Author Topic: Mad Fientist nails it again: Roth IRA Horserace.  (Read 34815 times)

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Mad Fientist nails it again: Roth IRA Horserace.
« on: July 15, 2014, 02:03:29 PM »
Is there anyone better at writing about avoiding taxes as part of an early retirement strategy than the mad Fientist?

I've learned so much from his blog posts. And today's is no exception:

http://www.madfientist.com/roth-ira-horse-race/?utm_source=rss&utm_medium=rss&utm_campaign=roth-ira-horse-race

Enjoy!

sb_NoVA

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #1 on: July 15, 2014, 02:19:24 PM »
Indeed!  Thanks for sharing.  Wish I had jumped on Roth IRA bandwagon lot sooner than I did.

shotgunwilly

  • Pencil Stache
  • ****
  • Posts: 548
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #2 on: July 15, 2014, 02:30:32 PM »
Wow, that was really interesting! Thanks.

ch12

  • Pencil Stache
  • ****
  • Posts: 593
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #3 on: July 15, 2014, 03:57:50 PM »
Sounds like a great strategy! I'm a long ways away from there, but I'll definitely use that one day. I did a huge spreadsheet on stock/bond allocation a few years ago, but MadFIentist has all the benefits of hindsight when you can still make decisions!

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #4 on: July 15, 2014, 04:06:38 PM »
Indeed!  Thanks for sharing.  Wish I had jumped on Roth IRA bandwagon lot sooner than I did.

Glad to share it. It's a great article.

But I think you may have missed an important point. His recommended strategy is maxing out your traditional IRA while employed, and then converting it to a Roth IRA in retirement.***

The "horse race technique" is referring specifically to Roth conversions in retirement.

*** The only exception to this wisdom of preferentially maxing out traditional IRAs while employed, is if you do not save on taxes by contributing to a traditional IRA during employment due to a low income. (IE you already pay no income taxes.)

sb_NoVA

  • 5 O'Clock Shadow
  • *
  • Posts: 66
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #5 on: July 15, 2014, 04:27:00 PM »
I did get his point.  My remark was a bit off topic.  Outside of a traditional 401k plan,  one should max out Roth ($5500) before stepping into taxable accounts.   I didn't fully take advantage of that.  But yes, his point is more towards low income or early FI years to convert 401k/IRA to Roth by coupling stocks and bonds in a specific ratio.

Sent from my SAMSUNG-SGH-I337 using Tapatalk


milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #6 on: July 15, 2014, 04:33:52 PM »
I did get his point.  My remark was a bit off topic.  Outside of a traditional 401k plan,  one should max out Roth ($5500) before stepping into taxable accounts.   I didn't fully take advantage of that.  But yes, his point is more towards low income or early FI years to convert 401k/IRA to Roth by coupling stocks and bonds in a specific ratio.

Sent from my SAMSUNG-SGH-I337 using Tapatalk

Got it. It's Always tough for me to straddle the line between "preachy" and helpful!

Taking the point further though, you may consider maxing out your traditional IRA instead of a Roth IRA at this point if your income is not above the tax deduction limit for IRAs. This allows you a tax break now with your contribution, and later when you withdraw from your converted Roth.

sobezen

  • Bristles
  • ***
  • Posts: 372
  • Age: 892
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #7 on: July 15, 2014, 06:22:02 PM »
Good article.  Slightly off, how many Mustachians have successfully tried this Roth IRA Horse Race?  Please share your experiences and concerns.  Thanks!

Paul der Krake

  • Walrus Stache
  • *******
  • Posts: 5516
  • Age: 13
  • Location: UTC-10:00
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #8 on: July 15, 2014, 06:49:51 PM »
I had to read the article 3 times to make sure I grasped all the subtleties of his plan. Great stuff.

Cyrano

  • Stubble
  • **
  • Posts: 123
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #9 on: July 15, 2014, 08:04:11 PM »
You don't need the complexity of multiple accounts with different asset allocations to play this game:

Convert 10,000 on January 1.
Case 1: Your investments do well. Current-year gains will never be taxed.
Case 2: Your investments do poorly. Attribute current-year losses to the traditional side by making a new conversion of lower-valued assets and then recharacterizing the original conversion.

Running the multiple accounts is an optimization to take advantage more advantage of the outliers among current-year winners and losers in your asset allocation, but if multiple accounts makes the strategy confusing, much of the strategy can be done with a one-fund asset allocation.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #10 on: July 15, 2014, 08:28:47 PM »
Is there anyone better at writing about avoiding taxes as part of an early retirement strategy than the mad Fientist?

I've learned so much from his blog posts. And today's is no exception:

http://www.madfientist.com/roth-ira-horse-race/?utm_source=rss&utm_medium=rss&utm_campaign=roth-ira-horse-race

Enjoy!

This has been around a while. Fidelity had a nice page outlining the strategy. The question I always have is how bad is it to file all the forms. A lot will come down to how aggressive you are. If you clean up by the end of the year you give up, on 10 months of market timing but get to avoid some amended tax issues which add a lot of complexity.  If you convert to 6 different asset classes, do more conversions when markets drop, wait til Oct and who knows what else it seems like the paper work could become a nightmare. This is an area where the more complexity you add, the more money you can make.  You need to decide how far you want to go


sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #11 on: July 15, 2014, 08:35:25 PM »
The comments section on fientist's blog makes one very important point that sort of negates the benefit of this strategy: the Roth IRA pipeline only allows you withdraw the principal of your conversions before age 59.5, so most of us don't really care if the $10k rollover grows to $18k.

For someone who is just trying to stuff their Roth IRA, this strategy totally makes sense.  But for a typical mustachian who is using the Roth IRA pipeline to convert funds from at traditional IRA to a Roth IRA for the sole purpose of accessing traditional IRA funds before traditional retirement age, this horse race doesn't help.  Five years later, you can still only withdraw the $10k of the rollover regardless of what amount it has grown to since then.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #12 on: July 15, 2014, 08:55:26 PM »

The comments section on fientist's blog makes one very important point that sort of negates the benefit of this strategy: the Roth IRA pipeline only allows you withdraw the principal of your conversions before age 59.5, so most of us don't really care if the $10k rollover grows to $18k.

For someone who is just trying to stuff their Roth IRA, this strategy totally makes sense.  But for a typical mustachian who is using the Roth IRA pipeline to convert funds from at traditional IRA to a Roth IRA for the sole purpose of accessing traditional IRA funds before traditional retirement age, this horse race doesn't help.  Five years later, you can still only withdraw the $10k of the rollover regardless of what amount it has grown to since then.

Sol,

This point didn't  make sense to me in the comments, and it doesn't make sense to me now.

