Major life change, need to reverse AA distribution in tIRA vs taxable

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DebiT
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Joined: Sat Dec 28, 2013 1:45 pm

Major life change, need to reverse AA distribution in tIRA vs taxable

Post by DebiT »

I am recently (2years) widowed, age 63 and newly retired, and am just now realizing that not only has everything else in my life changed, but also that my AA distribution as noted above needs to change, else my RMD's at age 72 are going to be a problem. Plan was that husband and I would work in our self-employed careers until 70, have SS and RMD's unavoidably at same time, and no ability to do Roths due to income. Now, it's all reversed.

I have a long thread going here
viewtopic.php?f=2&t=351468 where I am asking many questions about a Roth conversion strategy.

My question here is, how in the world can I change the distribution of my overall AA of 35/65 to get much more fixed income into the tIRAs to slow down the rate of growth there?

Here is my general info, with portfolio specifics below that.

Age 64 very very soon. Widowed 2 yrs, on survivor SS of 27504 until I take my own full benefit at age 70 of 42910. I use age 100 for life expectancy. My mom is a very healthy if physically slow 90, and her sister died at 93. Live in California, where SS is not taxed.

Portfolio is invested stock / bonds / cash at 34/60/6 overall, totaling just under $2M

Retirement money is mostly my 401K, a little of his IRA which is now mine. $1,385,00 invested 43/57/0

Taxable account is $603,400, invested per Rick Ferri at 15/66/19. Includes life insurance money which has taken me awhile to realize is part of my total portfolio, not a protected bucket. Taxable account last year generated $11,600 in dividends, $1183 in qualified dividends. I had appt with Rick around Jan 2020 to get advice as to how to generate income from my taxable accounts, and preserve my life insurance money. Will probably book another session with him to review whatever plan this wonderful forum is able to help me come up with.

If I make no conversions, RPM and other calculators estimate an RMD of just under $70K if growth is 3%. If it's 4%, it could go as high as $74K. My current survivor SS is 27504. My own benefit at 70 will likely be 42910

I think it's reasonable to expect that current tax law will stand, meaning that rates will go up in 2026. My 2 sons are high earners, but I cannot be concerned about legacy, at least not until I get my own situation clarified.

At this time, let's leave expenses in general out of this. I've run that many many ways and I am basically fine, but obviously want to mitigate the income tax hit as much as possible.

I should also share that I will feel very strange about reducing or completely using up that taxable account, but I want to do what is wise for the long term.

***********************
Portfolio review

Emergency funds: not relevant at this time.

Debt: 0

Tax Filing Status: Single

Tax Rate: 22% Federal, 2% State. This is where some confusion comes in. Talking to CPA, to clarify how dividends and Social Security interact.

Currently collecting SS survivor's benefit 27504, will claim my own higher benefit 42910 at 70.

State of Residence: California

Age: 64

Desired Asset allocation: 35% stocks / 65% bonds
Desired International allocation: 40% of stocks . As I write this it feels high.

Total portfolio about $1.9M.
Current total assets: Also own house free and clear. Would sell if necessary in extreme old age to rent or go to assisted living.

Accounts:

Taxable 30% of my total assets


7% cash
13% SWVXX Schwab Value Advantage money fund
12% VTI Vanguard Total Stock EFT ER .04
2% VXUS Vanguard Total International EFT ER 0.11
66% SCHZ Schwab US Aggregate Bond ER 0.04

My 401k and My IRA from husband combined 70% of my total assets

19% VTI Vanguard Total Stock EFT ER .04
15% VXUS Vanguard Total International EFT ER 0.11
4% XLU (have held for a very long time, good dividends last I checked)
6% RWO Spider Index Dow Jones Global RE ETF ER 0.50
28% BND Vanguard Total Bond EFT ER 0.05
13% PONAX Pimco Income Fund ER 0.79
13% TOTL Spider DoubleLine Total Return Tactical ETF ER 0.55
2% FAX (have held for a very long time, good dividends last I checked) Aberdeen Asia Pacific Income Fund ER 1.09

Roth IRA for conversions
$500, just opened.

Expenses in retirement pre-tax . I use $82K which includes exorbitant travel and "etc" budget. Reality is less than $58k, so currently $24K-$31 residual expense.

