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Post by FD1000 on Apr 9, 2023 18:53:07 GMT
Fast background. We immigrated to the US in 1991 with our kids. The goal was to retire when we get to one million adjusted to inflation + be debt free. When I passed the 1.5 million, I postpone it to next year, because of Obama care(which made healthcare at least 2-3 more expensive when you use the ACA) . The portfolio passed the 3 million, not bad for an immigrant who came here with nothing in his mid 30s. Since 1/1/2018 the portfolio is at about 10/90 stocks/bonds while beating the SP500. The best revenge against the naysayers is to make money. Portfolio breakdown rounded: 2 million in Rollover IRA, $400K in Roth, $600K in taxable. Ages 66+63 SS: I started to take mine at age 65, and my wife will take it at age 65. RMD at age 72 is mandatory. To make it simple let's assume, RMD already started this year for both of us: 1) Both taking SS = $60K annually. 2) I'm making 10% annually in taxable = $60K ($20K interest exempt + 40K CG all short). On purpose I assumed 10% as a worse case. 3) RMD about $80K Calculating taxes: Fed:( www.dinkytown.net/java/1040-tax-calculator.html#) GA Tax is very little because at age 65, each person gets $65K deduction. Total income=$171K...Taxable income=$143K...Fed tax=$22K. 22K / 171K = about 13% tax Part-B is based on MAGI( www.omnicalculator.com/finance/magi). Based on what I found and looking above Our MAGI: SS=60K + taxable=60K(no break on Munis) + RMD=80K = 200K. So far Part-B is at $164.9(max magi-$194K), but at $200K it goes to $230.8 (MAGI: 194-246K) when we start RMD ================What do I do now? 1) $80K annual conversion from Rollover to Roth. This shifts $80K to Roth and shrinks the Rollover. But $80K is still only 4% out of 2 million. Even $100K conversion is still only 5%. Good chance I will make more than 5%. This means the Rollovers keep growing. 2) I will keep MAGI under $194K until RMD and why I convert just $80K and see what how much my taxable makes. 3) Pay $5K taxes in the first 3 quarters (total $15K) + the max from my SS taxes which brings the total to about $21K annually. ================= Questions: 1) Is the above look close to reality 2) Is there away to lower taxes? This will also affect MAGI and part-B. Sure, I can see a CPA, but I always figured out things before and like to know a lot before asking one.
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Post by yogibearbull on Apr 9, 2023 19:17:44 GMT
Tax problem is a "good" problem to have. But not much can be done about it. The IRMAA will hurt the 1st year (its changes are in quanta, not gradual/progressive), but then you will get used to it (based on Medicare MAGI = AGI + tax-exempt interest from 2 years prior). Keep in mind that you will still be getting Medicare subsidy, but just less (even at the highest IRMAA level, there is some subsidy). Munis help with federal and state taxes, but not the IRMAA.
Some ideas:
1. Use $17K/person/yr (2x for couples) gifts to reduce your estate.
2. Some Roth Conversions. But these are taxable events, so spread them over the years.
3. Use charitable contributions through DAF. Contributions to DAF are more effective in an itemizing year. This money is also out of your estate but you can still manage it and make grants/donations at your timetable.
4. 529s for grandkids. This is also money out of your estate but you still manage it via 529. Up to 5 years of annual contributions ($17K/person/yr) can be put in any one year, but then no further contributions are allowed for 5 years. The 529 money can be used for qualified educational expenses of the beneficiary, and now, the excess 529 funds (up to $35K) can go to beneficiary Roth IRA.
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Post by habsui on Apr 9, 2023 20:25:00 GMT
One note, not all of SS is taxable (federal). In your case, most likely 85% is taxable and counts towards Medicare MAGI.
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Post by yogibearbull on Apr 9, 2023 20:44:41 GMT
One note, not all of SS is taxable (federal). In your case, most likely 85% is taxable and counts towards Medicare MAGI.
No, Medicare MAGI doesn't include taxable Social Security payments. Unfortunately, there are several definitions of MAGI for other things that may include more things. But, Medicare MAGI = AGI + tax-exempt interest, from 2 years prior ybbpersonalfinance.proboards.com/post/591/thread
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Post by FD1000 on Apr 9, 2023 21:07:05 GMT
One note, not all of SS is taxable (federal). In your case, most likely 85% is taxable and counts towards Medicare MAGI.
Taxes always drives me nuts and especially MAGI. I found what YBB said but after reading more, maybe 100% of SS counts toward MAGI( marketplace.cms.gov/technical-assistance-resources/income-eligibility-using-magi-rules.pdf) "Social Security income includes: Social Security Disability, Insurance (SSDI), retirement income, and survivor’s benefits. These forms of income are counted in MAGI, even when not taxable" From my example: Total income=$171K...Taxable income=$143K. I looked at the calculator and out of $60K SS, 51K is taxable. MAGI=200K But if I use YBB formula MAGI is AGI+tax-exempt interest= 171+20=191 I keep finding different sites with different formulas and why I go with the conservative way and include all my SS. My numbers also show why I selected to use 401K and not Roth 401k. Our taxes would be much higher if we used Roth 401K. The first and easy save is by not paying GA taxes on the first $130K, even the Fed tax is much lower. We spend a lot less than we did while working because we don't save and don't pay mortgage anymore, the rest stayed about the same. In fact we need about 1-1.5% from our portfolio for "normal" expenses. BTW, I need a Swiss bank to hide my taxable money, you got one?...joking!!
