401(k) to which kind of IRA

On 8/28/17 6:41 PM, Alan wrote:


No employer stock. All in Fidelity. She worked for Doctor's offices and Realtor's. Not a lot of employer stock in those. :)

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On Sunday, August 27, 2017 at 2:21:47 PM UTC-4, Kurt V. Ullman wrote:

If you have non-IRA assets available, doing a Roth conversion is mathematically the same as contributing the amount of the tax paid to a Roth IRA.
If you could somehow construct two portfolios which were perfectly negatively correlated, you could make a killing by doing a Roth conversion of half into each portfolio, then recharacterizing the one that went down. I haven't been able to figure out how to do that though.
There is really only one question pertinent to a Roth conversion (or which to contribute to), which is will your marginal tax rate be higher in retirement than it is now. Going back 30 years or so to when IRA's became popular, it was widely assumed your rate rate in retirement would be lower. That's no longer true, especially given the inclusion of a portion of social security benefits in taxable income. The calculation is mind-numbingly complex. And of course no one can be sure what will happen to the tax treatment of Roths, although if Congress or IRS tried to tax them I'm sure it would be litigated intensely. It seems wise to have at least a significant portion of your retirement assets in Roths to permit post-retirement flexibility.
The idea of "topping off" your income to the 15% bracket by Roth conversions is extremely sound. I do that currently, and in the past when I was working I remember doing a large Roth conversion to top up to the 25% limit two days before moving out of a state with no state income tax.
Of course, if you are under 59 1/2, paying the conversion tax from IRA assets isn't really an option, since it can't be worth paying the 10% penalty.
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On Saturday, October 21, 2017 at 4:51:34 PM UTC-4, Roger Fitzsimmons wrote:

An issue overlooked a lot is the distributions from a 401K while on Soc Sec could make a portion of the taxable at ordinary rates. All ROTH distribtions do not affect soc security taxation. A real plus.
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On Sat, 21 Oct 2017 16:50:29 EDT, Roger Fitzsimmons wrote:

I've been trying to wrap my head around that, but failing. Could you possibly do an example, with numbers?
As it happens, I'm expecting a non-IRA legacy. Upwards of 90% of my IRA money is traditional, and I'm thinking about a partial Roth conversion, so if I can convince myself of your equivalence, that will help in planning. I'm guessing you didn't factor in the increased cost of Medicare, two years later?
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Stan Brown, Oak Road Systems, Tompkins County, New York, USA
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On 10/28/2017 8:07 AM, Stan Brown wrote:

The analysis is clearer to understand if we make some simplifying assumptions. The assumptions I will use are: 33.33% tax rate applies at the time of the Roth conversion. 33.33% tax rate applies at the time the Conventional IRA distribution. 6% rate of return in the IRAs (both Conventional and Roth). 4% after-tax return for non-IRA funds (6% Gross return less 33.33% tax)
Options Today for a $15K Conventional IRA and $5K in non-IRA funds: 1) Convert Conventional IRA to Roth. Use the non-IRA funds to pay taxes on the conversion. Result is $15K Roth IRA plus a $5K reduction in non-IRA funds used to pay the taxes. 2) Convert Conventional IRA to Roth. Pay the taxes with the proceeds from the IRA Distribution. Result is $10K Roth IRA plus no reduction in non-IRA funds. The $5K in non-IRA funds is invested the same way as the Roth investments. 3) Don't convert Conventional IRA to Roth. Result is $15K IRA plus $5K in non-IRA funds that is invested the same way as the IRA.
After 12 years @ 6% annual investment returns: 1) Converted Roth is worth $30K and no taxes are due. Net After-Tax Value: $30K 2) Converted Roth is worth $20K and no taxes are due. The $5K in non-IRA funds grew after-tax to about $8K. Net After-Tax Value: $28K 3) Conventional IRA grew to $30K, which is worth $20K after taxes. The $5K in non-IRA funds grew after-tax to about $8K. Net After-Tax Value: $28K
You will note that Option 1 shows "If you have non-IRA assets available, doing a Roth conversion is mathematically the same as contributing the amount of the tax paid to a Roth IRA."
Options 2 and 3 result in the same After-Tax Value so the choice between these options has to be based on other criteria. There is no RMD due at age 70.5 for the Roth in Option 2 while the RMD is due for the Conventional IRA in Option 3. If reducing future RMDs is an objective, Option 2 may be more desirable than Option 3.
This analysis is sensitive to current and future tax rates, investment returns for the IRAs, and after tax investment returns for the non-IRA funds. Use estimates that correspond to your individual situation.
The calculations for Options 1 and 2 did not factor in any increased cost in Medicare IRRMA two years after the Roth conversions. They also did not factor in any decreased cost in Medicare IRRMA in the future due to lower IRA RMDs.
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BignTall wrote:

I bought shares in a muni fund. Later, when I moved out of that state, I simply bought muni bonds. ROI was 4-5+%. When I look at the pages and pages of worksheets for income tax returns, I'm glad I did. I'd have spent 1-2% of the ROI doing my taxes.
/BAH
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