The Money Mustache Community
General Discussion => Post-FIRE => Topic started by: boarder42 on June 29, 2021, 02:40:01 PM
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As we near the withdrawal stages I am digging deeper into how much we should convert. I was planning to go all the way to the top of the 12% bracket which may make sense in a down market but I don't think it makes sense long term.
Top of 12% ~106k currently
ACA Cost - 5607
Tax Cost - 6500
Total Cost to covert - 12,107
vs
90k
ACA Cost - 2979
Tax Cost - 3712
Total cost to covert - 6691
Savings converting 16k less 5416
so the out of pocket cost to convert 16k more is 5416 or 33%
if we go down further to 81.5k conversion we get
ACA Cost - 1707
Tax Cost - 2824
Total cost to convert - 4531
so the out of pocket cost to convert 8500 more is 2160 or 25%
i really wouldn't feel comfortable going lower than the 81500 conversion plus we have to keep that level or our healthcare costs go up due to kids going on CHIP.
starting to think we should only convert enough to keep the kids off CHIP long term i can always pay 31% to convert money including fed and state taxes. it also lowers our expenditures in the first 5-10 years which will pay off more long term in theory.
we will have exhausted current roth contributions by age 40 or 5 years in, as well as our HSA money we can freely tap due to existing receipts. So future monies will likely come from this conversion and either sale of taxable assets or margin borrowed against taxable assets.
Need to find someone who will lend me money against my IRA assets
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Need to find someone who will lend me money against my IRA assets
Yeah...that's a prohibited transaction (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-prohibited-transactions). Don't do that.
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But back to your main question, I think you've definitely hit on the fact that ACA tax credit phase-outs act as a pretty high add-on to your regular tax bracket (https://seattlecyclone.com/marginal-tax-rates-under-the-aca/). There's something to be said for realizing as much income as possible in years when you're not on ACA marketplace insurance, doing more Roth contributions/conversions before FIRE and/or waiting until you're Medicare age. Your current marginal rates of 25-33%, you can realize a ton of income in a lower bracket than that when you don't have ACA phase-outs to worry about.
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But back to your main question, I think you've definitely hit on the fact that ACA tax credit phase-outs act as a pretty high add-on to your regular tax bracket (https://seattlecyclone.com/marginal-tax-rates-under-the-aca/). There's something to be said for realizing as much income as possible in years when you're not on ACA marketplace insurance, doing more Roth contributions/conversions before FIRE and/or waiting until you're Medicare age. Your current marginal rates of 25-33%, you can realize a ton of income in a lower bracket than that when you don't have ACA phase-outs to worry about.
My marginal rate is 28% today. Realizing today also takes money out of compounding for you as well. I also expect healthcare not insurance but care to get cheaper over 25 years thru tech and someone finally doing something to fix why we overpay for bad services so much. And a public option to become available. It will likely be AGI based but the trend is more credits. And possibly hsa being allowed to purchase it
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Realizing today also takes money out of compounding for you as well.
Not really. Paying 25% now and then letting the rest compound is no different from compounding the whole amount and then paying 25% later. Either way you end up keeping 75% of what you would if taxes didn't exist.
I also expect healthcare not insurance but care to get cheaper over 25 years thru tech and someone finally doing something to fix why we overpay for bad services so much. And a public option to become available. It will likely be AGI based but the trend is more credits. And possibly hsa being allowed to purchase it
These might all be good reasons to hold off on recognizing unnecessary income before those reforms come to pass.
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Yes but if I don't need 20k in 5 years why roll it today as it stops some of that from compounding due to going for the govt. Keeping as much money in my account as possible today helps whether downturns longer right? Bc that tax is flowing out today and not compounding for me anymore.
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Yes but if I don't need 20k in 5 years why roll it today as it stops some of that from compounding due to going for the govt. Keeping as much money in my account as possible today helps whether downturns longer right? Bc that tax is flowing out today and not compounding for me anymore.
Part of your traditional IRA is already earmarked for the government. They give you the choice of giving them their share now or later. Your share compounds the same either way. Who cares whether their share compounds or not?
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Yes but if I don't need 20k in 5 years why roll it today as it stops some of that from compounding due to going for the govt. Keeping as much money in my account as possible today helps whether downturns longer right? Bc that tax is flowing out today and not compounding for me anymore.
Part of your traditional IRA is already earmarked for the government. They give you the choice of giving them their share now or later. Your share compounds the same either way. Who cares whether their share compounds or not?
In withdrawal it matters to some level right. Money is cut from 1 million to 500k. That 80k I move out at 500k is more valuable to me than them. So if you move out more earlier it hurts sorr. You're assuming it's all equal when money comes out which it never is. Long term and withdrawals aside I agree with the simplistic equation of whichever is cheaper.
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I don't really follow what you're saying. Are you saying that if the market dropped you'd tighten your belt and your tax rate would be lower than you originally planned, which would make traditional look like the better choice in hindsight?
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This is a complicated problem. I have spent lots of energy considering it and what could be the best path forward, as we are now in the beginning stages of this process.
If you are simply looking to pay as little tax as possible now, a blend of income from taxable accounts (long-term capital gains) and Roth IRA conversions is best. In 2021, married folks can convert $25,100 from tIRA to Roth tax-free. If you have children, that really juices the amount you can convert by allowing you to offset your federal taxes with the child tax credit. If planned for correctly, in 2021 a married couple could have an income of $106,150 consisting solely of Roth conversions and long-term capital gains and pay zero federal tax. If you have enough kids I suppose it could be even more, especially with the newly expanded child tax credit.
However, there's a long-term angle to consider as well. If your tIRA balances are high enough (ours are), solely focusing on minimizing tax burden now may lead to tIRA balances that are so large by the time you hit Required Minimum Distributions that you're paying significantly higher taxes on an income in old age that is so large you likely can't spend it all because your mobility and health are declining. This aspect is especially worth considering if you knew balancing current and future taxes would result in a larger income now that you could enjoy while younger and healthier. The obvious caveat here is that we don't know exactly what future taxes will be so this optimization won't be perfect.
