Wish I Knew How To Optimize LTCG STCG Div Int Roth Convs IRMAA My/DW SS My/DW RMDs...

[DawgMan]

Dawgman, I agree with a focus on your golf game, but some of us just enjoy the challenge of optimizing/reducing taxes as an exercise. But don't underestimate the widow tax trap. Taxes go way up while social security gets cut. The widow can also find themselves paying a lot more in Medicare. You may be surprised at the hit.

I suppose I am making many assumptions here. You and your spouse are living the good life as a couple so once you remove/adjust for all the living costs for 1 vs. 2, the extra taxes do not make significant dent in their lifestyle. That said, if one's RE income is more dependent on SS I can see how it may tighten the screws. Don't get me wrong, I want to maximize as much as the next guy... its my nature. Just trying to point out sometimes we miss the forest for the trees...

 

[Midpack]

Midpack, a few years back in another thread you really helped me with deciding on Roth conversions. I have been using RightCapital software I accessed through Heritage Wealth Planning (they no longer allow access for new requests). I found it to be very good software for modeling conversions. What I learned is that there are too many variables to be able to optimize perfectly. The 2 main variables I had trouble deciding on were 1) what assumed investment return rate, and 2) what inflation rate. The inflation rate will dictate tax bracket adjustments. Low investment returns and high inflation adjustments to tax brackets will mean I should convert less.

You just do the best you can. I have been converting to fill the 24% bracket with the main reason to insure my wife doesn't face a widow's tax trap.

I remember you.

I’ve been converting to the top of the 22% bracket even though 24% was slightly better. I may do a couple years up to 24% but I hate to take the additional IRMAA hit for those years. It’s turned out to be the best financial move I could have made, glad I figured it out back in 2019 while I still had time to convert more than 2/3rds of my TIRA. I learned a lot about IRMAA there too.

Since I started this thread I dove into the SS tax torpedo, and realized there is nothing we could have done to avoid it, so not worried anymore. We’ll still benefit from SS when we’re 70, the tax hit isn’t as bad as I thought.

So my only remaining (first world) problem is what to do with the huge capital gains I’m sitting on, even a depression wouldn’t wipe them all out. We won’t have to sell anything in taxable as dividends, interests, RMDs and SS will be more than we spend, but I’m just working through what to do as a opposed to sitting on all of it until we’re dead…

 

[fishfactory]

Dawgman, as far as living the good life, most assets were in a taxable IRA which is being converted to Roth. I am not yet 58.5 years old so I have not been drawing from the IRA. I have been doing roth conversions and paying taxes from non IRA assets. I retired at age 55 and am looking at how compounding can become an issue with RMDs and the widow tax trap. I am certainly not crying poverty, but compounding can certainly cause issues later in life, especially if widowed.

 

[fishfactory]

Midpack, paying max tax on Soc Sec is a given in my situation, so That was not a factor. I am concerned that the next decade will be near zero market return, so I may be converting too much. But as many have said on the thread, these are first world problems. I just want to make sure those I leave behind are in the best possible position.

FYI, both I-orp and Right Capital called for filling 24% bracket in my case, so for now I will stick with that plan. But making those quarterly tax payments is not fun !

 

[ERhoosier]

These Roth IRA conversion projections are all based on assumptions of future tax law/regulations, inc. Medicare & SS regs. Given the huge Fed deficit, no doubt the Gov't will need more $$ in the future. I have no doubt that marginal tax brackets will go up. I am NOT sure that large Roth IRA WDs will remain unaffected by future legislation (like possible wealth tax, counting Roth WD's in other 'MAGI'-type' calculations of Govt surcharges like IRMAA, etc.). Gov't has a history of getting 'creative' when it comes to ways it finds more net revenue.

 

[fishfactory]

ER, I agree, but I can only go by current rules. I would think taxing Roth would be way down on the list of revenue enhancements, since those funds have already been taxed.

