolute worst case scenario is that it's taxed at the highest bracket."
What are your thoughts about these?....
1. If many/most Bogles are typically planning for roughly a 4% draw (for 30 years) or less
2. And if historically those draw rates have had a 95+% success rate
3. And those 95+% success rate runs contain many which end up with mutiples of the starting value
Then what would the results be with Roth conversions up to ones income threshold between the 'worst' case and the 'best' case?
I'm not sure I understand your question.

From an estate planning perspective a Roth dollar is vastly superior to a tax deferred dollar. From a retiree's perspective, the Roth dollar is more valuable, but it costs more; sometimes significantly more. However, the ratio of Roth:TDA is not going to sink or float your retirement plan.

Having too much tax deferred dollars will make certain estate plans extremely costly. The simplest scenario is if you have a spendthrift or too young to trust heir inherit a significant amount of tax deferred dollars. Such an account is typically sent to a discretionary trust where the retained distributions are taxed at the highest income brackets. See the below link and multiply each bracket by 10x if you want to get an idea of the size of the account and what it might be taxed at.

https://www.greensfelder.com/trusts-and ... mounts-for
Chuckles960
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Re: Was not converting to Roth a good idea?

Post by Chuckles960 »

celia wrote: Mon Sep 13, 2021 12:03 am No money is “taxed twice”. It may seem like it when you let an investment grow over time, but possibly you are confusing the capital gains that are paid out each year and those that are "realized" when you sell.

Let’s look at a scenario...
Image
I explained it in the post you quoted, and explained it again in response to another poster. I'll try again. I am not confusing anything. Gains in taxable money are reduced twice due to taxation.

It's a general rule and just algebra; it's not necessary to use specific numbers. But if we must, the two reductions are clearly shown in your scenario table (above).

"From wages"..."Taxable"..."initial contribution": 1000*0.78=780, that's the first reduction (reduction of principal). Thus the "growth of principal" is also reduced to 780 rather than 1000. Yet that growth is taxed again, further to the right in your table, 780*0.85=663. So the growth is 1000*0.78*0.85 = 663. There's the two tax factors reducing the gain, right there in your table.

There is only one reduction factor due to tax (0.78) in tax-deferred or Roth. That is why the final "available to spend" amounts are larger in those rows.
Last edited by Chuckles960 on Mon Sep 13, 2021 2:17 pm, edited 3 times in total.
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WingsFan4Life
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Re: Was not converting to Roth a good idea?

Post by WingsFan4Life »

tonyclifton wrote: Mon Sep 13, 2021 10:47 am
WingsFan4Life wrote: Mon Sep 13, 2021 12:08 am This thread has convinced me to add more Roth 401k contributions right away.
How so and which part? I decided to continue with pre-tax 401k contributions. The reason is my current tax bracket is likely to be higher than in the years between retirement and RMDs, thus allowing me to convert from pre-tak 401k to a Roth Ira while in a lower tax bracket.
63% of our retirement funds are pre-tax, 25% is Roth, and 12% is taxable. Looking back last year we had room still in the 12% bracket :oops:

I believe we should increase our Roth amount. Our average age is 33 and we probably should have more in Roth because of the time factor, and our salaries *should* only increase as time goes on. Also - Trump tax cuts are set to expire in 2025, unless extended.

This thread has also made me realize that having more bonds in Roth is probably the wrong advice that I've seen previously. More bonds in pre-tax and more stocks in Roth makes more sense right? Roth hopefully grows more and hopefully pay less tax in retirement (RMDs). Of course, we can still do Roth conversions during early retirement.

This thread has truly been a revelation to me for tax planning. Hopefully someone will correct anything I've said above if it doesn't make sense.
Chuckles960
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Re: Was not converting to Roth a good idea?

Post by Chuckles960 »

WingsFan4Life wrote: Mon Sep 13, 2021 12:35 pmThis thread has also made me realize that having more bonds in Roth is probably the wrong advice that I've seen previously. More bonds in pre-tax and more stocks in Roth makes more sense right?
If the stocks go up, yes. If the stocks go down, no.
RJC
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Re: Was not converting to Roth a good idea?