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Post by FD1000 on Apr 9, 2023 21:18:39 GMT
Tax problem is a "good" problem to have. But not much can be done about it. The IRMAA will hurt the 1st year (its changes are in quanta, not gradual/progressive), but then you will get used to it (based on Medicare MAGI = AGI + tax-exempt interest from 2 years prior). Keep in mind that you will still be getting Medicare subsidy, but just less (even at the highest IRMAA level, there is some subsidy). Munis help with federal and state taxes, but not the IRMAA. Some ideas: 1. Use $17K/person/yr (2x for couples) gifts to reduce your estate. 2. Some Roth Conversions. But these are taxable events, so spread them over the years. 3. Use charitable contributions through DAF. Contributions to DAF are more effective in an itemizing year. This money is also out of your estate but you can still manage it and make grants/donations at your timetable. 4. 529s for grandkids. This is also money out of your estate but you still manage it via 529. Up to 5 years of annual contributions ($17K/person/yr) can be put in any one year, but then no further contributions are allowed for 5 years. The 529 money can be used for qualified educational expenses of the beneficiary, and now, the excess 529 funds (up to $35K) can go to beneficiary Roth IRA. Thanks YBB, The best idea is $17K gifts, and spend a lot more. The grandkids have rich parents.
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Post by habsui on Apr 10, 2023 0:17:20 GMT
One note, not all of SS is taxable (federal). In your case, most likely 85% is taxable and counts towards Medicare MAGI.
Taxes always drives me nuts and especially MAGI. I found what YBB said but after reading more, maybe 100% of SS counts toward MAGI( marketplace.cms.gov/technical-assistance-resources/income-eligibility-using-magi-rules.pdf) "Social Security income includes: Social Security Disability, Insurance (SSDI), retirement income, and survivor’s benefits. These forms of income are counted in MAGI, even when not taxable" From my example: Total income=$171K...Taxable income=$143K. I looked at the calculator and out of $60K SS, 51K is taxable. MAGI=200K But if I use YBB formula MAGI is AGI+tax-exempt interest= 171+20=191 I keep finding different sites with different formulas and why I go with the conservative way and include all my SS. My numbers also show why I selected to use 401K and not Roth 401k. Our taxes would be much higher if we used Roth 401K. The first and easy save is by not paying GA taxes on the first $130K, even the Fed tax is much lower. We spend a lot less than we did while working because we don't save and don't pay mortgage anymore, the rest stayed about the same. In fact we need about 1-1.5% from our portfolio for "normal" expenses. BTW, I need a Swiss bank to hide my taxable money, you got one?...joking!! UBS. In Zurich, one can show up at a back door with a large plastic bag, wearing sun glasses - only semi joking..
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Post by Fearchar on Apr 10, 2023 0:37:51 GMT
Everybody of course has their own unique set of circumstances and concerns. Looking over what's has been laid out though, the taxable account assumptions should be considered carefully.
I realize many retirees desire a steady source of income. Problem is within the taxable world that generally means dividends or distributions that are taxable. However, if instead one wishes to minimize taxes in taxable accounts, then long term gains should be considered.
In the lower brackets within either the 10% or 12% rate, it's probably okay to go with income. However, for MFJ, incomes over $89,450 are taxed at 22%.... that's a big step up. Gets even worse once one crosses over to $190,750 = 24% tax! Thankfully, the 32% rate doesn't come in until your over $364,200. But yikes!! 32% ....
Meanwhile, long term gains are only 15% up to $553,850.
So, the income vs long term gains decision will be different depending on ones income level. SS payments are base income once one retires. Yes, one might considering deferring for a year or so, but if one has investments, then the math favors taking the SS payments and allowing investments to compound.
With regards to RMDs.... you're only a little bit older than I am. The first RMD must be taken by April 1 of the year after you turn 73. I think that's 7 or 8 years from now. So, enough time to plan ahead and consider the longer term implications. Now, they have been changing the rules lately and who knows what they will be by then.
For a current retiree, converting some taxable funds into a Roth might make sense provided one can stay within the lower brackets. But it's also a matter of where those funds will come from. If there are minimal long term gains to be paid, then okay. For MFJ, that's something like less than $89,250/year.
I've got a RMD calculator spreadsheet that tracks out to age 120. Assuming 6% growth per year is already looking scary. The IRA account grows and grows before I even start RMDs. Then the RMD is only 3.65%. So, after RMDs start, the IRA still grows. RMD's don't cross over the 6% threshold until age 86. Beyond age 86, RMDs increase rather quickly. Max RMD in terms of $$'s is at age 98.
