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Old 06-11-2013, 10:31 PM   #21
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Contrary to a lot of what is often assumed, tax rates may be significantly lower in the future
If you have time, could you make a case for this viewpoint?

I think it is impossible, but I'm all eyes for your ideas.

Ha
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Old 06-12-2013, 04:42 PM   #22
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So here is the interesting dilemma. Conventional wisdom is you withdraw money from tax deferred account last to maximize the benefits of tax free compounding. Conventional wisdom is that you delay SS, because this is the least expensive COLA adjusted annuity you can purchase.

I am pretty sure that conventional wisdom is correct in both cases if these were strictly independent decisions, but they are not. If you do both you'll end up with a big spike in income at age 70. I haven't done any calculations, but my estimate is that tax wise you are much better off smoothing your income in your 60s than seeing a big spike in the 70s.

The question is which is the better approach, withdrawing money from your IRA and/or doing a ROTH conversion or taking SS at full retirement age or possible even at 62. Or even more fundamentally how do you go about modeling this question?
I didn't try modeling it, beyond looking at what would happen if I left my IRA untouched and delayed SS to age 70 as longevity insurance (for my wife; remember how benefits interact.) With it untouched, and adding in distributions from taxable accounts, SS was heavily taxed. If I tapped the IRA from 59 1/2, then with taxable distributions I could still keep taxable income quite low, run down the IRA, and keep most of SS tax-free past age 70.

So that's the plan for me.
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Old 06-12-2013, 09:06 PM   #23
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If you have time, could you make a case for this viewpoint?

I think it is impossible, but I'm all eyes for your ideas.

Ha
I don't think I can make a convincing case either way, but my point is that the common wisdom (which is currently that tax rates will be higher) isn't always right. As Yogi Berra said, "it's hard to make predictions, especially about the future". Therefore, in the case of taxes, we should discount the cost of a dollar paid in the future versus a dollar paid today.
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Old 06-12-2013, 09:13 PM   #24
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If you have time, could you make a case for this viewpoint?

I think it is impossible, but I'm all eyes for your ideas.

Ha
I am not the person you were responding to but I could make case for tax rates potentially being lower in the future.

Possibility 1 -

There is a move among some to simplify the tax code, reducing overall marginal rates, and possibly collapsing them to fewer ranges. Doing this and still raising similar revenue would undoubtedly require a number of deductions to go away and/or require a hard cap on itemized deductions. While changing the tax code in this measure might be designed to raise the same revenue (or more or less), some people would end up paying more and some would end up paying less. However, it is certainly possible that the tax rates for a particular income could be less.

Possibility 2 -

I tend to think Possibility 1 is more likely. However, various people have floated the idea of some sort of VAT or national sales tax with a corresponding reduction in income tax rates. This might even be combined with Possibility 1. We all seem to think of future tax rates with the idea that US government basically collects income taxes. However, it could be that income taxes would be reduced with some sort of other tax coming in to replace some or all of the revenue.
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Old 06-12-2013, 09:52 PM   #25
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This might be a topic for another thread, but the OP and several follow-on posts indicate that there are some sophisticated models running! I am nowhere near where I would need to be knowledge-wise to code up an accurate model, so I just figure i-orp is ok until I can study-up. Which brings me to the question...for those of you that have a model, how different is i-orp? I know the inputs are pretty basic, but if you shoe-horn your situation, how close does it come to your detailed plan? Or is it out in left field?
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Old 06-13-2013, 03:55 AM   #26
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I didn't try modeling it, beyond looking at what would happen if I left my IRA untouched and delayed SS to age 70 as longevity insurance (for my wife; remember how benefits interact.) With it untouched, and adding in distributions from taxable accounts, SS was heavily taxed. If I tapped the IRA from 59 1/2, then with taxable distributions I could still keep taxable income quite low, run down the IRA, and keep most of SS tax-free past age 70.

So that's the plan for me.
I am starting to lean that way. I think I'll spend the next 5 year being more aggressive about converting my T-IRA into a ROTH fill up the 25% bracket at least. Then start withdrawals from the T-IRA at 59.5. I'll still plan on delay SS until 70, but I still not convinced that taking it at 62,and keeping the money in IRA may not result in higher wealth for me/heirs unless I live to be near 90.

