529 to Roth? Planning for a one year old

[Alternatepriorities]

As an enjoyable YouTube economics channel likes to remind me, "no one can predict the future, least of all economists". I'm rather aware of how far off my 2008 predictions of my current life were and therefor how questionable my guesses about 2040 might be. However, I still need to make some kind of predictions...

About 18 months ago DS was born, DW and I brought him home from the hospital and completed the legal adoption about a year ago. We live in Alaska and as citizen on Jan 1st of this year DS qualifies for his first PFD. ($1700). The state gives the PFD of minors to their parents and AFAIK we will get a 1099-MISC for his the way we do for our own. We would like to set his money aside for him, but I have doubts about wisdom putting money into a 529 for higher education (I'd rather not be distracted by the justification of my position on this). However, putting money into a 529 for the express purpose of rolling it into a Roth IRA in 15 years does make sense to me...

My first question is: How likely is this conversion option to exist in 15 years? I didn't find a sunset provision on it. Under the current rules, it seems like we could contribute DS's PFD to a 529 plan every year until he is 12, then when he is 16 (15 years after opening it) we could roll as much as 7000 a year into a Roth IRA (assuming he has the income) for 2 or 3 years (depending on his age when he goes to college) deplete the 529 and give him a running start at his own retirement... DW would prefer doing something like this because she still doesn't truly embrace the fungibility of money...

Alternatively: As long as nothing crazy happens, by the time DS goes to college DW and I will both be able to access our Roth IRAs without penalty. As we are currently FI but still earning income we can just keep putting money into them even if we wouldn't for ourselves. As IRA's don't count as assets for figuring family contribution we could pull it out and give it to him when he goes to college without losing out on needs based aid...

I suspect being FI before having a child and retirement age before said child will be old enough for college is rather unique in the normal world. Certainly isn't the case for any of our local friends, but probably it isn't that uncommon among mustachians.

I'd also be interested in other suggestions for deferring the taxes on DS's pfd until he actually needs to money? This year in particular we are likely to be in the 22% bracket for the first time because I earned money in 2022/23 but didn't get paid until this summer... Another example of the world making a mockery of my careful planning.

[SeattleCPA]

As an enjoyable YouTube economics channel likes to remind me, "no one can predict the future, least of all economists". I'm rather aware of how far off my 2008 predictions of my current life were and therefor how questionable my guesses about 2040 might be. However, I still need to make some kind of predictions...

About 18 months ago DS was born, DW and I brought him home from the hospital and completed the legal adoption about a year ago. We live in Alaska and as citizen on Jan 1st of this year DS qualifies for his first PFD. ($1700). The state gives the PFD of minors to their parents and AFAIK we will get a 1099-MISC for his the way we do for our own. We would like to set his money aside for him, but I have doubts about wisdom putting money into a 529 for higher education (I'd rather not be distracted by the justification of my position on this). However, putting money into a 529 for the express purpose of rolling it into a Roth IRA in 15 years does make sense to me...

My first question is: How likely is this conversion option to exist in 15 years? I didn't find a sunset provision on it. Under the current rules, it seems like we could contribute DS's PFD to a 529 plan every year until he is 12, then when he is 16 (15 years after opening it) we could roll as much as 7000 a year into a Roth IRA (assuming he has the income) for 2 or 3 years (depending on his age when he goes to college) deplete the 529 and give him a running start at his own retirement... DW would prefer doing something like this because she still doesn't truly embrace the fungibility of money...

Alternatively: As long as nothing crazy happens, by the time DS goes to college DW and I will both be able to access our Roth IRAs without penalty. As we are currently FI but still earning income we can just keep putting money into them even if we wouldn't for ourselves. As IRA's don't count as assets for figuring family contribution we could pull it out and give it to him when he goes to college without losing out on needs based aid...

I suspect being FI before having a child and retirement age before said child will be old enough for college is rather unique in the normal world. Certainly isn't the case for any of our local friends, but probably it isn't that uncommon among mustachians.

