Retirement Tax Planning - Income Optimization?

[Midpack]

It took more than a week to hear back from Heritage for some reason. I would love to have access to right capital but directly it's priced for advisors ($150/mo 1 yr commitment). And I refuse to use PayPal anymore so I can't take advantage of the Heritage access to right capital either. I would have paid Josh to do a retirement spending plan for me, but his only packages were $2500 for a complete analysis (I'm already retired so I don't need any front end analysis) or $500 for investment analysis only (which is not what I want). So I was hopeful but I'm back to square one...

 

[fishfactory]

Mid,
I paid Josh $150 and have access for as long as he keeps using it, and will not have to make any more payments. I didn't have an issue using paypal. I don't know what issues you have with paypal, but I am glad to have access to the software for such a low price.

 

[BeachOrCity]

I don't see how you can write a credible article about retirement tax planning and Roth conversions and not discuss extensively the ACA subsidy cliff. His examples show folks under 65, the majority of which don't have access to non-aca medical plans thru a previous employer or the gov't.

For a married couple in late 50's / early 60's this subsidy can easily be 10K plus per year.

 

[bingybear]

I don't see how you can write a credible article about retirement tax planning and Roth conversions and not discuss extensively the ACA subsidy cliff. His examples show folks under 65, the majority of which don't have access to non-aca medical plans thru a previous employer or the gov't.

For a married couple in late 50's / early 60's this subsidy can easily be 10K plus per year.

I wouldn't say that it needs extensive coverage. It is simple enough once you show what it is. I would agree it should be covered for the uninitiated. But there are bigger issues for some later in retirement if they are not careful.

 

[Midpack]

Though rightcapital looked like a very helpful tool and I was anxious to give it a go, I just couldn't find a cost effective way to use it. [fishfactory: I got burned by PayPal a while back and I refuse to use them for the foreseeable future].

So I signed up for https://www.incomestrategy.com/ today, and it looks interesting. It doesn't just give me the optimal plan (that I've found) but it lets me compare as many withdrawal schemes as I want, lets me model Roth conversions anyway I want, and lots of variables/flexibility. Worst case I'm out $20 (it's $20/mo but no contract), but if it works well I may upgrade to the $50/mo plan and even use their $125/hr consulting to confirm my results.

We'll see how it goes, so far so good.

 

[BeachOrCity]

I wouldn't say that it needs extensive coverage. It is simple enough once you show what it is. I would agree it should be covered for the uninitiated. But there are bigger issues for some later in retirement if they are not careful.

Bigger?

A 10K tax credit at 22% tax bracket equals about $45K tax deduction which is about equal to the RMD on a $1M non Roth 401K / IRA in ones early 70's.

So I would say the issues deserve equal coverage. Especially since the tax credit goes away never to be recovered, whereas the RMD is just forcing the distribution and taxation of an account that will be taxed eventually either by the holder or the holders heirs.

Simple?
Also, the issue is not "simple" just to be mentioned. The credit is complex, varies by ones age and state. In fact I suspect that the author completely ignored it because modeling the interaction of future RMDs and current ACA tax credits is extremely complex.

What the author could have said is IF one is potentially needing ACA insurance and is eligible for tax credits, one should proceed with caution on RMD's and in most cases never push MAGI above 400% of FPL (but if one can keep their income under 300 or 200% of FPL, there are even more credits to be taken advantage of).

 

[Dtail]

Bigger?

A 10K tax credit at 22% tax bracket equals about $45K tax deduction which is about equal to the RMD on a $1M non Roth 401K / IRA in ones early 70's.

So I would say the issues deserve equal coverage. Especially since the tax credit goes away never to be recovered, whereas the RMD is just forcing the distribution and taxation of an account that will be taxed eventually either by the holder or the holders heirs.

Simple?
Also, the issue is not "simple" just to be mentioned. The credit is complex, varies by ones age and state. In fact I suspect that the author completely ignored it because modeling the interaction of future RMDs and current ACA tax credits is extremely complex.

What the author could have said is IF one is potentially needing ACA insurance and is eligible for tax credits, one should proceed with caution on RMD's and in most cases never push MAGI above 400% of FPL (but if one can keep their income under 300 or 200% of FPL, there are even more credits to be taken advantage of).

Agree with you.
My brother and I each receive 11k in tax subsidies and thus will hold off on any Roth conversions until 66 y.o. for me (Pension for me at 65 and he doesn't have a TIRA).
I will spend down some TIRA starting next year at 60 y.o., which should assist somewhat in reducing the tax torpedo.