Post by RJC »

Juice3 wrote: Mon Sep 13, 2021 11:04 am
RJC wrote: Thu Sep 09, 2021 2:24 pm
MrJedi wrote: Thu Sep 09, 2021 2:22 pm
RJC wrote: Thu Sep 09, 2021 2:21 pm
Gabelli2020 wrote: Thu Sep 09, 2021 11:04 am I’m 65, and made a similar decision. 3.5 million in my IRA, 1.2 in my wife’s. No available cash to pay the conversion. Withdrawal at 72 should be about 200 K for me ( about 22% bracket) . Did not make sense
How does one accumulate 3.5M in an IRA? Isn't the max contribution 6k a year?
401k rollovers. Or hitting a big stock in your IRA if that's your thing.
Gotcha, thanks.
Or using one of what seems like a million exceptions/variations of retirement account rules. The literal 6 (or 7K if you are older) IRA limit is pretty much just people people that are both untrusted by government and also unmotivated (or somehow unable) to get into a better situation.

Most common limits are probably the 401K limits, 19.5K deferred and 58K total.
Do you mind giving some examples outside of Mega-Backdoor Roth as not all plans allow this? I don't think 401k is considered an IRA.
Last edited by RJC on Mon Sep 13, 2021 12:56 pm, edited 1 time in total.
sc9182
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Re: Was not converting to Roth a good idea?

Post by sc9182 »

WingsFan4Life wrote: Mon Sep 13, 2021 12:35 pm 63% of our retirement funds are pre-tax, 25% is Roth, and 12% is taxable. Looking back last year we had room still in the 12% bracket :oops:

I believe we should increase our Roth amount. Our average age is 33 and we probably should have more in Roth because of the time factor, and our salaries *should* only increase as time goes on. Also - Trump tax cuts are set to expire in 2025, unless extended.

This thread has also made me realize that having more bonds in Roth is probably the wrong advice that I've seen previously. More bonds in pre-tax and more stocks in Roth makes more sense right? Roth hopefully grows more and hopefully pay less tax in retirement (RMDs). Of course, we can still do Roth conversions during early retirement.

This thread has truly been a revelation to me for tax planning. Hopefully someone will correct anything I've said above if it doesn't make sense.
All the Retirement calculator savvy and Roth-avid crowd may rejoice - except, most of that crowd is near/passing IRMAA tiers ., and here we are talking 12% brackets.

What can we say about quite possibly wrong correlations and revelations :oops:

May Roth be good for you, in your 12% marginal tax case :-)
wrongfunds
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Re: Was not converting to Roth a good idea?

Post by wrongfunds »

Juice3 wrote: Mon Sep 13, 2021 11:04 am
RJC wrote: Thu Sep 09, 2021 2:24 pm
MrJedi wrote: Thu Sep 09, 2021 2:22 pm
RJC wrote: Thu Sep 09, 2021 2:21 pm
Gabelli2020 wrote: Thu Sep 09, 2021 11:04 am I’m 65, and made a similar decision. 3.5 million in my IRA, 1.2 in my wife’s. No available cash to pay the conversion. Withdrawal at 72 should be about 200 K for me ( about 22% bracket) . Did not make sense
How does one accumulate 3.5M in an IRA? Isn't the max contribution 6k a year?
401k rollovers. Or hitting a big stock in your IRA if that's your thing.
Gotcha, thanks.
Or using one of what seems like a million exceptions/variations of retirement account rules. The literal 6 (or 7K if you are older) IRA limit is pretty much just people people that are both untrusted by government and also unmotivated (or somehow unable) to get into a better situation.

Most common limits are probably the 401K limits, 19.5K deferred and 58K total.
Could you care to elaborate on the part ? It feels disrespectful towards certain group of people (aka let them eat cake) but I might have misunderstood you.
RetiredAL
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Re: Was not converting to Roth a good idea?

Post by RetiredAL »

WingsFan4Life wrote: Mon Sep 13, 2021 12:08 am This thread has convinced me to add more Roth 401k contributions right away.
Starting around yr 2 for Roth's, I started maxing both my and DW Roth contributions at the cost of not maxing the 401K.

