Limping to the finish line at 55

[pb4uski]

^^^^ I struggle with the same thing... part of the reason that I won't withdraw or convert into the 22% tax bracket is that the marginal tax rate is really high... 37% for the first amount equal to qualified dividends and LTCG since those get pushed into the 15% tax bracket in addition to the 22% rate on ordinary income. Add 6.6% state tax and that's 43.6% for a while and then 28.6%... too much for me!

I may consider converting into the 22% tax bracket once we move to a no tax state.

 

[CardsFan]

^^^^ I struggle with the same thing... part of the reason that I won't withdraw or convert into the 22% tax bracket is that the marginal tax rate is really high... 37% for the first amount equal to qualified dividends and LTCG since those get pushed into the 15% tax bracket in addition to the 22% rate on ordinary income. Add 6.6% state tax and that's 43.6% for a while and then 28.6%... too much for me!

I may consider converting into the 22% tax bracket once we move to a no tax state.

Bold by me.

And then, if I take SS at FRA (2.2 years from now), even the conversion in the 12% bracket makes the marginal rate extreme. And, to honest, a lot of this is simply pre-paying taxes for DS (unless we live to 100 AND both go in a nursing home).

First world problems

 

[Dtail]

My struggle is with converting to a Roth to the top of 12%, vs. minimizing MAGI income for ACA.
No brainer at 65 y.o., but between now (59) and 65, a more difficult choice.
Converting for DGF for now, who is on SSDI.

 

[LarryMelman]

I have the same problem. The rate on Roth conversions in the 0/10/12 brackets is really 15/25/27 because of all the qualified dividends I already have. I just have to make my peace that they will all be taxed 15%, and my conversions are taxed separately at 0/10/12. I simply have to Roth-convert.


And I'm already way over the cliff for ACA subsidies. Honestly I wouldn't be considering ER if I wasn't.

 

[pb4uski]

So it sounds like the effective rate on your conversions to the top of the 12% bracket is really ~23% (increase in tax divided by conversion amount)?

If you didn't convert, what would the effective rate on RMDs be?

 

[Dtail]

I have the same problem. The rate on Roth conversions in the 0/10/12 brackets is really 15/25/27 because of all the qualified dividends I already have. I just have to make my peace that they will all be taxed 15%, and my conversions are taxed separately at 0/10/12. I simply have to Roth-convert.


And I'm already way over the cliff for ACA subsidies. Honestly I wouldn't be considering ER if I wasn't.

Bolded by me.
Well one can still ER and be under the ACA subsidy limit, depending on the investments in the Taxable account and how it is reported.

I Roth convert ~20k for my MAGI income and have the Taxable account income reported on DGF's account who is already on Medicare. Savings of 11k in medical yearly for me.

I realize my situation is a little unique in having our financial situation tied together somewhat, but not legally.

 

[LarryMelman]

So it sounds like the effective rate on your conversions to the top of the 12% bracket is really ~23% (increase in tax divided by conversion amount)?

If you were asking me, the effective tax rate for a single on the 0/10/12% brackets is 8.8%. Add 15% to that for a total of 23.8%. But like I said, it's just as well to imagine that the conversion is taxed at 8.8% and all the qualified income is taxed at 15%. And just forget that $52K of qualified income can be taxed at 0 if there was no ordinary income. (sigh.)

If you didn't convert, what would the effective rate on RMDs be?

Well that's the $64 question, isn't it. What will brackets be in 15 years, and what will my account have grown to by then? Magic 8-ball says "Answer is hazy, try again later."

 

[Montecfo]

Montecfo, I don't have an advisor - I handle all personal finances myself. The advisor is someone I knew from my old job who took my personal info and ran a simulation using his firm's software. Since I am not a paying client, I did not get into all of the assumptions in the software, but this is a big name firm - not a mom and pop. Without getting into $ specifics, most of my assets are in tax deferred IRA, so compounding is an issue due to the balance being so high and so many years to compound from current age of 55. I will utilize i-orp and fill the 24% bracket it suggests, and rerun the program each year with fresh numbers.

I agree with much of what you said and, as I said, I am in much the same boat.

When you do Roth conversions, you are paying tax you might never have to pay (though on balance, someone will have to). The payback for those prepaid taxes takes place over your RMD lifetime, which could be 30 years. Possible filing status changes also come into play. It is complicated

Also, future returns are unknown.

For these reasons, I plan to take a more conservative tack than the one your friend/advisor suggests, for whatever that is worth.

 

[fishfactory]

The compounding argument is a fallacy..... a popular urban myth.

Let's say you have $10,000 in an IRA and are in the 22% tax bracket now and will be in the 22% tax bracket later.

Option 1.... do nothing... the $10,000 IRA doubles in x years due to investment returns to $20,000 at which point you withdraw the $20,000, pay $4,400 in taxes and have $15,600 left to spend.

Option 2... you convert to Roth and to make the comparison easy, pay the $2,200 tax out of the withdrawal, leaving $7,800 in the Roth....in x years it doubles to $15,600 which you can then spend.

