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Old 05-13-2016, 01:41 PM   #41
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I'm slightly in the 28% tax bracket and expect to be in the 25% tax bracket in retirement. I'm single and my retirement income will come from a pension, Social Security, and a tax deferred 401k in that order. I also have a small Roth IRA. RMDs are not an issue. Due to my concern for the potential to means test Social Security and to increase the current means testing of Medicare Part B premiums, I'm considering contributing to a Roth 401k for the next two years and making small Roth conversions in retirement.

Another option might be to defer Social Security and spend down my deferred investments. Regardless, I-ORP calculations recommend the Roth conversions up to the top of the 25% tax bracket and these result in a small increase in after tax spending level of about $1K vs no conversions. Any thoughts would be appreciated.
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Old 05-14-2016, 07:49 AM   #42
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Originally Posted by ABQ2015 View Post
I'm slightly in the 28% tax bracket and expect to be in the 25% tax bracket in retirement. I'm single and my retirement income will come from a pension, Social Security, and a tax deferred 401k in that order. I also have a small Roth IRA. RMDs are not an issue. Due to my concern for the potential to means test Social Security and to increase the current means testing of Medicare Part B premiums, I'm considering contributing to a Roth 401k for the next two years and making small Roth conversions in retirement.

Another option might be to defer Social Security and spend down my deferred investments. Regardless, I-ORP calculations recommend the Roth conversions up to the top of the 25% tax bracket and these result in a small increase in after tax spending level of about $1K vs no conversions. Any thoughts would be appreciated.
If you compare ORP's spending plans for the IRA to Roth conversion scenario to the non conversion scenario you will see that conversions move tax payments up front in the plan but pay considerably less total tax. A Social Security means test is a tax increase and conversions are prudent in the face of higher taxes later in retirement. You have your finger right on it. The question is what will this anticipated means test look like? The Heritage Foundation proposes that benefits would be reduced by 25 cents of each dollar of income (excluding Soc Sec) beyond $55K with benefits disappearing at $110K income.
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Old 05-14-2016, 09:41 AM   #43
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The question is what will this anticipated means test look like? The Heritage Foundation proposes that benefits would be reduced by 25 cents of each dollar of income (excluding Soc Sec) beyond $55K with benefits disappearing at $110K income.
To expand: That appears to be from the "Saving the American Dream" Heritage Foundation proposal of 2011 (here), and the numbers are for single filers. For married couples, the phaseout of SS benefits would begin with $110K of non SS income, with no SS above $165K of non SS income. A couple of questions I would have:
- Why is this proposal commonly called a "means test" if it still based on income and not "means?"
- If this proposal, or one like it, came into effect, would Roth withdrawals count as income? Just Roth gains, or Roth contributions, too? How about withdrawals of the principal (not gains) in after-tax accounts?
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Old 05-15-2016, 07:53 AM   #44
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To expand: That appears to be from the "Saving the American Dream" Heritage Foundation proposal of 2011 (here), and the numbers are for single filers. For married couples, the phaseout of SS benefits would begin with $110K of non SS income, with no SS above $165K of non SS income. A couple of questions I would have:
- Why is this proposal commonly called a "means test" if it still based on income and not "means?"
- If this proposal, or one like it, came into effect, would Roth withdrawals count as income? Just Roth gains, or Roth contributions, too? How about withdrawals of the principal (not gains) in after-tax accounts?
You make a good point. Congress is totally unconstrained in how they define "income". It can include or exclude anything.
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Old 05-15-2016, 08:06 AM   #45
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To expand: That appears to be from the "Saving the American Dream" Heritage Foundation proposal of 2011 (here), and the numbers are for single filers. For married couples, the phaseout of SS benefits would begin with $110K of non SS income, with no SS above $165K of non SS income. A couple of questions I would have:
- Why is this proposal commonly called a "means test" if it still based on income and not "means?"
- If this proposal, or one like it, came into effect, would Roth withdrawals count as income? Just Roth gains, or Roth contributions, too? How about withdrawals of the principal (not gains) in after-tax accounts?
IF, and notice that "IF" is capitalized, they stay with the traditional definition of income then obviously Roth withdrawals and after-tax principal would not be income though they could slide slippery into some scheme to bifurcate Roth withdrawals between principal and gains and include the gains in income. I doubt that they would ever slide to the point of considering principal as income for that purpose but you never know the extent of politicians greed.

I suspect that they call the proposal a means test even though it is based on income in that income is the result of capital aka means... and defined broadly that would include pensions and tax-deferred accounts.

In a way it would make tax-deferred accounts much less desirable because the in retirement tax rate on an economic basis would be higher because it would be composed of income tax (as it is today) and loss of SS retirement benefits (sort of like in some ER cases the economic tax is a combination of taxes and loss of Obamacare subsidies) so it might generate more tax revenue in the long run since people would be less inclined to do tax-deferred savings.
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Old 05-15-2016, 03:20 PM   #46
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Gain Harvesting
As long as you stay within the 15% tax bracket all capital gains and qualified dividends are taxed at a rate of 0%.

So if I'm in the 15% tax bracket and I have a $200 investment that I bought for $100 I can sell it and immediately repurchase it tax free. I step up my basis from $100 to $200. I never have to pay taxes on that $100 gain. Any future gains or losses may be taxable or tax deductible.
I'm curious. Do you invest in individual equities? Or mutual funds/ETFs? I can see doing the harvesting with the individual stocks, but never really thought about harvesting gains in funds. I'll have to give this some thought.

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At the same time, tax laws change and not always in the way we expect. The imposition of a VAT or carbon tax would mean that your Roth conversion gets taxed twice. It's not a certainty that future tax changes will benefit Roth accounts.
But wouldn't a withdrawal from a tIRA also be taxed twice, with the withdrawal taxed at the higher level we would like to avoid while in the 15% bracket, then again when you buy something with it? In other words, I convert $10K now and pay $1.5K tax, then later withdraw it and buy something paying the whatever VAT. Or I don't convert, withdraw later from the tIRA paying 25% (because I'm now in a higher bracket due to RMDs) totaling $2.5K, then buy something with it and pay the VAT. Seems like I still pay higher taxes if I don't do the conversion.

This disregards the harvesting aspect. I'm just curious if my thinking about the conversion with VAT is right.
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Old 05-15-2016, 03:40 PM   #47
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I'm curious. Do you invest in individual equities? Or mutual funds/ETFs? I can see doing the harvesting with the individual stocks, but never really thought about harvesting gains in funds. I'll have to give this some thought.
Funds get the same tax treatment as individual stocks for this purpose. You can use the "Individual Sale" method of cost basis accounting for funds just like with stocks. But even if you're using the weighted average cost method gain harvesting still raises your basis and lessens future gains.

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But wouldn't a withdrawal from a tIRA also be taxed twice [with the imposition of a VAT], with the withdrawal taxed at the higher level we would like to avoid while in the 15% bracket, then again when you buy something with it?
Yes, but as with most things it also depends on the specifics.

If a VAT reduces or eliminates the income tax than a tIRA would fare better than a ROTH.

It's worth noting that one of the final four candidates for president of the U.S. put forward such a proposal as his tax plan this election cycle.

More generally, for those who support VAT type taxes it is usually for the reason that taxing consumption is more economically efficient (less distorting) than taxing income. So if something like a VAT ever gets passed, it probably only happens if it also reduces income taxes.

The same is true for something like a carbon tax, which might be more likely in the coming decades than is currently appreciated.
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