Surprise ER, Can Year One Budget Be This Simple?

[BubbaChris]

My wife and I are both 60 and up until last year we assumed we’d work to at least 65. Our health insurance was through my wife’s employment and she was getting antsy for semi-retirement. Luckily that discussion started early in 2020 and we switched to an ACA plan in April 2020. Subsequent COVID furloughs kept us within our targeted income brackets, so that was a big relief when I filed our 2020 taxes.

The furloughs gave us a forced test-drive of both retirement living and our comfort level on switching from accumulation mode into draw-down mode. My wife is now fully retired, and I am part time for the time being.

Here’s the big picture of where our money is located:
30% - After Tax Investments
60% - Traditional IRA
10% - ROTH IRA

While on a self-directed crash-course in FIRE basics, I’ve run FIREcalc, i-ORP, and NewRetirement. All these show we’re FI with plenty of room to grow our spending budget beyond my old assumptions. FIREcalc showed zero failures at 40 years, without any SS. So not only am I sleeping well at night, I’m dreaming about what ER will look like.

So while I continue to get educated on the advanced calculus of tax strategies, SS timing, etc., I’d love a quick sanity check of my year one budget. Our plan is to use $65K as a spending budget from the following sources:
$6K - W-2 income
$4K - Earnings from After Tax account
$15K - Traditional IRA Withdrawals
$40K - Draw from After Tax Investments

My top two priorities with this budget are to target our AGI in the right range for 2021 ACA Premium Tax Credits, and to start drawing down the Traditional IRA account before RMDs kick in 12 years from now. A side benefit of the predicted $25K AGI will be $0 Federal Income Tax liability for 2021.

So as the title says, can my planning really be this simple? I won’t even need to worry about paying estimated taxes this year. Thanks for being a great resource as I make this transition.

Best regards,
Chris

 

[pb4uski]

Are the after-tax investments in stocks or other assets that will result in gains on withdrawals? Or is it all savings account type investments?

Or put another way, will the $40k of withdrawals from after-tax investments result in gains that you need to consider in managing your income for ACA premium tax credits?

 

[BubbaChris]

Are the after-tax investments in stocks or other assets that will result in gains on withdrawals? Or is it all savings account type investments?

Or put another way, will the $40k of withdrawals from after-tax investments result in gains that you need to consider in managing your income for ACA premium tax credits?

Perfect question - We ran into that 2 years ago when making a vehicle purchase and sold part of an S&P 500 fund.

Currently 30% of that account is in money market funds, so there is no taxable event when I take from there. However rebalancing that account is on my to-do list. So I'll strategize around that when looking at how many years worth of withdrawals I want to keep in cash equivalents (or laddered CDs when that becomes a thing again).

Thank you for your ability to see the whole picture.

Best regards,
Chris

 

[pb4uski]

I'm not sure if you are aware of this but if your taxable income is $80,000 or less (2020) then the tax rate on any LTCG are 0%.

So let's say that your income target for ACA is $67k and you already have $6k or W-2 earnings and $4k of interest income from after-tax accounts. You could do $14.8k of tIRA withdrawals and/or Roth conversions and sell taxable investments to generate $42.2k of LTCG and end up with $67k of income and your tax bill would be a big, fat $0.

So if for example your taxable account investments were 60% basis and 40% unrealized gains you could have sales proceeds of $105.5k that could be used towards expenses.

You might want to play around with the dinkytown tax calculator https://www.dinkytown.net/java/1040-tax-calculator.html

 

[Animorph]

+1 0% LTCG taxes. That should be very relevant for you. You might consider maxing it out (under the ACA income limit) by harvesting gains and buying something new.

I'd also pitch Roth conversions. Check your tax situation when RMD's start up. They probably won't leave you in the 0% tax bracket. If you have any room left under the ACA income limit go ahead and do a conversion. It may also be beneficial to do the $15k tIRA withdrawal as a Roth conversion and take an extra $15k plus from the taxable accounts. That will reduce some of your taxable earnings and may add to the 0% LTCG you could take.

