Retirement Tax Planning - Income Optimization?

[Midpack]

Much appreciate you sharing your exercise!

Hindsight being what it is, and if we haven't outworn our welcome with all these questions...if you now set your ending balance in i-orp to what Income Strategy predicts, how do i-orp's suggested conversions (and tax amounts) compare?

I doubt I could get settings and assumptions close enough between Income Strategy and i-ORP to be meaningful. And there are way more bells and whistles with Income Strategy.

 

[audreyh1]

In the widowed spouse case, in our community property state the entire joint brokerage account will receive a stepped up basis. Since most of our income has been LT cap gains qualified, and expected to continue even after RMDs/SS, this gives the surviving spouse the opportunity to reorganize investments for far more tax efficiency without incurring capital gains, plus with higher basis more opportunity to tax loss harvest. This can offset a chunk of the higher surviving spouse tax burden.

This has been an richly informative thread, Midpack. Thanks for sharing. Your detailed analysis and responses to comments and questions. I’ll be referring to this thread when I review our situation yet again.

 

[audreyh1]

Another strategy we will probably implement for the surviving spouse is to have heirs inherit the IRAs, bypassing the spouse. It’s a small % of our net worth and heirs can really use it. So the surviving spouse only has to deal with their own SS and RMDs.

We have been gifting while alive, so this is just a variation.

 

[rkser]

A very informative thread, I am bookmarking it.

 

[levindb]

Another way to evaluate Roth choices....

Midpack,

I have used a slightly different approach to evaluate choices. While you see a fairly small difference in ending portfolio values (not a high priority for you), do you have the option of summing up all of your after tax spending from current age to age 97?

If you take that number and add it to your final portfolio balance each year, you can see what the different Roth conversion rates have on your lifestyle. I did something similar when looking at SSA benefits age 62 vs 70...and created a total for each year that I would be alive. The idea is that you can tell when your choices will matter and how much it matters as you age.

You could also test each of your tax rate assumptions to see if your tax rate assumptions matter as much as your Roth conversion assumptions...or more.

Finally, in my spreadsheets, I tend to do things in today's dollars (i.e., no inflation, no SSA COLA, and ROI's are reduced accordingly) This will produce numbers that make sense today. Everything will cost a lot more in 30 years, so $2k/year may not be that important in future dollars. It may only be a few hundred dollars/year in today's dollars.

Just some thoughts to help you use up your $20/month.

 

[Midpack]

I may be missing your points in some respects so please correct what I’m missing. FWIW

Midpack,

I have used a slightly different approach to evaluate choices. While you see a fairly small difference in ending portfolio values (not a high priority for you actually ending balance/portfolio preservation is/was my top priority, tax liability for heirs was the low priority for us), do you have the option of summing up all of your after tax spending from current age to age 97? After tax spending is a variable I’ve set, and it’s exactly the same every year for all models I’ve run (unlike i-ORP, never liked that BTW).

If you take that number and add it to your final portfolio balance each year, you can see what the different Roth conversion rates have on your lifestyle Again, there’s no effect on lifestyle/spending in any of our plans, all the same. I did something similar when looking at SSA benefits age 62 vs 70...and created a total for each year that I would be alive. The idea is that you can tell when your choices will matter and how much it matters as you age.

You could also test each of your tax rate assumptions to see if your tax rate assumptions matter as much as your Roth conversion assumptions...or more. The reports show federal taxes by bracket by year - e.g. $X at 10%, $Y at 12%, $Z at 22% so I know exactly where every tax dollar is going each year.

Finally, in my spreadsheets, I tend to do things in today's dollars (i.e., no inflation, no SSA COLA, and ROI's are reduced accordingly) This will produce numbers that make sense today. Everything will cost a lot more in 30 years, so $2k/year may not be that important in future dollars. It may only be a few hundred dollars/year in today's dollars. I can do today’s dollars or inflation adjusted, no personal preference.

Just some thoughts to help you use up your $20/month.

 

[Marc]

In the widowed spouse case, in our community property state the entire joint brokerage account will receive a stepped up basis. .

