withdraw sequence

[pb4uski]

For those who might take advantage of them, the ACA subsidies change the equation quite a bit. Prior to ACA, the common wisdom was to do Roth conversions up to the top of your current tax bracket. When the bracket is 15%, this allows for tax-free capital gains and qualified dividends.

But the subsidy cliff kicks in at 62K MAGI (for a family of 2). This is significantly lower than the top of the 15% bracket, and it seems to me that the cost of losing the subsidies would far outweigh the advantages of Roth conversions that would take one over the cliff while still staying in the 15% bracket.

I had initially thought the subsidies would be preferable as well but ultimately came to the opposite conclusion - that avoiding the amount of time I spend in the 25% tax bracket from 70 on is much more valuable than subsidies. What I have done instead of subsidies is to buy cheaper catastrophic health insurance since we are both relatively healthy and the additional deductibles and co-pays are not that much more than the bronze level plan we looked at and the premiums are 62% of the bronze level premium so we are saving quite a bit.

We would have federal tax refund before Roth conversions because of qualified dividends, LTCG and foreign tax credits but our Roth conversions bring us to the top of the 15% tax bracket and we ended up paying tax equal to about 7% of our Roth conversion in 2013, much better than the 25% or more I avoided paying when I deferred that income.

 

[SoClose]

I don't know where you got your tax bracket figures but this is where mine came from.

http://www.taxpolicycenter.org/taxfacts/content/pdf/individual_rates.pdf

I agree with your personal exemption and standard deductions. If I limit myself to $94,100 of taxable income, I won't make a serious dent in my IRAs before I take my first RMD. Using your numbers won't make a meaningful difference in my situation.

I obtained my numbers from the IRS publication 15
Publication 15 (2014), (Circular E), Employer's Tax Guide

TABLE 7—ANNUAL Payroll Period (a) SINGLE person (including head of household)— (b) MARRIED person—

The schedules above are for employers withholding from paychecks, it appears the bracket numbers are adjusted. I originally thought they should be the same as the tax rates but it doesn't seem to be the case. I can't logically determine why the bracket numbers differ by $4500/$8450 as neither of these correlates to the personal or standard deduction.

 

[GTFan]

I had initially thought the subsidies would be preferable as well but ultimately came to the opposite conclusion - that avoiding the amount of time I spend in the 25% tax bracket from 70 on is much more valuable than subsidies.

Well this all depends on what you plan to do with the marginal RMD income that exceeds the 15% bracket. I don't plan on leaving a ton of money to the kids - I prefer to give it away to good charities instead, so with that philosophy it will be easy to stay at the top of the 15% and still (hopefully, with inflation/bracket adj.) have enough money to spend.

Of course the equation changes significantly if your spouse dies before 70 or shortly thereafter. The tax man is likely to take more in those cases.

 

[pb4uski]

Well this all depends on what you plan to do with the marginal RMD income that exceeds the 15% bracket. I don't plan on leaving a ton of money to the kids - I prefer to give it away to good charities instead, so with that philosophy it will be easy to stay at the top of the 15% and still (hopefully, with inflation/bracket adj.) have enough money to spend.

Of course the equation changes significantly if your spouse dies before 70 or shortly thereafter. The tax man is likely to take more in those cases.

I guess that tax management is easy with RMDs if you just simply donate all income over 15%, but I suspect you are an exception and not the rule.

+1 on the spouse dying - which makes maximizing Roth conversions between ER and 70 even more important and make the case for prioritizing Roth conversions over ACA subsidies even stronger.