Early retirement doesn't end at 59.5.

Are you saying that you don't care how much money is in your Roth at age 62 or 68 or  74, or 80?

If not, then how is having more money squirreled away in your Roth each year not a good thing? (Don't forget there are no minimum distributions on Roths either. )

In other words, it may not effect your accessible cash for pipeline purposes, but it certainly effects your total nest egg in a non trivial way.







sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #13 on: July 15, 2014, 09:38:04 PM »
Early retirement doesn't end at 59.5.

For some of us, it sort of does.  In my case, 100% of our expenses past age 60 will come from pensions, annuities, and social security.  I want to spend every single penny of my invested stash before I turn 60, which means rolling all of it over from the TSP to our Roth IRAs over approximately 15 years, starting at age 40.

Quote
Are you saying that you don't care how much money is in your Roth at age 62 or 68 or  74, or 80?

Yes, I'm saying that the breakdown of Roth vs traditional IRA allocation after retirement age is inconsequential to someone who's not paying income taxes anyway.  Do you disagree?  I'm also saying that in my particular case it won't matter, because they should both be near zero.

Quote
(Don't forget there are no minimum distributions on Roths either. )

Since when?  I think you're misunderstanding the RMD rules for Roth IRAs, which clearly do have RMDs for any residual balance after you die.  Since we're practicing being particular.

Quote
In other words, it may not effect your accessible cash for pipeline purposes, but it certainly effects your total nest egg in a non trivial way.

For me, and presumably for most people, the value of the Roth pipeline is wholly in the "accessible cash" benefit, not the tax-reducing benefit.  I expect most people here to be tax optimizers who pay little or no income tax (like RootofGood's 90k of income with zero tax liability) in retirement, making the Roth and traditional IRAs identical after you reach traditional retirement age.  If I've missed some other benefit there, please fill me in.


I'm not saying the recharacterization game doesn't have benefits.  It clearly does (as stated above) for someone is just trying to stuff their Roth IRA.  And I may consider using it myself at some point.  It just doesn't help me retire any earlier.
« Last Edit: July 15, 2014, 09:39:53 PM by sol »

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #14 on: July 15, 2014, 10:03:55 PM »

Early retirement doesn't end at 59.5.

For some of us, it sort of does.  In my case, 100% of our expenses past age 60 will come from pensions, annuities, and social security.  I want to spend every single penny of my invested stash before I turn 60, which means rolling all of it over from the TSP to our Roth IRAs over approximately 15 years, starting at age 40.

Quote
Are you saying that you don't care how much money is in your Roth at age 62 or 68 or  74, or 80?

Yes, I'm saying that the breakdown of Roth vs traditional IRA allocation after retirement age is inconsequential to someone who's not paying income taxes anyway.  Do you disagree?  I'm also saying that in my particular case it won't matter, because they should both be near zero.

Quote
(Don't forget there are no minimum distributions on Roths either. )

Since when?  I think you're misunderstanding the RMD rules for Roth IRAs, which clearly do have RMDs for any residual balance after you die.  Since we're practicing being particular.

Quote
In other words, it may not effect your accessible cash for pipeline purposes, but it certainly effects your total nest egg in a non trivial way.

For me, and presumably for most people, the value of the Roth pipeline is wholly in the "accessible cash" benefit, not the tax-reducing benefit.  I expect most people here to be tax optimizers who pay little or no income tax (like RootofGood's 90k of income with zero tax liability) in retirement, making the Roth and traditional IRAs identical after you reach traditional retirement age.  If I've missed some other benefit there, please fill me in.


I'm not saying the recharacterization game doesn't have benefits.  It clearly does (as stated above) for someone is just trying to stuff their Roth IRA.  And I may consider using it myself at some point.  It just doesn't help me retire any earlier.

Interesting.

Our assumptions are quite different. These disagreements always bring interesting differences of perspective to light.

From my perspective, The more money you have available in your Roth IRA for after age 59.5, the less money you need to keep in taxable accounts in between early retirement and age 59.5.

in this way a beefier Roth very much helps your retirement security in terms of funding your whole retirement and it also helps you retire earlier (because You will have more years over which to spread your spending from your  taxable accounts .)

But then I do not have a pension. (Though I may invest in a SPIA at some point in retirement to cover basic necessities.)

It is also possible that I am simply more materialistic than you. I would certainly rather have $2 million in my Roth on the day I retire than 1 million, for instance. From my perspective this would equal more security  for my whole retirement and less need to take risks with my stash.

I can see how if you are 100% secure in your retirement after age 60 these issues would be of less importance to you, however.

In terms of the Roth versus traditional IRA. There are RMDs for traditional IRAs after age 70.5. There are no RMD's for Roth IRAs until death.

See here.

http://www.kitces.com/blog/roth-vs-traditional-ira-the-four-factors-that-determine-which-is-best/

This is an important distinction for some, but if you are planning on burning through your Roth by age 60 it is likely not an important distinction for you.

Thanks for explaining the particulars of your situation.  It has helped me see my own excessive focus on my own financial particulars.



sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #15 on: July 15, 2014, 10:58:04 PM »
From my perspective, The more money you have available in your Roth IRA for after age 59.5, the less money you need to keep in taxable accounts in between early retirement and age 59.5.

This confuses me.  Why would a larger Roth balance at 59.5 reduce your needed balance in a taxable account?  Is it just because the effective value of the taxable account is slightly lower than the listed balance after you pay capital gains?  If that's it, I should note that I'm hoping for 0% long term capital gains in retirement.  I guess it could be more important for a big spender in a higher tax bracket. 

Quote
I would certainly rather have $2 million in my Roth on the day I retire than 1 million, for instance.   

Why?  Isn't 2m in the Roth and 1m in the traditional IRA exactly the same as 1m in the Roth and 2m in the traditional, for someone over age 60 with no income tax burden?  2m is better than 1m, sure, but if that money has to come from somewhere then your total doesn't change, just the allocation to different accounts changes.

And before age 60, the total balance in the Roth is a lot less significant than the total balance actually available to you before age 60.  And that second number is the one that is determined by the amounts of your rollovers, regardless of how they appreciate after being rolled over or how and when funds get recharacterized back to the traditional IRA.  Only the initial amounts of your rollovers are available to you penalty free after five years.

Quote
helped me see my own excessive focus on my own financial particulars.

I think we all have that particular bias, and I haven't quite been able to work through mine in this case.  I'm still not seeing the benefit of stuffing your Roth IRA using these recharacterization tricks, unless you're in a high tax bracket.  Which you're not, if you're converting $10k/year tax free to the Roth like in the example.  Maybe for people who are living very frugally now, but intend to spend a bunch more in the future?

Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #16 on: July 15, 2014, 11:17:08 PM »
i must have not understood him, what does this accomplish? if i move $20k to roth then move $10k back at end of year, i'd still only have the growth of one $10k amount to use. even if in his example, stocks account went from $10k to $18k in a year, it would have done that if i moved just $10k at start of year. since it still grows in 401k what advantage does moving it now accomplish? if i move money back to 401k, the interest it got wasnt principle so i cant take it out without penalty, wouldnt it be better to let it grow in 401k then move it as principle so it can be used? or is this just for tax harvesting? i didnt know roths could tax harvest since they are tax exempted

edit: missed the talk above on my question. but still not quite getting it, so after age 70, i could move my entire 401k to roth, get growth on it, live off it and move it all back to 401k at end of year? how does this dwindle the 401k amount. it wont grow but it doesnt go down either.

and would this work on self directed ira? buy rentals with ira, recharter the rental income each year?
« Last Edit: July 15, 2014, 11:34:27 PM by eyem »

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #17 on: July 15, 2014, 11:30:05 PM »

From my perspective, The more money you have available in your Roth IRA for after age 59.5, the less money you need to keep in taxable accounts in between early retirement and age 59.5.

This confuses me.  Why would a larger Roth balance at 59.5 reduce your needed balance in a taxable account?  Is it just because the effective value of the taxable account is slightly lower than the listed balance after you pay capital gains?  If that's it, I should note that I'm hoping for 0% long term capital gains in retirement.  I guess it could be more important for a big spender in a higher tax bracket. 

Quote
I would certainly rather have $2 million in my Roth on the day I retire than 1 million, for instance.   

Why?  Isn't 2m in the Roth and 1m in the traditional IRA exactly the same as 1m in the Roth and 2m in the traditional, for someone over age 60 with no income tax burden?  2m is better than 1m, sure, but if that money has to come from somewhere then your total doesn't change, just the allocation to different accounts changes.

And before age 60, the total balance in the Roth is a lot less significant than the total balance actually available to you before age 60.  And that second number is the one that is determined by the amounts of your rollovers, regardless of how they appreciate after being rolled over or how and when funds get recharacterized back to the traditional IRA.  Only the initial amounts of your rollovers are available to you penalty free after five years.

Quote
helped me see my own excessive focus on my own financial particulars.

I think we all have that particular bias, and I haven't quite been able to work through mine in this case.  I'm still not seeing the benefit of stuffing your Roth IRA using these recharacterization tricks, unless you're in a high tax bracket.  Which you're not, if you're converting $10k/year tax free to the Roth like in the example.  Maybe for people who are living very frugally now, but intend to spend a bunch more in the future?

To answer your first question, the more money that I have in a Roth IRA that never needs to be withdrawn even after Age 70.5, The less money from my taxable account that I will need access after age 59.5.

In other words if I could cover my entire retirement from my Roth IRA after age 59.5 and until age 100, then I could spread out my taxable account money plus my Roth ladder over all of the years of my early retirement. If I need some of my taxable account money for my retirement after age 59.5, then assuming constant spending in early retirement this means less years of early retirement.

Granted, If you are confident that you will pay no taxes in retirement, there is no difference between a Roth IRA and 401(k) aside from the required minimum distributions after age 70.5.

It may be worthwhile to make sure that your Social Security, plus your pension, plus your required minimum distributions from your IRA will not place you over the taxable threshold at age 70.5. If they do then the horse race technique may provide some value to you in protecting you from future taxes.

If you're confident enough that you will never pay taxes in retirement (including your RMD as earned  income after age 70.5 ) then there is absolutely no difference between a Roth IRA and an IRA once you reach age 59.5.

In terms of the question as to whether or not it is better to have $2 million in a Roth, and $1 million in an IRA, or $1 million in a Roth and $2 million in an IRA, the former is clearly better from a tax efficiency standpoint.

At age 71 you will be required to withdraw 1/26.5th of your money from your IRA, and nothing from your Roth.

So if you have 2M in your IRA you must withdraw $75,500 in earned income. Try paying no taxes on that!  If you have only 1M in your IRA you must take only $37,750 in earned income (less taxes).




sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #18 on: July 15, 2014, 11:32:12 PM »
i must have not understood him, what does this accomplish?

It allows you roll over a larger amount from your trad IRA to your Roth IRA than would otherwise be allowed by a given income tax bracket.  So in his example if you can roll over $10k for 0% tax every year, you can do multiple rollovers and then revert all of them except the one that appreciated the most.  At age 59.5, you will have moved more money from the trad to the Roth than would otherwise have been possible.

The question I'm struggling with is why that would be very beneficial, at that age, unless you're paying high income taxes.  After 59.5 you can withdraw from either account freely, so I would plan on withdrawing only enough from the trad to fill the space in our 0% tax bracket, then from the Roth IRA (tax free) for the remainder of our spending needs.  There aren't many situations in which you would need more of that money in the Roth, and they all involve spending way more money in retirement than MMM recommends.

So, maybe a good tip for the bogleheads who need $100k/year to survive, but not so useful for your average $40k/year mustached reader.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #19 on: July 16, 2014, 12:09:31 AM »

i must have not understood him, what does this accomplish?

It allows you roll over a larger amount from your trad IRA to your Roth IRA than would otherwise be allowed by a given income tax bracket.  So in his example if you can roll over $10k for 0% tax every year, you can do multiple rollovers and then revert all of them except the one that appreciated the most.  At age 59.5, you will have moved more money from the trad to the Roth than would otherwise have been possible.

The question I'm struggling with is why that would be very beneficial, at that age, unless you're paying high income taxes.  After 59.5 you can withdraw from either account freely, so I would plan on withdrawing only enough from the trad to fill the space in our 0% tax bracket, then from the Roth IRA (tax free) for the remainder of our spending needs.  There aren't many situations in which you would need more of that money in the Roth, and they all involve spending way more money in retirement than MMM recommends.

So, maybe a good tip for the bogleheads who need $100k/year to survive, but not so useful for your average $40k/year mustached reader.

I would pushback on your last paragraph.

Your situation is somewhat unique in that you are planning to fund your entire retirement from pension/Social Security after age 60. Pensions are a rarity these days so I would say that this is the exception, not the rule.

assuming no pension and a shortened working career with not much Social Security income, if you want to live on $25,000 a year plus Social Security, you would be wise to have at least $625,000 in your retirement accounts at age 71.

At age 71 The RMD on your account at $625,000 would be 16500, which would place an individual above the level at which exemptions and standard deductions shelter him from income taxes.



