Tax Deferred : Taxable : Tax Free

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mtmingus
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Tax Deferred : Taxable : Tax Free

Post by mtmingus » Sun Nov 10, 2019 9:57 am

What are your asset allocations among the three major categories:

Tax Deferred (Regular 401k, Traditional IRA)
Taxable (non-retirement brokerages)
Tax Free (Roth)
?

We are guilty of top heavy 68:7:25.

Thinking of paying tax now for Roth Conversions when possible without bumping up the federal marginal rate. It's state tax free in the great state of Illinois.

stan1
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Re: Tax Deferred : Taxable : Tax Free

Post by stan1 » Sun Nov 10, 2019 10:02 am

Roth conversions can make sense and your heirs will thank you posthumously for leaving them Roth accounts not Traditional accounts. What is your marginal federal and state tax rate? What are your ages? Are you still working so you could switch from Traditional contributions to Roth contributions in your 401K? This type of analysis is specific to each person's situation not generic so the details matter.

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MNGopher
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Re: Tax Deferred : Taxable : Tax Free

Post by MNGopher » Sun Nov 10, 2019 10:03 am

About 40:40:20
I have only been maxing tax deferred for the last couple years (and will continue to do so), so that number should move ahead of the other two.

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mtmingus
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Re: Tax Deferred : Taxable : Tax Free

Post by mtmingus » Sun Nov 10, 2019 10:31 am

stan1 wrote:
Sun Nov 10, 2019 10:02 am
you could switch from Traditional contributions to Roth contributions in your 401K?
In Roth 401k I have to pay state income tax but if I do Roth Conversion - no state income tax in Illinois (4.95%).

lakpr
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Re: Tax Deferred : Taxable : Tax Free

Post by lakpr » Sun Nov 10, 2019 2:34 pm

What is the absolute amount you have in your tax deferred accounts? If it is less than $1 million (approximately) I wouldn't bother with Roth conversions. The reasoning is that, with balances less than that threshold, even withdrawals twice the RMD size would only place you in the 15% bracket, and opting for Roth conversions now you are paying 22% tax rate.

RMD starts at 3.65% of tax deferred balance at age 70.5, on a balance of $1 million that is $36500. Twice that is $73000. If you look up the tax tables for 2017, for a couple, that $73k income places you in 15% bracket (don't forget to deduct approximately $12000 in standard exemptions).

Why would you want to pay 22% rate now (a decision that will be irrevocable, remember TCJA removed that option?) when you could be paying only 15% rate?

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dodecahedron
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Re: Tax Deferred : Taxable : Tax Free

Post by dodecahedron » Sun Nov 10, 2019 2:42 pm

Roughly 23:50:27 here, and continuing to gradually increase the proportion of tax free at the expense of the other two (via Roth conversions and using taxable for expenses including charitable donations of appreciated securities.)

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Re: Tax Deferred : Taxable : Tax Free

Post by neilpilot » Sun Nov 10, 2019 2:46 pm

lakpr wrote:
Sun Nov 10, 2019 2:34 pm
What is the absolute amount you have in your tax deferred accounts? If it is less than $1 million (approximately) I wouldn't bother with Roth conversions. The reasoning is that, with balances less than that threshold, even withdrawals twice the RMD size would only place you in the 15% bracket, and opting for Roth conversions now you are paying 22% tax rate.

RMD starts at 3.65% of tax deferred balance at age 70.5, on a balance of $1 million that is $36500. Twice that is $73000. If you look up the tax tables for 2017, for a couple, that $73k income places you in 15% bracket (don't forget to deduct approximately $12000 in standard exemptions).

Why would you want to pay 22% rate now (a decision that will be irrevocable, remember TCJA removed that option?) when you could be paying only 15% rate?
Maybe I'm missing something, but does your post assume that there's no SS or pension income? Not to mention dividend, interest & capital gains.

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TomatoTomahto
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Re: Tax Deferred : Taxable : Tax Free

Post by TomatoTomahto » Sun Nov 10, 2019 2:52 pm

neilpilot wrote:
Sun Nov 10, 2019 2:46 pm
lakpr wrote:
Sun Nov 10, 2019 2:34 pm
What is the absolute amount you have in your tax deferred accounts? If it is less than $1 million (approximately) I wouldn't bother with Roth conversions. The reasoning is that, with balances less than that threshold, even withdrawals twice the RMD size would only place you in the 15% bracket, and opting for Roth conversions now you are paying 22% tax rate.

RMD starts at 3.65% of tax deferred balance at age 70.5, on a balance of $1 million that is $36500. Twice that is $73000. If you look up the tax tables for 2017, for a couple, that $73k income places you in 15% bracket (don't forget to deduct approximately $12000 in standard exemptions).

Why would you want to pay 22% rate now (a decision that will be irrevocable, remember TCJA removed that option?) when you could be paying only 15% rate?
Maybe I'm missing something, but does your post assume that there's no SS or pension income? Not to mention dividend, interest & capital gains.
No, neilpilot, you’re not missing anything; posters that discourage Roth always assume 1) that RMDs are the sole income 2) that MFJ remains the filing status 3) that the 2% that taxable throws off don’t count 4) that retirement is early so chance to do conversions 5) that you have no deferred compensation 6) that RMDs remain below 4% and so on.
Last edited by TomatoTomahto on Sun Nov 10, 2019 2:53 pm, edited 1 time in total.
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ruralavalon
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Re: Tax Deferred : Taxable : Tax Free

Post by ruralavalon » Sun Nov 10, 2019 2:53 pm

mtmingus wrote:
Sun Nov 10, 2019 9:57 am
What are your asset allocations among the three major categories:

Tax Deferred (Regular 401k, Traditional IRA)
Taxable (non-retirement brokerages)
Tax Free (Roth)
?