The ACA "tax" will happen no matter what. The only way you can limit that is by either choosing a cheaper bronze plan so that the loss of premium tax credits is less or relocating to another place where health insurance premiums are lower overall. There are potential drawbacks to both of these though. You may not want to move, or someone in your family may have health problems that make a bronze plan more expensive than a silver plan after considering the cost of care in addition to insurance premiums.
As to @boarder42's comment about leaving money untaxed to lessen the impact of SORR, this really depends on whether you need all those dollars, which is what @seattlecyclone was getting at. If you need to spend 80k per year it doesn't matter whether your portfolio is 1 million or 500k. However, if you can spend less than 80k (belt-tightening), or if you were simply creating an 80k income in the name of tax efficiency and aren't actually spending all that money each year, then having a larger portfolio balance is going to be better for SORR.
However, if your portfolio balance is high enough that you're not concerned about running out of money, and your long-term plan is to create a certain level of income yearly no matter what because that brings down your tIRA balance over time to make RMDs more equitable to current taxation, then performing a Roth conversion in the midst of a crash is a nice little bonus since you get to convert more shares for the same dollar amount.
Even after FIRE, I propose that someone with a huge tIRA balance should consider being more aggressive with Roth conversions, rather than conservative. Over time your portfolio will grow faster than the income tax bracket thresholds are increased. That means the current tax year allows you to convert the largest percentage of your portfolio for the same tax cost. There are caveats with this as well since tax rates can change and markets can crash, but considering the overall long-term trend of markets going up, delaying will only lead to converting smaller and smaller percentages of your portfolio if your intention is to convert up to a certain tax bracket threshold for tax efficiency.
I have gone so far as to create an Excel spreadsheet that calculates our overall tax rate (federal + state + ACA premiums) each year so that I can model tax efficiency over our lifetimes. At a 40-45k annual spend, being the most tax-efficient now (paying $0 federal tax) leads to ridiculous RMDs later in life, assuming average historical returns continue into the future. Like 200k in RMDs ridiculous (in today's dollars). So it would actually behoove us to perform larger Roth conversions now to make that tax rate more even across our lifetimes.
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I'm liking this discussion.
I'm thinking backwards, targeting the trad IRA so the RMD would be (maximally) close to your annual expected spend (at 70+), minus other sources of income, like pensions?
I'm less than 9 years away from 70, so I need to think about my total trad/Roth balance ratio, which is currently 1.27
and I'm contributing significantly more to trad (mostly in 403b) while I still work full time. Counting IRA alone, the ratio is 0.43
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I have gone so far as to create an Excel spreadsheet that calculates our overall tax rate (federal + state + ACA premiums) each year so that I can model tax efficiency over our lifetimes. At a 40-45k annual spend, being the most tax-efficient now (paying $0 federal tax) leads to ridiculous RMDs later in life, assuming average historical returns continue into the future. Like 200k in RMDs ridiculous (in today's dollars). So it would actually behoove us to perform larger Roth conversions now to make that tax rate more even across our lifetimes.
Your whole post sums up the conundrum nicely. Any chance you can share this on google sheets or PM me this b/c I was about to build the exact same thing. I feel like splitting the difference may make the most sense - I dunno either way because the 4% SWR is extremely conservative we're likely to end up with piles of RMDs like you say unless we maximize your conversion.
Also I'm strongly considering margin instead of selling my taxable assets. This would lead to an even larger reason to have more dry powder in roth conversions backlog in the event of a downturn so i could offset the losses without selling taxable shares.
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The ACA "tax" will happen no matter what.
Yes and no. It will end when you (and your spouse, if applicable) are on Medicare. It may end sooner than that depending on legislative changes in the intervening time. It ends at high incomes, once the subsidy phases out completely. The phase-out causes marginal rates up to 30% for ACA insurance purchasers with rather low incomes. Then, unusually, you see your tax rate drop significantly once your income raises to the point where the subsidy is gone. If you have decided that you do want to convert a big chunk of your balance before Medicare age, you may find that it's optimal to alternate between years where your income is way above the phase-out range (so some of it is only taxed at the regular 12-22% brackets instead of 25-30%), and years where your income is very low so you get a sweet subsidy.
At a 40-45k annual spend, being the most tax-efficient now (paying $0 federal tax) leads to ridiculous RMDs later in life, assuming average historical returns continue into the future. Like 200k in RMDs ridiculous (in today's dollars). So it would actually behoove us to perform larger Roth conversions now to make that tax rate more even across our lifetimes.
Two things about $200k RMDs:
1) A married couple with $200k AGI, no ACA coverage, is on the cusp between the 22% and 24% bracket. A married couple with $50k AGI on ACA is paying nearly 30%. Even though the income amount is vastly more if you wait until your 70s, the percentage taxed away is less.
2) Having so much in your IRA that you have $200k RMDs means you likely ended up with a lot more money than you need. What's your plan for the excess cash? If you have charitable ambitions there's a provision of the tax code letting you give the first $100k of your RMD straight to a charity and it's completely excluded from income. That brings you down to a $100k AGI (or potentially zero if you and your spouse have the same amount in your IRAs and both take full advantage of this). That will bring you down a bracket or two, making the advantage of limiting your income during ACA years even greater.
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Excellent discussion!!
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The ACA "tax" will happen no matter what.