Left

  • Handlebar Stache
  • *****
  • Posts: 1157
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #20 on: July 16, 2014, 04:17:02 AM »
for the rmd issue, is there an actual limit to what you can move back? i guessed his $10k example was for easy numbers and not a real limit? because if it would be limit, a 401k with $500k at 5% growth would net more than the $20k you move then $10k back. could i move entire balance of $500k on jan 1 to roth and at end of year move back $490k? so the entire growth is done in the roth account and there would be a net loss of $10k from 401k. So after 10 years between 60 to 70 rmd i could decrease it by $100k?

i still like the idea of using it with self directed ira to ira to roth since i cant touch it before 60 otherwise without penalty. assuming this would work.

Rural

  • Magnum Stache
  • ******
  • Posts: 4971
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #21 on: July 16, 2014, 04:39:00 AM »

i must have not understood him, what does this accomplish?

It allows you roll over a larger amount from your trad IRA to your Roth IRA than would otherwise be allowed by a given income tax bracket.  So in his example if you can roll over $10k for 0% tax every year, you can do multiple rollovers and then revert all of them except the one that appreciated the most.  At age 59.5, you will have moved more money from the trad to the Roth than would otherwise have been possible.

The question I'm struggling with is why that would be very beneficial, at that age, unless you're paying high income taxes.  After 59.5 you can withdraw from either account freely, so I would plan on withdrawing only enough from the trad to fill the space in our 0% tax bracket, then from the Roth IRA (tax free) for the remainder of our spending needs.  There aren't many situations in which you would need more of that money in the Roth, and they all involve spending way more money in retirement than MMM recommends.

So, maybe a good tip for the bogleheads who need $100k/year to survive, but not so useful for your average $40k/year mustached reader.

I would pushback on your last paragraph.

Your situation is somewhat unique in that you are planning to fund your entire retirement from pension/Social Security after age 60. Pensions are a rarity these days so I would say that this is the exception, not the rule.

assuming no pension and a shortened working career with not much Social Security income, if you want to live on $25,000 a year plus Social Security, you would be wise to have at least $625,000 in your retirement accounts at age 71.

At age 71 The RMD on your account at $625,000 would be 16500, which would place an individual above the level at which exemptions and standard deductions shelter him from income taxes.


I don't know that we can assume pensions are a "rarity." Less common by far than the once were, yes, but they were damn near universal for professional jobs, after all. How many teachers are there in this country? Almost all have pensions. How many government workers, federal, state, and (maybe) local? Ditto. Plus the few rare private pensions and some military retirees. I think it's more common than we think.

ender

  • Walrus Stache
  • *******
  • Posts: 6546
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #22 on: July 16, 2014, 05:29:15 AM »
This is genius.

Does it work too for actual Roth IRA contributions too?

So could I:

  • Jan 1 2015, put $5500 into total stock market index
  • Jan 1 2015, put $5500 into total bond index

Then in April 2016 recharacterize whichever had worse performance into a taxable investment?

Cyrano

  • Stubble
  • **
  • Posts: 123
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #23 on: July 16, 2014, 05:54:33 AM »
This is genius.

Does it work too for actual Roth IRA contributions too?

So could I:

  • Jan 1 2015, put $5500 into total stock market index
  • Jan 1 2015, put $5500 into total bond index

Then in April 2016 recharacterize whichever had worse performance into a taxable investment?

Read IRS pub. 590, but yes you should be able to over contribute and then correct the mistake. You'll likely need multiple IRA custodians to be allowed to overcontribute. 

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #24 on: July 16, 2014, 08:28:42 AM »
for the rmd issue, is there an actual limit to what you can move back? i guessed his $10k example was for easy numbers and not a real limit? because if it would be limit, a 401k with $500k at 5% growth would net more than the $20k you move then $10k back. could i move entire balance of $500k on jan 1 to roth and at end of year move back $490k? so the entire growth is done in the roth account and there would be a net loss of $10k from 401k. So after 10 years between 60 to 70 rmd i could decrease it by $100k?

i still like the idea of using it with self directed ira to ira to roth since i cant touch it before 60 otherwise without penalty. assuming this would work.

The conversion back is prorated. In your example, you would end up with 30k in the roth and pay taxes on about 28k.  Believe it or not the IRS is smarter than you (in general and when not hamstrung by congress). They have a 100 years of history of dealing with people trying to avoid taxes by being clever. And most of those people trying to cheat the IRS are also clever than you are. We have had a history of geniuses (and some not quite as smart) trying to legally work around the tax code.:)

johnhenry

  • Bristles
  • ***
  • Posts: 333
  • Age: 41
  • Location: Midwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #25 on: July 16, 2014, 08:53:46 AM »

i must have not understood him, what does this accomplish?

It allows you roll over a larger amount from your trad IRA to your Roth IRA than would otherwise be allowed by a given income tax bracket.  So in his example if you can roll over $10k for 0% tax every year, you can do multiple rollovers and then revert all of them except the one that appreciated the most.  At age 59.5, you will have moved more money from the trad to the Roth than would otherwise have been possible.

The question I'm struggling with is why that would be very beneficial, at that age, unless you're paying high income taxes.  After 59.5 you can withdraw from either account freely, so I would plan on withdrawing only enough from the trad to fill the space in our 0% tax bracket, then from the Roth IRA (tax free) for the remainder of our spending needs.  There aren't many situations in which you would need more of that money in the Roth, and they all involve spending way more money in retirement than MMM recommends.

So, maybe a good tip for the bogleheads who need $100k/year to survive, but not so useful for your average $40k/year mustached reader.

I would pushback on your last paragraph.

Your situation is somewhat unique in that you are planning to fund your entire retirement from pension/Social Security after age 60. Pensions are a rarity these days so I would say that this is the exception, not the rule.

assuming no pension and a shortened working career with not much Social Security income, if you want to live on $25,000 a year plus Social Security, you would be wise to have at least $625,000 in your retirement accounts at age 71.

At age 71 The RMD on your account at $625,000 would be 16500, which would place an individual above the level at which exemptions and standard deductions shelter him from income taxes.

I enjoyed the back and forth between sol and miles.  Have to say I'm with miles 100% on this one.  Using the Roth Conversion strategy is about getting one's savings into the vehicle that is both more tax efficient (which equals higher real returns) and more flexible in terms of early withdrawals and required distributions.  It's about moving your money to a place that's more free.