But let us not lose focus on what's more important than money.
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Post by Fearchar on Apr 10, 2023 1:12:33 GMT
PS: updated spreadsheet to take inflation into account. Assuming 2% inflation shifts the Max RMD $$ to age 95.
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Post by habsui on Apr 10, 2023 1:57:08 GMT
Wrt to income/distributions in taxable accounts, a lot of (US) distributions are qualified dividends thus taxed at the cap gains rate.
That doesn't help with IRMAA.
I personally have no problem paying more for Medicare. In the OP's case, the numbers may be really close, thus it's worth considering small changes.
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Post by FD1000 on Apr 10, 2023 12:54:38 GMT
Fearchar, you made several good points, but 1) When someone gets to big numbers, it gets harder to avoid more taxes, but it's not a bad thing. I never thought I would get there when I retired, but it happens 2) My system is based on making money while lose very little, this involve short term CG. I care less about the taxes. At the end, is how much money you have, after everything, including paying taxes. Looking at the big picture, I rather pay a bit more taxes than losing $300-500K in stocks. My highest loss since 2018 was less than 1% and that happen in 2018. 3) I can invest all my taxable account in a stock ETF, think SPY, and never sell. If SPY pays under 2% distributions annually on average, taxes on it will be pretty low. When RMD starts, taxable continue growing which means I will own more stocks, not a bad choice, since I believe in owning low % in stocks at retirement and increase as you age. When we die, my kids will inherit it with a step-up basis, if there is still money in that account. But, taxable is the account we will deplete first, such as paying taxes, extra spending(buying a vehicle, house renovation). Fearchar: For a current retiree, converting some taxable funds into a Roth might make sense provided one can stay within the lower brackets. But it's also a matter of where those funds will come from. If there are minimal long term gains to be paid, then okay. For MFJ, that's something like less than $89,250/year. FD: I didn't get the above. When you convert from Rollover to Roth, you transfer the positions directly (example 10000 shares of SPY). Even if you sold to cash and transfer, both are taxed as income. There is no tax on Rollover IRA, no matter the trades. You only pay when you convert or RMD. See ( link) "The amount you convert is added to your gross income for the tax year in which you make the switch."
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Post by liftlock on Apr 10, 2023 13:44:40 GMT
One note, not all of SS is taxable (federal). In your case, most likely 85% is taxable and counts towards Medicare MAGI.
Taxes always drives me nuts and especially MAGI. I found what YBB said but after reading more, maybe 100% of SS counts toward MAGI( marketplace.cms.gov/technical-assistance-resources/income-eligibility-using-magi-rules.pdf) "Social Security income includes: Social Security Disability, Insurance (SSDI), retirement income, and survivor’s benefits. These forms of income are counted in MAGI, even when not taxable" I keep finding different sites with different formulas and why I go with the conservative way and include all my SS. The Federal Government defines MAGI differently depending on the purpose for which is it used and applied. The MAGI definition provided by YBB is the calculation used by Social Security to determine IRMAA surcharges applicable to Medicare premiums for parts B and D. MAGI for Medicare IRMAA is calculated from one's Federal income tax return, IRS Form 1040. 2022 MAGI = Adjusted Gross Income (Line 11) + Tax-exempt interest (line 2a). There is a two year lag when applying the calculation. Medicare IRMAA surcharges for 2025 will be based on one's MAGI for 2023. The healthcare insurance marketplace uses a different calculations for MAGI.
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Post by liftlock on Apr 10, 2023 14:56:23 GMT
Retirees concerned about the impact of income taxes might want to become familiar with the concept of "income smoothing". The idea is to maximize lifetime after-tax income over one's life expectancy based on their available assets and sources of income. Smoothing income may suggest that income be accelerated earlier in retirement as a means to help smooth tax brackets over ones life expectancy. This might involve accelerating IRA withdrawals and the payment of taxes earlier in retirement to avoid higher marginal tax rates on required IRA withdrawals at future dates. The following software tools can help one evaluate the potential benefits of income smoothing as they estimate the potential impact of taxes over one's financial planning horizon: i-orp.com/Plans/extended.htmlmaxifiplanner.comwww.newretirement.compralanaretirementcalculator.comI-orp is a good place to start because it is free. The MaxFiPlanner site is a good place to read more about the potential benefits of income smoothing. Other ideas: QCDs can be used to help smooth one's Adjusted Gross Income and lifetime taxes. Traditional IRA's and other tax deferred accounts can be a tax efficient place to save for long term health care costs. IRA distributions for large health care expenses can be tax deductible to the extent they exceed 7.5% of AGI when added to one's other itemized deductions, and when one's total itemized deductions exceed one's standard deduction. I would never fully convert my T-IRA to Roth IRA because of this. Roth IRA conversions at higher tax rates can make sense if they will help prevent IRA distributions being taxed at ever higher marginal tax rates. The key thing to understand where one's lifetime income tax brackets may be headed. Tax rates and IRMAA surcharges for surviving spouses can be quite high. The financial impact of a spouse dying is another item to be considered and a potential benefit of accelerating income earlier in retirement. Some people believe that taxes should never be paid early when they can be deferred. Nothing wrong with that. Deferring taxes as long as possible may or may not end up being a benefit. No way to know ahead of time. If someone accumulates too much money, they may end up paying higher taxes that could have been partially avoided by accelerating income and the payment of taxes. If investment returns are poor or someone lives a long time, then deferring income and taxes might help a portfolio survive.