I assume you live in Texas; are you sure about this? We have a lot of QQQ in our joint brokerage account purchased in 2007 so over 75% of the value is capital gains; stepped up basis makes this a no-brainer to leave untouched until one of us is widowed.

thanks,

Marc

 

[audreyh1]

I’m pretty sure about this for community property states such as TX where accounts and other property held in joint tenancy with right of survivorship are treated as community property.

Federal tax code section 1014(b)(6) provides that community property assets step up 100 percent in basis at the death of one spouse (even though the other spouse survives). Example: Stock worth $100 at date of death with a basis of $20 steps up to $100 basis upon date of death. This is distinguished from "common law" states (non-community property states) where step up occurs to the extent of the decedent's ownership (e.g., basis of one-half of property held in joint tenancy or tenancy-by-the-entirety step ups on death of one spouse with other spouse surviving). Example: Stock worth $100 at date of death with basis of $20 has a new basis of $60 at date of death, which is $50 decedent's share (one-half of $100) plus $10 survivor's share (one-half of $20).

https://www.calcpa.org/public-resou...-up-on-my-securities-on-the-death-of-a-spouse

On the death of a first spouse, community property may be written up to its full fair market value. The author describes community property, how to obtain community-property status, and how to maintain such status when moving to noncommunity-property states.

https://www.cpajournal.com/2017/08/18/greatest-hits-community-property-step-basis/

 

[donheff]

In the widowed spouse case, in our community property state the entire joint brokerage account will receive a stepped up basis.

This is an issue I haven't given any thought to. For joint taxable accounts at places like Vanguard and Schwab is there a way to change the basis when a spouse dies and the account is changed to single? It would be nice to have the numbers they report to IRS match what you report on your tax forms.

 

[audreyh1]

Must be, but you’d have to talk to those institutions to understand the process of what happens when retitling the account to the surviving spouse.

 

[audreyh1]

In planning for the situation of taxes when a spouse dies and the survivor is facing single filer tax situation, I think it makes sense to look at the total estate situation - changes in basis in taxable accounts, inheritances dispersed from the estate reducing the surviving spouses estate, etc.

In our case we intend to gift to heirs during our lifetime, and when one of us passes, we want to have some of the estate go to heirs, and then retain the remaining estate exemption for future inheritance.

So one way to plan this is to consider how to set up inheritances in a way that would help the surviving spouse and their tax situation without reducing the inherited estate too much. Stepped up basis on joint taxable accounts should help a great deal providing the surviving spouse knows how to take advantage of it. And in our case having the IRAs go to heirs rather than the surviving spouse is perhaps the easiest way to handle a transfer of wealth upon the death of the first spouse, especially as the amount is small compared to the total estate. It’s not all or nothing either - if the IRA is large beneficiaries including the spouse can be proportionally assigned.

So, in our case if surviving spouse tax issues can be handled through judicious estate planning, we are simply back to looking at mitigation of the future joint tax torpedo and not worrying about the surviving spouse.

 

[SecondCor521]

This is an issue I haven't given any thought to. For joint taxable accounts at places like Vanguard and Schwab is there a way to change the basis when a spouse dies and the account is changed to single? It would be nice to have the numbers they report to IRS match what you report on your tax forms.

There is. Vanguard has a team that handles estate stuff. When my Mom died, we just told them to update the basis values to those as of her date of death, and they did it. It was probably a phone call. We may have had to fill out a form, but I don't think so. I was able to see the updated basis just by logging into the accounts and running a report.

I assume Schwab and Fidelity have similar processes.

...

Also, I can confirm that in Idaho, which is a community property state, that joint taxable accounts get a full step up in value as of the date of death of the first spouse.

 

[Cobra9777]

There is. Vanguard has a team that handles estate stuff. When my Mom died, we just told them to update the basis values to those as of her date of death, and they did it. It was probably a phone call. We may have had to fill out a form, but I don't think so. I was able to see the updated basis just by logging into the accounts and running a report.

I assume Schwab and Fidelity have similar processes.

...

Also, I can confirm that in Idaho, which is a community property state, that joint taxable accounts get a full step up in value as of the date of death of the first spouse.

