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Old 09-11-2019, 05:55 PM   #21
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There are many complications in trying to decide how to pay taxes on deferred accounts. When I put my spreadsheet together, these are the things I used.

Expected income from Social Security, Pension, and on-going revenue streams at age 70, while filing as MFJ.
Expected income from Surviving Spouse Social Security, Survivor Pension, and on-going revenue streams at age 70, while filing as single.
Tax Rates in effect from now until 2025. (MFJ and single)
Tax rates when(if) the current rates sunset in 2025. (MFJ and single)
Schedule of RMDs starting at age 70.
Expected market performance.

First pass is to look at what would happen if we did nothing. Let the accounts grow, start RMDs, one of us dies, and the tax tables revert back to circa 2017. What type of rate does that create?
Next, assuming both of us are still converting oxygen to CO2, what type of tax rate do we have with RMDs, with the 2017 tax tables.
Then, if we both survive, and the tax schedule is extended, what do the rates look like?
This gives me a bit of baseline for the consequences if we do nothing.

Next up is a set of spreadsheets to try to map out a conversion strategy. Starting column is the year, then starting deferred balance, Calculated RMD, amount converted, Social security, pension, other income, total AGI, standard deduction, taxes, and growth on deferred account.
Each year, add the growth, subtract the conversion, subtract the RMD, and copy it down.

I use a variable for the account performance, so I can see the impact if performance goes flat or if it runs like a bull. In our case, if the tax tables revert to 2017, and the market performance does marginally OK, we will be paying taxes at a fairly significant rate. If one of us expires, it gets brutal. So, we will aggressively convert, at least to the top of the 22%. We can also save a fair amount of state income if we relocate to a lower tax state, so we might consider that. That could be significant enough to push us to convert to the top of the 24% bracket for a couple years.
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Old 09-11-2019, 06:41 PM   #22
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You may want to have a look at the Retiree Portfolio Model which was developed by a member of the Boglehead forums. Link is below. Captures almost all of the items mentioned by posters in this thread including potential Roth conversions, SS, IRMAA, ACA, and more. Takes awhile to understand the workings of the model and set it up, but well worth it.

https://www.bogleheads.org/forum/viewtopic.php?t=97352
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Old 09-11-2019, 07:08 PM   #23
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Originally Posted by MileKing View Post
You may want to have a look at the Retiree Portfolio Model which was developed by a member of the Boglehead forums. Link is below. Captures almost all of the items mentioned by posters in this thread including potential Roth conversions, SS, IRMAA, ACA, and more. Takes awhile to understand the workings of the model and set it up, but well worth it.

https://www.bogleheads.org/forum/viewtopic.php?t=97352
Ive 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? Ill give it another look, thanks!
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Old 09-11-2019, 07:50 PM   #24
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I know about the single penalty. Your spouse dies and you are now filing single. Brutal.
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Old 09-11-2019, 07:52 PM   #25
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So, we will aggressively convert, at least to the top of the 22%. We can also save a fair amount of state income if we relocate to a lower tax state, so we might consider that. That could be significant enough to push us to convert to the top of the 24% bracket for a couple years.
I'm with you on this. With conversions I'll be well into the 22% bracket and also considering relocation for state taxes.

It's not easy to voluntarily increase the tax bite, but I can clearly see the bite getting much bigger in the future, especially considering the risks you discussed. It seems like a case of pay me now, or pay me much more later. Thanks.
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Old 09-11-2019, 10:01 PM   #26
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Also don't forget to factor the fact that one of you may need to file as a single taxpayer.
Im not even dealing with that scenario! Its not clear I can do anything to mitigate it.
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Old 09-12-2019, 05:01 AM   #27
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Im not even dealing with that scenario! Its not clear I can do anything to mitigate it.
easy, just marry someone

just kidding, but it would address it.
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Old 09-12-2019, 11:21 AM   #28
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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.
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Old 09-12-2019, 12:37 PM   #29
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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!
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.

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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Old 09-12-2019, 12:39 PM   #30
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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.
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Old 09-12-2019, 12:41 PM   #31
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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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Old 09-12-2019, 02:18 PM   #32
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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.

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...
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.
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Old 09-12-2019, 03:19 PM   #33
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Isn’t this the question that iORP answers? At least in the general sense...

https://www.i-orp.com/Spend/index.html
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.
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Old 09-12-2019, 03:44 PM   #34
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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.
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Old 09-12-2019, 04:50 PM   #35
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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.
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).
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Old 09-12-2019, 06:53 PM   #36
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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..
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Old 09-12-2019, 08:52 PM   #37
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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.
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Old 09-12-2019, 09:40 PM   #38
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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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Old 09-12-2019, 10:53 PM   #39
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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.
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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Old 09-13-2019, 07:23 AM   #40
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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.
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.
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