Please double check my logic on RMD

[joesxm3]

I currently have two more years on ACA, so that pretty much limits my maximum AGI and how much I might convert to ROTH. I probably plan to defer SS until 70. I am starting to try to calculate what my RMD hit will be and to figure out how that might affect my ROTH conversion strategy.

For the sake of argument, let's use the following:

Estimated annual SS: $40,800
Est. investment income: $12,000
Est. RMD $40,000 (based on some online calculator)
Single
Approximate annual expenses (including taxes): $70,000

It seems I will have to pay tax on "up to 85% of SS income". Does that mean I add 85% of SS into AGI? What controls the "up to" part?

Assuming 85% SS taxed and $12,000 standard deduction, I calculate taxable income around $74,680, which is in the 22% bracket. Even if only 50% SS taxed, it would still be 22% bracket.

So, it would seem that once ACA is not a factor, and I can have AGI more than the $40,000 I limit it to now, doing ROTH conversions up to the top of the 22% bracket seems to not be lower than my expected RMD-time bracket.

Would converting to ROTH at 22% be advantageous if I planned to leave the money in the ROTH as long as possible, i.e. shielding the gains?

What about keeping AGI in the 12% bracket and selling appreciated equities with the 0% LTCG rate? 0% LTCG seems to save 15%, while ROTH saves 10% (i.e. 22% rate - 12% rate). Of course, that would limit the total amount I could play with. Maybe do ROTH one year and LTCG the next?

I suppose the unknown future tax rate would also influence the decision. I tend to lean towards tax rates increasing over time due to the fiscal mess our country is in.

Any input or correction to my initial calculations will be appreciated.

Thanks.

Joe

 

[pb4uski]

If you defer until 70, you'll have ~5 years of no ACA constraints before SS starts assuming Medicare at 65.

If you took IRA withdrawals to the top of the 12% tax bracket for those 5 years that would drain $290k from your IRA [($70k spend - $12k inv income)* 5 years] and that $70k of income would result in $58k of TI and put you solidly in the 22% tax bracket.

You could then add Roth conversions to the top of the 22% tax bracket at 22% or LTCG at 15%... I'd probably lean to the Roth conversions to reduce RMDs once you turn 70.

 

[joesxm3]

Your assumption that I would have to withdraw $70,000 subject to tax made me realize that I forgot to mention that I have some cash in my taxable account that I can use for my annual expenses if I want to.

That would allow me to do the scenario where I limit my AGI to the 12% bracket for some years and harvest the 0% LTCG rate. At the moment I have about $54,000 of unrealized LTCG, so that might mean two years of 12% bracket limit and LTCG at 0% and three years of ROTH conversions up to the top of 22%.

Would this change your advice?

For the next two ACA years, since I am limiting my AGI anyway, would it make sense to do the 0% LTCG while on ACA (and not do ROTH) and then push ROTH to top of 22% once ACA is over?

 

[pb4uski]

.... For the next two ACA years, since I am limiting my AGI anyway, would it make sense to do the 0% LTCG while on ACA (and not do ROTH) and then push ROTH to top of 22% once ACA is over?

Yes, focus on LTCG for the next 2 years to get past ACA, then tax-deferred withdrawals and Roth conversions to reduce tax-deferred balances and future RMDs.

 

[joesxm3]

Thanks for the reply here and for all the previous help you have given me.

 

[kaneohe]

.............................
It seems I will have to pay tax on "up to 85% of SS income". Does that mean I add 85% of SS into AGI? What controls the "up to" part?

.........................................................

Joe

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf
see the wksht on p. 33 to calculate how much of SS is taxable. Do a few examples and you will get the idea. The amount of your other controls the
"up to" part. When your other income is low enough, none of your SS is taxable. When your other income is high enough, 85% of your SS is taxable.
In between, it varies . The metric for the calculation is 50% of SS plus your other income.

 

[RunningBum]

If you're still not quite getting the idea after reading that IRS publication, run your numbers through a tax program. There are some skinny tax estimators you can run, but I'd probably do it through whichever tax software you use for filing. That way you can actually view the forms and see details such as exactly how much SS is being taxed, and if that finally levels out to where the full 85% is being taxed. You'll actually see your effective tax rate dip after this because you've gotten over the SS tax hump where every new dollar is not only taxed, but pushed 85 cents of SS into being taxed.

 

[pb4uski]

or better yet:

For the 2019 tax year, single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income was more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.

https://smartasset.com/retirement/is-social-security-income-taxable

Combined income = 1/2 of your SS benefits + all other income = 1/2 of $40,800 + $12,000 = $32,400 before any Roth conversion amounts... close to the $34,000 base amount lit for 85%.

 

[kaneohe]

or better yet:

"For the 2019 tax year, single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income was more than $34,000, you will pay taxes on up to 85% of your Social Security benefits."

https://smartasset.com/retirement/is...income-taxable


............................................

I believe this statement from the link , while it may be true,is a bit misleading. It gets off innocent with those "weasel words" questioned by OP...... "on up to....."

If your "combined" income is $25,002 (w/ $25,000 SS and $12,502 other income, one might get the idea that "on up to 50% of SS is taxable". In fact , the amount that is taxable is $1.............50% of the amount that combined
income is above the lower threshold of $25K.

Again,if your "combined" income is 34,010 (w/$34,000 SS and $17010 in other income,one might get the idea that up to 85% of SS is taxable. In fact, the amount that is taxable is $4509..............which is 50% of the difference of the 2 threshold limits (25K/34K) plus 85% of the amount over the upper limit (34K).

Using a calculator like this one https://www.mortgagecalculator.org/calcs/1040-calculator.php
is useful for getting a feel for the numbers but going thru the actual calculation
on paper might be more useful for understanding.

 

[RunningBum]

I believe this statement from the link , while it may be true,is a bit misleading. It gets off innocent with those "weasel words" questioned by OP...... "on up to....."

If your "combined" income is $25,002 (w/ $25,000 SS and $12,502 other income, one might get the idea that "on up to 50% of SS is taxable". In fact , the amount that is taxable is $1.............50% of the amount that combined
income is above the lower threshold of $25K.

Again,if your "combined" income is 34,010 (w/$34,000 SS and $17010 in other income,one might get the idea that up to 85% of SS is taxable. In fact, the amount that is taxable is $4509..............which is 50% of the difference of the 2 threshold limits (25K/34K) plus 85% of the amount over the upper limit (34K).

Using a calculator like this one https://www.mortgagecalculator.org/calcs/1040-calculator.php
is useful for getting a feel for the numbers but going thru the actual calculation
on paper might be more useful for understanding.

This is why I recommend using Turbo Tax or similar, and look at how adding $100 or $1000 changes SS benefit taxation on 1040 lines 5a and 5b, and the Social Security Benefit Worksheet.

 

[kaneohe]

This is why I recommend using Turbo Tax or similar, and look at how adding $100 or $1000 changes SS benefit taxation on 1040 lines 5a and 5b, and the Social Security Benefit Worksheet.

The mortgage 1040 link calculator does list the taxable amount of SS in the
data input form.