Today, now retired and in hindsight, that was one of the most fortuitous decisions I made.

Today I withdraw about 2% tax from my roll-over IRA. I start RMD's next year. Those Roth contributions were made at 15% tax burden. Due to the SS hump catch-up, that next 2% needed to meet the RMD will be taxed at 22%, even though our total income will be well the top of the regular 12% bracket most people think of. If I had that additional $500K in differed instead of Roths, the RMD tax $ hit would be even worst.

Now if your working years incomes were already in the 22% bracket, this becomes a mute point. You were and will be in the 22% (going to 25%) bracket forever. It dings the hardest to those that were near to top of the 15% (currently 12%) tax bracket like I was.
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WingsFan4Life
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Re: Was not converting to Roth a good idea?

Post by WingsFan4Life »

Chuckles960 wrote: Mon Sep 13, 2021 12:44 pm
WingsFan4Life wrote: Mon Sep 13, 2021 12:35 pmThis thread has also made me realize that having more bonds in Roth is probably the wrong advice that I've seen previously. More bonds in pre-tax and more stocks in Roth makes more sense right?
If the stocks go up, yes. If the stocks go down, no.
20 years to 55 for me, so the plan is stocks going up!
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WingsFan4Life
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Re: Was not converting to Roth a good idea?

Post by WingsFan4Life »

RetiredAL wrote: Mon Sep 13, 2021 1:51 pm
WingsFan4Life wrote: Mon Sep 13, 2021 12:08 am This thread has convinced me to add more Roth 401k contributions right away.
Starting around yr 2 for Roth's, I started maxing both my and DW Roth contributions at the cost of not maxing the 401K.

Today, now retired and in hindsight, that was one of the most fortuitous decisions I made.

Today I withdraw about 2% tax from my roll-over IRA. I start RMD's next year. Those Roth contributions were made at 15% tax burden. Due to the SS hump catch-up, that next 2% needed to meet the RMD will be taxed at 22%, even though our total income will be well the top of the regular 12% bracket most people think of. If I had that additional $500K in differed instead of Roths, the RMD tax $ hit would be even worst.

Now if your working years incomes were already in the 22% bracket, this becomes a mute point. You were and will be in the 22% (going to 25%) bracket forever. It dings the hardest to those that were near to top of the 15% (currently 12%) tax bracket like I was.
The 22% bracket is only a mute point if stocks stay flat, right? I think its a good bet to assume stocks rise in the next 20+ years.

I was laid off for a little bit last year, so I regret now not taking advantage of the unused 12% bracket in my case. I guess I'll have to give myself a break due to the craziness of the past 18 months.
RetiredAL
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Re: Was not converting to Roth a good idea?

Post by RetiredAL »

WingsFan4Life wrote: Mon Sep 13, 2021 2:48 pm
RetiredAL wrote: Mon Sep 13, 2021 1:51 pm
WingsFan4Life wrote: Mon Sep 13, 2021 12:08 am This thread has convinced me to add more Roth 401k contributions right away.
Starting around yr 2 for Roth's, I started maxing both my and DW Roth contributions at the cost of not maxing the 401K.

Today, now retired and in hindsight, that was one of the most fortuitous decisions I made.

Today I withdraw about 2% tax from my roll-over IRA. I start RMD's next year. Those Roth contributions were made at 15% tax burden. Due to the SS hump catch-up, that next 2% needed to meet the RMD will be taxed at 22%, even though our total income will be well the top of the regular 12% bracket most people think of. If I had that additional $500K in differed instead of Roths, the RMD tax $ hit would be even worst.

Now if your working years incomes were already in the 22% bracket, this becomes a mute point. You were and will be in the 22% (going to 25%) bracket forever. It dings the hardest to those that were near to top of the 15% (currently 12%) tax bracket like I was.
The 22% bracket is only a mute point if stocks stay flat, right? I think its a good bet to assume stocks rise in the next 20+ years.

I was laid off for a little bit last year, so I regret now not taking advantage of the unused 12% bracket in my case. I guess I'll have to give myself a break due to the craziness of the past 18 months.
When I made the decision about maxing our Roth's, I did not know about SS hump stuff. I Roth'd as a screw-it to the future tax man concept.
Juice3
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Re: Was not converting to Roth a good idea?

