Planning mom's retirement portfolio - sanity check

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wolfv
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Planning mom's retirement portfolio - sanity check

Post by wolfv »

After reading the excellent book "Bogleheads' Guide To Investing", I offered to manage my mom's investments.
I think the following is a good plan, but I am no expert. There could very well be a misconception or error lurking in the plan.

The following is mom's-portfolio-related information.

Emergency funds: ready for emergency

Debt: $0

Tax Filing Status: Single

Tax Rate
Federal:
- Marginal tax rate - Ordinary income 10.0%
- Marginal tax rate - Capital income 0.0%
State: 4.90% Marginal tax rate

State of Residence: New Mexico

Age: 80 and expect to live into her 90s

Desired Asset allocation: 50% stock / 25% bond / 25% Inflation-Protected Securities
Desired International allocation: 10% of stock

Taxable account
33% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
10% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX)
5% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
10% Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
11% Vanguard Balanced Index Fund Admiral Shares (VBIAX)
-- VBIAX is legacy, do not purchase.

traditional IRA account
15% Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
15% Vanguard Short-Term Bond Index Fund Admiral Shares (VBIRX)

No Roth IRA account because viewtopic.php?p=6066903#p6066903

Balancing portfolios
- Set all fund cost basis to Specific ID.
- Check asset allocations annually or quarterly after distributions.
- Withdraw RMD from tIRA overweight funds.
- For withdraw from taxable account, use Specific ID to sell the most expensive shares (minimize LTCG) that are more than 1 year old (to avoid STCG)
- Reinvest taxable distributions into underweight funds.
- Rebalance if asset allocation is off by more than 5%.
- At end of year, if there is unused 0% capital gains tax, sell lowest-cost taxable underweight VTSAX, VTIAX, or VBIAX (useful if mom ever withdraws from taxable account).

Current portfolio

Taxable account
$347k at broker containing eight mutual funds (will be liquidated this month to buy lower exp ratio Vanguard funds)
$108k Vanguard Balanced Index Fund Admiral Shares (VBIAX)
$213k Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)

traditional IRA account
$289k annuity (will be terminated this month) (annuity drama posted at viewtopic.php?f=1&t=350196)
(no Roth IRA)

Putting it all together
Mom is living off her IRA RMD, Social Security payments, and pension.
She can withdraw more money at any time.

One concern is tax-efficiency for the family (mom and her heirs).
The following is my understanding of how to be tax efficient.

Heirs pay ordinary income on withdrawals from Traditional IRA.
Heirs pay no tax on inherited Roth IRA or taxable account.

Assuming that
  • the money would be invested regardless of who possesses the money (rather than spending it)
  • tax bracket of heirs is same or higher than mom's
Then the most tax efficient way to transfer wealth to heirs is for mom to withdraw money in order, from top of list down
  • IRA RMD, Social Security payments, pension (this is more than she spends)
  • interest, dividends, capital gains from taxable account (in a fund set aside for spending, giving, or reinvesting)
  • principal from taxable account (mom pay 0% cap gains tax - heirs pay 0% gains tax = mom pays same cap gains as heirs)
  • traditional IRA (mom pay 10% income tax - heirs pay 0% to 12% income tax = mom pays about same income tax as heirs)
Thanks for reading this far. That last paragraph contains a lot of tax logic and possibly an error I don't see.

Questions
1. Is the plan too complicated?
2. How would Vanguard Personal Advisor Service set it up?
3. I appreciate you pointing out any errors you found.
Last edited by wolfv on Thu Jun 17, 2021 5:43 am, edited 23 times in total.
dbr
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Re: Planning mom's retirement portfolio - sanity check

Post by dbr »

Strictly speaking she does not live off RMDs but rather RMDs are a transfer from tax deferred to taxable accounts with a tax bill. Whether or not spending from the taxable account is none, some of, all of, or more than the RMD makes no difference. What does make a difference is withdrawing more than the RMD. In your case withdrawing more for conversion is already the plan and makes sense. It might be there should be no stocks in the IRA and that the overall stock asset allocation should be higher in order to maximize hoped for but more risky wealth growth in basis stepped up inheritance.

I have no idea at all what Vanguard does about asset location and Roth conversions. They do attempt a risk assessment to set asset allocation.
MattB
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Re: Planning mom's retirement portfolio - sanity check

Post by MattB »

wolfv wrote: Sat Jun 12, 2021 11:19 am After reading the excellent book "Bogleheads' Guide To Investing", I offered to manage my mom's investments.
I think the following is a good plan, but I am no expert. There could very well be a misconception or error lurking in the plan.

The following is mom's-portfolio-related information.

. . .

Current portfolio

Taxable
$347k at broker containing eight mutual funds (will be liquidated this month to buy lower exp ratio Vanguard funds)


Questions
4. I appreciate you pointing out any errors you found.
Have you looked at the cost basis on the funds that are going to be liquidated? You might be subjecting your mom to unnecessary capital gains tax if the gains in her accounts pushes her into the next capital gains band.
MattB
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Re: Planning mom's retirement portfolio - sanity check

Post by MattB »

wolfv wrote: Sat Jun 12, 2021 11:19 am . . .

