Howdy from HTX, FIREing this summer, critique the plan, where are the blind spots

[yeartobefree]

Long time lurkers, making the leap into the spotlight.

Plan is to work through June and we’ll have earned ~$130k, so don’t plan any Roth conversions or selling any from taxable account this year. We have a mix of 401k, 403b, t/rIRA, HSA, pension. We’re in our mid-40s and will be moving overseas to Portugal.

Funding plans initial thoughts:
-Year 1: convert all 401k->tIRA, use savings and taxable account if needed
-Year 2-6: taxable account for entire year (~70k), Roth conversion ~70k
-Year 7-retirement age: mix taxable + Roth conversions (~70k), continue Roth conversions ~70k*
*conversions will stop 5 years before retirement age allowing access to pre-tax monies
*numbers will adjust up to include annual inflation
-Retirement till death us do part: pre/post-tax retirement accounts, pension, her SSA @ 62, his SSA at 70 (assuming it's still around)

Questions:
-For this final year we’re both contributing to 401k/403b to get match, then socking away into savings to get us through the rest of the year. We’ll also max out tIRA contributions. Thoughts?
-Anything we should think about wrt minimizing taxes in the LTCG/Roth conversion years? I’ve read a number of articles breaking down brackets for ordinary income/LTCG but still feel fuzzy on it. We can play with the numbers above, but generally between taxable withdrawals and Roth conversions we’re looking at ~140k total.
-Any sense consolidating down to a single brokerage? Right now considering consolidating down to two: Fidelity and Vanguard
-Anything we're missing or need to consider?

Appreciate any insights and thanks for all the info to-date on the site!

Cheers, HTX

 

[Exchme]

Can't really tell much without some account balances. Also, moving overseas makes it more complicated. Make sure you understand the tax rules in Portugal; for instance, from reading here, I understand there is no special after tax status for Roth's there. Check some threads about that subject.

The zero percent LTCG bracket is $83,350 and the top fo the 12% bracket for ordinary income is $83,550. To figure out how much capital gains are subject to the 15% tax rate, take wage income + Roth Conversions, etc. and subtract your standard deduction ($25,900). Then add your capital gains to that. If the total of everything is $109,250 -std deduction of $25900 is less than $83,550, you owe no capital gains tax and the ordinary income is taxed at 12%.

As your regular income increases, then the two interact. So an extra $ of say Roth Conversions gets taxes at 12% as regular income, plus it pushes a dollar of capital gains above the zero percent bracket, so it causes another 15% tax. The result is that during this capital gains tax phase in, you face a marginal tax rate on Roth Conversions of 12%+15% = 27%. So I wonder whether you might be better off doing smaller Roth Conversions for a longer time to stay under this nasty cliff.

You need to do some modeling.

 

[Bamaman]

To move to the Euro Zone requires a Visa--under the Schengen Agreement. And they're not easy to get if you're not a student (young.)

But I understand that Portugal is not as difficult as other countries to obtain a Visa from.

My question is what's it going to cost you to get that Portuguese visa? They're not free.

 

[yeartobefree]

So I wonder whether you might be better off doing smaller Roth Conversions for a longer time to stay under this nasty cliff.

You need to do some modeling.

Thanks Exchme for the reply, you've given me something to consider here: smaller Roth conversions over time. I've run some calculations with Intuit's Taxcaster site (if there's a better alternative I'd be open) and can now see the difference in tax liability. Just to check if I'm doing this correctly here's what Taxcaster spit out:

$70k OI-RC + $70k LTCG = 10100 tax (22% bracket, 8.8% effective)
$25k OI-RC + $115k LTCG = 5100 tax (22% bracket, 4.5% effective)
$25k OI-RC + $80k LTCG = 0 tax (12% bracket, 0% effective)

Does that math check out? Thanks again for the reply!

 

[yeartobefree]

Hey Bamaman, appreciate the reply. You're not wrong, PT is easier than most, but still a mound of paperwork and patience. They have a very obtainable D7 retirement/passive income visa. While not free to be sure, the only piece to consider here is admin fees and your mental state from what I gather.

 

[catii]

Yeah, go for it, & enjoy drinking your Port!

 

[Exchme]

Thanks Exchme for the reply, you've given me something to consider here: smaller Roth conversions over time. I've run some calculations with Intuit's Taxcaster site (if there's a better alternative I'd be open) and can now see the difference in tax liability. Just to check if I'm doing this correctly here's what Taxcaster spit out:

$70k OI-RC + $70k LTCG = 10100 tax (22% bracket, 8.8% effective)
$25k OI-RC + $115k LTCG = 5100 tax (22% bracket, 4.5% effective)
$25k OI-RC + $80k LTCG = 0 tax (12% bracket, 0% effective)

Does that math check out? Thanks again for the reply!

