Have Any Of You Tried to Figure Out Your Tax Equilibrium Rate?

[Kings over Queens]

You owe it to yourself to do the calcs to figure out how your current tax bracket/rates will compare to same when all your income sources have kicked in.

It's a lot of guess work and projections because we don't know what tax rates or tax brackets will be 16 years from now, when we would otherwise be forced into RMDs. It feels like playing a shell game. lol

 

[Midpack]

It's a lot of guess work and projections because we don't know what tax rates or tax brackets will be 16 years from now, when we would otherwise be forced into RMDs. It feels like playing a shell game. lol

Just start with current tax rates extended out. And see how that plays out. Then ask yourself if you think it’s likely they go down.

All financial planning involves some assumptions and projections.

 

[RunningBum]

It's a lot of guess work and projections because we don't know what tax rates or tax brackets will be 16 years from now, when we would otherwise be forced into RMDs. It feels like playing a shell game. lol

I hear that a lot as a reason not to convert, but it seems there would be a lot of risk they could be higher later. My own plan is to convert some now to reduce that risk.

 

[pjigar]

Is this your spreadsheet? it's in view only mode and tells me to ask the owner for access to edit.

Yes, this is my spreadsheet and it is view-only. You create your own copy and then you can edit your copy.

 

[pjigar]

This is what I struggle with in terms of conversions. We're both 57 with $1,800,000 combined in tax deferred accounts and I plan to retire next year. She's been a stay home mom. Using RMD calcs assuming we were at RMD age today puts us about $21,000 below the 22% bracket, and that's easily going to be chewed up by other ordinary income or capital gains.

And don't forget that 1.8M will grow to be several times more by the time you hit RMD age. Stocks typically double every 7-9 years. Most likely, you won't be able to convert that to Roth fast enough to make even a dent unless you covert Roth up to top of the 24% bracket. Use my spreadsheet to get some idea about where you might end up in RMD with conservative rate of stock return at around 8-9%.

 

[sengsational]

As to the 1.8 growing, it might double in 7 or 9 years, but the brackets index with inflation, right? So the growth you want to calculate is whatever you think stocks will do beyond inflation.

 

[audreyh1]

And don't forget that 1.8M will grow to be several times more by the time you hit RMD age. Stocks typically double every 7-9 years. Most likely, you won't be able to convert that to Roth fast enough to make even a dent unless you covert Roth up to top of the 24% bracket. Use my spreadsheet to get some idea about where you might end up in RMD with conservative rate of stock return at around 8-9%.

Or have your IRAs hold fixed income rather than stocks. It will grow slowly barely keep up with inflation, and you have a chance of drawing it down via RMDs.

Keep your equities in taxable. Depending on the size of your IRAs versus taxable this might not be doable if you maintain a high equity allocation. Otherwise it should be possible.

 

[Kings over Queens]

And don't forget that 1.8M will grow to be several times more by the time you hit RMD age.

Something I considered and ran the projections using 7%, the account grows to $5,313,894, and using today's RMD number would be $201,283, right at the bottom of today's 24% bracket. I'm sure those brackets will adjust for inflation.

Quick math tells me I'm stuck in today's 22% to 24% brackets no matter what.

Other advantages to converting however as simplicity for my family and potentially avoiding having them forced into higher brackets should we die and they have to liquidate over 10 years.

 

[Kings over Queens]

Or have your IRAs hold fixed income rather than stocks. It will grow slowly barely keep up with inflation, and you have a chance of drawing it down via RMDs.

I thought about that last night and again this morning. It's front of mind as I figure out where best to have growth and draw down income. I may draw some as regular income after 59 1/2. Some from IRA's, some from savings, some from taxable.

 

[pjigar]

As to the 1.8 growing, it might double in 7 or 9 years, but the brackets index with inflation, right? So the growth you want to calculate is whatever you think stocks will do beyond inflation.

