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From: Tom Elam <thomas.e.elam@gmail.com>
Newsgroups: comp.sys.mac.advocacy
Subject: Re: Very OT meant for Hugh H - Roth or no-Roth
Date: Thu, 19 Dec 2024 10:30:09 -0500
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On 12/13/2024 4:41 PM, -hh wrote:
> On 12/13/24 3:24 PM, Tom Elam wrote:
>> On 12/9/2024 8:16 PM, -hh wrote:
>>> On 12/9/24 3:36 PM, Tom Elam wrote:
>>>> On 12/8/2024 5:23 PM, -hh wrote:
>>>>> On 12/8/24 9:37 AM, Tom Elam wrote:
>>>>>> I have spent some quality time looking at Roth conversions. Wow, 
>>>>>> that gets complicated in a hurry. 
>>>>>
>>>>> It does, and in different ways/factors.
>>>>>
>>>>> For example, the "how much can I convert this year" stuff isn't too 
>>>>> hard to figure out if you're under age 63, but at 63+ one has to 
>>>>> add the relevant IRMAA bracket to fit under.
>>>>>
>>>>> Where it get complicated in a hurry with IRMAA is the risk of 
>>>>> busting a bracket .. converting as much as one dares without going 
>>>>> over .. which requires figuring out what one's total income is 
>>>>> going to be with sufficient precision.  Its not hard for simple use 
>>>>> cases, but when there's a taxable brokerage account with Mutual 
>>>>> Funds, the curveball is that their decision on end-of-year payouts 
>>>>> can be made with minimal advanced notice: an investor needs to seek 
>>>>> out their projected estimates and then also the declared ones...the 
>>>>> closer that one is to an IRMAA, the more important this fine detail 
>>>>> on income becomes.
>>>>>
>>>>> For example, I've been tracking PJFAX's 'Special Dividend' and the 
>>>>> gotcha here has been that their final decision (this past weekend) 
>>>>> was for a payout of $7.3309/shar, which exceeded their previously 
>>>>> published preliminary MAX estimate from last month by +3%.  Sure, 
>>>>> its a nice windfall, but if one has 10K shares in that fund, that 
>>>>> 3% is an extra $2000 of income that you weren't planning for.  
>>>>> Thus, the Roth Conversion question is "did you leave yourself 
>>>>> enough safety margin for this magnitude of a surprise?".
>>>>>
>>>>> Likewise, some funds don't declare until very late ... I have one 
>>>>> that's 12/23:  what's the leadtime required for doing a Roth 
>>>>> Conversion?  That deadline is set by whoever runs the 401k/IRA 
>>>>> account.
>>>>>
>>>>>> Bottom line is it's not at all clear that there are benefits for me. 
>>>>>
>>>>> True, at your age, the benefit potential is less "you" and more of 
>>>>> your heirs.  It may be lower taxes for them to pay, or just 
>>>>> "easier" by not being a time-sensitive timeline: the answer depends 
>>>>> on each heir's individual financial situation & tax bracket.
>>>>>
>>>>>> So much depends on assumptions and goals. You would need to do a 
>>>>>> complex probabilistic Monte Carlo analysis including tax policy 
>>>>>> changes, longevity, market returns, and more. 
>>>>>
>>>>> Adding additional variables only makes sense to do if they add more 
>>>>> insight than just noise.  Some don't really matter because of A*B = 
>>>>> B*A symmetry:  (Investment*(1-tax)*growth) = (Investment*growth*(1- 
>>>>> tax)).
>>>>>
>>>>> For tax policy change risks, 2024 taxes have a zero risk of change. 
>>>>> For 2025 & beyond, the best case (lowest tax) scenario is probably 
>>>>> just an extension of the 2017 TCJA but how likely is that really, 
>>>>> despite Trump going back into office in the context of how the 
>>>>> GOP's been beating the drum on the debt?  We're probably a lot 
>>>>> better off moving to a much more defensive investment posture than 
>>>>> worrying about a few points of tax rate changes.
>>>>>
>>>>>> Plus, your goals key. For me it comes down to wanting to leave my 
>>>>>> estate to charitable entities and some family members, doing so 
>>>>>> with as little tax liability for them as possible. 
>>>>>
>>>>> For that type of scenario, the family member's likely tax rate for 
>>>>> the ten years starting at the time of your Estate distribution is 
>>>>> what will impact them, if they receive tax-advantaged accounts.  If 
>>>>> they receive Roth or conventional brokerage, they'll end up with 
>>>>> more and with more flexibility on if/when taxes become due.
