There seems to be an advantage to Roth conversion now until 12/31/2025

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Libertarian666
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Libertarian666 » Mon Oct 15, 2018 11:37 am

MangoMan wrote:
Mon Oct 15, 2018 10:30 am
Libertarian666 wrote:
Mon Oct 15, 2018 9:15 am
ochotona wrote:
Mon Oct 15, 2018 4:38 am
The move to a low tax State doesn't have to be permanent. After conversion is complete, you can move back
Not necessarily. I understand New York State in particular may try to come after you even after you leave because you are "stealing their money", but I can't find substantiation for that online right now.
California tried that as retirees fled to Nevada and Texas. The courts ruled they had no jurisdiction or claim on the money.
Sure, but if you move back there they can hassle you unmercifully even if it is illegal.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Mon Oct 15, 2018 2:50 pm

Oh gee. Well, I would not move back to the same higher tax State, then.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Kbg » Mon Oct 15, 2018 7:24 pm

I recently had an audit from my state on my military retirement (left, became a Texan for many years and moved back). States definitely do this stuff and you need to have your ducks lined up and be familiar with your state's specific tax law on these things...I had my ducks in a row so other than sending off lots of tax return copies it was uneventful.

However, do not do tax moves like this lightly and make sure you are well informed.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Mon Oct 15, 2018 9:47 pm

Kbg wrote:
Mon Oct 15, 2018 7:24 pm
I recently had an audit from my state on my military retirement (left, became a Texan for many years and moved back). States definitely do this stuff and you need to have your ducks lined up and be familiar with your state's specific tax law on these things...I had my ducks in a row so other than sending off lots of tax return copies it was uneventful.

However, do not do tax moves like this lightly and make sure you are well informed.
How many years did they go back in the investigation?
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by sophie » Tue Oct 16, 2018 8:07 am

New York is well known for going after residents "moving" to other states but keeping an address in NY. I think if you move completely and have no address in the state there's nothing they can do. Not that they wouldn't try :-)

New York's tax structure is actually not bad for retirees, especially frugal ones. You get not only the $20K exemption on top of the standard one, but also SS is not taxed. And there are financial as well as quality of life benefits to living in NYC. Cars are an expensive hobby you know! So not such as simple question of whether to move. There would have to be a significant quality of life improvement, which involves things like being close to family.

Bedraggled, glad you're enjoying Florida!
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Kbg » Tue Oct 16, 2018 10:46 am

ochotona wrote:
Mon Oct 15, 2018 9:47 pm
Kbg wrote:
Mon Oct 15, 2018 7:24 pm
I recently had an audit from my state on my military retirement (left, became a Texan for many years and moved back). States definitely do this stuff and you need to have your ducks lined up and be familiar with your state's specific tax law on these things...I had my ducks in a row so other than sending off lots of tax return copies it was uneventful.

However, do not do tax moves like this lightly and make sure you are well informed.
How many years did they go back in the investigation?
Och,

What they normally do is flag the tax year retired and then go from there based on what they find out. So in my case I had to provide everything for that tax year and answer a four page questionnaire of which all the questions were focused on citizenship stuff. I'm pretty sure I would have been fine either way, but fortunately my last assignment ended up being in Texas as well so I was pretty much bullet proof. I transitioned everything over to the new state the day after my official retirement and as I heard getting an audit was fairly common I kept a good Texas resident documentation trail over the years.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Libertarian666 » Tue Oct 16, 2018 1:01 pm

sophie wrote:
Tue Oct 16, 2018 8:07 am
New York is well known for going after residents "moving" to other states but keeping an address in NY. I think if you move completely and have no address in the state there's nothing they can do. Not that they wouldn't try :-)

New York's tax structure is actually not bad for retirees, especially frugal ones. You get not only the $20K exemption on top of the standard one, but also SS is not taxed. And there are financial as well as quality of life benefits to living in NYC. Cars are an expensive hobby you know! So not such as simple question of whether to move. There would have to be a significant quality of life improvement, which involves things like being close to family.

Bedraggled, glad you're enjoying Florida!
I would be astonished to learn that living in NYC could possibly be cheaper than living in Texas no matter what your tax status.

I do know that NYC real estate taxes are relatively low, but I can't see how that could possibly make up the difference in the cost of virtually everything else.

