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SS and taxes
Old 09-10-2018, 02:56 PM   #1
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SS and taxes

The current thread on taking SS early got me thinking (again) about when to take and the tax implications.

So.. I used this calculator to run some scenarios: https://www.olt.com/main/home/taxestimator.asp

We are both 63, planning to take SS at FRA (66.2), and currently doing Roth conversions within the 12% bracket.

Using the referenced calculator, it predicts my current tax liability pretty closely ($6,000 to 8,000 depending on income from investments, no other income).

If I start SS, and stop conversions, my tax liability drops to $500-600. Can keep the cash flow constant by using cash/mm/selling bond funds that are close to par, with no additional income.

We will be in the 22% bracket (or more) when RMD's set in. There is no way to convert enough between now and 70.5 to stop that, or even substantially affect it (good problem to have, in reality).

So, now I am thinking, finish converting DW's tIRA to Roth (for simplicity) and then start SS at 65, when Medicare kicks in (for simplicity) and save $6,000+ per year in taxes, for 5 years.

FWIW, there is a very high probability that we will never use the IRA's for our selves, beyond paying taxes at RMD time. (yes, we probably worked a few years longer than needed, but after the great recession, we got a little more conservative) We have one DS, who will likely get a windfall beyond his expectations, even if we start significant charitable donations at RMD age.

So, the questions for this group:
1. Has anyone used the referenced calculator, and have you found it to be fairly accurate?
2. Does taking SS at 65 make sense in this scenario? I just don't see the benefit of waiting any longer
3. Am I missing something and letting the tax tail wag the dog?
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Old 09-10-2018, 03:12 PM   #2
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We've had a great run in the stock market the last few years. If the pundits are correct and the next decade has muted returns your RMD's may not be all that affected. FWIW
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Old 09-10-2018, 03:16 PM   #3
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Optimizing your tax situation is fine, but not for just a 5 year period. If you'd be taxed $6000+ at 12%, at 22% you'll be taxed ~$11,000 if you have to take that same amount in RMDs, right? So any early tax savings will be rapidly eaten up. I can't say how quickly because I have no idea what your RMDs will be with and without conversions.

I'm not sure what the "for simplicity" things are, but are things really that much more complex if you do it differently? Without jerking this thread into the "when to take SS" quagmire, I'd consider delaying SS until 70 to give you more time to convert at 12%. I realize there may be other factors but just consider how it looks for your situation.
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Old 09-10-2018, 03:18 PM   #4
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Have you considered / done the math by staggering SS withdrawal age for both of you? Perhaps one at 64 and one at 67-70?
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Old 09-10-2018, 03:32 PM   #5
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Originally Posted by RunningBum View Post
Optimizing your tax situation is fine, but not for just a 5 year period. If you'd be taxed $6000+ at 12%, at 22% you'll be taxed ~$11,000 if you have to take that same amount in RMDs, right? So any early tax savings will be rapidly eaten up. I can't say how quickly because I have no idea what your RMDs will be with and without conversions.

I'm not sure what the "for simplicity" things are, but are things really that much more complex if you do it differently? Without jerking this thread into the "when to take SS" quagmire, I'd consider delaying SS until 70 to give you more time to convert at 12%. I realize there may be other factors but just consider how it looks for your situation.
^^^ My thought too.. better to milk those 12% Roth conversions as much as possible to avoid paying 22% later.... either way I suspect that once SS starts that 85% of it will be taxed (based on current law).
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...check a few more options
Old 09-10-2018, 03:56 PM   #6
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...check a few more options

since youíve already said both of you are 63, but you havenít said anything that indicates that either of you have conditions that indicate a shorter life expectancy:

consider that, generally, women outlive their spouses

does she have the same PIA? if itís smaller, consider starting the smaller PIA earlier (say at FRA, actually Iíd start in the January of the year after FRA so as to maximize credits and have those credits immediately be implemented (strange way SS gives you the value, only in the year after... so better to maximize months of credit)
still continue conversions on hers ( again assumes that she outlives) so as to move more over to fully tax-free {as you noted, it may not matter much but at least that part will have lower tax treatment}

Then plan on your SS at 70, if your PIA is higher , as the surviving spouse will receive that higher value
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Old 09-10-2018, 03:59 PM   #7
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^^^^ the problem is that any SS reduces the amount that a couple can convert since the conversion to the top of a tax bracket is based on joint taxable income.... in fact, in certain circumstances it is worse because each additional $1 of Roth conversion increases taxable income by more than $1 because a bit more of SS is taxable.
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Old 09-10-2018, 04:00 PM   #8
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Thanks for the quick responses.

Regarding simplicity: Eliminating DW's tIRA means we only need to withdraw from one. Taking SS at 65 means we can have medicare deducted and not have to pay. Additionally, we can set the withholding amount to eliminate quarterly tax payments.

85% (or more) of SS will be taxed at RMD time. No way around that.

If we wait to 70 for SS, at BEST we could convert 15% of my tIRA to Roth, and stay in the 12% bracket.

