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
> 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

Forgot to mention, it's all in a trust. No probate for us.