And of course the cost of real estate in NYC is so high that a large portion of your net worth must be tied up in your apartment. Of course that produces no income other than the imputed income of rent savings. Thus, for a fair comparison you would have to add the value of that apartment (less the cost of your new living space) to your net worth if you were to move.

I think if you include this, there is no way you are better off financially staying there.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by sophie » Tue Oct 16, 2018 11:15 pm

OK will grant that - in fact yes, if it were only about finances I'd very likely move.

I think you'd be surprised at relative costs in NYC and Texas. Cost of living comparisons usually cherry pick a few items, and end up with a wildly un-representative sample. I once pulled a sheet of average spending figures broken down into categories, intended to be comprehensive, published by BLS. I compared these to my #s plus figures from my coop's annual financial statement, since a lot of my expenses are buried in the monthly maintenance. My living costs were high in some categories, but lower in others and overall it came pretty close to balancing out. You can certainly spend a ton of money in this city if you want, but you don't have to by any means.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Wed Oct 17, 2018 6:21 am

sophie wrote:
Tue Oct 16, 2018 11:15 pm
OK will grant that - in fact yes, if it were only about finances I'd very likely move.

I think you'd be surprised at relative costs in NYC and Texas. Cost of living comparisons usually cherry pick a few items, and end up with a wildly un-representative sample. I once pulled a sheet of average spending figures broken down into categories, intended to be comprehensive, published by BLS. I compared these to my #s plus figures from my coop's annual financial statement, since a lot of my expenses are buried in the monthly maintenance. My living costs were high in some categories, but lower in others and overall it came pretty close to balancing out. You can certainly spend a ton of money in this city if you want, but you don't have to by any means.
Housing costs have gotten out of control in the nice areas of Houston, like the Heights. Egads. Might as well be Seattle. Midland? Forget trying to buy any house now
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Wed Oct 17, 2018 7:20 am

MangoMan wrote:
Wed Oct 17, 2018 7:01 am
ochotona wrote:
Wed Oct 17, 2018 6:21 am
sophie wrote:
Tue Oct 16, 2018 11:15 pm
OK will grant that - in fact yes, if it were only about finances I'd very likely move.

I think you'd be surprised at relative costs in NYC and Texas. Cost of living comparisons usually cherry pick a few items, and end up with a wildly un-representative sample. I once pulled a sheet of average spending figures broken down into categories, intended to be comprehensive, published by BLS. I compared these to my #s plus figures from my coop's annual financial statement, since a lot of my expenses are buried in the monthly maintenance. My living costs were high in some categories, but lower in others and overall it came pretty close to balancing out. You can certainly spend a ton of money in this city if you want, but you don't have to by any means.
Housing costs have gotten out of control in the nice areas of Houston, like the Heights. Egads. Might as well be Seattle. Midland? Forget trying to buy any house now
Is that perhaps due to all the people fleeing CA for TX?
That's definitely a contributor.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by bedraggled » Wed Oct 17, 2018 8:53 pm

Sophie and I agree. The costs in Florida and New York can be comparable. We are not big spenders. I do miss public transportation more than I thought possible. The subways and buses are great, even if they are rotting at the moment. There isn’t much community and “neighborhood” here is concept. If a person wants to spend money in Manhattan, convene a HBPP lunch on West 181st Street down from the “A” train station.

Actually, the beer is a big part of the tab. Barrett and Goodasgold are currently out of town. I will be back to Manhattan in February for subway rides and bar food, if you(s) are interested.

BTW, one of the joys of Florida is that I-95 rarely has traffic and the airport drive offers no stress. The snow and ice do not tear up the road as much in Fort Lauderdale, also.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by sophie » Thu Oct 18, 2018 7:20 am

MangoMan wrote:
Wed Oct 17, 2018 10:43 am
If Beto beats Ted next month, it's prob an indication that more is happening here than just an increase in housing prices. I hear migration of New Yorkers is having a similar unplanned effect on Florida.
[/quote]

That's an interesting unintended effect of Trump's tax plan, isn't it? Revenge on blue states (if that's what it was) -> effective increased tax burden on blue state residents -> outmigration to less heavily taxed places -> increase in Democratic votes in said places.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by sophie » Thu Oct 18, 2018 8:04 am

Ha, well put.

