Retirement Tax Planning - Income Optimization?

I don't have an easy answer, but a couple thoughts that may stimulate some thinking. Not sure how much money you need to live on...which is also a big factor.

1) Consider a strategy where you "take a big hit" one year and then keep to the 12% bracket in other years. For example, take out up to $168,400 one year, then take out only to the 12% bracket in other years. If you spend over $80k/year and have no Roth IRAs...this may work.

2) We spend about $85k/year, but can't take that much from TIRAs because we don't want to lose the ACA subsidy...so we manage MAGI to 4x FPL (around $65k) and then take the rest from Roth IRAs. You stated you have no Roth IRAs so you can't do this...unless you can convert over time.

3) Another option would be to take out a HELOC and use it to "manage" income below the $65k ACA limit for most years, and again use the top of the 22% bracket "once" to bring enough money into the bank account that you can then use over the next several years.

Hope you find a good solution.
 
Midpack said:
I’ve seen and downloaded that, but I was a little uneasy not seeing the calcs and assumptions, IIRC some were hidden protected? And it took MANY iterations to finalize which made me wonder when/if it was ready for prime time? I’ll give it another look, thanks!
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So I downloaded the latest version, and it reminds me why I can't write the spreadsheet myself with any confidence. With all the inputs and options, it's VERY hard to follow when someone else has done the work. And since he's (understandably) hidden all the calculations, I'm not sure I trust the results anyway - and I'm not going to hand calculate everything I wonder about. :blush:

I'm surprised there aren't professionals who can easily provide a year by year retire income-tax minimization plan for a (modest) price. If there are, I haven't found one...
 
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I haven't been in the 12% bracket for years - I'm single, so am hit hard - to me converting up to 225 and maybe even 24% is feasible because I will end up with four separate pensions and my savings. I will try to work to get all tIRA into Roth by the time SS hits (at 67 for me). I also did some retirement calculator runs with different scenarios and was very surprised that i-ORP had me take the tax hit on conversions in two years right after I started my military pension - ouch! However, interestingly, it didn't change the overall spending amount per year (using inflation adjusted) until my projected death...I had also had a 'wealth manager' run numbers and they had me give away all of my TSP funds to a charity and again, over the long run it did not make a huge difference, even though that amount seems large to me.

So, I think each situation differs and it truly is what you think you can stomach with regard to a tax hit and when.
 
Midpack said:
So I downloaded the latest version, and it reminds me why I can't write the spreadsheet myself with any confidence. With all the inputs and options, it's VERY hard to follow when someone else has done the work. And since he's (understandably) hidden all the calculations, I'm not sure I trust the results anyway - and I'm not going to hand calculate everything I wonder about. :blush:

I'm surprised there aren't professionals who can easily provide a year by year retire income-tax minimization plan for a (modest) price. If there are, I haven't found one...
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All of the calculations (formulas) are plainly visible in Excel in all of the tabs. Those rows which are hidden for simplicity are easily made visible through the show/hide macros which the author included at the top of each sheet. Even so, the spreadsheet is not for the faint of heart as one can spend dozens of hours before understanding all of its inputs, options, and workings.
 
SnowballCamper said:
Isn’t this the question that iORP answers? At least in the general sense...

https://www.i-orp.com/Spend/index.html
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Yes, but it won’t let me decide what I want to spend that I can see. They maximize income (and fully deplete portfolio) which results in spending that’s literally more than double what we plan to spend. That substantially throws off all the recommended withdrawal, conversion, tax other results.

I ran it limiting conversions to the top of the 12% bracket, but it won’t even run that way. So I upped it to 22% and the conversions are huge.

And it completely emptied my taxable early, and used a stock:equity allocation in tax deferred and Roth that I wasn’t comfortable with, and unlike what I entered in starting portfolio.

I’ll take another look after dinner, surely I’ve missed some entries or assumptions.
 
I think in the extended tab, the plan surplus field will let you specify how much to have left at the end. Adjusting this number up would result in less annual income. It might take a few runs to get the income to match what you plan to actually spend.

Yes, the tax advantage of the Roth forces early conversions with a large tax bill. I'm not comfortable with that either. But at least the tool lets me see what the effects are.
 
SnowballCamper said:
Yes, the tax advantage of the Roth forces early conversions with a large tax bill. I'm not comfortable with that either. But at least the tool lets me see what the effects are.
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Depending on "how large" a tax bill, you may want to check i-orp's tax calculations to see if they are close enough for your case. E.g., i-orp ignores NIIT (and on the low end, it may be incorrect when it assumes the full 85% of SS benefits are taxed).
 
Thanks 7up for pointing that out. In my case, pension income will do it for a while (I'm 45), and I'll be nowhere near NIIT at the current trigger levels. I guess "large" is relative huh..
 