The argument against it is basically boiled down to: "I'm not worried about the increased tax efficiency because I plan to already have more than enough money anyway."  That's kind of like not taking advantage of an employer's 401(k) match because you can meet your savings goals without it! 

and "My living expenses after a certain age are already taken care of by a pension and social security, according to my current plans, so I don't want an additional nest egg that I could optionally pull money from."

and "Sure that strategy is a great way to build your nest egg, but you'd have spend money way faster than this website's creator advocates in order to spend it all before you die.  And I don't want to die with any."

Like Dwight Yoakam said, "baby things change".  Pensions and benefits can get cut and redefined.  Prolonged inflation could take place and in 20-30 years, it may very well take $100K instead of $25K to live a mustachian lifestyle.  You don't have to believe these things are imminent to be prepared.  And yes, the rules concerning Roth's could also change.  But so could tax rates, required distribution amounts, etc for Traditional IRAs. 

In the end, I don't see how you can argue against increased efficiency and increased flexibility.




milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Mad Fientist nails it again: Roth IRA Horserace.
« Reply #26 on: July 16, 2014, 09:49:59 AM »

i must have not understood him, what does this accomplish?

It allows you roll over a larger amount from your trad IRA to your Roth IRA than would otherwise be allowed by a given income tax bracket.  So in his example if you can roll over $10k for 0% tax every year, you can do multiple rollovers and then revert all of them except the one that appreciated the most.  At age 59.5, you will have moved more money from the trad to the Roth than would otherwise have been possible.

The question I'm struggling with is why that would be very beneficial, at that age, unless you're paying high income taxes.  After 59.5 you can withdraw from either account freely, so I would plan on withdrawing only enough from the trad to fill the space in our 0% tax bracket, then from the Roth IRA (tax free) for the remainder of our spending needs.  There aren't many situations in which you would need more of that money in the Roth, and they all involve spending way more money in retirement than MMM recommends.

So, maybe a good tip for the bogleheads who need $100k/year to survive, but not so useful for your average $40k/year mustached reader.

I would pushback on your last paragraph.

Your situation is somewhat unique in that you are planning to fund your entire retirement from pension/Social Security after age 60. Pensions are a rarity these days so I would say that this is the exception, not the rule.

assuming no pension and a shortened working career with not much Social Security income, if you want to live on $25,000 a year plus Social Security, you would be wise to have at least $625,000 in your retirement accounts at age 71.

At age 71 The RMD on your account at $625,000 would be 16500, which would place an individual above the level at which exemptions and standard deductions shelter him from income taxes.


I don't know that we can assume pensions are a "rarity." Less common by far than the once were, yes, but they were damn near universal for professional jobs, after all. How many teachers are there in this country? Almost all have pensions. How many government workers, federal, state, and (maybe) local? Ditto. Plus the few rare private pensions and some military retirees. I think it's more common than we think.

I believe the rough percentage of private employees offered to pension is about 10%. I believe about 85% of public employees are offered pensions.

Since public employees make up less than 10% of the working population that works out to about 17% of the working population having a pension option.

In my view this qualifies as a rarity.  Perhaps Mustachians are over represented in this category though?
« Last Edit: July 16, 2014, 10:22:18 AM by milesdividendmd »

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #27 on: July 16, 2014, 11:31:14 AM »
Private workers at at just under 20% (down from ~60% in 1960 and the trend of it dropping hasn't slowed much) . And for what it is worth, I find state income taxes to be a bigger deal at low income level. ROTHs help with them



I believe the rough percentage of private employees offered to pension is about 10%. I believe about 85% of public employees are offered pensions.

Since public employees make up less than 10% of the working population that works out to about 17% of the working population having a pension option.

In my view this qualifies as a rarity.  Perhaps Mustachians are over represented in this category though?

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #28 on: July 16, 2014, 11:56:55 AM »

Private workers at at just under 20% (down from ~60% in 1960 and the trend of it dropping hasn't slowed much) . And for what it is worth, I find state income taxes to be a bigger deal at low income level. ROTHs help with them



I believe the rough percentage of private employees offered to pension is about 10%. I believe about 85% of public employees are offered pensions.

Since public employees make up less than 10% of the working population that works out to about 17% of the working population having a pension option.

In my view this qualifies as a rarity.  Perhaps Mustachians are over represented in this category though?

What's your source for the percentage of private employees participating in pensions?

I got my 10% figure from this source:

http://www.bls.gov/opub/mlr/2012/12/art1full.pdf



Brian Fellows

  • 5 O'Clock Shadow
  • *
  • Posts: 36
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #29 on: July 16, 2014, 12:07:26 PM »
Putting money in your Roth ASAP makes sure you don't have to worry about paying the taxes on the gains EVER regardless of circumstances.  You don't have to play tricks and keep on top of changing tax laws (state and federal, and in my case, city) like you would with a pre-tax vehicle once it's in a Roth.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #30 on: July 16, 2014, 12:45:55 PM »
What's your source for the percentage of private employees participating in pensions?

I got my 10% figure from this source:

http://www.bls.gov/opub/mlr/2012/12/art1full.pdf

Random article I read last year. But read your article. It says 18% of private sector employees have pensions.:)

MooseOutFront

  • Pencil Stache
  • ****
  • Posts: 509
  • Age: 41
  • Location: Texas
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #31 on: July 16, 2014, 01:10:42 PM »
I don't need to do IRA to Roth conversions yet, but I plan to start doing this with Roth contributions next year.  The important thing is that the horse race needs to fit into my existing asset allocation.  That way I'm not taking on any additional risk in order to win at this game.  So maybe I put $5500 in SCV at Vanguard, $5500 in EM at Fidelity, and then $5500 in LCG at TD Ameritrade.  These are all asset classes I usually invest in anyway.  Then toward the end of the year repurpose the 2 losers and they'll have just been regular taxable investments.  Would this include having to sell those shares or would it be possible to have the brokerage just move them over from the IRA portion of your account to the taxable portion? (I would hate to have to capture short term gains as part of this process.)

The end result here is that you got like 11 months worth of your Roth investment doing better than 2 other asset classes that you could have had it in.  Worth the hassle?  Maybe, I need to read the logistics of it.  I've never seen the details of the paperwork.

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #32 on: July 16, 2014, 01:28:40 PM »
I don't need to do IRA to Roth conversions yet, but I plan to start doing this with Roth contributions next year.  The important thing is that the horse race needs to fit into my existing asset allocation.  That way I'm not taking on any additional risk in order to win at this game.  So maybe I put $5500 in SCV at Vanguard, $5500 in EM at Fidelity, and then $5500 in LCG at TD Ameritrade.  These are all asset classes I usually invest in anyway.  Then toward the end of the year repurpose the 2 losers and they'll have just been regular taxable investments.  Would this include having to sell those shares or would it be possible to have the brokerage just move them over from the IRA portion of your account to the taxable portion? (I would hate to have to capture short term gains as part of this process.)

