Question about which account to draw funds from

[Rianne]

The other Big reason to spend down the Qualified money (401ks, IRAa) is that once you start taking Medicare you can get hit with highly punitive IRMAA means-tested taxes on your (and spouses) Medicare per your income level.

Early Roth conversions are a great way around this.

Please explain the bold area. Are you saying if we can keep our income low that will benefit us regarding Medicare means testing? We're 62. When Medicare kicks in we'll have a higher income than now as SS and Pension start (if we take SS at that time). But we can keep our income lower and take SS at 70. We can use our I bonds and cash to supplement expenses.

Simply asking how does income affect Medicare? What year do they base the MAGI on? Does it change as your income changes in the future?

 

[FREE866]

My opinion is that unless one can predict what future tax rates will be, there is a risk one will be better off NOT doing the conversion, and not paying taxes today. Alternatively, one could get “burned” by paying taxes on the conversion today, then having Congress decide in the future—with a vote and stroke of a pen—to tax Roth IRAs, nullifying the move. Only two things are certain in life, Death & Taxes, right?

Well,even if tax rates stay where they are I'm still looking at being at a higher rate in 16 years as I will be receiving SS which that alone immediately puts me in a higher tax bracket than I'm am in now.



Yeah, I guess they could start to tax Roth IRA's but I wouldn't say that is a very likely situation. Presently 25 million households have Roth IRAs and that number is growing. That group is very tax sensitive ( which is why they created a Roth for themselves) so I doubt a majority of elected officials would agree on such a politically silly thing to do.

 

[FREE866]

One more question on this.
and thank you all so much for your help with this. I think I finally grasped the whole thing and wanted to run it again for confirmation if that is OK
I am going to use rounded numbers for simplicity:
LTCG tax rate for single with total income under 40 K is 0%
Tax rate for single under 40K is 12%
The standard deduction is 12K


If my Dividends and LTCGs are 22K then the ideal number to convert to Roth is 30K correct?
My logic is that if the ideal number is 52K before deduction then a 30K roth conversion + 22 K in LTCGs and dividends is the breaking point to keep me at the lowest tax rate.Similarly if my LTCGs and dividends were 27K then the ideal Roth conversion number would be 25K.



Is that right?

 

[pb4uski]

One more question on this.
and thank you all so much for your help with this. I think I finally grasped the whole thing and wanted to run it again for confirmation if that is OK
I am going to use rounded numbers for simplicity:
LTCG tax rate for single with total income under 40 K is 0%
Tax rate for single under 40K is 12%
The standard deduction is 12K


If my Dividends and LTCGs are 22K then the ideal number to convert to Roth is 30K correct?
My logic is that if the ideal number is 52K before deduction then a 30K roth conversion + 22 K in LTCGs and dividends is the breaking point to keep me at the lowest tax rate.Similarly if my LTCGs and dividends were 27K then the ideal Roth conversion number would be 25K.



Is that right?

Yes, I think so... broadly speaking (assuming ACA subsidies are not a factor):

Dividends and LTCG............$22k
Roth conversion...................30k
Total income........................52k
Standard deduction.............(12k)
Taxable income.....................40k

Ordinary income...................18k...........~$2k of tax
Preferenced income...............22k...............0k of tax
Taxable income.....................40k..............$2k of tax on $30k Roth conversion or about 7% of conversion amount

 

[FREE866]

Yes, I think so... broadly speaking (assuming ACA subsidies are not a factor):

Dividends and LTCG............$22k
Roth conversion...................30k
Total income........................52k
Standard deduction.............(12k)
Taxable income.....................40k

Ordinary income...................18k...........~$2k of tax
Preferenced income...............22k...............0k of tax
Taxable income.....................40k..............$2k of tax on $30k Roth conversion or about 7% of conversion amount

Great..thank you PB. Yeah, I'm 53 now, so Medicare is years away. Or, I should say, I am on my partners health care plan and her plan is better than if I went on my own and purchased insurance. Really appreciate your help with this! It's funny, because in general I'm pretty good with numbers, but this took me so long to finally grasp.

 

[pb4uski]

It's an acquired skill.

 

[MasterBlaster]

I skimmed this thread and I didn't see the mention of this

The other Big reason to spend down the Qualified money (401ks, IRAa) is that once you start taking Medicare you can get hit with highly punitive IRMAA means-tested taxes on your (and spouses) Medicare per your income level.

Early Roth conversions are a great way around this.

I also concur with spending some time with the advanced version of the Optimal retirement Planner (I-Orp.com) to model the outcome.

Please explain the bold area. Are you saying if we can keep our income low that will benefit us regarding Medicare means testing? We're 62. When Medicare kicks in we'll have a higher income than now as SS and Pension start (if we take SS at that time). But we can keep our income lower and take SS at 70. We can use our I bonds and cash to supplement expenses.

Simply asking how does income affect Medicare? What year do they base the MAGI on? Does it change as your income changes in the future?

Sorry for the delay in my response...

It's not just the income taxes that are affected by Roth conversions. It's also the IRMAA taxes on your Medicare cost. Think of those IRMAA taxes as extra income taxes to be avoided by ROTH conversions

The Medicare means tested taxes (The IRMAA charges) are proportional to your income (MAGI income). If you have quite a bit in 401ks and IRAs (ie. qualified accounts) then your RMD and other distribution may be such that you start paying extra for Medicare.

Roth withdrawals don't affect your MAGI income so you can spend that kind of money at will. In other words ROTH withdrawals don't affect your MAGI income and hence don't push you into paying extra IRMAA tax on your medicare. And really you don't need all that much income to start paying extra IRMAA taxes. Singles with $87k MAGI income pay extra Medicare charges. In brackets those charges go up with income.

if you have previously converted qualified money (401ks and IRAs) into ROTH accounts then the IRMAA surcharges may be nothing or may be less.