Post by Juice3 »

wrongfunds wrote: Mon Sep 13, 2021 1:20 pm
Juice3 wrote: Mon Sep 13, 2021 11:04 am
RJC wrote: Thu Sep 09, 2021 2:24 pm
MrJedi wrote: Thu Sep 09, 2021 2:22 pm
RJC wrote: Thu Sep 09, 2021 2:21 pm

How does one accumulate 3.5M in an IRA? Isn't the max contribution 6k a year?
401k rollovers. Or hitting a big stock in your IRA if that's your thing.
Gotcha, thanks.
Or using one of what seems like a million exceptions/variations of retirement account rules. The literal 6 (or 7K if you are older) IRA limit is pretty much just people people that are both untrusted by government and also unmotivated (or somehow unable) to get into a better situation.

Most common limits are probably the 401K limits, 19.5K deferred and 58K total.
Could you care to elaborate on the part ? It feels disrespectful towards certain group of people (aka let them eat cake) but I might have misunderstood you.
I am of the personal belief the many differences between IRA and 401K rules are effectively caused because of constituent favoritism and/or a governmental fear there would not be a clear neck to wring.

At risk of moving this discussion towards politics, I will say that I am believer that everyone should similiar access to retirement plans, regardless of who your work for (be it a government entity or yourself).

I would agree with you that certain people are "privileged" for example when able to do things like mega back door 401Ks or opt out of SS.

I would further agree with you that this privileged class often has the motto, Qu'ils mangent de la brioche.
RetiredAL
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Re: Was not converting to Roth a good idea?

Post by RetiredAL »

WingsFan4Life wrote: Mon Sep 13, 2021 2:48 pm
RetiredAL wrote: Mon Sep 13, 2021 1:51 pm
WingsFan4Life wrote: Mon Sep 13, 2021 12:08 am This thread has convinced me to add more Roth 401k contributions right away.
Starting around yr 2 for Roth's, I started maxing both my and DW Roth contributions at the cost of not maxing the 401K.

Today, now retired and in hindsight, that was one of the most fortuitous decisions I made.

Today I withdraw about 2% tax from my roll-over IRA. I start RMD's next year. Those Roth contributions were made at 15% tax burden. Due to the SS hump catch-up, that next 2% needed to meet the RMD will be taxed at 22%, even though our total income will be well the top of the regular 12% bracket most people think of. If I had that additional $500K in differed instead of Roths, the RMD tax $ hit would be even worst.

Now if your working years incomes were already in the 22% bracket, this becomes a mute point. You were and will be in the 22% (going to 25%) bracket forever. It dings the hardest to those that were near to top of the 15% (currently 12%) tax bracket like I was.
The 22% bracket is only a mute point if stocks stay flat, right? I think its a good bet to assume stocks rise in the next 20+ years.

I was laid off for a little bit last year, so I regret now not taking advantage of the unused 12% bracket in my case. I guess I'll have to give myself a break due to the craziness of the past 18 months.
Wrong: Income * .78 (the after tax investment) * LTCG @ 0 exit tax = income (before tax investment) * LTCG *.78 (exit tax rate)
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WingsFan4Life
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Re: Was not converting to Roth a good idea?

Post by WingsFan4Life »

RetiredAL wrote: Mon Sep 13, 2021 3:09 pm
WingsFan4Life wrote: Mon Sep 13, 2021 2:48 pm
RetiredAL wrote: Mon Sep 13, 2021 1:51 pm
WingsFan4Life wrote: Mon Sep 13, 2021 12:08 am This thread has convinced me to add more Roth 401k contributions right away.
Starting around yr 2 for Roth's, I started maxing both my and DW Roth contributions at the cost of not maxing the 401K.

Today, now retired and in hindsight, that was one of the most fortuitous decisions I made.

Today I withdraw about 2% tax from my roll-over IRA. I start RMD's next year. Those Roth contributions were made at 15% tax burden. Due to the SS hump catch-up, that next 2% needed to meet the RMD will be taxed at 22%, even though our total income will be well the top of the regular 12% bracket most people think of. If I had that additional $500K in differed instead of Roths, the RMD tax $ hit would be even worst.