The end result here is that you got like 11 months worth of your Roth investment doing better than 2 other asset classes that you could have had it in.  Worth the hassle?  Maybe, I need to read the logistics of it.  I've never seen the details of the paperwork.

As far as I know, you can't anything but cash out of an IRA. I would expect you would be hit with short term gains taxes. The real fun is that if you have a big year, it might make sense to leave the money in the ROTH and pay the 6% penalty and just not do a contribution the following year. I have felt crazy enough to run the math:)

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #33 on: July 16, 2014, 01:40:11 PM »

What's your source for the percentage of private employees participating in pensions?

I got my 10% figure from this source:

http://www.bls.gov/opub/mlr/2012/12/art1full.pdf

Random article I read last year. But read your article. It says 18% of private sector employees have pensions.:)

Look at graph three which is on a per employee, not a per employer scale.



foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #34 on: July 16, 2014, 01:57:30 PM »

What's your source for the percentage of private employees participating in pensions?

I got my 10% figure from this source:

http://www.bls.gov/opub/mlr/2012/12/art1full.pdf

Random article I read last year. But read your article. It says 18% of private sector employees have pensions.:)

Look at graph three which is on a per employee, not a per employer scale.

Not in the article you posted. Chart 3 is the break down by employer size.  Seriously just read the first paragraph where it states 10% of EMPLOYERS, 18% of EMPLOYEEs.

Doesn't really change anything but it would be nice to keep passing around bad info.


milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #35 on: July 16, 2014, 02:36:03 PM »


What's your source for the percentage of private employees participating in pensions?

I got my 10% figure from this source:

http://www.bls.gov/opub/mlr/2012/12/art1full.pdf

Random article I read last year. But read your article. It says 18% of private sector employees have pensions.:)

Look at graph three which is on a per employee, not a per employer scale.

Not in the article you posted. Chart 3 is the break down by employer size.  Seriously just read the first paragraph where it states 10% of EMPLOYERS, 18% of EMPLOYEEs.

Doesn't really change anything but it would be nice to keep passing around bad info.

You're right.

Embarrassing!



kpd905

  • Handlebar Stache
  • *****
  • Posts: 1915
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #36 on: July 16, 2014, 07:41:30 PM »
Outside of a traditional 401k plan,  one should max out Roth ($5500)

Or Traditional IRA if you can deduct.

sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #37 on: July 16, 2014, 07:54:24 PM »
In other words if I could cover my entire retirement from my Roth IRA after age 59.5 and until age 100, then I could spread out my taxable account money plus my Roth ladder over all of the years of my early retirement.

That's a nice problem to have.  For someone looking to cover 20+ years of early retirement, having that much set aside in a taxable account is quite an accomplishment.  For most of us, the problem is going to be getting the taxable account big enough to just cover the first 5 years of the Roth pipeline, not our entire early retirements.

Quote
If I need some of my taxable account money for my retirement after age 59.5, then assuming constant spending in early retirement this means less years of early retirement.

This sentence (and part of johnhenry's post) seem to put a finer point on what looks to be a misconception here.  You don't get any more money by transferring to your Roth IRA.  It doesn't create wealth, it just reallocates the money to a different bucket.  By stuffing the Roth, you've depleted some other bucket.  As soon as the buckets become equivalent at age 59.5, I see no difference.

Quote
So if you have 2M in your IRA you must withdraw $75,500 in earned income. Try paying no taxes on that!

Lots of people pay no taxes on that much income, and more.  RootofGood has a good post on it (http://rootofgood.com/make-six-figure-income-pay-no-tax/).  Bogleheads is full of people in the $100k neighborhood with zero tax liability.


sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #38 on: July 16, 2014, 07:55:12 PM »
Have to say I'm with miles 100% on this one...  Using the Roth Conversion strategy is about getting one's savings into the vehicle that is both more tax efficient

The whole point I was trying to make is that it's NOT more tax efficient, it's exactly equivalent after age 59.5.  Okay, it's exactly equivalent other than the RMD issue, which doesn't apply to some people, like me.  And on top of that BEFORE age 59.5, when it would actually matter, it doesn't actually help you at all because the gains aren't withdrawable anyway.

I'm all for tax optimization.  If you think this technique, or any other, will help your tax situation then I say go for it.  I'm just saying that this particular idea, which sounded super awesome when I first read it, turns out isn't so helpful to the early retiree as I first thought.  There is no tax efficiency to be gained here that is not already available to someone making regular Roth IRA rollovers without using the horse race.

Quote
In the end, I don't see how you can argue against increased efficiency and increased flexibility.

I'm not!  I'm arguing for avoiding paperwork that doesn't actually help you.  If you think this helps you, then go for it.  Just be sure you understand what I've posted about so you're not disappointed later.

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #39 on: July 16, 2014, 08:09:15 PM »
In other words if I could cover my entire retirement from my Roth IRA after age 59.5 and until age 100, then I could spread out my taxable account money plus my Roth ladder over all of the years of my early retirement.

That's a nice problem to have.  For someone looking to cover 20+ years of early retirement, having that much set aside in a taxable account is quite an accomplishment.  For most of us, the problem is going to be getting the taxable account big enough to just cover the first 5 years of the Roth pipeline, not our entire early retirements.

Quote
If I need some of my taxable account money for my retirement after age 59.5, then assuming constant spending in early retirement this means less years of early retirement.

This sentence (and part of johnhenry's post) seem to put a finer point on what looks to be a misconception here.  You don't get any more money by transferring to your Roth IRA.  It doesn't create wealth, it just reallocates the money to a different bucket.  By stuffing the Roth, you've depleted some other bucket.  As soon as the buckets become equivalent at age 59.5, I see no difference.

Quote
So if you have 2M in your IRA you must withdraw $75,500 in earned income. Try paying no taxes on that!

Roths only create wealth to the extent that they will help you avoid taxes.

If they don't help you specifically increase your tax efficiency, then you are right, after age 60 there is no point in having your money in a Roth vs a traditional IRA. In my case the Roth designation should save me thousands of dollars in taxes on a yearly basis from the RMD rule alone.

"Lots of people pay no taxes on that much income, and more.  RootofGood has a good post on it (http://rootofgood.com/make-six-figure-income-pay-no-tax/).  Bogleheads is full of people in the $100k neighborhood with zero tax liability.
"

Roths only create wealth to the extent that they will help you avoid taxes.

If they don't help you specifically increase your tax efficiency, then you are right, after age 60 there is no point in having your money in a Roth vs a traditional IRA. In my case the Roth designation should save me thousands of dollars in taxes on a yearly basis from the RMD rule alone.