We are guilty of top heavy 68:7:25.

Thinking of paying tax now for Roth Conversions when possible without bumping up the federal marginal rate. It's state tax free in the great state of Illinois.
mtmingus wrote:
Sun Nov 10, 2019 10:31 am
stan1 wrote:
Sun Nov 10, 2019 10:02 am
you could switch from Traditional contributions to Roth contributions in your 401K?
In Roth 401k I have to pay state income tax but if I do Roth Conversion - no state income tax in Illinois (4.95%).
Age 74, retired, no pension, no annuity.

82%, rollover IRA
06%, joint taxable account
12%, Roth IRAs

Roth IRAs were not available during most of my working life, and Roth 401k was never available to me.

. . . . .

More information is necessary to assess the desirability of Roth conversions.

What is your federal tax bracket?

What is your age?

Will you be eligible for a significant pension in addition to Social Security?

What is your profession or occupation?

How much do you currently have in traditional tax-deferred accounts?
Last edited by ruralavalon on Sun Nov 10, 2019 3:01 pm, edited 1 time in total.
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retiredjg
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Re: Tax Deferred : Taxable : Tax Free

Post by retiredjg » Sun Nov 10, 2019 2:58 pm

mtmingus wrote:
Sun Nov 10, 2019 9:57 am
We are guilty of top heavy 68:7:25.
Most everybody is top heavy. The limits for 401k and IRA make it that way and only people who both make and save a lot of money will/should have anything in taxable.
Thinking of paying tax now for Roth Conversions when possible without bumping up the federal marginal rate. It's state tax free in the great state of Illinois.
Staying in your tax bracket is not important. What you want to avoid is converting now at a higher rate than you might pay at another time after your income goes down.

If you are still in a higher tax bracket, you probably don't want to convert now.

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dodecahedron
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Re: Tax Deferred : Taxable : Tax Free

Post by dodecahedron » Sun Nov 10, 2019 3:03 pm

lakpr wrote:
Sun Nov 10, 2019 2:34 pm
What is the absolute amount you have in your tax deferred accounts? If it is less than $1 million (approximately) I wouldn't bother with Roth conversions. The reasoning is that, with balances less than that threshold, even withdrawals twice the RMD size would only place you in the 15% bracket, and opting for Roth conversions now you are paying 22% tax rate.
Brackets aren´t everything!

Next year my taxable income will put me in the 12% bracket but my effective marginal tax rate will be around 50% (due to a variety of interacting indirect tax effects sometimes referred to as the ¨Hump¨ or ¨Tax Torpedo

The complexity of our tax system means it is a careful balancing act, but it looks like a carefully titrated amount of Roth conversion will make sense for me if I can balance Roth conversions with some charitable donations of appreciated securities and some accessible tax credits calibrated to offset the tax impact of the conversions.

Even leaving aside indirect tax effects, your rule of thumb translating distributions into brackets ignores filing status (big difference between single & MFJ) and ignores other sources of income (e.g., pensions, dividends & interest on taxable holdings, rental income, etc.) as others above have noted.

Broken Man 1999
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Re: Tax Deferred : Taxable : Tax Free

Post by Broken Man 1999 » Sun Nov 10, 2019 3:35 pm

Tax deferred:
TIRAs - 79%
Variable Annuity - 9%
Series I Savings Bonds - 6%

Tax free:
Roths - 6%

Taxable:
Joint brokerage account: 0% ($3.09).

AA 50% equities 50% bonds. Retired, distributions from TIRAs + SS (both of us) used for expenses. Pension was taken as lump-sum.

We are both 66, so we aren't into RMDs yet. And, we have until 2030 before our I-Bonds start maturing.

Roth conversions might be considered. I'm pretty sure we can keep our taxes below the 24% bracket. If we get into 24% bracket it will be just on a tiny amount of dollars. Not sure a Roth conversions are worth it in the brackets we will most likely end up with, 22%. I'll think on it some.

Broken Man 1999

Edited to correct age.
Last edited by Broken Man 1999 on Sun Nov 10, 2019 4:06 pm, edited 1 time in total.
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lakpr
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Re: Tax Deferred : Taxable : Tax Free

Post by lakpr » Sun Nov 10, 2019 4:00 pm

@TomatoTomahto,

If you look at my post, you would see that I DOUBLED the RMD amount, to account for the vagaries you mentioned. Doubling the amount is intended precisely to account for the case where one spouse passes; even if the tax thresholds effectively halve for the newly single, the RMD amount would still place the income in the 15% bracket.

With only 7% of the portfolio being in taxable, and hints from the original post that it is not getting added to in a meaningful way, the dividends from taxable account are just noise (2% dividends on 7% of the portfolio = 0.14% of overall portfolio). As to capital gains, that is voluntary action on part of the portfolio holder. Unlike RMD, there is no one forcing the sale of equities in taxable accounts, and hence been considered and discarded.

SS: for a couple that would be a max of $50k. Only 85% of this SS income is taxable, so $42500 should be added to RMD. If the couple is drawing social security, it could be assumed reasonably that they would not want to withdraw more than the RMD. So on a $1 million dollars portfolio, $36500 RMD + $42500 SS = $79000 total income, less $12000 in standard exemptions = $67000 taxable income. Still placing the couple solidly in 15% bracket with room to grow for increase in RMDs for future years or take advantage of Roth conversions up to top of 15% bracket.