The problem with progressive government programs is that they require a bureaucracy to run them. After a certain point, the bureaucracy takes on a life of its own. I encountered a clinical issue yesterday that made me shake my head in wonder: a patient was required by a vocational program to submit a form from their MDs attesting to their ability to work, before the program would assist her to apply for a job. The form asked for a large number of very specific details pertaining to the patient's condition.

SO wrong on two levels: 1) how is anyone besides me and the patient entitled to the medical information requested on the form? and 2) the idea that a person needs my permission in order to apply for a job in the private sector. SERIOUSLY??? To me that requires only that the prospective employee has legal status in the US and wants the job, and the employer wants to hire them. I'm mystified. This is complete nonsense & makework designed mainly to give someone (not the patient) a job, without consideration for the value of the time of the other people involved.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Kriegsspiel » Thu Oct 18, 2018 4:06 pm

I remember reading an article about the Connecticut governor who, after presiding over a large tax increase, left for Florida to escape the high taxes after she left office.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by I Shrugged » Thu Oct 18, 2018 4:59 pm

Upon further review, we will not be making any Roth conversions. We are in the 22% tax bracket now. When we start taking RMD's and social security, the extra taxable income will put us into the 24% bracket. To do conversions, we would try to fill up the 24% bracket for several years, and maybe still end up in that same bracket anyway. Not to mention some lost tax deferral opportunity costs. No point.

That's a very simple analysis based on reasonable expectations for the next few years. Beyond that it's too unpredictable to use for planning. A Vanguard Advisor helped me sort this out. Might work for you Sophie?
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Thu Oct 18, 2018 5:51 pm

Roth conversion is an option on future increased tax rates. It may expire worthless. It may pay.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by boglerdude » Thu Oct 18, 2018 10:44 pm

And/or the forms are to get people to give up on getting aid. In CA they lose paperwork etc to get people off foodstamps.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by sophie » Fri Oct 19, 2018 8:52 am

I Shrugged wrote:
Thu Oct 18, 2018 4:59 pm
Upon further review, we will not be making any Roth conversions. We are in the 22% tax bracket now. When we start taking RMD's and social security, the extra taxable income will put us into the 24% bracket. To do conversions, we would try to fill up the 24% bracket for several years, and maybe still end up in that same bracket anyway. Not to mention some lost tax deferral opportunity costs. No point.
I'm confused...

If you're in the 22% bracket now and anticipate going up to the 24% bracket in future, thence to 28% potentially in 2025, why wouldn't it be to your advantage to fill up the 22% bracket with Roth conversions? If that's the only difference between withdrawing now or later, I should think that is a no-brainer.

Ochotona's original idea was to arbitrage the current reduction in tax rates, based on what you think the chances are of the tax rates going back up in 2025. If you anticipate being in the 28% bracket because the tax cuts are allowed to expire in 2025, then there might be an additional advantage to Roth conversions up to the top of the 24% bracket up until that happens. This is less clear. You might want to sit down with a spreadsheet (with or without that Vanguard advisor) and work through the numbers. I don't see that you have anything to lose with this, since you know that withdrawals will be subject to the rate in this specific tax bracket no matter when you take them. You could argue that taking conversions now would be better, because it will give you more control over your money in addition to the possibility of the 4% tax savings.

I think there are better ways to strategize conversions to minimize the tax hit though. For example, try to convert assets that have dropped in value and have the potential to recover their value after conversion. I once had the unpleasant experience of Roth-converting an asset at its peak, only to watch it lose most of its value after conversion. I ended up paying > 100% taxes on the conversion. Picking assets to convert that have dropped in value would be a better plan!
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Libertarian666 » Fri Oct 19, 2018 10:27 am

sophie wrote:
Tue Oct 16, 2018 11:15 pm
OK will grant that - in fact yes, if it were only about finances I'd very likely move.

I think you'd be surprised at relative costs in NYC and Texas. Cost of living comparisons usually cherry pick a few items, and end up with a wildly un-representative sample. I once pulled a sheet of average spending figures broken down into categories, intended to be comprehensive, published by BLS. I compared these to my #s plus figures from my coop's annual financial statement, since a lot of my expenses are buried in the monthly maintenance. My living costs were high in some categories, but lower in others and overall it came pretty close to balancing out. You can certainly spend a ton of money in this city if you want, but you don't have to by any means.
My 2000 sf (+garage) 20 year old house on 6 acres in East Texas is worth about $175,000.