I'd also be interested in other suggestions for deferring the taxes on DS's pfd until he actually needs to money? This year in particular we are likely to be in the 22% bracket for the first time because I earned money in 2022/23 but didn't get paid until this summer... Another example of the world making a mockery of my careful planning.

I would think you assume it exists. But that said, it does not seem very compelling to me. There's that $35,000 non-inflation-adjusted limit right? So when I do the math, this is about the same value as a couple of years of Roth contributions. I.e., you contribute $14K today. It grows to $35K in 15 years. That's the amount you move to the Roth.

It sure seems like a lot of fiddling for the marginal benefit.

Disclosure of general systemic bias: I think Roth accounts are usually overrated and usually oversold.

[secondcor521]

If you want to pass the money along to the kid at some point and want it to grow tax free, then doing the 529->Roth rollover thing works.  Bonus points that your DW approves.  In addition to the several restrictions mentioned, there is a limit that contributions have to stay in the 529 for five years before the rollover, but that probably won't be an issue with your plan.

You'd have to account for growth in the 529 and either (a) limit your contributions and/or growth so that you don't exceed the $35K limit or (b) be OK with some leftover money in the 529.

If AK offers any sort of state tax benefit for 529 contributions, I think it'd be a good way to achieve your goal.

There are other ways to achieve your goal.  Easiest I can think of would be to open a UTMA account for your kid and stick their PFDs in it.  Buy BRK.B or an index fund and your kid probably won't have to pay much in taxes (learn about the "kiddie tax" though).  Transfer ownership to them at age 21 or whatever AK's rules are.

[seattlecyclone]

The rollover option exists, I see no reason to expect it would be removed, and I agree with the others that it isn't a hugely compelling thing. Before this option was introduced people had incentive to err on the side of slightly underfunding their kid's 529 to avoid penalties on the excess, and now they have the incentive to err on the side of slightly overfunding it. I suppose a couple decades of $1,700 contributions won't result in a 529 balance hugely in excess of the $35k rollover limit if the kid doesn't go to college.

The other main option for saving on the kid's behalf would be an UTMA brokerage account. As a kid they probably wouldn't owe much (if any) tax on this account assuming you harvest gains from time to time.

The big quandary in choosing between these two options is you implicitly have to decide whether you think it's more likely your kid will or will not go to college. The 529 has better tax treatment if you use the money for education, and the UTMA has better tax treatment if you don't. Of course you've learned from Economics Explained that we can't perfectly predict the future, but this is a case where you have to make your best guess about your toddler's long-term educational trajectory and place your bets accordingly.

[MustacheAndaHalf]

My first question is: How likely is this conversion option to exist in 15 years? I didn't find a sunset provision on it.

If Congress attacks it, they'll be accused of taking money from children, and hurting children's education.  I doubt Congress will risk it.  But the description I read mentions a risk of IRS interpretation of the law:

"If you're planning to open a 529 for your children, consider funding different accounts for each child—but don't assume you'll also be able to transform these assets into Roth assets with a future rollover. Without additional clarity from the IRS on how the 15-year rule will work, it is better to err on the side of caution. If it turns out that you can switch 529 beneficiaries without having to wait 15 years for a rollover, you can always adjust your funding strategy."
https://www.schwab.com/learn/story/529-to-roth-ira-rollovers-what-to-know

Under the current rules, it seems like we could contribute DS's PFD to a 529 plan every year until he is 12, then when he is 16 (15 years after opening it) we could roll as much as 7000 a year into a Roth IRA (assuming he has the income) for 2 or 3 years (depending on his age when he goes to college) deplete the 529 and give him a running start at his own retirement...

Parents can also contribute to a child's Roth IRA using their own money, up to the amount of the child's income (limited to $6,500/year currently).  So you could do nothing now, and when your child starts earning an income, contribute to their Roth IRA.

"Many parents choose to match their child’s earnings and make the IRA contribution themselves. For example, if your child earns $3,000 at a summer job, you can let them spend their money as they wish and make the $3,000 IRA contribution with your own money."
https://www.investopedia.com/articles/personal-finance/110713/benefits-starting-ira-your-child.asp#:~:text=Many%20parents%20choose%20to%20match,contribution%20with%20your%20own%20money.

