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Old 07-10-2014, 06:02 AM
 
Location: Ponte Vedra Beach FL
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Quote:
Originally Posted by akck View Post
The simple solution to this is to withdraw all funds from your Roth, should any legislation be enacted.
You're assuming that changes wouldn't be made in that area. I assume nothing when it comes to tax law changes . Robyn
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Old 07-10-2014, 07:31 AM
 
Location: Ponte Vedra Beach FL
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Quote:
Originally Posted by StealthRabbit View Post
age?
tax rate?

I do my conversions when I can keep my annual contribution to IRS under 5% of AGI.
The lowest tax bracket in 2014 for ordinary income is 10%:

IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More - Forbes

That said - converting small amounts while keeping one's tax payment below X% (say 15%) may make sense for some people. OTOH - since our federal tax system is progressive - you're talking about > 15% if you're converting very low 6 figures and well over 30% if you're talking about mid 6 figures or more. If you live in a state with an income tax - you also have to take state income tax into account.

It's important to have a good tax calculator when estimating. Because increasing one's income can result in phaseouts of deductions and/or exemptions. And it can alter things like the amount of any medical deductions - which are based on a % of income. Robyn
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Old 07-10-2014, 07:47 AM
 
8,272 posts, read 12,007,998 times
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Quote:
Originally Posted by StealthRabbit View Post
I do my conversions when I can keep my annual contribution to IRS under 5% of AGI.
Quote:
Originally Posted by Robyn55 View Post
The lowest tax bracket in 2014 for ordinary income is 10%:

IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More - Forbes
Apples and oranges, Robyn.

AGI and tax brackets on taxable income are two very different things. It's not impossible for someone to keep his tax payment to less than 5% of AGI.
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Old 07-10-2014, 07:51 AM
 
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Depending on future election results we could see a drift toward required acceleration of RMD's from retirement accounts and or younger required distributions. It is one of the few remaining big pools of money to be taxed. Roth conversions gives government tax money now at the expense of tomorrow. Yes Dorothy tomorrow will soon become another today and what to do then?
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Old 07-10-2014, 07:58 AM
 
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Thanks to you all. A lot to think about.
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Old 07-10-2014, 08:11 AM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 18,043,939 times
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Quote:
Originally Posted by Wanderer0101 View Post
Here are the circumstances; the wife and I, no debt, SS and a small pension will be about 50K a year, 1.4 million in a 401K, 300K+ cash or equivalent. I'm considering converting half the 401K to a Roth IRA which will cost me well over 200K in taxes. The calculator tells me that I will be 700K+ better off in the long run if I do this. If I convert 80% I will apparently be over a million dollars better of in the long run but of course the taxes on the conversion will be larger. I do want to leave a substantial amount to my children. Should I do it? Should I pay the taxes out of cash? Should I stop chewing on this and just enjoy life as it comes?
In your particular situation - I wouldn't convert.

Why? Well - first off - I'm assuming you're still relatively young. Sixties? Perhaps early 70's. Not > 80. And perhaps < 60.

Unless you and your wife both have terminal diseases - your joint life expectancy is still pretty long. And you have no idea what hand life will deal you down the road. What you'll want to do with your money as you get older (everything from buying a new house to travel). What you may have to do with your money (like paying for a nursing home or other "senior" care - for one or both of you - which could easily cost > $100k year).

The bulk of your liquid net worth is in your 401k. Your non-retirement account assets are relatively small. If you paid taxes on a substantial conversion out of your non-retirement account assets - you'd be left with nothing there - or next to nothing. I think it's a bad idea to impoverish your taxable accounts to pay for conversion taxes. And paying conversion taxes with retirement account assets is almost never a recommended strategy.

Here is a decent (but still flawed) conversion calculator:

https://calcsuite.fidelity.com/rothc...launchPage.htm

Note all the assumptions that can affect potential returns. Including the implicit rates of return on various types of investments. One's future tax bracket. One's life expectancy. Etc. When I plug in what little information you gave us about yourself - plus some guesses about investment style and current tax situation and future tax rates - looks like you'll come out worse making a substantial conversion now - not better. Certainly not $700k+ better. So I'm wondering where you're getting your numbers. Keep in mind that the only thing one can say for sure in your situation is that if you make a substantial conversion now - you'll be paying a ton of taxes now. Everything else is a guess.

