Wish I Knew How To Optimize LTCG STCG Div Int Roth Convs IRMAA My/DW SS My/DW RMDs...

[ImThinkin2019]

Did Secure 2.0 pass the Senate?

I don't think so, yet. The last reading I did on it was that the Senate added some things to it which must be approved. But since the House passed it overwhelmingly, it seems likely that the Senate will approve it. My opinion, anyway.

 

[Exchme]

Sounds great. Can you adjust the tax burden? Is there a
"Tax Cuts and Jobs Act" (TCJA) feature you can add and subtract?

Yes, in each scenario, you set the year for the program to revert to the old law, including the old exemptions, AMT rules, SALT rules, etc., with inflation adjustments as appropriate. I believe that since Pralana Gold has been around for nearly a decade, that the programmer left all the old code in place when TCJA was enacted, so it just selects which one to use.

 

[Exchme]

I don't think so, yet. The last reading I did on it was that the Senate added some things to it which must be approved. But since the House passed it overwhelmingly, it seems likely that the Senate will approve it. My opinion, anyway.

I think you'll find the proposed Secure 2.0 won't make a noticeable difference. In general, you should level out your income tax brackets over time, so delaying the RMD start date will mean you should still be withdrawing from your IRA from age 72-74 anyway, but you get to do more as Roth Conversions instead of just putting the money in taxable like an RMD.

Offsetting that is that you still have to live, drawing cash from somewhere, either from your tax deferred (so not all the IRA withdrawals may be Roth conversions) or selling appreciated (hopefully!) assets in taxable, which generates new lifetime taxes.

I approximated the effect of Secure 2.0 in Pralana Gold for my situation. I found the RMDs for the ages 72-74, inflation adjusted that and entered that as a "Personal Contribution to Tax Deferred Accounts" on the "Income" tab. That put the money back in the tax deferred without paying tax on it, effectively deferring the RMD. I found it slightly changed my best Roth conversion plan, but ended up at almost precisely the same estate value as a case without Secure 2.0.

Congress likes Secure 2.0 because it sounds good to voters, but at least in my case, it's completely trivial.

 

[TheWizard]

I think you'll find the proposed Secure 2.0 won't make a noticeable difference. In general, you should level out your income tax brackets over time, so delaying the RMD start date will mean you should still be withdrawing from your IRA from age 72-74 anyway, but you get to do more as Roth Conversions instead of just putting the money in taxable like an RMD...

I call that levelizing your AGI and I totally agree.
I'm 72 this year, so doing RMDs but I'll still do a small Roth conversion in December up close to the next higher projected IRMAA threshold...

 

[Koolau]

I call that levelizing your AGI and I totally agree.
I'm 72 this year, so doing RMDs but I'll still do a small Roth conversion in December up close to the next higher projected IRMAA threshold...

Yeah, isn't that sad that we've given up worrying about tax level and now worry about the cliffs like IRMAA? I'm playing that game as well. I have too much in my 401(k) and must deal with it. I know there are much worse problems to have, but it has become a real issue, trying to titrate my withdrawals. It's hard being me!

 

[New Thinking]

Tax Torpedo

There are other Roth conversion threads on this aspect, especially ones that reference the Santa Clara professor who wrote an article suggesting they were a maybe at best as well. It is situation-dependent. For example, with a couple of kids in college and the ability to claim the AOTC, I can do Roth conversions in the low five figure range at 0% federal tax. Since I'll be probably pay 26% at age 75 between federal and IRMAA (which the SSA has me at about a 70% chance of reaching), it's more than a maybe for me personally.



Interesting. I always thought the tax torpedo was the high marginal rates in one's 70s and beyond due to large RMDs and SS, for those with significant traditional IRAs and SS benefit amounts. For me I do Roth conversions (and maybe QCD's; we'll see) to try to stay out of the 32% (plus about 13% IRMAA for a total of about 45%) bracket in case I make it to my 80's. I thought Ed Slott coined the term and used it as I describe in some of his books.

Regarding the popularity of the term Tax Torpedo, much of it comes from my paper published at The Pension Council in 2007. The paper, Rethinking Social Security Claiming in a 401(k) World mentions the Tax Torpedo. I had found a Scott Burns (Dallas Morning News) article that I cited in my paper, which discussed the Tax Torpedo that was going to hit retirees. and I was able to show that one could often avoid the Tax Torpedo by going against conventional wisdom and drawing down tIRA wealth first and delaying SS. I had shared the research findings on this board in 2005 and got some great feedback. I subsequently walked Bill Reichenstein through it and he has done some fabulous work on how to avoid the Tax Torpedo (and IRMAA surcharges). John Shoven of Stanford also did some great work and cited my research. So many before hand just assumed that their SS would be taxed 85 cents on the dollar and it wasn't true if one strategized and sequenced their withdrawals and SS claim in an optimal fashion.

If someone is in the zone to benefit, the after-tax break-even point of delaying SS is shortened by a few years (even with low inflation). My paper also introduced the concept of "File and Suspend" if you remember that technique. I had read the rules and realized that changes made under Clinton encouraged older Americans to work, so earnings past FRA no longer reduced benefits. So, the rule said someone could suspend their benefits after hitting FRA but any suspension wouldn't affect other benefits based on that work record. Hence, I figured one could file for benefits (and thus triggering a spousal benefit to be collected) and then immediately suspend them. The Obama Administration put an end to the strategy under the claim that it was a loophole.

Back to the Tax Torpedo, it is the high marginal tax rates one pays on IRA withdrawals that "force the taxation" of up to 85 cents of a dollar of SS. It can hit - and does hit - many prior to age 70 as well. Will be interesting what happens in 2026 with the old tax rates designed to kick in.

 

[TheWizard]

...Back to the Tax Torpedo, it is the high marginal tax rates one pays on IRA withdrawals that "force the taxation" of up to 85 cents of a dollar of SS. It can hit - and does hit - many prior to age 70 as well. Will be interesting what happens in 2026 with the old tax rates designed to kick in.

Ok, so now we know the origin.
But since the thresholds for SS taxation are not indexed to inflation, increasingly almost everyone with moderate retirement income or above will have 85% of SS taxed under current law.

So does this mean that the Tax Torpedo concept will diminish to nothingness?
NO!
We can adapt it to apply to folks with large tax-deferred accounts and large RMDs, pushing them into IRMAA territory at age 72+ without proper planning...

 

[Koolau]

Back to the Tax Torpedo, it is the high marginal tax rates one pays on IRA withdrawals that "force the taxation" of up to 85 cents of a dollar of SS. It can hit - and does hit - many prior to age 70 as well. Will be interesting what happens in 2026 with the old tax rates designed to kick in.

You may be correct on the definition of Tax Torpedo. But I gave up on taxable SS long ago. Much more important to me are the various cliffs like IRMMA. The other frightening thing is being the survivor of a couple - who suddenly trip all the cliffs of taxation and income limits. YMMV