Yes and no. It will end when you (and your spouse, if applicable) are on Medicare. It may end sooner than that depending on legislative changes in the intervening time. It ends at high incomes, once the subsidy phases out completely. The phase-out causes marginal rates up to 30% for ACA insurance purchasers with rather low incomes. Then, unusually, you see your tax rate drop significantly once your income raises to the point where the subsidy is gone. If you have decided that you do want to convert a big chunk of your balance before Medicare age, you may find that it's optimal to alternate between years where your income is way above the phase-out range (so some of it is only taxed at the regular 12-22% brackets instead of 25-30%), and years where your income is very low so you get a sweet subsidy.
True, if someone's income needs to be large enough that they get no ACA premium subsidies, it doesn't make sense to think of it as a tax. Most folks here probably won't be FIREing with those kinds of base expenses, though. It's valuable to understand how steep the marginal "tax" rate is on the loss of subsidies as someone's income moves from 150% of the federal poverty level to 400% and beyond.
A lot of the "how much do I need to convert" decision really just depends on each person's allocation between taxable, tIRA, and Roth IRA accounts. And of course how early they're retiring. This makes it basically impossible to offer universal advice, but threads like these can help people better understand their personal variables better.
We don't have a choice but to do sizeable Roth conversions because our taxable funds will run dry well before 59 1/2, even with good returns. It's possible that we could exhaust taxable funds in our 50s and then follow that up with a 72t SEPP on the tIRAs but that still feels like trying to land the plane as it's running out of gas. Too many variables for me to be comfortable with that scenario.
At a 40-45k annual spend, being the most tax-efficient now (paying $0 federal tax) leads to ridiculous RMDs later in life, assuming average historical returns continue into the future. Like 200k in RMDs ridiculous (in today's dollars). So it would actually behoove us to perform larger Roth conversions now to make that tax rate more even across our lifetimes.
Two things about $200k RMDs:
1) A married couple with $200k AGI, no ACA coverage, is on the cusp between the 22% and 24% bracket. A married couple with $50k AGI on ACA is paying nearly 30%. Even though the income amount is vastly more if you wait until your 70s, the percentage taxed away is less.
2) Having so much in your IRA that you have $200k RMDs means you likely ended up with a lot more money than you need. What's your plan for the excess cash? If you have charitable ambitions there's a provision of the tax code letting you give the first $100k of your RMD straight to a charity and it's completely excluded from income. That brings you down to a $100k AGI (or potentially zero if you and your spouse have the same amount in your IRAs and both take full advantage of this). That will bring you down a bracket or two, making the advantage of limiting your income during ACA years even greater.
If we ended up with excessive tIRA balances in our 70s, we would absolutely do something charitable with a bunch of that money. I'd rather see the money put to use while I'm alive than just willing it to some organizations after we're dead.
In yet another example of why this whole calculation is so personal based on individual circumstances, I'll use my own financial picture as an example. We could live on 40-45k per year comfortably, probably for the rest of our lives (while adjusting for inflation). However, if our income was 20-30k per year higher now, while we're young, we would probably spend some of that money. Maybe it would be a little more travel or more luxurious travel. Maybe we'd choose to support some charitable causes now, albeit in smaller amounts. We're also hopefully about to have a child or children. I don't know if that kid will end up with special needs or any other thing that might require more income than our 40-45k projection. So it would be smart to take some of those Roth conversions and allow them to marinate. For me, it's about having access to as much of my money while young as possible, while still being tax efficient. So it behooves me to look past the steep marginal "tax" rate of losing ACA premium subsidies to the long-term picture. I'm not going to try to be perfect, but the difference between all I have to do, and what I could do, is so big that the smart move is paying some extra tax.
Future changes (legislation, etc.) could absolutely render current moves obsolete. There's nothing I can do about those kinds of unknowns. You can't overthink those things or you'll go crazy. The long-term modeling is already complicated enough as it is.
Ironically, here's an example from my model which is already out of date because it assumes a subsidy cliff at 400% of the federal poverty level and a $2,000 child tax credit. At age 42 (year 2025), we're using a bronze ACA plan. Our income bumps right up against 400% FPL for a family of 3, which is just over 86k in 2021. I don't guess at future inflation, just use today's dollars. Our Roth conversions are just over 46k. We have 5k in rental income but the remainder is dividends and long-term capital gain harvesting. The $2,000 child tax credit means federal income tax is less than $1,000 (the newly expanded credit is even more beneficial). ACA premiums for the year come in just over 3k, using 2021's premium amounts as a guide.
Considering ACA premiums as a tax, because we could get those down to $0 if we really wanted, our total tax rate (state + federal + ACA premiums) comes out to ~9% of our income, or about $7,500. We could make that tax rate less than 5% (no federal tax, no ACA premium, and 5.25% state tax on income over $21,500). But that leaves us with less access to money while young, and likely those ridiculous RMDs in old age.
I need to update my model for the latest ACA changes passed in April. Sigh. I'm satisfied with the broad strokes though. I will try to sanitize it a bit and toss it up here in case anyone wants to look it over. It ain't fancy, I'll say that.
Also, a lot of this may only matter so immensely for those FIREing fairly young. If I was 50 some of this wouldn't be very important because I have a 72t SEPP as an option, access to all my money in a decade, and the child(ren) ship has already sailed. There are significantly fewer unknown variables that would affect that person's financial future.
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It's valuable to understand how steep the marginal "tax" rate is on the loss of subsidies as someone's income moves from 150% of the federal poverty level to 400% and beyond.
This might be helpful to you:
https://seattlecyclone.com/aca-premium-tax-credits-2021-edition/
particularly the second graph.
h/t of course to @seattlecyclone.
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It's valuable to understand how steep the marginal "tax" rate is on the loss of subsidies as someone's income moves from 150% of the federal poverty level to 400% and beyond.
This might be helpful to you:
https://seattlecyclone.com/aca-premium-tax-credits-2021-edition/
particularly the second graph.
h/t of course to @seattlecyclone.
I will dig into that for my model refresh. I still have one of @seattlecyclone's ACA posts bookmarked from 2015! This stuff is complicated enough that great explanations and visuals are valuable to hang on to. :)
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The ACA "tax" will happen no matter what.