 

[pb4uski]

....the first plan I got back showed MASSIVE taxes in the first two years, like $150,000 each year - more than 15 times what I am paying now. And then it tailed off to lower, but not low taxes thereafter. I'd want to talk that through with someone to better understand - I don't know that I could be talked into a tax hit like that. ...

+1 if I run with no conversions and unlimited conversions and 22% bracket conversions the disposal income amounts are all within $2k a year or each other... so it seems to be a matter or paying now or paying later.

The unlimited conversion would have a huge conversion in year 1 followed by signigicant conversions in years 2-3 and the 22% bracket limit would have significant conversions for the first 3 years.

My current plan is to convert to the top of the 0% capital gains tax bracket for 2019, and possibly to the top of the 22% tax bracket for a few years once we are clear of state income taxes.

While I concede that intellectually it might make sense to get $$$ into the Roth where it can grow tax free asap and my home grown model seems to confirm that too.... I can't get myself to adopt a strategy that voluntarily writes such big checks to the IRS.

 

[Midpack]

+1 if I run with no conversions and unlimited conversions and 22% bracket conversions the disposal income amounts are all within $2k a year or each other... so it seems to be a matter or paying now or paying later.

The unlimited conversion would have a huge conversion in year 1 followed by signigicant conversions in years 2-3 and the 22% bracket limit would have significant conversions for the first 3 years.

My current plan is to convert to the top of the 0% tax bracket for 2019, and possibly to the top of the 22% tax bracket for a few years once we are clear of state income taxes.

While I concede that intellectually it might make sense to get $$$ into the Roth where it can grow tax free asap and my home grown model seems to confirm that too.... I can't get myself to adopt a strategy that voluntarily writes such big checks to the IRS.

For other readers, you're quoting what I said a few days ago re: i-ORP.

I have moved on to https://www.incomestrategy.com/ - and it's very interesting. Income Strategy is also recommending substantial Roth conversions, but not quite as much as i-ORP. However, Income Strategy is also recommending I change most of our taxable holdings to other holdings in one fell swoop, most in the same asset classes I am already holding (though several funds > ETFs), which would result in HUGE cap gains taxes in 2020 and a $300K plus tax hit . That seems beyond crazy to me, but they do not sell funds or take commissions, so they gain nothing directly as far as I can tell. And they're going to explain their reasoning in a one on one call in the next few days, anxious to hear their reasoning. I am sitting on huge LTCGs and I will have to take them sooner or later, but why take most of the hit in one year to end up with a similar AA, just different holdings?

And I agree while I could save a little on taxes overall with Roth conversions (mostly pay it now or pay it later), it's not that much. Only benefit seems to be leaving more tax options to heirs when we go poof, but without kids that's not our top priority...

 

[SnowballCamper]

And they're going to explain their reasoning in a one on one call in the next few days, anxious to hear their reasoning. I am sitting on huge LTCGs and I will have to take them sooner or later, but why take most of the hit in one year to end up with a similar AA, just different holdings?

I'm anxious to hear the gist of what they say.

 

[pb4uski]

+1... because I have huge unrealized capital gains in my taxable account and am currently prioritizing tIRA withdrawals/Roth conversions over spending taxable money so to have more headroom to do tIRA withdrawals/Roth conversions to reduce future RMDs and the dreaded tax torpedo (or at least reduce the depth and time that we are in the 22% tax bracket later).... the unrealized gains will become tax free upon our passing due to stepped up basis.

 

[CardsFan]

Just for kicks, and prompted by this thread, I went to i-orp again to run a few scenarios. Everything from no conversions to converting to the top of the 24% bracket. The projected annual spend only changed by $1,000 (and is twice of what we currently spend).

So, barring a step change in the rules, like the SECURE act, that would impact our heir, I'll just continue to convert in the 12% bracket.

 

[BeachOrCity]

For other readers, you're quoting what I said a few days ago re: i-ORP.

I have moved on to https://www.incomestrategy.com/ - and it's very interesting. Income Strategy is also recommending substantial Roth conversions, but not quite as much as i-ORP. However, Income Strategy is also recommending I change most of our taxable holdings to other holdings in one fell swoop, most in the same asset classes I am already holding (though several funds > ETFs), which would result in HUGE cap gains taxes in 2020 and a $300K plus tax hit . That seems beyond crazy to me, but they do not sell funds or take commissions, so they gain nothing directly as far as I can tell. And they're going to explain their reasoning in a one on one call in the next few days, anxious to hear their reasoning. I am sitting on huge LTCGs and I will have to take them sooner or later, but why take most of the hit in one year to end up with a similar AA, just different holdings?