Rather than focus on the 529 rollover rules, have you thought about how long your child will take to earn $6,500 or more per year for six years?  Perhaps their high school income could be another bottleneck for rollovers/Roth contributions.

[secondcor521]

But the description I read mentions a risk of IRS interpretation of the law:

"If you're planning to open a 529 for your children, consider funding different accounts for each child—but don't assume you'll also be able to transform these assets into Roth assets with a future rollover. Without additional clarity from the IRS on how the 15-year rule will work, it is better to err on the side of caution. If it turns out that you can switch 529 beneficiaries without having to wait 15 years for a rollover, you can always adjust your funding strategy."
https://www.schwab.com/learn/story/529-to-roth-ira-rollovers-what-to-know

As the quote implies, that risk applies to people who have multiple children.  The question that the IRS regulations need to resolve is if a family contributes to a 529 for kid #1, then later changes the beneficiary or does a rollover to a 529 for kid #2, does that restart the 15 year clock?  Does it reset the 5 year clock?  Nobody knows yet until the IRS clarifies.

But OP only mentions a single child AFAICT, so the risk might not apply to them.

Parents can also contribute to a child's Roth IRA using their own money, up to the amount of the child's income (limited to $6,500/year currently).  So you could do nothing now, and when your child starts earning an income, contribute to their Roth IRA.

Sure they can.  But OP was also wanting a way to have a better tax situation for their kid's PFDs in the meantime.

Also, the IRA contribution limit is $7K now.

Rather than focus on the 529 rollover rules, have you thought about how long your child will take to earn $6,500 or more per year for six years?  Perhaps their high school income could be another bottleneck for rollovers/Roth contributions.

There are two time minimums in the law - 15 years having the account open and a 5 year minimum before contributions can be rolled over.  But there are no time maximums.  The parents could make a $7K 529->Roth conversion when their offspring is 45 years old.  They can also skip years, and/or make less than the maximum contribution amount, so if the kid earns $1K at a summer job, they can roll $1K that year.  The $35K is a lifetime per kid limit.

Of course, if it takes longer and the 529 grows, they do risk the 529 growing past the $35K limit.  There are other solutions to that issue though.

[SeattleCPA]

There are other ways to achieve your goal.  Easiest I can think of would be to open a UTMA account for your kid and stick their PFDs in it.  Buy BRK.B or an index fund and your kid probably won't have to pay much in taxes (learn about the "kiddie tax" though).  Transfer ownership to them at age 21 or whatever AK's rules are.

Section 529 plans didn't exist when I was funding my daughters' college costs. But the UTMA accounts actually ended up working really well.

As @secondcor521 notes, they can be pretty tax efficient. You can have $100K in a equity index fund probably and basically trigger no kiddie tax.

The two other things I'll note from my experience: First, not every kid goes to college or does a full four-year stint. (I think something like 40% of kids from college educated affluent families actually start and finish college.) Second, not every kid in the end who does do college actually ends up needing the money. (Scholarships can pick up all or a lot of the tab.)

Neither of my daughters ended up needing their college savings. One for first reason given above. The other for the second reason given above. And those UTMAs were super easy to convert to just regular old investment portfolios.

[FIRE@50]

Have you considered putting the money directly into a Roth IRA in your child's name today? Cut out the 529 "middleman".

[seattlecyclone]

Have you considered putting the money directly into a Roth IRA in your child's name today? Cut out the 529 "middleman".

Only possible if the child has bona fide work income. Not too many opportunities for a toddler to do that.

[Alternatepriorities]

Thank you for all the interesting responses! I very much appreciate the frequency with which I post a idea or question here and its quickly apparent that others have already wrestled with and often solved it!

