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Late to the Party - Last Minute Retirement Planning

2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
Surely I'm not the only one who eschewed the advice of, well, everybody throughout one's life and only began thinking about retirement once it became abundantly clear that I might actually live to a ripe old age. Best laid lack of plans and all that ... :)

If anyone has considered or applied a transfer from a Rollover IRA to a Roth IRA to maximize untaxed returns on TSLA investment, please take a moment and look this over.

Planning for a sustainable financial future became a priority for me late last year as I pondered the long running flat-line that was TSLA, right up to when I learned more about the company and was ready to dive in. This has opened the door to the possibility that I might be able to pull this off at the last minute, after all.

Since that time I've opened a personal account at Fidelity (mostly because my employer's 401K was there), then learned how (being over the 59.5 years old threshold) I could roll the meager 401K into a Rollover IRA and buy TSLA. Which I have done.

Later in this year I learned about the Roth IRA and sold some other assets in o tax-freerder to buy into it at the $7000 maximum allowed for my age. Which, frankly, ain't much in that account, but TSLA has treated the meager investment nicely. Considering how in five years I'll be able to withdraw from that account I'd love to have more there earning its keep over those years, but couldn't find a way to contribute more.

Until now, as I've stumbled across how one may roll any amount from their Rollover IRA into the Roth IRA, with the caveat that taxes must be paid on the amount coming out of the Rollover IRA, as "income" on that year's return. Fair enough. Based upon what I've found in a few Roth threads here, getting funds in the Roth from the Rollover should be a priority. Mostly because what TSLA will make over the next five years will likely be far in excess of the cost to make the transfer.

This led into a drawn out exercise in math, as I worked out the ways to go about this. There are several variables to consider and after much contemplation a plan developed that appears to be a good fit for me and I'd like to bounce it around here in case someone might see some glaring oversight on my part.

Here's the parameters at play:

1. TSLA holdings are scattered across: a) Individual Account; b) Rollover IRA; c) Roth IRA.

2. 2019 taxes on the transfer would be paid by selling TSLA from the Individual account, as I've been quite generous with my investment, bleeding cash and couch cushions nearly dry. Did I mention how this is a last-minute retirement plan?

3. Some of the shares in the Individual plan are now long-term, offering a lower tax rate on their sale.​


Working it out on a spreadsheet over a five year forecast, three scenarios were considered. Each scenario was calculated to compare:
a) 25%/year average gain in SP for five years (being conservative compared to 2020 gains)
b) 100%/year average gain in SP for five years (still feels a little conservative, ... for TSLA)​
This revealed how the costs of taxes on the Rollover transfer, and cost of long-term shares sold to pay those taxes would be recovered in the Roth over 4-5 years at 25%/year growth, and in 1-2 years at 100%/year growth.

Scenario 1: moving only an amount from Rollover to Roth that keeps my total "income" for tax purposes that won't bump it into the next level of taxes and keeps the amount of tax owed modest.

Scenario 2: moving an amount that would bump me up one level on the tax rate scale and more than double.

Scenario 3: moving all from the Rollover to Roth which would bump the tax rate up two levels.​

I've come to the decision to go with the first scenario before year end so it will apply to 2019 taxes. This reduces the tax burden due to a smaller number of shares to be transferred, and, to be sold to cover the tax on the shares being moved. Keeping the most shares in HODL status while significantly increasing the Roth balance.

Immediately after the new year the same amount will be transferred again from Rollover to Roth, which will show as income on 2020 taxes.

These two transactions will result in about half of the Rollover balance being moved into the Roth. While keeping cost to do so low, and providing time for SP upward moves to possibly offset the costs further if gains are realized over the months between now and tax days for 2019 and 2020 returns.

If this makes any sense at all, and, there is any angle that has been overlooked or otherwise unconsidered, please let me know. I've got just a few days to roll on this. (pun intended)
 
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2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
Apologies for the typos, missed the window to edit.

"assets in o tax-freerder to buy" should read "... assets in order to buy ..."

and

"Scenario 2: moving an amount that would bump me up one level on the tax rate scale and more than double."
should read;
Scenario 2: moving an amount that would bump me up one level on the tax rate scale and more than double the taxes owed.
 

