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

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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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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 pugchief » 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.
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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

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

Post by sophie » Sat Oct 20, 2018 10:47 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.
A LOT more than $175K :-). However, my apartment has turned out to be the best investment I have. It's appreciated about 20% in the 3 years since I bought it, plus my investment return is higher because I only have about 60% equity in it. I made out like a bandit with my last apartment too. That one went up almost 30% in price in 7 years. Less than the stock market or the mythical 7% to be sure, but not shabby either.

You could argue that this doesn't matter as long as I don't sell though. In that case yes, I am paying a premium equal to the annual investment return on the difference in the amount I have tied up in equity to live here. Let's say that's $15,000...is that worth it to be here instead of East Texas? Heck yeah! :)
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by sophie » Sat Oct 20, 2018 10:55 am

I Shrugged wrote:
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.
Retired and in the 32% bracket? I Shrugged, you are to be congratulated!!!

You could take the view that even if you don't squeeze every last cent out of tax optimization, you are in an outstanding financial position. How about making the decision based on whether you would prefer to maximize the amount of money under your direct control, vs. setting up RMDs + SS at age 70 and having a stress-free, worry-free, automatic income that will cover your expenses without your having to arrange for periodic fund withdrawals?

That's actually my plan. I'm going to Roth-convert only part of my retirement savings, and at age 70 put the rest into an annuity. Presumably I'll be able to set up the various income streams to deposit automatically. Then no worries about having to remember to make potentially complicated portfolio withdrawals to cover routine expenses.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Sat Oct 20, 2018 6:01 pm

Sophie, are you going to buy your annuity with IRA money or with after-tax money? I haven't thought much about it, my purchase is still 13 years away, but it seems risky to take a big huge distribution in one tax year in order to buy an annuity with after-tax money, because you might blow yourself into the next tax brackets. Maybe one could use after "after retirement but pre-70" low income years to take IRA distributions needed to buy the annuity. Of course, you could buy one after-tax, one pre-tax. Good idea to buy from two providers anyway...

Annuitization using IRA money seems to be another way to reduce the RMD hump. In fact, it's front-end loaded in real terms, which is good if you think nominal tax rates are going up over a long period of time.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by sophie » Sun Oct 21, 2018 9:58 am

The money earmarked for the annuity is in 403b accounts at TIAA-CREF, separate from the Vanguard/Fidelity retirement accounts. I figure I'll decide exactly how to do it when the time comes, but most likely I'll wait until age 70 then plow it all into a fixed annuity that stays in tax-deferred space. The payments will be subject to federal tax, but will mostly or completely avoid state tax. And yes, a tax-deferred annuity is exempt from RMD rules.

Libertarian666 I will definitely be asking for your advice at some point! I know annuities aren't necessarily ideal, but it's a bit of extra insurance against outliving my core savings, not to mention against having problems managing finances, getting confused and making a mistake or being swindled by online crooks preying on the elderly, etc. A danger of being too clever and inventive about finances.

I realize my last few posts have been about planning for old age...a bit morbid but I guess that's where my mind is at right now. Sorry all!
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Libertarian666 » Mon Oct 22, 2018 9:31 pm

sophie wrote:
Sun Oct 21, 2018 9:58 am
The money earmarked for the annuity is in 403b accounts at TIAA-CREF, separate from the Vanguard/Fidelity retirement accounts. I figure I'll decide exactly how to do it when the time comes, but most likely I'll wait until age 70 then plow it all into a fixed annuity that stays in tax-deferred space. The payments will be subject to federal tax, but will mostly or completely avoid state tax. And yes, a tax-deferred annuity is exempt from RMD rules.
Yes, that is one of their benefits.
sophie wrote:
Sun Oct 21, 2018 9:58 am
Libertarian666 I will definitely be asking for your advice at some point!
Any time you want to talk, I'm available. My calculator isn't really designed for you, as it is focused on smoothing the expected real spending of married people if one of them dies at the worst time. You don't have that problem as a single person, and can concentrate on maximizing expected real spending. It also doesn't cover state taxes, as that would be another big investment of time that I'm not interested in doing at this point.
sophie wrote:
Sun Oct 21, 2018 9:58 am
I know annuities aren't necessarily ideal, but it's a bit of extra insurance against outliving my core savings, not to mention against having problems managing finances, getting confused and making a mistake or being swindled by online crooks preying on the elderly, etc. A danger of being too clever and inventive about finances.
Actually, fixed annuities are ideal for the task they are designed for: making sure you don't run out of (nominal) spending power before you die. Did you know that they are by far the oldest financial instrument? There are records of what we would today refer to as life annuities hundreds of years B.C.!
sophie wrote:
Sun Oct 21, 2018 9:58 am
I realize my last few posts have been about planning for old age...a bit morbid but I guess that's where my mind is at right now. Sorry all!
Old age isn't necessarily great, but then you have to consider the alternative...
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by I Shrugged » Thu Dec 20, 2018 7:25 am

Recent downturn makes me glad I’ve waited till now to do my Roth conversion.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by ochotona » Thu Dec 20, 2018 2:18 pm

I Shrugged wrote:
Thu Dec 20, 2018 7:25 am
Recent downturn makes me glad I’ve waited till now to do my Roth conversion.
I am jealous.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by I Shrugged » Thu Dec 20, 2018 3:47 pm

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

Post by ochotona » Tue Jan 22, 2019 10:15 am

If the Democrats take over in 2020, you'll have wished you Roth converted when you could, after they rip out the tax cuts on party line vote.
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Re: There seems to be an advantage to Roth conversion now until 12/31/2025

Post by Kbg » Tue Jan 22, 2019 1:20 pm

ochotona wrote:
Tue Jan 22, 2019 10:15 am
If the Democrats take over in 2020, you'll have wished you Roth converted when you could, after they rip out the tax cuts on party line vote.
Or if around and in charge in 2025, just let them expire. This last tax cut bill was epic in its gimmickry, and of course, passed on to the national debt balance.
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