Projecting taxes in retirement

[MI-Roger]

Background:
62 years old and still working
Anticipate retiring in 18 months
$900K in income producing IRAs
$600K in growth producing IRAs
No pension
spouse is 59 who will stop work in one year and have a $7k annual pension

What tools or techniques did others use to predict tax implications in retirement? My particular conundrum is whether to:

1) delay filing for SS, drawdown IRAs until SS starts, thus reducing future RMDs

2) file for SS at time of retirement and reduce near-term IRA withdrawals

Thanks,

 

[braumeister]

The first thing I would do is use tax software (like Turbotax) to make up a dummy return leaving out my earned income. That will give you a quick idea of what your retirement taxes will be. You can use the "what if" function to look at next year's tax rules for an even better idea.

 

[Alan]

The first thing I would do is use tax software (like Turbotax) to make up a dummy return leaving out my earned income. That will give you a quick idea of what your retirement taxes will be. You can use the "what if" function to look at next year's tax rules for an even better idea.

+1

If using TurboTax you can go to "Forms View", select search and look for "What-if-worksheet". Then it is very easy to select a year and then modify your inputs including deleting your salary etc.

 

[corn18]

I use i-ORP.com. It seems to be the only thing that can take into account your entire retirement and project taxes. I was surprised how little taxes I could pay if I did things right. Use the extended form.

https://www.i-orp.com/BigGraph/extended.html

 

[RetireBy90]

Thanks Alan, I've used TT for years and never found this option. Probably cause by the time I'm done doing my taxes I don't want to see TT again You answered a big question I have about how I'll deal with estimated taxes after I RE in Sept.

 

[LOL!]

Since the OP has no taxable accounts and any withdrawals would be from traditional IRAs assuming there are no Roth IRAs, I wonder if ...

Will IRA withdrawals keep them in a low-enough tax situation where their SS benefits are NOT taxed? And if they withdraw lots from IRA early, will that then keep their future RMDs lower, too, and thus lead to lower taxes for SS benefits?

Note that TurboTax and other software will not calculate future RMDs for the future. I guess something like i-ORP does so.

 

[Alan]

Thanks Alan, I've used TT for years and never found this option. Probably cause by the time I'm done doing my taxes I don't want to see TT again You answered a big question I have about how I'll deal with estimated taxes after I RE in Sept.

Same here.

I used it this year for the first time after a tip by someone here. It's a very useful feature, particularly this year as the tax law has changed so much for 2018.

 

[pb4uski]

Yes, there is a little checkbox on the What-If worksheet to use 2018 rates so be sure to check it.

On SS, here is a link to a good SS optimization calculator:

https://opensocialsecurity.com/

RMDs may not be a big deal... first year RMD is ~4% ... but if you wait until your FRA to start then your IRA may be tapped enough that RMDs are less than what you might want to withdraw anyway.

 

[MI-Roger]

Turbo Tax - surprising

I have been using TT for years for doing only my tax returns. I never knew it contained this other functionality.

I will also check out i-ORP as it sounds as if it may do more.

I had been compiling my own spreadsheet with necessary income and projected SS payment amounts and IRA withdrawal amounts to determine our best strategy, but got stymied by the taxes issue.

Thanks!

 

[Independent]

Background:
62 years old and still working
Anticipate retiring in 18 months
$900K in income producing IRAs
$600K in growth producing IRAs
No pension
spouse is 59 who will stop work in one year and have a $7k annual pension

What tools or techniques did others use to predict tax implications in retirement? My particular conundrum is whether to:

1) delay filing for SS, drawdown IRAs until SS starts, thus reducing future RMDs

2) file for SS at time of retirement and reduce near-term IRA withdrawals

Thanks,

Many threads on this.

Additional considerations ...
Are you thinking you may qualify for ACA subsidies?
Would you consider tIRA to Roth conversions?

I did my own worksheet. Fortunately, if all your investments are in traditional IRAs, the tax law isn't all that complicated.

I ended up saying I had a clear win in Roth conversions, other than that, it was a "pay me now or pay me later" situation.

 

[MI-Roger]

Many threads on this.

Additional considerations ...
Are you thinking you may qualify for ACA subsidies?
Would you consider tIRA to Roth conversions?

My wife qualifies for a very good post-retirement health insurance plan as long as she continues working until age 60 or beyond. If she gets to the point where she can't take it any more before that date, then we will use the post-retirement health insurance plan from my first employer which is more expensive. I foresee no need to include ACA plans in our options.

Yes, I am amenable to doing traditional IRA to Roth IRA conversions if they make sense for us financially.