Life expectancy. Using 100 based on family longevity into early 90's.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
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grabiner
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by grabiner »

Talking to CPA, to clarify how dividends and Social Security interact.
You will probably have enough income that 85% of your Social Security will always be taxable. While this increases your taxes, it makes the computations simpler. (You may need to recheck this at ages 70 and 71; if you aren't spending much and thus don't need to withdraw much from the traditional IRA/401(k), you might still be in the phase-in. But for now, plan on 85% taxable.)

It is particularly attractive for you to hold stock in your taxable account, because you may never pay tax on the capital gains if you leave the stock to your heirs. Therefore, it makes sense to sell the SCHZ (Schwab Aggregate Bond) in your taxable account to buy more VTI and VXUS in the taxable account. I would suggest selling all the SCHZ, and selling an equal amount of stock in the IRA to buy a bond fund.

The other way to avoid increasing taxes on RMDs is to convert the traditional IRA to a Roth IRA. It's probably worth converting up to the top of the 22% bracket every year, but probably not into the 24% bracket. You want to pay taxes on any conversion from your taxable account, as this gives you more tax-deferred growth; it is worth converting even if you have to sell stock for a taxable capital gain.
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marcopolo
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by marcopolo »

it should actually be pretty easy for you to get to your desired overall 35/65 AA

1) You have 30% in taxable account. You already have positions in VTI and VXUS. You could sell all your other holdings there and put it in your desire US/International mix by adding to VTI and VXUS accordingly. There should be little or no tax consequence for doing so, since the bond and money market funds likely have little unrealized capital gains.

2) Your tIRA is more complicated than it needs to be. Fortunately, there is no tax consequences for selling and buying in a tax-deferred account. Easiest would be to liquidate everything and purchase 5% of total potfolio in equities, (VTI or VXUS would be just fine), to get to your overall 35% in desired equity allocation. Then stick the rest of the tIRA funds into one or two low cost bond (or money market, if desired) funds.
Once in a while you get shown the light, in the strangest of places if you look at it right.
DSBH
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by DSBH »

DebiT wrote: Fri Jun 18, 2021 7:16 pm ...
I have a long thread going here
viewtopic.php?f=2&t=351468 where I am asking many questions about a Roth conversion strategy.
...
Portfolio is invested stock / bonds / cash at 34/60/6 overall, totaling just under $2M

Retirement money is mostly my 401K, a little of his IRA which is now mine. $1,385,00 invested 43/57/0

Taxable account is $603,400,
...
My question here is, how in the world can I change the distribution of my overall AA of 35/65 to get much more fixed income into the tIRAs to slow down the rate of growth there?
...

If I make no conversions, RPM and other calculators estimate an RMD of just under $70K if growth is 3%. If it's 4%, it could go as high as $74K. My current survivor SS is 27504. My own benefit at 70 will likely be 42910
...
Expenses in retirement pre-tax . I use $82K which includes exorbitant travel and "etc" budget. Reality is less than $58k, so currently $24K-$31 residual expense.

Life expectancy. Using 100 based on family longevity into early 90's.
If you decide not to do Roth IRA conversion - as you rebalance to maintain your desired portfolio AA of 35/65:
---------- 1) Your Taxable account could hold mostly stock, and
---------- 2) Your T-IRA account could hold mostly bond with some stock %,
as suggested above.

If you decide to do Roth IRA conversion (e.g. to the top of 22% till 72 - Roth withdrawal might be needed later in life as Taxable account might get depleted) - as you rebalance to maintain your desired portfolio AA of 35/65:
----- A) Assuming that the desired individual account AAs are 100/0 for Taxable and ROTH, and 0/100 for T-IRA - some rebalancing cost might occur:
---------- 0) Your Roth IRA will grow your stock allocation as you convert, so
---------- 1) Your Taxable would become mostly bond (hence rebalancing cost) after a number of years as stock allocation is picked up by Roth, and
---------- 2) Your T-IRA account could hold mostly bond with some stock %.
----- B) An alternative is to hold the same AA fund in all accounts so virtually no rebalancing is required (One-Fund-Portfolio). For instance if your desired AA is 40/60, the Vanguard LifeStrategy Conservative Growth Fund would be a decent selection imho.
John C. Bogle: "Never confuse genius with luck and a bull market".
Topic Author
DebiT
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Joined: Sat Dec 28, 2013 1:45 pm

Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by DebiT »

DSBH wrote: Sat Jun 19, 2021 12:37 pm
DebiT wrote: Fri Jun 18, 2021 7:16 pm ...
I have a long thread going here
viewtopic.php?f=2&t=351468 where I am asking many questions about a Roth conversion strategy.
...
Portfolio is invested stock / bonds / cash at 34/60/6 overall, totaling just under $2M

Retirement money is mostly my 401K, a little of his IRA which is now mine. $1,385,00 invested 43/57/0

Taxable account is $603,400,
...
My question here is, how in the world can I change the distribution of my overall AA of 35/65 to get much more fixed income into the tIRAs to slow down the rate of growth there?
...

