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Retirement Tax Planning - Income Optimization?
Old 09-11-2019, 08:58 AM   #1
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Retirement Tax Planning - Income Optimization?

An advanced question often asked, rarely answered specifically that I’ve seen. In the past, these threads seem to elicit few replies?

With DW finally retired, we have a 5-7 year window where our taxable income will probably be at it’s lowest, before Soc Sec and RMDs hit, and the tax torpedo. TIRAs are about 29% of our holdings, so RMD will be significant. We have no Roth accounts. We haven’t had room for Roth conversions without exceeding the 0% cap gains threshold, but we may for the next 5-7 years. It may well be we’re better off paying more taxes now (above the 0% threshold) to do conversions before age 70 anyway.

My cocktail napkin approach has been to try and keep taxable income constant inflation adjusted year after year as a means to minimize taxes long term.

I’m decent with spreadsheets, so I’ve tried several times to build one to model retirement income and taxes but there are just too many interdependent moving parts for my brain to keep straight. I haven’t been able to build one I trust.

Online searches provide tons of articles explaining all the variables and issues, but not solutions other than talk to ‘your tax advisor’ - we’ve never had or needed one before.

IME Vanguard won’t touch anything significantly related to taxes with a 100’ foot pole, I’ve asked several times, several ways.

Some financial advisors do appear to include tax planning, but every one I’ve talked to pushes/insists on managing investments also - preferably ongoing, at a % of AUM of course. That’s not going to happen if I can help it. I only want a tax plan for income optimization.

I realize assumptions of future taxes have to be set, and that predicting taxes exactly is therefore impossible. But that doesn’t mean no plan, and I am willing to make specific assumptions. Ideally I’d like to see a plan with tax rates and cap gains the same inflation adjusted, and another assuming higher tax rates. We also know when some of the current rates/laws are set to expire.

So I’m looking for professional guidance, and expect to pay for it. Any ideas? Again we don’t know any tax advisors, and we’ve just moved to another state (our problem) so references are almost non existent as we build a new network of friends and contacts.
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Old 09-11-2019, 09:16 AM   #2
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I used TurboTax “what-if” worksheet to model projected taxes as each of us started SS and RMDs. I did projections for each year. This at least let me see how the variables played together and the marginal rates as new income came online. I used computations in current dollars since (most) tax brackets are inflation adjusted. I also modeled Medicare coverage related payments (all parts), drawdown of HSA accounts and IRMAA effects on Medicare insurance.

I suppose a tax accountant could create that kind of model for you.

In our case our IRAs only represent about 13% of our retirement assets. As our portfolio has grown so much over the last few years, we have large taxable cap gains income that keeps us above the 0% cap gains tax bracket, although ordinary income is low which means a small portion of cap gains is taxed at 0%. As soon as SS starts, that disappears. It’s not clear that we can reduce our IRAs via conversion enough now to make a meaningful future difference. I’m focusing more on reducing our cap gains income by opportunistically moving to more tax efficient funds.
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Old 09-11-2019, 09:32 AM   #3
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I've gathered many articles from this forum regarding your exact question. Seems like piecing together a puzzle. There are always more questions with convoluted answers. The link below brought me closer to understanding the complexity of this issue.

It's not so much the original article, but the add ons at the bottom that are helpful, to me anyway.

It would take hours to sit with a tax accountant and go over the best withdrawal strategy. Our estate attorney (in 15-20 minutes offered zero advice, this cost us approx $85.00) Then, CPA whisked through a few strategies which created more questions which took more time. We walked out with even more questions after paying $125 for that 1/2 hour. Bottom line, I'm trying to figure this out on my own. I discuss with DH as we continue to research.


https://www.thebalance.com/pre-tax-v...s-mean-2388974
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Old 09-11-2019, 09:55 AM   #4
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I use these two tools to plan:

https://www.schwab.com/public/schwab...alculators/rmd

https://www.mortgagecalculator.org/c...calculator.php

The first one calculates RMD's into the future. I use a 3% real rate of return, assuming tax brackets will inflate another 2-3%.

The second accomplishes the same as the Turbotax "what if". I just find it easier to use.

We have been converting tIRA to Roth up to the top of the 12% bracket. That, I think, is a no-brainer, but will really not significantly reduce my tIRA amount or RMD's when they start.

I have toyed with the idea of converting to the top of the 22% bracket, but just can't bring myself to voluntarily pay that much in taxes. If the SECURE Act passes, with the 10 year required payout on non-spousal inherited tIRA's, that could be a tipping point to pre-pay taxes at a lower rate than DS if/when he inherits it.

Good luck.
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Old 09-11-2019, 10:04 AM   #5
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Originally Posted by CardsFan View Post
I use these two tools to plan:

https://www.schwab.com/public/schwab...alculators/rmd

https://www.mortgagecalculator.org/c...calculator.php

The first one calculates RMD's into the future. I use a 3% real rate of return, assuming tax brackets will inflate another 2-3%.

