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Old 08-12-2014, 12:03 PM   #21
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Great question as it got me to try i-orp which I hadn't until now (thanks samclem). It didn't estimate my contributions correctly from now until 50 but the actual amounts aren't important just the withdrawl strategy. I input 50 as my ER date with approx $1MM balance at that time. Of the $1MM approx 80% in IRA, 20% in after-tax savings. SS starting at 65.

I see it's suggesting moving money from IRA to ROTH for the first 4 years of retirement and using the after-tax money for spending early on. From age 54 to 66 though it looks like it wants me to withdraw from IRA (taxdef) (and pay taxes early on). At 65 SS starts, at 70 RMDs start.
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Old 08-12-2014, 12:11 PM   #22
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From the horse's mouth:

http://www.irs.gov/pub/irs-drop/rp-13-35.pdf

"SECTION 3. 2014 ADJUSTED ITEMS
.01 Tax Rate Tables. For taxable years beginning in 2014, the tax rate tables under 1 are as follows:
TABLE 1 - Section 1(a) - Married Individuals Filing Joint Returns and Surviving
Spouses
If Taxable Income Is:
The Tax Is:
Not over $18,150
10% of the taxable income

Over $18,150 but not over $73,800
$1,815 plus 15% of the excess over $18,150

Over $73,800 but not over $148,850
$10,162.50 plus 25% of the excess over $73,800 "


"


TABLE 3 - Section 1(c) Unmarried Individuals (other than Surviving Spouses and
Heads of Households)
If Taxable Income Is
: The Tax Is:
Not over $9,075 1
0% of the taxable income
Over $9,075 but not over $36,900
$907.50 plus 15% of the excess over $9,075
Over $36,900 but not over $89,350
$5,081.25 plus 25% of the excess over $36,900 "

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Old 08-12-2014, 12:28 PM   #23
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Quote:
Originally Posted by dvalley View Post
I see it's suggesting moving money from IRA to ROTH for the first 4 years of retirement and using the after-tax money for spending early on. From age 54 to 66 though it looks like it wants me to withdraw from IRA (taxdef) (and pay taxes early on). At 65 SS starts, at 70 RMDs start.
IIRC, it suggested the same general pattern when I put in my numbers. Suggestions:
1) Play around with a few different levels of expected investment returns to get an idea of how sensitive your "optimum" strategy is to that. I found it to be especially important to understand the "best" strategy if my returns are lower than I presently expect: That's when it will be especially important to get every dime we can safely withdraw. If my investments do very well then I know I'll have to pay more taxes, but that's a "good problem to have."
2) If you are married, maybe see how the optimum withdrawal strategy changes if you/spouse are alone in the future. The tax situation can change a lot with the lower bracket levels and lower standard deduction.

I don't think i-orp is "smart enough" to take into account the impact of the zero% dividend and CapGains tax rate for those in the 15% bracket--I can see that it might pay to go a bit slower on the Roth conversions in order to have room in the 15% bracket to harvest some of those gains. And I know it doesn't take into account the ACA subsidies, which can be a major factor in causing some people to minimize O-MAGI income.
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Old 08-12-2014, 01:40 PM   #24
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Good thoughts samclem. I'll be honest, up until now I haven't given much thought to taxes and the withdrawl strategies, I'm saving that for a few years before I retire. However, I do see value in getting most taxes out of the way early on. Who knows where the taxes will go in the following 2 or 3 decades, even from the ACA perspective you could be on a high deductible plan early on when you're relatively healthy compared to later on. Who knew retirement planning could be a part-time job lol
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Old 08-12-2014, 11:56 PM   #25
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Originally Posted by samclem View Post
I don't think i-orp is "smart enough" to take into account the impact of the zero% dividend and CapGains tax rate for those in the 15% bracket--I can see that it might pay to go a bit slower on the Roth conversions in order to have room in the 15% bracket to harvest some of those gains.
It's far worse than you are assuming.

