Thanks. I didn’t know that. I may consider it.
That was not quite my situation. I never put money into a Roth while working, I preferred to maximize my 401K. But when I retired and my income fell, taking money from the IRA I moved the 401K money into while keeping my tax rate low was useful in reducing the amount I will have to take out when I am forced to.
In your example the person might be trading the benefit of the IRA deduction when the tax rate is high for the Roth deduction when the tax rate is low.
I wouldn’t do a Roth conversion at 61, myself. Assuming I was working, which I was at 61.
The one thing I learned when I retired is that all the calculations you make have to be revisited, since it is all about cash flow, not wealth. If you have post-tax savings you can control your taxable income by controlling what percent you take from your IRA versus savings to live on.
Until you reach the age of 73, when you have to start withdrawing a certain percentage of your retirement funds. This is the RMD, or Required Minimum Distribution.
And that’s why it is good to take money out when you still have control of how much to withdraw. Otherwise you’d only have to convert what you needed to live on, which, for us, is not much, thanks to Social Security.
I’m not at all sure what you mean by this statement. Are you talking about converting money to a Roth before the RMD kicks in?
At any point, you can withdraw however much money from your IRA as you choose. You can withdraw all of it as soon as you’re eligible to do so, or you don’t have to take any of it out until age 73.
Exactly. A CPA I visited suggested this. The trick is to take money out of the IRA when the tax hit is relatively small because your other income is small, which reduces the amount you need to take out because of the RMD. The amount clearly depends on ones financial situation. If you need money to live on, you can put it in more liquid investments, not a Roth.
I’m still a few years away from retirement, but these are some traditional/roth moves I’ve made in the last few years. My typical behavior is to put money in a Roth, because with three standard deductions, but only one income, my tax burden is low.
One year when I did lots of consulting my tax rate was particularly high, so I put money into a traditional IRA. A few years later I bought an EV, so I needed enough tax liability to collect the full amount of the EV tax credit. I moved some money from the traditional IRA to a Roth in order to increase my tax liability for the year.
Another consideration with a Roth is that you can effectively contribute more than with a traditional, because the amount put in a Roth is $max+tax instead of just $max.
Only from the perspective of convenience. Nothing prevents you from investing the difference in tax savings in a non-qualified brokerage account. Heck, your taxes may end up lower when you pull it out, since the tax rate will be at capital gains rates rather than income rates.
Please correct me if I’m wrong, but I believe that capital gains realized in a normal investment account are taxed as they occur, not when you withdraw them from the account. The capital gains in my Fidelity account during 2023 were part of my income for 2023.
They are - only if they’re realized.
But if you’re holding mutual funds and never sell, there’s always some internal turnover, resulting in some ongoing taxable events. Some brokerages offer “funds of funds” which can limit taxable exposure.
So let’s say you have 1 share of BigMutual S&P500 worth $10,000. As the fund manager for that mutual fund, I have to buy and sell the individual stocks it holds to keep up with my benchmark (of accurately reflecting the S&P500). As I buy and sell, that’s going to filter to you as a capital gain (or loss). It’s usually pretty minor, but some funds are very active with a lot of turnover, which can add up.
But then your advisor says, “hey - LittleMutual has started up this new mutual fund. Its internal holdings are nothing but shares of BigMutual S&P500. They don’t do any buying or selling within the portfolio of other stocks or funds, so there’s no turnover at all.”
It’s pretty handy. They also probably tack on some expense fees for the convenience, though.
Yeah, if you buy, say AAPL and hold for 30 years, there’s no taxable event until you sell. If you’re in an index fund that rebalances, you’ll have taxable events when the fund buys/sells stuff on whatever schedule they do that.
And if they issue dividends, well that gets more complicated.
In the last eight years combined I have reported about $5000 of Capital Gains in my index mutual funds. And I have hundreds of thousands in capital gains sitting in the funds still (though some are from 8-20 years ago)
How, exactly, do you know this? Is it reported somewhere? Or is it the fact that you purchased shares at a far lower prices than what they are worth today?
Yes, its reported somewhere. The brokers are required to keep track of the cost basis of your investments. When you sell the funds or securities the cost basis is reported to the IRS.
Yes, I am aware of that. I was asking @Mighty_Mouse if he had a method to discover exactly how much in capital gains is housed within his mutual fund(s).
Yes. Every line on my statement shows the basis. The difference between that and the current value is unrealized gains.
OK, understood. But is there a line on the statement that shows the exact total of unrealized gains at the time the statement was generated?
I have to subtract the number in the Basis column from the number in the Current Value column.
It’s not EXACT as the basis isn’t updated daily, but in an index fund the difference is tiny, because the balancing activity is so small. Like no more than a few hundred or a couple thousand on a number in the half million range.
Your Fidelity account statements have this - it’s a column labeled “unrealized gain/loss”. And if you go online to look at your portfolio, each security has a “purchase history” option so you can see every lot of that security you have acquired, along with that specific lot’s gain/loss.
Just wanted to chime in:
-I too have had trouble finding a fee for service advisor. I just want someone to review what I have and make allocation / risk suggestions. I simply haven’t been able to bring myself to give control AND 1% of it all to someone else.
-I’m 95% index funds, and probably 75% of that is in S&P500 and NASDAQ (and yes I know there’s a lot of overlap). The rest is mostly in Total Bond Fund and a tiny bit in a REIT. Emergency cash is in Money Market.
-I recently moved some into a midcap index fund to get some of the concentration away from the Magnificent 7.
-75% of what we have is in 401ks and Rollover IRA. The other 25% is in an individual brokerage account
I’m 50 and my wife is 45. We could survive on what we have. Double it and we’ll thrive.
If that spurs any thoughts from anyone I’m all ears.