The second accomplishes the same as the Turbotax "what if". I just find it easier to use.

We have been converting tIRA to Roth up to the top of the 12% bracket. That, I think, is a no-brainer, but will really not significantly reduce my tIRA amount or RMD's when they start.

I have toyed with the idea of converting to the top of the 22% bracket, but just can't bring myself to voluntarily pay that much in taxes. If the SECURE Act passes, with the 10 year required payout on non-spousal inherited tIRA's, that could be a tipping point to pre-pay taxes at a lower rate than DS if/when he inherits it.

Good luck.
Thanks for the links, Iíll play with them this afternoon.

I confess to a mental block in voluntarily paying taxes above the 0% cap gains threshold - and couldnít anyway until now. But I do want to optimize income and legally reduce taxes first and foremost.
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Old 09-11-2019, 10:24 AM   #6
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I wish there were a good commercial solution out there.... I just haven't found one yet so I developed my own spreadsheet for ages 63-75.

You may or may not have read about the epiffany I had last year that now that we are beyond 59 1/2 and have penalty free access that I changed course from living off taxable (which is mostly equities that will get a step-up in basis so effectively no tax on appreciation for heirs) to living off tax-deferred to reduce future RMDs.

So our current strategy is to live off tax-deferred and then do Roth conversions to the top of the 0% capital gains tax bracket. If/when we move to a no income tax state, I may bump that up to the top of the 22% bracket until RMDs start.

Year
Age
Int
Div
Pension
Spending
Withdrawals
Std Dedn
SS Ė DW
SS Ė Self
TI Subtotal
Roth conv
RMD factor
RMD
TI
Ordinary Income
Pref income
10% bracket
12% bracket
22% bracket
Ordinary tax
Div/CG Tax
Federal tax
Effective federal tax rate
Taxable acct balance
Tax basis
tIRA balance
Roth balances
Total
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Old 09-11-2019, 12:47 PM   #7
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Quote:
Originally Posted by Midpack View Post
An advanced question often asked, rarely answered specifically that Iíve seen. In the past, these threads seem to elicit few replies?
...
So Iím looking for professional guidance, and expect to pay for it. Any ideas? Again we donít know any tax advisors, and weíve just moved to another state (our problem) so references are almost non existent as we build a new network of friends and contacts.
As pb4uski noted, there seems no publicly available tool that
- looks at multiple years, and
- considers all tax, IRMAA, ACA, etc. effects rigorously.

If you can pay the conversion tax from taxable savings, and don't expect to withdraw from the Roth for a while, it can be advantageous to convert into higher tax brackets than one might think.

E.g., see the example in this post: Roth or Traditional based on tax bracket - Bogleheads.org and the when one uses taxable funds to pay the tax on a conversion section in that wiki.
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Old 09-11-2019, 01:11 PM   #8
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I am interested in the same problem. I've posted threads here over the years on similar topics.

My conclusions:

1. pb4uski gives pretty good advice for free here. Of course, it's without any warranty, as it should be.

2. There are CPAs that will review your plan and make qualitative suggestions or provide ideas, but they are few and far between. I found one, and he charges $250 per hour. PM me if you want a reference.

3. Building your own spreadsheet could work, although it can get so complex that, as you note, trusting the results can be problematic. I built my own spreadsheet to model the next five years, and it was something like 300 rows tall because I had to include all of the worksheets and stuff, and have a moderately complex tax situation for now. And then it needed significant overhaul due to TCJA, so I scrapped it.

4. It seems there are no really great answers.

What I find somewhat successful is to build simplified spreadsheets for specific parts of the equation that can at least provide indications. For example, I have one that just looks at RMDs, SS, and Roth conversions between now and age 90, and it simply plots my AGI due to those things and the tax brackets. Basically a visualization of my tax torpedo. Since it's simpler than the whole picture, I feel I can trust it and understand it better.
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Income/conversion strategy
Old 09-11-2019, 01:36 PM   #9
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Income/conversion strategy

My approach to the issue is to try and keep within the 12% bracket between ages 63 and 70. Assuming MFJ status then our max income within the 12% is about $101k. Our taxable income is about $35k so I assume I can convert $66k in TIRA to Roth for the remaining. After 7 years we will have about $460k converted and reduce the hit in RMD's when the RMD + SS income kicks in.
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Old 09-11-2019, 01:51 PM   #10
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DGF is now converting to the top of the 12% bracket.
As for me, I will convert to the top of the 12% bracket starting at age 66, with taking SS at 70.
From 60-70 y.o., we will also be using more of TIRA as an increasing % than taxable accounts.
Otherwise, will not sweat it further or pay CPA's, who mainly are not sophisticated enough to justify their fees.
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Old 09-11-2019, 01:59 PM   #11
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I have been doing RMD's for about 10 years, and roughly half our assets are tax deferred. I have a spreadsheet set up so at the end of every year I plug in the year end balances, and it calculates my RMD.
I then have 4 categories that allocating the RMD goes into:
Gifts to our sons
Charitable gifts