Yes and no. It will end when you (and your spouse, if applicable) are on Medicare. It may end sooner than that depending on legislative changes in the intervening time. It ends at high incomes, once the subsidy phases out completely. The phase-out causes marginal rates up to 30% for ACA insurance purchasers with rather low incomes. Then, unusually, you see your tax rate drop significantly once your income raises to the point where the subsidy is gone. If you have decided that you do want to convert a big chunk of your balance before Medicare age, you may find that it's optimal to alternate between years where your income is way above the phase-out range (so some of it is only taxed at the regular 12-22% brackets instead of 25-30%), and years where your income is very low so you get a sweet subsidy.
True, if someone's income needs to be large enough that they get no ACA premium subsidies, it doesn't make sense to think of it as a tax. Most folks here probably won't be FIREing with those kinds of base expenses, though. It's valuable to understand how steep the marginal "tax" rate is on the loss of subsidies as someone's income moves from 150% of the federal poverty level to 400% and beyond.
Right. I think there's some "standard advice" that it's good to keep your income as similar as possible from year to year to minimize your tax burden in the long run. This advice depends on a progressive tax structure, where the tax rates at lower incomes are lower than the tax rates at higher incomes. Better to keep your income just below the top of a tax bracket every year than to venture above that some years and pay tax at a higher rate.
The ACA actually creates something of a regressive tax structure, where you have a pretty high overall marginal rate in the subsidy phase-out range and then once your subsidy is exhausted your rate goes down to whatever the base tax bracket is at that point. Income stability is best for a progressive tax because you avoid the higher rates at higher incomes, but income fluctuation is best for a regressive tax, because you have more of your long-term overall income in the lower-rate range that occurs at higher income levels.
That's why I'm saying that if your FIRE plans depend on a Roth conversion ladder, try modeling the effect of switching from no subsidies one year to huge subsidies the next, compared to having medium subsidies every year. You may find that the oscillating income produces a better result.
A lot of the "how much do I need to convert" decision really just depends on each person's allocation between taxable, tIRA, and Roth IRA accounts. And of course how early they're retiring. This makes it basically impossible to offer universal advice, but threads like these can help people better understand their personal variables better.
I completely agree.
In yet another example of why this whole calculation is so personal based on individual circumstances, I'll use my own financial picture as an example. We could live on 40-45k per year comfortably, probably for the rest of our lives (while adjusting for inflation). However, if our income was 20-30k per year higher now, while we're young, we would probably spend some of that money. Maybe it would be a little more travel or more luxurious travel. Maybe we'd choose to support some charitable causes now, albeit in smaller amounts. We're also hopefully about to have a child or children. I don't know if that kid will end up with special needs or any other thing that might require more income than our 40-45k projection. So it would be smart to take some of those Roth conversions and allow them to marinate. For me, it's about having access to as much of my money while young as possible, while still being tax efficient. So it behooves me to look past the steep marginal "tax" rate of losing ACA premium subsidies to the long-term picture. I'm not going to try to be perfect, but the difference between all I have to do, and what I could do, is so big that the smart move is paying some extra tax.
Yeah that's totally fair. My personal situation is that we have almost enough in taxable accounts to sustain a pretty lean FIRE, and a bunch of Roth basis (helped by mega backdoor contributions), so the access piece is much less of a concern. The pre-tax retirement balances we have are more in a "old man money" and/or "probably not going to need it" bucket, so the focus is more on figuring out when the absolute cheapest time to realize that income will be. If you know you need to realize that income relatively soon that's a different ballgame. Do try to model the income oscillation thing.
Future changes (legislation, etc.) could absolutely render current moves obsolete. There's nothing I can do about those kinds of unknowns. You can't overthink those things or you'll go crazy. The long-term modeling is already complicated enough as it is.
For sure. I tend to plan as though the laws will remain as they are today, because the potential universe of changes is infinite. I know of course that the laws will change, but I don't claim to have any special insight into how those changes will look. The best I can hope for is that I have a diverse enough set of accounts that it's easy to adapt my plans to the changes as they happen, however they might look.
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Definitely lot to learn…ptf
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Ah yes. We get to play this game now. Plan to do some Roth conversions, some trad Ira withdrawals and try to keep the tax rate reasonable but we may end up doing alternating years if it makes more sense. We are very young retirees so don't want to do the 72t withdrawals. Aca subsidies definitely complicated things. What a problem to have.
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Ah yes. We get to play this game now. Plan to do some Roth conversions, some trad Ira withdrawals and try to keep the tax rate reasonable but we may end up doing alternating years if it makes more sense. We are very young retirees so don't want to do the 72t withdrawals. Aca subsidies definitely complicated things. What a problem to have.
Why are you planning trad ira withdrawals at 39. Do you not have a 5 year bridge in other accounts. We have 25 years of this so 72t doesn't sound fun to me.
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As we near the withdrawal stages I am digging deeper into how much we should convert. I was planning to go all the way to the top of the 12% bracket which may make sense in a down market but I don't think it makes sense long term.
Top of 12% ~106k currently
ACA Cost - 5607
Tax Cost - 6500
Total Cost to covert - 12,107
vs
90k
ACA Cost - 2979
Tax Cost - 3712
Total cost to covert - 6691
Setting aside ACA Cost for a moment, you are paying 4.1% tax on the first $90k, and then 17.4% on the next $16k. That doesn't sound like the 12% tax bracket to me. But with those numbers, avoiding the added 33.4% cost (ACA + Tax) makes sense, and stopping at $90k seems more efficient.
The larger question is predicting future tax rates. Corporate tax rates seem to be a race to the bottom, so those seem more likely to fall than personal tax rates. Personal tax rates seem to be at historic lows, so my guess would be they go higher over the upcoming decades. I'd expect the 12% bracket is a good deal now. In either event, a Roth Conversion brings certainty: you know you'll pay 12% tax, instead of the future tax rate.
