DH concerned about taxes...what to do...

[harllee]

Meaning...that I convert enough to get it so my RMDs from the 403b combined with my other income puts me at the top of the 12% bracket but not enough to put me over the 12% bracket?

Or if you have any interest in giving to charity, give enough to charity each year from your IRA (after you reach age 70.5) to reduce your IRA and required RMD and reduce the tax bite. That it what DH and I are doing. We already give a lot to charity and after age 70.5 we are moving all of our charitable giving to our IRAs.

 

[CindyBlue]

Meaning since you are in the 12% tax bracket, do roth conversions to the top of that 12% bracket, each year.
It probably does not make sense to do so much conversion in a year that you go into the next tax bracket.

Whatever is left in the 403b will come out as RMD's and you don't get a choice about that.

Finally got it! Thank you!

 

[CindyBlue]

Or if you have any interest in giving to charity, give enough to charity each year from your IRA (after you reach age 70.5) to reduce your IRA and required RMD and reduce the tax bite. That it what DH and I are doing. We already give a lot to charity and after age 70.5 we are moving all of our charitable giving to our IRAs.

Honestly, I'd love to, but we need to keep and save our money for our "old age." We retired with enough, but not enough to be able to donate too much.

 

[target2019]

What tax bracket are you in now, Cindy?

The tactic is to stay in a lower bracket, pay taxes on a conversion to Roth IRA, and avoid the additional taxes that will come when you enter a higher tax bracket.

Does this mean marginal and effective tax rates? If so, the marginal is 12% and the effective is 11%. (I mentioned I was ignorant...sigh...)

I'm thinking that the only way it would get higher is when I have to take RMDs in 6 years, right? (unless, God forbid, we start w*rking again (smile!))

I went over to the tax calculator at https://www.dinkytown.net/java/1040-tax-calculator.html and made a few guesses at your numbers. If you are still in the marginal 12% this year, I believe you are getting close to the top of that bracket. With two pensions, two SS checks and one RMD you're probably soon entering the 22% bracket. If you focus on just that calculator it will give you all you need to know about what to do this tax year 2021 as far as converting 403(b) to Roth IRA. If you and DH work on this together I know it will help you greatly, even if just to validate what a paid adviser comes up with later.

When you go to the calculator it has pre-filled data for a single person. You need to go through each expandable section and make changes to all of the boxes so it fits your profile.

If my estimates are correct, you may soon enter the 22% bracket. And of course it is inevitable that one of you will end up in the 24% bracket (as a single filer). So anything you can convert to Roth while in the "12" is a gain for you for the rest of your years.

As you can see from the depth of some posts here this is an elephant of a topic. You can't eat it all at one time, but a decent tax CPA or tax preparer can work this out for you, maybe make a simple table for the next 7 years or so. Of course the tax situation can change, and the projection won't be accurate each year, but it could be worth the effort.

 

[CindyBlue]

I went over to the tax calculator at https://www.dinkytown.net/java/1040-tax-calculator.html and made a few guesses at your numbers. If you are still in the marginal 12% this year, I believe you are getting close to the top of that bracket. With two pensions, two SS checks and one RMD you're probably soon entering the 22% bracket. If you focus on just that calculator it will give you all you need to know about what to do this tax year 2021 as far as converting 403(b) to Roth IRA. If you and DH work on this together I know it will help you greatly, even if just to validate what a paid adviser comes up with later.

When you go to the calculator it has pre-filled data for a single person. You need to go through each expandable section and make changes to all of the boxes so it fits your profile.

If my estimates are correct, you may soon enter the 22% bracket. And of course it is inevitable that one of you will end up in the 24% bracket (as a single filer). So anything you can convert to Roth while in the "12" is a gain for you for the rest of your years.

As you can see from the depth of some posts here this is an elephant of a topic. You can't eat it all at one time, but a decent tax CPA or tax preparer can work this out for you, maybe make a simple table for the next 7 years or so. Of course the tax situation can change, and the projection won't be accurate each year, but it could be worth the effort.

This is great information! I can see that I will need to find a good tax person to help us. When you say "make a simple table for the next 7 years or so" do you mean a table for the amount of money we wil need to convert to Roth every year for the next 7 years?

