Did you pay for a withdrawal roadmap? Or do you roll your own?

[Morgan22]

I'm taxed at 15% for LTCG as well.
But there are folks with lower AGI who are taxed at 0% on LTCG until their AGI exceeds a threshold.
That's what this is about...

Ok, but that poster made it sound like he or she was being taxed at 27% on cap gains and dividends. I guess I misunderstood the post.

 

[engineernerd]

Ok, but that poster made it sound like he or she was being taxed at 27% on cap gains and dividends. I guess I misunderstood the post.

The way most of us here think about tax effects is to plug a change into our tax calculator and see how much it changes our overall total tax bill. Take that dollar change, divide it into the dollar amount of the change we made, voila, that's the "real" marginal tax rate.

 

[youbet]

After several years of looking at the question, I've decided the future is too uncertain to bother trying to plan to the dollar or even the percentage point.

Oh so true............

 

[SecondCor521]

Ok, but that poster made it sound like he or she was being taxed at 27% on cap gains and dividends. I guess I misunderstood the post.

Your income is probably high enough that you're past the point where the effect the other poster described does not apply.

But what you wrote is not what the other poster said.

What they described was an additional dollar of ordinary income being taxed at 12% which also displaces a dollar of 0% LTCG into being taxed at 15%. This indeed results in that additional dollar creating an additional 27 cents of tax, creating a marginal rate of 27% on that dollar.

There are all sorts of situations in the tax code where similar things occur, and it's good to be aware of them. Taxation of SS benefits, ACA subsidy / repayment effects, and IRMAA are a few mentioned here regularly. Other tax benefits with a phase out also would show similar effects: AOTC, LLC, EIC, CTC, the new Schedule 1-A tax items ("no tax on").

Looking at just the nominal tax brackets misses these effects which are real and do impact the tax return and, in turn, impact tax planning.

 

[RunningBum]

Ok, but that poster made it sound like he or she was being taxed at 27% on cap gains and dividends. I guess I misunderstood the post.

Yes, you misunderstood. Read the post again.

However, the next dollar of regular income, which falls into the 12% bracket, will also push a dollar of LTCG past the 0% ceiling into 15%. So you are taxed 27% on that dollar.

It doesn't apply to everyone. They made it clear what income level they were talking about.

 

[Lorenzo]

However, the next dollar of regular income, which falls into the 12% bracket, will also push a dollar of LTCG past the 0% ceiling into 15%. So you are taxed 27% on that dollar.

The confusion may be due to how this is phrased. THAT dollar isn't being taxed at 27%. Rather, THAT dollar is taxed at 12%, but that results in a different dollar (from the capital gains category) being taxed at 15% instead of 0%.

 

[engineernerd]

I'm taxed at 15% for LTCG as well.
But there are folks with lower AGI who are taxed at 0% on LTCG until their AGI exceeds a threshold.
That's what this is about...

Exactly. This is our first year of full retirement and we are eyeing that 0% bracket.

For us (MFJ), if our ordinary income in 2026 is equal to or less than our total deductions we will be able to take $98,900 in qualified dividends and capital gains without paying a dime on it. If our ordinary income exceeds the sum of our deductions plus $98,900 we will be able to take no qualified dividends or capital gains at that rate (will owe 15% right from the start). In between those levels every dollar of ordinary income is a dollar less qualified dividends or capital gains we can take at 0%.

Ordinary income = wages, interest, nonqualified dividends, tIRA distributions including Roth conversions, S-corp income, pensions, annuity income, taxable SS, I think that's it but might be forgetting something irrelevant to me.

Note that this is irrelevant if you have no capital gains or qualified dividends in taxable accounts.

 

[surprising]

I asked Grok the question about it being better to fill the ordinary income up to the LTCG 0% limit and then take LTCG at 15% as was claimed earlier.

This caused Grok to process the longest I have ever seen it do, 3.5 minutes. Grok seemed to agree. Although I am still trying to wrap my mind around the various permutations of this concept.

This is the where linear programming solvers shine. You enter *all* constraints across the retirement time period and the solver will generate an optimal solution to the objective, which in this case is simply maximize total withdrawals and minimize taxes. If you've ever used i-orp you know it can generate a solution that goes against conventional wisdom.

The solver I'm working on is adamant on withdrawing from IRA early even though there is a 10% early withdrawal penalty. I was convinced it's a bug, but when I tried to artificially limit it, the overall result was worse. I still don't know exactly why, but a guess is that, because of inflation, over a 40 year span, it is cheaper to withdraw from IRA as soon as possible, when the effect of inflation is the smallest.