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As we near the withdrawal stages I am digging deeper into how much we should convert. I was planning to go all the way to the top of the 12% bracket which may make sense in a down market but I don't think it makes sense long term.
Top of 12% ~106k currently
ACA Cost - 5607
Tax Cost - 6500
Total Cost to covert - 12,107
vs
90k
ACA Cost - 2979
Tax Cost - 3712
Total cost to covert - 6691
Setting aside ACA Cost for a moment, you are paying 4.1% tax on the first $90k, and then 17.4% on the next $16k. That doesn't sound like the 12% tax bracket to me. But with those numbers, avoiding the added 33.4% cost (ACA + Tax) makes sense, and stopping at $90k seems more efficient.
The larger question is predicting future tax rates. Corporate tax rates seem to be a race to the bottom, so those seem more likely to fall than personal tax rates. Personal tax rates seem to be at historic lows, so my guess would be they go higher over the upcoming decades. I'd expect the 12% bracket is a good deal now. In either event, a Roth Conversion brings certainty: you know you'll pay 12% tax, instead of the future tax rate.
this is a combination of state and federal taxes with the child tax deductions my state tax is 5.4% so 12+5.4 = 17.4%
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Ah yes. We get to play this game now. Plan to do some Roth conversions, some trad Ira withdrawals and try to keep the tax rate reasonable but we may end up doing alternating years if it makes more sense. We are very young retirees so don't want to do the 72t withdrawals. Aca subsidies definitely complicated things. What a problem to have.
Why are you planning trad ira withdrawals at 39. Do you not have a 5 year bridge in other accounts. We have 25 years of this so 72t doesn't sound fun to me.
We had more than 5 years but spent it on a house. I won't need to do more than a couple of years of trad Ira withdrawals which is why I won't do a 72t. Just a couple of years of higher tax rate, not the end of the world. We have a lot of assets in trad Ira form right now. I have some in Roth iras but not enough to completely avoid the trad Ira withdrawals. We still are wealthier than when we retired so I can't feel too heart broken about it.
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I overhauled my long-term FIRE spending/tax model today and it revealed some things I was not prepared for. Even though some of the data is specific to my personal situation, I think it's a valuable process to share. Having a large enough W2 income to retire in your 30s probably means a small Roth balance, and large taxable and tIRA balances. So I'm guessing there'd be others out there in a similar situation as us. Our portfolio split is currently ~60% tIRA/35% taxable/5% Roth.
If you want to download and dig into the specific data of the model, feel free, but I'm going to talk about the broader trends here because that is what was so surprising.
I first made this model because I knew that continuing to create an income just big enough for us to live on would inevitably lead to obscene account balances in old age. The question I wanted to answer was, "How large could our income be during the younger years of our lives (when we'd be more likely to spend it) while being as tax efficient as possible over the long term?"
A couple of general points about the data before I dive into the trends.....
- I used a 5% growth rate, which is a bit conservative since the long-term figure in the US is closer to 7% before inflation
- State taxes are specific to North Carolina
- ACA premiums are specific to the bronze and silver plans I've chosen based on my County of residence
- I consider ACA premiums a "tax" because we could lower them to $0, but Medicare premiums are not since base premiums are a set amount. So ACA premiums are reflected in the overall tax percentage but Medicare premiums are not.
- The percentage of our taxable accounts that are long-term capital gains are specific to us
- Assumes one child and the associated child tax credit
- Income tax thresholds are Married Filing Jointly
At first, I thought making our tax rate as even as possible over our lifetimes would be best. However, it became apparent that doing this would leave a huge portfolio balance in old age. The model quickly struck down that idea.
I also assume that we will spend less in old age (50k), and I'm probably being overly generous with that figure as it's more than we spend now. After watching my very healthy grandparents age, it's quite evident that spending really falls off in your 80s and beyond (maybe even 70s depending on health), unless it's increased healthcare spending. As we get into our 70s and 80s, Social Security and a bit of rental income will cover about half of our planned spending. The model indicates that 500k in our tIRAs will be enough to cover the remainder of our spending in old age (~25k), while growth keeps our tIRA balance healthy enough to cover long term care costs at the end of our lives.
So once we hit 72, Social Security, some rental income, and our RMDs are enough to cover all spending, essentially leaving our remaining Roth IRA funds to compound untouched until we die. So with that trend in mind, I started to examine how we could increase our Roth conversions and spending earlier in life to bring down the balance of our Roth IRA fairly low by the age of 72.
A side effect of having exhausted our taxable accounts by the age of 72 and having only small RMDs is that our taxable income in our 70s and beyond is basically nothing. As far as I can tell, this is simply the way it has to be if we want to maximize the access we have to our money when we're younger.
As I started increasing our Roth conversions over the next 20-30 years, it became evident that the real pinch point was going to be the age of 60 because we don't have access to Roth gains prior to that without penalty. Bearing that in mind, I started pulling larger Roth conversion amounts forward, even closer to now, than I had originally planned for. It got to a point where the model indicated that having maximum access to our money over the next 30 years meant immediately increasing Roth conversions to 70-80k per year. In doing so, our AGI rises to ~120k for almost a decade until our taxable accounts are exhausted and there are no more long-term capital gains to be had. After that, our AGI drops to ~85k per year for another decade until we finally reach the point that it doesn't make sense to do any more Roth conversions because we want to leave enough tIRA money for those RMDs to cover our spending in old age. Plus we can't convert everything to Roth IRAs before we get on Medicare or we'll have no way to create income since we exhausted taxable accounts already.
