Fortunate One w/new concerns

[lem1955]

I'm a fortunate daughter. My father (last of my parents) died in January and left me about $800,000. My portfolio is now in a range and configuration that has me needing to look more carefully at IRMAA, NIIT, SS taxation, etc. The rules are confusing and prioritizing between them is causing me some headaches. I anticipated the inheritance, so did what I could to do ROTH conversions from a hefty tIRA account, but I was only able to convert a little less than a $100K over the last four years while trying to stay below the first IRMAA tier increase. Even then, I missed one year and had to pay the surcharge in 2021. Now my tIRA and Inherited IRA combined are 34.4% higher than at the end of 2022. I still have two years before I turn 70 and start collecting a good size SS check. DW and my combined SS will be north of $65K a year. I'm thinking I should allow MAGI to go as high as $249,000 by reducing the Inherited IRA and depositing in my Taxable investment account what I don't need. Bite the IRMAA surcharge for 2025 but avoid the NIIT hit this year and next year. I will probably need some of that Taxable account anyway to move to a CCRC in 2026 or 2027. (DW is 10years older than me.) I welcome your comments and further suggestions on my situation and plan.

 

[pacergal]

No financial suggestions, however, my condolences on the loss of your father.

 

[pb4uski]

I'm sorry for your loss.

Hard to tell but the sweet spot may be the top of the 24% tax bracket which would be in IRMAA tier 2 or the top of IRMAA tier 2 that would put you in the 32% tax bracket. I think I would lean to the former, top of 24% tax bracket, absent further information.

 

[RunningBum]

I'm sorry for your loss.

Hard to tell but the sweet spot may be the top of the 24% tax bracket which would be in IRMAA tier 2 or the top of IRMAA tier 2 that would put you in the 32% tax bracket. I think I would lean to the former, top of 24% tax bracket, absent further information.

I was thinking the same. Even if you overshoot, 24% is not much higher than 22%, and it tax brackets revert to the old, 22% becomes 25%. You can convert a pretty sizeable chunk that way.

But realize that you can't convert an inherited IRA.

 

[38Chevy454]

I also give condolences for your father's passing. I agree that you are going to have some pain in the tax paid if you don't do some conversions now. Don't let the IRMAA tax affect your goal of reducing potential RMD tax torpedo. I think also to top of 24% bracket may be the sweet spot for your targeting. Yes IRMAA is an extra tax on higher incomes, and it doesn't seem fair when you are already paying higher income tax rates already. I guess the consolation prize is you have a nice inheritance that many do not have.

 

[lem1955]

I'm sorry for your loss.

Hard to tell but the sweet spot may be the top of the 24% tax bracket which would be in IRMAA tier 2 or the top of IRMAA tier 2 that would put you in the 32% tax bracket. I think I would lean to the former, top of 24% tax bracket, absent further information.

Thanks all for condolences. My father was 92. He was a kind, wonderful man and I will miss him but he lived a good life. Did everything he wanted to do.

pb4uski - here are the details in case you care to respond further:

Current Balances:

Inherited IRA 433,000
ROTH 1 218,000
ROTH 2 159,000
tIRA 1 1,453,200
tIRA 2 82,000
HSA 47,000
Taxable 487,000

Income: ~ $110,000/yr (Private Passive real estate, SS, part-time job)

We spend (including taxes) about $120K/yr. We make QCD donations from tIRA 2 each year. Probably ~$8K in 2024.

Expecting SS to increase from $11k (DW) to $67,500/yr mine+spousal in June 2025.

 

[pb4uski]

I think you need to schedule out your income for the next 10-15 years at a minimum, but at first blush it looks like once you are collecting SS that you will be slightly in the 22% tax bracket (unless you have income other than SS and tIRA withdrawals/Roth conversons). IOW, if I look a a MFJ over 65 in 2023 with $65k of SS and $75k of RMDs (~4% of your tIRA balances) you would be slightly in the 22% tax bracket and the effective tax rate on the RMD would be 17%. So to me, any Roth conversions that you can do at an effective tax rate of less than 17% and a marginal tax rate of 22% or lower would be ok.

The problem is that in the first few years of RMDs that the balance doesn't go down much because the withdrawal is less than investment growth.

I would look to see what the effective tax rate and marginal tax bracket is on your RMDs in the first 5 RMD years and then calibrate your Roth conversions for the next few years to be similar.

 

[RunningBum]

Don't forget to include income generated by the $487K taxable account and the passive real estate income and part-time job, if that continues.

Is that $110K of income including just the $11K wife's SS, or is it the $67,500 total?

I made an assumption that their income when RMDs hit, will be:
$75K RMD
$90K passive rental income
assume no part time job in your 70s?
$10K QDivs on taxable account
$67.5K SS

This pushes them just into the 24% marginal bracket.
If they can reduce RMDs to $65K with conversions now, they will be at the top of 22%.

I did not include anything for state, which is probably only a factor if they plan to move.

I don't think the "effective tax rate" has anything to do with this decision. Conversions are taxed at the marginal rate, and reductions to the RMD by conversions save taxes at the marginal rate.

If these numbers are correct, I would convert to the top of the 22% bracket for sure, but watching IRMAA levels. Don't creep just beyond an IRMAA level. Either stop short or convert to the edge of that level.

Model what those conversions would do to your deferred accounts and see if those conversions do enough to keep you out of the 24% bracket later. Growth in the deferred accounts and passive income have to be considered too, which might make a case for converting at 24%.

 

[lem1955]

Don't forget to include income generated by the $487K taxable account and the passive real estate income and part-time job, if that continues.

Is that $110K of income including just the $11K wife's SS, or is it the $67,500 total?

