Retirement Tax Planning - Income Optimization?

[Montecfo]

I am not considering a future change in tax rates. They may go up and they may go down. 5 years ago, I doubt anyone would have predicted the reduction that took place. For my analysis, I assume that they will stay as they are now, knowing that they will most likely change one way or the other. Also, if they do go up, I assume that one will have at least one tax season to take action before the effect of the new rates.

Due to the stepped nature of the tax brackets, I believe that by recognizing income to bring one up to the bottom of the next tax bracket may reduce taxes in the RMD years. This is why the change in brackets from married to single is probably the biggest thing to think about.

I agree with you that the potential change in rate schedule to single is a big issue. On rates on general, I expect them to rise but not dramatically.

I think filling up your low brackets while you can is least risky. If you prepay taxes aggressively over several years and then have a big market decline, you would probably wish you had some of the tax money back.

Predictions are hard. Especially about the future.

 

[RME1958]

I agree with you that the potential change in rate schedule to single is a big issue. On rates on general, I expect them to rise but not dramatically.

I think filling up your low brackets while you can is least risky. If you prepay taxes aggressively over several years and then have a big market decline, you would probably wish you had some of the tax money back.

Predictions are hard. Especially about the future.

You nailed it.

 

[audreyh1]

I have to agree with your last point about change in brackets from married to single. If you disregard all the other points quoted in midpack's recent post this is enough for me to convert. Bold in quote is my doing.

There are estate planning ways to mitigate the effect of a surviving spouse’s tax burden, especially if a couple is well off enough that they can direct tax sensitive funds to heirs on the death of the first spouse such as having multiple beneficiaries on an IRA. Plus stepped up basis on taxable accounts can really. Whenever we look into the issue, we find options significantly improving the tax situation for the surviving spouse.

Of course if funds are tight, then the surviving spouse will need to inherit everything.

 

[pb4uski]

^^^^ I guess if some tIRAs were inherited by the kids rather than DW it would reduce DW's taxes, but increase the kids taxes.... since they kids are still working they are already in moderate tax brackets to begin with so it might just be pushing the tax obligation from DW to the kids in which case the benefit might not be so great.

If one of us kicks once RMDs begin we'll jump from the 22% bracket to the 24% bracket... meanwhile, DD and DSIL are already in the 22% bracket and DS is in the 12% bracket... so the savings would not be all that significant... 2% on some and 14% on some. The 14% might be worth the effort.

 

[RME1958]

In early retirement (we are both 61), I am trying to maximize spending for my wife and I with no plan to give any of it away to our kids. So I am not looking at any solutions that would minimize taxes by giving assets away as long as one of us is still around. Down the road, I will start looking at making withdrawals that will take into account the taxes of our heirs.

 

[tenant13]

I agree with you that the potential change in rate schedule to single is a big issue. On rates on general, I expect them to rise but not dramatically.

I think filling up your low brackets while you can is least risky. If you prepay taxes aggressively over several years and then have a big market decline, you would probably wish you had some of the tax money back.

Predictions are hard. Especially about the future.

I keep thinking that we all seriously entertain the idea of living past 90 while the more realistic number is probably way lower. At 56 and fairly fit, I give myself 10-15 years of active life followed by a gradual decline where I eventually spend most of my time Netflixing and such. And that is if I'm lucky. I'm not genetically blessed so I can expect either cancer, dementia or RA hitting me rather sooner than later. It may not happen and I don't live worrying about it but it puts into perspective all those calculation where I pay taxes up front to avoid them later. There might be nothing to avoid or I won't care because my standard of living will get lower.

So while I'm definitely into optimizing I think that as long as even the worst strategy leaves me with enough money to cover my expenses, I'll be good.

 

[Midpack]

I keep thinking that we all seriously entertain the idea of living past 90 while the more realistic number is probably way lower. At 56 and fairly fit, I give myself 10-15 years of active life followed by a gradual decline where I eventually spend most of my time Netflixing and such. And that is if I'm lucky. I'm not genetically blessed so I can expect either cancer, dementia or RA hitting me rather sooner than later. It may not happen and I don't live worrying about it but it puts into perspective all those calculation where I pay taxes up front to avoid them later. There might be nothing to avoid or I won't care because my standard of living will get lower.