To clarify a couple of points. DS is very likely to receive a similar check from the state of Alaska every year for as long as he is a resident. I can't predict the future years values as it depends on a combination of state politics and market performance... For sake of this discussion lets just assume it will be 1700 a year. I don't actually believe he will need the money for education, but that's a completely different discussion and I could very well be wrong. I'm looking for a way to 1) set aside the money for his future needs with some flexibility. 2) Defer the taxes at least until he needs the money or eliminate them. 3) For the sake of DW's peace of mind keep it clearly separated from our other money.

If it were not for point three, I would just dump the extra money into my 401k, covert it to Roth at a tax advantageous time, and leave him a larger pile of Roth IRA money as his inheritance when I go...

Using the 1.7k/year assumption and a 7% return, if i put his next 10 PFDs into a 529, by the time the account has been open 15 years it should be 35k and we can begin making the transfers out. Given it would take 5 year with no returns to get that all into Roth, that's probably overshooting but who knows, maybe he will need some money for higher education.

It seems the general consensus here is that the roll over option won't go away. This brings up another point... Should DW and I open 529s for ourselves, put enough in that will be worth 35k in 15 years and then roll it into our own roths? Including the gain that's a free 70k of tax deferral turned into no taxes? Related would the conversion of IRA money to Roth money which is taxed as earned income count towards the 7k in earned income?

It sure seems like a lot of fiddling for the marginal benefit.

Disclosure of general systemic bias: I think Roth accounts are usually overrated and usually oversold.

Yeah, it is extra fiddling... Total tax savings for him over 10 years is at most $3400, but it's the principle of it :) and I think it satisfices all three goals? Definitely over thinking it with my follow up. It's hard sometimes to stop trying to save $100 here and there after working so hard to get to a place where I don't need to do so.

I'm curious if you'd care to expand on the overrating of roth accounts.

If AK offers any sort of state tax benefit for 529 contributions, I think it'd be a good way to achieve your goal.

There are other ways to achieve your goal.  Easiest I can think of would be to open a UTMA account for your kid and stick their PFDs in it.  Buy BRK.B or an index fund and your kid probably won't have to pay much in taxes (learn about the "kiddie tax" though).  Transfer ownership to them at age 21 or whatever AK's rules are.

No state taxes here just federal income tax.

I had not heard of a UTMA before. It seems like that would probably solve issues 1 & 3. I'm not entirely sure an 18 or 21 year old should be handed what could easily be over 50K by then, though I do hope to teach him how to handle money and it might be okay.

Have you considered putting the money directly into a Roth IRA in your child's name today? Cut out the 529 "middleman".

Only possible if the child has bona fide work income. Not too many opportunities for a toddler to do that.

Yeah, I once DS can earn money I will probably put his PFDs into a Roth against what he earns.

[seattlecyclone]

It seems the general consensus here is that the roll over option won't go away. This brings up another point... Should DW and I open 529s for ourselves, put enough in that will be worth 35k in 15 years and then roll it into our own roths? Including the gain that's a free 70k of tax deferral turned into no taxes?

I wouldn't mess with this. Remember that your annual rollover is only up to your Roth IRA contribution limit for that year, and is in lieu of a regular contribution. For this to pay off, both of you would need to have work income in 15 years (and each of a few years after while you do your rollovers). Given this is a FIRE-oriented forum I'd think you might want to avoid feeling as though you've committed to having a job of some sort in your late 50s/early 60s. If the market grows faster than you expect over that time you'd need to figure out what to do with the excess. Even if it works perfectly you end up saving capital gains tax on perhaps $20k of gains each. Do you expect to be above the 0% capital gains bracket in 15 years and every year afterward?

Related would the conversion of IRA money to Roth money which is taxed as earned income count towards the 7k in earned income?

No. If it did then retired people doing Roth conversions would unlock the ability to make new IRA contributions each year without actually earning any income from work.

[secondcor521]

Crossposted with seattlecyclone who essentially gave the same answer.

It seems the general consensus here is that the roll over option won't go away. This brings up another point... Should DW and I open 529s for ourselves, put enough in that will be worth 35k in 15 years and then roll it into our own roths? Including the gain that's a free 70k of tax deferral turned into no taxes?