Current portfolio

Taxable
$347k at broker containing eight mutual funds (will be liquidated this month to buy lower exp ratio Vanguard funds)


Questions
4. I appreciate you pointing out any errors you found.
Have you looked at the cost basis on the funds that are going to be liquidated? You might be subjecting your mom to unnecessary capital gains tax if the gains in her accounts pushes her into the next capital gains band.
HomeStretch
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Re: Planning mom's retirement portfolio - sanity check

Post by HomeStretch »

The two-portfolio / two-asset allocation concept sounds complicated and unnecessary to me.

Your mom’s portfolio is ~$950k and she expects to live another 10+ years. Long-term care is costly, if needed, and probably wouldn’t be covered in full by her retirement income. Consider advising your mom to maintain a conservative asset allocation suitable for just her needs and to spend more whenever possible to make her life as comfortable and fulfilling as possible.
Topic Author
wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

MattB wrote: Sat Jun 12, 2021 11:58 am
wolfv wrote: Sat Jun 12, 2021 11:19 am . . .

Current portfolio

Taxable
$347k at broker containing eight mutual funds (will be liquidated this month to buy lower exp ratio Vanguard funds)
Have you looked at the cost basis on the funds that are going to be liquidated? You might be subjecting your mom to unnecessary capital gains tax if the gains in her accounts pushes her into the next capital gains band.
That's a good point.

Selling taxable account mutual funds will generate $7k tax at 15% long-term capital-gains rate.
Which comes to a 2-year payback period assuming 1% lower expense ratios.
RubyTuesday
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Re: Planning mom's retirement portfolio - sanity check

Post by RubyTuesday »

wolfv wrote: Sat Jun 12, 2021 11:19 am One concern is tax-efficiency for the family (mom and her heirs).
The following is my understanding of how to be tax efficient.

Heirs pay capital gains tax on inherited Traditional IRA.
Heirs pay no tax on inherited Roth IRA or taxable account.
I don’t believe your understanding in the bold (by me) section above is accurate.

Heirs will pay ordinary income on withdrawals from Traditional IRA. May make sense to leave any TIRA to charity if so inclined or to someone in low tax bracket.

Heirs will pay no taxes on inherited Roth IRA and will get a step up in basis on taxable account and then pay taxes on future distributions or gains from this basis.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
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FiveK
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Re: Planning mom's retirement portfolio - sanity check

Post by FiveK »

wolfv wrote: Sat Jun 12, 2021 11:19 am Balancing portfolios
- Set all fund cost basis to FIFO.
Consider using "Specific ID" instead. That gives the most flexibility for minimal complexity increase.
4. I appreciate you pointing out any errors you found.
RubyTuesday already commented on the inherited tIRA taxation.

Might be worth putting her other income numbers into something like the personal finance toolbox Excel spreadsheet and seeing the marginal tax rate she will pay on tIRA withdrawals. E.g., see the chart in the Using a spreadsheet section of the Roth IRA conversion wiki.
HomeStretch
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Re: Planning mom's retirement portfolio - sanity check

Post by HomeStretch »

wolfv wrote: Sat Jun 12, 2021 11:19 am Tax Rate
Federal: bottom of 10% ordinary-income tax bracket, near top of 0% capital-gains tax band …

The following is my understanding of how to be tax efficient.

Heirs pay capital gains tax on inherited Traditional IRA.
Heirs pay no tax on inherited Roth IRA or taxable account….
+1 to FiveK’s suggestion about the personal finance tool box Excel spreadsheet. Just to be sure you have accurately assessed the tax impact of the portfolio changes you are proposing.

Both heirs (as posted by RubyTuesday) and your mom pay ordinary income taxes (not capital gains tax) on Traditional IRA distributions. Most of your mom’s income (RMDs, pension and SS) is ordinary income. Is your mom really at the bottom of the 10% bracket for ordinary income and top of the 0% capital gains tax bracket? Also be aware that $1 of additional capital gains (even in the 0% CG bracket) could push $1 of SS to be taxed/taxed at higher rates.
BarbK
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Re: Planning mom's retirement portfolio - sanity check

Post by BarbK »

I think a lot of your tax implications are not correct.

2021 80 YO Standard Deduction =$12,550 + $1350 = $13,900

Qualified Dividends / Capital Gains are not taxed up to $40,400

10% Tax bracket - up to $9,950

----
So any ordinary income under $13,900 have 0 tax, all qualified dividends / Capital Gains under $40,400 have 0 tax.

She will only start the 10% tax bracket after ordinary income exceeds the standard deduction.
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cchrissyy
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Re: Planning mom's retirement portfolio - sanity check

Post by cchrissyy »

wolfv wrote: Sat Jun 12, 2021 11:19 am principal from taxable account (mom pay 15% cap gains tax - heirs pay 0% cap gains tax = mom pays 15% more tax than heirs)
the capital gains tax is only on her profit not on the withdrawal of principal.

for example, if she sells $10k of a taxable investment and her cost basis for those shares was $9k, the capital gains tax rate applies to only $1k of the $10k transaction. Since she probably has many shares bought at a variety of times, every sale is an opportunity to choose whether to sell shares that have experienced a higher or lower amount of gains and therefore she can control her tax bill. This is why people above have said use specific id not fifo.

i am not sure if you know this next part but, when she moves her 8 mutual funds from the high fee broker and into the vanguard funds you recommend, that will be a large taxable event. the capital gains come from selling the old stuff. they do not come from changing the institution where the account is held, and they do not come from her withdrawing the money or spending it. they are triggered by the sale of the old shares. therefore, if the shares have a lot of gains, many people would spread the selling over multiple years. the tradeoff is do you hold on to some shares of the bad/expensive funds for longer, maybe forever, or do you bite the bullet and get it over with.
Last edited by cchrissyy on Sat Jun 12, 2021 3:42 pm, edited 1 time in total.
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Topic Author
wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

BarbK wrote: Sat Jun 12, 2021 1:46 pm I think a lot of your tax implications are not correct.