So while I'm definitely into optimizing I think that as long as even the worst strategy leaves me with enough money to cover my expenses, I'll be good.

A decision we all have to make individually. I've planned on age 96 because a) MIL lived to 88, Mom to 93 and Dad to 96 without taking care of themselves, and b) I'd rather go poof with some money left over - than have our money go poof before we do...

 

[jollystomper]

One thing I will need to consider is to moving to a lower or no income tax state before RMDs hit. Having to pay little or no state tax on the forecasted RMDs will be helpful, regardless of what happens to the Federal rates. Of course there will be tradeoffs, which is why we are looking at it as a consideration and not an automatic.

 

[SevenUp]

Great link/read thanks, though mostly about where to put IRA money initially - trad vs Roth, not conversions per se. Some applies, some doesn’t.

If the taxes are paid from cash on hand, the analysis for conversions is effectively identical to the analysis for initial contributions.

Leaving the money in the traditional and taxable accounts is the equivalent of making a traditional contribution, while converting to Roth is the equivalent of making a Roth contribution. The math works the same.

Or was there something else that didn't apply?

 

[SevenUp]

I do not see how it could make a difference in the long run.

The IRS has a claim on X% of your IRA. It's either X% of your account today, or X% of the (presumably grown) account in the future.
Either way, your after-tax account value in the future will be the same.

Paying the tax on a conversion with outside money doesn't change this. It's just adding money to the account and pretending that you didn't add money.

It's not always X%. It could be X% now but Y% later. How Y compares to X will determine whether a current or future withdrawal will be better.

And paying the tax on a conversion with outside money can affect the Y to X comparison. See how paying the...tax with money that would otherwise have been invested in a taxable account affects the math.

 

[Humbooster]

One other software that I found that looks interesting (and is certainly affordable) is this one:

VeriPlan - Lifetime and Retirement Personal Financial Planning Software for Home Users - Complete Lifetime Financial Planning Software for Individuals | VeriPlan – Lifetime and Retirement Personal Financial Planning Software for Home Users

I intend to check it out over the next few weeks if I can get some time.
If anyone is familiar with it would appreciate your comments.

 

[Midpack]

One other software that I found that looks interesting (and is certainly affordable) is this one:

VeriPlan - Lifetime and Retirement Personal Financial Planning Software for Home Users - Complete Lifetime Financial Planning Software for Individuals | VeriPlan – Lifetime and Retirement Personal Financial Planning Software for Home Users

I intend to check it out over the next few weeks if I can get some time.
If anyone is familiar with it would appreciate your comments.

Great. I’m sure many here would be interested in your assessment. I’d encourage you to start another thread as this one is understandably petering out, as they all should.

 

[fishfactory]

Humbooster, I would definitely be interested in the VeriPlan software. Looking at their site, it is not obvious that their software optimizes taxes via Roth conversions, which is my main interest. I am converting from age 55 onward in order to take advantage of current low fed brackets, minimize medicare premiums, avoid the widow tax trap, minimize future taxes from RMDs. If you find the software does this, please let us know by posting.
Thanks,
Fishfactory

 

[target2019]

There is a free user guide download. It was last modified in 2017.
http://www.myfinancialfreedomplan.c...f-financial-plans-the-veriplan-user-guide.pdf

 

[tenant13]

I went ahead and bought the $20 subscription to Income Strategy. Has anyone else had issues with linking Fidelity? They have tons of options but my credentials don't work with any of them. Strange because I have no issues at Personal Capital or Mint aggregators.

 

[Midpack]

I went ahead and bought the $20 subscription to Income Strategy. Has anyone else had issues with linking Fidelity? They have tons of options but my credentials don't work with any of them. Strange because I have no issues at Personal Capital or Mint aggregators.

I input my info manually since I wasn’t sure I’d want to subscribe ongoing. Give them a call or email, you shouldn’t have problems with connecting to Fido.