ReddyLeaf

Active Member
Mar 19, 2014
1,578
2,377
WA State
Probably won’t make a stitch of difference, but you might consider timing the conversions. For example, I have my regular, rollover, and ROTH IRAs all at the same brokerage and I believe that I can do the conversion directly. I’ve not tried to time stock trade conversions yet, but I believe that they should be possible. My past conversions so far in 2018, 2019, and 2020 have all been mutual funds, and all priced at the closing price of that day’s request. For 2021, I plan to try to move TSLA stock during a temporary lower SP. In principle, it should work to minimize dollars converted (and taxes paid), while maximizing the number of shares moved. Many years ago one could recharacterize (undo the conversion), for example if the stock market went down, but I don’t think that’s allowed anymore.
 
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2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
I'll look into that. Thanks for the suggestion.

One thing that is a key point for me is to assure that whatever is transferred does NOT exceed the break over total that would put reported income into the next higher tax bracket.

A strategy I have considered, to know the value being transferred exactly, would be to move some shares to SPAXX, then transfer those to the Roth, taking the dynamic of TSLA out of the equation.

Edit: Have verified that I can move shares myself using the Fidelity interface. Including choices about whether to pay tax now or later, and selecting the shares to be moved, opening up the option to transfer cash from SPAXX if I want to be precise in the dollar amount.
 
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2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
I've found the trickiest part is estimating what the 2020 W2 will show as "income" in order to determine what amount to transfer.

The 2020 tax table isn't out, so the 2019 is the reference being used for calculations.

At this point I'm leaving several thousand dollars worth of wiggle room to avoid going over.
 

2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
Some other things I learned over the past year for folks looking to get started (this is what I did and is not meant as investment advice):

The 59-1/2 year rule that allows transfer from a limited 401K to a Rollover IRA. This usually will offer more trading options if TSLA isn't available to select from the 401K choices.This rule also allows more flexibility elsewhere, The annual limit to Roth contribution is increased, as an example.

Instead of rolling into the Rollover IRA, a roll into a Roth IRA from the 401K is an option. There will be tax due on whatever is transferred. A little more thought regarding tax brackets and how this reported income will affect the IRS Return, and, the overall cost of the transfer should be fully understood. As mentioned in earlier posts, the gains in the Roth will not be taxed when they are withdrawn after the 5 year period has elapsed. So, it seems to me a good place to build up the account to maximize what you can use after any gains accrued over time. The way I look at it is that the taxes will have to be paid eventually no matter what. Which is better, paying them before the dollar amount increases, or, after? Something to think about.

One mistake I made was not committing more of my assets to TSLA earlier. I had metals accumulated since the late 1990's that I could have sold sooner and began reaping the gains from more TSLA shares. After decades of holding my spare assets in metals to avoid depreciation over time I finally shook off that old-school thinking once it became clear how putting that into TSLA could provide the potential of a greater level of financial security to someone getting into the stock investment game late in life.

Keep in mind that this is from my experience as a complete noob. TSLA is the first stock I have ever decided to purchase, evah.

My goal is to create a thread where others learning and who are starting late in the game may share tips and tricks which might help maximize their returns from investing in TSLA.
 

MABMAB

Member
Jun 19, 2019
831
3,077
Mulligan's Valley
For good targeted advice may I suggest you post in the following format

Asking portfolio questions - Bogleheads

Or like this:

Asking Portfolio Questions - Bogleheads.org

Over here:

Bogleheads Investing Advice and Info

If you post specifics pertaining to TSLA expect the discussion to get sidetracked. Following the specific format they like will also help to organize the mish mash of thoughts in your head. I found your post here tough to read.

FWIW, I moved some IRA to Roth this year to take us up to max of current tax bracket. I might do so again next year but it might be tougher taxwise. Gains have done well, very glad we did this. I've read it is better to do in down markets.
 
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X-pilot

Member
Jul 5, 2019
65
45
Florida
I've found the trickiest part is estimating what the 2020 W2 will show as "income" in order to determine what amount to transfer.