This would be a pretty cool calculator if somebody wanted to build it, essentially take the output of FIRECALC and with some assumptions about present and future taxes....
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Old 06-13-2013, 07:35 AM   #27
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This would be a pretty cool calculator if somebody wanted to build it, essentially take the output of FIRECALC and with some assumptions about present and future taxes....
+1. And if it included the impact of various courses of action on PPACA subsidies, that would be a bonus. Those tIRA -> Roth conversions are going to put some folks above the 400% of the FPL cutoff--even $1 over the line = "no soup for you!"
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Old 06-13-2013, 11:34 AM   #28
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+1. And if it included the impact of various courses of action on PPACA subsidies, that would be a bonus. Those tIRA -> Roth conversions are going to put some folks above the 400% of the FPL cutoff--even $1 over the line = "no soup for you!"
Thanks for the reminder.
This thread has me wondering if I am doing right by only TIRA - Roth conversion so that I don't pay Fed tax when others are burning through the 10% and 25% range? I can't guess at what the answer would be so I ran some numbers.

1st I assume the worst case scenario (for taxes). 7% return and no more Roth conversions. I am 58. This brings our TIRA up to about $500k by the time I am 70-1/2. RMD on this starts at $20k.
The taxes in this plus our SSA and a few dividend and capital gains came out to about a thousand dollars. $11k of SS income was taxable and total spending money for this instance was $68k for the year.

So the answer is, my situation does not cause concern and worse case is the 10% tax bracket without conversions. I will continue the Roth conversions so long as I don't have to pay fed taxes.
Another reason to go easy on conversions is the health care thing as noted above.
Yet another reason is that most believe that I dollar is move valuable when you are 60 versus when you are 80 years old.
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Old 06-13-2013, 12:17 PM   #29
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This can be complicated. Even more complicated if you live in certain states. Here in Georgia most income is taxed at 6%. Starting in the year you turn 62, which is next year for us 35K per person of retirement income is excluded from state taxation. Starting in the year you turn 65 the exclusion increases to 65K of retirement income for each person. They use a very liberal definition of retirement income including pensions, SS, investment income and withdrawals from retirement plans. In our case our pensions plus a small annuity will put us near the top of the 15% federal income tax bracket and just over the state income retirement income exclusion so we will do no IRA-Roth conversions until we turn 65. The year we turn 65 we will start making IRA to Roth conversions up to the top of our state income tax exclusion and delay taking SS until as much $$ as possible is converted to the Roth accounts.
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Old 06-13-2013, 12:36 PM   #30
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Because there are so many variables, there is no one plan that best fits all the people. Everyone should evaluate their own situation and determine what is best for them. By estimating your future situation you can make a better plan at this time.
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Old 06-13-2013, 09:40 PM   #31
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Specifically for my situation, with my own software code and assumptions...

I found that giving up the $2500 tuition tax credit (160k-180k AGI) and one $6500 Roth contribution (178k-188k AGI) (my tIRA screws up the backdoor, but DW can still do it) is worth it if I Roth convert more than $40k this year. That's the break-even point. However, if I fully optimize this year's Roth conversion at something like $131k converted, that results in a whopping $100/year additional spending throughout retirement compared to sticking at $160k AGI and picking up the credits. Next year these credits won't apply (DS graduates and DW retires I hope), so the more Roth the better unless I can make a case for ACA subsidies.

I've said it before, making substantial Roth conversions has always looked like a big retirement income booster any way I looked at it. The exact details of how you do it is much less important.
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Old 06-14-2013, 11:22 AM   #32
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I've said it before, making substantial Roth conversions has always looked like a big retirement income booster any way I looked at it. The exact details of how you do it is much less important.
In my non-detailed analysis that I did a while back, I accidentally discovered that moving to a non-income tax state made a MUCH bigger difference than Roth conversions. It was an "all other things being equal" ASSumption, but still, the difference was huge! It seems like optimizing on finer and finer points is what I tend to do, but I'm trying to convince myself that just knowing what the various levers are, I can do an ok job without getting down to the whopping $100 savings items
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Old 06-14-2013, 01:47 PM   #33
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In my non-detailed analysis that I did a while back, I accidentally discovered that moving to a non-income tax state made a MUCH bigger difference than Roth conversions. It was an "all other things being equal" ASSumption, but still, the difference was huge! It seems like optimizing on finer and finer points is what I tend to do, but I'm trying to convince myself that just knowing what the various levers are, I can do an ok job without getting down to the whopping $100 savings items
sengsational,

What was the state tax rate for you pre-move? (I'm assuming 0 post-move.)

omni
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Old 06-14-2013, 06:54 PM   #34
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...(snip)...