If one spouse dies, the SS is also halved, $25000 * 0.85 = $21250, plus RMD of $36500 = $57,750. Less standard exemption for single at $6800 = $51k taxable income approximately. This does place this newly single person in the 25% bracket, but that 25% is applicable only on the last $12k income, as first $39750 of taxable income would be 15% bracket. That is 3% extra to be paid on $12k income = $360 (22% tax escaped at deferral, 25% paid at RMD time)

I still feel $1 million in tax deferred can be a thumb rule that can be used to cover most practical cases where Roth conversions are being contemplated. Only extreme cases where there is substantial SS income and one spouse dies, will cause a slight tax loss. By doing Roth conversions now, you are GIVING UP the option to do conversions later when it is more favorable to do so. Having the option now has its own value, especially when weighed against the irrevocability of the decision if made now, and worth the slight extra cost you may pay later under the most unfavorable circumstances.
Last edited by lakpr on Sun Nov 10, 2019 4:12 pm, edited 1 time in total.

lakpr
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Re: Tax Deferred : Taxable : Tax Free

Post by lakpr » Sun Nov 10, 2019 4:05 pm

@ dodecahedron,

I do concede the point about tax humps and the effective tax rates of 50%+, but in my defense I was trying to come up with a benchmark rule that can be quickly tested against to decide if one should opt for Roth conversions now. It is meant to be ONE tool, among others, to assist the decision making. Obviously incorporating the vagaries of tax code into this simplistic test is impossible. If one does want to do such a fine tuned calculation, I think the Retiree Portfolio Model spreadsheet is better than my poor attempt.

retired@50
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Re: Tax Deferred : Taxable : Tax Free

Post by retired@50 » Sun Nov 10, 2019 4:07 pm

mtmingus wrote:
Sun Nov 10, 2019 9:57 am
What are your asset allocations among the three major categories:

Tax Deferred (Regular 401k, Traditional IRA)
Taxable (non-retirement brokerages)
Tax Free (Roth)
?

We are guilty of top heavy 68:7:25.

Thinking of paying tax now for Roth Conversions when possible without bumping up the federal marginal rate. It's state tax free in the great state of Illinois.
I'm currently 30:62:8.
I'm working on moving the tIRA money to Roth IRA each year using partial conversions.

I never really gave too much thought to this sort of breakdown, but I suppose I'm heavier in taxable than most folks... Just the way things worked out for me, I can't say I planned it this way. I was contributing the max to a 401k and Roth IRA when I had one available and/or earnings.

Regards,

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TomatoTomahto
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Re: Tax Deferred : Taxable : Tax Free

Post by TomatoTomahto » Sun Nov 10, 2019 4:22 pm

@lakpr, I apologize if I lumped you in with the BH cohort that does overly simplistic recommendations against Roth contributions. You thought about the OP’s situation more carefully.

I admit to falling in the cohort that does overly simplistic pro Roth contribution recommendations. We are in the tax torpedo’s bullseye.
Okay, I get it; I won't be political or controversial. The Earth is flat.

Triple digit golfer
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Re: Tax Deferred : Taxable : Tax Free

Post by Triple digit golfer » Sun Nov 10, 2019 4:25 pm

50% tax deferred
29% taxable
17% tax free
4% 529

Tax deferred would be higher and taxable lower if my 401k at work didn't suck and refund a large portion of my contribution each year.

retiredjg
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Re: Tax Deferred : Taxable : Tax Free

Post by retiredjg » Sun Nov 10, 2019 4:30 pm

lakpr wrote:
Sun Nov 10, 2019 2:34 pm
What is the absolute amount you have in your tax deferred accounts? If it is less than $1 million (approximately) I wouldn't bother with Roth conversions. The reasoning is that, with balances less than that threshold, even withdrawals twice the RMD size would only place you in the 15% bracket, and opting for Roth conversions now you are paying 22% tax rate.
So sorry lakpr, but since we are picking on this "rule of thumb", I've never really liked it either. :(

It seems to apply to married people with no pensions who are very near retirement..but that never gets mentioned.

I agree there is a point at which worrying about RMDs is not productive, but just mentioning this $1 million dollar number without qualifying information could be misleading to a lot of people.

I know it does not apply to me. In fact, it is not even close. That is probably why it grates on my nerves to see it mentioned with no information about situations it might apply best to.

Sorry. Just how I feel about it.

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Re: Tax Deferred : Taxable : Tax Free

Post by ruud » Sun Nov 10, 2019 4:38 pm

12:71:17
"A good plan, violently executed now, is better than a perfect plan next week."

