Looking for a tax efficiency calculator

[Raymond01]

I read this article with interest:
https://www.fidelity.com/viewpoints/retirement/tax-savvy-withdrawals

So I'm looking for a calculator that will help me determine how to withdraw my funds from my various accounts (401K, IRA, Roth, Taxable etc.) in the most tax efficient way, including doing Roth conversions.

Anyone know of a simple to use calculator that would handle those 2 issues?

 

[sengsational]

I do not know of a 'simple' one, but I know about i-orp

I suspect a simple one wouldn't really work well because it's a complicated problem.

For people doing i-orp for the first time, I have a few standard warnings...

First, set aside a bunch of time (don't be in a hurry) to read about all of the inputs.

And finally one 'gotcha' (that got me) was how the equities/bond split thing worked. i-orp will preferentially sell bonds (because of the lower rate of return), but in reality, for most people, the asset allocation will continually be adjusted back to your target (across all tax categories). For that reason, you should put the SAME equity/bond split % in all tax categories. This way, the optimization will not use the asset class rates of return as a 'lever', and instead use taxes exclusively.

Also, I recommend using the 'extended' version (look towards the bottom and find the link). I figure if you're going to do a model, use all of the input and do a few 'what if' runs that have Roth conversion 'on' and 'off'.

 

[corn18]

I-orp is the only one I know of that does that.

https://www.i-orp.com/TaxRepeal/index.html

 

[MRG]

The whole article is a pitch for Fidelity's wealth management. They know iorp is the only tool, they want to pitch their service. How many Fidelity folks haven't seen a teaser for this service? I've had several.

 

[COcheesehead]

I-orp is the only one I know of and its not the greatest.

What you are asking for isn't that hard in reality as long as you track where you are tax wise for the year.

 

[Raymond01]

Thanks for the input so far. I messed with I-Orp but didn't have much luck.

I think there are 2 issues for me.

1. My wife and I retired at age 52. Per the I-Orp documentation:
There can be some interesting results for early retirees. Spending is increased by inflation every year. Tax-deferred Account withdrawals are fixed at the same level before the age of 59½. If there are sufficient funds in the After-tax Account the difference is made up from there each year. If the After-tax Account is small then the fixed withdrawal will be larger than necessary during the early years and the excess is transferred to the After-tax Account. Then the After-tax Account is used to cover the difference between spending and Tax-deferred Account withdrawals during the years just before 59½, or the 5 year expiration.

2. I haven't used a 72t so I should be able to use this feature explained in the documentation, but I don't see these options on the tool:

Early Retirement Tax-deferred Account Distribution Strategies.
Early Retirement (ER) is defined by ORP to be the ages between retirement and 59 1/2, the age at which you can withdraw from your tax advantaged accounts without the 10% early withdrawal penalty. The IRS has rules about withdrawing from your Tax-deferred Account during ER. ORP offers you these options:


Does anyone have experience with these issues before I email the support person?

 

[Kelor]

Maybe I'm wrong here, but my NQ generates enough income in dividends, and there's really not much I can do about it other than sell these highly appreciated assets. Aren't many others on this site in the same predicament?

 

[RunningBum]

Mods, could you please expand the thread subject to some thing "Looking for a calculator to help with tax-efficient ER withdrawals", or something like that, rather than the vague teaser with the "..."? Thanks.

 

[Raymond01]

Mods, could you please expand the thread subject to some thing "Looking for a calculator to help with tax-efficient ER withdrawals", or something like that, rather than the vague teaser with the "..."? Thanks.

Good call.

 

[braumeister]

Fixed (I hope)

 

[Raymond01]

I do not know of a 'simple' one, but I know about i-orp

I suspect a simple one wouldn't really work well because it's a complicated problem.

For people doing i-orp for the first time, I have a few standard warnings...

First, set aside a bunch of time (don't be in a hurry) to read about all of the inputs.

And finally one 'gotcha' (that got me) was how the equities/bond split thing worked. i-orp will preferentially sell bonds (because of the lower rate of return), but in reality, for most people, the asset allocation will continually be adjusted back to your target (across all tax categories). For that reason, you should put the SAME equity/bond split % in all tax categories. This way, the optimization will not use the asset class rates of return as a 'lever', and instead use taxes exclusively.

Also, I recommend using the 'extended' version (look towards the bottom and find the link). I figure if you're going to do a model, use all of the input and do a few 'what if' runs that have Roth conversion 'on' and 'off'.