What Rick fails to mention is if you followed conventional wisdom you also delayed taking social security (for at least one spouse) until age 70. Because SS benefit increase pretty rapidly a working couple that take SS at age 70 can easily get another $50-70K in SS benefits. This means that you'll see a spike in income of more than $200K for a couple when they turn 70 and the tax bracket will shoot up from say 15% to 33%.

So here is the interesting dilemma. Conventional wisdom is you withdraw money from tax deferred account last to maximize the benefits of tax free compounding. Conventional wisdom is that you delay SS, because this is the least expensive COLA adjusted annuity you can purchase.

I am pretty sure that conventional wisdom is correct in both cases if these were strictly independent decisions, but they are not. If you do both you'll end up with a big spike in income at age 70. I haven't done any calculations, but my estimate is that tax wise you are much better off smoothing your income in your 60s than seeing a big spike in the 70s.

The question is which is the better approach, withdrawing money from your IRA and/or doing a ROTH conversion or taking SS at full retirement age or possible even at 62. Or even more fundamentally how do you go about modeling this question?
I don't know who's conventional wisdom is mentioned in the OP.

Ours was to do aggressive Roth conversions before starting SS. So we payed at a moderate tax rate up to SS rather then sitting around enjoying a near zero rate. But I think the long term picture will work in our favor. Also I have come to dismiss the idea to hold off SS until late in retirement but that's a personal and highly tax dependent situation. My projections are we will be paying moderate taxes in the future although we can only guess at the tax policy.

Circumstances change too. Before the 2008 equity decline we had a different plan. One just has to be flexible.
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Old 06-17-2013, 05:54 PM   #35
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sengsational,

What was the state tax rate for you pre-move? (I'm assuming 0 post-move.)

omni
7% in North Carolina, and no breaks for retirement income. Plus, I've got family and spent a lot of time in Florida growing up (at least then I didn't even notice the heat and humidty). Being selective on location, you can find some reasonable property taxes there too.
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Old 08-30-2013, 10:28 AM   #36
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Great thread, don't know how I missed it first time around.

I am building my own spreadsheets to model options and I've been told I'm pretty good with Excel, but the complexity is almost endless...sigh. I may seek professional help.
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Old 08-30-2013, 11:27 AM   #37
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Same problem here. SS and MRD hit at 70 if I continue with my plan.

Currently, I have about $1 in Roth IRA for every $5 in a tIRA. I plan to convert over the next few years until I have at least $2 in Roth for every $4 in tIRA. My thinking is that the extra Roth money will allow me to look later in the year at things like marginal tax rates and hopefully avoid being bumped up into a higher one by switching my withdrawals to the Roth IRA. I want some flexibility in choosing what source I tap for funds - regular $$, tIRA $$, or Roth $$.
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Old 08-30-2013, 12:18 PM   #38
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If I only do 0% LTCG and/or Roth conversions to 400% FPL from 2014 until I am 70, I expect to slightly break into the 25% tax bracket (adjusted for inflation) when I begin SS. However, since that is so far away and there are some many moving parts, if I am slightly in the 25% bracket then I will view it as a nice problem to have.

I don't see much sense in losing Obamacare subsidies and paying more in taxes now to possibly save later since a lot can happen in the next 10 years. I'll take my chances.
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Old 08-30-2013, 01:08 PM   #39
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I figure I'll have 9 years to to do Roth conversions and initially will just use up the 15% tax bracket. At some point, I may use up the 25% tax bracket, if it looks like it will help me avoid 25% for several years after age 70.5. I'm certain we'll be into the 25% tax bracket after RMDs if we do nothing.
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Old 08-30-2013, 01:25 PM   #40
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I figure I'll have 9 years to to do Roth conversions and initially will just use up the 15% tax bracket. At some point, I may use up the 25% tax bracket, if it looks like it will help me avoid 25% for several years after age 70.5. I'm certain we'll be into the 25% tax bracket after RMDs if we do nothing.
Sounds a lot like our situation, and we have 11-13 years to figure out what's best, likely the sooner the better...recognizing there is no absolutely correct answer.
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