Retirement Tax Planning - Income Optimization?

[fishfactory]

Midpack, thank you for taking the time to give such a detailed response on the 1 hour session you had. The more I read the more I feel it best to fill the 24% bracket at a minimum. I believe fed tax rates have nowhere to go but up after 2025, and I like preventing the widow's tax trap if something were to happen to me. I say this with the usual caveat that each person's situation is different, and I am speculating on future tax rates.

[Midpack]

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Originally Posted by fishfactory Midpack, thank you for taking the time to give such a detailed response on the 1 hour session you had. The more I read the more I feel it best to fill the 24% bracket at a minimum. I believe fed tax rates have nowhere to go but up after 2025, and I like preventing the widow's tax trap if something were to happen to me. I say this with the usual caveat that each person's situation is different, and I am speculating on future tax rates.

I may not have explained it well, but while 24% is the numeric optimum for me, I will probably convert to 22%. Though total lifetime taxes are significantly lower, they're just too high to stomach while I am converting, and the portfolio total value (the overriding objective) difference is almost trivial. YMMV

FWIW now that I know how to inflate future tax rates, I may run some scenarios with much higher future rates to see the sensitivity and double check myself.

And the widow's tax trap is bad, but not as bad as I thought - we looked at that directly today.

[fishfactory]

Understood. In my case, I am trying to get out from under the tax burden as soon as possible while still optimizing as much as possible. The 24% bracket is very wide, allowing for many dollars of conversion at only 2% additional tax. I definitely want to take full advantage of this. I understand that each person has different priorities. I am prioritizing minimizing possible future higher tax rates and avoiding widow tax trap.

[Gumby]

Thank you for this thread, Midpack. My plan has always been to Roth convert to the top of the 22% bracket. We'll probably stick with that plan, but you (and others) have provided much more food for thought before that becomes our final answer.

[CardsFan]

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Originally Posted by Midpack Thanks for asking. I wasn't sure (and my earlier guess was wrong) so I went back and added Roth conversions to 22% (vs 24%). To my surprise the lifetime savings were only 9% vs 31%, and the "breakeven" age was about the same. Doesn't make our decision any easier. It appears we either convert aggressively or not at all, not quite what I was guessing - but I have my consult later this week, so we'll see if I'm missing something. If nothing else, it appears I've gotten more than our money's worth on our $20 one month subscription. Who knows, I may continue it for more than a month, or even try their $50 premier version. And like RunningBum, the tax situation we leave heirs isn't a top priority for us, though it's probably a very legit consideration for many households.

I have read all the posts, but am responding to this one specifically.

So, in your case, after age 85 (break even point), you will pay an extra 3% per year in taxes, on average, to get to the 31% higher tax payment with no conversions.

Now, I know tax rates can, and will, change. And yes, they will probably go up, unless they don't. But I can't get excited about saving 3% per year after I turn 85. H@ll, I"ll be grateful I lived that long.

The factors of the widow's tax and inheritance concern me more.

From the small number of scenarios I have run (not in your software, but in others), the widow's tax is real, but only a small portion of the IRA would be in the 32% (or higher) bracket.

Inheritance, on the other hand, could cause me to convert more, if something like the SECURE act passes

[CardsFan]

Edit to add: BTW thanks for the info you have shared. It is very helpful.

[RunningBum]

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Originally Posted by CardsFan But I can't get excited about saving 3% per year after I turn 85. H@ll, I"ll be grateful I lived that long.

I see this kind of statement now and then on this board, and I never understand that attitude. I understand you'll be grateful if you live past 85. But won't you be even more grateful if you make it past 85, AND took easy steps in your finances now to live a little more comfortably later?

[Montecfo]

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Originally Posted by RunningBum I see this kind of statement now and then on this board, and I never understand that attitude. I understand you'll be grateful if you live past 85. But won't you be even more grateful if you make it past 85, AND took easy steps in your finances now to live a little more comfortably later?

If you think of the taxes voluntarily paid early as an investment, it will make more sense I think.

Stated differently, would you buy the investment called "taxes paid in advance" or TPIA that will take most or all of your remaining life to generate a return, if at all? ?Or would you find other investments to be more lucrative?

I am not trying to convince you one way or the other, (I do not fully know the answer for me) I just think the long time horizon involved does materially impact the decision.

[Montecfo]

Midpack,

Thanks for all the detail. It is nice to know there is such a powerful tool out there. I may have to take a crack at it!

[RunningBum]

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Originally Posted by Montecfo If you think of the taxes voluntarily paid early as an investment, it will make more sense I think. Stated differently, would you buy the investment called "taxes paid in advance" or TPIA that will take most or all of your remaining life to generate a return, if at all? ?Or would you find other investments to be more lucrative? I am not trying to convince you one way or the other, (I do not fully know the answer for me) I just think the long time horizon involved does materially impact the decision.

Now we back to debating whether the conversion breakeven point is a meaningful thing, and I don't want to go there again.

[Midpack]

I've been well below the 22% bracket since I retired.

For those getting something from my journey and still here, who are also reluctant to pay higher taxes now vs later, this chart showing Federal tax brackets might help ***. If we don't do some conversions, we're going to be in the 22% bracket for almost the rest of our years. I'd rather pay marginal income into 22% for 5-6 years, than most of the 28 years after. Yes, it's a "good problem." FWIW

I apologize for the quality of the chart, hard to squeeze into one.

