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

[Midpack]

...between now and 2028 when DW reaches 72 yo a couple years after me, and everything is basically locked down. In inexcusable how hard it is to do so. I'm well on the way to converting my TIRA to a Roth, so I should probably be happy that I have made some of the right moves - I believe enough to pay 22% now to avoid 25% for the last 23 years of our retirement (at least under current regs). But I am sure I will see stones I left unturned too late when I can't do anything about it. Sorry, just a rant after another of many bouts with trying to model it all in a spreadsheet over about 10 years - ridiculous.

 

[oldtimer]

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.

 

[N02L84ER]

We also have the desire to optimize all of the above, but we also need to balance ACA income limits for the next 4 years, beneficiary 10 yr IRA withdrawals for the next 9 years, and decide if the lower earner should start SS once we are both on Medicare into the mix. We did Roth conversions until DH inherited the IRA in 2020, but if we had realized my SMIL would pass before her 76th birthday, we would have done much larger conversions when we first retired. Now we are prioritizing taking the beneficiary IRA withdrawals over the conversions while managing to stay under the $69K/yr ACA income limits. We will probably add the Roth conversions back after age 65.
TL/DR We empathize!

 

[aja8888]

I'm working on optimizing my golf game after two hip replacements. I can't do that with a spreadsheet. Work on fun things.

 

[Dash man]

We’re converting slightly into the 35% bracket, trying to get our pretax investments to a manageable level. This is what it takes to get it lower before the TCJA sunsets in 2026, the year we both turn 70. Family history says I might not have a lot of time after that and I don’t want DW to have to pay high individual rate taxes. I have know idea if it’s an optimal approach though. I tend to move forward and evaluate later. Right now our pretax, Roth and taxable accounts are pretty even.

 

[pb4uski]

.......I'm well on the way to converting my TIRA to a Roth, so I should probably be happy that I have made some of the right moves - I believe enough to pay 22% now to avoid 25% for the last 23 years of our retirement (at least under current regs). ...

Sounds like a problem that many Americans would welcome with open arms.

I assume that even at 22% or 25% you saved a lot in income taxes... I presume the income that was deferred would have been taxed at 28% or more... so you're saving 3-6%+ (defer 28%+ to pay 22% or 25%)

 

[Midpack]

Sounds like a problem that many Americans would welcome with open arms.

I assume that even at 22% or 25% you saved a lot in income taxes... I presume the income that was deferred would have been taxed at 28% or more... so you're saving 3-6%+ (defer 28%+ to pay 22% or 25%)

Yes, a good problem, but don’t we all want to optimize whatever resources we have?

I’ve chosen to pay 22% marginal until I’m 70, and 15% thereafter (assuming TCJA). Saves us about $400K in taxes (if we live into our 90’s as family history suggests) vs no Roth conversions, paying 12% marginal now then 25% thereafter. I know we can’t predict taxes, but I believe that can only become more confiscatory, not less. Certainly others may believe otherwise.

But again, I can easily understand any of elements in the title - it’s keeping putting them all together, with their interdependences, that gets hard…

 

[2HOTinPHX]

This is part of a longer quote about all data is backward looking and all decisions are forward looking.......In financial planning, greater precision only provides the illusion of greater accuracy....LOL.

 

[mrfeh]

Y
But again, I can easily understand any of elements in the title - it’s keeping putting them all together, with their interdependences, that gets hard…

I assume you've tried i-orp?

 

[Midpack]

I assume you've tried i-orp?

Yes, never liked it’s assumptions on spending, but I’ll give it another look, thanks. Maybe with a forced residual I can get something closer to what I expect.

 

[Midpack]

Was just watching a video on tax efficiency in retirement and saw a description that better captures my issue.

"Tax code is filled with non-linearities and traps."

Shouldn't be that way, but I'm under no illusion it'll change anytime soon if ever...so I'm trying to navigate all the tax non-linearities and traps.

 

[COcheesehead]

I came to the conclusion long ago that optimizing financial moves are based on assumptions about the future that may never actually happen and in all likelihood will not affect the success of your plan. Could they make you more money? Maybe. They can also not make any difference at all.

Like the old saying don’t let perfect get in the way of good.

 

[Midpack]

I came to the conclusion long ago that optimizing financial moves are based on assumptions about the future that may never actually happen and in all likelihood will not affect the success of your plan. Could they make you more money? Maybe. They can also not make any difference at all.