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ruralavalon
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Re: Tax Deferred : Taxable : Tax Free

Post by ruralavalon » Sun Nov 10, 2019 4:40 pm

The issues of traditional vs Roth contributions and Roth conversions are always fact-sensitive. We have a hideously complex income tax system.
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Re: Tax Deferred : Taxable : Tax Free

Post by LadyGeek » Sun Nov 10, 2019 4:41 pm

This thread is now in the Investing - Theory, News & General forum (general discussion).
mtmingus wrote:
Sun Nov 10, 2019 9:57 am
Thinking of paying tax now for Roth Conversions when possible without bumping up the federal marginal rate. It's state tax free in the great state of Illinois.
Please don't use the answers in this thread to decide if you should convert. Everyone has a different situation and portfolio. What's right for one person may not be right for another.
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Workable Goblin
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Re: Tax Deferred : Taxable : Tax Free

Post by Workable Goblin » Sun Nov 10, 2019 5:15 pm

0:66:33

I've never actually had the opportunity to contribute to a tax-deferred account other than a traditional IRA, except rather briefly while I was a graduate student (after a month or so they essentially told me, "Actually, you're not an employee" and didn't let me contribute any more; and in any case I had decided to use the Roth option given the reasoning below). In any case, as a graduate student contributing enough to my (Roth) IRA to hit the contribution limits implied a savings rate of 25% of gross or better, so it was clearly a choice between paying taxes at 10% now to withdraw at 0% later, or deferring 10% taxes now in favor of a most likely higher rate later. Since the median income with a Ph.D. in physics is about five times my income at the time, it wasn't exactly hard to decide that the Roth IRA would probably turn out better in the long run.

After I graduated, I got a postdoc, which led to some interesting consequences. Most particularly, since my income was, technically speaking, a "grant or scholarship," per IRS rules I actually had no earned income after I started it. In other words, I couldn't contribute to any IRA after I had maxed out my contribution the year I graduated, since my income was "too low" (never mind that I had gotten a raise of 150% going from the graduate student to postdoc position). As a postdoc I also had no access to the institution's 457(b)/403(b)/401(k) plans. So I was in a peculiar situation where I simply didn't have access to any tax-advantaged space at all despite not having a particularly large income. Combine this with a fairly sizable, compared to how much I had been able to save on my own, taxable inheritance and non-retirement savings, and that's how my taxable is more or less twice as large as my Roth space.

Right now, I'm looking forward to most likely starting a new government contracting job in the near future (once I get a relevant clearance). This will finally allow me to access tax-deferred space other than a traditional IRA, along with another 60% increase in income, so hopefully these ratios will change soon.

babystep
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Re: Tax Deferred : Taxable : Tax Free

Post by babystep » Sun Nov 10, 2019 5:20 pm

lakpr wrote:
Sun Nov 10, 2019 4:00 pm
@TomatoTomahto,

If you look at my post, you would see that I DOUBLED the RMD amount, to account for the vagaries you mentioned. Doubling the amount is intended precisely to account for the case where one spouse passes; even if the tax thresholds effectively halve for the newly single, the RMD amount would still place the income in the 15% bracket.

With only 7% of the portfolio being in taxable, and hints from the original post that it is not getting added to in a meaningful way, the dividends from taxable account are just noise (2% dividends on 7% of the portfolio = 0.14% of overall portfolio). As to capital gains, that is voluntary action on part of the portfolio holder. Unlike RMD, there is no one forcing the sale of equities in taxable accounts, and hence been considered and discarded.

SS: for a couple that would be a max of $50k. Only 85% of this SS income is taxable, so $42500 should be added to RMD. If the couple is drawing social security, it could be assumed reasonably that they would not want to withdraw more than the RMD. So on a $1 million dollars portfolio, $36500 RMD + $42500 SS = $79000 total income, less $12000 in standard exemptions = $67000 taxable income. Still placing the couple solidly in 15% bracket with room to grow for increase in RMDs for future years or take advantage of Roth conversions up to top of 15% bracket.

If one spouse dies, the SS is also halved, $25000 * 0.85 = $21250, plus RMD of $36500 = $57,750. Less standard exemption for single at $6800 = $51k taxable income approximately. This does place this newly single person in the 25% bracket, but that 25% is applicable only on the last $12k income, as first $39750 of taxable income would be 15% bracket. That is 3% extra to be paid on $12k income = $360 (22% tax escaped at deferral, 25% paid at RMD time)

I still feel $1 million in tax deferred can be a thumb rule that can be used to cover most practical cases where Roth conversions are being contemplated. Only extreme cases where there is substantial SS income and one spouse dies, will cause a slight tax loss. By doing Roth conversions now, you are GIVING UP the option to do conversions later when it is more favorable to do so. Having the option now has its own value, especially when weighed against the irrevocability of the decision if made now, and worth the slight extra cost you may pay later under the most unfavorable circumstances.
lakpr,

Great analysis, very helpful. I am slightly confused.
Shouldn't the MFJ case be 79000- 24400. Similarly, single will use 12000 standard deduction.
If true it actually supports your point more.

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fortfun
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Re: Tax Deferred : Taxable : Tax Free

Post by fortfun » Sun Nov 10, 2019 5:26 pm

90:3:7

With a pension, it is high time for us to utilize DWs Roth457.

curmudgeon
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Re: Tax Deferred : Taxable : Tax Free

Post by curmudgeon » Sun Nov 10, 2019 5:36 pm

We are about 40:55:5

Didn't have access to Roth most of my earning career, nor to anything beyond the standard employee contribution limits with minimal company contributions. Paid a lot of tax along the way saving in the taxable account. Currently retired, but keeping gross income below the ACA cliff until age 65, so we can only do limited Roth conversions. Plan to do larger Roth conversions between age 65-70. Our path with conversions and drawdown from taxable is heading roughly towards 33:33:33 at age 70 when we start SS, but much will depend on investment returns and other factors.

lakpr
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Re: Tax Deferred : Taxable : Tax Free

Post by lakpr » Sun Nov 10, 2019 6:17 pm

babystep wrote:
Sun Nov 10, 2019 5:20 pm
lakpr,

Great analysis, very helpful. I am slightly confused.
Shouldn't the MFJ case be 79000- 24400. Similarly, single will use 12000 standard deduction.
If true it actually supports your point more.
@babystep,

Thank you! Note that the TCJA will expire at the end of 2025, and as things stand now, starting 2026 the tax rates and tax brackets (only the personal ones! Corporate tax cuts are supposedly permanent) will revert to 2017 levels. In 2017, there were no "standard deductions", only "standard exemptions" and they were only $12000 per married couple. That is why the figures I used were $12000 and $6800 (to the best of my recollection and I may have rounded slightly), not $24,400 and $12,200 respectively. The tax brackets also were much narrower.