*** It assumes when TCJA expires in 2026 we revert to 2017 tax rates - not that I expect that will happen, I expect taxes will go (much) higher in my lifetime.

[ChrisC]

Good food for thought. We've been converting since 2013 going deep into the 24% bracket the last few years -- IRMAAs be damned for at least my wife who pays Part B premiums. Our plans were to continue this for my wife and empty her tIRA/457 completely into her Roth IRA for the next 3 years before she goes into RMD land. Without any conversions, we'll always be in the 22% bracket (from pensions alone) and once my wife dips into SS at 70, we'll always be in the 24% bracket. Once my wife is done with her conversions, I'll begin the process of converting my 401k and TSP into my Roth (that I was able to fund with a rollover from the Federal/OPM Voluntary Contribution Program).

Our plans have always been to maximize our Roths for legacy purposes. We continue to bite the Federal and State tax burden with these conversions, and will probably still do that even post RMDs. We need a gut check on this and will probably consult with a CFP to see if this continues to make sense for us.

[harley]

Wow! What a meaningful chart! Thanks. I was already planning on doing this, but that really drives it home.

[CardsFan]

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Originally Posted by RunningBum I see this kind of statement now and then on this board, and I never understand that attitude. I understand you'll be grateful if you live past 85. But won't you be even more grateful if you make it past 85, AND took easy steps in your finances now to live a little more comfortably later?

I know you don't want to discuss the break-even point, but for OP, with no concern about heirs, isn't it the ONLY thing to look at?

In our case, since we do not come close to spending our FireCalc SWR, and we DO have an heir we would like to leave it to, as I stated in the post you quoted, both the widow's tax and inheritance taxes COULD drive us to make more aggressive conversions. But it is not compelling.

[Midpack]

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Originally Posted by CardsFan I know you don't want to discuss the break-even point, but for OP, with no concern about heirs, isn't it the ONLY thing to look at?

It was just an offhand observation. Not terribly meaningful and never intended to start in a discussion. FWIW

[RunningBum]

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Originally Posted by CardsFan I know you don't want to discuss the break-even point, but for OP, with no concern about heirs, isn't it the ONLY thing to look at? In our case, since we do not come close to spending our FireCalc SWR, and we DO have an heir we would like to leave it to, as I stated in the post you quoted, both the widow's tax and inheritance taxes COULD drive us to make more aggressive conversions. But it is not compelling.

I can't figure out how to make my point better than what I already tried. Maybe that's just an indication that it's not as absolute for everyone as I think it is. So I'm going to leave it alone.

[CardsFan]

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Originally Posted by Midpack It was just an offhand observation. Not terribly meaningful and never intended to start in a discussion. FWIW

OK, then what is driving your thought to make the large conversions? I know the data you presented was only specific to your case, and we cannot assume our data would yield the same recommendation.

Is it the concern (probably real) that tax rates will rise? Is it the 6% (I think this is what you posted) higher final value at age 97? Or maybe that was a 6% higher spend rate for the duration?

I'm just curious if there is something I am missing.

As you have been careful to point out, we all have very specific circumstances and desires, so your data is not really applicable to any of us.

That all said, I have found this discussion to cause me think, again, about increasing conversions. So, thank you for sharing.

[Midpack]

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Originally Posted by CardsFan OK, then what is driving your thought to make the large conversions? I know the data you presented was only specific to your case, and we cannot assume our data would yield the same recommendation. Is it the concern (probably real) that tax rates will rise? Is it the 6% (I think this is what you posted) higher final value at age 97? Or maybe that was a 6% higher spend rate for the duration?

It’s all in my posts, but to summarize:

• 24% would be the optimal portfolio ending balance for us, but I’m going with converting to 22%, so I am not going with “large conversions” IMO. If we don’t we’ll be in the 22% bracket from age 72 to the bitter end anyway, conceivably 25 years. We can’t avoid the 22% bracket so might as well optimize within it - paying now vs longer later. And though we don’t save as much in total taxes going with 22% (vs 24%), the loss in portfolio ending balance is surprisingly trivial.
• WRT tax assumptions, all my results are based on inflation adjusted 2017 tax rates beginning in 2026, TCJA until then. In fact, I don’t believe that’s what’ll ultimately happen - rates will be more confiscatory sooner or later IMO. So now is probably a good time to prepay taxes, even more than my results suggest.
• Leaving a reduced tax liability to heirs and charities is nice but not in our top three priorities. However, odds are we won’t die on schedule and one of us will outlive the other, maybe for quite a few years. You can see the bracket impact in my last chart in the last two years. Reducing taxes for the widow is worthwhile to me.

Increasing spending isn’t on our radar, we’re spending more than enough to be comfortable already, and short a financial apocalypse we won’t run out.

[Souschef]

I may have missed it in the 9 pages, but if one spouse dies the other obviously has to file as single.
But your income would also be lower. As an example, in our case, we are both getting SS and pensions. One set of these would go away when one spouse dies.

[Gumby]

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Originally Posted by Souschef I may have missed it in the 9 pages, but if one spouse dies the other obviously has to file as single. But your income would also be lower. As an example, in our case, we are both getting SS and pensions. One set of these would go away when one spouse dies.

That depends on how you set it up. The young wife and I chose to have a 100% survivor provision in our pensions.