The 2020 tax table isn't out, so the 2019 is the reference being used for calculations.

At this point I'm leaving several thousand dollars worth of wiggle room to avoid going over.

I'm confused about some of statements regarding the years (i.e. 2019 or 2020) The IRS 2020 tax tables are out. See 2020 Instruction 1040 TAX AND EARNED INCOME CREDIT TABLES (irs.gov) Also, when you get into the next higher tax rate, it ONLY apples to the marginal amount of money above the lower rate's top.

Also, IMHO I would personally NOT put all my eggs (hopes) into a single basket (TSLA) and expect the future to be like the current year (2020), which has been very good to us.
 

2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
I'm confused about some of statements regarding the years (i.e. 2019 or 2020) The IRS 2020 tax tables are out. See 2020 Instruction 1040 TAX AND EARNED INCOME CREDIT TABLES (irs.gov) Also, when you get into the next higher tax rate, it ONLY apples to the marginal amount of money above the lower rate's top.

Also, IMHO I would personally NOT put all my eggs (hopes) into a single basket (TSLA) and expect the future to be like the current year (2020), which has been very good to us.

Thanks for the link, don't know how I missed that.
EDIT: the linked document doesn't show tax rates beyond income level of $56,844

Also, interesting about how to apply the rates. I had read that and wasn't certain that was what it implied. Appreciate the clarification. This may task my meager spreadsheet skillz to deal with that. Ought to be a good excuse to play.

For now TSLA still appears to have good fundamentals for growth over the next several years, and the greater market is still behind the curve on what Tesla actually is as a business. I'd have to find something else like this to diversify into. I do have a few shares of ARKK and ARKG and could expand on those, someday.

In the mean time the "Late to the Party" plan is to temper emotions, HODL, and hope what I have will continue to grow to a comfortable level. I'd like to see an SP of 1500 or so, then, I'd be inclined to spread it around more. That, or, begin gambling with options in the Roth, after eclipsing the steep learning curve to wrap my head around the variables and strategies.

There is a lot for me to learn, and my time is constrained until I can leave the job. Not there yet and am hoping to be retired by late 2021 or maybe 2022.
 
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CHGolferJim

Supporting Member
Jan 28, 2014
1,107
480
Chapel Hill, NC
For your Roth Conversion (Traditional IRA to Roth IRA), the entire amount transferred does not necessarily get taxed. Check into how the Trad. IRA assets are classified as contributions and gains within the IRA, etc. Also, suggest you not obsess about limiting the conversion amount to avoid raising your marginal tax rate, as the increased tax is minimal compared to the long-term benefit, especially if you foresee tax rates increasing. Another option is to bring forward deductions/credits to shelter more of the Conversion. Also, there is some element of political risk in the decision, as it is unclear what changes in taxation will occur in the next administration.
 
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2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
For your Roth Conversion (Traditional IRA to Roth IRA), the entire amount transferred does not necessarily get taxed. Check into how the Trad. IRA assets are classified as contributions and gains within the IRA, etc. Also, suggest you not obsess about limiting the conversion amount to avoid raising your marginal tax rate, as the increased tax is minimal compared to the long-term benefit, especially if you foresee tax rates increasing. Another option is to bring forward deductions/credits to shelter more of the Conversion. Also, there is some element of political risk in the decision, as it is unclear what changes in taxation will occur in the next administration.

Thanks for the good info. More key words to search on.

My leaning toward obsession about the "marginal" tax rate is mostly because it will be necessary to sell shares to cover additional taxes. The only shares that are long-term (lower tax rate) are 50 shares in the Individual account. My earliest share purchases are just over a year old now. Next ones go from short to long-term mid-January, then a few more in February, and after that, June.

It seems unwise to sell shares from the Rollover IRA just to cover paying taxes when those shares could otherwise be moved to the Roth to provide tax-free returns in the future.

I have no deductions that I am aware of to bring forward. No house, no kids, no debt, no significant investment losses. Are there other deductions I should consider?

Working the tax considerations out seems to be a lot like trying to reverse engineer something Rube Goldberg built.
 

