Someone who has a lot of investment capital often has control as to when to realize capital gains and losses for various investments owned that could be sold.
A retiree with lots of traditional IRA account money can control when to take taxable distributions (beyond the required minimum distributions) or conversions to Roth.
MY bad, based on this article.
so in the future , pls read the article, especially if it appears on Forbes.
A couple pages back someone asked about Roth conversions. If anyone is aware of an article that explains the pros and cons in a clear, not highly technical way, Iâd love to hear about it too.
While I keep up with this forum, I have to be honest: I donât understand everything I read. Dh and I are under 60 but have retired. Our retirement accounts are IRA/401k and not Roth. Iâve been curious about whether a conversion is something we should consider but dh believes itâs not. With some planning, I do believe we could have a zero income year aside from perhaps some dividends. While dh may be right, Iâd really like to understand it better.
@collage1, hereâs an explanation from the Bogleheads wiki â
Well, BIL explained he wanted life insurance to pay off his $280k mortgage on his house. I said, why? You will be gone and proceeds from selling the house will be much higher than that.
Actually H believes he really should sell one or both houses and get a smaller place. His current place is really too much house for him. He doesnât want to move because heâs lived here SO long (decades) and it would require him to make significant lifestyle changes and downscale all his âstuff.â His pit bull wouldnât be suitable in a small or no yard dwelling either.
Heâs very softhearted and I just donât see him as a landlord. I certainly understand his low cash flow with his mortgage, dental practice and the money to maintain his huge home.
I think BIL and many of us are sentimental about homesâthe other property he owns belonged to his sister.
His S is making barely minimum wage with no benefits and living at home. His D is a teacher so making a fairly low salary for Bay Area as well. The S has some impulse control issues and isnât very good at saving money or budgeting. He may need a special needs trust or similar.
That sounds like a difficult situation with the son, @HImom. I guess if BIL wants to bequeath the house to the son without a mortgage, I guess that life insurance makes sense. But, I think he needs to work out a financial plan. How is he going to support himself (and his son?) when he retires?
I had dinner with ShawD last night. Taco Tuesdays at a restaurant near the clinic where she works. Sheâs told a few friends that we are planning on selling/downsizing from the 5BR house where she lived from age 2 to 18 (and then comes back to for things). She said three friends all asked her if this would be difficult for her because of all the memories. She said, âI have the memories. I donât need the house.â I feel the same way. No sentiment here.
@collage1, even if your husband thinks heâs not interested in converting to a Roth, if you have years with zero income, itâs a must. In a nutshell, however much you convert to a Roth, you will pay taxes on, when you file that yearâs taxes. But you will never pay taxes on the Roth again. If it grows to millions of dollars, you wonât pay taxes on any of it. No RMDâs either. So if you have a zero income year that you could pay no/low taxes on the conversion, to not convert some of it would be like flushing money down the toilet. And instead of doing that, would you just give it to me? Please??
@busdriver11, thank you for the response. Dh disagrees which is why I need to educate myself better and be able to share with him information, particularly information from people in the field. I donât know how we could pay ânoâŠtaxes on the conversionâ though. And I donât know the tax brackets well enough to know about âlowâ taxes either. And, while I would see an advisor in a heartbeat, dh will not. Having said all that, dhâs career was in finance and he has done a great job with our investments over the life of our long marriage. I just believe this one issue is one worth exploring further.
If your income MFJ is below $19,401, your federal tax is 0. Your state may tax you. You could have 0 income and convert 19,401 every year. If you do, I donât know what you would live on.
@collage1, as far as zero taxes, consider this. You pay taxes on your Roth conversion at current income tax rates. Say you have zero income this year. Convert 24K into a Roth, which gives you 24K in income. But standard deduction for married filing jointly is 24K, leaving you with zero income and taxes after the conversion, and 24K in a Roth whose growth will never be taxed.
There are some caveats if you have other IRAâs, so itâs not for everyone. But Iâm surprised that since your husband is a professional in this field, knowing you two could have zero income years, that heâs writing this off. I wonder if he has a specific reason that this wouldnât work for you, or if he just hasnât given it any thought. Maybe he has a philosophical desire to not avoid taxes, unlike most of us! Definitely worth learning about or consulting a professional on your own if need be.
People with no taxable income could be living off of their savings.
Where does the saving come from? Do they already have cash lying around? Or do they have to liquidate assets in preparation that will generate excessive income?
concur with busdriver. Doing tIRA conversions to Roths is a no-brainer for someone in a no/low income bracket, particularly prior to taking SS. Itâs also beneficial to children as heirs, since they are presumably working, and in a higher tax bracket than the retired parents. We plan on doing conversions up to the 24% bracket which is about where IRMMA kicks in.
Tax brackets can be found online. here is one example.
Liquidating assets in savings to provide money to live off of does not necessarily generate significant income. For example, using money from bank accounts or money market mutual funds does not ordinarily result in taxable income. Indeed, a typical bottom-90% labor-class family whose pay-earner(s) become unemployed probably lives on spending this kind of savings until the pay-earner(s) find another job.
Even those who have securities which may have unrealized capital gains and losses may choose to sell some of those with losses to balance out the gains from the sale of those with gains, resulting in close to zero net capital gain income. Obviously, the more successful investors will have more gains than losses, so they may not be able to avoid realizing gains indefinitely. But job-losers in 2008 or so may have had a lot of losses to choose from if they had to liquidate securities for money to live on.
Adding to @ucbalumnus comment above, even those w/o losses can take advantage of the zero percent capital gains space, assuming their incomes qualify.
âThe zero percent tax rate on long-term capital gains applies to certain income tax brackets. In 2018, married tax filers with taxable income up to $77,400 and single tax filers with taxable income up to $38,700 will be in the 12 percent tax bracket and are eligible for zero percent long term capital gain tax rates.â
Thatâs a good point. For capital gains, zero tax limit is higher. That should help.
I am sure college1 will figure it all out but I am not sure converting to Roth is necessarily better if one plans to spend all the money from the IRA account in retirement. If it wonât be spent and will be inherited by kids, it would be advantageous.
@CT1417
I thought traditional IRA widthdraws are all taxable at current income rate, not at Capital Gain rate, so your comments does not apply. The best way to figure out the tax liabilities, if you use turbotax or the like, is to make a copy of the current tax filing and rename it to some thing else like âtax modelingâ and fill it out as if you are filing next yearâs tax, but add that intended widthdraw/roth conversion into the software. You will find out the tax due soon enough.
I donât think long term capital gains rates apply to IRA Roth conversions, you pay taxes at current income tax rates. You are paying taxes on income that has never been taxed. I am correct about that, or wrong?
I donât know how not converting to Roth when you could pay zero or extremely low tax rates on the conversion would not be better. In all cases. Except if you have a philosophical desire for you or your children to pay more taxes.
@artloversplus I think CT1417 meant for living expenses one could liquidate assets. The capital gains from it wonât be taxed if your total income is below $78K. If you are liquidating stocks that appreciated 100%, when you sell $100K, your capital gains income will be $50K, and you have $100K to spend in your pocket. It is a good suggestion to run it on TurboTax since you would pay 12% tax rate for income over $19,401. It gets a bit tangled. Is $19401 excluding CG?