Hope that explains.

aristotelian
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Re: Tax Deferred : Taxable : Tax Free

Post by aristotelian » Sun Nov 10, 2019 6:27 pm

OP, what is your tax bracket? Unless your tax situation is unusual, I would not lock any conversions in at your current marginal rate unless you expect to be in a higher bracket in retirement. If you expect to be in the same or lower bracket, you might as well stay where you are.

I am 38/32/30, but pretax is the fastest growing bucket. I did not see the light about maxing my 401k until too late.

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dodecahedron
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Re: Tax Deferred : Taxable : Tax Free

Post by dodecahedron » Sun Nov 10, 2019 6:34 pm

retiredjg wrote:
Sun Nov 10, 2019 4:30 pm
lakpr wrote:
Sun Nov 10, 2019 2:34 pm
What is the absolute amount you have in your tax deferred accounts? If it is less than $1 million (approximately) I wouldn't bother with Roth conversions. The reasoning is that, with balances less than that threshold, even withdrawals twice the RMD size would only place you in the 15% bracket, and opting for Roth conversions now you are paying 22% tax rate.
So sorry lakpr, but since we are picking on this "rule of thumb", I've never really liked it either. :(

It seems to apply to married people with no pensions who are very near retirement..but that never gets mentioned.

I agree there is a point at which worrying about RMDs is not productive, but just mentioning this $1 million dollar number without qualifying information could be misleading to a lot of people.

I know it does not apply to me. In fact, it is not even close. That is probably why it grates on my nerves to see it mentioned with no information about situations it might apply best to.

Sorry. Just how I feel about it.
Yes, the simplistic rule also really does not apply to me--not even close. Our system was hardly perfect (some things are hard to predict--like early unexpected death of a spouse at 59 or how the market will perform) but I am really grateful that we did opportunistic Roth conversions when we did (self-employment income years were something of a roller-coaster) and feeling pretty good about the mix I have (23-50-27) but will probably continue to consider some continuing small conversions every year at least until RMDs start. (Six years to go!)

babystep
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Re: Tax Deferred : Taxable : Tax Free

Post by babystep » Sun Nov 10, 2019 8:07 pm

lakpr wrote:
Sun Nov 10, 2019 6:17 pm
babystep wrote:
Sun Nov 10, 2019 5:20 pm
lakpr,

Great analysis, very helpful. I am slightly confused.
Shouldn't the MFJ case be 79000- 24400. Similarly, single will use 12000 standard deduction.
If true it actually supports your point more.
@babystep,

Thank you! Note that the TCJA will expire at the end of 2025, and as things stand now, starting 2026 the tax rates and tax brackets (only the personal ones! Corporate tax cuts are supposedly permanent) will revert to 2017 levels. In 2017, there were no "standard deductions", only "standard exemptions" and they were only $12000 per married couple. That is why the figures I used were $12000 and $6800 (to the best of my recollection and I may have rounded slightly), not $24,400 and $12,200 respectively. The tax brackets also were much narrower.

Hope that explains.
aha, that make sense. Sorry, it may not matter to this thread but then it should be 20800 = 12700 + 2 * 4050 ?
https://taxfoundation.org/2017-tax-brackets/

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TierArtz
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Re: Tax Deferred : Taxable : Tax Free

Post by TierArtz » Sun Nov 10, 2019 8:40 pm

Interesting question; I had not calculated it before:
Taxable (41%) and no cash to add to it.
Roth (36%); will be adding to IRAs and the after-tax slice of my 401k with Roth conversion (about $39K per year).
Deferred (23%); adding the max to a 401k and about 21% of my pay to deferred comp (about $65k per year total).

I’m placing as much of my bond slice in deferred as possible to minimize growth and RMDs.

lakpr
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Re: Tax Deferred : Taxable : Tax Free

Post by lakpr » Sun Nov 10, 2019 8:42 pm

babystep wrote:
Sun Nov 10, 2019 8:07 pm
aha, that make sense. Sorry, it may not matter to this thread but then it should be 20800 = 12700 + 2 * 4050 ?
https://taxfoundation.org/2017-tax-brackets/
You are right! I underestimated the amount to be deducted to arrive at taxable income.

bsteiner
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Re: Tax Deferred : Taxable : Tax Free

Post by bsteiner » Sun Nov 10, 2019 9:26 pm

Traditional and Roth combined: as much as possible.

Roth to the extent I can contribute or convert at a tax rate less than, equal to, or not too much higher than the tax rate that I expect to apply to distributions from traditional, and in the case of a conversion where I have sufficient high basis assets with which to pay the tax on the conversion.