Ditto here in Texas. My FIL died last year. The estate dept rep at Fidelity transferred his IRA assets to DMIL's IRA and re-titled the joint accounts to her individual ownership. However, they did not automatically restate cost basis on the taxable assets to FMV as of his date of death. I had to make a phone call and answer some questions. It then happened a few days later and I confirmed by checking her accounts online. I actually checked a few holdings using the closing price as of the day he died.

I can't recall the specific questions they asked. But it definitely left me with the impression that the basis step-up is not automatic and is dependent on meeting certain criteria. I just don't remember the details.

 

[levindb]

Midpack,

Thanks so much for those clarifications.
I assumed if you did not focus on your heirs' tax liability, you also did not focus on the gross amount you were leaving to your heirs. I see they ae two different things for you.

Also, since you kept your withdrawals/spending the same in all of your scenarios, your ending balance would then highlight the total differences between the Roth conversion options.

My approach is slightly different in that I solve to run out of money at age 105 (I might not make it that far) and then my withdrawals/spending vary based on the Roth choices that are made. That way, my Roth choices impact MY lifestyle rather than the lifestyles of my heirs.

While I can clearly see how paying more taxes in the short term will yield tax savings in the long run, I have been focusing on 0% capital gains so I can hop on that tax torpedo next year. I will focus on additional rental properties and expenses to decrease my reportable income.

I also think there is a possibility that the current tax rates could be extended...excuse me while I polish up my rose colored glasses.

Thank you for all the time you have put into this thread!!

 

[googily]

This is an issue I haven't given any thought to. For joint taxable accounts at places like Vanguard and Schwab is there a way to change the basis when a spouse dies and the account is changed to single? It would be nice to have the numbers they report to IRS match what you report on your tax forms.

I can confirm that Vanguard handled it for the joint accounts I had with DH. Not community property in DC, so half of all shares received stepped-up basis as of his date of death, and the other half remained unchanged.

 

[audreyh1]

Ditto here in Texas. My FIL died last year. The estate dept rep at Fidelity transferred his IRA assets to DMIL's IRA and re-titled the joint accounts to her individual ownership. However, they did not automatically restate cost basis on the taxable assets to FMV as of his date of death. I had to make a phone call and answer some questions. It then happened a few days later and I confirmed by checking her accounts online. I actually checked a few holdings using the closing price as of the day he died.

I can't recall the specific questions they asked. But it definitely left me with the impression that the basis step-up is not automatic and is dependent on meeting certain criteria. I just don't remember the details.

Thanks for sharing those details. I’ll follow up with Fidelity as we continue to plan.

 

[Third Son]

yes but....

Another graphic view of my situation comparing no Roth conversions, converting to 22% (most likely) and converting to 24%. Though the tax savings are significant - 18% less in taxes converting at 22% and 28% less in taxes converting to 24% - the difference in portfolio ending balance is trivial between the three. I never would have guessed that without the Income Strategy analysis, and supporting data/calcs in incredible detail.

So all else equal converting won't do much to increase our portfolio total value - the original objective. However, it is worthwhile to me because 1) I don't believe for a minute that taxes won't become (significantly) more confiscatory resulting in even larger long run tax savings and some increase in portfolio total value, 2) in the end the more we have in tax free vs tax deferred or taxable, the better for whoever the widow is in our situation, and ultimately for heirs/charities.

It's been a fascinating exercise over the past few weeks, glad I finally found a tool to do all the math I was too lazy to do...

Yes the taxes are unavoidable, BUT by doing the Roth conversions in the sweet spot (60-70) results in tax free withdrawls at 70 1/2. Maybe I am not savvy enough to get the nuances of your table.....

 

[rkser]

Midpack, I heard from Income Strategy

I was curious about income strategy after reading this thread before I could subscribe to either $20 or @50 a month deal as given on their website, I was wanting to get an idea, what these Advisors could do for me.
I wanted to make sure if this site is not one of those many sites who do not deliver any more info than I can glean from early-retirement & bogleheads sites.