Now if your working years incomes were already in the 22% bracket, this becomes a mute point. You were and will be in the 22% (going to 25%) bracket forever. It dings the hardest to those that were near to top of the 15% (currently 12%) tax bracket like I was.
The 22% bracket is only a mute point if stocks stay flat, right? I think its a good bet to assume stocks rise in the next 20+ years.

I was laid off for a little bit last year, so I regret now not taking advantage of the unused 12% bracket in my case. I guess I'll have to give myself a break due to the craziness of the past 18 months.
Wrong: Income * .78 (the after tax investment) * LTCG @ 0 exit tax = income (before tax investment) * LTCG *.78 (exit tax rate)
Thanks, I think I was confusing two separate concepts.
Juice3
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Re: Was not converting to Roth a good idea?

Post by Juice3 »

RJC wrote: Mon Sep 13, 2021 12:48 pm
Juice3 wrote: Mon Sep 13, 2021 11:04 am
RJC wrote: Thu Sep 09, 2021 2:24 pm
MrJedi wrote: Thu Sep 09, 2021 2:22 pm
RJC wrote: Thu Sep 09, 2021 2:21 pm

How does one accumulate 3.5M in an IRA? Isn't the max contribution 6k a year?
401k rollovers. Or hitting a big stock in your IRA if that's your thing.
Gotcha, thanks.
Or using one of what seems like a million exceptions/variations of retirement account rules. The literal 6 (or 7K if you are older) IRA limit is pretty much just people people that are both untrusted by government and also unmotivated (or somehow unable) to get into a better situation.

Most common limits are probably the 401K limits, 19.5K deferred and 58K total.
Do you mind giving some examples outside of Mega-Backdoor Roth as not all plans allow this? I don't think 401k is considered an IRA.
Funny you should ask. I had a long conversation with a college this weekend that TL/DR was that ESOPs will allow him to soon FI/RE.

The terms as used here are often not used a specific references to code, but rather references feature of various tax advantaged plans. 401K and IRA are often used generically "review my ability to retire" posts, although there are differences that are important.

A 401K is not IRA but both are section of the Internal Revenue Code. Perhaps we should push to rename IRA to 408(a).
https://www.law.cornell.edu/uscode/text/26/408

Or perhaps just call all of it:
https://www.law.cornell.edu/uscode/text ... /subpart-A

Here is a great example with a SEP IRA that is wonderful for self employed prosperous people
SEP IRAs
SEP IRAs have higher annual contribution limits than standard IRAs, and only your employer can contribute to it. As of 2020, employers can contribute as much as 25% of an employee’s gross annual salary as long as the contributions do not exceed $57,000.17 In 2021, the contribution limit is $58,000, or $64,500 if the employee is age 50 or older.18
Rules like these often allow people like doctors to get huge amounts of money into tax advantaged plans.
tonyclifton
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Re: Was not converting to Roth a good idea?

Post by tonyclifton »

WingsFan4Life wrote: Mon Sep 13, 2021 12:35 pm ... Looking back last year we had room still in the 12% bracket :oops:
Ahhh..OK, I get it. This wiki page has an excellent guide under Funding Priority that we use as our roadmap for deciding which type of accounts to use for retirement savings.

If you have a high-deductible health plan, be sure to check out the Health Savings Account. It has the most tax advantages - even greater than a Roth IRA or Roth 401k. HSAs offer tax-free contributions, growth, and withdrawals when used for qualified medical expenses.
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WingsFan4Life
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Re: Was not converting to Roth a good idea?

Post by WingsFan4Life »

tonyclifton wrote: Mon Sep 13, 2021 3:51 pm
WingsFan4Life wrote: Mon Sep 13, 2021 12:35 pm ... Looking back last year we had room still in the 12% bracket :oops:
Ahhh..OK, I get it. This wiki page has an excellent guide under Funding Priority that we use as our roadmap for deciding which type of accounts to use for retirement savings.

