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Old 08-30-2013, 01:39 PM   #41
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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 possible save later since a lot can happen in the next 10 years. I'll take my chances.
pb4uski:

Question: Don't you only have to be concerned about the 400% FPL until you are 65 because you will then be on Medicare?

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Old 08-30-2013, 01:57 PM   #42
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pb4uski:

Question: Don't you only have to be concerned about the 400% FPL until you are 65 because you will then be on Medicare?

Thanks,
Mark
Yes, you are right! I knew that but forgot. I added that nuance to my spreadsheet but I'll still be in 25% from 70 to 90 and 15% thereafter so it helps a bit.

But then I also added maximum HSA contributions from now until age 65 (which reduces my O-MAGI and increase my Roth conversions without breaching 400% FPL) I will be in the 25% tax bracket only from 70 to 78.
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Old 08-30-2013, 03:04 PM   #43
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But then I also added maximum HSA contributions from now until age 65 (which reduces my O-MAGI and increase my Roth conversions without breaching 400% FPL) I will be in the 25% tax bracket only from 70 to 78.
Aren't you ASSUMING that the exchange plans will have HSA style plans...I know that HSA barely made it under the new thresholds for coverage, but they may only be available outside of the exchange?
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Old 08-30-2013, 04:13 PM   #44
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AFAIK no problems with HSA eligibility in state exchanges. It's up to each state to determine what kind of coverage they want. RI has already announced HSA plans.
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Old 08-30-2013, 08:42 PM   #45
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Aren't you ASSUMING that the exchange plans will have HSA style plans...I know that HSA barely made it under the new thresholds for coverage, but they may only be available outside of the exchange?
Yes and I already know that my state will have HSA plans available.
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Old 10-08-2013, 03:02 PM   #46
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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.
+1 re probably seeking professional help. Losing my mind around estimating taxes due to RMD's and desire to delay SS to 70. Already have more than $2 of every 3 in after tax accounts, with a bit of that in roth. Considering tIRA to roth conversions from age 60-70. And spreadsheets? They are not my friend...
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Old 10-08-2013, 07:25 PM   #47
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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.
Possibility 1: In the United States of America Not in my wildest dreams.
Possibility 2: Strong possibility of a VAT, IMHO, but income taxes will NEVER be reduced.
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Old 10-08-2013, 08:49 PM   #48
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+1 re probably seeking professional help.
Don't get discouraged. You can do it as well as they can.

Find good tax software and try several scenarios. Good tax software should be able to warn you about the AMT.

All we can do is assume that future tax rules will be the same as today. Of course, they will not, but we are only looking for differences between alternatives to give us a strategy.

I have been assuming a simple return of 6% for everything, an estimated 3% inflation rate, a SS annual increase of 2% and no outside income. An estimated first year income after taxes comes from FIREcalc and is increased 3% a year. I take no account of the value of the house (we would get a one-time Mulligan on capital gains--two, one for each of us, if we downsize and sell twice and we both live that long). Also both of us life to 100. More on assumptions later.

I use a fairly simple spreadsheet to keep track of the cases year by year. It includes a column for tIRA balance, tIRA withdrawals, SS income (from our annual SS reports), total income from the last two, taxes to be paid on that, after-tax income, how much of after-tax income is moved to the Roth and Roth balance. On a second page, I look at each year, with columns for SS, income from tIRA (100% taxable), and the income tax calculated for the total income. (Deductions are assumed to be the same in all cases.) The amount of tIRA withdrawn is incremented in successive rows in even steps. The income tax for each case is calculated using the tax prep software. The last column calculates the marginal % tax rate between steps. This column tells me when to stop withdrawing from my tIRA each year. That info goes back to the first page (manually). On the first page again, when the tIRA is exhausted, the deficit in the inflation-adjusted after-tax income is made up by withdrawing from the Roth. I sum all the income taxes paid to age 100. I then look at the balances of the tIRA and Roth at 100 years.

The calculations are tedious because there is a bit of manual work, but the tax software does the heavy lifting.