CHGolferJim

Supporting Member
Jan 28, 2014
1,107
480
Chapel Hill, NC
Thanks for the good info. More key words to search on.

My leaning toward obsession about the "marginal" tax rate is mostly because it will be necessary to sell shares to cover additional taxes. The only shares that are long-term (lower tax rate) are 50 shares in the Individual account. My earliest share purchases are just over a year old now. Next ones go from short to long-term mid-January, then a few more in February, and after that, June.

It seems unwise to sell shares from the Rollover IRA just to cover paying taxes when those shares could otherwise be moved to the Roth to provide tax-free returns in the future.

I have no deductions that I am aware of to bring forward. No house, no kids, no debt, no significant investment losses. Are there other deductions I should consider?

Working the tax considerations out seems to be a lot like trying to reverse engineer something Rube Goldberg built.


If you haven’t already, consider shifting future contributions to Roth vs. Traditional unless (I’m unaware) doing both allows for additional contributions and tax-deferred gains. You could also hold the Traditional until later years when you have more deductions. Sounds like you’re younger and may be taking the standard deduction near-term.
 
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2daMoon

Mostly Harmless
Nov 25, 2020
666
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If you haven’t already, consider shifting future contributions to Roth vs. Traditional unless (I’m unaware) doing both allows for additional contributions and tax-deferred gains. You could also hold the Traditional until later years when you have more deductions. Sounds like you’re younger and may be taking the standard deduction near-term.

"Younger" may be generous, but I'll take it. :D Let's just say I will qualify to receive Social Security benefits in 2021. (hence the thread title)

Agreed, what little is yet to come from the employer's 401K will be immediately rolled directly into the Roth. I had already rolled the rest of that account into the Rollover earlier this year when a co-worker clued me in on the 59 1/2 rule. This was before fully grasping the Roth's advantages. I've been playing catch-up all this year, adjusting as I learn. Let's just say that I'm cramming for the final exam, so to speak. :eek:

What I have in the portfolio is pretty much everything that will be available to me going forward, unless I find a winning lottery ticket blowing down the road. I'm aggressively working to maximize gains, while avoiding very high risks and limiting exposure to some less risky, and less orthodox strategies which someone with more time and resources could avoid.
 

2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
As I'm wanting of a few crucial variables it is difficult to compare whether it would be a benefit in the long term to move the contents of the Rollover to the Roth immediately. That is, will the gains over "X" period of time in the Roth will more than exceed the taxes that would be paid pre-gains? This is the conundrum.

Would it be unlikely that the tax hit now, which would have to be paid by selling shares in the Individual account, would be more detrimental as the potential gains on those shares sold to pay taxes would not be exceeded by the tax-free Roth gains over time?

With a little more research behind me, I've found that the "Roth calculation tools" all seem to limit themselves to max returns of 20-25%, and are therefore unable to assist in determining a more reasonable example of an outcome for a TSLA shareholder. Still, by simple multiplication of the results by factors of 2 and more do provide strong motivation for getting the balance of the Rollover into the Roth as quickly as possible. My feeling is that TSLA's run will continue for a while. At what rate of increase I won't speculate, but it seems to me that figuring it out based upon only 25% would be very, very, conservative.

One factor that still isn't clear is how the tax for the Rollover shares transferred to the Roth is calculated. Is there any aspect of Long term vs. Short term shares that applies in any way to this?

The total amount in Rollover has tax due before going into the Roth. Are part of those taxes calculated based upon capital gains rates? Or, is the total value of the amount transferred from Rollover to Roth simply added to the Income reported on the tax forms, and whatever rate the IRS places the total income on the Tax Tables is what is paid?

In my case, I rolled from the 401K to the Rollover IRA in batches as my confidence in TSLA increased. There are shares reaching the 1-Year (Long term) mark in January, February, April, May, July, and September.

Is there good reason to wait for the date that each set of shares in the Rollover eclipses 1 year in order to reduce the Capital Gains Tax on the amount that will be reported? In other words, is the value of the rollover broken into taxes as "income" on the initial amount, and then taxes on Capital Gains on the balance of that amount?