2021 80 YO Standard Deduction =$12,550 + $1350 = $13,900

Qualified Dividends / Capital Gains are not taxed up to $40,400

10% Tax bracket - up to $9,950

----
So any ordinary income under $13,900 have 0 tax, all qualified dividends / Capital Gains under $40,400 have 0 tax.

She will only start the 10% tax bracket after ordinary income exceeds the standard deduction.
I don't understand. Which tax implications might not be correct?

I got these numbers from mom's professionally prepared Form 1040:

Tax Rate
Federal: bottom of 10% ordinary-income tax bracket, near top of 0% capital-gains tax band
Last edited by wolfv on Sun Jun 13, 2021 1:23 am, edited 3 times in total.
Topic Author
wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

Wow. You caught a lot of errors. Thanks for the education :happy . I will post back when after I incorporate the corrections into my spreadsheet.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

Desired Asset allocation is updated in the original post and corrections were made.
Mom's new retirement portfolio is simpler and more tax efficient thanks to your insights. :sharebeer

dbr wrote: Sat Jun 12, 2021 11:51 am Strictly speaking she does not live off RMDs but rather RMDs are a transfer from tax deferred to taxable accounts with a tax bill.
I like your clarity of thought.
dbr wrote: Sat Jun 12, 2021 11:51 am It might be there should be no stocks in the IRA...
Good call. So I removed Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) from the IRA account.
HomeStretch wrote: Sat Jun 12, 2021 12:04 pm The two-portfolio / two-asset allocation concept sounds complicated and unnecessary to me.

Long-term care is costly, if needed, and probably wouldn’t be covered in full by her retirement income.
A future inheritance will cover costly long-term care, if needed.
HomeStretch wrote: Sat Jun 12, 2021 12:04 pm Consider advising your mom to maintain a conservative asset allocation suitable for just her needs and to spend more whenever
possible to make her life as comfortable and fulfilling as possible.
Will do. That's been an implicit assumption, but it's good to say it explicitly.
RubyTuesday wrote: Sat Jun 12, 2021 12:36 pm Heirs will pay ordinary income on withdrawals from Traditional IRA.
Corrected in OP.
FiveK wrote: Sat Jun 12, 2021 1:14 pm
wolfv wrote: Sat Jun 12, 2021 11:19 am Balancing portfolios
- Set all fund cost basis to FIFO.
Consider using "Specific ID" instead. That gives the most flexibility for minimal complexity increase.
Thanks. I will use Specific ID. https://www.bogleheads.org/wiki/Specifi ... _of_shares
HomeStretch wrote: Sat Jun 12, 2021 1:39 pm
wolfv wrote: Sat Jun 12, 2021 11:19 am Tax Rate
Federal: bottom of 10% ordinary-income tax bracket, near top of 0% capital-gains tax band …
Is your mom really at the bottom of the 10% bracket for ordinary income and top of the 0% capital gains tax bracket?
Mom's professionally prepared "1040 Federal Return Summary 2020" says:
Marginal tax rate - Ordinary income ... 10.0%
Marginal tax rate - Capital income ..... 0.0%
Effective tax rate .................... 3.0%

If my tax math is right:
- unused 10% tax bracket = $3k
- unused 0% cap gains tax band = $19k
cchrissyy wrote: Sat Jun 12, 2021 2:21 pm
wolfv wrote: Sat Jun 12, 2021 11:19 am principal from taxable account (mom pay 15% cap gains tax - heirs pay 0% cap gains tax = mom pays 15% more tax than heirs)
the capital gains tax is only on her profit not on the withdrawal of principal.
Yes, I know. The equation is for comparison, the "profit" cancels out:
(mom pay 15% cap gains tax on profit - heirs pay 0% cap gains tax on profit = mom pays 15% more tax on profit than heirs)
cchrissyy wrote: Sat Jun 12, 2021 2:21 pm ... when she moves her 8 mutual funds from the high fee broker and into the vanguard funds you recommend, that will be a large taxable event.
... many people would spread the selling over multiple years. ... or do you bite the bullet and get it over with.
I looked at the cost basis on the taxable account mutual funds.
Selling them will generate $7k tax at 15% long-term capital-gains rate.
Which comes to a 2-year payback period assuming 1% lower expense ratios.
She will be in the same 15% cap gains tax band regardless if she sells at once or spread over several years. So she will bite the bullet and get it over with.
Last edited by wolfv on Sun Jun 13, 2021 7:34 am, edited 3 times in total.
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Stinky
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Re: Planning mom's retirement portfolio - sanity check

