Retirement Tax Planning - Income Optimization?

[RunningBum]

+1 In both cases the tax-deferred balances are reduced and the tax torpedo is reduced a bit.

That is what I did in 2018 and some in 2019... but I'm starting to think that a better strategy is to do 100% Roth conversions but then just spend from the Roth... a hair more tax efficient since interest/growth on the funds is tax-free.

So in your case do the Roth conversion which takes some off the table as you want (assumes it is MM in the Roth) and the cash in the Roth is just as good, and arguably a hair better than cash in a taxable account since the interest is tax-free.

Once I got over my aversion to "never touch" the Roth it became a lot easier to think about.

I agree that it would be a better strategy and keep the backup cash in the Roth earning tax free interest until you need it. But depending on your age and how long the Roth has been open, you may not have access to Roth money now. Just a word of caution for those it would apply to.

 

[pb4uski]

^^^ Agreed. In our case our Roths are more than 5 years old and we are both over 59 1/2 so we are free and clear.

 

[Dtail]

+1 In both cases the tax-deferred balances are reduced and the tax torpedo is reduced a bit.

That is what I did in 2018 and some in 2019... but I'm starting to think that a better strategy is to do 100% Roth conversions but then just spend from the Roth... a hair more tax efficient since interest/growth on the funds is tax-free.

So in your case do the Roth conversion which takes some off the table as you want (assumes it is MM in the Roth) and the cash in the Roth is just as good, and arguably a hair better than cash in a taxable account since the interest is tax-free.

Once I got over my aversion to "never touch" the Roth it became a lot easier to think about.

Interesting, just speaking about this concept with my buddy.
The step up basis adjustment in the taxable account is a very enticing concept to pass on to the heirs vs. the tax free Roth account passage to the heirs.

 

[RunningBum]

Interesting, just speaking about this concept with my buddy.
The step up basis adjustment in the taxable account is a very enticing concept to pass on to the heirs vs. the tax free Roth account passage to the heirs.

That doesn't mean you'd favor adding to the taxable account over the Roth. It means if you already have highly appreciated assets in taxable, and plan to leave money to an heir, you are probably better taking from a Roth than selling those assets in taxable.

If you start from scratch with a $1000 investment, putting it in taxable and letting it grow untouched until you die is no better than putting it in a Roth and doing the same for your heirs. In fact if your investment generates any taxable dividends or interest, it will do worse in the taxable account.

 

[RetireBy90]

So with secure act looking like it will become law shortly and included is changing RMDs to age 72, does this change your strategy ? My plan today without this change is to do conversions for 7 years to age 70 when RMDs are/were set to kick in and also my target for SS. Now I'll still have SS income at 70, but if I can delay RMDs to 72 does it make sense to make RMDs at a slightly slower pace, incurring less of the 24% bracket ?

Midpack, you did lots of very useful thinking and research, does this affect your plan ?

 

[Dtail]

That doesn't mean you'd favor adding to the taxable account over the Roth. It means if you already have highly appreciated assets in taxable, and plan to leave money to an heir, you are probably better taking from a Roth than selling those assets in taxable.

If you start from scratch with a $1000 investment, putting it in taxable and letting it grow untouched until you die is no better than putting it in a Roth and doing the same for your heirs. In fact if your investment generates any taxable dividends or interest, it will do worse in the taxable account.

Yes agree completely.

 

[corn18]

So with secure act looking like it will become law shortly and included is changing RMDs to age 72, does this change your strategy ? My plan today without this change is to do conversions for 7 years to age 70 when RMDs are/were set to kick in and also my target for SS. Now I'll still have SS income at 70, but if I can delay RMDs to 72 does it make sense to make RMDs at a slightly slower pace, incurring less of the 24% bracket ?

Midpack, you did lots of very useful thinking and research, does this affect your plan ?

Interesting question. I looked it it and it appears to not matter much what we do at age 70 & 71. Due to the SS hump, our marginal rate is 27%, even though we are solidly in the 15% tax bracket. And that doesn't change once we hit 72. So the marginal tax due to RMDs is the same at 70 on. If we do max conversions to age 69, we won't have much 401k left to convert, so we will probably do nothing.

 

[Dtail]

Interesting question. I looked it it and it appears to not matter much what we do at age 70 & 71. Due to the SS hump, our marginal rate is 27%, even though we are solidly in the 15% tax bracket. And that doesn't change once we hit 72. So the marginal tax due to RMDs is the same at 70 on. If we do max conversions to age 69, we won't have much 401k left to convert, so we will probably do nothing.