If the transfer value in $ is simply added to the total income for the IRS, then a best strategy might warrant doing transfers over years, and keeping the tax at the lowest possible rate based upon overall reported income. Unless, the growth of the Roth would net greater value over that period of time.

To get to the bottom of this a call to the broker was in order. Unfortunately, Fidelity has had very long hold times when calling in. I've listened to their Muzak for over an hour before giving up, a couple of times. Maybe after the new year I will be able to reach an agent more quickly.

I do realize how this is all quite convoluted. :confused:
 

ReddyLeaf

Active Member
Mar 19, 2014
1,578
2,377
WA State
As I'm wanting of a few crucial variables it is difficult to compare whether it would be a benefit in the long term to move the contents of the Rollover to the Roth immediately. That is, will the gains over "X" period of time in the Roth will more than exceed the taxes that would be paid pre-gains? This is the conundrum.

Would it be unlikely that the tax hit now, which would have to be paid by selling shares in the Individual account, would be more detrimental as the potential gains on those shares sold to pay taxes would not be exceeded by the tax-free Roth gains over time?

With a little more research behind me, I've found that the "Roth calculation tools" all seem to limit themselves to max returns of 20-25%, and are therefore unable to assist in determining a more reasonable example of an outcome for a TSLA shareholder. Still, by simple multiplication of the results by factors of 2 and more do provide strong motivation for getting the balance of the Rollover into the Roth as quickly as possible. My feeling is that TSLA's run will continue for a while. At what rate of increase I won't speculate, but it seems to me that figuring it out based upon only 25% would be very, very, conservative.

One factor that still isn't clear is how the tax for the Rollover shares transferred to the Roth is calculated. Is there any aspect of Long term vs. Short term shares that applies in any way to this?

The total amount in Rollover has tax due before going into the Roth. Are part of those taxes calculated based upon capital gains rates? Or, is the total value of the amount transferred from Rollover to Roth simply added to the Income reported on the tax forms, and whatever rate the IRS places the total income on the Tax Tables is what is paid?

In my case, I rolled from the 401K to the Rollover IRA in batches as my confidence in TSLA increased. There are shares reaching the 1-Year (Long term) mark in January, February, April, May, July, and September.

Is there good reason to wait for the date that each set of shares in the Rollover eclipses 1 year in order to reduce the Capital Gains Tax on the amount that will be reported? In other words, is the value of the rollover broken into taxes as "income" on the initial amount, and then taxes on Capital Gains on the balance of that amount?

If the transfer value in $ is simply added to the total income for the IRS, then a best strategy might warrant doing transfers over years, and keeping the tax at the lowest possible rate based upon overall reported income. Unless, the growth of the Roth would net greater value over that period of time.

To get to the bottom of this a call to the broker was in order. Unfortunately, Fidelity has had very long hold times when calling in. I've listened to their Muzak for over an hour before giving up, a couple of times. Maybe after the new year I will be able to reach an agent more quickly.

I do realize how this is all quite convoluted. :confused:
I’m having a hard time understanding your stream of consciousness, but one thing is abundantly clear: Get expert advice or learn A LOT more.

First, there is a subtle difference between a regular IRA with and without deductible principle. What is your basis? There are ways to reduce, but not necessarily eliminate paying taxes on IRAs, and subtle differences.

Second, the ROTH account is most beneficial to younger people, high return assets like TSLA, or those wanting to pass on assets to another generation. The ROTH returns are tax free, and future returns may greatly exceed principal when measured in 50+ years. Regular IRA returns are almost always taxable, but there are ways to minimize the taxes.

Now, a bit of learning:
For example, early on in the IRA accumulation phase, I added $2000/yr to the IRA while deducting that amount from my annual taxes. At that time, ALL money coming out of the IRA would be tax deferred to the future, but still 100% taxed (principal and gains). In subsequent years, I made too much money to benefit from the $2000 deduction, but was still able to add the annual principal, but after I paid taxes on it. Thus, the IRS allows/requires me to calculate my basis (Form 8606) every year I make changes to the basis. They are kind enough to reduce my future tax burden for those $2000 deposits that I already paid taxes on (no double taxation). For several years, I added $2000 after taxes, then eventually made less salary and was able to add again before taxes.