 

[SevenUp]

So, what flexible tool would you use to simulate this tax scenario? A lot of CPAs and tax professionals use a tax software called Holistiplan to simulate tax scenarios. However, the software is very expensive.

The Finance Buff has two good articles that address some common scenarios:
Roth Conversion and Capital Gains on ACA Health Insurance
Roth Conversion with Social Security and Medicare IRMAA

The case study spreadsheet described in those articles is free.

 

[RunningBum]

The confusion may be due to how this is phrased. THAT dollar isn't being taxed at 27%. Rather, THAT dollar is taxed at 12%, but that results in a different dollar (from the capital gains category) being taxed at 15% instead of 0%.

OK but they said that in the first sentence. Perhaps the second sentence should have been "That dollar has a marginal tax rate of 27%." But nowhere did it say capital gains were taxed at 27% as the other poster misread.

 

[Trooper]

I'm mainly a DIYer, using a spreadsheet since retirement to stay on track. Based on others' responses my s/s isn't as as complex as others. To validate I purchased Pralana a few weeks ago and really like its layout and depth. My spreadsheet was directionally close to Pralana.

 

[Dtail]

Another vote for doing my own. I am contemplating getting Pralana just to see their view on Roth conversions for me and the fiance who of course file separately.
This site has clearly helped to fill in the blanks over the years.
Will never pay an FA.

 

[pb4uski]

Yes, you misunderstood. Read the post again.

However, the next dollar of regular income, which falls into the 12% bracket, will also push a dollar of LTCG past the 0% ceiling into 15%. So you are taxed 27% on that dollar.

It doesn't apply to everyone. They made it clear what income level they were talking about.

And when the 27% rate does apply, it is usually applicable to a narrow band of income... for the excess of the top of the 0% preferenced income tax bracket over ordinary income or your preferences income, whichever is less.

 

[Dash man]

I had used Bolden and Pralana in the past along with my own spreadsheet that I ran out to 90 years old. Now that we’re done with Roth conversions as we both turn 70 this year, I’m not worried much about our spending levels and taxes.
DW begins her SS in August to add that to my SS and small pension. We have about $235k in annual dividends with only $40k taxable. We don’t worry about RMDs beginning in three years since they’ll be satisfied by QCDs. Property taxes, medical deductions and charitable giving should bring us down close to owing zero taxes as long as the $12k deduction for seniors lasts.
If we do owe any taxes, we may borrow against our portfolio to pay the taxes and let the kids worry about paying that loan off with the step up in basis after we pass.

 

[Exchme]

The solver I'm working on is adamant on withdrawing from IRA early even though there is a 10% early withdrawal penalty. I was convinced it's a bug, but when I tried to artificially limit it, the overall result was worse. I still don't know exactly why,

That's a bug as there are many competent solvers, or even manual calculation procedures that disagree with that logic.

The problem I-orp had (and many current programs still have), was that it could not handle a tax efficient portfolio, where bonds are preferentially put in tax deferred. The input allowed the user to input that kind of portfolio, but it went off the rails when folks tried it.

The reason was that I-orp saw the low returns in tax deferred (due to lots of bonds) and the high returns in Roth/taxable (due to more stock allocation there). It then favored rapid Roth Conversions to get the money out of the low return t-IRA and into the high return Roth. What it was really doing of course was shifting the overall asset allocation to more stocks and that was the dominant source of return, the actual impact of Roth conversions was dwarfed by the accidental stock/bond allocation shift. I saw a couple of posters here hurt by this as they converted to the top bracket, following I-orp's recipe, when in fact they had modest tax deferred holdings and should never have left the 10-12% bracket.

 

[pjigar]

DIY for me. FWIW if you do your own taxes then you are the best person to figure out the withdrawal strategy.

 

[L-5Player]

Thanks to the posters who chimed in to help further explain and clarify my 27% isolated tax rate math. Saved me a few precious minutes of cognitive energy, which is always in limited supply.

Here is a Kitces article that discusses the subject:

The Tax Impact Of The Long-Term Capital Gains Bump Zone

With 11 total tax brackets, good tax planning requires the consideration of the interrelationship between both ordinary income and capital gains tax brackets.

www.kitces.com

 

[old medic]

Roll your own "with a little help from your friends" on this forum.
Couldn't resist.

Would defiantly agree with that, Yall been a big help to us.

 

[Sunset]

......

