Retirement Tax Planning - Income Optimization?

[rayvt]

a favorite of mine is to allow for taxes to be paid today so I don't have to worry about falling into some unknown tax trap invented by the boys and girls in Washington when they change income tax rules.

Yet you ignore the possibility that they will change the tax rules to put a tax on ROTH withdrawals.

See, when you set about to make plans to guard against potential bad risks you have to make allowances for _all_ reasonable risks, not just the ones that have a favorable outcome.

And there's an example of just that.
SS benefits were not subject to income tax originally. Reasonable, since you paid the SS tax with after-tax dollars. Then they changed the tax rules and it suddenly became taxed.

 

[fishfactory]

Midpack,
I retired this year at age 55 and am in the same situation, trying to find software which handles all of the variables. The i-orp "extended orp" was very helpful. As stated in the thread, you have to adjust the ending asset balance upward in order to reduce the annual spend to what you want.

I recently started using software from RightCapital which I got access to through Heritage Wealth Planning. He charges a one time fee of $150 for access through him. The software has a few quirks I am working through, but well worth the money. Heritage Wealth has several youtube videos and videos on his site worth looking at. He uses the software in many of those videos, so you can get a feel as to what it does. One thing I like is it creates 1040 tax forms for each year so you can look at many scenarios on the actual form.

In my particular situation, I will be converting to the top of the 24% bracket each year. Yes, it is tough sending that money to the IRS each year, but the bottom line is that the numbers don't lie. It is the optimal solution. Personally, I don't believe fed rates will be this low again in my lifetime.

The i-orp software also has me filling the 24% bracket for several years, then reducing conversions when my regular IRA is cut in half. RightCapital has me filling 24% bracket until my IRA goes all the way to zero. I need to study the difference in software assumptions to see why the difference, but since they both have me doing the same level of conversions for several years, I have time to figure it out.

Hope this helps.
Eric

 

[fishfactory]

Midpack,

Here are some links to what I have been using:

https://heritagewealthplanning.com/

https://www.youtube.com/channel/UCSEzy4i9xrKPoaU9z0_XbmA

https://www.rightcapital.com/

RightCapital's website shows all the features.

Eric

 

[Perryinva]

The chances of a Roth withdrawal becoming taxable are far less than SS taking a haircut, which I also think is only a remote possibility. Apples and oranges. I’m surprised that moving to a tax free state is brought up so many times, here. Sure if you are a lower income FIRE, that rents, but that’s few on this forum. Maybe if you have an additional specific reason to be in that tax free state, but for the most part it is pretty well known that the states get their revenue one way or the other. If there is no income tax, then other taxes and costs are higher, so the savings are often phantom. And states where all costs are low, mean few or poor services, limited population, so typically not on my radar as desirable to live in. I agree that some states are just expensive to live in at every turn, like Taxachussetts, or NJ, and from a net income standpoint only, are hard to justify IMHO, so maybe that is the reference point mentioned.

 

[harley]

Yet you ignore the possibility that they will change the tax rules to put a tax on ROTH withdrawals.

See, when you set about to make plans to guard against potential bad risks you have to make allowances for _all_ reasonable risks, not just the ones that have a favorable outcome.

And there's an example of just that.
SS benefits were not subject to income tax originally. Reasonable, since you paid the SS tax with after-tax dollars. Then they changed the tax rules and it suddenly became taxed.

I don't think there's a chance in hell that the gov't will start taxing Roth withdrawals. Since I'm in retireby90's corner with doing the conversions ahead of reaching RMD age, I'm obviously willing to take that chance. If I'm wrong I'll be really pissed, but it would have been worth the risk.

Much more likely are things like a VAT, or even the mythical wealth tax that keeps getting floated. But either of those would hit you whether you have your money in a Roth or a tIRA, so it's a wash. And, if by some chance they do start taxing Roth withdrawals, I suspect it will come long after regular tax brackets have been massively inflated. In which case getting the money from the tIRA to the Roth at these current rates will look pretty smart.

 

[Midpack]

Midpack,

Here are some links to what I have been using:

https://heritagewealthplanning.com/

https://www.youtube.com/channel/UCSEzy4i9xrKPoaU9z0_XbmA

https://www.rightcapital.com/

RightCapital's website shows all the features.

Eric

Thank you very much. I've watched quite a few of the Heritage Wealth Planning YouTube videos. He's kind of quirky, but he seems knowledgeable and no nonsense, so worthwhile watching. I may try that.

I've also watched several Money Evolution videos, and they talk about all the right retirement income-tax issues so I may give them a look. However, they're upfront that they're looking for ongoing accounts so getting a one time plan from them (available) will probably have just enough hooks/missing pieces to annoy me...