Either way, all else being equal you only have $15,600 to spend.

Conversions are a tax play... clear and simple.... if your tax rate today is less than your tax rate later then it is better to convert now... if it is the same then it doesn't matter... if your tax rate today is more than your tax rate later (like you are still working) then defer converting until later.

If you pay the tax from taxable account funds then there is a minor second order benefit because you avoid paying tax on that after-tax money... but it is very minor. The real juice is from rate differences.... like my paying about 8% now on Roth conversions or tIRA whdrawals to the top of the 12% bracket vs 22% later.

That is assuming you are in the same tax bracket after the $10k doubles. Change the study from $10k to a $2.5MM IRA at age 55, and with no conversion in option 1 at age 70.5 odds are great you will be facing a higher tax bracket.

 

[LarryMelman]

Another thread mentioned "12 questions" to consider:


1. Expenses - yes, I know them very very well.
2. Expected expenses in retirement, including health insurance - yes, considered.
3. Other expenses - home/yes, parents/no need now, kids/NA.
4. Major lifestyle changes - nothing truly major planned.
5. Income sources - relying heavily on growing dividends from my taxable side. IRA/401k/Roth as a backup. Cash cushion currently about $100K on the taxable side as a backup.
6. Pension - NA.
7. SS - about $2K/mo at 62 if I worked to 62, about $1.8K/mo at 62 if I retired at 55. Not as much reduction as I expected.
8. Tax planning - yes, in detail for many scenarios.
9. Nest egg - the $1.8M/$1.2M I mentioned does not include home value.
10. Longevity - I've run FIRECalc to age 95.
11. FIRECalc - 100% with initial spend of $60K and "constant spending power" selected. Increasing the spend, I'm 100% up to annual spend of just over $119K.
12. Survivor issues - NA.

 

[pb4uski]

^^^^ So what are you waiting for.... Christmas?

 

[LarryMelman]

^^^^ So what are you waiting for.... Christmas?

Hoo boy... no way.

I'll have a final resolution within a few days.

 

[jhmccox32]

Congrats and enjoy your new life!!

 

[Sugarmountain]

Hoo boy... no way.

I'll have a final resolution within a few days.

I am currently struggling with some similar issues and may do a full post on my situation. I think it sounds like you may have the same problem that I do where you are looking at it like a cliff where I'm either "retired and never working again" or continuing my current job indefinitely. Logically, I realize that this is not that case that I could do something else, but emotionally I'm not there. (I also would be leaving a bunch of unvested equity that I'm struggling to leave behind even though I probably don't need the money.)

 

[Dean56]

Hoo boy... no way.

I'll have a final resolution within a few days.

Any updates yet?? From your previous posts, it sounds like you're ready for FIRE.

 

[LarryMelman]

Any updates yet?? From your previous posts, it sounds like you're ready for FIRE.

There's a little "negotiation" to be done, and then I'll be on my way.

 

[flyingaway]

I have read this thread three times. If I were you, I would NOT worry about if I have enough money or how to do the Roth conversion.

I would worry about how to spend the money. You do not have a family, so you have all the freedom and "obligation" to spend all the money. I would spend my time to figure out a plan to spend $100K a year before it is too late.

 

[LarryMelman]

I would spend my time to figure out a plan to spend $100K a year before it is too late.

Your profile doesn't have any detail, but you have been on this site for several years. I'll assume your comment was written in good faith. Please explain your advice in more detail. Why do I need to spend $100K a year?

 

[SnowballCamper]

Your profile doesn't have any detail, but you have been on this site for several years. I'll assume your comment was written in good faith. Please explain your advice in more detail. Why do I need to spend $100K a year?

I guess you don't *need* to spend that much. But the back of the envelope calculation of a 4% withdrawal rate 0.04*3,000,000=120,000

If you are not spending at least 100k a year you'll die with a lot of money, and if I recall from earlier, you don't have descendants to inherit it. Will looking at the big bank statement give you that much pleasure if you're on your death bed?

It could, but probably not for most of us.

 

[HI Bill]

As someone without kids, and who experienced the death of a parent last year, I've been thinking about what happens to our home, our stuff, and our investments, when we are gone. Who comes in and cleans up the house, sells the stuff, and distributes the assets? Charities are identified as beneficiaries with the brokerage firms, but who gives them the death certificate?

Guess we need to identify an executor if we care?

P.S.
Agree, unless the OP wants to leave a lot to charities, it's time to Blow that Dough.

 

[nancyfrank232]

As someone without kids, and who experienced the death of a parent last year, I've been thinking about what happens to our home, our stuff, and our investments, when we are gone. Who comes in and cleans up the house, sells the stuff, and distributes the assets? Charities are identified as beneficiaries with the brokerage firms, but who gives them the death certificate?

Guess we need to identify an executor if we care?

P.S.
Agree, unless the OP wants to leave a lot to charities, it's time to Blow that Dough.

I would strongly recommend against using your kids as Executor. Unless you hate them