 

[RetiredHappy]

Regarding Long Term Care Insurance (LTCI), it is alot less expensive if you are young and healthy when you buy. I bought mine 12 years ago and my husband's 6 years ago. We both have 3% compound interest built into the policy. I have not had a single rate increase todate. Currently mine covers about $10K a month, at $120K per year, $600K for 5 years if used at maximum level. If utilized less than the maximum per month, then the years stretch out. My husband bought a different one, a lump sum payment and his coverage is just a little lower than mine per month but his goes out 7 years. Similarly if he does not utilize to the maximum per month, the years stretch out. It is as though we have another $1M invested in LTCI and the amount grows 3% compounded each year.

 

[CindyBlue]

Regarding Long Term Care Insurance (LTCI), it is alot less expensive if you are young and healthy when you buy. I bought mine 12 years ago and my husband's 6 years ago. We both have 3% compound interest built into the policy. I have not had a single rate increase todate. Currently mine covers about $10K a month, at $120K per year, $600K for 5 years if used at maximum level. If utilized less than the maximum per month, then the years stretch out. My husband bought a different one, a lump sum payment and his coverage is just a little lower than mine per month but his goes out 7 years. Similarly if he does not utilize to the maximum per month, the years stretch out. It is as though we have another $1M invested in LTCI and the amount grows 3% compounded each year.

That's no longer an option for us, I guess. My DH is 75 and I'm 66.

 

[RetiredHappy]

That's no longer an option for us, I guess. My DH is 75 and I'm 66.

The main question is whether you are healthy. If you have certain pre-existing conditions, LTCI companies won't sell you a policy. LTCI companies will always sell you a policy if you healthy, regardless of age.

If you are interested in a hybrid policy which is a combination of LTCI and life insurance, you should take a look at Lincoln Moneyguard. My husband bought this policy. Lump sum payment, say $100K, it covers about $5K a month (and it compounds at 3% or higher if you wish) and 7 years. If long term insurance is never utilized when policy holder dies, it pays out $140K and the amount is slowly reduced over the years to about $110K. If long term care is fully utilized, it still returns a small sum of about $10K upon death, which I call it funeral money.

 

[CindyBlue]

The main question is whether you are healthy. If you have certain pre-existing conditions, LTCI companies won't sell you a policy. LTCI companies will always sell you a policy if you healthy, regardless of age.

If you are interested in a hybrid policy which is a combination of LTCI and life insurance, you should take a look at Lincoln Moneyguard. My husband bought this policy. Lump sum payment, say $100K, it covers about $5K a month (and it compounds at 3% or higher if you wish) and 7 years. If long term insurance is never utilized when policy holder dies, it pays out $140K and the amount is slowly reduced over the years to about $110K. If long term care is fully utilized, it still returns a small sum of about $10K upon death, which I call it funeral money.

Thank you for that info - I will go look it up!

I am healthy, and my DH has always been very healthy...up until very recently, when he was diagnosed with Parkinson's. I'm sure no one would sell him LTC insurance now...sigh...but he has Veteran's benefits and that will help.

 

[RetiredHappy]

Thank you for that info - I will go look it up!

I am healthy, and my DH has always been very healthy...up until very recently, when he was diagnosed with Parkinson's. I'm sure no one would sell him LTC insurance now...sigh...but he has Veteran's benefits and that will help.

I am sorry to hear that your husband has been diagnosed with Parkinson's. I think all the more you should look at a LTCI policy for yourself.

You should also look at AARP site for LTCI. I do not know if they still have it. Group policies are always cheaper than individual policies and the contracted LTCI company treated AARP customers as a group. I bought through AARP. An independent LTCI agent showed me the difference between individual and AARP rates and the difference is huge.

 

[target2019]

This is great information! I can see that I will need to find a good tax person to help us. When you say "make a simple table for the next 7 years or so" do you mean a table for the amount of money we wil need to convert to Roth every year for the next 7 years?

Yes, a table which has rows for the inputs (SS, SS, RMD, Pens, Pens, and so on). And below you can calculate how much headroom in the tax bracket you have for this year, and next, and next...

But if only things would follow a straight line (sigh)...

So, dinkytown does this for 2021, but then someone has to guesstimate following years. For example:
- does the pension have a COLA?
- what increase will you see in SS?
- what will be the total held in 403(b) and DH-IRA at end of year? (need that for the next year's RMD calculation)
- and so on.

Edit: added picture to illustrate the concept. Not for planning as all numbers are invented.

 

[pb4uski]

This is great information! I can see that I will need to find a good tax person to help us. When you say "make a simple table for the next 7 years or so" do you mean a table for the amount of money we wil need to convert to Roth every year for the next 7 years?

Cindy,

Please just do it yourself... it is good that you understand it. Here's a simple calculation that you can adjust as needed.