I've been converting to the top of the 15% (now 12%) for the past 10 years or so. I've managed to convert about a pretty significant amount to my Roth. However, my tIRA is now 33% higher than it was when I started, so while I'm accomplishing my goal of minimizing the tax paid on the amounts I've converted vs. what I saved while putting it in, I haven't decreased the eventual tax burden on my heir (DD), and I haven't accomplished my goal of minimizing my/DW's RMDs. I've been discussing the topic with a friend/fellow ER member, and we're both leaning toward converting to the top of the 22% and maybe the 24% bracket until 2025 at least, with the assumption that the tax rates will go back up. The goal is to position ourselves to have minimal RMDs in a potentially higher tax environment. I know this is making some assumptions, but I'm fairly comfortable with them. The taxes will have to be paid eventually by someone, and doing it now gets it out of the way. I haven't pulled the trigger on this plan yet, but I'm definitely thinking about it.

I doubt any advisor or calculator would recommend this plan, but unless someone points out any major flaws I think it's what I'll do.
 
Harley,
Your plan is what I’ve concluded is appropriate for me (too). Pay the tax for whatever bracket I’m in, but don’t roll over any more beyond the tax bracket. This gives me some advantage in the long run, but without paying too much for an advantage that I might not live to see.
 
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harley said:
I've been discussing the topic with a friend/fellow ER member, and we're both leaning toward converting to the top of the 22% and maybe the 24% bracket until 2025 at least, with the assumption that the tax rates will go back up.
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Even if rates don't go back up, if you can pay the tax from savings then converting now at 24% is probably better than withdrawing at 22% if the withdrawal is more than ~11 years from now.

That is due to exchanging (in effect) the tax drag in the taxable account for the tax free growth in the Roth.
 
SevenUp said:
Even if rates don't go back up, if you can pay the tax from savings then converting now at 24% is probably better than withdrawing at 22% if the withdrawal is more than ~11 years from now.

That is due to exchanging (in effect) the tax drag in the taxable account for the tax free growth in the Roth.
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No, that's not true. Put it in a spreadsheet and you'll see it's not.

Code: 
Amount $10,000
Current tax rate 24.00%
Future tax rate 22.00%
Investment growth rate 10.00%

Year TaxDeferred Roth

0 $10,000 $7,600
1 $11,000 $8,360
2 $12,100 $9,196
3 $13,310 $10,116
4 $14,641 $11,127
5 $16,105 $12,240
6 $17,716 $13,464
7 $19,487 $14,810
8 $21,436 $16,291
9 $23,579 $17,920
10 $25,937 $19,712
Final $20,231 $19,712

I taxed the initial $10000 going into the Roth at 24%. I taxed the final balance of the tax deferred at 22%. Each year they grew at the same rate. Use whatever rate you want.
 
That said, I agree with aggressively converting to a Roth. People complain that i-orp is too aggressive, but I think the reason why is that it uses average returns and if you aren't aggressive, the tIRA will grow and push you into a higher tax bracket when you hit MRDs. I'm managing for ACA subsidies so I'm only able to do small conversions until age 65, but any year I forego the subsidy I do a larger conversion.
 
Interesting discussion. I tried once or twice to wrap my head around this and never really did. My best guesstimate was that, since our pensions/SS income is fully taxable and takes us into a high enough bracket to make Roth conversions not sensible we should just take our spending withdrawals fro taxable. DW's tax differed accounts are large so we will get hit by a torpedo in 4 years but there doesn't appear to be much room to wriggle savings out. Our plan will be to just pay the tax on the RMDs and bank the excess in taxable which will be stepped up on death.

I vaguely remember running the numbers thru i-orp years back and being over-whelmed by the output. But doesn't it claim to do what you want?
 
SevenUp said:
Even if rates don't go back up, if you can pay the tax from savings then converting now at 24% is probably better than withdrawing at 22% if the withdrawal is more than ~11 years from now.

That is due to exchanging (in effect) the tax drag in the taxable account for the tax free growth in the Roth.
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RunningBum said:
No, that's not true. Put it in a spreadsheet and you'll see it's not.
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The spreadsheet analysis reflected the simplest situation regarding traditional vs. Roth, for which one needs to know only the current and future marginal rates.

If one can pay the conversion tax from savings, it's a more complicated situation, for which one needs to know other things such as the tax rate on taxable investments. See that link for links to two other spreadsheets one can use to quantify the effect.

Does the quote at the top of this post make more sense now?
 
SevenUp said:
The spreadsheet analysis reflected the simplest situation regarding traditional vs. Roth, for which one needs to know only the current and future marginal rates.

If one can pay the conversion tax from savings, it's a more complicated situation, for which one needs to know other things such as the tax rate on taxable investments. See that link for links to two other spreadsheets one can use to quantify the effect.

Does the quote at the top of this post make more sense now?
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Yes, I was just coming back to correct myself for the more preferred case of paying the tax from savings. It would depend on the tax rate for the side fund you'd have in the tax deferred case, where you got to keep invested the amount you'd have paid for taxes in the Roth conversion. For some, they may be at 0%, or may keep it in their estate and their heirs get an stepped up basis. But if it's taxed at 15% LTCG or higher, the Roth conversion does come out ahead. I didn't fully read the link you provided, but I'm sure there are other complications, and my spreadsheet was too simplistic. I'll agree with you that a conversion at 24% probably does beat paying 22% later.
 