Probably not.  To do a 529->Roth rollover, you need compensation (generally W-2 or Schedule C income).  If, in 15 years, you and your wife have compensation and want to put it into a Roth, just contribute from your compensation.  Alternatively, just contribute from your compensation now to your Roth IRAs now and it's tax-free from the get-go.

Related would the conversion of IRA money to Roth money which is taxed as earned income count towards the 7k in earned income?

Nope.  Roth conversions are taxed as ordinary income, but are considered unearned income.

[Alternatepriorities]

Thank you secondcor521 and seattlecyclone, I just now realized I had a mistaken understanding of the 529 plan to begin with. Somewhere I got it into my head that 529 contributions were tax deductible. I've never had reason to think about them before and that "fact" has been in my mind unquestioned so long that I completely missed the implication in earlier answers that they are not. Which as everyone gracefully assumed I hadn't made such a basic mistake probably made my second post even more odd. It wasn't until I read seattlecyclone's recent answer twice through that I thought to question my premise...

There might not be a way to achieve all three goals. I could accomplish 1&3 with either the 529-Roth conversion or an UTMA. Or, I can accomplish 1&2 by spending the 1700 on normal expenses and then deferring an extra 1700 of earned income into myi401k or DW's 403b. Then taking it out and giving it to DS in 18 years when we will almost certainly be in a lower tax bracket than this year if I don't make an extra effort to defer some of our income... It's been an interesting (very unusual) year on the income and spending front, but i think that optimization problem is a new subject.

[SeattleCPA]

Yeah, it is extra fiddling... Total tax savings for him over 10 years is at most $3400, but it's the principle of it :) and I think it satisfices all three goals? Definitely over thinking it with my follow up. It's hard sometimes to stop trying to save $100 here and there after working so hard to get to a place where I don't need to do so.

I don't think it saves anywhere close to $3400. It might not even save any taxes.

You can't do this without the child having earned income, but if you could drop $14000 into a child's Roth-IRA today, allocate 100% to US equities, and let it grow for 15 years, a good guess is, it might grow to $35,000.

In comparison, if you put $14,000 into a regular taxable investment account that allocated 100% to US equities, let it grow for 15 years... and paid the taxes on that income.... after taxes it also might grow to $35,000.

The reason: Your child won't pay any income taxes on investment income due to their standard deduction and zero percent qualified dividends and capital gains tax rates.

I'm curious if you'd care to expand on the overrating of roth accounts.

I was going to publish a blog post with Roth calculator at the end of the year. But I'll publish it now to let you see how a tax accountant does the math:

Traditional IRA vs Roth Calculator

Super simple to use. You can just click the Calculate button to see how things look using the default inputs. In most cases, the math shows people shouldn't use Roth accounts.

Sidebar maybe of interest to people learning about ChatGPT: This Roth Calculator is another example of the JavaScript calculators that I've been getting ChatGPT's help to write. I've also had it write JavaScript programs to calculate Washington State estate taxes, home ownership return on investment, S corporation payroll tax savings, and then the depreciation deductions on a short-term-rental investment.

I'm now way too far into the weeds, but basically what you do is give really precise instructions to ChatGPT, engage in a bit of back and forth, and voila.

[SeattleCPA]

Apologies to everyone who's already suffered through me rolling out these links to screeds about Roth accounts in past, but @Alternatepriorities ? Here's the first blog post in a short series where I step through the tax accounting that shows why most people shouldn't "Roth."

https://evergreensmallbusiness.com/are-roth-iras-and-roth-401ks-really-a-good-deal/

[Alternatepriorities]

Apologies to everyone who's already suffered through me rolling out these links to screeds about Roth accounts in past, but @Alternatepriorities ? Here's the first blog post in a short series where I step through the tax accounting that shows why most people shouldn't "Roth."

https://evergreensmallbusiness.com/are-roth-iras-and-roth-401ks-really-a-good-deal/

Thank you for the blog and the reference link. That is helpful. The calculator predicts my results for Roth vs traditional are the same for any money I might contribute to the Roth, which makes sense and slightly ahead for the Roth using the hybrid model, though I didn't try to finetune the div rates.