Post by Stinky »

wolfv wrote: Sun Jun 13, 2021 2:28 am
cchrissyy wrote: Sat Jun 12, 2021 2:21 pm ... when she moves her 8 mutual funds from the high fee broker and into the vanguard funds you recommend, that will be a large taxable event.
... many people would spread the selling over multiple years. ... or do you bite the bullet and get it over with.
I looked at the cost basis on the taxable account mutual funds.
Selling them will generate $7k tax at 15% long-term capital-gains rate.
Which comes to a 2-year payback period assuming 1% lower expense ratios.
She will be in the same 15% cap gains tax band regardless if she sells at once or spread over several years. So she will bite the bullet and get it over with.
It sounds like you'll be able to move your mom's entire portfolio into a much more efficient portfolio at Vanguard, and the tax cost will be covered by two years of lower expenses. Coupled with your other thread about moving your mother's variable annuity to a Vanguard IRA, she'll be getting rid of her (very expensive) advisor entirely.

That sounds like very good news for her. And congratulations to you for being so helpful to your mother.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
RubyTuesday
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Re: Planning mom's retirement portfolio - sanity check

Post by RubyTuesday »

wolfv wrote: Sat Jun 12, 2021 11:19 am The Roth IRA account will add IRA conversions at the $7k per year limit.
There is no $7k per year limit on conversions only tax consequences. There is a limit on contributions, which without eligible income she can’t make anyway.
wolfv wrote: Sat Jun 12, 2021 11:19 am
Balancing portfolios
- Set all fund cost basis to Specific ID.
- Check asset allocations annually or quarterly after distributions.
- Withdraw RMD from tIRA overweight funds.
- Reinvest taxable distributions into underweight funds.
- Rebalance if asset allocation is off by more than 5%.
-- for withdraw from taxable account, use Specific ID to sell the most expensive shares (minimize LTCG) that are more than 1 year old (to avoid STCG)
You’ll likely always be selling bonds in tIRA. Assuming stocks have gone up (more often than not) and are out of balance, you’ll be selling stocks in taxable and buying bonds in taxable or Roth.

Looks like a fine approach overall. Kudos for helping mom.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
Jablean
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Re: Planning mom's retirement portfolio - sanity check

Post by Jablean »

RubyTuesday wrote: Sun Jun 13, 2021 7:35 am
wolfv wrote: Sat Jun 12, 2021 11:19 am The Roth IRA account will add IRA conversions at the $7k per year limit.
There is no $7k per year limit on conversions only tax consequences. There is a limit on contributions, which without eligible income she can’t make anyway.
This^
If you were only able to move $7000 a year into Roth ($70,000) over 10 years that's a drop in the bucket compared to her 1 mill and does little to nothing for heirs. This is another place to look at her income brackets. To get things moved she may need to be at a higher tax bracket for her remaining life.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

Jablean wrote: Sun Jun 13, 2021 10:50 am
RubyTuesday wrote: Sun Jun 13, 2021 7:35 am
wolfv wrote: Sat Jun 12, 2021 11:19 am The Roth IRA account will add IRA conversions at the $7k per year limit.
There is no $7k per year limit on conversions only tax consequences. There is a limit on contributions, which without eligible income she can’t make anyway.
This^
If you were only able to move $7000 a year into Roth ($70,000) over 10 years that's a drop in the bucket compared to her 1 mill and does little to nothing for heirs. This is another place to look at her income brackets. To get things moved she may need to be at a higher tax bracket for her remaining life.
Mom's unused 0% cap gains tax band was $19k in 2020. So maybe put that much in Roth.
But it's more complicated with Social Security tax and Medicare premiums.
I will look at the Personal finance toolbox spreadsheet that FiveK suggested.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

FiveK wrote: Sat Jun 12, 2021 1:14 pm Might be worth putting her other income numbers into something like the personal finance toolbox Excel spreadsheet and seeing the marginal tax rate she will pay on tIRA withdrawals. E.g., see the chart in the Using a spreadsheet section of the Roth IRA conversion wiki.
Thanks for the suggestion.
I looked at the Personal finance toolbox Instruction page. Looks like it would take me all day to figure out.
Does "Personal finance toolbox" take Social Security tax and Medicare premiums into consideration when evaluating IRA-Roth conversions?

https://www.bogleheads.org/wiki/Roth_IR ... iderations says:
Recognize three cautions regarding taking conversions during retirement
1. Social Security tax
2. Medicare premiums
3. RMD
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FiveK
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Re: Planning mom's retirement portfolio - sanity check

Post by FiveK »

wolfv wrote: Sun Jun 13, 2021 3:08 pm
FiveK wrote: Sat Jun 12, 2021 1:14 pm Might be worth putting her other income numbers into something like the personal finance toolbox Excel spreadsheet and seeing the marginal tax rate she will pay on tIRA withdrawals. E.g., see the chart in the Using a spreadsheet section of the Roth IRA conversion wiki.
Thanks for the suggestion.
I looked at the Personal finance toolbox Instruction page. Looks like it would take me all day to figure out.
Does "Personal finance toolbox" take Social Security tax and Medicare premiums into consideration when evaluating IRA-Roth conversions?
Sure does.

