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

[TheWizard]

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.

Totally agree, especially since we have no guarantee for being around "later on"...

 

[youbet]

don’t we all want to optimize whatever resources we have?

Yes. And of course, by far, your most important resource is your time. Working on that? Enjoying life to the max every minute? Whether you leave one million or two million or..... whatever..... to charity isn't going to matter much. Wasting time fretting over financial details that most likely will never matter might not be the best use of your time. Or, it might be. But think it over.

 

[Midpack]

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.

Timely comment, I am considering Pralana Gold. I did Income Strategy and it was certainly worth $20 but it doesn’t provide as much detail as it used to, it’s more of a black box today - not my preference.

I did attempt the spreadsheet yesterday and concluded I might be able to pull it off but I’m not willing to take the time.

 

[big-papa]

So far, I've played with several things.
I-ORP (an optimizer)
RPM over on bogleheads which doesn't optimize.
A Friend's optimizing spreadsheet which seeks to maximize annual spendable income over retirement (also an optimizer)
An older version of a now updated spreadsheet from a member of bogleheads, with the link to the thread here (also an optimizer): https://www.bogleheads.org/forum/viewtopic.php?t=365518

So many of these, especially the optimizers, have some restrictions such as assuming the same AA in all of your accounts to get something meaningful. They also all tend to assume something like SWR withdrawal methods. At any rate, so far, when I've run these, I'm only seeing a 1-2% improvement in spending over a projected lifetime with the assumptions I've put in. That's not much and I can easily see that if reality varies much from those assumptions, Roth conversions could end up worse than not having done it.

More studying to do on this subject still.

cheers

 

[Midpack]

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.

I was just showing an example spreadsheet format.

But I must be missing something. She converts less than $400K, and she would pay more in taxes later on without the Roth conversions. I am sure you know the before after math with Roth conversions. Here’s her before spreadsheet though the are other changes e.g. SS.

Again, it was only meant as an example format.

 

[big-papa]

I was just showing an example spreadsheet format.

But I must be missing something. She converts less than $400K, and she would pay more in taxes later on without the Roth conversions. I am sure you know the before after math with Roth conversions. Here’s her before spreadsheet though the are other changes e.g. SS.

Again, it was only meant as an example format.

Is the video where you grabbed the format publicly accessible? If so, can you post a link?

Thanks!

 

[Midpack]

Is the video where you grabbed the format publicly accessible? If so, can you post a link?

Thanks!

Sure, it’s very long and not one of my favorite sources, the example w spreadsheet results are near the end.

https://youtu.be/wSmo9QZRpmg

 

[Koolau]

DW and I have been dealing with having "too much money" especially in 401(k). So far, we're okay with our RMDs into the future, I think. The torpedo I'm concerned about is when one of us dies. The other will suddenly be in a higher tax bracket and will quickly bump up against MC limits for a single person. Not only that, but if I go first, she loses her SS and 1/4 of my modest pension. I need to find someone (CFP?) who knows all the tax laws (Fed and state) to help us plan for the likely event that we'll not go together (à la Thelma and Louise.) YMMV

 

[TheWizard]

DW and I have been dealing with having "too much money" especially in 401(k). So far, we're okay with our RMDs into the future, I think. The torpedo I'm concerned about is when one of us dies. The other will suddenly be in a higher tax bracket and will quickly bump up against MC limits for a single person. Not only that, but if I go first, she loses her SS and 1/4 of my modest pension. I need to find someone (CFP?) who knows all the tax laws (Fed and state) to help us plan for the likely event that we'll not go together (à la Thelma and Louise.) YMMV

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...

 

[Koolau]

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...

Yes, one of the options I want to look into.

I'm hoping I pass first so I don't have to deal with the aftermath. I guess that's selfish of me.

 

[Midpack]

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 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!

 

[TheWizard]

I was just showing an example spreadsheet format.

...

Again, it was only meant as an example format.

Ok, so it's sort of ok as an example, except that it uses a constant amount for the SS payment, etc.
In my own sheet, I assumed my SS would grow at a certain rate year after year and then I updated it each January with the actual.

Additionally, you need to know where certain boundaries are, such as IRMAA thresholds and higher income tax rates, both of which increase with inflation now...

 

[Exchme]

Timely comment, I am considering Pralana Gold. I did Income Strategy and it was certainly worth $20 but it doesn’t provide as much detail as it used to, it’s more of a black box today - not my preference.

I did attempt the spreadsheet yesterday and concluded I might be able to pull it off but I’m not willing to take the time.

Sometimes I feel like I'm an advertisement for Pralana Gold, but it really is a nice product, with huge flexibility. Most folks that try to roll their own spreadsheet would probably be better off spending a few $.

 

[almost there]

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!

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.

 

[pb4uski]

... There is nothing I can do to avoid the SS torpedo..

I always assumed that between SS, our other income and the hurdles to taxing SS that 85% of our SS would be taxable. My focus was more on tax rate arbitrage... doing relatively low tax cost Roth conversions today to avoid higher tax cost RMDs in the future. Less than 85% taxable SS was never a reasonable possibility for us so I didn't even consider it.