The simple answer is that the payoff for converting tIRA to Roth is big, especially if it can be done before RMDs start at 70.5. I looked at withdrawals from the tIRA to the top of the 0%, 15% and 25% tax brackets. I am still checking my calcs, but it looks like the more I convert and the earlier I convert, the better. What happens in the first 10 years makes a big difference. There are several cases where we lose to inflation (can't maintain 3% increase in after-tax income until 100) and where we run out of money in the tIRA and Roth accounts well before 100. Typically, this warns me that we are starting with too high a draw.

The simplifying assumptions work well enough to give us a strategy. Remember, we are only looking for DIFFERENCES between methods. The things that don't change don't matter. Of course, we will do the taxes every year with the current rules. The assumptions are conservative. If we make more money, we pay more taxes. No problem.

The big attraction for me is that potentially we could have zero taxable income and be freed from making quarterly payments or even filing. We could be protected from many possible future tax increases and rules. Of course, they could always tax Roths, but I suspect that other things would happen first.

Again, do not be discouraged. It is not as hard as you may think.
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Old 10-09-2013, 09:11 AM   #49
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Also both of us life to 100.
This assumption could sabotage your retirement plans. The real longevity risk is not that you both live to 100. The real risk is that one of you (probably the wife) lives to 100 and the other one dies early. Instead of two SS incomes and a low tax rate, suddenly the survivor has one SS income and a high tax rate. Look at the tables for single vs married joint and you will see what happens. Although the cost of living goes down slightly when there is just one, this is probably equalized by the loss of one SS income. There are the same RMDs, so the survivor now is probably taxed on their SS as well as paying at the higher rate.

When running our portfolios through the different planners, this is the case that forces the survivor to pay huge taxes. Maximizing roth conversions to lower the RMDs is definitely important. It is also important to make sure spending assumes this worse case scenario. You don't want to spend too much early on assuming taxes will not eat away at your savings and then the worse happens and the surviror is stuck paying away their savings in taxes.

I can't stress enough how important this assumption is!
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Old 10-09-2013, 09:17 AM   #50
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Possibility 1: In the United States of America Not in my wildest dreams.
Possibility 2: Strong possibility of a VAT, IMHO, but income taxes will NEVER be reduced.
Never say NEVER Lots of economists believe taxing labor and using the tax code to influence behavior is inefficient and hurts job creation.

Possibility 3 of course is that Congress decides that "rich" people who own Roth IRAs should have to pay tax on them anyway. It is legislation after all, which can be changed. I would expect when the deficit hits the $30 - $40 Trillion range that they will be looking for more revenue and hitting retirement accounts will be easier than hitting Social Security, but who knows.

Still over 20 years out for me until RMD, so I am taking the bird in the hand vs. betting on the future and maxing out all current tax deductible options. If anything is left after that I hit a ROTH to hedge my bets some.
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Old 10-09-2013, 09:20 AM   #51
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This assumption could sabotage your retirement plans. The real longevity risk is not that you both live to 100. The real risk is that one of you (probably the wife) lives to 100 and the other one dies early. Instead of two SS incomes and a low tax rate, suddenly the survivor has one SS income and a high tax rate. Look at the tables for single vs married joint and you will see what happens. Although the cost of living goes down slightly when there is just one, this is probably equalized by the loss of one SS income. There are the same RMDs, so the survivor now is probably taxed on their SS as well as paying at the higher rate.

When running our portfolios through the different planners, this is the case that forces the survivor to pay huge taxes. Maximizing roth conversions to lower the RMDs is definitely important. It is also important to make sure spending assumes this worse case scenario. You don't want to spend too much early on assuming taxes will not eat away at your savings and then the worse happens and the surviror is stuck paying away their savings in taxes.

I can't stress enough how important this assumption is!
My planning assumption is that the cost of running the house stays the same (assuming my wife stays in the house after I'm gone). All other expenses are cut in half.