Eventually, some brilliant legislation was passed and ROTH IRAs were authorized. I stopped adding to the regular one (but kept it open and didn’t rollover) and instead opened a ROTH and only added to it. The ROTH is completely different, no $2000 principal deduction, but everything (principal and earnings are tax free when removed after 5yr and 59-1/2). I wasn’t confident about future tax policy at the time, believing that it was a ploy to get everyone to convert and pay their taxes earlier (I think this was during the Clinton admin and the stock bubble). Anyway, fast forward to 2011, and I wasn’t making enough salary to pay taxes, but wanted to buy my Nissan LEAF and still benefit from the $7500 tax credit. Thus, I converted about $50K from my IRA to my ROTH, just enough so that I’d have a $7500+ tax liability to offset the credit. I repeated that process again in 2015 for my S70D. Each of those times I had to recalculate and update my non-deductible/deductible IRA basis.

Now, my annual taxable income is low enough that I’m able to convert a small amount from regular to ROTH every year and not pay taxes. I’m under 70, so no required minimum distributions yet, and I’m planning to continue this method until then, though maybe bumping up the conversion amount to the 10% tax rate.

Finally, there was a post in one of the early retirement threads that linked to an article which ran a series of removal/conversion IRA calculations, including paying the 10% early removal penalty, using the 72(t) withdrawal method, etc. Though perhaps not exactly your situation, it exemplifies the need for a detailed analysis. Surprisingly large different results ($100K++) are obtained from the different scenarios, making assets last decades longer. Everyone’s situation is different, but time in a ROTH is your friend.
 
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2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
Thank you very much for the detailed response.

I’m having a hard time understanding your stream of consciousness, but one thing is abundantly clear: Get expert advice or learn A LOT more.

I'm fully in the "or learn a LOT more" category. This is the sole purpose of this thread. :) Your relating real-world experience is very helpful and bears upon the aspects I'm looking to clarify.

I've been misled by "paid experts" often enough in my experience to want to educate myself beyond a knowledge level of "just enough to be dangerous" prior to engaging their services. Blind faith isn't a strong suit for me. ;)

Trying to put the questions I have into easy to understand form has been challenging thanks mostly to our cryptic system of taxation.

First, there is a subtle difference between a regular IRA with and without deductible principle. What is your basis?

Well, here's the low-down on the overall picture.

Have only ever needed to file a 1040 or 1040EZ in the past. So no Form 8606 calculated basis exists currently.

Age: 62 later this year

Status: Currently Employed, Married, no Heirs, no Real Estate, no Debt.

Portfolio:
401K (still receiving contributions each paycheck, promptly rolled into IRAs, essentially kept empty)
(the following accounts are 99.9% TSLA, spare change is used to purchase some flavors of ARK)
Investment Account:
Individual Account funded from (taxed) savings. Created account about 14 months ago.​
Retirement Accounts:
Rollover IRA funded from (untaxed) employer's 401K. Created account about 12 months ago.
Roth IRA funded from cash and a transfer from Rollover IRA. Created account 6 months ago.​

The high points: I put off retirement planning until about a year ago. Have managed to squirrel away some capital over the years, and was distrustful of the stock market, so, held savings in precious metals to thwart erosion by inflation. This worked well to preserve purchasing power. Over the past year TSLA has nearly 5X'ed the Cost Basis.


Regular IRA returns are almost always taxable, but there are ways to minimize the taxes.

I'd be interested to determine if any of those ways are applicable. If hinged upon ownership of real estate, dependents, and/or debt, there may not be much to apply for this case. It won't surprise me at all if there aren't.


...
Thus, the IRS allows/requires me to calculate my basis (Form 8606) every year I make changes to the basis. They are kind enough to reduce my future tax burden for those $2000 deposits that I already paid taxes on (no double taxation).

Best guess, I'll file my first 8606 sometime after retirement. The spreadsheet provided up-thread indicated how the 8606, based upon my estimates for W2 and 1099-R, is unlikely to be required for the 2020 tax year return.