"Register for FREE access to
our award-winning software
and see your personalized
withdrawal strategy!"

I registered on incomeStrategy.com as asked above.
During registration I had to give very detailed info as asked about my account totals in IRA, Roth IRA & Taxable,

I got a one line reply email today in my spam folder, asking me to subscribe to their $20 or @50 a month deal. That is it, something which I knew before they asked me for the account details.Moreover, funny, when I tried to load their email to my incoming emails, it would not & it just disappeared. Other spam emails load on to my incoming email folder when directed. (That was the first indication, that this may not be legit.)
Ms Robin called me from the office of social security solutions in Olathe Kansas asking me to subscribe, & gave no further info.

I was kind of disappointed as I was expecting something about the access to their software, as promised above on their website after asking me the account details.

I don't know, this kind of looks a little strange (suspect site) to me, although I can be wrong. I just hope they do not divulge my account details, email & phone to some other shady source on the web. Maybe it was my fault in the first place.

I will be following this thread before I feel comfortable enough to subscribe

 

[Midpack]

^^ My experience was nothing like that. I started with the FREE report you mention, and got their Quick Start report. It was what I expected for free, some useful info, to entice your to subscribe. Certainly you weren’t expecting a full blown plan for free. And if anyone offers you something for “free” these days, it’s usually in exchange for personal information (e.g Google, FaceBook).

I don’t know but I am assuming the FREE report is how they screen for some minimum portfolio threshold. If they can’t ascertain quickly, they may move on to other potential customers. They are running a business, so they’re looking for folks interested in paying for their services. They’ll answer questions if they think it’s leading to a paying customer.

Their software isn’t perfect, but for as little as $20, I wouldn’t have expected it to be. That takes more one on one service, at $125/hour. As a long time member of Bogleheads and ER.org, they can both help a lot, but they can’t give you advice on your unique circumstances and needs. $20 and $125/hr is a screaming bargain for someone managing a 6-7 figure portfolio. My total investment is $145, and that’s it. Income Strategy provided detailed info I’d been trying to develop for years. I couldn’t do it myself, and other options would have cost FAR FAR more.

If it’s not for you, there are other options. i-ORP is amazing for free, but it wasn’t enough for me, and it had one feature I didn’t like - maximize spending.

Caveat: Income Strategy isn’t for novices, unless you’re planning on several/many $125/hr sessions. If you have a fundamental understanding, Income Strategy can be a useful bargain IME. My financial savvy is moderate, I’m no wizard by any means.

 

[rkser]

Midpack, I take my above post back with my apologies for my initial impression about income strategy.

I called them up & upon asking they sent me the Quick Report today. I do not know why I did not receive it with their email yesterday.

The Quick Report (in general terms) explains how their software will help in saving $ in the different ways with graphs showing my totals in my various accounts. This gives me an idea of the value their software may help me if I subscribe.

I want to thank you for the detail you gave us about your workings with & the answers the income strategy software has provided you with.

BTW, my situation is quite similar to yours, from what I could gather in your above given post. I am also looking for the same answers when doing our Roth conversions to save on taxes later & also self manage a similar sized portfolio.

I started looking into Financial Engines yesterday on Vanguard Site to see if they can provide the Tax estimates now for each year going forward, as that will make things clear for me in optimizing my income. I do not have the answers yet.
For this year I have estimated our income post Roth conversion taxes, to keep the MAGI below 170k to prevent additional supplemental Medicare Premium, by using various calculators from the Web.

 

[pb4uski]

I signed up and have been playing with Income Strategy today.

One frustrating thing... no matter what strategy I select it wants to immediately sell all of my highly appreciated stock, incur the tax and reinvest the proceeds so it shows a big tax bill in the first projection year.... I don't want to sell since those gains will be zero if I just hold them until the basis gets stepped up! But I can't find a way to keep it from doing it.

Also, after I do that the program wants me to live off roth first and then tax-deferred and then taxable... what they call Opposite Conventional Wisdom.

Not impressed so far, but it is early.