Sure, she would pay more taxes. But, in our situation, her spending would drop by more than the taxes would go up.
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Old 10-09-2013, 11:11 AM   #52
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My planning assumption is that the cost of running the house stays the same (assuming my wife stays in the house after I'm gone). All other expenses are cut in half.

Sure, she would pay more taxes. But, in our situation, her spending would drop by more than the taxes would go up.
But SS income has dropped as well. So income is less and taxes are more.

In addition, non-housing expenses would probably not be cut in half. Food is probably more than half as there may be more waste. In retirement, you may have assumed one car for you both to share. So transportation may stay the same. Travel is more expensive as a single person. I suggest people actually run both the budget numbers and the tax numbers.
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Old 10-09-2013, 03:41 PM   #53
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RetiringAt55 is making some very good points here. Some of us have done our retirement planning without adequately looking at what may happen after one spouse is gone.
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Old 10-09-2013, 04:26 PM   #54
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Originally Posted by Ed_The_Gypsy View Post

I use a fairly simple spreadsheet to keep track of the cases year by year. It includes a column for tIRA balance, tIRA withdrawals, SS income (from our annual SS reports), total income from the last two, taxes to be paid on that, after-tax income, how much of after-tax income is moved to the Roth and Roth balance. On a second page, I look at each year, with columns for SS, income from tIRA (100% taxable), and the income tax calculated for the total income. (Deductions are assumed to be the same in all cases.) The amount of tIRA withdrawn is incremented in successive rows in even steps.[FONT=quote]

This is really helpful, but can you explain what you mean by the last sentence?

[FONT=quote] The income tax for each case is calculated using the tax prep software. The last column calculates the marginal % tax rate between steps. [FONT=quote]

Again, can you explain what you mean by "between steps?"

[FONT=quote] This column tells me when to stop withdrawing from my tIRA each year. That info goes back to the first page (manually). On the first page again, when the tIRA is exhausted, the deficit in the inflation-adjusted after-tax income is made up by withdrawing from the Roth. I sum all the income taxes paid to age 100. I then look at the balances of the tIRA and Roth at 100 years[FONT=quote]

This process not unlike something that ORP does, although probably more accurate and reliable, would you agree?

[FONT=quote] The simple answer is that the payoff for converting tIRA to Roth is big, especially if it can be done before RMDs start at 70.5. I looked at withdrawals from the tIRA to the top of the 0%, 15% and 25% tax brackets. I am still checking my calcs, but it looks like the more I convert and the earlier I convert, the better. What happens in the first 10 years makes a big difference. [FONT=quote]

Agreed. I'm definitely leaning towards converting to Roth from ages 60-70 (retiring end of next year at 59 1/2)

There are several cases where we lose to inflation (can't maintain 3% increase in after-tax income until 100) and where we run out of money in the tIRA and Roth accounts well before 100. Typically, this warns me that we are starting with too high a draw.

Can you please explain how you run out of money when you used Firecalc to estimate initial expenses and success rate? Is it because you ran numbers in Firecalc excluding taxes?

The big attraction for me is that potentially we could have zero taxable income and be freed from making quarterly payments or even filing. We could be protected from many possible future tax increases and rules. Of course, they could always tax Roths, but I suspect that other things would happen first.

Again, do not be discouraged. It is not as hard as you may think.
[/QUOTE]

Yes, it's sounding less "taxing" all the time (sorry, I couldn't resist)...
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Old 10-09-2013, 05:36 PM   #55
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This assumption could sabotage your retirement plans. The real longevity risk is not that you both live to 100. The real risk is that one of you (probably the wife) lives to 100 and the other one dies early. Instead of two SS incomes and a low tax rate, suddenly the survivor has one SS income and a high tax rate. Look at the tables for single vs married joint and you will see what happens. Although the cost of living goes down slightly when there is just one, this is probably equalized by the loss of one SS income. There are the same RMDs, so the survivor now is probably taxed on their SS as well as paying at the higher rate.