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Post by Fearchar on Apr 11, 2023 1:34:08 GMT
FD1000, Apology: I am fixated on protecting long term gains in taxable accounts. That's much more my situation than yours. So, please disregard my bad comment. Yes; Conversion from IRA to Roth is always going to be ordinary income. You may be under-estimating RMD's though especially if IRA grows at same 10% rate as taxable. That is a very good rate, but as such it also leads eventually to a huge port and even larger tax bill. The challenge for conversions is accurately estimating the future tax bracket. It's not just the portfolio growth, as the RMD rate grows every year too. Starts at 3.65% for 1st year. Gradually increases so by age 83 it's 5.4%. Increases a bit faster and by age 90 it's 7.75%. God bless anybody who makes it to 90! Can't help to think that one will tire of trading the markets as much by then. 14.7% RMD awaits those who make it to 100. Anyhow, by age 90, the RMDs would likely push you into high end of future 24% bracket. Fortunately, the MFJ 24% tax bracket is good size. But if spouse passes, then size is cut in half and survivor could easily be pushed into 32% bracket. It is such a huge increase from 24% to 32%, but that's how it goes. If you really serious about 10% appreciation for long term, then may wish to consider converting enough so that you are solidly in the 24% bracket this year and continue until RMDs start.
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Post by FD1000 on Apr 11, 2023 4:09:33 GMT
Fearchar , the 10% is wishful thinking, who can guarantee that? I never forecasted or believed in 01/2018 I can do it using 90% bond OEFs, but it was achieved by not losing and why I trade and will pay taxes on it in the taxable account. Actually, I trade more in my IRA and made 1.5-2% more annually and why I almost double them. I hike with several guys that retired at least 10-12 years ago and several of them have several millions. As an individual, each pays $527 for part-B which means MAGI at $183-500K. I think I can keep up staying below the $194K per MFJ and pay only $164 for part B + also pay about 13-15% for Fed taxes until age 74 which is another 7 years. Then 2 years later for wife. This will be accomplished by converting $80-100K annually. The Rollover IRA should increase regardless because it's only about 4%. If I'm wrong, and I make more money, then be it. Converting a huge amount this year and pay 24% is too much, I will postpone it and hope for the best. There is QLAC which deferred RMD to age 85, see ( www.investopedia.com/terms/q/qualified-longevity-annuity-contract-qlac.asp) A QLAC is a retirement strategy in which a portion of required minimum distributions (RMDs) are deferred. The SECURE 2.0 Act of 2022 allows individuals to move $200,000 from a qualified retirement plan or IRA to a QLAC. A QLAC allows taxes to be deferred that are normally required by RMDs. Well, I need to just spend more, my 17 years old minivan with just 111K miles still drives well. When prices of new vehicles go down, I will buy a new one.
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Post by FD1000 on Apr 11, 2023 14:02:03 GMT
After looking and searching, RMD starts looking pretty scary at age 85 + Part-B will have higher prices from age 73-74. The most logical way is to start aggressive conversions NOW from Rollover IRA to Roth . I will pay a lot more for Part-B and much more taxes in the next 3-5 years but then taxes will be very low for life and Part-B the lowest. It gets better. Converting large amount and paying all taxes means: Roth gets the full amount + I use my taxable account to pay for all taxes and it will be reduced dramatically.
Based on my numbers If I convert $300K per year...AGI=$365K...taxable income=$338K...tax=$69K (19% total tax). This will reduce my Rollover by a lot over 10 years. If I convert $500K per year...AGI=$565K...taxable income=$538K...tax=$133K (24% total tax). This will reduce my Rollover by a lot over 3 years. If I convert $700K per year...AGI=$765K...taxable income=$738K...tax=$204K (27% total tax). This will reduce my Rollover by a lot over 3 years.
First option is too slow. Third option is too aggressive. The $500k is just right. The joint taxable account will be cut by half (paying taxes). So, for 3 years I will pay high taxes, maybe 5 years of high Part-B(they look at the previous 2 years MAGI), finishing the rest of the conversion maybe another 3-4 years but after that most of the the money will be in Roth and for years to come, taxes + Part-B will be very low since Roth distributions are not taxed + are not part of MAGI.
