Actions before moving to higher tax area

[Cat-tirement]

I am on the cusp of ER (with DW following in a couple of years), and working on strategies for funding life thereafter. We have no income tax in our current location, but after a couple or three ER years here, will move to a state with an income tax. (For the location and lifestyle, not for the tax. ) So, I am thinking that we should do some things a little differently than we might otherwise in those first few years to take advantage of the lack of income tax now. Some options I am considering:

1. Do Roth conversions well into the 25% bracket, since the bump from 15% to 25% is only slightly higher than the future state tax of 9%.
2. Roth conversions could be limited by availability of non-IRA funds to pay taxes, but a currently unused HELOC could be tapped to pay taxes, so conversions could be larger. (HELOC would be payed off with proceeds from sale of house when moving to new location.)
3. Being pre-59.5, there is of course the 10% penalty for taking out IRA/401k funds early. But if the future state tax is 9%, the penalty is effectively only 1%, so it may be worth getting more out now to reduce future RMDs.
4. Take LTCGs earlier, which are taxed as ordinary income in the new location.
5. Take a small lump sum from a minor pension plan.

I am interested in your thoughts or recommendations on any of the above, including which ones would be more advantageous than others.

 

[LongPrime]

Moving to Oregon, which has the 9% IC ?

 

[yakers]

Sounds like you have it right. Similar reverse process for those leaving a high tax state for a low/no income tax state.

 

[Brat]

OP, Oregon's income tax is not 9%, that is the marginal rate after deductions and credits. The best way to model that is to download the Oregon return in TurboTax (or download the return from the State website) and play with your numbers.

 

[pb4uski]

OP, Oregon's income tax is not 9%, that is the marginal rate after deductions and credits. The best way to model that is to download the Oregon return in TurboTax (or download the return from the State website) and play with your numbers.

I have found this site useful for estimating federal and state income taxes in the past. I'm not sure how accurate it is for Oregon but for my state it not spot on (there is a nuance that it overlooks IIRC) but is close enough to be useful.

http://www.tax-rates.org/income-tax-calculator/?action=preload&ref=embed_refer_taxbrackets#undefined

 

[jebmke]

I have found this site useful for estimating federal and state income taxes in the past. I'm not sure how accurate it is for Oregon but for my state it not spot on (there is a nuance that it overlooks IIRC) but is close enough to be useful.

Income Tax Calculator - Tax-Rates.org

I ran this for a fictitious taxpayer in Maryland and, like many summaries of state income taxes, it completely ignored the county income tax that rides on top of the Maryland state tax. Depending on income level, this can increase the state tax in Maryland from 50%-100% There really is no good substitute for using a legitimate tax prep software to do this exercise. Software is not expensive, especially after the normal tax season is over.

 

[BBQ-Nut]

1. Being pre-59.5, there is of course the 10% penalty for taking out IRA/401k funds early.

Actually, the tax laws do allow you to withdraw from a 401k (but not an IRA) w/o the 10% penalty, if it is with your current employer and you quit at age 55 (or older).

Check the Plan documentation to see if your 401k allows this - the tax law allows it, but depending on how the Plan is written up - it may not.

I went thru this with my Company's Plan Administrator - got it straightened out and my 401k Plan does allow for early withdrawals w/o penalty if I quit age 55.

 

[Cat-tirement]

OP, Oregon's income tax is not 9%, that is the marginal rate after deductions and credits. The best way to model that is to download the Oregon return in TurboTax (or download the return from the State website) and play with your numbers.

I have already been playing with the Oregon return for TurboTax. I am aware that 9% is the marginal rate. However after no more than a couple of years after arriving, our pensions start kicking in, which will more than fill the lower brackets. Any LTCG or Roth conversions on top of that will get hit for 9%.

So, the main concern is which actions taken before moving would have the biggest benefit. The secondary question would be does it make sense to pay some early IRA distribution penalties or HELOC interest in order to cover the federal taxes for even larger Roth conversions before moving.

 

[Cat-tirement]

Actually, the tax laws do allow you to withdraw from a 401k (but not an IRA) w/o the 10% penalty, if it is with your current employer and you quit at age 55 (or older).

Check the Plan documentation to see if your 401k allows this - the tax law allows it, but depending on how the Plan is written up - it may not.

I did actually ask about that a while ago, and my 401k plan does allow this, but I had forgotten about it. Thanks for that reminder! I'll have to run some TurboTax scenarios with this approach.

 

[Brat]

Looking forward to your arrival in Oregon. Welcome home!

 

[Cat-tirement]

Looking forward to your arrival in Oregon. Welcome home!

Thanks We're eager to make the jump once we get through all the family transition stuff, though the timeline of that is unpredictable right now.