Take a look at the example shown on the Roth IRA conversion page. It shows where the entries go for
- filing status
- age
- interest + non-qualified dividends
- qualified dividends
- pension
- social security
go.

Does that reduce the steepness of the learning curve?
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

FiveK wrote: Sun Jun 13, 2021 5:15 pm Take a look at the example shown on the Roth IRA conversion page. It shows where the entries go for
- filing status
- age
- interest + non-qualified dividends
- qualified dividends
- pension
- social security
go.

Does that reduce the steepness of the learning curve?
Yes, that flattened the learning curve. Thanks for pointing me in the right direction.

The "Personal finance toolbox" file is named "2021 Cashflow.xls".
https://www.bogleheads.org/wiki/Roth_IR ... preadsheet says,
Another useful spreadsheet is the Personal finance toolbox.
With minimal input in the appropriate green cells, including filing status and ages
Screen shots of the "Calculations" sheet show some green cells, where "the appropriate green cells" are
- filing status
- age
- interest + non-qualified dividends
- qualified dividends
- pension
- social security
- Foreign tax credit

I input all those numbers. But I don't see how it helps me decide on the amount of IRA-Roth conversions.
There is some Roth IRA information in Cashflow.xls:
  • Calculations sheet > "Total Tax Rate vs. tIRA withdrawal" graph
    [Marginal and Cumulative lines appear flat at 0.0%.]
  • Invest. Order sheet > 4. Rule of thumb: traditional if current marginal rate is 22% or higher; Roth if 10% or lower; coin flip in between.
    [Does this apply to mom, or is it just for contributions?]
  • Misc. cals sheet > Roth vs. Traditional when contributing the maximum allowed
    Withdrawal breakeven rate 34.488% <- prefer Roth if the marginal withdrawal rate will be greater than this.
    [Does this apply to mom, or is it just for contributions?]
Is Cashflow.xls the right tool to calculate the optimal amount of IRA-Roth conversions? Or am I missing something?
Last edited by wolfv on Tue Jun 15, 2021 12:53 am, edited 1 time in total.
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FiveK
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Re: Planning mom's retirement portfolio - sanity check

Post by FiveK »

wolfv wrote: Mon Jun 14, 2021 1:37 am [Marginal and Cumulative lines appear flat at 0.0%.]
Are you using Excel? Unfortunately other spreadsheet tools (Google Sheets, LibreOffice Calc, etc.) don't seem to be able to generate the curves such as those shown in the Roth IRA conversion wiki.
[*]Invest. Order sheet > 4. Rule of thumb: traditional if current marginal rate is 22% or higher; Roth if 10% or lower; coin flip in between.
[Does this apply to mom, or is it just for contributions?]
That is primarily for contributions, and like most rules of thumb in this area has so many exceptions that such rules of thumb are often better ignored.
[*]Misc. cals sheet > Roth vs. Traditional when contributing the maximum allowed
Withdrawal breakeven rate 34.488% <- prefer Roth if the marginal withdrawal rate will be greater than this.
[Does this apply to mom, or is it just for contributions?][/list]
The 34.488% number is only valid for the situation described by the inputs there. Presumably your mother's situation is much different. E.g., her "Current marginal tax rate" probably isn't 40%. ;)
Is Cashflow.xls the right tool to calculate the optimal amount of IRA-Roth conversions? Or am I missing something?
It may be the best tool for showing what marginal tax rate various amounts of Roth conversions would incur this year (if you can get the marginal rate chart to work, which probably means using Excel). Note that Roth conversions can't start until RMDs have been taken so the marginal rates of interest begin with the first dollar after the RMD amount.

You also need to estimate what marginal tax rates would be on withdrawals in the future. Because she is already taking SS and RMDs, it is possible that not doing Roth conversions would be correct for her. How to factor in the marginal rate any heirs might face is another question.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

FiveK wrote: Mon Jun 14, 2021 2:42 am
Is Cashflow.xls the right tool to calculate the optimal amount of IRA-Roth conversions? Or am I missing something?
It may be the best tool for showing what marginal tax rate various amounts of Roth conversions would incur this year (if you can get the marginal rate chart to work, which probably means using Excel). Note that Roth conversions can't start until RMDs have been taken so the marginal rates of interest begin with the first dollar after the RMD amount.

You also need to estimate what marginal tax rates would be on withdrawals in the future. Because she is already taking SS and RMDs, it is possible that not doing Roth conversions would be correct for her. How to factor in the marginal rate any heirs might face is another question.
I am using LibreOffice Calc. I am running the Linux operating system and don't have a Windows machine. Can Cashflow.xls render graph curves on Microsoft 365 browser-based version of Excel?

Mom's 2020 tax return had $19k of unused 0% cap gains tax. It would be nice to use that for IRA Roth conversions.
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FiveK
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Re: Planning mom's retirement portfolio - sanity check

Post by FiveK »

wolfv wrote: Mon Jun 14, 2021 5:33 am I am using LibreOffice Calc. I am running the Linux operating system and don't have a Windows machine. Can Cashflow.xls render graph curves on Microsoft 365 browser-based version of Excel?
I would guess so, but don't know.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

FiveK wrote: Mon Jun 14, 2021 2:42 am It may be the best tool for showing what marginal tax rate various amounts of Roth conversions would incur this year
Cashflow.xls graph curves rendered on Microsoft 365 browser-based version of Excel :D.