These are great tips, thanks much!

 

[Midpack]

Roth conversions is an important but separate question. After you’ve chosen that course, keeping your taxable income as (inflation adjusted) level year after year is probably the best practice. It’s not rocket surgery. There couldn’t be a “calculator” without knowing future tax rates, but that’s an unknown....

 

[sengsational]

Thanks for the input so far. I messed with I-Orp but didn't have much luck....Does anyone have experience with these issues before I email the support person?

This is a good forum for "getting used to it" questions, I think.

The help text is explaining the reality of the IRS rules, and those rules are baked into the simulator.

So it's just warning your that if you spend all of the money in your after-tax accounts, then there's IRS penalties for pulling from retirement accounts before 59 1/2. One alternative to get around the penalties is to set up a 72t. The question for you is "are you going to run out of after-tax money before 59 1/2?" Most people answer 'no' to that. Not everybody. But none of this will affect your model run if the sum of your after tax accounts (also Roth basis, since there's no penalty for using that either) is enough to cover your spending between now and 59 1/2.

 

[Raymond01]

Can someone please explain in a simplistic way how to convert cash from a 401K to a Roth an amount that bumps you up to the bottom of the next tax bracket? I'm not real familiar with taxes.....and I don't know how much income I will have till my last deposit of dividends, interest and capital gains hit my account on 12/31 each year.

 

[pb4uski]

Here's what I do, targeting the top of the 0% qualified dividends/long-term capital gains tax bracket which is $80,000 for a married couple in 2020.

$80,000 target taxable income + $24,800 standard deduction +$1,300 over 65 deduction *2 + $50 QBI deduction = target income of $107,450...... less pension income, estimated dividends, 85% of SS (if we had SS) = Roth conversion target.

My pension income is fixed so I know that. For dividends I use last years as an estimate early in the year and then update it periodically as the year goes by. In December I drill down more precisely, especially once dividends are paid in late December. I also have to include an estimate of foreign taxes paid but I pretty much use last years.

Then I do my Roth conversion on Dec 30.

I was off by $105 in 2019 because the foreign taxes paid was a little different from what I estimated and I had a $50 QBI deduction for the first time.... but I'm usually pretty close.

I use the $80,000 top of the 0% qualified dividends/long-term capital gains tax bracket rather than the $80,250 top of the 12% tax bracket because of a quirk in the way taxes work that last $250 would be taxed at 27%.

I have a relatively simple, one page Excel model with less than a dozen inputs that then does a calculation of my income and taxable income and taxes that I just update periodically during the year... it takes less than 5 minutes to review and update it.

 

[N02L84ER]

First look up the value of the top of the next tax bracket.
Second, add the standard deduction to that amount (or your estimated itemized deductions if you normally itemize).
Third, subtract the estimate of your total income.
The result is approximately what you can convert to get to the top of the next tax bracket.
For example say you are married, no dependents, want the top of the 22% bracket, use the standard deduction, and typically have $100,000 in total income.
For 2020, I believe the numbers are 171,050 + 24,800 - 100,000 = 95,850.
Hope this helps.

 

[Raymond01]

Thanks to you both, that helps a great deal.

 

[HI Bill]

Here's what I do, targeting the top of the 0% qualified dividends/long-term capital gains tax bracket which is $80,000 for a married couple in 2020.

$80,000 target taxable income + $24,800 standard deduction +$1,300 over 65 deduction *2 + $50 QBI deduction = target income of $107,450...... less pension income, estimated dividends, 85% of SS (if we had SS) = Roth conversion target.

Can you please confirm that if you go over $80K in taxable income (MFJ), only the LTGCs over $80K (up to $496,600) are subject to the 15% LTCG Rate? For example, I have a taxable income of $90K, and would only pay 15% of $10K, or $1,500.

Thank you!

 

[pb4uski]

Can you please confirm that if you go over $80K in taxable income (MFJ), only the LTGCs over $80K (up to $496,600) are subject to the 15% LTCG Rate? For example, I have a taxable income of $90K, and would only pay 15% of $10K, or $1,500.

Thank you!

Yes, if you take the scenario that I had before and added $10k of LTCG then just 15% or $1,500.

 

[HI Bill]

Yes, if you take the scenario that I had before and added $10k of LTCG then just 15% or $1,500.

Thank you! Just sold a lot for 2020 income use after I RE in a few months! Should cover the entire remainder of the year, not including dividends!