If I make no conversions, RPM and other calculators estimate an RMD of just under $70K if growth is 3%. If it's 4%, it could go as high as $74K. My current survivor SS is 27504. My own benefit at 70 will likely be 42910
...
Expenses in retirement pre-tax . I use $82K which includes exorbitant travel and "etc" budget. Reality is less than $58k, so currently $24K-$31 residual expense.

Life expectancy. Using 100 based on family longevity into early 90's.
If you decide not to do Roth IRA conversion - as you rebalance to maintain your desired portfolio AA of 35/65:
---------- 1) Your Taxable account could hold mostly stock, and
---------- 2) Your T-IRA account could hold mostly bond with some stock %,
as suggested above.

If you decide to do Roth IRA conversion (e.g. to the top of 22% till 72 - Roth withdrawal might be needed later in life as Taxable account might get depleted) - as you rebalance to maintain your desired portfolio AA of 35/65:
----- A) Assuming that the desired individual account AAs are 100/0 for Taxable and ROTH, and 0/100 for T-IRA - some rebalancing cost might occur:
---------- 0) Your Roth IRA will grow your stock allocation as you convert, so
---------- 1) Your Taxable would become mostly bond (hence rebalancing cost) after a number of years as stock allocation is picked up by Roth, and
---------- 2) Your T-IRA account could hold mostly bond with some stock %.
----- B) An alternative is to hold the same AA fund in all accounts so virtually no rebalancing is required (One-Fund-Portfolio). For instance if your desired AA is 40/60, the Vanguard LifeStrategy Conservative Growth Fund would be a decent selection imho.
Can you clarify what you mean by rebalancing cost in the taxable account? Do you mean eventually I would need to sell stocks, incurring tax charges? Or does it mean something else?

This question is reminding me that as a result of loaning our corporation money, some of which was not repaid, apparently I have a large carryforward capital gains loss. I have to re-educate myself on that. I imagine that might help down the road. It's quite possible that the taxable account would also get fully depleted due to Roth conversions and paying my own expenses. I guess that again that is what would create some capital gains, when I would have to sell stock.

Lots of moving parts.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
DSBH
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Location: Texas

Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by DSBH »

DebiT wrote: Sat Jun 19, 2021 6:07 pm '''
Can you clarify what you mean by rebalancing cost in the taxable account? Do you mean eventually I would need to sell stocks, incurring tax charges? Or does it mean something else?
...
Yes, as you keep converting and adding stock to a growing Roth IRA account, at some point you might need to rebalance by selling stock and buying bond in the Taxable account in order to maintain the desired portfolio AA of 35/65.

Alternatively you could also relax your desired 100/0 AA for Roth IRA account, rebalance using the Roth IRA account and as a result add bond to the Roth IRA holding, and maintain desired AAs of mostly stock in Taxable account and mostly bond in T-IRA account and 35/65 portfolio AA target.
John C. Bogle: "Never confuse genius with luck and a bull market".
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goingup
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by goingup »

marcopolo wrote: Fri Jun 18, 2021 8:11 pm it should actually be pretty easy for you to get to your desired overall 35/65 AA

1) You have 30% in taxable account. You already have positions in VTI and VXUS. You could sell all your other holdings there and put it in your desire US/International mix by adding to VTI and VXUS accordingly. There should be little or no tax consequence for doing so, since the bond and money market funds likely have little unrealized capital gains.

2) Your tIRA is more complicated than it needs to be. Fortunately, there is no tax consequences for selling and buying in a tax-deferred account. Easiest would be to liquidate everything and purchase 5% of total potfolio in equities, (VTI or VXUS would be just fine), to get to your overall 35% in desired equity allocation. Then stick the rest of the tIRA funds into one or two low cost bond (or money market, if desired) funds.
:thumbsup
Seems like the perfect answer to me.
Topic Author
DebiT
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Joined: Sat Dec 28, 2013 1:45 pm

Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by DebiT »

I will be doing this tomorrow. I should end up with tIRAs at 14/86, and with taxable at 81/19 right away. Later when I do a Roth conversion that ratio will change again.