 

[RME1958]

I went ahead and bought the $20 subscription to Income Strategy. Has anyone else had issues with linking Fidelity? They have tons of options but my credentials don't work with any of them. Strange because I have no issues at Personal Capital or Mint aggregators.

I had no problem with Fidelity but could not get Schwab to link. I inputted that manually and even with that, I could not get it to recognize one of my Schwab funds.

 

[tenant13]

I had no problem with Fidelity but could not get Schwab to link. I inputted that manually and even with that, I could not get it to recognize one of my Schwab funds.

I got Fidelity to work - I wasn't selecting Fidelity Investments. As to Schwab I had to select Schwab for investments and Schwab Banking for my checking/ATM account. Same thing with Chase: Investments and banking had to be added separately.

I noticed that while credit card accounts can be added they don't really appear in the profile. Not a big deal for me since I pay all the bills monthly.

 

[On My Own]

Midpack
You can do the analysis yourself. Go to Josh's website and pay $150 one time fee for access to the RightCapital software. On the website, click on "connect" tab, then fill out personal info and under "select and option" choose "get access to software". You will have access for as long as he uses it - no additional fee beyond the one time $150.
https://heritagewealthplanning.com/contact/

Fishfactory,

Considering using Income Strategy; however, was wondering about any advantages Right Capital may offer. Can you offer any insights into use of Right Capital ?

 

[fishfactory]

On My Own,
I am not very knowledgeable of Income Strategy, so I can't speak on a comparison. I like RightCapital because it has detailed budget capability, handles Roth conversions, optimizes taxes, and provides future tax returns for each scenario. I also use i-orp which is free as a comparison to RightCa[ptal on optimizing Roth conversions/taxes. I won't pay for any more software due to my particular situation. I am 55 and have several years of Roth conversions before needing to look at anything else to optimize. There may also be new free software coming out during that time.

I find RightCapital well worth a one time charge of $150, but I suggest you look at some of the youtube videos of Heritage Wealth Planning where Josh is using the software so you can make a decision.

 

[rkser]

Fish Factory,

I paid for Right Capital, & have received an email from Josh to sign up for Financial Planning as he calls it. I am trying to understand how this works.

I understood it was just access to Right Capital Software & then we take it from there. Is it difficult for a regular joe to use the software, as it is intended for Certified Financial Planners.

Thanks in advance

 

[fishfactory]

rsker,
No, it is not that difficult. There are videos on the rightcapital website to help, and Josh youtube videos as well. If I were you, I would try on my own first, then hire Josh if you feel you need him. It took me a couple of months to work out all details, but you can't break it. "Play" around with it and you will figure it out. You are under no obligation to use Josh for financial planning. Give it a go ! You can always use Josh as a fallback position.

 

[Midpack]

I’ve never worked with Right Capital though I’ve seen it on YouTube videos and it looked useful, I was tempted enough to contact Josh at Heritage Wealth.

For purpose of comparing cost, you can use Income Strategy for $20/month, no contract so you could limit your spend to $20. One on one personal help is available for $125/hr. OTOH it takes some doing to fully master Income Strategy and get the full benefit. I had it about 80% figured out after a week, but I did a one hour session to get the other 20%.

Unfortunately I have no idea the level of difficulty with Right Capital - maybe fishfactory does...

 

[fishfactory]

Midpack,
I only have experience with RightCapital and i-orp, so I can't comment on Income Strategy level of difficulty compared to RightCapital. Since rkser has already paid the $150 and now has unlimited access to RightCapital, my suggestion is to take some time to figure out RightCapital before spending additional money on another software package or paying Josh $2500 for a personal analysis. There is enough support through Josh youtube videos and RightCapital home page to make RightCapital software workable for the "average Joe" as rkser put it.

 

[rkser]

I put in the number & feel my way through Right Capital.

I have a Non taxable Disability monthly income, Right Capital is calculating as taxable & has inflated my income by including it in my 1040 Taxes. That is where I am at now, I hope I can find a way around it.

Otherwise, info input is easy enough for Right Capital to get the Tax Forms filled out after getting the numbers from the linked Vanguard, Fidelity & the bank accounts. As the final distributions start trickling in, the taxes should take a Form closer to real taxes.