I am guessing that Cashflow.xls, "Calculations" sheet, cell B55 ("Other Specific Investment Types", "Roth IRA") is where to enter various amounts of Roth conversions. Is that right?

Here are the resulting "Total Tax Rate vs. tIRA withdrawal" graphs.
Graph for Roth IRA = $0: https://photos.app.goo.gl/DBW3r1XS4ox1BqBr8

Graph for Roth IRA = $19,000: https://photos.app.goo.gl/xfXHoS8bHCjZXq8j6
Last edited by wolfv on Mon Jun 14, 2021 4:35 pm, edited 1 time in total.
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FiveK
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Re: Planning mom's retirement portfolio - sanity check

Post by FiveK »

wolfv wrote: Mon Jun 14, 2021 4:20 pm
FiveK wrote: Mon Jun 14, 2021 2:42 am It may be the best tool for showing what marginal tax rate various amounts of Roth conversions would incur this year
Cashflow.xls graph curves rendered on Microsoft 365 browser-based version of Excel :D.

I am guessing that Cashflow.xls, "Calculations" sheet, cell B55 ("Other Specific Investment Types", "Roth IRA") is where to enter various amounts of Roth conversions. Is that right?
Not quite. Those go in cell D31. B55 is for Roth IRA contributions. For tax purposes, a tIRA withdrawal is pretty much the same as a tIRA->Roth IRA conversion. The chart, however, does the work of calculating the IRA conversion tax effects for you. :)
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

FiveK wrote: Mon Jun 14, 2021 4:32 pm Those go in cell D31. B55 is for Roth IRA contributions. For tax purposes, a tIRA withdrawal is pretty much the same as a tIRA->Roth IRA conversion. The chart, however, does the work of calculating the IRA conversion tax effects for you. :)
Thanks for the detailed instructions.

I entered various amounts of Roth conversions in "2021 Cashflow.xls", "Calculations" sheet, cell B31 ("Non-paycheck Income", "tIRA distribution (converted to Roth or not)").

Here are the resulting "Total Tax Rate vs. tIRA withdrawal" graphs.
Graph for tIRA distribution = $0: https://photos.app.goo.gl/vPXtiC2n7wynoUss6

Graph for tIRA distribution = $19,000: https://photos.app.goo.gl/1M5DYV2sMLm6FhFF7

They look the same up to $49,000 tIRA withdrawal. Mostly 16% to 22% tax rate.
The tax rate dips down to 12% at $16,000 tIRA withdrawal. But that small range would be hard to hit without Roth recharacterization.
Conclusion: best not to transfer to Roth, assuming heirs will be retired and in 12% or 22% income-tax bracket when they inherit.

Is that how you interpret the graph?
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FiveK
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Re: Planning mom's retirement portfolio - sanity check

Post by FiveK »

wolfv wrote: Mon Jun 14, 2021 5:22 pm
FiveK wrote: Mon Jun 14, 2021 4:32 pm Those go in cell D31. B55 is for Roth IRA contributions. For tax purposes, a tIRA withdrawal is pretty much the same as a tIRA->Roth IRA conversion. The chart, however, does the work of calculating the IRA conversion tax effects for you. :)
Thanks for the detailed instructions.

I entered various amounts of Roth conversions in "2021 Cashflow.xls", "Calculations" sheet, cell B31 ("Non-paycheck Income", "tIRA distribution (converted to Roth or not)").
Probably not a good idea to overwrite cell formulas. In this case it appears not to matter, but.... Or did you mean D31 instead of B31?
Here are the resulting "Total Tax Rate vs. tIRA withdrawal" graphs.
Graph for tIRA distribution = $0: https://photos.app.goo.gl/vPXtiC2n7wynoUss6

Graph for tIRA distribution = $19,000: https://photos.app.goo.gl/1M5DYV2sMLm6FhFF7

They look the same up to $49,000 tIRA withdrawal. Mostly 16% to 22% tax rate.
The tax rate dips down to 12% at $16,000 tIRA withdrawal. But that small range would be hard to hit without Roth recharacterization.
Conclusion: best not to transfer to Roth, assuming heirs will be retired and in 12% or 22% income-tax bracket when they inherit.

Is that how you interpret the graph?
There shouldn't be any differences between the graphs if the only thing changed was a number in cell D31. That's because the spreadsheet generates the graph by using 500 different values of cell D31 "behind the scenes" and calculating the marginal rate for you. You might want to put her RMD amount in cell P84, because that much is not optional so the amounts above that are the ones of interest.

The "glitch" in the graphs that appears ~$40K apart in one vs. the other is unusual.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

FiveK wrote: Mon Jun 14, 2021 6:09 pm Probably not a good idea to overwrite cell formulas. In this case it appears not to matter, but.... Or did you mean D31 instead of B31?
I meant D31.
FiveK wrote: Mon Jun 14, 2021 6:09 pm There shouldn't be any differences between the graphs if the only thing changed was a number in cell D31.
You're right, there is no difference.