Perhaps in concert with the RMD change, the Gov could look at extending the max age of taking SS to 72 y.o.

 

[RetireBy90]

On the topic of RMDs at 72 vs 70, after earlier post I did do some more work to my spreadsheet and it appears that with the same conversion (to top of 22% and additional $35K in 24%, costing additional $8,400 in 24% bracket) would just about empty my TIRA by age 72. So there is an impact, but I'll have to do more thinking and reviewing advice here. For 2019 conversions I'm done and for 2020 conversions I'm hoping for a pull back in the market or bonds to convert more shares at lower cost and tax.

 

[tenant13]

Hey, for those of you who are using Income Strategy: is there a place where you can add (rental) real estate? I have two properties that atm pay for my mother's LTC so I don't think of them as MY assets even though they are technically mine. Nor do I add the income they generate to my income. Once she passes however that will change. And while I could add that rental income into the future income streams, the properties themselves have value that would affect my financial profile.

 

[Cobra9777]

Converting into the 22% bracket

Great thread. Starting to change my mind...

We are 58/59 and have been converting to the top of the 12%/15% bracket for several years. But the amounts are rather small due to ordinary income from two small pensions. So even with 11-12 years to go, we would only convert a small portion of tax-deferred balances by the time SS starts. But this does greatly reduce the probability of RMDs being taxed higher than 22%, which is certainly a good thing.

I'd like to do more. Yet I struggle with paying 22% now to avoid 22% later. Especially since "22% now" throws our qualified dividends and LTCGs into the 15% bucket thus creating the dreaded 27% bracket. Still, I'd prefer to settle-up with the IRS sooner rather than later and current rates are looking pretty good. In theory, 22% reverts to 25% after 2025 and that should help with the 27% thing. But the benefit is still very small and not without risk.

The widow-filing-single scenario doesn't really seem to be a huge deal for us. We both elected single-life annuity on our pensions and we both have large SS benefits coming. So when one dies, the survivor will pay significantly less tax due to one less set of pension/SS. The portfolio can still easily support the survivor; and while expenses won't go down by half, they will go down. Yes, there's still an impact of single vs MFJ on the lower income. But there's just no tax disaster from single rates on same income. Secondly, in Texas, there's stepped-up basis on joint taxable accounts. Our taxable balance includes 35% LTCGs currently, which at 15%, would offset increased tax from single rates for many years.

So it really just boils down to settling the liability now to lock-in our tax rate and remove the uncertainty of future tax rate changes, good or bad. I suppose I should feel good about 22% since we avoided 28-33% when the income was deferred. But then my reptile brain can still conjure up ways this whole thing goes horribly wrong, like an ill-timed, prolonged market collapse right after I depleted the taxable account paying 22%+ conversion tax for 10 years. Or crafty code changes that make indirect use of Roth balances to increase taxes elsewhere.

I'm still undecided for 2019. I'll decide on Monday or Tuesday. The rest of the return is pretty solid at this point and I have the two conversion figures ready to go. It's just a matter of noodling this a bit more and making a decision. DW wants to do it. I'm hesitant as usual, but warming.

 

[james22]

Great thread. Thanks, everyone.

Single, with ~65% in tax-deferred, I needs to think about this.

 

[pb4uski]

Hey, for those of you who are using Income Strategy: is there a place where you can add (rental) real estate?...

Not using Income Strategy anymore, but I don't think so.

 

[Midpack]

Hey, for those of you who are using Income Strategy: is there a place where you can add (rental) real estate? I have two properties that atm pay for my mother's LTC so I don't think of them as MY assets even though they are technically mine. Nor do I add the income they generate to my income. Once she passes however that will change. And while I could add that rental income into the future income streams, the properties themselves have value that would affect my financial profile.

Not using Income Strategy anymore, but I don't think so.

Probably too late, sorry I didn't see this much sooner. I didn't enter rental income, but it IS a profile input. I am no longer using Income Strategy either, but I did save the User Guide pdf. [I just PM'd tenant13].