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Post by Mustang on Apr 11, 2023 14:45:28 GMT
But if spouse passes, then size is cut in half and survivor could easily be pushed into 32% bracket. It is such a huge increase from 24% to 32%, but that's how it goes. It appears to be a huge increase but it isn't really, especially if you only just cross over. Only the portion that crosses the threshold is taxed at 32%. For an example, say and investor has taxable income of $190,000. The upper limit for the 24% bracket is $182,100 (2023 single brackets) so only $7,900 would be taxed at 32%. Below is a breakout.
Bracket Amount Taxes 10% $11,000 $1,100 12% 33,725 4,047 22% 50,650 11,143 24% 86,725 20,814 Total taxes on $182,100 is 37,104 or 20.4%.
32% 7,900 2,528 Total taxes on $190,000 is 39,632 or 20.9%.
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Post by anovice on Apr 11, 2023 14:51:32 GMT
After looking and searching, RMD starts looking pretty scary at age 85 + Part-B will have higher prices from age 73-74. The most logical way is to start aggressive conversions NOW from Rollover IRA to Roth . I will pay a lot more for Part-B and much more taxes in the next 3-5 years but then taxes will be very low for life and Part-B the lowest. It gets better. Converting large amount and paying all taxes means: Roth gets the full amount + I use my taxable account to pay for all taxes and it will be reduced dramatically. Based on my numbers If I convert $300K per year...AGI=$365K...taxable income=$338K...tax=$69K (19% total tax). This will reduce my Rollover by a lot over 10 years. If I convert $500K per year...AGI=$565K...taxable income=$538K...tax=$133K (24% total tax). This will reduce my Rollover by a lot over 3 years. If I convert $700K per year...AGI=$765K...taxable income=$738K...tax=$204K (27% total tax). This will reduce my Rollover by a lot over 3 years. First option is too slow. Third option is too aggressive. The $500k is just right. The joint taxable account will be cut by half (paying taxes). So, for 3 years I will pay high taxes, maybe 5 years of high Part-B(they look at the previous 2 years MAGI), finishing the rest of the conversion maybe another 3-4 years but after that most of the the money will be in Roth and for years to come, taxes + Part-B will be very low since Roth distributions are not taxed + are not part of MAGI. What about NIIT?
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Post by FD1000 on Apr 11, 2023 15:28:06 GMT
Searching on NIIT, ( link1) ( link2)( link3) "Distributions from a traditional IRA are not considered NII, but they do increase MAGI." "If you have investment income and go over the MAGI threshold, the 3.8% tax will apply to your net investment income or the portion of your MAGI that goes over the threshold—whichever is less." "he taxable income from the conversion will increase your MAGI and may result in more of your investment income being subject to the NIIT in the year of the ROTH conversion. In the future, though, this strategy could result in tax savings since the earnings and gains inside the ROTH will be exempt from both income tax and the NIIT when distributed." Looks like, I will pay an additional 3.8% for the amount over $250K. If I have MAGI=$550K, then 3.8% on $300K = $11,400.
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Post by liftlock on Apr 11, 2023 17:27:22 GMT
Searching on NIIT, ( link1) ( link2)( link3) "Distributions from a traditional IRA are not considered NII, but they do increase MAGI." "If you have investment income and go over the MAGI threshold, the 3.8% tax will apply to your net investment income or the portion of your MAGI that goes over the threshold—whichever is less." "he taxable income from the conversion will increase your MAGI and may result in more of your investment income being subject to the NIIT in the year of the ROTH conversion. In the future, though, this strategy could result in tax savings since the earnings and gains inside the ROTH will be exempt from both income tax and the NIIT when distributed." Looks like, I will pay an additional 3.8% for the amount over $250K. If I have MAGI=$550K, then 3.8% on $300K = $11,400. That would only be true if the 300K is net investment income. The 3.8% Medicare surcharge, aka the Obama Care surcharge, only applies to your net investment income. Its a surcharge on investment income (e.g. long term capital gains and qualified dividends), normally on assets held in taxable accounts that is otherwise taxed at favorable capital gains rates The 3.8% surcharge doesn't apply to ordinary income. IRA distribution's including Roth IRA conversions are taxed as ordinary income and not taxed as investment income.
