Critique my income realization plan

[FLSUnFIRE]

With the recent tax planning threads, I’ll throw my situation out for your collective wisdom and perspectives.


TSP: $1,100K (at today’s balance/current age, SEPP provide ~$29K minus taxes)
tIRA non-ded: $5K basis $3.5K
Roth IRA $312K
Taxable MF $260K basis $75K
Taxable Stock $38K basis $12K

Annual cashflow need for next year (will liquidate in late 2022 to fund 2023) ~$35K in 2023 and about $45K in 2024 growing with inflation thereafter (or inflation plus BTD if the market is kind to me)
Earned income est $2,000
Qualified Dividend est $4,500
Interest is negligible

Desire to keep MAGI under $35K, ideally under $30K for ACA. I will also max out HSA contribution in 2022.

Long term plan is to start a SEPP using life expectancy method in a few years when I am sure I’m not going to have significant earned income (FIRE Fail?), if the balance grows substantially in order to reduce the balance that will subjected to RMDs at a higher rate, or when my taxable accounts drop to some undecided level… likely 2-3x annual cash needs.

Short term (this year) plan is to sell from VTSAX to get close to $30K threshold.

I don’t think Roth conversions are in the cards for me as the MAGI threshold is pretty low for a single person and would not allow me to liquidate to fund current living expenses without boosting those expenses pretty substantially by loss of ACA subsidy plus income tax liability. I do have a HELOC available and may use it to shift income realization/avoid selling in a severely depressed market. Anything I might want to consider? Thanks!

 

[Phroig]

You could simplify your accounts by first liquidating the non-deductible IRA, and selling the individual stocks. If you get to your target taxable income and still need cash, you can use the Roth.

 

[FLSUnFIRE]

You could simplify your accounts by first liquidating the non-deductible IRA, and selling the individual stocks. If you get to your target taxable income and still need cash, you can use the Roth.

I'll hold the non-deductable until I get old enough to touch it; I don't have any desire to pay 10% penalty on the appreciation just to liquidate it. Individual stock is on the chopping block but I'll likely use it to nudge up to the MAGI limit at the end of the year rather than sell it all off as I can dial in the price a bit better than the MF.

 

[Phroig]

I'll hold the non-deductable until I get old enough to touch it; I don't have any desire to pay 10% penalty on the appreciation just to liquidate it. Individual stock is on the chopping block but I'll likely use it to nudge up to the MAGI limit at the end of the year rather than sell it all off as I can dial in the price a bit better than the MF.

Makes sense. I assumed you were older than 59.5 - sorry!

 

[pb4uski]

I think you're right that Roth conversions will not be possible since your main need is cash flow and you are on ACA. Roth conversions create income but not cash flow... in fact, negative cash flow since the taxes need to be paid.

I think you have 11 years or so until you are 59-1/2 and have penalty free access to tax-deferred funds so at $45k a year you'll need access to ~$500k and your taxable account is only ~$300k so the ~$200k difference needs to come from somewhere.

How much are the contributions in your Roth?

But I think I would drain the taxable accounts first and then start the SEPP unless you have enough Roth contributions to avoid the SEPP. Or perhaps between taxable account money, Roth contribution money and the HELOC you can find a way to get to 59-1/2 without putting the SEPP in place.

 

[FLSUnFIRE]

I think you're right that Roth conversions will not be possible since your main need is cash flow and you are on ACA. Roth conversions create income but not cash flow... in fact, negative cash flow since the taxes need to be paid.

I think you have 11 years or so until you are 59-1/2 and have penalty free access to tax-deferred funds so at $45k a year you'll need access to ~$500k and your taxable account is only ~$300k so the ~$200k difference needs to come from somewhere.

How much are the contributions in your Roth?

But I think I would drain the taxable accounts first and then start the SEPP unless you have enough Roth contributions to avoid the SEPP. Or perhaps between taxable account money, Roth contribution money and the HELOC you can find a way to get to 59-1/2 without putting the SEPP in place.

I have about $90K contributions in my Roth. Market performance over the next 2-8 years and my actual spending will have a big impact on when I need to look beyond my taxable account. I think my current thinking is probably close to optimal (just a matter of how much I want to deplete the taxable.. it is nice to have options so I won't likely run it to zero) but if there is anything I can do now to be more tax efficient later I will do it. For now, it seems maxing out subsidies and keeping in the 0% bracket is my best tax strategy. Eventually, I expect/hope my portfolio will grow enough that I'll decide to eat the tax bullet and spend more (BTD!) while I'm young enough to enjoy it.