 

[oldtimer]

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.

As a couple your finances look good. You should now take a look at the scenario after one of you pass on and now the living person is single. IRMAA for a single is now a consideration for the survivor based on your numbers.

 

[Cobra9777]

My plan is to convert into the 22% bracket until projections indicate that pensions+SS+RMDs will all fit inside the 22/25% bracket. I'll reduce conversions just enough to avoid IRMAA in a couple years. I'll also reevaluate *if* the TCJA rates actually revert in 2026, as per current law. My current modeling assumes they do NOT.

Either way, we'll delay DW's SS until conversions are done or the taxable account runs dry, both of which should occur around her FRA, per current projections. We'll delay mine until 70. Of course, we'll reevaluate based on health, market conditions, and how long our taxable account actually lasts.

I have all this (and lots more) modeled in Excel. I'm sure there are some interdependencies that I haven't fully or properly modeled. And perhaps some other strategies I haven't thought about. But that's about the extent of how deep I want to dig into this. I feel like I've done my due diligence and then some.

I'm now 9 years into ER. I messed around with spreadsheets for the first 5 when I should have been traveling more and pursuing my hobbies more extensively. Further analysis is not likely to change anything fundamentally. But it will definitely consume more precious time.

 

[VanWinkle]

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

+1000

 

[almost there]

As a couple your finances look good. You should now take a look at the scenario after one of you pass on and now the living person is single. IRMAA for a single is now a consideration for the survivor based on your numbers.

Thanks for the info, have not really looked too much into Medicare.
But am sure the next 5 yrs will fly by. And I really should look into it.
As time is really moving now. Seems every night is trash night. (Thurs)
If I go 1st the bride would lose about $17400 a yr. income.
Not enough to worry about, as the Roth IRA's are not factored into the above plan. So there is a $500k Roth kicker just in case. A main goal with my ret. including SS is to stay in the low tax bracket. 12% today... Again, I know I am the minority here. Taking SS in 2 yrs at 62. Also she would have about 2.5m in real-estate she could part with. We live below our means, and I don't see that changing anytime soon. Still driving the same truck I bought new in 1995. Cant kill it. So why not...

 

[almost there]

Just looked into single IRMAA. $91,000 (or $182,000 if you’re married)
We have never received any type of inheritance.
But will probably down the road. Yet another consideration.
After being in the 20's-30%+ brackets for decades.
Its nice being in a lower bracket. And writing smaller checks at the end of the year.
Revenge of sorts, if you will.

 

[JustKickItForward]

TIme has been on our side ...

I have not read through this entire thread- but


yes, I agree, this whole optimization deal is so complex. Software do help, but with a lot of assumptions that can change.


For us, we are fortunate to have started TIRA to RIRA conversion before 50yo. It looks like we maybe able to keep our under the 12% fed tax bracket as wew convert until 72yo when RMDs kick in. At that point, we may still be within the 12% tax bracket annually. Again, this is from the report our financial advisor ran, with a lot of assumptions, such as a constant conversion each year with a fixed capital gains sell each year to supplement our various income streams - both may or may not occur.


The point is, if you start this TIRA to RIRA conversion earlier giving yourself a longer runway, you have a better chance of optimizing your lifetime tax savings.


Oh, a nice plus with staying within the 12% bracket is any LTCG is not subject to fed taxes.

 

[Koolau]

I have not read through this entire thread- but


yes, I agree, this whole optimization deal is so complex. Software do help, but with a lot of assumptions that can change.


For us, we are fortunate to have started TIRA to RIRA conversion before 50yo. It looks like we maybe able to keep our under the 12% fed tax bracket as wew convert until 72yo when RMDs kick in. At that point, we may still be within the 12% tax bracket annually. Again, this is from the report our financial advisor ran, with a lot of assumptions, such as a constant conversion each year with a fixed capital gains sell each year to supplement our various income streams - both may or may not occur.


The point is, if you start this TIRA to RIRA conversion earlier giving yourself a longer runway, you have a better chance of optimizing your lifetime tax savings.


Oh, a nice plus with staying within the 12% bracket is any LTCG is not subject to fed taxes.

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

 

[fishfactory]

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.

 

[DawgMan]

Man, I love/want to "optimize" like most of us, but frankly, my head starts to spin running a 1000 "what if" scenarios and all the implications. I'm assuming like most/many here, I have set up my plan so conservatively and have levers to pull that it is (hopefully) hard to screw this thing up. So, here's another way "first world problem" folks like us can look at this... you saved the dough and the numbers support your spend so what's the worst thing that can happen...

1) you pay more taxes over your lifetime than you thought/or could have paid had you anal-ized your Roth conversions... or maybe not
2) Surviving spouse is in a higher tax bracket! Oh dear! Now only 1 mouth to feed/clothe/house... how can they make it paying more taxes??
3) Kids get your tax deferred accounts and have to pay taxes on it over 10 years! How will they do it!?? Those poor kids!

My plan... I will look at each year and make a decision to Roth convert or not convert, otherwise, my golf game needs ALLOT of work and will put my energy there

 

[fishfactory]

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.