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Post by liftlock on Apr 11, 2023 18:53:38 GMT
After looking and searching, RMD starts looking pretty scary at age 85 + Part-B will have higher prices from age 73-74. The most logical way is to start aggressive conversions NOW from Rollover IRA to Roth . I will pay a lot more for Part-B and much more taxes in the next 3-5 years but then taxes will be very low for life and Part-B the lowest. It gets better. Converting large amount and paying all taxes means: Roth gets the full amount + I use my taxable account to pay for all taxes and it will be reduced dramatically. Based on my numbers If I convert $300K per year...AGI=$365K...taxable income=$338K...tax=$69K (19% total tax). This will reduce my Rollover by a lot over 10 years. If I convert $500K per year...AGI=$565K...taxable income=$538K...tax=$133K (24% total tax). This will reduce my Rollover by a lot over 3 years. If I convert $700K per year...AGI=$765K...taxable income=$738K...tax=$204K (27% total tax). This will reduce my Rollover by a lot over 3 years. First option is too slow. Third option is too aggressive. The $500k is just right. The joint taxable account will be cut by half (paying taxes). So, for 3 years I will pay high taxes, maybe 5 years of high Part-B(they look at the previous 2 years MAGI), finishing the rest of the conversion maybe another 3-4 years but after that most of the the money will be in Roth and for years to come, taxes + Part-B will be very low since Roth distributions are not taxed + are not part of MAGI. The upper end of 24% ordinary income tax bracket for married filing jointly (MFJ) for 2023 is $364,200 which is indexed annually for inflation. After that the marginal tax rate increases to 32%, which might increase to 33% if the tax cuts and job acts is allowed to expire at the end of 2025. Adding a standard deduction of $27,700 plus a $3000 senior deduction to ordinary taxable income of $364,200, creates a target AGI of $394,900 excluding net investment income. Staying below $394,900 would allow one to avoid incremental IRA distributions being taxed at the 32% rate. One can add net investment income to $394,900 and not exceed the 24% bracket for ordinary taxable income. I would look at whether doing Roth IRA conversions into the 32% bracket (beyond the 24% bracket) would save enough future tax to justify doing them.
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Post by FD1000 on Apr 11, 2023 21:12:30 GMT
After looking and searching, RMD starts looking pretty scary at age 85 + Part-B will have higher prices from age 73-74. The most logical way is to start aggressive conversions NOW from Rollover IRA to Roth . I will pay a lot more for Part-B and much more taxes in the next 3-5 years but then taxes will be very low for life and Part-B the lowest. It gets better. Converting large amount and paying all taxes means: Roth gets the full amount + I use my taxable account to pay for all taxes and it will be reduced dramatically. Based on my numbers If I convert $300K per year...AGI=$365K...taxable income=$338K...tax=$69K (19% total tax). This will reduce my Rollover by a lot over 10 years. If I convert $500K per year...AGI=$565K...taxable income=$538K...tax=$133K (24% total tax). This will reduce my Rollover by a lot over 3 years. If I convert $700K per year...AGI=$765K...taxable income=$738K...tax=$204K (27% total tax). This will reduce my Rollover by a lot over 3 years. First option is too slow. Third option is too aggressive. The $500k is just right. The joint taxable account will be cut by half (paying taxes). So, for 3 years I will pay high taxes, maybe 5 years of high Part-B(they look at the previous 2 years MAGI), finishing the rest of the conversion maybe another 3-4 years but after that most of the the money will be in Roth and for years to come, taxes + Part-B will be very low since Roth distributions are not taxed + are not part of MAGI. The upper end of 24% ordinary income tax bracket for married filing jointly (MFJ) for 2023 is $364,200 which is indexed annually for inflation. After that the marginal tax rate increases to 32%, which might increase to 33% if the tax cuts and job acts is allowed to expire at the end of 2025. Adding a standard deduction of $27,700 plus a $3000 senior deduction to ordinary taxable income of $364,200, creates a target AGI of $394,900 excluding net investment income. Staying below $394,900 would allow one to avoid incremental IRA distributions being taxed at the 32% rate. One can add net investment income to $394,900 and not exceed the 24% bracket for ordinary taxable income. I would look at whether doing Roth IRA conversions into the 32% bracket (beyond the 24% bracket) would save enough future tax to justify doing them. The above looks correct. LT, I'm pretty sure I will be ahead. Let's forget NIIT for a while. If I convert $500K, the total tax is just 24% in the next 3 years, and then it goes to 11-13% for for another 3-5 years, unless they increase taxes. After about 7-8 years, my taxes will be almost none. No Rollover IRA, No Taxable, just Roth. If we get $60K SS and everything else comes from Roth, taxes are zero. Part-B is back to $164 after 3 years.
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Post by liftlock on Apr 12, 2023 0:07:25 GMT
The upper end of 24% ordinary income tax bracket for married filing jointly (MFJ) for 2023 is $364,200 which is indexed annually for inflation. After that the marginal tax rate increases to 32%, which might increase to 33% if the tax cuts and job acts is allowed to expire at the end of 2025. Adding a standard deduction of $27,700 plus a $3000 senior deduction to ordinary taxable income of $364,200, creates a target AGI of $394,900 excluding net investment income. Staying below $394,900 would allow one to avoid incremental IRA distributions being taxed at the 32% rate. One can add net investment income to $394,900 and not exceed the 24% bracket for ordinary taxable income. I would look at whether doing Roth IRA conversions into the 32% bracket (beyond the 24% bracket) would save enough future tax to justify doing them. The above looks correct. LT, I'm pretty sure I will be ahead. Let's forget NIIT for a while. If I convert $500K, the total tax is just 24% in the next 3 years, and then it goes to 11-13% for for another 3-5 years, unless they increase taxes. After about 7-8 years, my taxes will be almost none. No Rollover IRA, No Taxable, just Roth. If we get $60K SS and everything else comes from Roth, taxes are zero. Part-B is back to $164 after 3 years. If you are self insuring for long term care, you may want to leave the funds for that in your T-IRA. Also if your investment returns are decent and you limit your withdrawals to RMD amounts, you may only end up consuming about 60% of what you earn in your IRA. I am not a fan of converting 100% of a T-TIRA into a Roth. at a 24% rate.