All the input numbers are from mom's tax return. But two of the numbers may not align:

Code: Select all

| 2021 CashFlow.xls, Calculations sheet, Non-paycheck income | mom's 2020 1040                       | $amount |
|------------------------------------------------------------+---------------------------------------+---------|
| cell D31 tIRA distribution (converted to Roth or not)      | line 4a Traditional IRA distributions |       0 |
| cell B32 Pension income                                    | line 5b Pension and annuities income  |    4458 |
Mom's entire tIRA is a variable annuity. So on her Form 1040, the tIRA distribution is included in line 5b "Pension and annuities income", and not on line 4a "Traditional IRA distributions".
Was it correct to enter the tIRA annuity distribution in cell B32 rather than cell D31?
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FiveK
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Re: Planning mom's retirement portfolio - sanity check

Post by FiveK »

wolfv wrote: Mon Jun 14, 2021 8:52 pm Mom's entire tIRA is a variable annuity. So on her Form 1040, the tIRA distribution is included in line 5b "Pension and annuities income", and not on line 4a "Traditional IRA distributions".
Was it correct to enter the tIRA annuity distribution in cell B32 rather than cell D31?
If that is the RMD amount, you have found another way to skin this particular cat. :)

By doing it that way, the amounts in cell D31 (whether hand-entered or used by the Data Table in cells P83:R584) become the optional Roth conversion amounts.
BarbK
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Re: Planning mom's retirement portfolio - sanity check

Post by BarbK »

wolfv wrote: Mon Jun 14, 2021 5:33 am
Mom's 2020 tax return had $19k of unused 0% cap gains tax. It would be nice to use that for IRA Roth conversions.
IRA Roth Conversions are treated as ordinary income (same as RMDS); however, the $19K unused 0% cap gains could be used for some of the profit on the sale of the Mutual Funds.

----
wolfv wrote: Mon Jun 14, 2021 5:33 am
If my tax math is right:
- unused 10% tax bracket = $3k
- unused 0% cap gains tax band = $19k
So working backwards,
Ordinary Income (Social Security, Interest, RMDs) = $13,900 + ($9,900-3K) $6,900 = $20,800
Capital Gains (40,400 - $19K) = $21,400

I am guessing that her RMD was approximately $16K (based on her IRA balance of $289K) ; however, that only leaves approx $5K for her Social Security and Pension.

Was her 1040 line 11b approximately: $42,000 ?

I am guessing that her SS is already 85% taxed since she is over the $34K limit with her other income.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

Please disregard my last three posts. I think this time I got the Cashflow.xls entries correct.

2020 Traditional IRA distributions was $0 because COVID-19.
- the CARES Act waives required minimum distributions (RMDs) during 2020 for IRAs

So I changed cell D31 from $0 to $16,000, thus more closely approximating 2021 taxes.
- cell D31 "tIRA distribution (converted to Roth or not)" = $16,000
- cell P84 = $16,000

Here are the resulting "Total Tax Rate vs. tIRA withdrawal" graph:
https://photos.app.goo.gl/GWAAQhwJvxqQAxws7

On the graph, tIRA withdrawal marginal tax rate is mostly 28% and 22%.
Conclusion: best not to transfer to Roth, assuming heirs will be retired and in 0% to 22% income-tax bracket when they inherit.

Thank you FiveK for your help and patients.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

BarbK wrote: Mon Jun 14, 2021 9:57 pm
wolfv wrote: Mon Jun 14, 2021 5:33 am
Mom's 2020 tax return had $19k of unused 0% cap gains tax. It would be nice to use that for IRA Roth conversions.
IRA Roth Conversions are treated as ordinary income (same as RMDS); however, the $19K unused 0% cap gains could be used for some of the profit on the sale of the Mutual Funds.
2020 Traditional IRA distributions was $0 because COVID-19.
- the CARES Act waives required minimum distributions (RMDs) during 2020 for IRAs

2021 RMD is $18,347, so there will be much less unused 0% cap gains tax.
You make a good suggestion though. Selling taxable mutual funds to unload some capital gains at 0% tax :) . I will add that to mom's investment plan.
Last edited by wolfv on Tue Jun 15, 2021 12:12 pm, edited 1 time in total.
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BL
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Re: Planning mom's retirement portfolio - sanity check

Post by BL »

Looks like you may have a better handle on taxes now, assuming she is already being taxed on 85% of her SS. I agree that sometimes leaving things as they are can be a better choice when doing something for someone else, especially if there are other heirs. The Roth conversion may be a bit late unless there is an overwhelming desire for it.

It might be worth your/her while to contact Vanguard PAS and ask what kind of portfolio they would put her in if she went with them at 0.3% AUM. It sounds like they are willing to tell folks ahead of time and let them make a reasoned decision whether to use them or not, rather than buying a "pig in a poke" like most "advisors". It might be worth letting them handle the transfer and setting it up and then run with it either indefinitely or for a year. This way she would have someone to answer questions, and would be a protection if you should get run over by the proverbial "truck".

