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
Trust represents a single point of failure risk.

> In the meantime, as RMD funds come in a portion is invested in non-
> advantaged assets that will go to individuals. Not quite there yet, but
> the ratio is getting closer to what it will take to prevent them from
> having to take any IRA assets.

RMDs can be tricky because the base amount and withdrawn amounts are
constantly changing year-to-year. One strategy can be to make a large
"deathbed" withdrawal so that the deceased pays the taxes instead of the
(not-nonprofit) beneficiaries, but that's fraught with challenges.
There's also complications when none (or not all) of the annually
required RMD was dutifully withdrawn prior to death too. Been
contemplating a "RMD on 1/1" type of strategy. In any event, even a
modest tax-advantaged bequeathment isn't necessarily a bad thing for
some beneficiaries, when their financial situation is such that they're
not maxxing out their annual 401k/IRA contributions due to lack the
funding: the taxable bequeathment can be offset by it being used to
make equal deposits into their own 401k/IRA (if they have suitable
discipline & foresight/wisdom).

> Your comments on expense ratio do not account for performance
> differentials. If returns justify the higher ratio I have no issue
> paying for that.

It did, because that was already covered with my context note:

This isn't about if Market Segment A performs better than B (eg, Large
Cap vs Small Cap), but it is noting that when two funds are tracking the
same index, because their performance is supposed to mirror that of the
index, the fund with the lower Expense Ratio is structurally advantaged
outperform the higher ER fund.

This structural difference is more of a statistical one and incremental
in magnitude, but multiply that factor by N years of investing and it
grows in significance.

This is more nuanced because it is contextual to the sector/index: the
example I noted was that International index is uniformly higher average
ER than Domestic. Likewise Small Cap ER's > Large Cap ERs. It isn't
used to pick Small Cap vs Large Cap, but the competing Index fund
products offered _within_ Small Cap, and offered _within Large Cap, etc.

FWIW, another layer to this is to understand how well a fund tracks the
index it claims to be following, and where exceptions lie. Likewise,
there's also aspects of this to which equities a fund company picks to
represent that Index, as this varies between fund companies: this is
why its generally a good idea to *not* mix between fund companies unless
you know the in-the-weeds details as to how they define their fund
cutoffs, so as to minimize risks of unknowingly having a gap and of
unknowingly having an overlap.

-hh