"Lots of people pay no taxes on that much income, and more.  RootofGood has a good post on it (http://rootofgood.com/make-six-figure-income-pay-no-tax/).  Bogleheads is full of people in the $100k neighborhood with zero tax liability.

There's a big difference between not paying taxes on 90K in actual earned income from employment  (when you can legally shelter 35K in 401Ks and 11k in IRAs and 7K in an HSA, etc and not paying taxes on 90k in earned income and SSI as a 71 year old  on Medicare.

Where would such a Mustachian shelter all of his income?  No IRA, no 401k?

If you have such a strategy, I would be thrilled to hear it.


« Last Edit: July 16, 2014, 08:15:47 PM by milesdividendmd »

sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #40 on: July 16, 2014, 08:30:29 PM »
Where would such a Mustachian shelter all of his income?  No IRA, no 401k?

Go check out the bogleheads threads on tax avoidance. 

Here's a quick example.  The married filing jointly standard deduction, three kids, and the $3k limit on tax loss harvesting already gets you to $60k per year in straight up unsheltered income with zero tax liability, and that's without even itemizing or doing anything fancy like owning rental property, having kids in college, using a trust or charity, setting up a small business, having investment income, or playing tricks with the EITC or ACA subsidies.  If you can also pull 10k/year from your Roth IRA principal and 20k year in qualified dividends or long term capital gains, both of which are tax free, you've suddenly hit $90k/year in actual spending without paying Uncle Sam a dime.  Easy peasy.

Everyone thinks taxes in retirement are super hard, but all of these forums are just chock full of information on how to pay zero federal income tax with a minimum of effort.  I gag every time someone complains about how their taxes are too high. 

Now if you want to bitch about property tax or gas tax or state tax or sales tax or VAT, you go right ahead.  Those are all 100% within your control too, but I agree they can add up to a nasty bite if you choose to live the wrong way in the wrong place.
« Last Edit: July 16, 2014, 08:48:31 PM by sol »

foobar

  • Pencil Stache
  • ****
  • Posts: 731
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #41 on: July 16, 2014, 08:47:27 PM »

Lots of people pay no taxes on that much income, and more.  RootofGood has a good post on it (http://rootofgood.com/make-six-figure-income-pay-no-tax/).  Bogleheads is full of people in the $100k neighborhood with zero tax liability.

It is a different situation. There is no 35k going into a 401(k). No 17k going into 457. No 6k pension. No 5k dependent care. No child tax credits or deductions (well I don't plan on having kids at home at 70:)). No 11k ira. You will also have 30k+ or so of SS that will be getting taxed. You will be start off paying ~10k in taxes unless you have a lot of property/state tax

In theory getting 200k or so of income and paying 0 dollars in federal taxes isn't hard. Quick attempt. 100k salary, 100k LTGC. 78k in 401+457, 13k in iras, 2 kids under 13 in day care gets me a 1k refund. It is a lot harder to be 50+, have 2 young kids, employers that offer both retirement plans, and the pile of money generating those LTGC is pretty hard to do in the real world.

But if you have won the game (you living on 24k and making 100k), why worry about 10k in taxes. Write the check and move on with your life. You don't need the cash

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Mad Fientist nails it again: Roth IRA Horserace.
« Reply #42 on: July 16, 2014, 09:32:36 PM »
Where would such a Mustachian shelter all of his income?  No IRA, no 401k?

Go check out the bogleheads threads on tax avoidance. 

Here's a quick example.  The married filing jointly standard deduction, three kids, and the $3k limit on tax loss harvesting already gets you to $60k per year in straight up unsheltered income with zero tax liability, and that's without even itemizing or doing anything fancy like owning rental property, having kids in college, using a trust or charity, setting up a small business, having investment income, or playing tricks with the EITC or ACA subsidies.  If you can also pull 10k/year from your Roth IRA principal and 20k year in qualified dividends or long term capital gains, both of which are tax free, you've suddenly hit $90k/year in actual spending without paying Uncle Sam a dime.  Easy peasy.

Everyone thinks taxes in retirement are super hard, but all of these forums are just chock full of information on how to pay zero federal income tax with a minimum of effort.  I gag every time someone complains about how their taxes are too high. 

Now if you want to bitch about property tax or gas tax or state tax or sales tax or VAT, you go right ahead.  Those are all 100% within your control too, but I agree they can add up to a nasty bite if you choose to live the wrong way in the wrong place.

Sol,

No disrespect, but your math doesn't add up.

Please detail how standard deductions get you to 60K in the current system with no 401k and no IRA, and no HSA because I frankly don't see it. (25K maybe. but not 60K)

But I am always willing to learn. (Honestly.)

And please don't tell me to look it up on bogleheads or elsewhere. (I frequent that board and have never seen such an ingenious prescription. )

If it's so easy, please spell it out for everyone. I am sure others will learn a lot from your knowledge.

And remember no pulling 10 K from your Roth as it is not in your plans since you claim to have no need for it and plan to have no funds in it after age 59.5. (Your own original point.)

And another small point. Are you planning on having 3 dependant children to claim at age 71?  I'm not, but to each his own. That is biologically possible, but probably not with your current wife. (Oh well, there's always adoption I suppose.)

And remember the 90 k in the current scenario doesn't include long term capital gains or qualified dividends. Just your RMD from your 2M IRA and your SSI income, both  of which are taxable as earned income.

I stand by, ready to learn.
« Last Edit: July 16, 2014, 09:43:39 PM by milesdividendmd »

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Mad Fientist nails it again: Roth IRA Horserace.
« Reply #43 on: July 16, 2014, 09:35:37 PM »
Duplicate
« Last Edit: July 16, 2014, 09:44:06 PM by milesdividendmd »

sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #44 on: July 16, 2014, 10:40:27 PM »
No disrespect, but your math doesn't add up.

Please detail how standard deductions get you to 60K in the current system with no 401k and no IRA, and no HSA because I frankly don't see it. (25K maybe. but not 60K)

We're Married Filing Jointly with three kids, so that's 12.4k standard deduction plus the 5 personal exemptions at $3950 each minus 3k in child tax credits is $58,200 in tax free income.  Try it yourself at any of the online tax calculators.  I like this one because it's simple.

Tax loss harvesting will reduce your income by up to 3k per year, so now you're at 61.2k.  If you itemize your deductions the amount could go up considerably.  For example, we had almost 19k in itemized deductions last year instead of the 12,400 standard deduction, that got us over $67,000 without paying any tax at all. (For the record, we make a lot more than 67k and ended up paying a ton of tax.)