Historically bracket top amounts do not grow anywhere close to the stock market returns. I can't find the data source but when I created my spreadsheet, I concluded that the historical increase of tax bracket top amounts rises about 1-2% annually. I tried to account for that in my spreadsheet but I think the better approach, like you pointed out, would be to just use "real" rate of return in portfolio growth calculations. I may do this in the next version of the spreadsheet. I just created V3 sheet in the same spreadsheet. Sheet is so much cleaner now, thanks to you.

Recent IRS inflation-adjustments here:

Inflation-adjusted Tax Items by Tax Year | Internal Revenue Service

Tax benefits are preserved from the effects of rising prices.

www.irs.gov

 

[pjigar]

Quick math tells me I'm stuck in today's 22% to 24% brackets no matter what.

We fall in the same range coincidentally! It would be interesting to see how it all will change if TCJA brackets sunset actually happen. But I am not going to count my chickens before they hatch.

 

[MarieIG]

I did i-orp before it was discontinued. It did recommend some serious conversions.

 

[thatguy]

different ages, different retirement years, different years for the onset of every benefit, pensions, SS, & RMD, different longevity expectations, makes it seem complicated to spreadsheet

 

[Kings over Queens]

Yes, this is my spreadsheet and it is view-only. You create your own copy and then you can edit your copy.

I just copied it, thanks for sharing, it's very much appreciated.

 

[Hubcity]

fplan on github is a python program that makes calculations similar to i-orp. i-orp fans who don't mind taking the time to figure out a slightly daunting config file might find it interesting.

 

[sengsational]

I remember this guy had this program, but lost the link...thanks for posting @Hubcity

Fplan is only 500 lines of python code. I didn't look real closely, but didn't see anything indicating it was a linear programming solution, as I-ORP was. I asked for the I-ORP source code back in the day, but never was able to get it. It was written in FORTRAN, but I probably could have automated rewriting it to a more modern language, but James wasn't giving it up.

 

[xtradoe]

It's too late for me now, but for anyone younger, be careful of building a tax deferred balance too large, too soon. I should have been doing Roth for the earlier years and a bit into the later years while working. If you save tax deferred too much, too early, natural portfolio growth will carry you right into a higher bracket and undo all your Roth/deferred tax arbitrage plans.

Spot on....

 

[Scuba]

This is a great topic. Thanks Midpack for starting it.

We couldn’t ever contribute to Roth accounts while working. We retired 8 years ago and haven’t done many conversions. I did use I-orp and it came out somewhat neutral for us. Our income has been all over the map in retirement, partly due to some deferred comp payouts but also due to some unpredictable investment returns. We’ve done a few conversions, but not many, and I’m sure we could have taken more opportunity to convert during the years where were able to deduct large accumulated passive losses had we planned more precisely.

Now DH is on Medicare and 2025 will be my year to start it. We don’t have heirs, so our primary question is whether it makes sense to pay taxes now, reducing future growth accordingly, or just keep deferring tax for as long as we can. The AGI equalization strategy sounds reasonable to me, but I don’t have much time to figure out this year!

Thanks to all who posted spreadsheet or website links.

 

[Koolau]

It's too late for me now, but for anyone younger, be careful of building a tax deferred balance too large, too soon. I should have been doing Roth for the earlier years and a bit into the later years while working. If you save tax deferred too much, too early, natural portfolio growth will carry you right into a higher bracket and undo all your Roth/deferred tax arbitrage plans.

Spot on....

I too "shout this from the roof-tops" here on the Forum. The young'uns need to be aware that tIRAs and 401(k)s and equivalent CAN become a tax and "gotcha" trap later in life. It's important to understand how this can all play out. It gets worse for those traps and gotchas which have not been indexed for inflation.

I always emphasize starting Roths ASAP and filling tax brackets with Roth conversions once retired. I was able to follow some of my own advice, but started too late for the best results. A word to the wise and YMMV.