I agree, that by age 75 or 80 we may have crossed the break even point on taxes. But at that point, do I even care? Basically we will be paying taxes for my DS, since we are unlikely to use the money.
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Old 09-10-2018, 04:04 PM   #9
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As alluded to by RunningBum and Pb4uski, it's not what tax bracket you are in when RMDs start, it is the quantity of dollars that are being taxed at that marginal rate. Any portion of the 12% bracket you don't utilize before 70.5 will, of necessity, be taxed at 22% during the RMD life cycle, unless you are reserving such amounts for charitable contributions or LTC expenses. If you can convert an incremental few hundred thousand up to the top of the 12% bracket until 70.5, that is just that many dollars that will not be taxed later at 22%.
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Old 09-10-2018, 04:30 PM   #10
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In round numbers, RMD's will be about $100k at 70.5. So 15% more would be $15k at a 10% additional tax, so $1,500 more in taxes. since I will save $30,000 over 5 years, that is a 20 year break even point. Yes, I know RMD's increase each year, so call it 15 years. If I live to 85, then I won THAT game, and will pay a little more in taxes.

I know that there are more moving parts to this (time value of money, ROI, when will we take the dirt nap, etc.) But I can't control, or accurately predict these numbers.

Just a thought for consideration.
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Old 09-10-2018, 04:41 PM   #11
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I agree, that by age 75 or 80 we may have crossed the break even point on taxes. But at that point, do I even care? Basically we will be paying taxes for my DS, since we are unlikely to use the money.
OK, if you don't care, I don't care. I'm not sure why you care about taxes from 65-70 but not 70 on, but I'll let it be.
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Old 09-10-2018, 04:49 PM   #12
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RMDs increasing very quickly. It’s not always 3.7%
If you have $100k at 70.5, it’s most likely be $165k at 75. At that point it may cross over the 22% threshold. I save a federal and state tax rate in my iPad for quick reference. And if one spouse has to file single, it will be a lot worse.
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Old 09-10-2018, 05:03 PM   #13
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According to the Boglehead Wiki cited below, if a couple has $40K worth of SS benefits, then they reach the 22% marginal rate with an RMD of only $32,459.

The RMD at 70 is 3.65% of your account balance, so the account can be just $890K. Unless the market crashes, many of us cannot withdraw or convert enough to Roth to go below that level at 70. One should still draw or convert as much as possible at tax rates below 22%, at ages below 70.

https://www.bogleheads.org/wiki/Taxa...urity_benefits
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Old 09-10-2018, 05:07 PM   #14
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According to the Boglehead Wiki cited below, if a couple has $40K worth of SS benefits, then they reach the 22% marginal rate with an RMD of only $32,459.

The RMD at 70 is 3.65% of your account balance, so the account can be just $890K. Unless the market crashes, many of us cannot withdraw or convert enough to Roth to go below that level at 70. One should still draw or convert as much as possible at tax rates below 22%, at ages below 70.

https://www.bogleheads.org/wiki/Taxa...urity_benefits
Not only that once you hit $170k your IRMMA goes up. I hope I have the spelling right. So instead of paying $134 for Medicare part B, you could pay a lot more. This I think is another way they can soak the rich. In the future it could be raised further to support the program.
And if one spouse is filling single, it can’t be too pretty.
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Old 09-10-2018, 05:08 PM   #15
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RMDs increasing very quickly. Itís not always 3.7%
If you have $100k at 70.5, itís most likely be $165k at 75.
It's not that bad. The distribution period is 27.4 years at 70, and 22.9 at 75.

So, the ratio is 27.4/22.9, or 20% more at 74.
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Old 09-10-2018, 05:12 PM   #16
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Not only that once you hit $165k or $170k your IRMMA goes up. I hope I have the spelling right. So instead of paying $134 for Medicare part B, you could pay a lot more. This I think is another way they can soak the rich. In the future it could be raised further to support the program.
What's new?

When still working, the people with higher incomes have to pay more in percentage, not just in dollar amount. So, in retirement, people with more money stashed away have to pay a higher percentage too.

You cannot get money from people without money. Blood from a turnip?
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Old 09-10-2018, 05:19 PM   #17
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What's new?

When still working, the people with higher incomes have to pay more in percentage, not just in dollar amount. So, in retirement, people with more money stashed away have to pay a higher percentage too.

You cannot get money from people without money. Blood from a turnip?
Yeah, but in the context of this thread. Saving $6K is nothing. Because you might lose $3k to Medicare premium already and more if you are single. You pay a little more in tax because it’s now over 22% tax bracket. Plus from what I’ve found and particular to my state tax situation, I might save a few percentage there. Could be 3%. Even if the tax rate for the federal stays the same.
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Old 09-10-2018, 05:23 PM   #18
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That is the problem that I have been facing... even though over the last 6 years I have converted 25% of my retirement date tIRA balance, my balance is still the same as it was when I retired... but at least I have converted some of the growth and saved $38k as a result.
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Old 09-10-2018, 05:48 PM   #19
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Well, just because I cannot avoid paying many hundred $K in taxes, I am not going to give up trying to salvage a few $K here and there. Every bit helps.
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Old 09-10-2018, 06:26 PM   #20
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Also, I think $40k in SS is a low amount for a working couple. In today’s dollar for a working couple like my husband and I, it could be $70k-$80K. If you have income from other investments and pension, plus RMD, then it will be worse.
This is why I had to byte the bullet and convert up to 22%. I could be in 24% bracket or higher at the current tax rate.
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