What calculator have you been using? And what assumptions are you plugging in that are painting such a rosy scenario? Robyn
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Old 07-10-2014, 08:35 AM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 18,043,939 times
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Quote:
Originally Posted by MadManofBethesda View Post
Apples and oranges, Robyn.

AGI and tax brackets on taxable income are two very different things. It's not impossible for someone to keep his tax payment to less than 5% of AGI.
Sure - because AGI doesn't take deductions into account. So far - we're in a 0% tax bracket this year because of deductions (largely medical). But could quickly get to > 30% with a large ROTH conversion. Smaller amounts (like $50k or less) might make some sense this year (they've made sense in some past years). Will have to run the numbers closer to the end of the year. Robyn
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Old 07-10-2014, 12:41 PM
 
Location: Phoenix, AZ > Raleigh, NC
15,165 posts, read 19,221,592 times
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I did not read all of this thread, but would strongly suggest you contact an estate planner before you do any conversion.

A 401k that is converted to a Traditional IRA can be set up with a designated beneficiary. Why is that a great thing? Because that beneficiary can take the annual RMD's based on THEIR life expectancy NOT YOURS. They are required to take out the RMD based on your life expectancy in the year of your death. After that, the RMD is calculated on their life expectancy, and they are required to take it out, even if they have not reached age 59.5.

This is a huge benefit to your kids, or even grandkids if you wanted to make them designated beneficiaries. And yes, you can have more than one designated beneficiary.
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Old 07-10-2014, 01:00 PM
 
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Comment to Robyn. Also if the only draw down is RMD's, won't late in life drawdowns for high cost health needs minimize the resulting tax obligation?
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Old 07-10-2014, 03:22 PM
 
Location: Ponte Vedra Beach FL
14,628 posts, read 18,043,939 times
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Quote:
Originally Posted by Jkgourmet View Post
I did not read all of this thread, but would strongly suggest you contact an estate planner before you do any conversion.

A 401k that is converted to a Traditional IRA can be set up with a designated beneficiary. Why is that a great thing? Because that beneficiary can take the annual RMD's based on THEIR life expectancy NOT YOURS. They are required to take out the RMD based on your life expectancy in the year of your death. After that, the RMD is calculated on their life expectancy, and they are required to take it out, even if they have not reached age 59.5.

This is a huge benefit to your kids, or even grandkids if you wanted to make them designated beneficiaries. And yes, you can have more than one designated beneficiary.
I agree with your recommendation to see an estate planning lawyer (and/or a knowledgeable accountant) when dealing with estate planning issues.

I've never had a 401k. But - with any IRAs - you must set them up with a designated beneficiary (or beneficiaries). I think the default absent a designated beneficiary is the IRA goes to your estate - which is in general a pretty bad idea. I think it works this way with 401ks too - but am not sure.

IMO - the OP doesn't have enough money to be seriously concerned about estate planning issues as opposed to the well-being of him and his spouse in their senior years. The OP thinks he has a lot. But - in all honesty - in these days of SNFs costing close to or more than $100k a year - one can never be too cautious.

And what is the OP going to do? I assume the 401k belongs to the OP - not his wife. Will he list his kids as designated primary beneficiaries on his major asset - bypassing his wife if he predeceases her? That's nuts IMO. And - if I were his wife - I'd go ballistic if he did that. I'd go ballistic even if he were talking about 50% to kids before me - his wife. Also note that in this case - a lawyer would have a conflict of interest advising both husband and wife. Because bypassing a wife (in favor of kids) screws the wife - and a lawyer would have a conflict of interest advising both husband and wife in this situation.

FWIW - in our family - I - the wife - have the large IRA. And would never think of having anyone other than my husband as my primary IRA beneficiary (there are secondaries if we die simultaneously - or one of us dies before we get a chance to change things around). I am very firmly of the belief that in a long term marriage - whatever people have - they have earned it together in various ways - shapes or forms. And that spouses come way ahead of kids (unless you have a lot more money than the OP has). Robyn

P.S. When it comes to beneficiary forms - every brokerage firm I've ever dealt with has them. They're easy to complete. Separate forms for every firm where you have parts of your IRA(s).
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