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High, Low, Low, High - income plan
04-14-2021, 03:12 PM
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#1
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Recycles dryer sheets
Join Date: Mar 2008
Posts: 363
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High, Low, Low, High - income plan
If you want to minimize taxes, credits, and opportunities - does anyone take out a high amount in year 1, and then in year 2 and 3 to a much lower amount?
Year 1 would be in a higher tax bracket, etc - and then 2 & 3 in substantially lower tax brackets with ACA payments subsidized etc?
Is this a reasonable plan?
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Retired 3/22/2021
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04-14-2021, 03:23 PM
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#2
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,202
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Sure. Every case is different but that can definitely work.
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04-14-2021, 03:54 PM
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#3
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Recycles dryer sheets
Join Date: Aug 2018
Posts: 345
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Quote:
Originally Posted by retire48in2018
If you want to minimize taxes, credits, and opportunities - does anyone take out a high amount in year 1, and then in year 2 and 3 to a much lower amount?
Year 1 would be in a higher tax bracket, etc - and then 2 & 3 in substantially lower tax brackets with ACA payments subsidized etc?
Is this a reasonable plan?
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What does that mean take out a high amount? how does it work? I am in the first year too.
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04-14-2021, 09:11 PM
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#4
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Apr 2013
Posts: 11,078
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Yes I accidentally this last year. Blew my ACA subsidy only to find it didn't matter last year. I'll be able to do some Roth conversions this year because of it..
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04-14-2021, 09:14 PM
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#5
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Aug 2004
Location: Laurel, MD
Posts: 8,309
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It means take out more than you need in a single year and use the extra to tide you over the next year. Example:max out 22% tax bracket in year one and use the extra so you can stay in a lower bracket the next year.
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...with no reasonable expectation for ER, I'm just here auditing the AP class.Retired 8/1/15.
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04-14-2021, 09:43 PM
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#6
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Moderator
Join Date: Nov 2014
Posts: 9,101
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I don’t think it would work unless you do have some other opportunity, like an ACA subsidy. I haven’t done the math and I accept that I could be wrong, but I think if all you have is the taxes to minimize, taking out more, which means moving into the next higher tax bracket, isn’t going to minimize taxes. Of course taxes do include things like credits or formulas like capital gains, but I’m just talking about general taxes.
So, I think you’d need to have a pretty solid plan for it to work. I max out the 12% bracket. If I take out enough to max out the 22% bracket, that’s obviously 10% more on a lot of money (MFJ). So, it would take a good amount of other benefits offset that extra tax payment. I’m thinking the ACA subsidy plus the preferential treatment of capital gains and maybe more.
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Every day when I open my eyes now it feels like a Saturday - David Gray
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04-15-2021, 03:53 AM
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#7
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Thinks s/he gets paid by the post
Join Date: Mar 2009
Posts: 2,983
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On SS, Medicare, pre RMD's and done with Roth conversions I use this plan. It's easy to figure out by simply modeling a steady income vs hi -lo every two years. The combined tax savings with the hi-lo plan are a couple thousand per 2 year period. Most the savings are derived from how SS is taxed as well as state tax credits for the lo years.
I also must note that I only went this route when my future RMD's were projected to be less than what I would take out to stay in the 12/15% tax bracket. Roth conversions reduced my tIRA to this point. In my case I plan to have the Roth carry the load if my tIRA runs out in my 90's or if LTC depletes it earlier. In that case medical costs would be deductible, reducing taxes on the RMD's. One reason to keep a tIRA as well as Roth. Who knows? But that's about all the planning I can do.
__________________
Took SS at 62 and hope I live long enough to regret the decision.
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04-15-2021, 05:06 AM
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#8
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Thinks s/he gets paid by the post
Join Date: Mar 2014
Location: Dallas
Posts: 1,150
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Generally speaking, spreading income over multiple years results in lower average tax. Do the math with real numbers and focus on average tax rate paid after ACA subsidies. And think percentage vs absolute numbers.
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04-15-2021, 06:17 AM
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#9
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Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Join Date: Jun 2007
Posts: 13,202
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Generally speaking, yes, evenly spreading out income and taxes over the years is best. But the OP mentioned the ACA subsidy. When there is a cliff and spreading out income evenly would put you just over the cliff every year, it may work better to sacrifice a year with more income to get a few years with subsidy. It doesn't have to be regular income. Maybe you take a lot of cap gains one year. There's a lot of space there before you pay more than 15%. You might use this space to unload holdings that throw a lot of dividends or CG distributions, and replace them with more tax efficient funds.
Another reason to do this is if you itemize expenses. Maybe you can double up property taxes, or have a big year of medical expenses, or take a large charity deduction by funding a DAF.
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04-15-2021, 08:22 AM
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#10
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Recycles dryer sheets
Join Date: Jun 2008
Posts: 154
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We are in the process of doing something like this. Last year DW retired in January and I worked the entire year. At the end of the year we did a large Roth conversion so that we can spend down our available cash over the next 3-5 years (supplemented with other sources of income). The large Roth conversion put us into a higher tax bracket last year, but allows us to manage our MAGI going forward for ACA subsidy purposes and keep some in reserve for potential unexpected large costs. We'll continue to do smaller Roth conversions going forward to smooth our annual taxes.
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