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Ok, I see there could be an advantage, if I had taxable capitol gains that could be taxed at 0%, but it would cause funds not converted to roth now at 15% to be taxed at 25% when eventually withdrawn or converted later. 0% rather than 15% tax, for a CG, is better than 15% rather than 25% for the conversion.
It will be something to think about if I sell some property.
If you convert to a Roth before you are 59 1/2 years old, don't you have to pay the 10% penalty for early withdrawal? Also when you do the conversion that new Roth can't be touched for 5 years without penalty, right? I believe I read that this is why people open a new Roth for each conversion--to simplify record keeping.
Ugh... So I finally sat down this morning & did a first prelim tax workup for collecting SS at 70 as best I could considering it is a bit more than 4 years away. Using 2018's Standard Deduction/Personal Exemption, & not including any interest/dividends since they are a pretty small amount & keeping my pre-tax account at the high end of this year's range for the RMDs I come out to being $240 over the line to have my SS taxed at 85%... ouch!
In the realm of problems having a bit too much money is a good one but it's such a small amount. So I'm thinking about what to do: take SS earlier, be more spendy now to bring down my pretax accounts (pushing me now into the 25% bracket) - why not enjoy the $ now - or convert some to a Roth IRA each year also pushing me into the 25% bracket for those, & future years.
I guess I'm leaning towards the Roth conversion option but maybe I should spend some extended time in exotic locations while I'm active & healthy instead? I'll have to figure out what amount will bring me safely under the 85% line for future years
Ugh... So I finally sat down this morning & did a first prelim tax workup for collecting SS at 70 as best I could considering it is a bit more than 4 years away. Using 2018's Standard Deduction/Personal Exemption, & not including any interest/dividends since they are a pretty small amount & keeping my pre-tax account at the high end of this year's range for the RMDs I come out to being $240 over the line to have my SS taxed at 85%... ouch!
Understand that it's really a range of income where this is happening. Imagine you are pulling money out of your deferred account one dollar at a time, with each dollar having its own tax rate. So just as a hypothetical, the first dollar coming out might be taxed at 10%. Same for the second dollar, third, etc.
If you pull enough out, eventually the dollars will be taxed at 15%. And if you pull even more, eventually your SS benefits will start to be taxed, but not all at once. For each dollar you pull out of the deferred account, 85 cents of your SS benefit will become taxable. So let's say you are still in the 15% bracket. Pull out one dollar that is taxed directly at 15%, but then you also have 85 cents of SS benefit taxed at 15%. So your effective tax rate is 15% x 1.85 = 27.75%. This same phenomenon can happen in the 25% bracket, and if that happens you would be paying an effective rate of 25% x 1.85 = 46.25%.
Then once 85% of all your SS benefits are being taxed, your effective rate will drop back down the usual 15%/25%/28%/etc brackets.
So your task right now should be to estimate the effective tax rate you'll be paying on the money you pull from the deferred account, remembering that all of those dollars may not be taxed at the same rate. If you estimate hitting that 46.25% effective rate then yes, absolutely do some Roth conversions before you hit age 70. If it's just the 27.75% rate then there's not much difference if you'd be paying 25% on the Roth conversion.
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
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Originally Posted by Hefe
Ugh... So I finally sat down this morning & did a first prelim tax workup for collecting SS at 70 as best I could considering it is a bit more than 4 years away. Using 2018's Standard Deduction/Personal Exemption, & not including any interest/dividends since they are a pretty small amount & keeping my pre-tax account at the high end of this year's range for the RMDs I come out to being $240 over the line to have my SS taxed at 85%... ouch!
In the realm of problems having a bit too much money is a good one but it's such a small amount. So I'm thinking about what to do: take SS earlier, be more spendy now to bring down my pretax accounts (pushing me now into the 25% bracket) - why not enjoy the $ now - or convert some to a Roth IRA each year also pushing me into the 25% bracket for those, & future years.
I guess I'm leaning towards the Roth conversion option but maybe I should spend some extended time in exotic locations while I'm active & healthy instead? I'll have to figure out what amount will bring me safely under the 85% line for future years
I vote for all... diligent tax / withdrawal planning; Roth conversions when optimal; Spending NOW; living in / traveling to some exotic locations while physically and financially able. (This does not have to be expensive). Since we like to be embedded with the local culture, we volunteer at international schools. Our 'work'(?) tasks are simple, but it gets us into the communities (buying supplies, hiring helpers, finding treasures at remodeling and repair shops) and a chance to meet and stay with locals, and plenty of time to travel to nearby destinations (plus free room and board).
Airfare and traveling is still very cheap and ez and accessible and relatively safe. All that can change very quickly. Leave SOON!
BTW: where do you want to go? Sounds exciting.
While there... you can work out your future Plenty of free time!
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Plenty of free time!