DW and I are pretty firmly in the middle of the 12% tax bracket on spending... (Calculated as MFJ = $23,200 to $94,300 + Std Ded =29,200 so the true 12% bracket for MFJ is $54.400 to $123,500) and the middle is $88,990) Before this year we've never spent more than that, although it is possible that when adjusting for inflation we crossed the mid point in some previous year... I see very little chance of our spending ever needing to increase into 22% bracket on a recurring basis.

However we have had a number of years where we have earned well into the 22% bracket. So, my tax strategy for at least the past six years has been to always contribute 100% of income that would fall into the 22% bracket to our Tradition IRA/401k/403b accounts. (In the more distant past I just maxed out my contributions to traditional 401k/403b without a real strategy and I rolled it all into an IRA at vanguard after finding this forum) Any money we earn that is in the 12% bracket but that we are not going to spend is placed first into our Roths and then into taxable investments (mostly Brk.b and VTI). I see the advantage of the Roth in the flexibility to have additional income beyond one of the cut off points for SS taxability or Health insurance in retirement and early retirement respectively. I also expect to use a Roth ladder for early retirement. Otherwise I agree it's a wash on taxes compared to a traditional IRA and most years it's not saving more that the taxes on dividends from VTI compared with a taxable account.

This year is special... Despite my attempt to FIRE I did some work in 2022 and 2023 which I was not paid for until this summer (Family was involved and it was a bit of a mess but it's behind us now). I've also done some work this year I was not expecting... So we are firmly into the the 22% bracket. Lets call it 140k for easy math. No problem, per my normal strategy I should just put 17k into trad 401k/403b accounts and invest the remainder into Roth and taxable. However, I'm also adding onto our house and paying cash as we go. So this year and this year only we are like to spend well into the 22% bracket... Maybe as much as 40k into it. So how to optimize covering this one time expense for taxes?  - I was planning this as it's own topic, but the people most likely to have insights are on this topic anyway and we've drifted into it...

Options:
1) We have enough in money market to cover the difference between our after tax earnings and our total expenditure. We could just accept paying 22% tax this one time on earnings and cover the difference with that.
2) We can borrow from DW's 403b and pay it back over the next five years. We would borrow enough for the project and also to increase our 2024 contributions to said 403b enough to defer earnings in the 22% bracket.
3) I have an inherited Roth IRA that is 2 years into the 10 years before i have to cash it out. There is enough to cover at least half of the needed funds
4) I can sell taxable investments that are appreciated. It's a first in first out account, and the oldest shares have approximately doubled in value, so if I want to avoid paying 15% capital gains on about 1/2 I need to sell enough extra to put even more or our earned income into tax deferred accounts.

I'm leaning towards a combination of 2&3 especially considering SeattleCPA's point about the oversold benefits of Roth growth and that in any normal year of spend we would not pay any capital gains tax, but I'd love to hear other ideas or if someone sees a flaw in the plan.

[seattlecyclone]

I was going to publish a blog post with Roth calculator at the end of the year. But I'll publish it now to let you see how a tax accountant does the math:

Traditional IRA vs Roth Calculator

Super simple to use. You can just click the Calculate button to see how things look using the default inputs. In most cases, the math shows people shouldn't use Roth accounts.

Nice! I played around with it a bit and the results were as I expected: higher tax rate at retirement tends to favor Roth, lower tax rate at retirement tends to favor traditional, equal tax rate is equal (with a slight advantage for Roth in the "hybrid strategy" since you're not paying dividend/capital gains tax on part of the investment). ChatGPT did well.

Small bit of coding advice to improve the display of calculated results: Replace instances of

Code: [Select]

.toFixed(2) with

Code: [Select]

.toLocaleString('en-US', {style: 'currency', currency: 'USD'})
This will make the numbers show up like "$123,456.78" instead of "123456.78".

You could also apply a

Code: [Select]

style="text-align: right" to the numeric table cells to right-justify the numbers, as is typically done in spreadsheets and other financial reports.