Later in the year, when I figure out Roth conversion amount, I'll transfer much of RWO to Roth as the conversion. I figured I shouldn't replace that in taxable since it generate dividends.

1. Can I get a quick lesson in taxes regarding dividends vs long term capital gains in taxable accounts? I believe I have a very sizable long term capital gains carryforward loss. That won't apply against dividends, correct? And, when money comes out of Roth, dividends and cap gains don't apply, is that correct? I know I could look this up but might as well append that question.

2. My major question is, if my target for VXUS is no more than 15% of total portfolio of $1.98M = just under $300K (generates some foreign tax credit) , my current RWO+XLU is 7% (which will stay in tIRA or end up in Roth) , and my therefore my target for VTI is at least 13%, what proportion of VTI vs VXUS would be suggested in the taxable account. I have close to $400K in taxable account currently in bond fund where I'll be buying a combination of VXUS and VTI. I'll still have positions in those in the tIRAs as well.

Just for clarity, and sorry, I don't know how to insert a table

VTI tIRA 246000 taxable 14300
VXUS tIRA 205000 taxable 74300
Can buy approx 400000 in taxable account of VTI/VXUS. Want to maintain current totals, am asking what ideal proportion of VTI/VXUS in taxable would be

Thanks so much
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
retiredjg
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by retiredjg »

About conversions...since you are single, you can convert very little while remaining in the 22% bracket (up to an AGI of about $98,925). And if you go all the way to $98,925, you are into IRMAA territory which will increase your Medicare premiums.

If you don't want to get into IRMAA territory, your AGI needs to be less than about $87k...which will mean the conversions will be very small.

The point I'm trying to make is you need to work out the numbers on this. If you are going into IRMAA territory, I'd go past the top of the 22% bracket but stay under the next IRMAA tier.

Since you will be in the 25% tax bracket when taxes revert to previous rates in 2026, you might want to make larger conversions now (paying the IRMAA piper) and cut back to smaller conversions later.

With about $1.3 million in tax-deferred accounts, as a single person I think you could be facing some RMD issues. You didn't mention a pension so maybe you will be needing money from the tax-deferred accounts anyway. That will help.
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DebiT
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by DebiT »

retiredjg wrote: Sun Jun 20, 2021 1:32 pm About conversions...since you are single, you can convert very little while remaining in the 22% bracket (up to an AGI of about $98,925). And if you go all the way to $98,925, you are into IRMAA territory which will increase your Medicare premiums.

If you don't want to get into IRMAA territory, your AGI needs to be less than about $87k...which will mean the conversions will be very small.

The point I'm trying to make is you need to work out the numbers on this. If you are going into IRMAA territory, I'd go past the top of the 22% bracket but stay under the next IRMAA tier.

Since you will be in the 25% tax bracket when taxes revert to previous rates in 2026, you might want to make larger conversions now (paying the IRMAA piper) and cut back to smaller conversions later.

With about $1.3 million in tax-deferred accounts, as a single person I think you could be facing some RMD issues. You didn't mention a pension so maybe you will be needing money from the tax-deferred accounts anyway. That will help.
This is what I’m going to have to figure out next, how much to convert, and what sort of IRMAA penalty I’m willing to live with .
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
DSBH
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by DSBH »

DebiT wrote: Sun Jun 20, 2021 1:09 pm I will be doing this tomorrow. I should end up with tIRAs at 14/86, and with taxable at 81/19 right away. Later when I do a Roth conversion that ratio will change again.

Later in the year, when I figure out Roth conversion amount, I'll transfer much of RWO to Roth as the conversion. I figured I shouldn't replace that in taxable since it generate dividends.

1. Can I get a quick lesson in taxes regarding dividends vs long term capital gains in taxable accounts? I believe I have a very sizable long term capital gains carryforward loss. That won't apply against dividends, correct? And, when money comes out of Roth, dividends and cap gains don't apply, is that correct? I know I could look this up but might as well append that question.

2. My major question is, if my target for VXUS is no more than 15% of total portfolio of $1.98M = just under $300K (generates some foreign tax credit) , my current RWO+XLU is 7% (which will stay in tIRA or end up in Roth) , and my therefore my target for VTI is at least 13%, what proportion of VTI vs VXUS would be suggested in the taxable account. I have close to $400K in taxable account currently in bond fund where I'll be buying a combination of VXUS and VTI. I'll still have positions in those in the tIRAs as well.