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Post by Fearchar on Apr 12, 2023 0:35:33 GMT
Here's a screen shot of a spreadsheet I've been building. Primary inputs are age for a given year, current IRA worth, assumed growth rate and assumed rate of inflation. Optional inputs are the amount converted each year. Right now, I stop conversions when RMDs start, but of course that does not have to happen and the spreadsheet could be easily modified. In this particular simulation, $240,000 is converted for 7 years. Despite the 10% growth rate, the IRA diminishes in value as conversions are made. Keep in mind, these are inflation adjusted values. That is the actual account value will be greater, but so too the tax rate brackets. However, since tax rates are typically indexed to inflation, all dollars in the spreadsheet should correspond to current dollars and current tax brackets can be reasonably assumed as rough approximation. In this simulation, IMO, too much is converted since the RMD won't equal the converted amount until after age 100. So, I would think a smaller conversions would be closer to optimal. Of course, that is just my opinion, as my thoughts are the lowest overall taxes are arrived thru constant taxes. Also, 10% growth rate is very aggressive and such an assumption is generally not achievable and especially doubtful as one advances in age and loses interests and changes personal priorities. So, a possible improvement would be to vary assumed growth rate and transition to a generally achievable rate (closer to 6.5% max). Personally, I'm still planning to work a few years. So, I have some time to figure this out!
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Post by Mustang on Apr 12, 2023 13:22:19 GMT
The most difficult part of forecasting is assumptions about the future. Since I believe the next 30 years are going to be more like the 1970-80s than the 2010-20s I think 10% average return is too high and 2% inflation is too low. Optimists will think otherwise. The biggest problem about using an assumed average return is that the spreadsheet doesn't include volatility. Volatility evens out during the accumulation phase but it make a difference in the withdrawal phase. You cannot ride out dips. Even if the market drops 30% RMDs have to be taken. This is why they have to include standard deviations as inputs to Monte Carlo simulations. Another problem with average returns is that it doesn't consider the sequence of returns. As research has shown sequence of returns makes a huge difference. The FIRE (Financial Independence Retire Early) articles show how returns during the first 10 years significantly change the outcome. earlyretirementnow.com/safe-withdrawal-rate-series/
I don't have the software for Monte Carlo simulations. Like you I use a spreadsheet. But I can't see the future and don't even try to estimate future returns. When I'm testing withdrawal strategies I use real historical data for the worst and best retirement times. For a 30 year payout I think starting retirement dates of 1968 for a worst case scenario and 1990 for a best case show how different the outcomes can be. Actual returns and inflation data is readily available online. Unfortunately when looking at specific funds data only goes back to when the fund originated. The math is simple, seeing the future is hard.
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Post by Chahta on Apr 12, 2023 14:00:14 GMT
Tax problem is a "good" problem to have. But not much can be done about it. The IRMAA will hurt the 1st year (its changes are in quanta, not gradual/progressive), but then you will get used to it (based on Medicare MAGI = AGI + tax-exempt interest from 2 years prior). Keep in mind that you will still be getting Medicare subsidy, but just less (even at the highest IRMAA level, there is some subsidy). Munis help with federal and state taxes, but not the IRMAA. Some ideas: 1. Use $17K/person/yr (2x for couples) gifts to reduce your estate. 2. Some Roth Conversions. But these are taxable events, so spread them over the years. 3. Use charitable contributions through DAF. Contributions to DAF are more effective in an itemizing year. This money is also out of your estate but you can still manage it and make grants/donations at your timetable. 4. 529s for grandkids. This is also money out of your estate but you still manage it via 529. Up to 5 years of annual contributions ($17K/person/yr) can be put in any one year, but then no further contributions are allowed for 5 years. The 529 money can be used for qualified educational expenses of the beneficiary, and now, the excess 529 funds (up to $35K) can go to beneficiary Roth IRA. To offset IRMAA if possible, use form SSA-44 for a lifechanging event. Since IRMAA is using 2 year trailing income the event must be in the timeframe it will help. Ending work is the most popular event.
