End of tax year financial decisions -- not spending "enough" in retirement?

[TallGuyJohninBKK]

On 12/24/2020 at 12:01 AM, gamb00ler said:

Certainly once the Roth has aged 5 years you have greater flexibility.

 

And no federal tax on either the principal amounts or earnings from those once they're in a Roth IRA (including funds transferred via IRA to Roth conversions), because you're paying the tax now at today's relatively low fed tax rates as part of the conversion.

 

The other thing that's potentially good for, is if you have any long-term stock holdings in an IRA that are still down/underwater from the spring crash. As long as you expect to keep the holdings and expect them to ultimately do well, it's great to transfer them to a Roth when their value is down because you'll pay less tax on the currently reduced values.

 

[TallGuyJohninBKK]

On 12/24/2020 at 10:41 PM, Qman said:

I work backwards from having a goal of a taxable level of income that takes advantage of lower graduated tax rates and the impact of Medicare Part B tax surcharge levels.  There are income items with limited control like Social Security and then dividends, interest and capital gains in taxable investment accounts.  I look at what is taxable usually in early December and then make a taxable IRA withdrawal to get to the desired level of taxable income for Medicare and taxes in general.  Note RMDs will be the minimum but you can take more.  If I have too much cash after the IRA withdrawal that can be kept for emergencies or invested in a regular brokerage account subject to taxation but you can control the taxable elements.  A good financial plan for retired people is to have access to funds which are fully taxable (IRA), partially taxable with control (regular investment accounts) and nontaxable (Roth IRA).  As a general rule you do not want to unnecessarily understate income and miss out on low tax rates and then wind up having to overstate income in future years and incur higher tax rates so managing within comfortable tax rate ranges is a good goal to work towards.  Having investments in accounts with varying tax implications gives you the ability to manage outcomes. 

 

The other advantage to Roth IRA, and/or converting regular IRA funds into Roth accounts, is Roth accounts don't have any RMDs at all. So you can keep the money in the Roth account as long as you want, until whatever age, continue to earn dividends etc. And if and when you need it, at that point, it will be tax free.

 

Having funds in a Roth makes it easier to avoid being forced to boost your taxable income in later years due to IRA RMDs when you may have other income coming in as well, such as Social Security, and don't want to get bumped into higher tax brackets.

 

[Jingthing]

4 minutes ago, TallGuyJohninBKK said:

 

The other advantage to Roth IRA, and/or converting regular IRA funds into Roth accounts, is Roth accounts don't have any RMDs at all. So you can keep the money in the Roth account as long as you want, until whatever age, continue to earn dividends etc. And if and when you need it, at that point, it will be tax free.

 

Having funds in a Roth makes it easier to avoid being forced to boost your taxable income in later years due to IRA RMDs when you may have other income coming in as well, such as Social Security, and don't want to get bumped into higher tax brackets.

 

Yes but my strong feeling at this point is that such an advantage is mostly applicable to higher wealth people. If your social security check is minimal and you don't have a million in your IRA, they actually might be doing people a favor by forcing them to do minimum withdrawals in their 70s (considering typical life spans). Even if it forces some tax at lower levels, it won't be so much!

Edited December 30, 2020 by Jingthing

[Why Me]

51 minutes ago, TallGuyJohninBKK said:

The other advantage to Roth IRA, and/or converting regular IRA funds into Roth accounts, is Roth accounts don't have any RMDs at all. So you can keep the money in the Roth account as long as you want, until whatever age, continue to earn dividends etc. And if and when you need it, at that point, it will be tax free.

Yep, that was my tax move of the year. Moved around 30k a few months ago which if my calculations were right was the sweet spot between a higher tax bracket and projected savings. Shall rinse and repeat each year.

 

Re Jingthing's problem I feel his pain:-) I am invested fully in stocks too and, no, I am not going to get into if Trump had anything to do with most indexes pretty much doubling over the past 4 years.

 

Anyway, what I do is make it rain when I go out. 100 b. tips for everyone starting from the door. Might sound like showing off. Maybe it is. But it is highly appreciated. Formerly regular staff at clubs I go to are now busted down to part-time. Incomes have been halved and they are hurting. Every little bit helps.

