ER spend down strategy from ages 59-65

[ddieckm]

I recently joined and have enjoyed all the information being shared. One great resource I learned about is i-orp.com. I have run i-orp and the spend-down plan surprised me. I'm 56 now and plan to retire at 58 and it shows taking my income from my IRA/401K money from 59 to 65, then using my after-tax money from 65-68 then back to IRA/401K money. I guess I never really thought about it but I assumed I would start with after-tax money until 65, which would still leave a large balance in after-tax money, and then start using IRA/401K money at 65 on. The plan shows that I never get in trouble with RMD requirements in future years. What is the thought process in spending (and paying taxes) on IRA/401K money from 59-65? Is it to help avoid RMD requirements in future years? I'm sure the reasoning makes sense but I just never considered it.

 

[Dtail]

On a related matter, how are you paying for Healthcare?
If you are managing income (MAGI) for ACA purposes, then after tax income usually comes into play.

 

[pb4uski]

Yes, it is to reduce taxes later in life once any pensions and SS start and that income puts you in a higher tax bracket. While alot is based on individual facts and circumstances, in many cases it makes sense to figure out what your tax bracket is likely to be when you're 72 and pensions and SS is going and RMDs are going and then do 401k/tIRA withdrawals and/or Roth conversions to the top of the prior tax bracket from ER until 72 to reduce RMDs.

So for example, once my pension and our SS starts, based on that income plus taxable account interest and dividends and RMDs I expect that we'll likely be in the 22% tax bracket.... so I have been doing tIRA withdrawals and Roth conversions to the top of the 12% tax bracket for the last 7 years... on average I have paid 8.5% in federal tax on between $350-400k in withdrawals/conversions because some have been covered bu the standard deduction since our taxable account interest and dividends and my pension are less than the standard deduction, some at 10% and some at 12%.

If I waited and lived on taxable account money now, I would definitely pay 22% or more on that income, so by getting while the getting is good I'm saving 13.5% (22% vs 8.5%). Most of our taxable account money is in equities and those will get a stepped up basis for our heirs.

 

[ddieckm]

Good question on Healthcare. I'm not totally sure. I thought about trying to reduce income producing investments and selling after-tax stock investments and live off the capital gains to get the subsidized ACA or just paying the unsubsidized prices and leave my investments as-is. Or maybe in two years, we will have a new option.

 

[pb4uski]

In most cases, if you manage income for ACA subsidies you can't get much punch out of the period of lower tax rates like I described in post #3 until you are 65 and on Medicare.... but in some cases the ACA subsidies are very compelling even compared to the potential tax savings.

 

[Dtail]

My example is between my brother and I, we are receiving a total of 23k yearly in tax subsidies.
Thus, I will only pay down the TIRA necessary to stay under 150% of FPL, not to mention not owing any Federal/State (FLA) taxes.
At 65 y.o., the goal then is to pay down much more of the TIRA in order to reduce RMD's.

 

[Offgrid Organic Farmer]

ER spend down strategy from ages 59-65

I am 60. I have been retired 19 years so far.

I have no intention of 'spending down' my portfolio.

I have more Net Worth today than I had back when I retired.