* Household Details – The Household Details section asks for inputs related to your personal scenario. You’ll be asked to enter your name, date of birth, estimated life expectancy, state of residence, and other details that are important in your withdrawal strategy management.
* ACCOUNTS AND ASSETS – Without having access to your portfolio accounts, Income Strategy™ cannot create a viable set of withdrawal strategy options. You will be able to enter your account information and sync your accounts directly with your financial institutions. An option to enter your accounts manually is available, but if you select this option, you will be required to enter all account updates manually as well.
* INCOME SOURCES – Many of us will have income during retirement. Whether income will be from a job, rental income, or other sources, it’s important to include all income projections within Income Strategy™.
* PENSIONS AND ANNUITIES – While Pensions and Annuities are income, Income Strategy™ understands there are specific rules applied to these types of income.
* SOCIAL SECURITY SETTINGS – One of the most important aspects of retirement income is your Social Security strategy. Income Strategy™ asks you to provide minimal information about your Social Security benefits and will calculate the benefit claiming strategy that is best suited to your withdrawal strategy. This will be noted as the “Primary” strategy. If you would like to choose an alternate claiming strategy, you can do so.

 

[Safe Harbour]

Is there a clear winner?

Is there a clear winner between IncomeStrategy and RightCapital? Just getting ready to test out our scenario after having played with ORP for a few weeks. A one time fee of $150 might be better than $20/month in the long run? But how do the software capabilities compare. I want something that will do the best analysis.

Thanks,
SafeHarbour

 

[Midpack]

Is there a clear winner between IncomeStrategy and RightCapital? Just getting ready to test out our scenario after having played with ORP for a few weeks. A one time fee of $150 might be better than $20/month in the long run? But how do the software capabilities compare. I want something that will do the best analysis.

Thanks,
SafeHarbour

Depends largely on your financial acumen and math skills. Some people could figure it out in a week, some wouldn’t get it no matter how long they worked at it. Income Strategy is quite a bit more involved than i-ORP, has to be as it provides far more information. I gather Right Capital is as well based on the YT results I’ve seen, but I didn’t use it myself so someone else would have to comment.

I used Income Strategy for less than two months, and I’m no rocket surgeon. I had all the answers and detail I wanted/needed in less than 3 weeks, but hung on longer to thoroughly confirm. Turned out I could’ve gotten off for $20. And there’s no way I’d have needed 7-1/2 months ($150) with Income Strategy - the discounted cost of Right Capital.

 

[rkser]

YMMV

I did not get much out of Income Strategy, I do not even follow or log on it any more.

I may try income strategy some time

 

[tenant13]

There's one more option that you can try: PlanVision. This is a service that gives you (limited but totally workable) access to eMoney plus an hour with Mark Zoril who runs it. I actually tried all 3 options and I think that Income Strategy is probably the most detailed of them but it doesn't necessarily mean the most helpful - sometimes endless tinkering with input parameters can be entertaining but I wonder if the different outcomes are worth the time spent on getting them. My guess is that most people would be able to get a lot of value from it for $20 in just one month so I'd say it's the most bang for the buck.

I kind of like Real Capital interface, mobile app and capabilities but there were a few places where I felt I didn't have enough control over it. Also it had issues with logging to my accounts.

eMoney has a very friendly look (Fidelity uses it too) and it's very easy to work with but Mark limits access to its features so I was initially disappointed - I tried Income Strategy first and this version of eMoney felt crippled in comparison. But I think this is intentional: they want to keep things simple and stress out the importance of the big picture/long term approach. Eventually I learned how to work around the limitations and I appreciate the ability of emailing them with questions.

Interestingly every software predicted slightly different results when fed the same data.

 

[Safe Harbour]

Income Strategy Portfolio

Did anyone have success at creating a custom portfolio with more than one Primary Ticker Symbol (PTS) for a given asset class. For instance, I want 4 different mutual funds for International Developed Equity, an international LCG, an international LCV, an international SCG, and an international SCV fund each at 4.5% asset allocation. Every time I try to put in more than one PTS by adding the same asset class again I get a an error "Error. Unexpected Condition. Error Code 1272." Is this something the pro-version of the software gets around. I need this to keep Income Strategy from reworking my asset allocation strategy and still use the rebalancing function.

If I can't work this out I'll try PlanVision or RightCapital next.

 

[rkser]

I did not find any value in Planvision when I tried it for a year, YMMV.

 

[tenant13]

I did not find any value in Planvision when I tried it for a year, YMMV.

I only started liking it after I learned how to work around its version of eMoney input limitations: I just simplified my expenses by dividing them into separate buckets/goals. The reports it produces are somewhat clearer than what I was getting out of Income Strategy.

If you like tinkering and are already good at finances then PlanVision might be too basic for you but if you're new-ish to this world, having someone calm answering your emails might be helpful.