 

[corn18]

Based on this thread, I just made a spreadsheet for retirement taxes. It also calculates the amount of my SS that will be taxable. I can vary a lot of things, but it revealed that I can keep things simple. I can convert my 401k to the top of the 12% bracket (changing to 15% in 2025) and have enough income between my taxable account and pension to cover all my expenses. I have retiree health insurance, so ACA is not a factor. And it looks like I can convert all of my 401k before SS kicks in. Effective tax rate over my entire retirement stays fairly flat at 8-9%. This surprised me and really helps with planning.

 

[Midpack]

I signed up and have been playing with Income Strategy today.

One frustrating thing... no matter what strategy I select it wants to immediately sell all of my highly appreciated stock, incur the tax and reinvest the proceeds so it shows a big tax bill in the first projection year.... I don't want to sell since those gains will be zero if I just hold them until the basis gets stepped up! But I can't find a way to keep it from doing it.

Also, after I do that the program wants me to live off roth first and then tax-deferred and then taxable... what they call Opposite Conventional Wisdom.

Not impressed so far, but it is early.

That was my first and biggest reservation as well. IMO no one in their right might would wholesale sell all their holdings and buy other holdings (some in the same asset classes), much less in one fell swoop - the cap gains tax hit is mind boggling of course.

It took me almost two weeks to figure out how to stop that “feature,” so I can save you some time, though there may be a better way.

Sounds like you have your initial profile, inputs and settings done.

Go to Manage>Investment Management. You'll see four top level options - Premium, Vanguard, Custom and None. Just choose None and your holdings will remain as is throughout your retirement, only selling to meet spending, tax and distribution-conversions $ needs if any.

That's still not ideal, but it stops the silly first year cap gains taxes.

Premium and Vanguard are set portfolios designed by Income Strategy and Vanguard respectively for an investor who wants extreme guidance. Vanguard for example has six risk tolerance levels and three portfolios for each, small, medium and large (number of holdings) - so 18 permutations. These are there for novice customers who don’t have any idea what they’re doing frankly. There are people like that as you know.

What's most desirable IMO is Custom. You can set exactly what you want for each and every holding. So select Custom and you'll see Create a Model Portfolio. You can choose any risk level-asset allocation you want with whatever holdings you choose. And you can create as many model portfolios as you'd like. If for example, you create a custom portfolio that's exactly what you already hold, it has the same effect as choosing None.

That could still be a horrible cap gains event if you create a portfolio to go to that's radically different than your current holdings.

When you're creating a new custom portfolio, there's a drop down at the top called Phase Count. You can choose up to 5 transitional or intermediate portfolios to get from where you're starting to where you want to end up. And you can set when you want each transition to occur.

So the best answer to me is to create a custom portfolio that mirrors your current holdings, that will be your Phase 1. Then choose up to 4 more phases, where the phase 5 is what you want to move your asset allocation and holdings to - and phases 2, 3 and 4 are intermediate or transitional phases moving assets as radically or conservatively as you'd like. You make each phase a year apart, 5 years apart, variable periods or whatever you'd like.

I would have just preferred it if the software made a gradual transition from where I am to where I say I want to end up. But you can get pretty close with the above method.

There may be a better way, but that's the best I could come up with. Not planning on it, but if I do another formal help session, I may ask if there's a way to do a gradual transition.

FWIW.

 

[pb4uski]

Thanks! It worked... I chose None and no longer have those first year capital gains.

 

[damonhowatt]

Midpack: Question for you.

Midpack: thank you for initiating this thread. It's very informative and I've spent 1.5 hours reading all 200+ posts.

I understand your reasoning for converting up to the 22% bracket. My question is what account will you pay for the conversion with. Will it be taxable account or the IRA account itself?

I've got ~ 65% of my assets in either tIRA or previous employer 401K accounts. I can convert either or both of these account assets on an annual basis. My taxable account is approximately 90% in stocks with substantial LTCG and 10% in cash. I can use the small amount of cash to pay for the tax the first year of conversions but will have to sell stocks and incur LTCG's for subsequent years. I seem to remember in the thread that you had a significant quantity of LTCG's. How are you paying for these conversions?

Great thread. Thanks in advance for your reply!