IRA distrib vs Roth Conv (was SWR and portfolio size?mist.?)

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Oliver
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IRA distrib vs Roth Conv (was SWR and portfolio size?mist.?)

Post by Oliver »

Ataloss - I am not retired and have a goal of finding some pt work in early "retirement" both to keep my options open and take advantage of lower tax rates. I haven't looked at the issue of ira distributions. In general is it always (or under a broad range of circumstances usually) best to defer IRA distributions. I was thinking of starting them relatively early to spread the tax burden over more years in an effort to get a lower marginal tax rate.

Hello Ataloss,

I am in the FIRE stage and have taken a slightly different approach. I intend to convert the majority of my 401k/IRA to Roths to take advantage of the lower marginal tax bracket. I could withdraw the same amount of money and pay the same tax as in your scenario, but this plan will allow me to retain the $ in a tax deferred account.

Oliver
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ataloss
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Post by ataloss »

interesting idea if yo can keep the tax bracket low enough. do you have a spreadsheet to figure out the best course of action? chips is withdrawing nothing until he is forced to

I guess my decision will depend on whether I have big earnings from cat boarding pyushing me up in tax brackets :wink:
Have fun.

Ataloss
Oliver
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Post by Oliver »

Here are the tax brackets after taking the standard deduction.

Approx...........Bracket
7,800 Single 0%
13,000 Single 10%
35,000 Single 15%

15,500 Married 0%
25,000 Married 10%
71,000 Married 15%

Take care,

Oliver
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Post by wanderer »

oliver -

we've opted for number 3 - under abt $70k. the child care credit and some other stuff gets us a bit more room, iirc.

we only have 20% (less now) in tax deferred. your idea makes sense to me. doesn't lock you into SEPPs, either.
regards,

wanderer

The field has eyes / the wood has ears / I will see / be silent and hear
WiseNLucky
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Post by WiseNLucky »

I am in the FIRE stage and have taken a slightly different approach. I intend to convert the majority of my 401k/IRA to Roths to take advantage of the lower marginal tax bracket.


I'm not sure exactly what you mean here but I think I'm planning something similar.

I will not be able to FIRE unless something dramatic happens (which I don't expect to happen). I still plan to retire about a year before I start collecting social security and convert all of my 401(k) to my Roth. I will have to pay substantial taxes at that time out of my taxable accounts but will then be able to withdraw from the Roth while collecting social security without taxation of SS benefits. Taxation of SS benefits is extremely onerous.

I can't contribute to Roths any more or convert 401(k) to Roth while I'm working because my income is too high.

I haven't fully researched the feasibility or cash flow of my plan yet because it is still almost 20 years away and all kinds of things could change in the tax laws between now and then. But I must at least think about what I will do then so I can be in the position to make choices when the time comes.
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BenSolar
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Re: IRA distrib vs Roth Conv (was SWR and portfolio size?mis

Post by BenSolar »

Oliver wrote: I am in the FIRE stage and have taken a slightly different approach. I intend to convert the majority of my 401k/IRA to Roths to take advantage of the lower marginal tax bracket.


I am hoping to convert my 401k to IRA to Roth IRA at some point as well. In fact one thing I'm considering is changing jobs in a couple of years with one of the main goals being rolling the 401k into an IRA (another issue driving this thought is that I would gain access to significantly better investment options in an IRA than in my current 401k). Then, down the road when closer to FIRE, switching down gears to a lower paying job for a few years and converting the IRA (and any additional 401k accumulated at that time) into a Roth.

Then, early stages of FIRE would be funded by taxable investments, investment real estate and odd jobs, giving the Roth a decade or two or three to compound and make up for the tax hit I take doing the conversion.

I guess this is all pretty specualtive at this point, though. Who knows how the laws will change :?
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
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kathyet
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Post by kathyet »

Hi All,

I am confused a bit here you are all saying that you are going to convert your IRA over to a Roth and take a tax hit????Okay why???You will lose the tax break if you want to add to it, plus pay taxes on the conversion, isn't there a "Safe" withdrawal rate on an IRA?Wouldn't you just open a Roth and as you withdraw your IRA money out deposit in there?? How about an Sep Ira do you feel the same on that as well, you all understand this much better than I but It doesn't make sense to me...



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BenSolar
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Post by BenSolar »

kathyet wrote: I am confused a bit here you are all saying that you are going to convert your IRA over to a Roth and take a tax hit????Okay why???You will lose the tax break if you want to add to it, plus pay taxes on the conversion,


I will first say that I haven't run the numbers, which I would do before doing the conversion. But, the idea is that by converting to a Roth, you pay tax now, but you increase your flexibility later, and you reduce tax later.