Before I FIRE'd myself, I played around a lot in FIRECalc using just taxable; odds are higher than zero... about 30-45% depending on the variables I played with that I could make it all the way to 59.5... of course, if it lasts that long, my tax deferred will have grown so much as well that I'll be "rich" and want to spend it!

 

[pb4uski]

Could you rollover a part of your TSP to an IRA and then do a SEPP using just the IRA, which would result in a lower SEPP and reduce the need for taxable account withdrawals?

If so, I'm thinking that you rollover enough to create a $10k per year SEPP. Low enough to that you reduce the risk of unanticipated income messing with ACA but enough to reduce your taxable account withdrawals to a level where the $10k SEPP along with taxable account withdrawals can comfortably carry you to 59-1/2.

 

[FLSUnFIRE]

So doing a bit of planning for this first ever post-FIRE sale. I'm hoping to get tax software early December to plug everything in to give me confidence I didn't miss/misunderstand any tax impacts before realizing income mid-Dec.


This is where I am:
1099 Earned income $1000-1300?
Div est $4,500
Interest est $300
Minimum cash needed to top off the tank $25K (more would be better but that plus residual would get me through 2023)


Security I plan to liquidate has a cost basis of ~33%
Plan to contribute to HSA $3,650 before April cut off
Considering putting 1099 earned income (net of self-employment taxes) into a tIRA (not sure if it's worth it would return about 10% as additional ACA subsidy but may be taxed more later)
Thinking I can sell about $31k for a CG of ~$21K HSA would offset most of the Div and interest income on MAGI and if I do the tIRA the earned income would be cancelled out. Should owe no taxes and get a bit more subsidy.... only question is if I want to realize more (add to my cash now so more carryover into 2024) and get a lower subsidy or go for max subsidy (~10% bird in hand).
Net cash into my spending pot would be approximately $31,000K-$3,650(HSA)-$1,300(tIRA)+$1000(refundable ACA tax credit)=$27,000



Still thinking but in general feeling pretty good I can have a very low MAGI and meet my needs for 2023 over but open to your thoughts/things to consider. Sharing so those interested can follow along with my thought process on my journey and so you can shoot holes in my plan before I execute.

 

[EastWest Gal]

Here are my thoughts on your plan:

Poking a hole in funding your HSA. I don't see the point in funding an HSA when your income tax will be zero and when there is no MAGI cliff on the ACA until 2026. You have to have an HSA qualified high deductible health plan to fund an HSA. Do you? Also, you cash is tied up in an HSA, when you may want to have it for unexpected expenses, build a cash account, or even to invest back into your taxable account.

There are very few HSA qualified HDHPs on the ACA in my area. Out of 47 plans, only four are HSA qualified.

If you keep your income below $32,200 this year, and something higher next year (I don't know the numbers yet), you will qualify for cost-sharing and much lower deductibles.

Another thing to remember is that any self-employment income can be offset by your health insurance premiums. See Schedule 1 of form 1040.

You might want to try this website for its tax calculator. I have found it quite accurate:

https://www.dinkytown.net/

 

[FLSUnFIRE]

Here are my thoughts on your plan:

Poking a hole in funding your HSA. I don't see the point in funding an HSA when your income tax will be zero and when there is no MAGI cliff on the ACA until 2026. You have to have an HSA qualified high deductible health plan to fund an HSA. Do you? Also, you cash is tied up in an HSA, when you may want to have it for unexpected expenses, build a cash account, or even to invest back into your taxable account.

There are very few HSA qualified HDHPs on the ACA in my area. Out of 47 plans, only four are HSA qualified.

Thanks, I'll check out the link.



The point of reducing MAGI is to increase the subsidy on my ACA plan (basically works out to about 10% reduction in premium for $1 of MAGI reduction).


I'm funding my HSA to take advantage of long term tax free/deferred growth (and the 10% bonus on my subsidy). I've got quite a book of receipts to reimburse if I need HSA funds but would likely tap my HELOC in a liquidity crisis instead. I view my HSA as an emergency/self-insurnace fund for medical and LTC and plan to contribute as long as I am eligible and able.



I'm in FL and very happy with my ACA choices. I have a HDHP that has all my doctors in network. One of the happy surprises is how much I like my plan and with the subsidy it is cheaper than my portion of my employer sponsored plan.