Immediately maximizing Roth conversions while still maintaining a consistent, low overall tax rate from year to year does eventually have the side effect of "running out" of convertible money. Once we hit that point, we only convert the minimum needed to qualify us for private ACA insurance. Once our income becomes minimal, estimated to be in our late 50s, we basically pay no taxes. So we actually end up with a model that shows us paying little to no tax from our late 50s through the end of our lives. Taxable accounts have been exhausted, most all tIRA money has been converted to Roth, and what tIRA money remains barely goes above income tax exemptions. Again, this seems to be something that has to happen if we're to maximize access to our money while young.
So....shortcomings of the model. Our portfolio is obviously not going to grow at 5% every year. Sequence of returns is going to affect this. But 5% is also a bit conservative, historically speaking, so maybe our spending could be even higher than this. Future legislation could require the model to change.
And of course, the obligatory note that this is just a model that I created to gain better insight into long-term trends for income and tax efficiency. This will not dictate our spending but it can be a very useful guide.
And if anyone should find an error, please let me know!
I suppose I shouldn't be surprised that the model shows large, immediate Roth conversions are needed to maximize access to our money when 60% of it currently sits in tIRAs. We could choose to not convert that much money, leaving higher account balances in old age but why? It seems the prudent approach, given that the future is unknown, would be to maximize access to our money at any given time, even if it means paying a little bit more tax than we'd have to only covering our base expenses. I do have to say I was pleasantly surprised to see that we could spend 80-100k over the next 30 years while having a marginal tax rate of only ~12%. And that includes ACA insurance premiums. That's pretty damn good.
Edit: Attachment of my model was removed due to a request for an updated/improved version, which can be found downthread here (https://forum.mrmoneymustache.com/post-fire/trad-to-roth-conversion-more-or-less/msg2876104/#msg2876104)
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Oh, and I almost forgot. @seattlecyclone I was thinking about the income fluctuation you were talking about. I could definitely see how it might ultimately work out better for the ACA premiums alone to alternate high and low years. I had planned to try and work this into my model and see what it would look like but I was pleasantly surprised with how low the overall "tax" rate was, thanks to using a Bronze insurance plan that had pretty small premiums even at higher income levels. I'm still trying to wrap my head around how fluctuating our income every other year might improve this. It's a lot!
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Oh, and I almost forgot. @seattlecyclone I was thinking about the income fluctuation you were talking about. I could definitely see how it might ultimately work out better for the ACA premiums alone to alternate high and low years. I had planned to try and work this into my model and see what it would look like but I was pleasantly surprised with how low the overall "tax" rate was, thanks to using a Bronze insurance plan that had pretty small premiums even at higher income levels. I'm still trying to wrap my head around how fluctuating our income every other year might improve this. It's a lot!
It is a lot! Here's a quick example. Let's suppose you're a married couple with no kids, 40 years old, looking to average $75k of Roth conversions every year. No other income.
Scenario 1: Smooth income ($75k/year)
AGI: $75k
Income tax: $5,593
Health insurance (second-cheapest silver plan): $6,388 (after $2,568 subsidy)
Annual tax plus insurance premiums: $11,981
Two-year total: $23,962
Scenario 2: Fluctuating income ($25k one year, $125k the next)
Year 1:
AGI: $25k
Income tax: $0
Health insurance (second-cheapest silver plan): $16 (after $8,940 subsidy) <-- Sweet cost-sharing subsidies lower the out-of-pocket costs too!
Annual tax plus insurance premiums: $16
Year 2:
AGI: $125k
Income tax: $13,481
Health insurance (second-cheapest silver plan): $8,956 (no subsidy)
Annual tax plus insurance premiums: $22,437
Two-year total: $22,453
You can see that in this scenario you save about $1,500 every two years in tax + insurance premiums by varying your income, plus every other year your insurance comes with super-low out-of-pocket costs.
Adding kids into the mix complicates things (not just tax-wise, of course!). In my state a couple with two kids and income below $84k will have the kids on Apple Health (Medicaid/CHIP). This threshold may vary by state, I'm not sure. If you want to have the whole family on the same insurance plan you either need to have your income low enough for the adults to be on Medicaid too (<$36k/year), or high enough to have the kids disqualify (>$84k). The alternating $25k/$125k income scenario would flip you between both extremes, rather than being on private coverage all the time if you didn't have kids. I think the child tax credit would be the same either way under this year's rules, but under last year's rules you'd lose some of it with such a low income, especially if it's all unearned income from Roth conversions. So many variables!
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If you are simply looking to pay as little tax as possible now, a blend of income from taxable accounts (long-term capital gains) and Roth IRA conversions is best. In 2021, married folks can convert $25,100 from tIRA to Roth tax-free. If you have children, that really juices the amount you can convert by allowing you to offset your federal taxes with the child tax credit. If planned for correctly, in 2021 a married couple could have an income of $106,150 consisting solely of Roth conversions and long-term capital gains and pay zero federal tax. If you have enough kids I suppose it could be even more, especially with the newly expanded child tax credit.
One consideration you aren't thinking here is once you start "losing" the refundable portions of credits, you are still paying a marginal tax rate even if your federal tax owed is still $0 or negative.
Going from $0 owed/$5k refund to $0/$0 still means you had a marginal tax rate.
That doesn't change the conclusion you came to necessarily but it does change how you are thinking about the "tax-free" aspect.
However, there's a long-term angle to consider as well. If your tIRA balances are high enough (ours are), solely focusing on minimizing tax burden now may lead to tIRA balances that are so large by the time you hit Required Minimum Distributions that you're paying significantly higher taxes on an income in old age that is so large you likely can't spend it all because your mobility and health are declining. This aspect is especially worth considering if you knew balancing current and future taxes would result in a larger income now that you could enjoy while younger and healthier. The obvious caveat here is that we don't know exactly what future taxes will be so this optimization won't be perfect.