 

[Midpack]

With iORP I think it comes down to wanting proof it's right, even though I have no reason to doubt it. I have done several online calculators like Vanguard (no longer available) and others over the years using our numbers and they've all come back suggesting Roth conversions would be a wash in the past using the assumptions I'd want them to use - we're going to take about the same tax hit either way. I've never understood why iORPs results are consistently much different, every time I've run it it recommends Roth conversions.

I realize I'm planning on a very conservative WR, but iORP tells me our constant spending income is between $188K and $246K depending on assumptions, where we're used to spending about $70K year. So the results seem like they're from another planet. If iORP would let me set an income for comparison that might help - yes, I realize I can do that by setting a (large) surplus. On one pass thru, I accidentally left an extra "0" and put in a surplus of $10,000,000 - and it said we could manage a constant spending income of $61K/year!!! That just doesn't compute to me...

I ran iORP last week and the first plan I got back showed MASSIVE taxes in the first two years, like $150,000 each year - more than 15 times what I am paying now. And then it tailed off to lower, but not low taxes thereafter. I'd want to talk that through with someone to better understand - I don't know that I could be talked into a tax hit like that.

Then I ran it again a few hours later and could not get that same front loaded result. I am sure it was something with one of my entries, I am not suggesting iORP is erratic, I am sure it's not.

Still considering my options including the two above.

I never needed any hand holding for investing, but I guess I do when it comes to long term retirement income - tax planning.

 

[fishfactory]

Midpack,

In my case, even if it was a wash I would aggressively do Roth conversions, because I believe tax rates have nowhere to go but up. But that is just a personal opinion. I don't know for sure, but in my case the difference between i-orp and RightCapital may be that i-orp is not taking into account optimizing social security taxes and medicare premiums. That would explain why RightCapital uses Roth conversions until my regular IRA goes to zero by age 65 so medicare and soc sec are optimized.

Please share with me any new discoveries you make on this topic. It is worth studying closely due to the amount of money involved.

Eric "fishfactory"

 

[RetireBy90]

Yet you ignore the possibility that they will change the tax rules to put a tax on ROTH withdrawals.

See, when you set about to make plans to guard against potential bad risks you have to make allowances for _all_ reasonable risks, not just the ones that have a favorable outcome.

And there's an example of just that.
SS benefits were not subject to income tax originally. Reasonable, since you paid the SS tax with after-tax dollars. Then they changed the tax rules and it suddenly became taxed.

One thing I have going for me if I convert to ROTH now and they start talking seriously about it I could just take a complete withdraw and add to the cash account. Risk I'm willing to take.

 

[SnowballCamper]

Midpack,

Are you running the MonteCarlo after you run ORP on the extended tab?

After you run ORP, click on the "Monte Carlo" at the bottom. A pop up window comes up, but it might take up to a minute to get results. Sometimes it comes up with an error too...

 

[Perryinva]

One thing I have going for me if I convert to ROTH now and they start talking seriously about it I could just take a complete withdraw and add to the cash account. Risk I'm willing to take.

An innately obvious answer and exactly why they can never tax Roth withdrawals. Thanks for pointing that out.

 

[pb4uski]

One thing I have going for me if I convert to ROTH now and they start talking seriously about it I could just take a complete withdraw and add to the cash account. Risk I'm willing to take.

An innately obvious answer and exactly why they can never tax Roth withdrawals. Thanks for pointing that out.

Yup... I figure that like most tax changes that we'll see it coming ahead of time and can take preemptive action to avoid it.... unless they made it retroactive.

 

[donheff]

Thank you very much. I've watched quite a few of the Heritage Wealth Planning YouTube videos. He's kind of quirky, but he seems knowledgeable and no nonsense, so worthwhile watching. I may try that.

Never heard of this guy before but I like him.

 

[SnowballCamper]

This article is a good discussion of conventional wisdom on tax strategy vs. the optimal case. It gets to the convert or not discussion at the end. The more I read about this, the more I'm inclined to skip the conversions.

https://www.i-orp.com/modeldescription/mitigatedtaxes.pdf

 

[rayvt]

An innately obvious answer and exactly why they can never tax Roth withdrawals.

You guys don't think deviously enough. You are thinking like a normal person and not like a tax-hungry bureaucrat.

Currently you can take unlimited Roth IRA distributions without having any impact on the taxation of your Social Security benefits.

Does that give you any hints on how they could effectively put a tax on Roth withdrawals?
A: They could include them in the calculation for how much of your SS benefit is taxed (up to the present 85%). So: No direct tax on Roth withdrawal, but another tax goes up based on that withdrawal.