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FiveK
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Re: Tax Deferred : Taxable : Tax Free

Post by FiveK » Sun Nov 10, 2019 9:56 pm

retiredjg wrote:
Sun Nov 10, 2019 4:30 pm
...since we are picking on this "rule of thumb", I've never really liked it either. :(
+1

Sometimes seems "rules" of thumb in the traditional vs. Roth arena have more exceptions than rules. :)

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FiveK
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Re: Tax Deferred : Taxable : Tax Free

Post by FiveK » Sun Nov 10, 2019 10:38 pm

FWIW,

Deferred 59%
Taxable 33%
Roth/HSA 8%

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changingtimes
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Re: Tax Deferred : Taxable : Tax Free

Post by changingtimes » Sun Nov 10, 2019 10:51 pm

53, widowed.

Deferred 75% (my 401k and DH's 401k I inherited)
Taxable 15%
Roth 10%

Maxing out the mega backdoor to push up the Roth total, and vacillating hourly on the best way to plan for future taxes. Today's plan is to match my mega backdoor next year with a withdrawal from the inherited IRA, up to the top of the 24% bracket. I'm just considering it a huge salary bump. 😁

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grabiner
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Re: Tax Deferred : Taxable : Tax Free

Post by grabiner » Thu Nov 14, 2019 10:46 pm

Nominally:
Tax-deferred: 35%
Taxable: 35%
Tax-free: 30%

But as I view it:
Tax-deferred: 33%
Taxable: 34% -7% mortgage
Tax-free: 40%

That is, I adjust my tax-deferred account for the 31% that I expect to lose to taxes (federal and state, assuming I retire in MD). I adjust my taxable account for the 27% that I expect to lose to taxes, but I also include the mortgage as a negative amount. I don't adjust my tax-free account at all because I own 100% of it; my Roth IRA becomes tax-free when I turn 59-1/2, and my HSA is tax-free now as long as I spend it on medical costs.
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Re: Tax Deferred : Taxable : Tax Free

Post by bhsince87 » Thu Nov 14, 2019 11:03 pm

Tax Deferred (Regular 401k, Traditional IRA): 40%
Taxable (non-retirement brokerages): 60%
Tax Free (Roth): 0.2%

But how should I consider a pension? And real estate?

Ages 54/52.

It is what it is.

It would be nice to have more Roth at this point. But every year the plus/minus of converting to Roth seems different. It's a very complicated decision.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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Re: Tax Deferred : Taxable : Tax Free

Post by RubyTuesday » Fri Nov 15, 2019 8:32 am

grabiner wrote:
Thu Nov 14, 2019 10:46 pm
Nominally:
Tax-deferred: 35%
Taxable: 35%
Tax-free: 30%

But as I view it:
Tax-deferred: 33%
Taxable: 34% -7% mortgage
Tax-free: 40%

That is, I adjust my tax-deferred account for the 31% that I expect to lose to taxes (federal and state, assuming I retire in MD). I adjust my taxable account for the 27% that I expect to lose to taxes, but I also include the mortgage as a negative amount. I don't adjust my tax-free account at all because I own 100% of it; my Roth IRA becomes tax-free when I turn 59-1/2, and my HSA is tax-free now as long as I spend it on medical costs.
why would tax drag be so high? Wouldn’t you just owe 15% of gains? Does your taxable throw off lots of income or do you have zero basis or ?

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grabiner
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Re: Tax Deferred : Taxable : Tax Free

Post by grabiner » Fri Nov 15, 2019 10:47 pm

RubyTuesday wrote:
Fri Nov 15, 2019 8:32 am
grabiner wrote:
Thu Nov 14, 2019 10:46 pm
Nominally:
Tax-deferred: 35%
Taxable: 35%
Tax-free: 30%

But as I view it:
Tax-deferred: 33%
Taxable: 34% -7% mortgage
Tax-free: 40%

That is, I adjust my tax-deferred account for the 31% that I expect to lose to taxes (federal and state, assuming I retire in MD). I adjust my taxable account for the 27% that I expect to lose to taxes, but I also include the mortgage as a negative amount. I don't adjust my tax-free account at all because I own 100% of it; my Roth IRA becomes tax-free when I turn 59-1/2, and my HSA is tax-free now as long as I spend it on medical costs.
why would tax drag be so high? Wouldn’t you just owe 15% of gains? Does your taxable throw off lots of income or do you have zero basis or ?
I make my plans assuming I will retire in MD (7.95% state tax), so I will lose 21% of my gains assuming the tax laws reset in 2026, and 23% if they do not reset (additional state tax not deductible from federal because I pay more than $10K including property tax). In addition, I pay the same 21% or 23% tax on my qualified dividends.

I also adjust my asset allocation based on the tax effect on gains, rather than on the total balance, because I use asset allocation to model risk. If I lose $1000 in my taxable account, this reduces my standard of living in retirement by the same amount as if I lose $730 in my Roth IRA, because that $1000 loss does not change my basis and will remain invested in stock. (My taxable account is all stock.) Therefore, if I have $100K in Fund A in my taxable account, and $73K in Fund B in my Roth, I have a 50/50 after-tax split between the two funds.
Wiki David Grabiner

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celia
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Re: Tax Deferred : Taxable : Tax Free

Post by celia » Sat Nov 16, 2019 1:10 am

3:43:54

Yep, that's correct. The majority of our assets are now in Roth. I'm a big believer in Roth conversions as those who read my Roth conversion posts know. I followed the advice I give others in mapping out our income for each year until we hit 72 before we even retired. Basically I did enough Roth conversions to keep us at the same Taxable Income each year and thus our taxes pretty much stayed the same during our early retirement years. At the time we retired, we were probably 25:15:60, but since then inherited some taxable money and a Traditional IRA, whose RMDs set us back in Roth conversions since the RMDs took up some of the space I originally had planned for Roth conversions.

