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

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sophie
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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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Kriegsspiel
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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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I Shrugged
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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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ochotona
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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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sophie
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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 technovelist » 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 pugchief » Fri Oct 19, 2018 10:59 am

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

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

pugchief wrote:
Fri Oct 19, 2018 10:59 am
technovelist 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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I Shrugged
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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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ochotona
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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

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
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