Sorry for not checking back in. Yes, for 2021, that's what I would get too, a quick on-line tool is at:

https://www.mortgagecalculator.org/calcs/1040-calculator.php

For Roth Conversions though, don't use the effective tax rate, what you are interested in is the marginal rate, meaning the incremental taxes per amount of money converted (because of tax code weirdness this is not always the same as the tax bracket).

Let's take a couple different cases to illustrate, with our base case at the top of the 0% LTCG bracket and then add some more conversions on top and compare.(2021 tax brackets as in your cases):

Base Case (Top of 0% LTCG, near top of 12%)
$80.8K OI+RC & $25K LTCG =$6,289 taxes

Extra $25K of Roth
$105.8K OI+RC & $25K LTCG = $13,024 taxes

We might have naively thought that since the $105.8K was within the 12% bracket that we were going to pay 12% on the conversion, but it's actually 27% as the conversion makes more of the LTCGs taxable as well:

That extra $25K Roth conversion cost us:
$13,024-$6,289 = $6735 in taxes

The marginal tax rate on that extra Roth conversion is the ratio of the extra taxes paid to the extra Roth conversion made.
=$6,735/$25,000 = 26.94%

The capital gains tax phase in is an "attractor" for your Roth conversion calculations, meaning a hurdle that's hard to get over. Other "attractors":
ACA credits at different FPL factors
SS taxation phase-in (nasty as it's not inflation adjusted)
IRMAA tiers
NIIT (nasty as it's not inflation adjusted)
20% capital gains rate

I see several of these "attractors" in our Roth plan:
-Conversions through the 24% bracket while on COBRA, selling extra stocks to build cash/taxable bonds to avoid a cash pinch in the next time period.
-Then restrict conversions to get ACA premium credits until Medicare.
-Then conversions to the top of the top of the 22% (just below 1st IRMAA tier) or NIIT, whichever is lower, until DW claims SS
-Then conversions to the top of the 12% /0% LTCG bracket until I claim SS & DW claims spousal SS
-Then no conversions until RMDs
-Then conversions to the top of whatever tax bracket/IRMAA tier the RMD puts us in (not a big impact except as a way to reduce taxes once one of us passes).

 

[pb4uski]

With respect to Roth conversions, a common approach is to develop an estimate of your income and tax situation when you are 72 and RMDs start... so including taxable accunt investment income, any pensions, SS, RMDs, etc. and what the effective tax rate on the RMDs is [(tax with RMD - tax without RMD)/RMD amount].

If you can do Roth conversions before age 72 at a lower effective tax rate then go, otherwise don't as it doesn't much matter if you pay x% now or x% later.

For us, when we reach RMD age I expect that we'll be in the 22% tax bracket, so we currently convert to the top of the 0% capital gains tax bracket.

Why the top of the 0% capital gains tax bracket rather than the top of the 12% tax bracket? Because that extra $200 of taxable income ends up being taxed at 27%... 12% on the Roth conversion increase in ordinary income and 15% on some capital gains being pushed from 0% to 15%.

 

[yeartobefree]

Extra $25K of Roth
$105.8K OI+RC & $25K LTCG = $13,024 taxes

We might have naively thought that since the $105.8K was within the 12% bracket that we were going to pay 12% on the conversion, but it's actually 27% as the conversion makes more of the LTCGs taxable as well:

That extra $25K Roth conversion cost us:
$13,024-$6,289 = $6735 in taxes

The marginal tax rate on that extra Roth conversion is the ratio of the extra taxes paid to the extra Roth conversion made.
=$6,735/$25,000 = 26.94%

No worries at all on reply delay. It's not like I'm paying for a service here. Now this math make sense to me and where that 27% was coming from. This is clearly something I was overlooking and appreciate you pointing it out. WRT these 'attractors' is there somewhere you recommend to run models? I've run my numbers through i-ORP to get a general sense of things, but perhaps need to revisit with a sharper eye on tax exposure.

Again really appreciate the reply and insight!

 

[yeartobefree]

With respect to Roth conversions, a common approach is to develop an estimate of your income and tax situation when you are 72 and RMDs start... so including taxable accunt investment income, any pensions, SS, RMDs, etc. and what the effective tax rate on the RMDs is [(tax with RMD - tax without RMD)/RMD amount].

This makes sense to me. My initial thought/goal with conversions is access to that money before age 59.5 with an eye on lowering tax exposure in the current year. Forecasting out to RMD time is something I need to model out. Thanks for the input!