Like the old saying don’t let perfect get in the way of good.

I understand and agree. I am just looking for more probable, not perfect. Once I start SS and RMDs, the die is cast until we go poof...I'd like to know I tried to anticipate mistakes instead of regretting them for 23 years or so.

 

[TheWizard]

Was just watching a video on tax efficiency in retirement and saw a description that better captures my issue.

"Tax code is filled with non-linearities and traps."

Shouldn't be that way, but I'm under no illusion it'll change anytime soon if ever...so I'm trying to navigate all the tax non-linearities and traps.

Step one is determining which nonlinearities apply to you. In my case, for example, 85% of SS is taxed, LTCG and Qdivs are all taxed at 15% and I've been on Medicare for years.

So the only significant thing I pay attention to is keeping my AGI from getting into the next higher IRMAA tier.

I tend to think there's a fairly broad span of near-optimal financial management in your years before age 72.
For single people, it makes no sense to pay higher taxes in your 60s so you can pay lower taxes from age 72 on.
For MFJ, it can make sense depending on the details...

 

[SecondCor521]

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.

I'm guessing here, but I think OP may be frustrated - as I am - that even if you accept the above about future uncertainties, it's still pretty darn difficult to calculate an optimal path forward.

That is, even if I accept those uncertainties, give up on knowing the future, and insert point estimates, or probabilities, or ranges, the math required to build a model of even a moderate tax return over the next decade or so is very challenging.

I tried it once for my own case for five years, making a lot of simplifying assumptions about the tax code, and it ended up being about 300 or 400 rows in Excel. That included all the necessary tables and lookup values in addition to my particular lines on my particular tax return. And I ended up identifying several bugs in my implementation over time that made me doubt the resulting model.

So what I've ended up doing, OP, is giving up on trying to "maximize to optimum" and have settled for a lower standard of somewhere between "obviously not stupid" and "probably a good idea". In giving up, I won't ever know to what extent the choices I end up making were suboptimal - and this can be considered a feature rather than a bug.

Thankfully I'm at a point where that lowering of my standards won't really affect my life. I have multiple times enough for me. The only impact is that my kids will likely inherit some degree of suboptimal dollars instead of some larger number. But they already have a lot and will likely inherit a lot as well, and they'll probably never realize or care that it could have been a bit or a lot more.

Perhaps some day in the future I'll take another crack at it and maybe I'll succeed then.

 

[Chuckanut]

I stopped Roth conversions a few years back because my calculations showed no significant net difference in my case. But, if the market takes a plunge below 20% I may be tempted to do the conversions anyway simply because I will have less profit to be taxed and, hopefully, at some point the market will recover. The recovery gains will then be free of future taxes.

I don't see a big downside to this unless I get myself boosted into a higher tax bracket.

 

[Midpack]

I think I have Roth conversions down, but I am not sure I'm optimizing capital gains or doing all I can to minimize the tax torpedo. I saw this spreadsheet in a video today, I may take a stab at it but it's not unlike what I've attempted before.

 

[TheWizard]

I think I have Roth conversions down, but I am not sure I'm optimizing capital gains or doing all I can to minimize the tax torpedo. I saw this spreadsheet in a video today, I may take a stab at it but it's not unlike what I've attempted before.

It's only a tax torpedo if your AGI and taxes at age 72+ are significantly larger than pre-72.
For many of us, that's easy to avoid by doing moderate Roth conversions in those pre-72 years.

I took a look at that spreadsheet and I don't like it.
I have a similar spreadsheet, but I did "moderate" Roth conversions all the way to age 71 (last year). Your spreadsheet has that person paying significantly higher taxes up to age 70 and then way lower taxes afterwards.
That's not so good.

My approach has my AGI and taxes increasing a few percent per year from my 60s through my 70s (and beyond).
Much better since I stay in ruffly the same tax bracket throughout...

 

[COcheesehead]

I think we can all get caught up in “doing” stuff to “minimize” other stuff, but we all need to look at probabilities and what the net results really are. Things like Roth conversions are taken almost as a given, but in reality they are a maybe at best. My RMDs don’t reach 4% - a standard withdrawal rate - until I am in my late 80’s. Why would I want to prepay taxes now for something that may or may not ever happen? Rates could be less and RMDs may be postponed like they were in the last couple years. Who knows!

