The Logistics of Withdrawals to Minimize Taxes

[DawgMan]

I have been slowly landing the plane for the last 2 years as I unwind my business and plan to start taking withdrawals in 2022. Like most here, I have a macro strategy that makes assumptions on current/future taxes, RMDs, when to take SS, but as I get closer to the annual withdrawal plan, I am trying to figure out the best steps. In my case, my nest egg of both after tax and tax deferred accounts split roughly 55/45 will fund my spend. Since I am planning for a larger spend, ACA/IRMA really isn't my concern. Right now, I plan on doing annual Roth conversions starting next year (age 57) until age 72 in the 24% tax bracket. For now, I am sitting on a couple of years worth of cash as I get ready to take withdrawals. I also plan on turning off my interest/dividend reinvestments in my after tax accounts which will cover close to half of my annual spend. So my question is really how/when do you pull from accounts/do Roth conversions/create capital gains and run a mock return to know you are staying in bounds of your desired effective tax? At first glance, my thought is you want to peg the Roth conversions toward the end of the year and back into a desire effective tax bracket, but if the market takes a dip, capitalize then.

Inquiry minds want to know!

 

[OldShooter]

... So my question is really how/when do you pull from accounts/do Roth conversions/create capital gains and run a mock return to know you are staying in bounds of your desired effective tax ...

Well our situation is a little different because we are building a house that ends up getting paid for by RMDs and IRA withdrawals above the RMD level. Not being prescient, I sold sufficient equities a couple of months ago and left the expected cash sitting in the IRAs. Construction starts next spring, but I'll do strategy withdrawals beginning this year. I'll then do withdrawals up to a threshold next year and pay the balance of the contractor bills from a HELOC. Then withdrawals in 2023 will repay the HELOC.

Hopefully all this will keep us in the 24% marginal rate. With congress helping, too, there are lots of moving parts.

As to "how," for 2021 tax tuning I just today ordered H&R Block Tax Cut 2021 which is projected to ship on November 12. We pay our income taxes by withholding the safe harbor amount in December; The safe harbor amount for 2021 will result in serious underpayment when our tax return is due, so that thickens the planning soup as well.

 

[Souschef]

Unfortunately,
I do not have a strategy other than doing QCD's from my IRA. I am stuck doing my RMD's and that is the only way to avoid paying taxes on part of them.
I really should not complain, as the funds I am in have done very well.

 

[pb4uski]

.... So my question is really how/when do you pull from accounts/do Roth conversions/create capital gains and run a mock return to know you are staying in bounds of your desired effective tax? At first glance, my thought is you want to peg the Roth conversions toward the end of the year and back into a desire effective tax bracket, but if the market takes a dip, capitalize then.

Inquiry minds want to know!

We live off of my pension, DW's SS and taxable account withdrawals.

Our tax income is very predictible since our taxable investments are mostly fixed income... so in 2021 I took my entre Roth conversion other than ~$5k in January. In December, I'll finalize my estimate of our tax income for all of 2021 and then do a small additional converision to bring us up to the top of the 12% tax bracket.

Then I'll rinse and repeat in January 2022.

Taxes on withdrawals to pay the taxes on the Roth conversion are not an issue because I structured the tax withholding on my pension to fully fund our projected tax liability for the year.

I may make an additional $5k estimated payment in early January so our refund is more than $5k and then use the $5k to buy paper i-bonds.

 

[RunningBum]

While you can no longer recharacterize Roth conversions, you can do multiple conversions in the same year.

Most years I don't have much room for Roth conversions so I do them at the end of the year to get them right. When I do have more room, I'll convert a safe amount early in the year, giving myself almost a full year of tax free growth compared to converting late in the year. Looking for a downturn is another option, but you don't know if one will come that year.

 

[Koolau]

There are enough variables that it may not be possible to get everything just right. Sounds like you have a plan. If need be, seek tax guidance up front. Stand ready to give yourself some grace if you make a little mistake or two. Remember, it's only money. YMMV

 

[tominboise]

I just keep an elaborate spread sheet and update it monthly with our income for the year. Obviously, at the beginning of the year it's mostly planned assumptions and gets more accurate as the year goes on, with actual inputs. Anyway, I did about half of my planned Roth conversions a couple of months ago, and I will "trim up" to the income I am trying to hit, with another conversion in December. Since you have cash in hand for living expenses, there shouldn't be any unplanned withdraws to foul up your income planning/strategy for withdraws/conversions.

 

[DawgMan]

Follow up question to my original thread...

As previously noted, my plans are to start doing Roth conversions next year and like most I assume, I will be looking to execute on them towards the end of next year. In doing a trial run, I was playing around with an online tax calculator, https://www.mortgagecalculator.org/calcs/1040-calculator.php, to see how I would actually plug in specific variables to manage my desired tax threshold (i.e. 24%). It is obviously clear where I would enter any earned income, dividends, interest and capital gains, but where do you plug in a Roth conversion amount... "Taxable IRA Distribution", "Wages, Salaries"... or does it matter for the purposes of determining the Roth conversion amount?

 

[CardsFan]

Taxable IRA Distribution is where I put it.

 

[braumeister]

Taxable IRA Distribution is where I put it.

That's the line.
Really, you could just add it to W-2 type income for all it matters.

 

[pb4uski]

Taxable IRA Distribution is where I put it.

+1

 

[finnski1]

Taxable IRA Distribution is where I put it.

Me too.