We're now over 70.5 and QCDing the tax-deferred so it will be down to 0 in about 2 more years. Then our financial lives will be simpler, not having to think about RMDs. The rest of the portfolio grows more than the money we give away.

Yay... the plan worked!
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: Tax Deferred : Taxable : Tax Free

Post by willthrill81 » Sat Nov 16, 2019 1:17 am

92:0:8

By the time I retire, I expect that we'll be closer to 80:0:20 by doing Roth conversions of an old 401 rollover IRA between now and then. The plan is to continue doing Roth conversions until age 70, at which point I'd hope that we'll be around 65:0:35. We have lots of tax-advantaged space and no need whatsoever for taxable accounts.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Tax Deferred : Taxable : Tax Free

Post by willthrill81 » Sat Nov 16, 2019 1:20 am

celia wrote:
Sat Nov 16, 2019 1:10 am
3:43:54

Yep, that's correct. The majority of our assets are now in Roth. I'm a big believer in Roth conversions as those who read my Roth conversion posts know. I followed the advice I give others in mapping out our income for each year until we hit 72 before we even retired. Basically I did enough Roth conversions to keep us at the same Taxable Income each year and thus our taxes pretty much stayed the same during our early retirement years. At the time we retired, we were probably 25:15:60, but since then inherited some taxable money and a Traditional IRA, whose RMDs set us back in Roth conversions since the RMDs took up some of the space I originally had planned for Roth conversions.

We're now over 70.5 and QCDing the tax-deferred so it will be down to 0 in about 2 more years. Then our financial lives will be simpler, not having to think about RMDs. The rest of the portfolio grows more than the money we give away.

Yay... the plan worked!
I haven't read your 'Roth conversion posts', but I'm assuming that you must be filling up at least the standard deduction and 10% brackets, and likely some of the 12% bracket, with Social Security benefits at this point. I don't see any other way that this approach would come out ahead over one's lifetime mathematically, though it would certainly be an effective safeguard against rising tax rates in the future.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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celia
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Re: Tax Deferred : Taxable : Tax Free

Post by celia » Sat Nov 16, 2019 1:44 am

willthrill81 wrote:
Sat Nov 16, 2019 1:20 am
I haven't read your 'Roth conversion posts', but I'm assuming that you must be filling up at least the standard deduction and 10% brackets, and likely some of the 12% bracket, with Social Security benefits at this point. I don't see any other way that this approach would come out ahead over one's lifetime mathematically, though it would certainly be an effective safeguard against rising tax rates in the future.
We both had pensions starting when we retired. We filed and suspended for SS at FRA and one of us took 1/2 of the other person's SS. At age 70, we both started the max benefits we were eligible for. Our pensions and SS alone put us in the 22% bracket. I'm glad we were able to use the pre-SS years to do lots of Roth conversions.

I also took advantage of the 2008 market crash to convert a lot of stock funds at a bargain rate for taxes (since the converted amounts were half their usual price, so were the taxes). I was still working at that time and our taxes jumped a bit, but I considered that I was paying half the usual rate on the taxes since the stock funds rebounded the next year.
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: Tax Deferred : Taxable : Tax Free

Post by BigJohn » Sat Nov 16, 2019 3:46 am

Retired at 58, currently 63 and widowed so filing single.

When I started retirement it was about 70:30:0. I’ve been doing fairly aggressive Roth conversions for four years and currently stand at about 60:30:10. Unless tax laws change significantly, I plan to continue Roth conversions for seven more years until RMDs and SS kick in. By that time I should somewhere around 45:20:35.

I agree with comments above that limiting Roth conversions to current tax bracket could be non-optimal. After lots of spreadsheets and forum posts, my approach boils down to converting an amount about equal to my expected RMD + 85% of SS. This keeps my taxable income relatively constant. But, I’ve participated in many forum discussions on this topic and there is no one size fits all answer.

rkhusky
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Re: Tax Deferred : Taxable : Tax Free

Post by rkhusky » Sat Nov 16, 2019 8:12 am

Currently 57:11:32. Hope to do some serious Roth conversions in the 12% bracket over the next 15 years, perhaps reaching 10:5:85.

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PhysicianOnFIRE
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Re: Tax Deferred : Taxable : Tax Free

Post by PhysicianOnFIRE » Sat Nov 16, 2019 8:27 am

16: 64 : 20

:beer
-PoF

RubyTuesday
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Re: Tax Deferred : Taxable : Tax Free

Post by RubyTuesday » Sat Nov 16, 2019 9:08 am

grabiner wrote:
Fri Nov 15, 2019 10:47 pm
RubyTuesday wrote:
Fri Nov 15, 2019 8:32 am

why would tax drag be so high? Wouldn’t you just owe 15% of gains? Does your taxable throw off lots of income or do you have zero basis or ?
I make my plans assuming I will retire in MD (7.95% state tax), so I will lose 21% of my gains assuming the tax laws reset in 2026, and 23% if they do not reset (additional state tax not deductible from federal because I pay more than $10K including property tax). In addition, I pay the same 21% or 23% tax on my qualified dividends.
.
I understand the concept but still not getting how you get to 27% of taxable to taxes. You mention a combined (fed and MD I think) loss of either 21 or 23%, but not 27%, and I can’t see how you get to any of those 21, 23, or 27, lol.

I’m sure I’m confused but would like to understand how so that I don’t make the same mistake with my tax adjusted AA.