And I agree while I could save a little on taxes overall with Roth conversions (mostly pay it now or pay it later), it's not that much. Only benefit seems to be leaving more tax options to heirs when we go poof, but without kids that's not our top priority...

When you speak to them maybe you can you ask why one should convert and take gains when it pushes them into the 3.8% add on tax as well as possibly the 20% bracket?

Also ask why if one is in a high cost state now why they recommend this when one might move to a lower cost state in the future.

Do they model for these scenarios? Do they mode for aca subsidies?

Also the quick calf has earliest retirement year as age 60

Sorry for piling on the questions!

 

[SoReady]

For other readers, you're quoting what I said a few days ago re: i-ORP.

I have moved on to https://www.incomestrategy.com/ - and it's very interesting. Income Strategy is also recommending substantial Roth conversions, but not quite as much as i-ORP. However, Income Strategy is also recommending I change most of our taxable holdings to other holdings in one fell swoop, most in the same asset classes I am already holding (though several funds > ETFs), which would result in HUGE cap gains taxes in 2020 and a $300K plus tax hit . That seems beyond crazy to me, but they do not sell funds or take commissions, so they gain nothing directly as far as I can tell. And they're going to explain their reasoning in a one on one call in the next few days, anxious to hear their reasoning. I am sitting on huge LTCGs and I will have to take them sooner or later, but why take most of the hit in one year to end up with a similar AA, just different holdings?

And I agree while I could save a little on taxes overall with Roth conversions (mostly pay it now or pay it later), it's not that much. Only benefit seems to be leaving more tax options to heirs when we go poof, but without kids that's not our top priority...

I’d be interested in how your meeting goes with them as well. I have enlisted them and received guidance to the high levels of Roth conversions, which I then tried to educate them on how it is beneficial to keep my magi low for ACA subsidy purposes. That took pretty much most of the 2nd hour meeting I had with them.

The first hour meeting ended up being guided through the software and the numerous settings that a required to make it work properly. I found this to be frustrating considering these hourly sessions cost money. But if I had proceeded without the correct settings that would not good too.

All in all I have somewhat better handle on the software and the strategies it is providing, but honestly, I pretty much knew that is what I needed to do. It is helpful to see the year by year numbers but I will probably be dropping this service soon.

 

[pb4uski]

Maybe they should offer to do a webcast or webinar on their software and services for e-r.org members.

 

[Midpack]

+1... because I have huge unrealized capital gains in my taxable account and am currently prioritizing tIRA withdrawals/Roth conversions over spending taxable money so to have more headroom to do tIRA withdrawals/Roth conversions to reduce future RMDs and the dreaded tax torpedo (or at least reduce the depth and time that we are in the 22% tax bracket later).... the unrealized gains will become tax free upon our passing due to stepped up basis.

I exchanged emails with them (free), and I suspect the huge one time capital gains tax hit in most of the recommended strategies will be easily undone, but I won’t speculate here how - even though I’m pretty sure I know how/why it’s part of the results. I suspect there will be simple tweak in settings that will undo the 2020 LTCG tax hit that I’ll confirm in the one on one session. Otherwise the plan looks pretty good for $20/mo plus optional upcoming $125 session. It’s not meant for everyone, but our situation is relatively straightforward, may be all I need.

 

[RobLJ]

This thread makes my haid hurt, with all the myriad of factors. I may play around with I-ORP, but for now, I'm withdrawing to the top of the 12% bracket and putting unused funds into a brokerage account which I tap as needed. We spent 29k on solar panels, so I wound up using more of the withdrawals this year than originally intended, but that's a one-off.
Later, after DW can withdraw from her IRAs without penalty and the taxable account is 50% larger, I'll stash unused funds (usually about 20-30% of withdrawals) in a Roth. Right now, I'm only withdrawing from my 403b and can only withdraw 3x/year, so I'd prefer to build up the brokerage and draw CEF muni dividends or 15% LTCG from it.

I'm reluctant to pay 22% on aggressive withdrawals above the 12%, although I suspect I-ORP will suggest it.

 

[Midpack]

This thread makes my haid hurt, with all the myriad of factors. I may play around with I-ORP, but for now, I'm withdrawing to the top of the 12% bracket and putting unused funds into a brokerage account which I tap as needed. We spent 29k on solar panels, so I wound up using more of the withdrawals this year than originally intended, but that's a one-off.
Later, after DW can withdraw from her IRAs without penalty and the taxable account is 50% larger, I'll stash unused funds (usually about 20-30% of withdrawals) in a Roth. Right now, I'm only withdrawing from my 403b and can only withdraw 3x/year, so I'd prefer to build up the brokerage and draw CEF muni dividends or 15% LTCG from it.

