We've been retired for a while now and utilize the Roth conversion pipeline heavily since ~55% of our stash is in traditional IRAs and we're still a long way from age 59.5. As a family of 3, we can convert ~85k per year without going over the ACA subsidy cliff, assuming it returns next year. Between state and federal taxes and income-based insurance premiums, going right up to the ACA subsidy cliff puts our overall tax rate at ~15%. If we go one dollar over it, the tax rate jumps to ~23% so there's a heavy disincentive not to do this.
There is a reasonable expectation that in the next couple of years we will close on a long-term land lease that generates ~50k in income per year. I do some pretty extensive modeling and I was shocked to learn that, assuming we live to 100, every single dollar of this income is lost to taxes. How is this possible? Well it drastically reduces the amount of money we're able to convert to Roth IRAs, resulting in traditional IRAs that are triple the size they otherwise would be when we reach the point of Required Minimum Distributions. As soon as RMDs bite, our tax rate jumps to the low-to-mid 20s. Our Adjusted Gross Income is quite large at that point so the tax bill is considerable. Indeed, my modeling shows that even planning for a tax-optimal income across our lifetimes, earning a 50k income for 30 years results in paying $1.5 million more in taxes by age 100.
Obviously we could donate considerable sums of money when RMDs start. However, I'm wondering if there are other strategies we might be able to use that don't result in the automatic loss of all that income to taxes. I had the thought of making our daughter part owner of an LLC that would hold the land lease. We could funnel some or all of her part of the income into IRAs for her. However, she might see 15 years of income before she becomes an adult and I'm nervous about potential adverse effects of that. It certainly won't be trust fund baby money or anything like that but it could be multiple six-figures by the time she's 20. This wouldn't do her any favors with respect to college costs either. Plus if something happens where we'd have needed the money, say the market drags for a decade or two and our stash isn't nearly as large as I model, it preemptively takes a third of it out of our hands.
Another thought is to try and take advantage of big market drops to make what Roth conversions we can, though once the land lease income starts this won't have much effect.
I thought there might be some folks here who have considered long-term planning and maybe there are some ideas I haven't considered. I guess I'm still in the shock stage of the projection results. The scenario where we earn 50k for 30 years actually results in our stash being 20k less at age 100 than if we did nothing.