 

[fishfactory]

Meant to say, not yet 59.5 yrs old, age when can w?d from IRA w/out penalty.

 

[SecondCor521]

So my only remaining (first world) problem is what to do with the huge capital gains I’m sitting on, even a depression wouldn’t wipe them all out. We won’t have to sell anything in taxable as dividends, interests, RMDs and SS will be more than we spend, but I’m just working through what to do as a opposed to sitting on all of it until we’re dead…

My Dad is currently in a similar situation as you, and I probably will be when I get older.

Our thoughts, and his CPA agreed, was spend forced income first, then from Roth second if needed, then taxable.

I'm sure you know, but if you donate those appreciated shares to charity or hold them through death, then nobody pays anything on those "huge capital gains". So donate appreciated shares to a DAF and/or QCD, or hold them til the first or both of you die (depending on your state and the way you hold assets).

Probably not groundbreaking thoughts, but FWIW.

 

[almost there]

These Roth IRA conversion projections are all based on assumptions of future tax law/regulations, inc. Medicare & SS regs. Given the huge Fed deficit, no doubt the Gov't will need more $$ in the future. I have no doubt that marginal tax brackets will go up. I am NOT sure that large Roth IRA WDs will remain unaffected by future legislation (like possible wealth tax, counting Roth WD's in other 'MAGI'-type' calculations of Govt surcharges like IRMAA, etc.). Gov't has a history of getting 'creative' when it comes to ways it finds more net revenue.

Agree, also wanted to mention when we revert back to the 2017 tax brackets in Jan 2026, we also revert back to the lower max income levels and std deductions. Probably just be me, but it just occurred to me. I was focused on just percentages. In my case, "married filing jointly" it goes back to 15% up to $75,900 25% at 75,901 with a standard deduction of only $12,700. Opposed to 12% up to $83550 and a std ded. of $25,900. More of a tax torpedo than I had imagined. With no way to stay out of the middle of the 25% bracket. Which was a personal goal. Was just thinking 12 to 15% / 22 to 25% / 24 to 28% etc. Again, probably just me. So yes. 22% is probably smart to convert well into. As I was in the 28% club when working. And it looks like 25% going forward.

 

[friar1610]

You need to repeat the Serenity Prayer. One cannot optimize with the many uncertainties in ones financial life. Such as unknown date of death, inflation rates, investment returns, tax changes, etc. All one can do is take their best guess based on available information and their risk tolerance.

Over the past couple of years I’ve moved from being very concerned about any additional taxes to being accepting of the fact that there’s only so many prudent steps I can take and, beyond them, I have no control over the variables that determine how much I’ll pay.

So, I’ve decided to be a “satisficer” rather than an optimizer and find it much more relaxing.

 

[almost there]

Over the past couple of years I’ve moved from being very concerned about any additional taxes to being accepting of the fact that there’s only so many prudent steps I can take and, beyond them, I have no control over the variables that determine how much I’ll pay.

So, I’ve decided to be a “satisficer” rather than an optimizer and find it much more relaxing.

Now there is someone secure in their investments / personal retirement strategy! Congrats!

 

[Out-to-Lunch]

Agree, also wanted to mention when we revert back to the 2017 tax brackets in Jan 2026, we also revert back to the lower max income levels and std deductions. Probably just be me, but it just occurred to me. I was focused on just percentages. In my case, "married filing jointly" it goes back to 15% up to $75,900 25% at 75,901 with a standard deduction of only $12,700. Opposed to 12% up to $83550 and a std ded. of $25,900. More of a tax torpedo than I had imagined. With no way to stay out of the middle of the 25% bracket. Which was a personal goal. Was just thinking 12 to 15% / 22 to 25% / 24 to 28% etc. Again, probably just me. So yes. 22% is probably smart to convert well into. As I was in the 28% club when working. And it looks like 25% going forward.

I cannot remember if it was you or another member, but I recently had to point out that the pre- and post-TCJA code also had personal exemptions of $4050 per person in addition to the standard deduction. So a couple MFJ in 2017 would have deductions of $20,800 compared to $24,000 in 2018.