Anyway, fast forward to 2011, and I wasn’t making enough salary to pay taxes, but wanted to buy my Nissan LEAF and still benefit from the $7500 tax credit. Thus, I converted about $50K from my IRA to my ROTH, just enough so that I’d have a $7500+ tax liability to offset the credit. I repeated that process again in 2015 for my S70D. Each of those times I had to recalculate and update my non-deductible/deductible IRA basis.

This is helpful. I'll keep in mind how the IRA basis should be weighed using the Form 8606 as part of future planning.


Now, my annual taxable income is low enough that I’m able to convert a small amount from regular to ROTH every year and not pay taxes. I’m under 70, so no required minimum distributions yet, and I’m planning to continue this method until then, though maybe bumping up the conversion amount to the 10% tax rate.

This seems somewhat similar to what I am considering. The opportunity to usefully fund the Roth will be over only the next couple of years and in 8 years I'll be 70.

My query is to determine whether transferring all shares from the Rollover IRA to Roth would provide any substantial benefit when comparing potential TSLA gains over only 5 years to the tax cost of the transfer. Otherwise, I'd only contribute the $7K (taxed) annually to the Roth.

44 shares of TSLA were transferred from Rollover IRA to Roth IRA before the end of December. This amount kept the tax hit for the 2020 Income Tax minimized by getting close to the next bracket.

The Rollover IRA holds about 3X the dollar value of Roth IRA at this time.

In early 2021 I'm considering transferring a similar amount of (untaxed) shares in addition to making the allowed $7K post-tax contribution. 2021's Income taxes (due in 2022) should be about the same, or less, depending upon whether I choose to retire this year. This plan will make the Roth significantly larger and I can sell shares in 2022 to cover the taxes on the transfer. Hopefully, continuing to reap gains in TSLA in all accounts between now and 4/15/22.


Everyone’s situation is different, but time in a ROTH is your friend.

This is a sentiment I keep seeing, and this is what has led me to look into determining if the gains over 5 years in a late-funded Roth (100% TSLA) would justify taking the tax hit for transferring all shares from the Rollover IRA right now.

Will the cost of taxes on the current value being transferred (and cost in value and gains of shares sold to cover the taxes) be offset (or blown away) by the gains of TSLA residing in the Roth tax free over the next five years?

Any taxes owed on the Rollover shares will be paid from selling Long-term shares from the Investment Account at 15% Capital Gains tax on what was earned by TSLA.

In other words, do I pay maybe 24% tax now on TSLA in the Rollover to transfer it and watch it grow tax free in the Roth, or, leave it in the Rollover and pay ~15% Capital Gains taxes on the Rollover after five years of TSLA growth?

Something tells me that the Roth shares of TSLA could grow over five years to more than offset the cost of the transfer.

I want to get the variables dialed in to run annual SP gain scenarios to demonstrate the potential for this to occur.

Honestly, this never seemed possible before and a tremendous weight has already been lifted from my shoulders in 2020. Now it is time to study what choices to make going forward to maximize this windfall. Hopefully, this response better relates the point of view I'm coming from. A "Late to the Party" perspective of someone facing retirement soon, leveraging TSLA's growth potential to make a Hail Mary pass and score, late in the 4th quarter, to win the game. :)

Or, to put it another way ...

 
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ReddyLeaf

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Mar 19, 2014
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WA State
.........if the gains over 5 years in a late-funded Roth (100% TSLA) would justify taking the tax hit for transferring all shares from the Rollover IRA right now.

Will the cost of taxes on the current value being transferred (and cost in value and gains of shares sold to cover the taxes) be offset (or blown away) by the gains of TSLA residing in the Roth tax free over the next five years?

Any taxes owed on the Rollover shares will be paid from selling Long-term shares from the Investment Account at 15% Capital Gains tax on what was earned by TSLA.

In other words, do I pay maybe 24% tax now on TSLA in the Rollover to transfer it and watch it grow tax free in the Roth, or, leave it in the Rollover and pay ~15% Capital Gains taxes on the Rollover after five years of TSLA growth?

Something tells me that the Roth shares of TSLA could grow over five years to more than offset the cost of the transfer.