 

[BubbaChris]

+1 0% LTCG taxes. That should be very relevant for you. You might consider maxing it out (under the ACA income limit) by harvesting gains and buying something new.

I'd also pitch Roth conversions. Check your tax situation when RMD's start up. They probably won't leave you in the 0% tax bracket. If you have any room left under the ACA income limit go ahead and do a conversion. It may also be beneficial to do the $15k tIRA withdrawal as a Roth conversion and take an extra $15k plus from the taxable accounts. That will reduce some of your taxable earnings and may add to the 0% LTCG you could take.

Thank you for the ROTH conversion idea, I mostly wasn't considering that route as i-ORP wasn't suggesting any. But the suggestion makes sense, use this as an opportunity to shift funds into the smallest, best protected from future taxes account.

The ACA limits will be my upper bounds, as we'll get $25K in premium credits this year. Getting coverage this way is what gives us peace of mind starting retirement before Medicare age.

Best regards,
Chris

 

[SecondCor521]

The ACA limits will be my upper bounds, as we'll get $25K in premium credits this year. Getting coverage this way is what gives us peace of mind starting retirement before Medicare age.

I wonder if the elimination of the ACA cliff in the pending legislation affects your situation.

 

[walkinwood]

You should manage your income to be high enough to qualify for ACA - I don't know what the exact amount is, but you should verify that you don't fall below it.


Congrats on being ER.

 

[Finance Dave]

Thank you for the ROTH conversion idea, I mostly wasn't considering that route as i-ORP wasn't suggesting any. But the suggestion makes sense, use this as an opportunity to shift funds into the smallest, best protected from future taxes account.

The ACA limits will be my upper bounds, as we'll get $25K in premium credits this year. Getting coverage this way is what gives us peace of mind starting retirement before Medicare age.

Best regards,
Chris

We are 59/62, and what we do each February is give our accountant the data and have him do a prelim return. If MAGI is above the ACA limit, we simply contribute to our TIRAs to get it below...which you can do retroactively so long as you have "earned" income...looks like you have $6k you can play with. Consider that if you're worried your income might go over. This year (2020) we planned very well and our MAGI came in at $64,800.

 

[BubbaChris]

I wonder if the elimination of the ACA cliff in the pending legislation affects your situation.

Thanks for suggesting I look into this!

Best regards,
Chris

 

[BubbaChris]

You should manage your income to be high enough to qualify for ACA - I don't know what the exact amount is, but you should verify that you don't fall below it.

Congrats on being ER.

Thank you, that number is roughly $2,4500 for a MFJ couple in 2021. You can play in the application process on Healthcare.gov to see when it kicks you out for being Medicaid eligible for being too low.

I learned about ACA from another ER person who makes it sound like he's been able to file taxes below the AGI minimum, but always estimates just above the minimum on the application process.

Best regards,
Chris

 

[BubbaChris]

We are 59/62, and what we do each February is give our accountant the data and have him do a prelim return. If MAGI is above the ACA limit, we simply contribute to our TIRAs to get it below...which you can do retroactively so long as you have "earned" income...looks like you have $6k you can play with. Consider that if you're worried your income might go over. This year (2020) we planned very well and our MAGI came in at $64,800.

Thank you. I was furloughed last year and my UI was going to have us over our limit, so I used tIRAs to get me to a very happy place on the 2020 1040 bottom line.

Congrats on having a system that works well for you.

Best regards,
Chris

 

[BubbaChris]

Thank you everyone, here’s a summary of what I’ve learned:

• When moving cash for living expenses from after tax investment account to my checking account, consider the zero tax rate on LTCGs.
• Consider doing a ROTH conversion with money coming from the IRA. Any future gains will be tax and RMD free. And I'll work down earnings from the taxable account.
• Watch for legislation changes on ACA limits
• If I have W-2 earnings, I can still do a tIRA contribution in 2022 towards our 2021 taxes to fine-tune our AGI

Best regards,
Chris