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Post by FD1000 on Apr 12, 2023 19:35:14 GMT
I had some time. NIIT calculator( www.irstaxapp.com/who-pays-net-investment-income-tax/) shows that you pay a very small amount. On $250K conversion, you pay $9500. On $500K, you pay $11,400. That's only $2000 per year and negligible in the big picture. Let's assume only 7% performance annually and look at $250K vs $500K conversion. In both cases start with 2 million and convert 1.75 million. Example one: convert $500K for 3 years + one year at $250K After 3 years: 738K After another year: 523K. No more conversion Add 3 years at 7% and you end up with 641K. Taxes: on $500K conversion + 60K SS = 127K * 3 years = $381. See dist calculator( www.360financialliteracy.org/Calculators/Savings-Distribution-Calculator) On $250K conversion + 60K SS = 52K Total taxes = $433KStarting RMD from age 73 to 100, based on $641K RMD( www.dinkytown.net/java/required-minimum-distribution-rmd.html) shows excellent results, starting from $26K, and the highest at $94K Example two: convert $250K for 7 years After 7 years: 923K
Taxes: On $250K conversion + 60K SS = 52K * 7 years = $364 Total taxes = $364K
Starting RMD from age 73 to 100, based on $923K RMD(https://www.dinkytown.net/java/required-minimum-distribution-rmd.html) still shows excellent results, starting from $37K, and the highest at $135K I can also decide to convert another $250K in the second example, to be closer to the first, but since I must take out first $37K, I can convert only 213K. You end up with %761K, taxes are $43K. You still paid less taxes: 364 + 43 = 407K (in the first example you paid $433K). What happens if I don't convert?The 2 million grows to 3.2 million, taxes will be paid later and will catch up, too complicated and time consuming for me to calculate. ============= Conclusions: 1) Both are good choice. My new goal is to have under 1 million in Rollover IRA when I start my RMD. 2) Taxes stay the same only in the next 3 years. Taxes will go higher later in 2026 and can go much higher after that, think about our national debt. 3) In the first option, I pay another $70K taxes, but I will reduce taxes in the next 20 years. This is based on lower RMD + smaller taxable account. 4) Imagine that the Dems decide to tax Roth at a certain % about a certain number. Anything can happen. 5) Looks to me that I can start with $250K and see what happens. It is the middle road between no conversion to too much conversion. 6) With this in mind, my wife will start taking her SS at age 70, because the marginal tax rate for MFJ = $178-340K is at 24%, above it in 32%.
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Post by liftlock on Apr 12, 2023 23:57:22 GMT
What happens if I don't convert?The 2 million grows to 3.2 million, taxes will be paid later and will catch up, too complicated and time consuming for me to calculate. I suspect you might find it quite easy to calculate that here: i-orp.com/Plans/extended.html
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Post by Fearchar on Apr 13, 2023 0:33:24 GMT
Another update to my spreadsheet. Added calculation of taxes for each year including Social Security payments. Adjusted assumed inflation to 3% for this year, then 2.5% followed by decades of 2.0%. Likewise, reduced assumed rate of return from 10% gradually lower to 6%, which is still considered aggressive. Assumed 7 years of converting equal amounts each year. The sheet is set up now so that I can easily tinker with it to use differing conversions. I also hide the rows for age 100 to 120. Those years are included in the calculated total taxes, but I no longer pay much attention to them. Goal is simply minimizes total taxes paid. The actual total is of course dependent on other variables besides the amount converted. However, with assumptions laid out, the minimum total tax bill summing over all the years looks to be converting $305,500 for the 1st 7 years. Appears that minimizing, but not totally avoiding taxes in the 32% bracket is where the sweet spot is. After that, the IRA is reduced so much that all following years are contained within the 12% bracket except for 7 years in the age 90+ range where some RMDs have small amounts that fall into the 22% bracket. There may be better solutions, but that's it for tonight.
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Post by liftlock on Apr 13, 2023 1:21:47 GMT
Another update to my spreadsheet. Added calculation of taxes for each year including Social Security payments. Adjusted assumed inflation to 3% for this year, then 2.5% followed by decades of 2.0%. Likewise, reduced assumed rate of return from 10% gradually lower to 6%, which is still considered aggressive. Assumed 7 years of converting equal amounts each year. The sheet is set up now so that I can easily tinker with it to use differing conversions. I also hide the rows for age 100 to 120. Those years are included in the calculated total taxes, but I no longer pay much attention to them. Goal is simply minimizes total taxes paid. The actual total is of course dependent on other variables besides the amount converted. However, with assumptions laid out, the minimum total tax bill summing over all the years looks to be converting $305,500 for the 1st 7 years. View AttachmentAppears that minimizing, but not totally avoiding taxes in the 32% bracket is where the sweet spot is. After that, the IRA is reduced so much that all following years are contained within the 12% bracket except for 7 years in the age 90+ range where some RMDs have small amounts that fall into the 22% bracket. There may be better solutions, but that's it for tonight. That spreadsheet is very nice effort. A couple of observations: It looks to me like taxable income can be reduced by incorporating the standard deduction + the additional deduction for age 65+. Income in the 12% tax bracket is not being maximized for a series of years after the initial Roth Conversions which suggests that less can be converted early on to make sure the 12% tax brackets are filled. Introducing Medicare IRMAA brackets may suggest further income smoothing, but that would require making some assumptions about the amount of net investment income. I am assuming the Social Security income represents the portion being taxed at 85%. It would be nice to see what the taxes are for a baseline case with no Roth IRA conversions. But including some income before RMDs kick in, possibly by extending and increasing the distribution factors down to age 66.
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