Just for clarity, and sorry, I don't know how to insert a table

VTI tIRA 246000 taxable 14300
VXUS tIRA 205000 taxable 74300
Can buy approx 400000 in taxable account of VTI/VXUS. Want to maintain current totals, am asking what ideal proportion of VTI/VXUS in taxable would be

Thanks so much
1. I believe that gains in Roth IRA are tax free and so are withdrawals after 5 years. Regarding capital loss carryover in Taxable I think it's a good idea to look it up (e.g. https://turbotax.intuit.com/tax-tips/in ... /L7GF1ouP8 , among others), and to test various scenarios using a commercial tax software package.

2. I believe that Fidelity and Vanguard allocate roughly 40% of the stock holding to international stocks in their Target Date Index (or equivalent) funds, and the Vanguard Total World Stock Index Fund composition has roughly 40% in international stocks.

I don't know what "ideal proportion" means and it could vary from one individual to the next, but I would be hesitant to do more than what the pros are doing - realizing that nobody alive can predict the future with any kind of consistent accuracy, and that the pros can change their mind at any time.
John C. Bogle: "Never confuse genius with luck and a bull market".
sycamore
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by sycamore »

DebiT wrote: Sun Jun 20, 2021 1:09 pm 1. Can I get a quick lesson in taxes regarding dividends vs long term capital gains in taxable accounts? I believe I have a very sizable long term capital gains carryforward loss. That won't apply against dividends, correct? And, when money comes out of Roth, dividends and cap gains don't apply, is that correct? I know I could look this up but might as well append that question.
Capital losses don't offset dividends. DBSH's link to the turbotax article goes into the details. In general you first offset any capital gains and losses with each other, and if you still have any losses leftover you use up to $3000 to offset regular income (which is better than offsetting dividends which are taxed at a lower rate). The remainder carries over to next year.

And you're right that dividends and gains don't matter when you make Roth withdrawals. Other things may matter, like how much you contributed versus converted -- see https://www.bogleheads.org/wiki/Roth_IRA#Distributions.
DebiT wrote: Sun Jun 20, 2021 1:09 pm Just for clarity, and sorry, I don't know how to insert a table

VTI tIRA 246000 taxable 14300
VXUS tIRA 205000 taxable 74300
FWIW, one way to do tables is to use the "code" tag. When you compose a post, click the button that looks like </>. That will create a "code" and "/code" tag. Every character in between those tags takes up one column (fixed-width font). Then you can use space to get things lined up just right.

Code: Select all

VTI  tIRA 246000 taxable 14300
VXUS tIRA 205000 taxable 74300
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grabiner
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by grabiner »

DSBH wrote: Mon Jun 21, 2021 9:59 am 1. I believe that gains in Roth IRA are tax free and so are withdrawals after 5 years.
This is correct because the OP is already over 59-1/2. She can withdraw the amount converted tax-free and penalty-free at any time, and withdraw gains tax-free five years after she has opened the Roth IRA (regardless of when the gains occurred).
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Topic Author
DebiT
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by DebiT »

Mission accomplished. Simple, but not easy, in that I have 2 retirement accounts and 1 taxable, and was reversing my AA taxable vs tIRA. Sort of like a weird sliding tile puzzle. I always hated those!

It is now 21/79 stock/bond in the tIRA, and 64/17/19 cash in the taxable, for an overall AA of 34/60/6, which is almost perfect. That was as far as I could get it and still feel comfortable about my available cash. However, the tIRA stock AA will go down another 5% at the end of the year when I make a Roth conversion. Right now RPM estimates a growth rate of 2.4% which is a definite improvement.

Thank you all for helping me think about things. Now I'll get back to fiddling around with RPM regarding Roth scenarios.
Age 63, life turned upside down 3/2/19, thanking God for what I've learned from this group
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Re: Major life change, need to reverse AA distribution in tIRA vs taxable

Post by ivgrivchuck »

DebiT wrote: Fri Jun 18, 2021 7:16 pm Life expectancy. Using 100 based on family longevity into early 90's.
Based on your family longevity, you might be a good candidate for a SPIA (perhaps 2% COLA). I know you weren't asking about this, but some Bogleheads have purchased it and been really happy with it...
40% VTI | 40% VXUS | 13% I-bonds | 7% EE-bonds
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