How much is your apartment worth?

If you invested the difference, how much could you earn after taxes, assuming 7% nominal?

You have to add that amount to your expenses to make a meaningful comparison between NYC and rural Texas.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Libertarian666 » Fri Oct 19, 2018 3:09 pm

MangoMan wrote:
Fri Oct 19, 2018 10:59 am
Libertarian666 wrote:
Fri Oct 19, 2018 10:27 am
sophie wrote:
Tue Oct 16, 2018 11:15 pm
OK will grant that - in fact yes, if it were only about finances I'd very likely move.

I think you'd be surprised at relative costs in NYC and Texas. Cost of living comparisons usually cherry pick a few items, and end up with a wildly un-representative sample. I once pulled a sheet of average spending figures broken down into categories, intended to be comprehensive, published by BLS. I compared these to my #s plus figures from my coop's annual financial statement, since a lot of my expenses are buried in the monthly maintenance. My living costs were high in some categories, but lower in others and overall it came pretty close to balancing out. You can certainly spend a ton of money in this city if you want, but you don't have to by any means.
My 2000 sf (+garage) 20 year old house on 6 acres in East Texas is worth about $175,000.

How much is your apartment worth?

If you invested the difference, how much could you earn after taxes, assuming 7% nominal?

You have to add that amount to your expenses to make a meaningful comparison between NYC and rural Texas.
Although I wouldn't want to live in NYC, I would want to live in rural TX even less. So you have to figure in quality of life factors. You may think the quality of life there is great, but I doubt many city/suburb dwellers would want to do it.
I have always lived in the city or suburbs until I moved out here.

Really the only drawback is that it's pretty far to Costco and most other shopping.

But if I were going to move somewhere today, it would probably be somewhere around 10 miles from the Costco in Rockwall Texas. You can still buy a pretty nice house there for $200K or so, and you still have the low taxes and good roads of Texas.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by I Shrugged » Fri Oct 19, 2018 3:50 pm

Sophie, thanks for pointing that out. I'll take another look at it.
Honestly I was being more receptive to any justification for not doing it. Confirmation bias I guess.

Filling up at least the 22% bracket does seem pretty safe. Actually the 24% bracket too. The closer I look, the more I think we will be in the 33% bracket (barely) in 8-10 years, what with RMDs and SS. My wife and I both agree that we would bet on the rates going back up.

Also, there are state tax considerations in our favor now, versus in a few years. (We are considering a move.)
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Fri Oct 19, 2018 7:13 pm

I have to take RMDs in 13 years. I shudder to think what the tax rates will be in after year after year of trillion dollar deficits. The birds will come home to roost someday, there is no avoiding it. Taxes are going up over time.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by InsuranceGuy » Sat Oct 20, 2018 8:57 am

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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by I Shrugged » Sat Oct 20, 2018 10:24 am

I've been basically retired since my early 40s. I built and sold a business. Building and running it stressed me a lot and burned me out, so I didn't have the appetite to do it again. I retained some modest rental commercial real estate until last year. Now I'm really retired.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by barrett » Sat Oct 20, 2018 10:26 am

InsuranceGuy wrote:
Sat Oct 20, 2018 8:57 am
I Shrugged wrote:
Fri Oct 19, 2018 3:50 pm
The closer I look, the more I think we will be in the 33% bracket (barely) in 8-10 years, what with RMDs and SS. My wife and I both agree that we would bet on the rates going back up.
Why not retire early then? Start living on your taxable savings and start your Roth conversions now in a much lower tax bracket to reduce future RMDs that would only give more to the taxman.

Could be preference, but I'd guess that your standard of living won't be much different.

IG
Interesting thought. Have you run a few scenarios on the extended i-orp calculator?

Here is a link:

https://www.i-orp.com/LumpSum/extended.html

And I know that Libertarian666 has a calculator as well... just not familiar with his version yet. It could be the case that an extra few years of work just mean that you are giving more total money to the government in terms of taxes... and that your SS PIA is not really getting bumped up at this point due to the effect of bend points.
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