If you have a high-deductible health plan, be sure to check out the Health Savings Account. It has the most tax advantages - even greater than a Roth IRA or Roth 401k. HSAs offer tax-free contributions, growth, and withdrawals when used for qualified medical expenses.
Yes sir, we max out our HSA's and move funds to Fidelity once a year to get great fund choices.
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celia
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Re: Was not converting to Roth a good idea?

Post by celia »

Chuckles960 wrote: Mon Sep 13, 2021 12:44 pm
WingsFan4Life wrote: Mon Sep 13, 2021 12:35 pmThis thread has also made me realize that having more bonds in Roth is probably the wrong advice that I've seen previously. More bonds in pre-tax and more stocks in Roth makes more sense right?
If the stocks go up, yes. If the stocks go down, no.
WingsFan4Life, you're right. Even if stocks go down, they should still remain in the Roth and bonds in tax-deferred. The stocks won't stay down forever. And bonds can lose value, too.

Stock funds (especially those that are expected to grow the most) belong in Roth, even if you never do Roth conversions, but contribute directly. You want to maximize future tax-free growth. Bonds should go in tax-deferred to minimize future large RMDs (and their taxes). Your remaining stocks, especially international ones, should go in taxable. This is just the simplified version of Tax-efficient Fund Placement.

Of course the space (value) you currently have in Roth plus taxable probably doesn't match the percentage of your Asset Allocation you want in stocks. And the space (value) in tax-deferred probably won't match your desired bond allocation. In this case, just place things as best you can. While in the accumulation stages, this will minimize your taxes compared to other fund placement strategies.
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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celia
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Re: Was not converting to Roth a good idea?

Post by celia »

Chuckles960 wrote: Mon Sep 13, 2021 11:46 am
celia wrote: Mon Sep 13, 2021 12:03 am Let’s look at a scenario...
Image
"From wages"..."Taxable"..."initial contribution": 1000*0.78=780, that's the first reduction (reduction of principal). Thus the "growth of principal" is also reduced to 780 rather than 1000. Yet that growth is taxed again, further to the right in your table, 780*0.85=663. So the growth is 1000*0.78*0.85 = 663. There's the two tax factors reducing the gain, right there in your table.

There is only one reduction factor due to tax (0.78) in tax-deferred or Roth. That is why the final "available to spend" amounts are larger in those rows.
I'm not sure if we are agreeing or not, but there may also be a terminology issue here. In taxable, the amounts available for spending (last column) are just the sum of the three different parts, with no money or taxes being included in more than one of the three columns. The "growth of principal" does not include the original amount that was contributed to taxable. It is the GROWTH since all the accounts have the same investment that doubles over the ten years, besides the yearly distributions.

The reason the Roth is worth more than the taxable is that all growth in Roth is tax-free (if a Roth has been open for 5 years and the owner is over 59.5 when withdrawn). Meanwhile, taxable has what is known as "tax drag" which brings down the account value instead of allowing all the growth to be tax-free. But that "tax drag" still only taxes each source of money once.
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.
ponyboy
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Re: Was not converting to Roth a good idea?

Post by ponyboy »

Converting to Roth is a difficult and confusing process. That alone is probably a good enough idea not to do it. One wrong mistake and you're in trouble.
lstone19
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Re: Was not converting to Roth a good idea?

Post by lstone19 »

ponyboy wrote: Tue Sep 14, 2021 7:42 am Converting to Roth is a difficult and confusing process. That alone is probably a good enough idea not to do it. One wrong mistake and you're in trouble.
Care to provide any details about why you think it's difficult and confusing? I have my IRAs at Fidelity and find their process to be easy and straight-forward. But if you make a mistake (which would require you blindly clicking through multiple confirmation screens), yes you could find yourself with an unexpected tax bill.

Fidelity's online process is select the IRA to convert from and the Roth to convert to. It then asks if you want to convert all or some and if you want taxes withheld. If you select some, you then get a screen showing your positions, you select what you want to convert while it gives you the approximate value (approximate as conversions are done in-kind at the closing price). You then move to a confirmation screen, check that it's right, click OK and it's done. Yes, you can make a mistake and there have been posts about people who have. But you could just as easily write a check for a wrong amount. So would you say "Writing a check is a difficult and confusing process. That alone is probably a good enough idea not to do it. One wrong mistake and you're in trouble"?
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celia
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Re: Was not converting to Roth a good idea?