Let’s call the state tax 8% and say you sell $20,000 with $10,000 basis, $10,000 cap gain. Highest cap gain rate is 20% + 8%. Taxes are $2800, which would be 14% of $20,000. If you had zero basis it would be 28% worst case. Is your 27% just very specific to your circumstances regarding average basis and tax bracket?

MathIsMyWayr
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Re: Tax Deferred : Taxable : Tax Free

Post by MathIsMyWayr » Sat Nov 16, 2019 9:21 am

celia wrote:
Sat Nov 16, 2019 1:44 am
willthrill81 wrote:
Sat Nov 16, 2019 1:20 am
I haven't read your 'Roth conversion posts', but I'm assuming that you must be filling up at least the standard deduction and 10% brackets, and likely some of the 12% bracket, with Social Security benefits at this point. I don't see any other way that this approach would come out ahead over one's lifetime mathematically, though it would certainly be an effective safeguard against rising tax rates in the future.
We both had pensions starting when we retired. We filed and suspended for SS at FRA and one of us took 1/2 of the other person's SS. At age 70, we both started the max benefits we were eligible for. Our pensions and SS alone put us in the 22% bracket. I'm glad we were able to use the pre-SS years to do lots of Roth conversions.

I also took advantage of the 2008 market crash to convert a lot of stock funds at a bargain rate for taxes (since the converted amounts were half their usual price, so were the taxes). I was still working at that time and our taxes jumped a bit, but I considered that I was paying half the usual rate on the taxes since the stock funds rebounded the next year.
43:55:2 (not my 10k time) - My grade is a solid "F" by Celia's scale.
I also took advantage of the 2008 market crash to convert a lot of stock funds at a bargain rate for taxes - I don't get this part. Why does the market condition matter at all? Don't you decide how much to convert to Roth? Since tax-deferred has a zero tax basis, only the absolute dollar amount matters. There is no gain or loss as far as tax is involved. A question by an "F" on Roth conversion.

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Re: Tax Deferred : Taxable : Tax Free

Post by GrowthSeeker » Sat Nov 16, 2019 9:56 am

16:81:3
When I retired about 5 years ago it was about 20:80:0
At age 67, I still have some more Roth conversion years.
Just because you're paranoid doesn't mean they're NOT out to get you.

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grabiner
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Re: Tax Deferred : Taxable : Tax Free

Post by grabiner » Sat Nov 16, 2019 10:21 am

RubyTuesday wrote:
Sat Nov 16, 2019 9:08 am
grabiner wrote:
Fri Nov 15, 2019 10:47 pm
RubyTuesday wrote:
Fri Nov 15, 2019 8:32 am

why would tax drag be so high? Wouldn’t you just owe 15% of gains? Does your taxable throw off lots of income or do you have zero basis or ?
I make my plans assuming I will retire in MD (7.95% state tax), so I will lose 21% of my gains assuming the tax laws reset in 2026, and 23% if they do not reset (additional state tax not deductible from federal because I pay more than $10K including property tax). In addition, I pay the same 21% or 23% tax on my qualified dividends.
.
I understand the concept but still not getting how you get to 27% of taxable to taxes. You mention a combined (fed and MD I think) loss of either 21 or 23%, but not 27%, and I can’t see how you get to any of those 21, 23, or 27, lol.
21% is based on a 15% federal tax on qualified dividends, and 7.95% state tax deducted from federal at 25% (my expected tax bracket in retirement). Under current tax laws, since I pay more than $10,000 in state and local taxes, I get no tax benefit from additional state tax, so my marginal tax rate on qualified dividends is 23%.

The 21% and 23% are annual tax rates, but the actual tax cost includes compounding. Dividends are reinvested, and subject to further dividend tax, and capital-gains tax when the compounded dividends are sold.

Assuming a 21% tax rate and a 2% dividend yield, I would lose 0.42% of my taxable account to dividend tax every year; I actually use 0.47% because some of my taxable dividends are non-qualified and taxed at 31%. Assuming a 25-year time horizon (mid-retirement), that is an 11% loss before I sell anything.

Then, when I sell, I will pay 21% tax on the capital gain. I assume a 2% dividend yield and 8% pre-tax return, so my 7.53% return each year includes a 1.53% increase in the basis. Therefore, the tax is 6/7.53 * 21% = 17% of the future gains. The combination of the 11% and the 17% means that 27% of my gains will be lost to taxes.

Note that I said "of my gains"; the fraction of the total account lost to taxes depends on how much of the current investment is basis. That is relevant in estimating how much income I could get from the portfolio, since every dollar of basis is 21 cents that I won't have to pay in taxes.

But for asset allocation purposes, it makes sense to ignore the basis. I hold Fund A in which my basis is 25% of the current value, and Fund B in which my basis is 75% of the current value. If I want to hold equal after-tax amounts in Fund A and Fund B, the basis difference isn't relevant; if I gain $1000 in Fund A and lose $1000 in Fund B, I break even. (In contrast, if I gain $1000 in Fund A and lose $1000 in Fund C which is in my Roth IRA, I don't break even, because I have to share some of my gains with the IRS but take all my losses; this is why I adjust taxable versus Roth.)

But even considering current basis doesn't make much difference for a long-term investment. Given my assumed 6% rate of unrealized gains, my current balance will be less than 1/5 of the share value when I sell, so I will lose between 17% and 21% of my current balance on that 1/5, plus 27% on the other 4/5. The net effect is that I will lose 26% of the value of the shares I sell during retirement, for all the funds I hold; the difference between Fund A and Fund B is about half a percent.
Wiki David Grabiner

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