 

[Midpack]

Over the past couple of years I’ve moved from being very concerned about any additional taxes to being accepting of the fact that there’s only so many prudent steps I can take and, beyond them, I have no control over the variables that determine how much I’ll pay.

So, I’ve decided to be a “satisficer” rather than an optimizer and find it much more relaxing.

You're probably in heated agreement with the rest of us. Optimize does not mean perfect or guaranteed here, we all know there are many unknowns and we use the assumptions we're comfortable with an accept the answers. I am satisfied with my optimization as stated in an earlier post. I just needed a little more reading and spreadsheet time.

 

[gumshoe]

Now ya tell me!

Seriously, by the time I knew about tIRA to RIRA, I was making too much to do it cheaply - until I retired. That helped a lot. Of course, I was "behind" and never completed the task. One more warning to the young'uns not to put too much into tIRA/401(k). At some point (and I don't know what point that is) taxable funds may be better. YMMV

Yeah, the exact same thing happened to me. My trad. IRA is so much larger than my Roth IRA. In 3 years, I will have to pay taxes on the RMD's that I won't need. So, yes, I agree it would've been better to keep more of the investments in a taxable account.

 

[qwerty3656]

Sounds like your IRA is very very large.
I am probably the minority here. But here is my home made strategy to avoid a tax torpedo from SS and RMD.
2 final Roth conversions 2022 & 2023. Leaving $450k in the regular IRA.
Both take SS at 62 in 2024 (SS =$35,800 yr /and around 27k from the IRA till around 82. (Will draw small amounts from the IRA over a long period of time. Rather than converting it all to Roth's.) Or a tax hit by pulling large chunks.
Combined with my other income's, I can control my income / tax bracket with IRA distributions. Intentionally staying in the 12/% bracket. 15% in 2026.
With no debt, I can easily live on $109,450.00
(12% $83550 + std ded. $25,900) And still save a bit every year if I wanted to.
Will adjust as the tax code changes. And yes, its going to change. And not in our favor. My prediction anyway.
Guess I am lucky, as my 401K / IRA was not all that large . And will have several years of conversions in by 2023.

How are you covering health insurance before age 65? If it's ACA, you may have too much income

 

[almost there]

How are you covering health insurance before age 65? If it's ACA, you may have too much income

I dont have Obamacare. And my plan is flawed. As we are probably going back to the old 2017 tax plan.

 

[Alex The Great]

My plan looks so stupid that I wanted to share it with you.
Assuming finally I FIRE at 56 as planned, my plan is to take more money from 401K/IRA during the first two years of retirement while I'm on Cobra (first is a full year and second is a half). There are two parts of it. The first comes from 401K direct withdrawal, the second part is Roth conversion. After that, the next two years just 401K withdrawal to cover expenses. After I turn 59.5, equally small amounts of tIRA distribution each year to cover expenses (in addition to after tax dividend and Roth dividend). The plan is to take SS at 70 or whenever it will be the highest by that time. This would leave me with large chunk in tIRA for RMD. But I don't worry about it as it is a moving target. By the time I turn 72 RMD age will be 78 or something like that. I may not live that long, but even if I do I would rather give those RMDs to charity.

 

[dmpi]

From a dollar and cents standpoint this is a incredibly important task. But it almost impossible to do because there's a lot of unknown variables and assumptions. Since the tax code says higher income pays a higher tax rate I just try to level off my income throughout my whole retirement. I also try to front-load it some because of 65+ medicare premiums and social security.

 

[RunningBum]

Golf frustrates me more than figuring out how to optimize my financial regarding all of these things. I like working with numbers so I enjoy the mental exercise and trying to figure out the best strategy. I understand not everybody does. I work on this in my down time so I don't feel like I'm giving anything up. If I figured out my rate per hour spent on things like this it might not even be worthwhile to most people, but since I get enjoy developing and maintaining spreadsheets I think of it more as a money making hobby.