The solver I'm working on is adamant on withdrawing from IRA early even though there is a 10% early withdrawal penalty. I was convinced it's a bug, but when I tried to artificially limit it, the overall result was worse. I still don't know exactly why, but a guess is that, because of inflation, over a 40 year span, it is cheaper to withdraw from IRA as soon as possible, when the effect of inflation is the smallest.

I don't see what inflation has to do with it to encourage paying a 10% penalty, unless of course this is due to low returns.

I'd suggest asking it what to do where all accounts have various holdings to test if the answer is bias based on the source of the income (which is related to earnings over time).

Test it: Keep the total value of each account as it is now but vary the holdings:

1. Set all holding the same in all accounts (taxable, IRA, Roth).
2. Set the holdings (All bonds in Taxable, All Stocks in IRA, All Stocks in Roth)

I suspect the recommendations would drastically change and would estimate:
Case 1) would say to withdraw from any but avoid 10% penalty.
Case 2) Will be withdraw from Taxable.

 

[TheWizard]

...The solver I'm working on is adamant on withdrawing from IRA early even though there is a 10% early withdrawal penalty. I was convinced it's a bug, but when I tried to artificially limit it, the overall result was worse. I still don't know exactly why, but a guess is that, because of inflation, over a 40 year span, it is cheaper to withdraw from IRA as soon as possible, when the effect of inflation is the smallest.

As mentioned elsewhere, inflation isn't the issue, it's GROWTH of the investments in the IRA that outpaces inflation, if you're lucky.

And that 10% penalty does not apply if you do Roth conversions from your IRA, converting the entire amount and paying the tax with other money...

 

[Original Wally]

I started out some years before retiring tracking income, deductions and other w*rk items.
Since then, the spreadsheet has EXPANDED. As part of the retirement planning, I forecast our retirement account balances, made projections on necessary draws (even adjusting them for inflation projections) , earnings rates, etc and developed a graph of where the balance should be and when it would run out. SO FAR, my projections have turned out to be VERY conservative. The account growth has been better AND our need to go to the well has been nil. SO we are doing well. THEN a few years ago, I built ANOTHER tab to mimic the tax return. THEN I added ANOTHER tab to calculate the tax based on Qualified Dividends and Capital Gains form.

When I get the VG consolidated 1099 in a week or so, I will fine tune that spreadsheet calc. AS IS, it calcs ESTIMATED Qualified divs, section 199A deduction and the foreign taxes paid - all based on prior years results and/or info released by VG <- They have released what THEY expect the Qual Div rate to be.

It will be fun to tweak my spreadsheet to pick up any other things. For example, when VG posts divs to my account, they are NET of foreign taxes. BUT the 1099 will be for the gross amount. So I will need to figure out how to lay THAT distinction into my spreadsheet. Sigh. Thankfully I have the time to play with it.

God, this is FUN! Keeps the brain engaged.

 

[Midpack]

Looks like the OP hasn't been back since posting?

Like many, I've relied mostly on my own spreadsheets. If I wasn't able, I would probably use Boldin, maybe Praline - I did trials on both and they looked like they could be helpful for those who don't want to develop their own spreadsheets.

It helps that I was an engineer by profession (used spreadsheets literally every day of my career) and I've been a DIY investor since 1990. Mostly a Bogle and Bernstein disciple.

It helps that I have done my own taxes every year of my life, keeps me current. I find TurboTax helpful, worth the money to me. l I've read lots on Roth conversions, IRMAA, Medicare, SS, the tax torpedo, RMDs, etc. so I know how they all work together.

I've learned a lot here, that's invaluable.

I would never pay someone else $5K or 1% of AUM for investment advice, much less a withdrawal plan. But people do it all the time...

 

[DEC-1982]

We use a simple spreadsheet and check with Fidelity Planner annually. We have various lumpy expenses mentioned in this forum (thank you) entered into the Planner.

TBH, there is a fair amount of guessing about many things in the future. The accuracy (or lack of accuracy) of these guesses is more important to us than whether a CFP does the planning or we do the planning.

 

[RunningBum]

Looks like the OP hasn't been back since posting?

1st post. They joined in 2015. I look for a follow-up in late 2036.

 

[superfreak]

Hi Everyone:
Thank you for your feedback, I have read your replies and appreciate your input. I even learned about a new peril (NIIT).

I've been working on my XLS and feel comfortable using it as a crude model to do what if analysis on different roth conversion scenarios, solving for optimizing taxes and minimizing penalties.

I would like to add that with the advent of AI, this complex set of topics can easily be summarized with a series of Q&A, but always fact check the answers given against IRS info.

Cheers!