Several people here have claimed RootofGood's post isn't accurate for an early retiree because he's using retirement accounts to reduce his AGI to ~$72k.  That ignores the fact that he's still paying $150 in tax on $72,000 of unreduced income.

As for retirees not having children, that's certainly a potential problem.  I had my last child at age 36, so she'll be a tax deduction until I'm 54 years old.   At age 71 I'll have to find an alternative tax avoidance strategy if I want to spend more than about $23k/year in inflation adjusted dollars and still pay zero tax.  Like itemizing.  Or owning rental property.  Or starting a small business, paying myself a small salary, and claiming the EITC.  Or paying college tuition.  Or, you know, I could skip tax optimization entirely and just swallow the 10% tax on the first tax bracket's $9k or so and pay an effective tax rate of 900/32k = 2.8%.  Doesn't sound too terrible, for a couple of empty nesters living an optimized lifestyle.

And remember no pulling 10 K from your Roth as it is not in your plans since you claim to have no need for it and plan to have no funds in it after age 59.5. (Your own original point.)

Quite the contrary, I'm going to have a ton of money in my Roth IRA at age 59.5 precisely because of my original point, which is that you can only withdraw contributions and not earnings penalty free before 59.5.  By that age, the majority of my Roth IRA balance is going be earnings.  I will have withdrawn all of my contributions (tax and penalty free) before age 59.5 but still intend to have a vast sum of money suddenly available to me for tax-free anytime withdrawal at age 59.5 to supplement my ~20k (inflation adjusted) tax-free income for a MFJ couple with no kid and no tax optimization (standard deduction with 2 exemptions and no kids is about 20k in today's dollars).

The Roth is still a great deal for people who want to spend a boatload in retirement.  I don't mean to disparage it as a useful tool for everyone here.  But the horse race recharacterization trick, in particular, doesn't help most moderate spenders much because only the contributions can be withdrawn prior to 59.5 so recharacterizing the least-appreciated conversion is useless in terms of accessing more money early.  Recharacterizing the losers is useless because the withdrawal rules are based on value at conversion, not subsequent price decreases, and the decreased value would still exist in your trad IRA so it's not like you've undone a loss.


milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #45 on: July 16, 2014, 11:02:36 PM »

We're Married Filing Jointly with three kids, so that's 12.4k standard deduction plus the 5 personal exemptions at $3950 each minus 3k in child tax credits is $58,200 in tax free income.  Try it yourself at any of the online tax calculators.  I like this one because it's simple.


Whoa, whoa, whoa.  The arithmatic still doesn't work for me.

12,400 + (3950 X 5) = 32,150 (not 58,200) if you include the child tax credit you are up to 35,150.  And again if you subtract the children (which seems rational at age 71) you are down to 20,300 instead of 35,150.

Also 3K in TLH decreases your income NOT your taxes by 3K as you seem to imply. 

In fact plugging your 90 K of earned income into your calculator still shows a tax bill of $6548, even assuming you have 3 new kids at age 71!  (Which is 6548 you would not have to pay if the theoretical 2M were in a Roth at age 71.)

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #46 on: July 16, 2014, 11:08:49 PM »
Quite the contrary, I'm going to have a ton of money in my Roth IRA at age 59.5 precisely because of my original point, which is that you can only withdraw contributions and not earnings penalty free before 59.5.  By that age, the majority of my Roth IRA balance is going be earnings.  I will have withdrawn all of my contributions (tax and penalty free) before age 59.5 but still intend to have a vast sum of money suddenly available to me for tax-free anytime withdrawal at age 59.5 to supplement my ~20k (inflation adjusted) tax-free income for a MFJ couple with no kid and no tax optimization (standard deduction with 2 exemptions and no kids is about 20k in today's dollars).


If you want more earnings in your Roth at age 59.5, then the IRA horserace would be a great strategy for you specifically.  That is the whole point of the IRA horserace.  It allows you to have more earnings in your Roth to withdraw tax free at any time in the future!  (In addition to not having to pay unnecessary taxes on your RMD's after age 71.)

sol

  • Walrus Stache
  • *******
  • Posts: 8474
  • Age: 44
  • Location: Pacific Northwest
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #47 on: July 16, 2014, 11:10:45 PM »
12,400 + (3950 X 5) = 32,150 (not 58,200) if you include the child tax credit you are up to 35,150.

Right, but the child tax credit is refundable.  $58,200 in taxable income generates $3k in taxes for a MFJ couple with 3 kids, and then the 3 kids provide a $3k tax credit, for zero taxes due on $58,200.

I added the other 3k for TLH to the income, to get from 58.2k to 61.2k, just as you suggest.  It reduces your taxable income by 3k so you can earn 3k above 58.2k without incurring any additional taxes.  Note that RootfGood's post above uses similar strategies to get to $72k.

You said:
Please detail how standard deductions get you to 60K in the current system with no 401k and no IRA, and no HSA because I frankly don't see it. (25K maybe. but not 60K)

So I just did.  This is exactly how I currently get over $60k in income without paying any federal income tax without using an IRA or a 401k.  And you can too!  Start having children!
« Last Edit: July 16, 2014, 11:14:02 PM by sol »

milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Re: Mad Fientist nails it again: Roth IRA Horserace.
« Reply #48 on: July 16, 2014, 11:15:14 PM »

12,400 + (3950 X 5) = 32,150 (not 58,200) if you include the child tax credit you are up to 35,150.

Right, but the child tax credit is refundable.  $58,200 in taxable income generates $3k in taxes for a MFJ couple with 3 kids, and then the 3 kids provide a $3k tax credit, for zero taxes due on $58,200.

I added the other 3k for TLH to the income, to get from 58.2k to 61.2k, just as you suggest.  It reduces your taxable income by 3k so you can earn 3k above 58.2k without incurring any additional taxes.

You said:
Please detail how standard deductions get you to 60K in the current system with no 401k and no IRA, and no HSA because I frankly don't see it. (25K maybe. but not 60K)

So I just did.  This is exactly how I currently get over $60k in income without paying any federal income tax without using an IRA or a 401k.  And you can too!  Start having children!

Only you didn't.

Plug $58,200 in to your Calculator and you will see that even with three children and being married filing jointly you will still owe $1778. This means that the government thinks you're still making over $17,000 over the exemption at a marginal rate of 10%.



milesdividendmd

  • Handlebar Stache
  • *****
  • Posts: 1913
  • Location: Portlandia
    • Miles Dividend MD
Mad Fientist nails it again: Roth IRA Horserace.
« Reply #49 on: July 16, 2014, 11:19:54 PM »
(Even adding 3K in TLH only lowers your tax bill to 1478 )