Top of 12% tax bracket for 2021 for MFJ couple:..................$81,050
Standard deduction........................................................... 25,100
Additional standard deduction for over 65 (2 * $1,350)............ 2,700
Total income at top of 12% tax bracket with std deductions. $108,850

Subtract from the $108,850 the total for your pensions (gross amount), interest, RMDs and 85% of your gross SS and that will be the headroom that you have for Roth conversions in the 12% tax bracket. Use your 2020 tax return as a guide but obviously update numbers from 2020 to 2021.

Then run your numbers through the dinkytown calculator to confirm it.

 

[RunningBum]

^^ +1.
Also, it's no big deal if you go a little over that $108,650 number. It's not a cliff like the ACA subsidy used to be, or the IRMAA tiers. If you went $100 over you'd just pay 15% for the qualified dividends you pushed into being taxed, plus 12% for the income itself. $27 on that $100. Nothing to break your plan.

 

[TheWizard]

In order to put together a good financial planning spreadsheet, I think it's best if the person involved has been doing his/her/their income taxes for the last few decades and is familiar with the various nooks and crannies of the tax law relevant to them: SS taxable amounts, qualified dividends taxability, Roth conversion details, RMD details, Medicare IRMAA, etc.

This is not a HUGE body of knowledge, but it takes more than a week or two to learn up on it with confidence...

 

[rodi]

In order to put together a good financial planning spreadsheet, I think it's best if the person involved has been doing his/her/their income taxes for the last few decades and is familiar with the various nooks and crannies of the tax law relevant to them: SS taxable amounts, qualified dividends taxability, Roth conversion details, RMD details, Medicare IRMAA, etc.

This is not a HUGE body of knowledge, but it takes more than a week or two to learn up on it with confidence...

I agree... But the OP is interacting, refining her questions, engaged. I think she's on the path to coming up with a good enough plan, that she can refine over time.

 

[CindyBlue]

In order to put together a good financial planning spreadsheet, I think it's best if the person involved has been doing his/her/their income taxes for the last few decades and is familiar with the various nooks and crannies of the tax law relevant to them: SS taxable amounts, qualified dividends taxability, Roth conversion details, RMD details, Medicare IRMAA, etc.

This is not a HUGE body of knowledge, but it takes more than a week or two to learn up on it with confidence...

I absolutely agree with you here! And that's why I'm bugging you nice folks here, trying to glean enough information to know the basic questions to ask the professional I'm about to hire!

You all are so kind and patient!

 

[CindyBlue]

I agree... But the OP is interacting, refining her questions, engaged. I think she's on the path to coming up with a good enough plan, that she can refine over time.

Thank you for this! I'm trying hard and getting better with each response from the nice people here!

I've researched, found, and contacted both a fee-based financial planner and a tax expert. Both have written back and say they can help. Working on making an appointment with each. Hunted down and printed out the information about all the sources of income we have, and dug out our 2020 tax return. Put it all in a file and I'm hopefully ready to go!

I feel - and best of all, hubby feels - a lot better now!

Thank you so much, everyone! I am SO grateful - I know I keep saying this, but it's absolutely true!

And now, please celebrate with me!

In the incredibly good news category, today we finally got the property insurance squared away!!!

When my dad passed and we inherited the property, the insurance company wasn't sure they'd write a new policy because of the devastating fires out here in the past few years. But we have a wonderful insurance broker, who had helped us so much over the past few years when we had to deal with my dad's finances when he developed Alzheimer's, and then has busted his tail for months to help us get a property insurance policy in our name. It's been hanging over my head for seven months - I was very worried, losing a lot of sleep, because 1), could we even get insurance? And 2), how much would it cost (again, the fires in this area!)

It costs about a third more than my dad's policy did (which expires in August), but it's reasonable, and we can afford it, and we GOT IT!!

Whoopee!!

 

[CindyBlue]

Cindy,

Please just do it yourself... it is good that you understand it. Here's a simple calculation that you can adjust as needed.

Top of 12% tax bracket for 2021 for MFJ couple:..................$81,050
Standard deduction........................................................... 25,100
Additional standard deduction for over 65 (2 * $1,350)............ 2,700
Total income at top of 12% tax bracket with std deductions. $108,850

Subtract from the $108,850 the total for your pensions (gross amount), interest, RMDs and 85% of your gross SS and that will be the headroom that you have for Roth conversions in the 12% tax bracket. Use your 2020 tax return as a guide but obviously update numbers from 2020 to 2021.

Then run your numbers through the dinkytown calculator to confirm it.