Much like the OP, those are the questions in my head as I head to the magic 59.5 in January. Woooo Hoooo!

Many thanks to all of you for your insight & esp for the shared links. I've bookmarked this post!
 
Midpack said:
An advanced question often asked, rarely answered specifically that I’ve seen. In the past, these threads seem to elicit few replies?

With DW finally retired, we have a 5-7 year window where our taxable income will probably be at it’s lowest, before Soc Sec and RMDs hit, and the tax torpedo. TIRAs are about 29% of our holdings, so RMD will be significant. We have no Roth accounts. We haven’t had room for Roth conversions without exceeding the 0% cap gains threshold, but we may for the next 5-7 years. It may well be we’re better off paying more taxes now (above the 0% threshold) to do conversions before age 70 anyway.

My cocktail napkin approach has been to try and keep taxable income constant inflation adjusted year after year as a means to minimize taxes long term.

I’m decent with spreadsheets, so I’ve tried several times to build one to model retirement income and taxes but there are just too many interdependent moving parts for my brain to keep straight. I haven’t been able to build one I trust.

Online searches provide tons of articles explaining all the variables and issues, but not solutions other than talk to ‘your tax advisor’ - we’ve never had or needed one before.

IME Vanguard won’t touch anything significantly related to taxes with a 100’ foot pole, I’ve asked several times, several ways.

Some financial advisors do appear to include tax planning, but every one I’ve talked to pushes/insists on managing investments also - preferably ongoing, at a % of AUM of course. That’s not going to happen if I can help it. I only want a tax plan for income optimization.

I realize assumptions of future taxes have to be set, and that predicting taxes exactly is therefore impossible. But that doesn’t mean no plan, and I am willing to make specific assumptions. Ideally I’d like to see a plan with tax rates and cap gains the same inflation adjusted, and another assuming higher tax rates. We also know when some of the current rates/laws are set to expire.

So I’m looking for professional guidance, and expect to pay for it. Any ideas? Again we don’t know any tax advisors, and we’ve just moved to another state (our problem) so references are almost non existent as we build a new network of friends and contacts.
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We hired a true fee only financial planner from the Garrett Network. (Cost us $1200 for the plan- period-he does not manage our accounts- just advises- with access to him all year and an option to put him on retainer or hourly in the following years if we so desire)He has advised us to delay SS until age 70 (or at least just my husband) and to draw down our assets from taxable and/or tax deferred accounts to live on in the meantime.


This will start in January- me being age 63 (and already retired) and hubby age 65 1/2 and retiring then. This to help decrease the tax torpedo at age 70 1/2 when RMD's kick in and we start collecting SS. We will also have to pay health insurance for me until I reach age 65. He doesn't seem concerned about any of this. But I am freaking out! LOL! I am so used to saving money not depleting our accounts.


We have a very conservative portfolio but I still worry about a market downturn.
 
Financial planners with a RIA (Retirement Income Advisor? I think) designation have specific expertise in these kinds of questions. My long-time CPA recently became a CFP and he has been really helpful to me on these kinds of questions. I should not be left alone with a spreadsheet, so I couldn't do this without help.
 
SevenUp said:
If one can pay the conversion tax from savings, it's a more complicated situation,
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No it isn't. The money in savings to pay the tax doesn't just magically appear from nowhere. It's simply part of your overall portfolio.

Money if fungible. If you can use it to pay the tax you could also use it to invest, and you're right back to the spreadsheet printout that RunningBum showed in his 08:23 AM post.
 
rayvt said:
No it isn't. The money in savings to pay the tax doesn't just magically appear from nowhere. It's simply part of your overall portfolio.

Money if fungible. If you can use it to pay the tax you could also use it to invest, and you're right back to the spreadsheet printout that RunningBum showed in his 08:23 AM post.
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Money may be fungible, but money held in a taxable account is subject to annual taxation while money held in a Roth account is not.

See the first of the two More complicated situations for a summary, Maxing out your retirement accounts for more details, and Roth 401(k) vs. 401(k) Spreadsheet Attempt - Critique Please for math derivation details.
 
I think the analysis of using money in an IRA or 401K to pay tax for conversion depends on what you are trying to accomplish. Of course one objective in any action on your savings is to maximize the savings balance, but there are other objectives also. One is to pay taxes today while in a lower bracket, another is to allow for lower MAGI when having to contend with Medicare IRMAA or taxable portion of SS distributions. Yet another is perhaps you have a plan to draw after tax funds where you need to sell securities and realize capital gains, trying to minimize other reported income to minimize capital gain taxes. And a favorite of mine is to allow for taxes to be paid today so I don't have to worry about falling into some unknown tax trap invented by the boys and girls in Washington when they change income tax rules.

Just one man's opinion, not to be sexist :cool:
 
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