Apologies to everyone who's already suffered through me rolling out these links to screeds about Roth accounts in past, but @Alternatepriorities ? Here's the first blog post in a short series where I step through the tax accounting that shows why most people shouldn't "Roth."

https://evergreensmallbusiness.com/are-roth-iras-and-roth-401ks-really-a-good-deal/

That's a long article, but you sum up the main point nicely at the end:

Just to repeat this point, then, the big (massively big) insight one wants to keep in mind? The decision to use or not use a Roth-style account rests almost entirely on the top tax rate you pay today versus the top tax rate you will pay in retirement.

And just to repeat a point I already made (because it’s so important): Most people enjoy higher incomes when they work as compared to when they’re retired, so almost always the Roth-style account only costs an investor more taxes.

I agree entirely with the first paragraph. The second relies on an assumption that lower income in retirement will lead to lower marginal rates. I think the ACA really throws that assumption out the window for people planning to retire significantly earlier than Medicare age. A more nuanced case-by-case examination is now needed.

Just as one example I can point to this recent thread where a family was worried about high RMDs in their old age and wanted to consider pros and cons of doing Roth conversions early in retirement while on ACA insurance in order to avoid RMDs pushing them into a high bracket later on.

I ran some numbers and found they (a married couple with a kid) would experience marginal rates in the 22-30% range when doing Roth conversions on ACA insurance while their AGI is in the relatively low ballpark of $60k-90k. ACA aside, the 22% bracket for a married couple covers taxable incomes in the $94-201k range, and the 24% bracket goes up to $383,900. This seems to indicate they would have been better off contributing directly to Roth while working, even with a gross as high as $400k, rather than doing a Roth conversion to realize this income while on ACA insurance with a gross income of $75k.

But we're really derailing the thread at this point. Bringing it back...

Options:
1) We have enough in money market to cover the difference between our after tax earnings and our total expenditure. We could just accept paying 22% tax this one time on earnings and cover the difference with that.
2) We can borrow from DW's 403b and pay it back over the next five years. We would borrow enough for the project and also to increase our 2024 contributions to said 403b enough to defer earnings in the 22% bracket.
3) I have an inherited Roth IRA that is 2 years into the 10 years before i have to cash it out. There is enough to cover at least half of the needed funds
4) I can sell taxable investments that are appreciated. It's a first in first out account, and the oldest shares have approximately doubled in value, so if I want to avoid paying 15% capital gains on about 1/2 I need to sell enough extra to put even more or our earned income into tax deferred accounts.

I'm leaning towards a combination of 2&3 especially considering SeattleCPA's point about the oversold benefits of Roth growth and that in any normal year of spend we would not pay any capital gains tax, but I'd love to hear other ideas or if someone sees a flaw in the plan.

Option 3 seems fine. Waiting for an extra eight years of tax-free growth could be nice, but it looks like you're talking about a principal amount in the $20k range and your tax rate isn't going to be that high anyway so the opportunity cost of cashing this out early isn't going to be very big.

I'm a fan of Option 4 though. Especially if you have extra room to contribute to retirement accounts, selling taxable stock to fill your tax shelters (and bump yourself down a tax bracket!) can be a great way to go. I know I've done this in recent lower-income years myself where I couldn't just cashflow retirement contributions without selling other investments. Just make sure you've thought through scenarios to access this money pre-59˝ in the event your spouse joins your FIRE. And, per the point above, make sure you're not saving 22% now to pay 30% later.

[SeattleCPA]

Small bit of coding advice to improve the display of calculated results: Replace instances of

Code: [Select]

.toFixed(2) with

Code: [Select]

.toLocaleString('en-US', {style: 'currency', currency: 'USD'})
This will make the numbers show up like "$123,456.78" instead of "123456.78".

Done. This suggestion I could figure out. Thank you.

You could also apply a

Code: [Select]

style="text-align: right" to the numeric table cells to right-justify the numbers, as is typically done in spreadsheets and other financial reports.

Ugh. I can't figure out where to "stick" this. FYI it's ChatGPT's JavaScript. I haven't really programmed since COBOL and RPG III were used. Not joking.