 

[COcheesehead]

I have been using TT for years for doing only my tax returns. I never knew it contained this other functionality.

I will also check out i-ORP as it sounds as if it may do more.

I had been compiling my own spreadsheet with necessary income and projected SS payment amounts and IRA withdrawal amounts to determine our best strategy, but got stymied by the taxes issue.

Thanks!

Here's a little tip about Turbo Tax, you don't need to use the what if feature. The next year's estimated tax payment stubs will show you the same answer without the detail. So just look at those for a ballpark. If you plan to have changes to your income, then you can get into the details and what ifs by using the rest of the functionality.

 

[Independent]

My wife qualifies for a very good post-retirement health insurance plan as long as she continues working until age 60 or beyond. If she gets to the point where she can't take it any more before that date, then we will use the post-retirement health insurance plan from my first employer which is more expensive. I foresee no need to include ACA plans in our options.

Yes, I am amenable to doing traditional IRA to Roth IRA conversions if they make sense for us financially.

From what you've said so far, I'd think that your own worksheet would be a good approach (unless you're really opposed to worksheets).


True story -- My employer provided a good post retirement health care plan. We got the letter notifying us that it had been canceled while my wife was doing chemo. Fortunately for you, you have a second option plus ACA as backups.

 

[Perryinva]

Glad to see you here, MI-Roger, some smart people on this forum, lots to learn. I use Taxcaster only because it is SO easy to change the what if’s. Roth conversions are more difficult to determine the extent of the benefit, but conversions before the tax rate goes back up in 2025 can yield some nice extra pocket change in addition to the tax savings, since you have no pension. Once a pension pushes you in to the same tax situation as earning in the 22% bracket, the conversions are less meaningful than delaying SS is, as RMD reduction becomes the major impact.

 

[Dash man]

We don’t have much room for doing the Roth conversions we would like to do without paying taxes on our dividends. This is our first year with no W-2 income. We have a large taxable portfolio that along with rental income and a small pension bring us close to the top of the 12% bracket. Hopefully deductions will help us convert some of our IRAs to Roth. I’ll be doing a deep dive in December to run the numbers.

 

[RetireBy90]

Here's a little tip about Turbo Tax, you don't need to use the what if feature. The next year's estimated tax payment stubs will show you the same answer without the detail. So just look at those for a ballpark. If you plan to have changes to your income, then you can get into the details and what ifs by using the rest of the functionality.

I don't know about others, but this year will be with 3-4 months fire. Next year will be first year on my own. Every year I get TT printing off 4 of those estimated tax forms. Wasting my paper. I have never done them and never had a fine or interest for under withholding. Guess I'll have to do more than turn the sheet over and insert back into printer to print on back side. With the tax law changes and changing situation for us I expect 2019 taxes to be a whole new experience, or perhaps not. After tons of time in the tax prep, cut a check to DA MAN

 

[pb4uski]

.... Yes, I am amenable to doing traditional IRA to Roth IRA conversions if they make sense for us financially.

You'll have to run your own numbers but it may be worthwhile. the first thing you need to do is get a sense of your tax bracket once SS starts... so your income would be 85% of SS, the pension and any expected IRA withdrawals less the standard deduction and look up your tax bracket. Then look up you tax bracket based on the above less SS (between RE and SS). If they are the same then it is still worthwhile but the benefit is a lot lower... if the first number is higher then Roth conversions may save you some money.

 

[COcheesehead]

I don't know about others, but this year will be with 3-4 months fire. Next year will be first year on my own. Every year I get TT printing off 4 of those estimated tax forms. Wasting my paper. I have never done them and never had a fine or interest for under withholding. Guess I'll have to do more than turn the sheet over and insert back into printer to print on back side. With the tax law changes and changing situation for us I expect 2019 taxes to be a whole new experience, or perhaps not. After tons of time in the tax prep, cut a check to DA MAN

I have to use them for the first time this year as well. Welcome to the club.

 

[Alan]

I don't know about others, but this year will be with 3-4 months fire. Next year will be first year on my own. Every year I get TT printing off 4 of those estimated tax forms. Wasting my paper. I have never done them and never had a fine or interest for under withholding. Guess I'll have to do more than turn the sheet over and insert back into printer to print on back side. With the tax law changes and changing situation for us I expect 2019 taxes to be a whole new experience, or perhaps not. After tons of time in the tax prep, cut a check to DA MAN

Instead of printing directly from TT use the option to save as PDF and then print, but when the print window comes up instead of printing all, select pages. e.g. selecting 3-50 will only print from page 3 to page 50

 

[Gotadimple]

The reality of your situation is that you have $1.5M in IRAs and a $7K annual pension. All of this is taxable. What you draw off is really a function of your retirement budget. So how much do you need to live? And after age 65 will your retiree health care be too expensive or not cover you adequately?