Look here to see what the i-orp developer says about its model for a taxable account. It ignores income from a taxable account. It just reduces growth of that account by your tax bracket.

IMHO, this is a dangerous tool. It gives tax advise but doesn't really take tax law into consideration. And, it calls itself optimal.
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Old 08-13-2014, 07:32 AM   #26
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For those who might take advantage of them, the ACA subsidies change the equation quite a bit. Prior to ACA, the common wisdom was to do Roth conversions up to the top of your current tax bracket. When the bracket is 15%, this allows for tax-free capital gains and qualified dividends.

But the subsidy cliff kicks in at 62K MAGI (for a family of 2). This is significantly lower than the top of the 15% bracket, and it seems to me that the cost of losing the subsidies would far outweigh the advantages of Roth conversions that would take one over the cliff while still staying in the 15% bracket.
I had initially thought the subsidies would be preferable as well but ultimately came to the opposite conclusion - that avoiding the amount of time I spend in the 25% tax bracket from 70 on is much more valuable than subsidies. What I have done instead of subsidies is to buy cheaper catastrophic health insurance since we are both relatively healthy and the additional deductibles and co-pays are not that much more than the bronze level plan we looked at and the premiums are 62% of the bronze level premium so we are saving quite a bit.

We would have federal tax refund before Roth conversions because of qualified dividends, LTCG and foreign tax credits but our Roth conversions bring us to the top of the 15% tax bracket and we ended up paying tax equal to about 7% of our Roth conversion in 2013, much better than the 25% or more I avoided paying when I deferred that income.
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Old 08-13-2014, 08:48 AM   #27
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I don't know where you got your tax bracket figures but this is where mine came from.

http://www.taxpolicycenter.org/taxfa...dual_rates.pdf

I agree with your personal exemption and standard deductions. If I limit myself to $94,100 of taxable income, I won't make a serious dent in my IRAs before I take my first RMD. Using your numbers won't make a meaningful difference in my situation.
I obtained my numbers from the IRS publication 15
Publication 15 (2014), (Circular E), Employer's Tax Guide

TABLE 7—ANNUAL Payroll Period (a) SINGLE person (including head of household)— (b) MARRIED person—

The schedules above are for employers withholding from paychecks, it appears the bracket numbers are adjusted. I originally thought they should be the same as the tax rates but it doesn't seem to be the case. I can't logically determine why the bracket numbers differ by $4500/$8450 as neither of these correlates to the personal or standard deduction.
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Old 08-13-2014, 09:33 AM   #28
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I had initially thought the subsidies would be preferable as well but ultimately came to the opposite conclusion - that avoiding the amount of time I spend in the 25% tax bracket from 70 on is much more valuable than subsidies.
Well this all depends on what you plan to do with the marginal RMD income that exceeds the 15% bracket. I don't plan on leaving a ton of money to the kids - I prefer to give it away to good charities instead, so with that philosophy it will be easy to stay at the top of the 15% and still (hopefully, with inflation/bracket adj.) have enough money to spend.

Of course the equation changes significantly if your spouse dies before 70 or shortly thereafter. The tax man is likely to take more in those cases.
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Old 08-13-2014, 11:13 AM   #29
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Well this all depends on what you plan to do with the marginal RMD income that exceeds the 15% bracket. I don't plan on leaving a ton of money to the kids - I prefer to give it away to good charities instead, so with that philosophy it will be easy to stay at the top of the 15% and still (hopefully, with inflation/bracket adj.) have enough money to spend.

Of course the equation changes significantly if your spouse dies before 70 or shortly thereafter. The tax man is likely to take more in those cases.
I guess that tax management is easy with RMDs if you just simply donate all income over 15%, but I suspect you are an exception and not the rule.

+1 on the spouse dying - which makes maximizing Roth conversions between ER and 70 even more important and make the case for prioritizing Roth conversions over ACA subsidies even stronger.
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