I'm reluctant to pay 22% on aggressive withdrawals above the 12%, although I suspect I-ORP will suggest it.

Unfortunately it's pretty clear to me withdrawing to the 12% bracket isn't the most tax efficient/income-residual maximizing strategy for us over the life of our projected retirement. We'd have low taxes now, and get creamed later even if tax rates remain unchanged - which seems unlikely. I wish it was easier, but it's just not, so I am willing to work through it as long as I can see detailed baselines and strategies for comparison. Income strategy may do that for me, at a very low cost - as little as $20 for a lot of detail, though I will happily spend more for good data.

i-ORP is a wonderful value (can't beat free), but the lack of control (or indirect at best) over spending makes me uncomfortable. I'm not sure entering a surplus is the same as reducing spending...

 

[RunningBum]

+1 if I run with no conversions and unlimited conversions and 22% bracket conversions the disposal income amounts are all within $2k a year or each other... so it seems to be a matter or paying now or paying later.

The unlimited conversion would have a huge conversion in year 1 followed by signigicant conversions in years 2-3 and the 22% bracket limit would have significant conversions for the first 3 years.

My current plan is to convert to the top of the 0% capital gains tax bracket for 2019, and possibly to the top of the 22% tax bracket for a few years once we are clear of state income taxes.

While I concede that intellectually it might make sense to get $$$ into the Roth where it can grow tax free asap and my home grown model seems to confirm that too.... I can't get myself to adopt a strategy that voluntarily writes such big checks to the IRS.

Funny how we all have our own little biases. I'm the opposite way, it bugs me to have that tax liability over my head, and I have to resist the urge to purge it all immediately. I don't believe that would be a good strategy for me though, so I don't.

$2K a year seems like a big enough deal to me to pick that way over another. It's probably not guaranteed because you have to make assumptions about growth, future taxes, etc, but it's essentially free money. You may have to pay more taxes up front, but that's all baked into the calculations. But you didn't say which method got you $2K/yr more.

It would make sense to me to do less now if I was moving to a lower or no tax state.

 

[pb4uski]

.... It would make sense to me to do less now if I was moving to a lower or no tax state.

The likely move to a no income tax state in 2020 is a lot of why I'm not so hot to trot on big conversions right now.... I can be patient.... once we are free of state income taxes I'll study it closer.... like Midpack and others are doing now.

 

[rkser]

A very informative thread, want to follow along.

 

[SevenUp]

i-ORP is a wonderful value (can't beat free), but the lack of control (or indirect at best) over spending makes me uncomfortable. I'm not sure entering a surplus is the same as reducing spending...

As the traditional vs. Roth choice (both for contributions and conversions) boils down to marginal rate (primarily tax, but also IRMAA and other tax-like actors) analysis, if
- I-ORP is calculating your marginal rates accurately, its suggestions are probably good for you.
- I-ORP is not calculating your marginal rates accurately, its suggestions may not be good for you, depending on how inaccurate.

 

[Senator]

Many people are already at 85% so the impact of your scheme is probably not substantial.

I can see a plan coming where SS is offset by Roth Withdrawals.

Perhaps they allow a bit, up to $36K of SS and Roth combined, then deduct $1 from SS for every $1 that is withdrawn from a Roth. It would not be a tax, just a lowering of SS payments.

It would only affect a few high-earners, much like many of the current taxes.

 

[pb4uski]

I can see a plan coming where SS is offset by Roth Withdrawals.

Perhaps they allow a bit, up to $36K of SS and Roth combined, then deduct $1 from SS for every $1 that is withdrawn from a Roth. It would not be a tax, just a lowering of SS payments.

It would only affect a few high-earners, much like many of the current taxes.

You're such a visionary.....especially considering there isn't a proposal out there anywhere that is near to what you describe.

While we're at it, what is the stock market going to return in 2020?

 

[GenXguy]

Agree with you.
My brother and I each receive 11k in tax subsidies and thus will hold off on any Roth conversions until 66 y.o. for me (Pension for me at 65 and he doesn't have a TIRA).

If the ACA is still around, as a single person, I expect to receive a similar amount in ACA PCT and CSR combined per year over 9+ years, while RMDs will never put me in a higher tax bracket. I have this all plotted out in a spreadsheet. Tax rates on existing/adjusted brackets could go up 15 years in the future, but that wouldn't offset higher taxes now combined with $100,000 in lost tax credits and subsidies. Maybe I'm just not rich enough - only $500K in my 457 and have double that in post tax investments.