 

[RunningBum]

It's only a tax torpedo if your AGI and taxes at age 72+ are significantly larger than pre-72.

That's not what I understand the tax torpedo to be. First match in google shows exactly what my understanding is.

https://www.financialplanningassoci...020-09/July2018_Contribution_Reichenstein.pdf

The “tax torpedo” refers to the
sharp rise and then sharp fall
in marginal tax rates caused by
the taxation of Social Security
benefits.

It's all about that marginal rate, which can be as high as 49.95%. Fortunately it's only that high for a limited amount of income.

You were correct in saying that Roth conversions before 72 (actually 70, when SS starts) can help avoid this. For my case, I need to make more than moderate conversions. The first part of any withdrawal, conversion or RMD I make from my tIRA looks to be taxed at the 49.95% torpedo rate until my SS benefit is fully (85%) taxed.

 

[pb4uski]

I think I have Roth conversions down, but I am not sure I'm optimizing capital gains or doing all I can to minimize the tax torpedo. I saw this spreadsheet in a video today, I may take a stab at it but it's not unlike what I've attempted before.

The spreadsheet doesn't make any sense... why would anyone voluntarily do $1m of Roth conversions and pay ~$200k in tax to just be in a lower tax bracket later on? Doesn't make sense.

 

[Exchme]

I understand and agree. I am just looking for more probable, not perfect. Once I start SS and RMDs, the die is cast until we go poof...I'd like to know I tried to anticipate mistakes instead of regretting them for 23 years or so.

Have you looked at any of the paid software? I use Pralana Gold and like it a lot; I've seen comments from folks praising MaxiFi and Income Strategy. No need to torture yourself if someone else has already built what you need.

Not sure what you are looking forth respect to capital gains & dividends. If you were doing smaller amounts of Roth Conversions where you stayed below the 0% LTCG bracket, there might be tax gain harvesting opportunities or if you were needing ACA, you might want to alternate years to raise cash vs. keep income low, but it doesn't seem like those kinds of complexities apply to your situation.

 

[SecondCor521]

I think we can all get caught up in “doing” stuff to “minimize” other stuff, but we all need to look at probabilities and what the net results really are. Things like Roth conversions are taken almost as a given, but in reality they are a maybe at best.

There are other Roth conversion threads on this aspect, especially ones that reference the Santa Clara professor who wrote an article suggesting they were a maybe at best as well. It is situation-dependent. For example, with a couple of kids in college and the ability to claim the AOTC, I can do Roth conversions in the low five figure range at 0% federal tax. Since I'll be probably pay 26% at age 75 between federal and IRMAA (which the SSA has me at about a 70% chance of reaching), it's more than a maybe for me personally.

That's not what I understand the tax torpedo to be. First match in google shows exactly what my understanding is.

Interesting. I always thought the tax torpedo was the high marginal rates in one's 70s and beyond due to large RMDs and SS, for those with significant traditional IRAs and SS benefit amounts. For me I do Roth conversions (and maybe QCD's; we'll see) to try to stay out of the 32% (plus about 13% IRMAA for a total of about 45%) bracket in case I make it to my 80's. I thought Ed Slott coined the term and used it as I describe in some of his books.

 

[Out-to-Lunch]

My "education" on this term comes from Bogleheads; their usage comports with RunningBum's usage.

Here is a relevant graph of the marginal rates in one case:

(Source: https://www.bogleheads.org/wiki/Taxation_of_Social_Security_benefits)

EDIT: Well, I looked a bit harder, and some people on BH seem to use it the way that SecondCor understands it!

 

[TheWizard]

That's not what I understand the tax torpedo to be. First match in google shows exactly what my understanding is.

https://www.financialplanningassoci...020-09/July2018_Contribution_Reichenstein.pdf


It's all about that marginal rate, which can be as high as 49.95%. Fortunately it's only that high for a limited amount of income...

I suppose that's one variation of the insidious tax torpedo concept.
But another is having $2M in your IRA and then suddenly having an additional $75k income at age 72 that you didn't plan for.

Over time, almost everyone will be taxed on 85% of their SS income since the dollar amounts for that computation aren't indexed to inflation.

Separately, I think it would be fun if they would make a movie, The Tax Torpedo, where elderly couples are out on the lake in their rowboat or whatever when all of the sudden there's a vector in the water and KA-BOOOM, it's all over.
This would be right up there with the Friday the 13th films...