"...and that will be the headroom that you have for Roth conversions in the 12% tax bracket"

Does this mean that that "headroom" number shows how much money I can covert from 403b to to Roth that year because I will have to count those dollars I converted as income, and thus it will put me over the 12% bracket?

(Sorry to keep asking - I think I almost have it!)

 

[pb4uski]

"...and that will be the headroom that you have for Roth conversions in the 12% tax bracket"

Does this mean that that "headroom" number shows how much money I can covert from 403b to to Roth that year because I will have to count those dollars I converted as income, and thus it will put me over the 12% bracket?

(Sorry to keep asking - I think I almost have it!)

Close, not put you over but put you spot on the top of the 12% bracket.

Expanding on the example, let's say that your gross pensions were $30k, your interest was $10k, your gross SS was $40k and RMDs were $15k. Your total income before any Roth conversions would be $89k ($30k + $10k + $40k*85% + $15k).... so you could do $19,850 of Roth conversions and that $19,850 would bring your income to the $108,850.

After $27,800 of standard deductions your taxable income would be $81,050... exactly equal to the top of the 12% tax bracket.

Your tax on that $19,850 Roth conversion would be $2,382 (12%).

 

[BlueberryPie]

BIG RED FLAG! "fee-based" is not "fee-only" or fiduciary
You want someone that is fee-only and fiduciary (meaning they are legally bound to have your best interest at heart)
"fee-based" was invented to confused people about thinking it's the same as fee-only and still make money off you.

If your questions are mostly tax-based, a CPA may be a better bet than an investment advisor. They shouldn't try to sell you anything but hte cost of their time for their advice

 

[target2019]

"...and that will be the headroom that you have for Roth conversions in the 12% tax bracket"

Does this mean that that "headroom" number shows how much money I can covert from 403b to to Roth that year because I will have to count those dollars I converted as income, and thus it will put me over the 12% bracket?

(Sorry to keep asking - I think I almost have it!)

Yes, money you convert is counted as income.

Headroom is a concept (an actual measurement) that applies to each tax bracket, single or MFJ. Your bracket of interest now is the 12% MFJ which extends up to $81,050 at this time. If your adjusted income last year was $70,000, then you had $11,050 of headroom. You could have converted $11,000 from your 403(b) to a Roth IRA if Vanguard allows that. And the FED tax would have been 12%.

So a key question for tax expert is what is the anticipated tax bracket for 2021?

 

[CindyBlue]

BIG RED FLAG! "fee-based" is not "fee-only" or fiduciary
You want someone that is fee-only and fiduciary (meaning they are legally bound to have your best interest at heart)
"fee-based" was invented to confused people about thinking it's the same as fee-only and still make money off you.

If your questions are mostly tax-based, a CPA may be a better bet than an investment advisor. They shouldn't try to sell you anything but hte cost of their time for their advice

My error!! I looked up the financial planner and he is fee ONLY and a fiduciary.

The tax person is the one who did my dad's taxes for years, and were incredibly helpful to us when we had to figure out how to help Dad once he developed Alsheimer's.

 

[CindyBlue]

Close, not put you over but put you spot on the top of the 12% bracket.

Expanding on the example, let's say that your gross pensions were $30k, your interest was $10k, your gross SS was $40k and RMDs were $15k. Your total income before any Roth conversions would be $89k ($30k + $10k + $40k*85% + $15k).... so you could do $19,850 of Roth conversions and that $19,850 would bring your income to the $108,850.

After $27,800 of standard deductions your taxable income would be $81,050... exactly equal to the top of the 12% tax bracket.

Your tax on that $19,850 Roth conversion would be $2,382 (12%).

Ohmygosh, I understand it now! This is great! Thank you for taking the time to frame an example! I can now talk to the tax person with some knowledge already in hand!

 

[CindyBlue]

Yes, money you convert is counted as income.

Headroom is a concept (an actual measurement) that applies to each tax bracket, single or MFJ. Your bracket of interest now is the 12% MFJ which extends up to $81,050 at this time. If your adjusted income last year was $70,000, then you had $11,050 of headroom. You could have converted $11,000 from your 403(b) to a Roth IRA if Vanguard allows that. And the FED tax would have been 12%.

So a key question for tax expert is what is the anticipated tax bracket for 2021?

Thank you for this explanation and example! This gives me before-hand knowledge for when I meet with the tax person!

 

[BlueberryPie]

Good luck Cindy, aren't these boards awesome? Sounds like you had your lightbulb moment and that your are in good hands with a fiduciary advisor.