Even after FIRE, I propose that someone with a huge tIRA balance should consider being more aggressive with Roth conversions, rather than conservative. Over time your portfolio will grow faster than the income tax bracket thresholds are increased. That means the current tax year allows you to convert the largest percentage of your portfolio for the same tax cost. There are caveats with this as well since tax rates can change and markets can crash, but considering the overall long-term trend of markets going up, delaying will only lead to converting smaller and smaller percentages of your portfolio if your intention is to convert up to a certain tax bracket threshold for tax efficiency.
One of the things I stressed when I gave a "To Roth or Not" presentation last year was looking at which failure mode is more palatable. Paying too much now? Or later?
Personally, for me the failure mode of paying too much in taxes because I took the guaranteed tax savings now is less of an emotional negative than paying too much in taxes to lock in Roth.
I also think a risk people do not consider is how Roth may be implicitly taxed in the future. I do not think it's likely Roth withdrawals will be directly taxed but I would not be surprised if they change to for example impact your ACA subsidies or SS taxation. There is an assumption in a lot of FIRE calculations that Roth growth never will negatively impact your financial situation or have any tax impact.
But the flip side is risk such as the 5 year conversion rule or Roth conversion process changes.
I have gone so far as to create an Excel spreadsheet that calculates our overall tax rate (federal + state + ACA premiums) each year so that I can model tax efficiency over our lifetimes. At a 40-45k annual spend, being the most tax-efficient now (paying $0 federal tax) leads to ridiculous RMDs later in life, assuming average historical returns continue into the future. Like 200k in RMDs ridiculous (in today's dollars). So it would actually behoove us to perform larger Roth conversions now to make that tax rate more even across our lifetimes.
This gets to the failure mode analysis I talked about before.
If I have a larger than anticipated tax burden in retirement due to RMDs I... have "won."
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And if anyone should find an error, please let me know!
Two errors, and a couple of things you could consider changing.
1. The RMD divisors you are using are the old ones. New ones were published by the IRS in the last few months that will apply to you by the time you're 72. The new ones are higher, meaning that the percentage withdrawals are lower. Probably won't affect your model and solution too much if at all.
2. The standard deduction increases when you hit age 65, and also when your spouse hits age 65.
Other considerations:
You're ignoring IRMAA, although with your goals and solution it probably won't affect you, so probably not a real issue.
In general, I prefer to work in nominal dollars, so if I have a number for my SS in 2041 or whatever, I keep the number in 2041 dollars. Doing so reasonably accurately requires me to inflate everything according to the various inflation rates.
You've increased your portfolios by 5%, but it looks like you haven't adjusted anything else in your spreadsheet. The things that I adjust in my model are my SS amounts, the tax bracket amounts, the standard deduction amounts, the IRMAA brackets and amounts (again, possibly N/A for you), and the FPL amounts.
Some people argue that all of this stuff cancels out. Maybe so, but it makes me feel better to model it all out in case it doesn't. It can add a lot to complexity though, and more complexity can increase the chances of an error in the model.
I didn't dig into it for this, but in general since it sounds like you have a child, you might want to model the tax changes as that child gets older - your ACA family size will drop by one at some point, and your child tax credit changes (at age 6 and age 17 or so, IIRC). Things of that nature.
Overall it looks quite nice though.
Another thing you might take a look at is i-orp (www.i-orp.com). You can't probably bend it to model what you are trying to accomplish (more spendable when young) as I think the tool tries to maximize lifetime spending instead. But it may be informative to play with. Use the advanced version - there should be a checkbox at the top somewhere.
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It is a lot! Here's a quick example. Let's suppose you're a married couple with no kids, 40 years old, looking to average $75k of Roth conversions every year. No other income.
Scenario 1: Smooth income ($75k/year)
AGI: $75k
Income tax: $5,593
Health insurance (second-cheapest silver plan): $6,388 (after $2,568 subsidy)
Annual tax plus insurance premiums: $11,981
Two-year total: $23,962
Scenario 2: Fluctuating income ($25k one year, $125k the next)
Year 1:
AGI: $25k
Income tax: $0
Health insurance (second-cheapest silver plan): $16 (after $8,940 subsidy) <-- Sweet cost-sharing subsidies lower the out-of-pocket costs too!
Annual tax plus insurance premiums: $16
Year 2:
AGI: $125k
Income tax: $13,481
Health insurance (second-cheapest silver plan): $8,956 (no subsidy)
Annual tax plus insurance premiums: $22,437
Two-year total: $22,453
You can see that in this scenario you save about $1,500 every two years in tax + insurance premiums by varying your income, plus every other year your insurance comes with super-low out-of-pocket costs.
I think this might fall apart depending on the income level one chooses, the specific insurance plan costs and premium tax credit one gets, and other income variables.
I first tried doing this in my model for the first two years we're using a bronze plan. The smooth taxation method has our AGI at 130k. This happens while we're still depleting our taxable accounts so there are long-term capital gains involved. I should also highlight the fact that the model does two things semi-independently. I input how much I want our spending to be each year, before taxes and insurance premiums, and this adjusts our investment account balances accordingly (after adding the requisite taxes). I also adjust our AGI, mostly through Roth conversions, to determine what amount will result in similar taxation year to year. For the two years I've chosen, our spending is at 80k. We have LTCG in these early years and at that spending level, I can't get our income under 150% of the federal poverty level for a family of 3 ($32,580). The best I can do is about 44k. This is early enough that I can't really replace those funds from our taxable accounts with Roth principal, as there's only 30k there (we're still in the 5-year wait period for the start of these big conversions).
So I used 45k and 215k as my fluctuation years. All income tax in the examples is federal only.