I made an assumption that their income when RMDs hit, will be:
$75K RMD
$90K passive rental income
assume no part time job in your 70s?
$10K QDivs on taxable account
$67.5K SS

Current Income is $11K wife's SS, $82,000 passive real estate partnership (will probably grow some), $15K Part time job will probably end in early 70's - doing it to satisfy need to be engaged, learning, sharing what I know. It's a business coaching gig with a non-profit.

The Inherited IRA needs to be drawn down within the next 10 years. And we may need some cash to move to a CCRC in the next 3 -4 years, so instead of ROTH conversion, I'm focused on moving that Inherited IRA money to the Taxable account.

I think I've settled on withdrawing up to the top of 1st tier IRMAA level $246,000 and moving what we don't need to that taxable account for the next two years.

THANKS for the responses!

 

[Out-to-Lunch]

And we may need some cash to move to a CCRC in the next 3 -4 years, so instead of ROTH conversion, I'm focused on moving that Inherited IRA money to the Taxable account.

If you are taking money out of a deferred account and paying taxes on it, why wouldn't you prefer to put it into a Roth account, rather than a taxable account?

 

[lem1955]

If you are taking money out of a deferred account and paying taxes on it, why wouldn't you prefer to put it into a Roth account, rather than a taxable account?

I think I'll need some for the CCRC buy-in. If I can, I'll put some in the ROTH too. And I can't convert from Inherited to ROTH.

 

[Out-to-Lunch]

I think I'll need some for the CCRC buy-in. If I can, I'll put some in the ROTH too. And I can't convert from Inherited to ROTH.

I understand about the inherited IRA. But I don't understand why you prefer the CCRC money to be in a taxable account. You can just withdraw from a Roth when you need the cash, and you won't pay tax on any gains.

 

[lem1955]

I understand about the inherited IRA. But I don't understand why you prefer the CCRC money to be in a taxable account. You can just withdraw from a Roth when you need the cash, and you won't pay tax on any gains.

It's a good point. But I've been advised to draw down the Inherited IRA before the tIRA because I can use the tIRA for a share of the CCRC medical expenses throughout my life and I have only 10 years to draw down the Inherited IRA. I've already set up AA in each account per that advice.

 

[Koolau]

I understand about the inherited IRA. But I don't understand why you prefer the CCRC money to be in a taxable account. You can just withdraw from a Roth when you need the cash, and you won't pay tax on any gains.

I don't know about anyone else, here, but I just don't see using my Roths until everything else is gone. Too many advantages to my Roths (and I w*rked too hard at getting my Roths) to cash them in. I suppose under the right situation (maybe to avoid a "cliff" like IRMAA) I might consider busting a Roth.

Just my particular point of view, I guess so YMMV.

 

[pb4uski]

^^^ I pretty much agree. I suspect I will be doing Roth conversions to the top of the 12% bracket until RMD age and perhaps even thereafter, and then relying on taxable account money first and Roth conversions once the taxable account money is gone.

 

[Out-to-Lunch]

I don't know about anyone else, here, but I just don't see using my Roths until everything else is gone. Too many advantages to my Roths (and I w*rked too hard at getting my Roths) to cash them in. I suppose under the right situation (maybe to avoid a "cliff" like IRMAA) I might consider busting a Roth.

Just my particular point of view, I guess so YMMV.

I know you have expressed this before, but it is still irrational. It's not irrational to tap the Roths last -- I probably will as well (unless a lumpy expense makes that my best option). But it is irrational to avoid putting money into a Roth (if it is otherwise advantageous) just because you don't have the cojones to take the money out when you need it.

YCMV.

 

[Koolau]

But it is irrational to avoid putting money into a Roth (if it is otherwise advantageous) just because you don't have the cojones to take the money out when you need it.

YCMV.

Was one of us out of the room when you heard what I said?



I never avoided putting money into a Roth. I put a lot of money into Roths from tIRAs. AND I WOULD take money out of a Roth if I needed it. I've just planned NOT to need it until the very end of my stash.

 

[Badger]

I don't know about anyone else, here, but I just don't see using my Roths until everything else is gone. Too many advantages to my Roths (and I w*rked too hard at getting my Roths) to cash them in. I suppose under the right situation (maybe to avoid a "cliff" like IRMAA) I might consider busting a Roth.

Just my particular point of view, I guess so YMMV.

+1

I wish I could put a larger amount of tIRA into a Roth for the simple reason to try and reduce the large increase in income tax for my wife if I go first. As it is now the RMDs from each of us (and the SS and small pensions) will be enough to keep us in sufficient cash.
If not for that I would not be concerned.

Cheers!

 

[Out-to-Lunch]

Was one of us out of the room when you heard what I said?



I never avoided putting money into a Roth. I put a lot of money into Roths from tIRAs. AND I WOULD take money out of a Roth if I needed it. I've just planned NOT to need it until the very end of my stash.

Well, if that was all you meant, then it seems very odd that you quoted my post #12 to introduce that thought.

 

[Morgan22]

I think I've settled on withdrawing up to the top of 1st tier IRMAA level $246,000 and moving what we don't need to that taxable account for the next two years.

You should be safe having income of up to $262,000 this year to max out the 1st IRMAA tier.

See TFB post. https://thefinancebuff.com/medicare-irmaa-income-brackets.html#htoc-2025-irmaa-brackets
Scroll down a little to the 2025 IRMAA brackets, and 0% inflation part of his post.

 

[Koolau]

Well, if that was all you meant, then it seems very odd that you quoted my post #12 to introduce that thought.

I quoted you because I personally do not plan to spend my Roths until the last of my stash (with exception for certain tax events that I don't yet envision.) IOW my plan differs from yours. No biggie, one way or another, but not worth a food fight.