Income taxes
travel
The spreadsheets adds them up and matches them to the RMD. I then juggle the gifts so the difference is about zero. It is very simple and works for me.
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Old 09-11-2019, 02:09 PM   #12
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My approach to the issue is to try and keep within the 12% bracket between ages 63 and 70. Assuming MFJ status then our max income within the 12% is about $101k. Our taxable income is about $35k so I assume I can convert $66k in TIRA to Roth for the remaining. After 7 years we will have about $460k converted and reduce the hit in RMD's when the RMD + SS income kicks in.
We are doing the same, unfortunately (really it is fortunate), the market run up since retiring 3.5 years ago, has resulted in us having 16% more in the tIRA's than when we started, even after conversions (haven't yet made this years conversion, so that will change some).

I plan to stay at the top of the 12% bracket, but if the SECURE Act passes, and/or we get a large drop in the market (30% or more), I might make a bigger move for a few years. No matter what we do, we will be solidly in the 22-24-25% (depending on tax law changes) bracket when RMD's hit.
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Old 09-11-2019, 02:17 PM   #13
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Thanks all. I suspect using a TurboTax test case near the end of each year is about as close as I’m going to get. I may adjust how much I convert each year, but otherwise the income and taxes should be similar until we reach 70 and RMD and Soc Sec changes everything.

Unfortunately as others have said, topping off at the top of the 12% bracket is a no-brainer. I’m asking about going beyond that to a break even that optimizes income and legally minimizes taxes. If I hold it to the 12% threshold we’ll be in a higher bracket at 70 for sure, not optimal.

I’ll go back and find your thread pb4uski, thanks.
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Old 09-11-2019, 02:41 PM   #14
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Quote:
Originally Posted by SecondCor521 View Post
3. Building your own spreadsheet could work, although it can get so complex that, as you note, trusting the results can be problematic. I built my own spreadsheet to model the next five years, and it was something like 300 rows tall because I had to include all of the worksheets and stuff, and have a moderately complex tax situation for now. And then it needed significant overhaul due to TCJA, so I scrapped it.
I used multiple sheets to manage some of the complexity. For example IRA growth projections and RMD calcs were done on a separate sheet from the main one modeling income and taxes. Medicare/IRMAA was probably also on a separate sheet.
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Old 09-11-2019, 03:15 PM   #15
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Also don't forget to factor the fact that one of you may need to file as a single taxpayer.
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Old 09-11-2019, 03:24 PM   #16
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Not sure what your taxable income will be, or what you'll do for health care, but ACA may also figure into your planning. Keep your MAGI within upper limits for access to better plans, subsidies, etc.
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Income/conversion strategy
Old 09-11-2019, 03:59 PM   #17
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Income/conversion strategy

Quote:
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Thanks all. I suspect using a TurboTax test case near the end of each year is about as close as Iím going to get. I may adjust how much I convert each year, but otherwise the income and taxes should be similar until we reach 70 and RMD and Soc Sec changes everything.

Unfortunately as others have said, topping off at the top of the 12% bracket is a no-brainer. Iím asking about going beyond that to a break even that optimizes income and legally minimizes taxes. If I hold it to the 12% threshold weíll be in a higher bracket at 70 for sure, not optimal.

Iíll go back and find your thread pb4uski, thanks.
My thoughts regarding conversions beyond the 12% limit was that I would be paying taxes on 22-24-25% now or the same after age 70. I've chosen to wait and pay the taxes on that amount later.
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Old 09-11-2019, 04:09 PM   #18
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My thoughts regarding conversions beyond the 12% limit was that I would be paying taxes on 22-24-25% now or the same after age 70. I've chosen to wait and pay the taxes on that amount later.
+1 To me there is little difference between paying 22% and 24% that I'll take my chances... its the 12%/22% difference that I'm trying to utilize.

While both my own spreadsheet and i-orp suggest that in the long run I would be best of accelerating conversions and writing the IRS a big-a$$ check, I can't bring myself to do it.
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Old 09-11-2019, 05:08 PM   #19
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I've been looking at this for a while, but there are another facets at least in my view. I had a spread sheet that would model all our accounts using nominal performance, track basis, spending , ...all sorts of account, replenish spending cash, calculate taxes, do roth conversion and so on.

Then I got broadsided in what I was doing.

I saw first hand what the tax torpedo can do. DMIL was widowed about a decade ago and tax rates jumped with filing as single. Most of there $ was in TIRAs.

My advice is to first bound your problem. Do you consider the death of a spouse? Inheritance? Are you planning to do QCDs?

There are a few ways to play these issues

If you are not considering the death of a spouse, I would encourage you to to visit an old folks home and see the demographics.

I am doing roth conversions to a higher level.
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Old 09-11-2019, 05:46 PM   #20
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Good discussion, thanks. I found this Roth conversion calculator useful:


https://www.schwab.com/public/schwab...ira_conversion
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