When running our portfolios through the different planners, this is the case that forces the survivor to pay huge taxes. Maximizing roth conversions to lower the RMDs is definitely important. It is also important to make sure spending assumes this worse case scenario. You don't want to spend too much early on assuming taxes will not eat away at your savings and then the worse happens and the surviror is stuck paying away their savings in taxes.

I can't stress enough how important this assumption is!
Your warning is welcomed, but it addresses a separate subject. One of us is certain to die first, and before 100, of course. This will happen in every case. The assumption of living to 100 will not sabotage our retirement plans because we are going to have zero taxable income after the conversion is completed, having eliminated everything in our tIRA so no RMDs. The big hit would come if, for example, one of us dies before we finish converting the tIRA to Roth. In that case, the survivor finishes the conversion as fast as possible and takes the tax hit early.

Remember this is an investigation into which strategy to choose today, comparing strategies on a common basis.

Your statement
Quote:
Maximizing roth conversions to lower the RMDs is definitely important.
is the crucial point in ALL cases, as I have just proved to myself.

The biggest threat to us is Congress eliminates the right to convert, or taxes Roth distributions or taxes SS directly instead of indirectly. Congress has a way of eliminating options that are legal when people actually start to use them (for example, the free loan from restarting SS).
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Old 10-09-2013, 05:45 PM   #56
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Never say NEVER Lots of economists believe taxing labor and using the tax code to influence behavior is inefficient and hurts job creation.
"NEVER!"

I agree totally with the economists, but Congress only listens to economists when the economists tell them how to increase revenues, usually by sneaky taxation (e.g., the Tax Torpedo--thank you, David Stockman ).

Two changes would supercharge this economy:
1) A flat income tax.
2) Eliminating income tax on corporate earnings.
Neither one will ever come to pass in this universe.
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Old 10-09-2013, 06:39 PM   #57
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This assumption could sabotage your retirement plans. The real longevity risk is not that you both live to 100. The real risk is that one of you (probably the wife) lives to 100 and the other one dies early. Instead of two SS incomes and a low tax rate, suddenly the survivor has one SS income and a high tax rate. Look at the tables for single vs married joint and you will see what happens. Although the cost of living goes down slightly when there is just one, this is probably equalized by the loss of one SS income. There are the same RMDs, so the survivor now is probably taxed on their SS as well as paying at the higher rate.
Some good points, but as a single person I look at this the other way. What is the impact if I was to get married? I don't assume a slight increase in the cost of living at all, unless we were to live life very simple and not travel much, eat out, go to events that cost money, etc.
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Old 10-10-2013, 03:14 PM   #58
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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.
That is pretty much my plan. I am also most likely to get a nice inheritance which will really get me into a higher tax bracket. But there are worse things than paying a lot of taxes. . . .
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Old 10-10-2013, 03:27 PM   #59
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Never say NEVER Lots of economists believe taxing labor and using the tax code to influence behavior is inefficient and hurts job creation.

Possibility 3 of course is that Congress decides that "rich" people who own Roth IRAs should have to pay tax on them anyway. It is legislation after all, which can be changed. I would expect when the deficit hits the $30 - $40 Trillion range that they will be looking for more revenue and hitting retirement accounts will be easier than hitting Social Security, but who knows.

Still over 20 years out for me until RMD, so I am taking the bird in the hand vs. betting on the future and maxing out all current tax deductible options. If anything is left after that I hit a ROTH to hedge my bets some.
The first thing will be to provide RMD for any inherited Roths, based upon the originators age, and do the same thing for regular IRAs/Roths. Prevent perpetuates since the retirement vehicles are supposed to be for the originator. As suggested you would take the age of the originator and make that the value used for the RMD. The treatment of IRAs that came in during the 2000s where the clock is reset on inheriting the IRA/401k does give a big advantage to those who inherit allowing 2 to more generations of tax free growth.
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Old 10-10-2013, 05:57 PM   #60
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ESPlanner does a good job estimating the living standard of the surviving spouse. While the absolute values may be suspect, there is good value in comparing various scenarios.
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