When I've seen people do this analysis, the results depend on how much you expect your portfolio to grow after conversion: the more future growth the more advantageous to be in a Roth, and it depends on your tax rate at the time of conversion vs. the time of withdrawals. Note that traditional IRA withdrawals are taxed as ordinary income so you lose the breaks for dividend and capital gain income.

The added flexibility of a Roth vs. traditional is a big bonus: no required withdrawals, and increased flexibility of withdrawals before age 59. Last year I converted my traditional IRA to Roth because the value was down due to the bear, and because I have a long time before I expect to need that money. So it seemed like a good idea. The amount was low enough that when combined with my real estate tax benefits, I felt no pain.

You do lose the current deduction when paying into a Roth vs. a traditional IRA, but the benefits down the road outweigh that issue, IMO.
"Do not spoil what you have by desiring what you have not; remember that what you now have was once among the things only hoped for." - Epicurus
JWR1945
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Post by JWR1945 »

When I have seen the numbers, there is little (if any) advantage to making a conversion unless you add new money. If you pay the taxes from outside funds when you make the conversion, you have in effect increased your investment amount. That can give you a bonus, a bonus because you are allowed to invest more that the standard amount.

Have fun.

John R.
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Income taxes on Social Security benefits

Post by therealchips »

I still plan to retire about a year before I start collecting social security and convert all of my 401(k) to my Roth. I will have to pay substantial taxes at that time out of my taxable accounts but will then be able to withdraw from the Roth while collecting social security without taxation of SS benefits. Taxation of SS benefits is extremely onerous.


Short response: Income taxes on social security would confiscate at most 30% of those benefits and you'd have to have annual taxable income over $300,000 to pay that much. Please run the numbers before converting to a Roth IRA.

Long response:

I have my doubts that the conversion to a Roth IRA will benefit you, except maybe in the case John mentions where you pay the tax on the conversion from other funds. Even then, the analysis should include the alternative possibility that you do not convert and, instead, keep the money that would have gone for income taxes working for you in a taxable account. Even if you plan to convert, spreading the conversion out over a few years seems an attractive alternative, rather than doing it all at once, so that IRS will tax the income later and in lower brackets. Every time I run the numbers for my own case the results tell me not to convert any significant amount of money to a Roth. This accords with my preference: Pay no tax before you have to.

Are the taxes on SS benefits really onerous? As I understand it, the maximum amount of social security benefits subject to income taxes is 85% of those benefits, and the maximum federal income tax rate is 35%. This means that the maximum possible federal income tax on your social security benefits would be about 30% of those benefits (not 85% of them as someone mistakenly thought) although you might pay a little more by encountering some phase-outs of deductions. If your taxable income is anything less than $300,000 a year, the effective income tax on your social security benefits would be less than 30%. Further, your social security benefits may be only a fraction of your retirement budget -- say one or two fifths. If social security is a large part of your retirement income, maybe three or four fifths of it, you would probably pay little or nothing in income taxes on your SS benefit under present law anyway.

The imposition of income taxes on social security benefits is obnoxious, of course, since we made all our social security "contributions" involuntarily and with after-tax earnings. That is, we have already paid income taxes on the money we put into SS and now some of us have to pay income tax on the same money when we take it out. This burden falls exclusively on a small group of people who were the most successful in providing for their own retirements. The point of this tax, of course, was to introduce something resembling means testing for social security benefits without having to admit it. The government even pretends that the income tax from social security income taxes goes to shore up the social security and medicare programs, when in fact, the government just gives those programs IOU's and spends the money elsewhere.

In the event that your income is so high that you pay the maximum income tax on your social security benefits, the fraction of your income going to that tax will be barely noticeable rather than onerous.

This is not tax advice. The authoritative source of information on these matters is IRS, even though their employees answer taxpayers' questions incorrectly maybe half the time.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]

Chips
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Post by WiseNLucky »

In the event that your income is so high that you pay the maximum income tax on your social security benefits, the fraction of your income going to that tax will be barely noticeable rather than onerous.


Good point, chips.

I will certainly run the numbers before I make a leap. I haven't looked at it seriously yet because the time is so far away for me. My Dad, who is much smarter than me financially, worked it out that converting was better. His situation was different from mine as he was about to start collecting two retirements and had fewer dollars in IRAs than taxable accounts. He was also able to spread the tax hit over four years (that window is now closed). Each one of us must run real numbers on his or her scenario.
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I just wish everyone could step back and get less car and less house then they want, and realize they don't NEED more. -- NeuroFool
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