Post by celia »

ponyboy wrote: Tue Sep 14, 2021 7:42 am Converting to Roth is a difficult and confusing process. That alone is probably a good enough idea not to do it. One wrong mistake and you're in trouble.
I disagree. Doing Roth conversions is easier than taking an RMD. Taking a smaller withdrawal than required or taking it from the wrong account or even forgetting to take it will give you a 50% penalty on the shortfall.

If you're not sure (or even if you ARE sure) of what the tax implications are, you should run all your projected incomes for the year through the previous year's tax software to see what the Roth conversion you are considering will do to your taxes (and future IRMAA).
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.
Chip
Posts: 3510
Joined: Wed Feb 21, 2007 4:57 am

Re: Was not converting to Roth a good idea?

Post by Chip »

celia wrote: Tue Sep 14, 2021 10:09 pm I disagree. Doing Roth conversions is easier than taking an RMD. Taking a smaller withdrawal than required or taking it from the wrong account or even forgetting to take it will give you a 50% penalty on the shortfall.
I disagree. Since many (most?) custodians provide an automatic RMD service, RMDs can be set up so the correct amount is withdrawn each year without any need to remember to do it.

I agree that implementing a Roth conversion is easy, but calculating the "right" amount can require quite a bit of effort.
sc9182
Posts: 695
Joined: Wed Aug 17, 2016 7:43 pm

Re: Was not converting to Roth a good idea?

Post by sc9182 »

Chip wrote: Wed Sep 15, 2021 4:44 am
celia wrote: Tue Sep 14, 2021 10:09 pm I disagree. Doing Roth conversions is easier than taking an RMD. Taking a smaller withdrawal than required or taking it from the wrong account or even forgetting to take it will give you a 50% penalty on the shortfall.
I disagree. Since many (most?) custodians provide an automatic RMD service, RMDs can be set up so the correct amount is withdrawn each year without any need to remember to do it.

I agree that implementing a Roth conversion is easy, but calculating the "right" amount can require quite a bit of effort.
Its not: all or nothing. You are "invariably" going to have RMDs (unless some Ultra-Wealthy or Ultra-Poor converted it all to Roths) -- you can't simply avoid these pesky (or might I say Fruitful) RMDs on TDAs.
Forcibly cleaning up TDAs have consequences (many a negative) for most/majority of Americans (sorry, don't pitch-in that one-off/two-off cases - we know exceptions exist, but its not norm).

Simply learn to live with RMDs (and enjoy as well), as a matter of fact. Where as Roth-conversions are volitional act.

Even those highly-aggressive Roth-converts., many may be better off leaving a few hundreds of thousands in TDA - to possibly account for 1-2 peoples Nursing-care large-medical costs, and/or if considering some charity (also include - if you have a kid or two, or grand-kid or two who are in average-tax-brackets -- you can selectively make them TDA beneficiaries, while leaving stepped-up Brokerages, Rental-homes, and Roths to high-achiever kids)
Last edited by sc9182 on Wed Sep 15, 2021 8:50 am, edited 1 time in total.
wrongfunds
Posts: 2866
Joined: Tue Dec 21, 2010 3:55 pm

Re: Was not converting to Roth a good idea?

Post by wrongfunds »

A question arises as to how does one decide to use which kitty for which expenses? Just to give a simple example, we don't use HSA account for the current health expenses. The attraction of letting HSA grow is bigger.

Wouldn't I have the same feeling of "wasting" my "precious" Roth dollars on "frivolous" things later in life when the time comes to decide which of the kitty I should withdraw from?

I am talking about the psychology behind it and NOT the raw mathematics/probabilities. Our behavior is more based on the former even though we would like to and want to think that it is from later.
lstone19
Posts: 1203
Joined: Fri Nov 03, 2017 3:33 pm

Re: Was not converting to Roth a good idea?