Another alternative could be putting almost everything into a single balanced fund, such as Target Retirement Income (30/70 stock/bond and includes inflation-protected fund) https://investor.vanguard.com/mutual-fu ... file/VTINX
or Balanced Fund (60/40) or Life Strategy funds which have 4 funds in various proportions. Perhaps using total stock market in taxable would be more tax efficient. Any one of these could help her avoid re-balancing almost completely. Since I am about her age, I prefer to make sure I have adequate fixed income (CDs, etc.) and let the equities run for the most part. Sometimes less is more.

Using a 3-fund portfolio is certainly another good option, where you could put most fixed income into tIRA and rest into CDs or perhaps I-bonds that keep up with inflation (3.5+% rate this 6-month period) and 1 year minimum hold.) Total stock market and total international are quite tax-efficient and have not thrown off Capital Gains in the almost 20 years we have had them.

Jane Bryant Quinn's book, How to Make Your Money Last, is great for retirees to have on hand for questions on personal finance and investing that come up. Amazon sells used books sometimes, which are fine especially if they are a late edition. I believe this book is in the recommended books list in the Wiki. It is easy to read, and the author has been writing in magazines and AARP for a long time. Good place to go for common-sense ideas.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

Thanks for the suggestions BL.
I am tempted to set her up on a system that doesn't need my attention.
  • Vanguard PAS
  • no-manual-rebalancing of accounts
    • taxable account
      - Vanguard Balanced Index Fund Admiral Shares (VBIAX) (legacy 60%/40%)
      - Vanguard Target Retirement Income Fund (VTINX) (70%/30%)
    • traditional IRA account
      - Vanguard Inflation-Protected Securities Fund Admiral Shares (VAIPX)
On the other hand, I already manage my investments on Vanguard, so it would be very easy for me to manage her Vanguard accounts as well.
But what would happen if I get run over by the proverbial "truck"?
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

wolfv wrote: Sun Jun 13, 2021 2:28 am
cchrissyy wrote: Sat Jun 12, 2021 2:21 pm ... when she moves her 8 mutual funds from the high fee broker and into the vanguard funds you recommend, that will be a large taxable event.
... many people would spread the selling over multiple years. ... or do you bite the bullet and get it over with.
I looked at the cost basis on the taxable account mutual funds.
Selling them will generate $7k tax at 15% long-term capital-gains rate.
Which comes to a 2-year payback period assuming 1% lower expense ratios.
She will be in the same 15% cap gains tax band regardless if she sells at once or spread over several years. So she will bite the bullet and get it over with.
@cchrissyy
Thanks for making me think about this.

How Social Security benefits are taxed depends on adjusted gross income, which includes capital gains.
Lucky I read about this before I pulled the trigger on the sale.

How do I decide if the 8 mutual fund sales (and its capital gains) should be spread over years, or sold all at once?
Is there a calculator for that?

From Mom's 2020 Form 1040:
- line 2a Tax-exempt interest = 1,852
- line 6a Social Security benefits = 17,683
- line 6b Taxable amount = 7,801
- line 11 adjusted gross income = 34,991

https://www.bogleheads.org/wiki/Taxatio ... y_benefits
The marginal tax on Social Security benefits appears to be quite steep (progressive).
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FiveK
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Re: Planning mom's retirement portfolio - sanity check

Post by FiveK »

wolfv wrote: Fri Jun 25, 2021 4:50 pm How do I decide if the 8 mutual fund sales (and its capital gains) should be spread over years, or sold all at once?
Is there a calculator for that?
The toolbox spreadsheet will show you the marginal rates for capital gains. Change cell G107 to "D27" (without quotes) and click the "Update chart" button.
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wolfv
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Re: Planning mom's retirement portfolio - sanity check

Post by wolfv »

FiveK wrote: Fri Jun 25, 2021 5:17 pm
wolfv wrote: Fri Jun 25, 2021 4:50 pm How do I decide if the 8 mutual fund sales (and its capital gains) should be spread over years, or sold all at once?
Is there a calculator for that?
The toolbox spreadsheet will show you the marginal rates for capital gains. Change cell G107 to "D27" (without quotes) and click the "Update chart" button.
Thanks FiveK, that's what I needed :D .
So here is the tax logic for anyone that cares to follow along.

In 2020 tax Form 1040, LTCG = $4,845
Unrealized capital gains if all 8 expensive funds were sold = $49,507
If sold all at once, total LTCG for the year would be = $49,507 + $4,845 = $54,352

In the "toolbox spreadsheet", I changed cell G107 from "D31" (tIRA distribution) to "D27" (LTCG $4,845).
Results are:
$4,845 LTCG tax is: 22.2% Marginal, 20% Cumulative
$11,800 LTCG tax jumps up to 27.0% Marginal
$54,352 LTCG tax is: 22.0% Marginal, 24% Cumulative

The least-cost strategy would be:
- sell the expensive funds up to the 27% tax bump every year
- maybe sell it all when share prices fall

The least-cost strategy may not save enough money to go through all the trouble of tracking the funds for so many years.
net savings = $49,507 unrealized capital gains * (24% - 20% Cumulative tax + 1% expense ratio savings) = $2,475

Selling all expensive mutual funds at once, taxed at 24.2%, will generate $12k tax.
Which comes to a 3.3-year payback period assuming 1% lower expense ratios.

Is my tax logic correct?
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