[khunjeff]

6 hours ago, TallGuyJohninBKK said:

The other thing that's potentially good for, is if you have any long-term stock holdings in an IRA that are still down/underwater from the spring crash. As long as you expect to keep the holdings and expect them to ultimately do well, it's great to transfer them to a Roth when their value is down because you'll pay less tax on the currently reduced values.

 

Just to clarify: to the IRS, you're only moving dollars, not a particular holding, and so they don't care whether the value of that holding is down, or up, or has never changed. They simply ask, "how much value did you take out of your traditional IRA", and then you pay regular income tax on that amount.

 

And since you're moving funds from one tax-advantaged account to another, it doesn't particularly matter whether you move the actual security from the traditional to the Roth, or just liquidate it in the source account and repurchase it in the target account (other than perhaps some small intraday price moves) - capital gains and losses in these accounts are not taxable events.

[TallGuyJohninBKK]

1 hour ago, khunjeff said:

 

Just to clarify: to the IRS, you're only moving dollars, not a particular holding, and so they don't care whether the value of that holding is down, or up, or has never changed. They simply ask, "how much value did you take out of your traditional IRA", and then you pay regular income tax on that amount.

 

And since you're moving funds from one tax-advantaged account to another, it doesn't particularly matter whether you move the actual security from the traditional to the Roth, or just liquidate it in the source account and repurchase it in the target account (other than perhaps some small intraday price moves) - capital gains and losses in these accounts are not taxable events.

 

I think you're missing the point. When you do a Roth conversion (meaning take money/stock holdings out of a regular IRA and move them into a Roth IRA), the IRS taxes you on the current amount/value that you transfer into the Roth at the time of the transfer.

 

If you had shares of IBM that you bought two years ago for $50 per share, but now they've declined to $25 per share, you'd only be paying tax on the value of $25 per share at the point you move those into the Roth.  But if the shares had remained at their full price, you'd be paying tax on the full $50 per share value.

 

Thus, it's always a good time to consider doing Roth conversions of stock holdings whenever the value of what you want to transfer into the Roth has (hopefully temporarily) declined.

Edited December 31, 2020 by TallGuyJohninBKK

[Thailand J]

Converting 381 Vanguard VOO shares into ROTH in June compared to converting it yesterday saved me about $5000 in taxes. Instead of $130,000 ($341/sh), my taxable amount is $107,000. I am in 24% tax bracket.

Edited December 31, 2020 by Thailand J

[gamb00ler]

On 12/24/2020 at 10:41 PM, Qman said:

I work backwards from having a goal of a taxable level of income that takes advantage of lower graduated tax rates and the impact of Medicare Part B tax surcharge levels.  There are income items with limited control like Social Security and then dividends, interest and capital gains in taxable investment accounts.  I look at what is taxable usually in early December and then make a taxable IRA withdrawal to get to the desired level of taxable income for Medicare and taxes in general.  Note RMDs will be the minimum but you can take more.  If I have too much cash after the IRA withdrawal that can be kept for emergencies or invested in a regular brokerage account subject to taxation but you can control the taxable elements.  A good financial plan for retired people is to have access to funds which are fully taxable (IRA), partially taxable with control (regular investment accounts) and nontaxable (Roth IRA).  As a general rule you do not want to unnecessarily understate income and miss out on low tax rates and then wind up having to overstate income in future years and incur higher tax rates so managing within comfortable tax rate ranges is a good goal to work towards.  Having investments in accounts with varying tax implications gives you the ability to manage outcomes. 

It sounds like you do much the same as I.  Except, I got too lazy to bother with the "work backwards" part.  Now I just use Turbotax files that I have populated with the income amounts that are not flexible and then do stepwise refinements on the adjustable components to zero in on the maximum IRA withdrawal that keeps me at my target marginal tax rate.  I often use the previous year's version of Turbotax and adjust it for the deduction and other changes that are usually announced well ahead of time.  Instead of Turbotax  you can use the free excel spreadsheet that is updated for each years tax calculations.  Now that I'm getting familiar with the spreadsheet, I'll switch to it because navigation between screens in Turbotax is painfully slow.

https://sites.google.com/view/incometaxspreadsheet/home