 

[rayvt]

Yup... I figure that like most tax changes that we'll see it coming ahead of time and can take preemptive action to avoid it.... unless they made it retroactive.

Which they did in the 1993 tax bill.

From the first google hit: "Congress has been adopting retroactive tax increases for a very long time, essentially since the 1930s. The 1913 Revenue Act was the first one with an effective date before the date of the actual enactment."

 

[pb4uski]

You guys don't think deviously enough. You are thinking like a normal person and not like a tax-hungry bureaucrat.

Currently you can take unlimited Roth IRA distributions without having any impact on the taxation of your Social Security benefits.

Does that give you any hints on how they could effectively put a tax on Roth withdrawals?
A: They could include them in the calculation for how much of your SS benefit is taxed (up to the present 85%). So: No direct tax on Roth withdrawal, but another tax goes up based on that withdrawal.

Many people are already at 85% so the impact of your scheme is probably not substantial.

 

[RetireBy90]

You guys don't think deviously enough. You are thinking like a normal person and not like a tax-hungry bureaucrat.

Currently you can take unlimited Roth IRA distributions without having any impact on the taxation of your Social Security benefits.

Does that give you any hints on how they could effectively put a tax on Roth withdrawals?
A: They could include them in the calculation for how much of your SS benefit is taxed (up to the present 85%). So: No direct tax on Roth withdrawal, but another tax goes up based on that withdrawal.

I could see that, if I understand correctly they have you add back in some non-taxable stuff to figure how much of SS is taxable. Impact may not be a lot but can’t believe they would pass up “free” money.

 

[Theo]

You guys don't think deviously enough. You are thinking like a normal person and not like a tax-hungry bureaucrat.

Of course the tax hungry beurocat doesn't need your taxes to spend. You should only worry about this scenario if we have a sustained period of price inflation as raising taxes can be an effective way of reducing inflation by taking money out of the economy.

 

[teejayevans]

TLDR
My plan (theory) is to wait for a downturn, let’s assume at least 20%. I will withdraw up to the 24% limit, instead of my normal 12% limit. When the market comes back, I will have paid a higher amount on the 80% but now the 20% I have is capital gains which in the 12% tax bracket are tax free.

A simple example for easy math:
Market drops 25%.
I withdraw $120,000.
I pay tax of $25,000 on above.
Market returns, my $120,000 is now back to $160,000
My CGs are tax free, so effectively I paid 15.6% on $160,000.

Obviously I’m assuming the market returns as it always has. Hope that makes sense.

So yes, this means I will be happy when the market drops...weird eh?

 

[Midpack]

Well that’s timely on two counts. I may just pay Josh to do an analysis for me.

https://heritagewealthplanning.com/when-to-do-roth-conversions-part-1/

 

[fishfactory]

Midpack
You can do the analysis yourself. Go to Josh's website and pay $150 one time fee for access to the RightCapital software. On the website, click on "connect" tab, then fill out personal info and under "select and option" choose "get access to software". You will have access for as long as he uses it - no additional fee beyond the one time $150.
https://heritagewealthplanning.com/contact/

 

[CardsFan]

Well that’s timely on two counts. I may just pay Josh to do an analysis for me.

https://heritagewealthplanning.com/when-to-do-roth-conversions-part-1/

WADR, I think the article has cherry picked a perfect scenario. Moderate to low value in the tIRA (at least compared to many here, including myself), low expenses, and living beyond "average" life expectancy. Which leads to all taxes being paid in the 12% bracket, or lower, and a longer time in the no tax zone. In the scenario presented it makes perfect sense to convert. But, then again, converting in the 12% bracket, appears to be a no-brainer, at least to me.

It's when you get to converting in the 22-24% brackets that the benefit appears to diminish, if that is where you expect to be after SS and RMD's. The wild cards are the "widow's tax trap" and changes to tax law (such as the SECURE Act).

If you decide to do it, please tell us if you think the excersize has value. For $150 I'm willing to reconsider my plan.

 

[Midpack]

Midpack
You can do the analysis yourself. Go to Josh's website and pay $150 one time fee for access to the RightCapital software. On the website, click on "connect" tab, then fill out personal info and under "select and option" choose "get access to software". You will have access for as long as he uses it - no additional fee beyond the one time $150.
https://heritagewealthplanning.com/contact/

I did, and it said ‘we will reply within 24 hours.’ I’m not sure that’s what I wanted, but we’ll see. Thanks.

 

[fishfactory]

Mid, he will reply with payment instructions thru paypal, then he will set you up with a RightCapital account. I did it in order to have a second confirmation of the i-orp conversion optimization, and was pleased at how close they were. I found it to be worth $150, since I plan to use it for years to come. I especially like the 1040 tax forms for all years.