P.S. Really appreciate your feedback. Also I agree with the general point/observation you made which I'm going to summarize as "run the numbers".

[Alternatepriorities]

Options:
1) We have enough in money market to cover the difference between our after tax earnings and our total expenditure. We could just accept paying 22% tax this one time on earnings and cover the difference with that.
2) We can borrow from DW's 403b and pay it back over the next five years. We would borrow enough for the project and also to increase our 2024 contributions to said 403b enough to defer earnings in the 22% bracket.
3) I have an inherited Roth IRA that is 2 years into the 10 years before i have to cash it out. There is enough to cover at least half of the needed funds
4) I can sell taxable investments that are appreciated. It's a first in first out account, and the oldest shares have approximately doubled in value, so if I want to avoid paying 15% capital gains on about 1/2 I need to sell enough extra to put even more or our earned income into tax deferred accounts.

I'm leaning towards a combination of 2&3 especially considering SeattleCPA's point about the oversold benefits of Roth growth and that in any normal year of spend we would not pay any capital gains tax, but I'd love to hear other ideas or if someone sees a flaw in the plan.

Option 3 seems fine. Waiting for an extra eight years of tax-free growth could be nice, but it looks like you're talking about a principal amount in the $20k range and your tax rate isn't going to be that high anyway so the opportunity cost of cashing this out early isn't going to be very big.

I'm a fan of Option 4 though. Especially if you have extra room to contribute to retirement accounts, selling taxable stock to fill your tax shelters (and bump yourself down a tax bracket!) can be a great way to go. I know I've done this in recent lower-income years myself where I couldn't just cashflow retirement contributions without selling other investments. Just make sure you've thought through scenarios to access this money pre-59˝ in the event your spouse joins your FIRE. And, per the point above, make sure you're not saving 22% now to pay 30% later.

Now that I am "retired" I can can recognize a few thousand in capital gains without paying any taxes on it, covert a little bit of traditional IRA to Roth in the 12% bracket, or a combination of the two. That's what we did last year. This year is actually unique of the last three in that we've used all of the 12% tax bracket with our earnings and we are actually going to spend all of it because of the house project. Is there a reason you're not a fan of borrowing from DW's 403b to fund that expense this year and paying it back next year from money in the 12% bracket or with capital gains that isn't taxed at all? I thought I had a pretty good hack figured out, but as my original topic demonstated I could have missed something important.

[seattlecyclone]

One risk with a 403(b) loan is that if you leave the job before the loan is repaid any remaining balance is considered an early distribution from the account. That's obviously less than ideal. You can get around it by making a lump-sum repayment just before quitting, but that might require you to realize some capital gains in a higher bracket than you'd like, which is also less than ideal. A five-year planned repayment period seems long enough that there's a real risk of wanting to leave that job in that time, or a layoff or health situation making that decision for you.

Beyond that there's definitely a time and a place for one of these loans. If you have a big project coming up and have decided that a loan would be a better way to get some short-term liquidity than selling taxable assets, the interest is less than a bank would charge you, but more than you expect your existing fixed-income assets in the 403(b) to pay, it can be a win.

What I'm less sold on is the idea of taking out a 403(b) loan in part so that you can contribute more to your 403(b) this year and go down a tax bracket. For this purpose why not sell some stock and use the proceeds to allow you to bump up the 403(b)? Given that realizing capital gains adds a bit to your AGI and a 403(b) loan doesn't, this does mean you'll need to bump your 403(b) contributions up a bit more this way to stay in the 0% capital gains/15% regular income bracket. However in general I think this can be a good thing to do every year even if you aren't close to a tax bracket boundary. You're essentially transferring funds from a taxable brokerage account to a tax-sheltered retirement account, and I think that's likely to be the right long-term play for many of us. This becomes more and more true the closer you get to the 59˝ age where there's less planning and shenanigans needed to get the money back out again. You enjoy growth on that money free of tax drag from interest or dividends, and likely gain a bit more flexibility on the timing of your income during FIRE.