I want to get the variables dialed in to run annual SP gain scenarios to demonstrate the potential for this to occur.
Exactly! Ok, now I feel that you have a good handle on things. I’ve not done the spreadsheet calculations, but my WAG is that TSLA will outperform at about +50%/yr for 5yr, and therefore it’s much better to convert all of your 401(k) and non-ROTH IRAs into ROTHs, especially if you can pay the taxes now from a non-retirement taxable account. Definitely continue to add $7K/yr while working into ROTH and buy more TSLA. If you can “time” your conversions when the SP is down (good luck with that), then even better. I have all my accounts at a single brokerage and “think” it might be possible to time the conversion, but haven’t tried it myself so I don’t really know how long it actually takes.

BTW, I should take my own advice, but I just can’t seem to convert everything into TSLA or into a ROTH. Since I started in mutual funds decades ago in college, maxing out my IRA & 401(k), I’m financially secure enough to not need the additional risk. Plus, I don’t have an additional $200k+ in a non-retirement account for paying the taxes. I’m on a pre-defined glide path and don’t want to disrupt it, even though it means forgoing some gains. Once I cross the 59-1/2 age limit, I may revise my plans and pull more than the minimum out of the 401(k) to convert into ROTH. In the end, I’ll probably pay more in taxes, but now it still feels better to defer them as long as possible.

Good luck with your calculations and conversions. I will be interested in what you discover.
 

2daMoon

Mostly Harmless
Nov 25, 2020
666
4,586
Terra
Doing a little back of the napkin math (or maybe it was Bistromath) I think I've come up with an answer to whether there is any advantage in transferring from a Rollover IRA to a Roth IRA with only a short term ahead. TL-DR, there isn't.

Using $150,000 to represent a Rollover amount available for transfer to Roth,
Add $60K to represent an annual income for tax calculation purposes,
Work the 2019 tax table (no 2020 1040 Instruction available) to calculate tax on $210,000, then, break down the taxes per tax level to generate a total Income Tax for the example. 1040 Taxes are $48,500. Of which $36,675 applies to the Rollover's $150K.

Subtracting the tax ($36,675) from the $150K leaves $113,325 being added to the Roth,

Scenario 1

Based upon a pessimistic(?) 10% / year TSLA gains for 5 years this amount added to the Roth nets $57,855 in tax free gains, or, about $21,180 more than the tax losses on that $150K from the transfer.

Based on an optimistic(?) 50% / year TSLA gains for 5 years this amount nets $860,562 in Roth gains, or, $747,237 more than the tax losses from the transfer.​

Scenario 2

Next, I ran it through the mill another way, leaving the $150K intact and transferring to Roth, taking taxes from selling Long-term shares in the investment account. After boiling this down it nets $35,557 over 5 years, and, I'm also out 80 shares. Working it at $700 SP including taxes on the Rollover and taxes on the shares to cover their additional 15% tax. Losses on 80 shares at the 10% / year rate is an additional $90,189 for an overall loss of $54,632 for this nutty plan.​

Doing this again at 50% / year nets $1,012,199, after subtracting the tax cost. Then, subtracting the losses of share cost and gains lost from shares sold to cover taxes leaves gains of $374,324 over 5 years for this snipe hunt.​

Scenario 3

Lastly, if the Rollover is left as is, and the same math is performed for a 10% gain over 5 years, then, remove the 15% Long-term tax, the Rollover IRA's $150K generates ~$55,340 of gains after taxes.​

Calculated for 50% / year Rollover gains generate $818,203 after removing 15% Long-term tax at withdrawal.​


It seems most prudent to leave the shares in the Rollover, as in Scenario 3. As always a simple HODL strategy beats the other scenarios, regardless of the annual gains percentage used.

One caveat might be a scenario where the taxes can be paid with cash on hand (no share dilution). I didn't do the math on that one as it wouldn't be applicable to my situation.

Another caveat could be that I've misunderstood how the tax will be calculated on the Rollover IRA transfer to Roth IRA. For the example above it was simply added to "income" for the 1040 tax table.


This was a good exercise. I hope it may help someone else considering such a strategy.
 
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