 

[COcheesehead]

How are you covering health insurance before age 65? If it's ACA, you may have too much income

Last year and this year, the income limits were expanded. We had income above this and still got over $700 a month in credits on ACA.

 

[Out of Steam]

Sounds like your wife will be ok financially if you pass first.
If really too much income for her at that point, there are various ways to pass a portion of inherited assets to the next generation or to charity to lessen the problem...

As my retirement income is mainly from a pension, while my wife's is from retirement savings, I would expect to be OK if my wife dies first.

If I die first, my wife would have substantial transition expenses as she doesn't believe she can physically maintain our current house alone, and would sell it immediately. I'm keeping term life insurance with this in mind.

I can definitely see us naming our daughter a partial direct beneficiary of my wife's retirement accounts once we're past 70.

 

[ImThinkin2019]

I think I'm coming to realize I'm in the same boat. There is nothing I can do to avoid the SS torpedo, it's just going to be a bite in our taxes we have to live with - a good problem I guess.

I'm doing all I can do within limits (22% bracket and IRMAA) to move money from my largish TIRA to a Roth and paying IRMAA 40% penalties for (only) 5 years is a price worth paying in the larger scheme. By age 70, that will reduce my RMDs by about 2/3rds vs having done no Roth conversions, and save me about $400K in lifetime taxes depending on longevity (though it probably won't add as much to our final portfolio value).

In 2024 I start SS. In 2026 I start RMDs and DW starts SS. In 2028 DW starts RMDs - and the die is cast forevermore. At that point SS, dividends, interest and RMDs will probably generate more than we will spend. If I have room to do some small Roth conversions and/or take LTCGs I will. Again, we're grateful to have such "problems."

I may buy Pralana Gold to see the numbers for myself, I kinda enjoy those exercises anyway - for those who see it as a drag. I'm probably doing all I can to improve our situation before the die is cast, and as someone said earlier others might be happy to have these "problems" with tax nonlinearities and traps...[-]but they still pi$$ me off.[/-]

Thanks for the support - it sure is nice to have smart people to bounce thoughts off!

+1 on Pralana Gold. It's the only tool we found - admittedly there may be others - that allowed us to test several different scenarios at once. It lets you set various limits for Roth conversions and it's flexible enough to let you do a different conversion every year.

Also it's optimization screens let you real-time adjust some variables and see what the effect would be without laborious data input.

Absolutely worth the $100. It's really powerful and easy to use.

We do the rough modeling in Pralana Gold then my DW, who does our taxes, decides on how much to convert to limit our tax burden.

 

[almost there]

+1 on Pralana Gold. It's the only tool we found - admittedly there may be others - that allowed us to test several different scenarios at once. It lets you set various limits for Roth conversions and it's flexible enough to let you do a different conversion every year.

Also it's optimization screens let you real-time adjust some variables and see what the effect would be without laborious data input.

Absolutely worth the $100. It's really powerful and easy to use.

We do the rough modeling in Pralana Gold then my DW, who does our taxes, decides on how much to convert to limit our tax burden.

Sounds great. Can you adjust the tax burden? Is there a
"Tax Cuts and Jobs Act" (TCJA) feature you can add and subtract?

 

[ImThinkin2019]

Sounds great. Can you adjust the tax burden? Is there a
"Tax Cuts and Jobs Act" (TCJA) feature you can add and subtract?

Yes, pretty much everything we want is there as a model or constraint you can test or use as limits. The only thing not in the current version, unless recently added, is SECURE 2 act, which would start our RMD's at 74. I suspect this will be added as an upgrade soon.

 

[Midpack]

Yes, pretty much everything we want is there as a model or constraint you can test or use as limits. The only thing not in the current version, unless recently added, is SECURE 2 act, which would start our RMD's at 74. I suspect this will be added as an upgrade soon.

Did Secure 2.0 pass the Senate? I wouldn’t expect Pralana to add it yet…