>>>>>
>>>>> For charities, they're a lot more straightforward, since they don't 
>>>>> have to pay taxes...but there's also the option of a Donor Advised 
>>>>> Charitable Fund (DAF) while you're still living.  There's a couple 
>>>>> of scenarios where this can make sense to do (eg, stacking to gain 
>>>>> tax credit instead of the STD Deduction), plus a motivation can be 
>>>>> that one is still alive to see the good work that comes from having 
>>>>> made the donation.
>>>>>
>>>>>> I am doing something different from Roth, reinvesting RMD and 
>>>>>> other investment income into income-producing assets. 60% was put 
>>>>>> back this year, not spent. Amazing how fast that compounds into 
>>>>>> even more income.
>>>>>
>>>>> The compounding is even faster when pre-RMD age & recycling 100%. /s
>>>>>
>>>>>
>>>>> -hh
>>>>
>>>> You missed one very important point that I told you earlier. We are 
>>>> giving a large portion of the estate to charities. They will have 
>>>> zero taxes. 
>>>
>>>
>>> See above:  "For charities, they're a lot more straightforward, since 
>>> they don't have to pay taxes..."
>>>
>>> It is intuitively obvious to then gift them from tax-advantaged 
>>> accounts (eg, 401k/IRA).
>>>
>>>> The portion that goes to individuals is, for the most part, not tax 
>>>> advantaged. 
>>>
>>> As a basic strategy, sure, but when the assets are mixed (tax- 
>>> advantaged and non-advantaged) going to individuals, this is where 
>>> the marginal income tax rates of beneficiaries can also be a factor 
>>> to include.
>>>
>>> For a KISS example, consider having $400K that's $200K advantaged & 
>>> $200K non-advantaged split evenly between two heirs who are in 
>>> different marginal tax brackets (KISS:  10% and 30%): if one 
>>> bequeaths equal portions from each account .. $100K from advantaged + 
>>> $100K non-, then:
>>>
>>> Heir A net after taxes receives ($100K + (1-10%)*$100K) = $190K
>>> Heir B net after taxes receives ($100K + (1-30%)*$100K) = $170K
>>>
>>> That's longer equal after taxes, and sums to $360K Net.
>>>
>>> A different distribution plan could be:
>>>
>>> Heir A: ($50K + (1-10%)*$150K) = $185K
>>> Heir B: ($150K + (1-30%)*$50K) = $185K
>>>
>>> Not only does this net out to be more equal between the heirs, but 
>>> note that the total net sum after taxes is higher too:  $370K.  
>>> That's $10K saved from taxes which goes to the heirs instead.
>>>
>>>
>>>> As the RMD funds come in I'm investing some of that and ordinary
>>>> income into equity-based income funds. That's my "Roth" piece. I get 
>>>> the income now, they get the appreciation later. Those funds are 
>>>> taxed 100% ordinary income until you sell, then capital gains. But 
>>>> the individuals get a one time step-up basis, so no gains if they 
>>>> sell right away. So their income tax will also be zero, or close to 
>>>> it. And I'm happy to pay the taxes on the income from the equity 
>>>> funds in the meantime.
>>>
>>> Yup, which is what I was alluding to when I noted "...with more 
>>> flexibility on if/when taxes become due."
>>>
>>>> That capital gains distribution thing from a fund I once owned 
>>>> kicked my butt a few times. I sold that portfolio 4 years ago. It 
>>>> was low dividend yields, high expense ratio, and the gains were 
>>>> automatically reinvested. It was generating tax liabilities, 
>>>> brokerage house fees, and no income. I was also under-performing the 
>>>> S&P. Negative cash flow is not my idea of a good investment for a 
>>>> retiree. At least I am now getting income that is way in excess of 
>>>> the tax liability and the much lower (0.35% versus 1.6%) expense ratio.
>>>
>>> Expense ratios and Brokerage fees are a much greater portfolio 
>>> resource suck than many realize.  I've calculated that I've paid out 
>>> more than $100K more than I really should have had to have paid.  Its 
>>> also useful to have contextual insight on what the Expense ratio fee 
>>> in the context of what the market segment is.  For example, 
>>> International Funds have a higher average Expense Ratio than US Large 
>>> Cap.  There's also some fund providers who range higher than their 
>>> competitors too, etc.
>>>
>>>
>>> -hh
>>
>> As I pointed out I have planned for non-tax advantaged funds to go 
>> entirely to individuals. Those individuals are mostly grandchildren 
>> likely to be in a low tax bracket when the windfall comes.
>>
>> We have appointed a financial estate executor and given explicit 
>> instructions on what funds go where with the goal to minimize all 
>> beneficiaries' federal and state income taxes.
> 
> Well planned; a challenge here is to configure things suitably with the 
> accounts which offer TODs to bypass probate (& end of life medical 
> claims).  One strategy is to pipe 'everything' into a Trust, which then 
> determines the distributions, but I'm not necessarily convinced, as the 
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