So many decisions and much researching.

1. What is the total retirement budget? Less the $7K in pension, all of it comes from an IRA.
2. What tax bracket does that put you into? Is there room in that bracket to draw an additional amount from the IRAs and convert it to a Roth? Without hitting the IRMAA limit?
3. Should you delay Social Security? Probably, yes, as a married couple.
4. Should you pre-pay Income Taxes to have some tax-free (i.e., Roth) savings to draw on to keep your taxable income at a certain level?
5. What will your retiree health plans cover after age 65? How does that cost compare to the cost of Medicare Part B? Part B + Medicare Supplement/Medicare Advantage Plan
6. What is the IRMAA limit for you as respects your Medicare Part B premium?

So you can delay Social Security for each of you. But neither of you can delay Medicare (well you can delay starting it, but you pay a premium penalty on Part B forever). And if your income exceeds the IRMAA limit, your Medicare premium can go even higher.

My experience with employer provided health-care post age 65 was that it was a closed plan (meaning only retirees could be added and as their health deteriorated, the premiums were far more expensive than what you can find in the Medicare market).


For research, I'd start with anything written by Ed Slott, who is an expert on IRAs and when to draw, etc. He is famous for describing what you are facing: a tax torpedo. The library has many of his books, most address social security and it's impact, Roth conversions, etc.

The Social Security and Medicare websites are excellent as well.

I-orp.com can also suggest a pattern of withdrawals that includes an assumption about taxes, and when/if to convert.

Then! Ask questions. It's a bit of an exercise to absorb it all, but once you have your personal finance plan figured out, you can set it on autopilot. Welcome to the adventure!

- Rita

 

[MI-Roger]

iORP Guide

Is there a text book to assist with completing the iORP spreadsheet? Hovering the mouse over the highlighted text assists with a few options but many others are still baffling.

Tontine?

At first I wondered why the Canadian dish of french fries covered with cheese curds and gravy would be part of retirement planning? Other than the artery clogging and life shortening concept. Then I googled the name, found its actual definition, and once again wondered why it would be considered common enough to include in a retirement calculator.

 

[SevenUp]

What tools or techniques did others use to predict tax implications in retirement?

There is a spreadsheet hosted on the MMM forum (see Case Study Spreadsheet updates) that will show a graph of tax rates vs. the income or contribution type of your choice.

The chart below is for $40K of W-2 income and $2K of qualified dividends, for MFJ both age 62.

 

[RetireBy90]

5. What will your retiree health plans cover after age 65? How does that cost compare to the cost of Medicare Part B? Part B + Medicare Supplement/Medicare Advantage Plan
6. What is the IRMAA limit for you as respects your Medicare Part B premium?

- Rita

IRMAA is pretty straight forward, for Married filing jointly it is based on your MAGI from federal taxes. Expressed below is extracted from a SSA letter after enrolling DW about 2 months ago. IRMAA is a monthly figure.

MAGI - PART B IRMAA - Part D IRMAA
Less than $170K - 0 - 0
$170K to 214K- $53.50 - $13.00
$214K to $267K - $133.90 - $33.60
$267K to $320K - $214.30 - $54.20
Over $320K - $294.00 - $74.80

Another poster can address the Modified part of Adjusted Gross Income. SSA referred to numbers on line 37 of my 1040, bottom of first page before any deductions.

 

[MI-Roger]

I was able to use the Base Model i-ORP

After using the base model and reading all the parameters used in performing the calculations, and the default values of these variables, the data entry sheet for the extended version makes more sense.

In summary, we look to be in good shape.

Per the base model our initial retirement spending in 2 years time can be approximately 140% of our existing pre-retirement Net Income, then increase further with each successive year till reaching our assumed life expectancy of 92+.

My wife and I were just discussing how Retirement no longer seems to be a reward for a career well served, but has become another angst ridden and unavoidable complex decision with no 'do-overs' available.

Pensions are gone, retirees now have to plan and fund their own regular income. Post-retirement health care is gone, retirees now have to plan and fund for their own health care needs. Social Security is threatened on a different front every day in Washington. Families are often widely scattered making family support or assistance with decisions a rarity. More and more information is only available on-line - provided you even know where to look!

Instead of being a reward, retirement has become a person's final career.

 

[pb4uski]

^^^^ Well, retirement is still better than the alternatives.... working or pushing up daisies.