Post by lstone19 »

wrongfunds wrote: Wed Sep 15, 2021 8:49 am A question arises as to how does one decide to use which kitty for which expenses? Just to give a simple example, we don't use HSA account for the current health expenses. The attraction of letting HSA grow is bigger.

Wouldn't I have the same feeling of "wasting" my "precious" Roth dollars on "frivolous" things later in life when the time comes to decide which of the kitty I should withdraw from?

I am talking about the psychology behind it and NOT the raw mathematics/probabilities. Our behavior is more based on the former even though we would like to and want to think that it is from later.
Your question is going off-topic but remember that cash is fungible. Source of funds and what it's used for should rarely be a consideration. Now that we're both north of 59-1/2, our retirement funds are now just more money that can be spent as appropriate. When cash is needed, where to take it from is based on tax considerations involving the source, not what term is used to describe the account. Our plan is to take taxable to zero*, then start withdrawing from tIRAs until an annual taxable income target for the year is reached. If additional funds are needed in the year (which would be driven by a major expense such as buying our retirement home (coming soon)), then we tap Roth.

* Except for things with large capital gains. While we live in Illinois which taxes capital gains but not retirement income (including Roth conversions), it makes tax sense to prioritize Roth conversions within our target taxable income until we move to a state (likely) which taxes both capital gains and Roth conversions.
smitcat
Posts: 8275
Joined: Mon Nov 07, 2016 10:51 am

Re: Was not converting to Roth a good idea?

Post by smitcat »

sc9182 wrote: Wed Sep 15, 2021 8:39 am
Chip wrote: Wed Sep 15, 2021 4:44 am
celia wrote: Tue Sep 14, 2021 10:09 pm I disagree. Doing Roth conversions is easier than taking an RMD. Taking a smaller withdrawal than required or taking it from the wrong account or even forgetting to take it will give you a 50% penalty on the shortfall.
I disagree. Since many (most?) custodians provide an automatic RMD service, RMDs can be set up so the correct amount is withdrawn each year without any need to remember to do it.

I agree that implementing a Roth conversion is easy, but calculating the "right" amount can require quite a bit of effort.
Its not: all or nothing. You are "invariably" going to have RMDs (unless some Ultra-Wealthy or Ultra-Poor converted it all to Roths) -- you can't simply avoid these pesky (or might I say Fruitful) RMDs on TDAs.
Forcibly cleaning up TDAs have consequences (many a negative) for most/majority of Americans (sorry, don't pitch-in that one-off/two-off cases - we know exceptions exist, but its not norm).

Simply learn to live with RMDs (and enjoy as well), as a matter of fact. Where as Roth-conversions are volitional act.

Even those highly-aggressive Roth-converts., many may be better off leaving a few hundreds of thousands in TDA - to possibly account for 1-2 peoples Nursing-care large-medical costs, and/or if considering some charity (also include - if you have a kid or two, or grand-kid or two who are in average-tax-brackets -- you can selectively make them TDA beneficiaries, while leaving stepped-up Brokerages, Rental-homes, and Roths to high-achiever kids)
"or grand-kid or two who are in average-tax-brackets -- you can selectively make them TDA beneficiaries,"
Are your thoughts to best use a legal custodian or a trust in these cases?
Lee_WSP
Posts: 5723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Was not converting to Roth a good idea?

Post by Lee_WSP »

Juice3 wrote: Mon Sep 13, 2021 3:26 pm Here is a great example with a SEP IRA that is wonderful for self employed prosperous people
SEP IRAs
SEP IRAs have higher annual contribution limits than standard IRAs, and only your employer can contribute to it. As of 2020, employers can contribute as much as 25% of an employee’s gross annual salary as long as the contributions do not exceed $57,000.17 In 2021, the contribution limit is $58,000, or $64,500 if the employee is age 50 or older.18
Rules like these often allow people like doctors to get huge amounts of money into tax advantaged plans.
Not exactly.

Only if you have no employees (you need to contribute the same percentage of each employee's salary to the SEP (but if you only have one employee making a tiny fraction of your salary, it may work out, but it usually doesn't)). But if you have no employees, you can do the same with a solo 401k and preserve the backdoor Roth.

A highly paid 1099 side gig can also top off one's annual contribution limit.
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