Watch and learn. You can comfortably live “tax-free”, too..
intercst
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The concepts are straightforward enough, but that video was difficult to follow for some reason.
Maybe it’s his droning monotone.
Excellent post.
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Make sure you watch to the end:
For the person planning to leave money behind, the whole thing inverts. Don’t harvest the brokerage account, the step up handles it. Do convert the IRA [to a Roth].
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One thing I didn’t understand well enough is that you don’t want your traditional retirement accounts to be too big, basically for the reasons he points out. I would have benefited by less in retirement accounts and more in regular brokerage.
So I can’t really follow this strategy because I have the RMD gun barrel staring at me.
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I came to understand the magic of keeping my taxable account intact after I’d been retired for a few years because DELL and Pfizer, my two biggest winners at the time, were in my IRA.
intercst
Pluses and minuses to everything.
Retirement accounts have protections from lawsuits and bankruptcy which vary by state. Given my former profession, it was a question of when, not if, I was sued. So a little sleep well at night factor given the sometimes seeming randomness of jury trial results. I maxed out retirement accounts every year and then $$$ in brokerage accounts and side businesses (LLCs).
Ironically had the misfortune of making too much to qualify to open a Roth IRA.
Now retired and living off my IRA. Taking enough to stay within the 24% bracket*. Do I need all of it now? No. But drawing down so when RMDs are required in about 15 years we will hopefully still be in the 24% bracket or lower.
*When we were both working, DW & I were in the top bracket by a long shot. We were part of the “evil 1%ers”. So 24% seems low to us. Plus, the gross majority of our monies come from dividends/cap gains so the max there is 20%. The LLCs are losing money on paper but put $$ in our pockets.
Tax laws are different from when I started 30+ years ago and they will be different 30 years from now. Like I’m teaching my nephew, you take the information you have now and make a decision that you can live with. But know that years from now the information will change and you will have to make a new decision.
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I made too much as well, so I did backdoor Roths although it took me longer than it should have to figure it out.
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OK, I watched about 75% of this and his advice doesn’t seem to hold much water.
His example illustrates a scenario where a person or couple has taxable income, as well as spending needs, well below the 22% tax bracket.
In this scenario, the person/couple has a significant IRA(s) and significant taxable assets.
His advice appears to be that the person/couple would be better off realizing the gains on the taxable assets at 0% rather than doing a Roth conversion. That make almost no sense.
That IRA, as he goes on to mention, will eventually be subject to RMDs which can make that mandatory income not only taxable at the 22% rate, but also make the person subject to IRMAA.
Even in the case of passing, the Roth money passes tax free - just like the stepped cost basis on a taxable account. That IRA passes with a potential tax trap due to the new 10 year rule - and this can be even worse if the beneficiary is in their highest earning years when the parent passes.
He states it comes down to one question, are you going to spend the money or pass it on. In both cases, I am doing a Roth conversion/IRA withdrawal on any money I am not spending. On money I am spending, I am probably still pulling it from my IRA while I am in the 12% tax bracket. Why would I pull from my taxable account - which has the potential to generate tax free income in the future while leaving the potential IRA tax bomb? I can ALWAYS harvest those gains on my preferred schedule. I don’t have the same luxury on IRA assets.
One last thing I don’t think he addresses is the fact that LTCG rates are subject to the whim of Congress. While the Roth is as well, it is significantly less likely that Roths will lose their tax free status (that is virtually what defines a Roth), especially for lower tax brackets, than the risk of LTCGs being taxed at a different rate in the future.
For those not aware, the capital gain tax rate has been changed over a dozen times in the last 100 years. The Roth has been tax-free since its creation in 1997.
In his scenario, this person isn’t living tax free - they are potentially creating a tax bomb on those IRA holdings due to RMDs. Someone (absent giving it to charity) is going to eventually pay income tax on those IRA holdings and I would decide on 8 days a week and twice on Sunday to realize IRA income at 12% via a roth conversion than to harvest a gain at 0%.
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