Scenario 1: Smooth income ($130k/year)
AGI: $130k
Income tax: $4,840
Health insurance (cheapest bronze plan): $4,901
Annual tax plus insurance premiums: $9,741
Two-year total: $19,482
Scenario 2: Fluctuating income ($45k one year, $215k the next)
Year 1:
AGI: $45k
Income tax: $0
Health insurance (cheapest bronze plan): $0
Annual tax plus insurance premiums: $0
Year 2:
AGI: $215k
Income tax: $19,140
Health insurance (cheapest bronze plan): $11,870 (no subsidy)
Annual tax plus insurance premiums: $31,010
Two-year total: $31,010
Worth noting is the use of a Bronze plan in Year One of the fluctuating version, which is not efficient since it gives up CSRs. The lowest cost Silver plan for us in that instance would cost about $1,000 a year. I caught this after I reverted the model to look at another scenario. I guess one would have to consider their family health circumstances to determine if the extra $1,000 in costs upfront was worth using the more expensive Silver plan.
One shortcoming of the model this highlights is that it does not begin to spend Roth principal while there are still taxable funds left. When I created it, I did not envision that it would suggest an income so high, sustained over a long period. Using some Roth principal each year would reduce LTCG needed to fund our annual spending. While those gains are taxed at 0%, they do push our overall AGI up which still costs us additional taxes and increased health insurance premiums. I will look into adapting this concept to see how it would improve the projection.
If I run this same comparison in later years when there are no more LTCG impacting our AGI, here's what I get.
Scenario 1: Smooth income ($86k/year)
AGI: $86k
Income tax: $4,905
Health insurance (cheapest bronze plan): $1,125
Annual tax plus insurance premiums: $6,030
Two-year total: $12,060
Scenario 2: Fluctuating income ($32k one year, $140k the next)
Year 1:
AGI: $32k
Income tax: $0
Health insurance (cheapest silver plan): $0
Annual tax plus insurance premiums: $0
Year 2:
AGI: $140k
Income tax: $14,775
Health insurance (cheapest bronze plan): $5,812 (still some subsidy)
Annual tax plus insurance premiums: $20,587
Two-year total: $20,587
I think the variable that is making my examples look so much worse than yours is the use of a bronze plan. The reduced cost allows one's AGI to be higher before the cost of insurance starts to rise dramatically. How much really just depends on how expensive individual plans are in one's location and how big the premium subsidy is. Where we are, the value of the premium subsidy and the cost difference between a bronze and silver plan means we save 5k in premiums at the same AGI. At 79.5k AGI the bronze plan costs $0.88 a month and the silver plan we would use is $422 per month.
Should we find ourselves in a situation where we need enough medical care long-term that we're always choosing a silver plan I would definitely re-examine fluctuating AGI because I think it will be more comparable to your example.
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One consideration you aren't thinking here is once you start "losing" the refundable portions of credits, you are still paying a marginal tax rate even if your federal tax owed is still $0 or negative.
Going from $0 owed/$5k refund to $0/$0 still means you had a marginal tax rate.
That doesn't change the conclusion you came to necessarily but it does change how you are thinking about the "tax-free" aspect.
While true, the refundable portion of the child tax credit requires earned income, doesn't it? We have none, so we would forfeit that portion of the CTC regardless.
One of the things I stressed when I gave a "To Roth or Not" presentation last year was looking at which failure mode is more palatable. Paying too much now? Or later?
Personally, for me the failure mode of paying too much in taxes because I took the guaranteed tax savings now is less of an emotional negative than paying too much in taxes to lock in Roth.
I also think a risk people do not consider is how Roth may be implicitly taxed in the future. I do not think it's likely Roth withdrawals will be directly taxed but I would not be surprised if they change to for example impact your ACA subsidies or SS taxation. There is an assumption in a lot of FIRE calculations that Roth growth never will negatively impact your financial situation or have any tax impact.
But the flip side is risk such as the 5 year conversion rule or Roth conversion process changes.
Roth changes may be a risk but in our particular case, we are stuck working with what we can given where our money is located. If we waited until age 60 to access our tIRA money to avoid the 10% penalty, we leave 60% of our money to grow until a point where arguably most of our high spending years are over. In the face of my model telling me we could dramatically increase our spending, perhaps I need to re-examine a 72t SEPP for some portion of that increased spending. That could mitigate future tax treatment of Roth funds.
While I understand that the government can do anything they damn well please, I have a hard time believing they would tax straight Roth withdrawals. That would be double taxation since we've already paid tax once on conversions. Also, if they decided to start taxing Roth gains, it's basically the same thing as a tIRA at that point so why not just eliminate the Roth account entirely. Are there other factors here I'm not thinking of?
This gets to the failure mode analysis I talked about before.
If I have a larger than anticipated tax burden in retirement due to RMDs I... have "won."
I'm definitely a conservative person. I want a larger than anticipated tax burden in retirement too. And for those that are comfortable spending what they already are for the rest of their lives, this is a useless exercise. One could always leave their money where it is and if something happens that does require more income they can change their process then, or if it's a one-time deal they can just take the 10% penalty of an early tIRA withdrawal. But we probably would increase our annual spending a bit. I don't know that I'd kick it up to the 80-100k per year that the model is indicating; it's hard for me to fathom spending that kind of money after years of 40-45k in spending. But I could see an increase to 60-70k, whether it's choosing to fund charitable efforts now, spending a little more on our kid, having more kids than we originally thought we wanted, taking care of a parent, etc.
For me, what the modeling can do is eliminate obscene possibilities. For instance, if I adjust our spending down to 50k for life (plus taxes on top) our RMDs start at 150k at age 72 and work up to 300k (in today's dollars) by age 90 or so. On a certain level, I feel like that is simply poor planning. At 80 our accounts are cumulatively worth $7.5 million and at 100 it's over $19 million. That's obscene. And this is using a growth rate less than the historical average. Though the growth rate is smooth in the model and we know it will not actually be that way.
We would choose to increase spending over our lifetimes, even if we planned to donate all the extra over our original spending amount, rather than allow the money to pile up like that. I think being able to use that money in various ways would be more rewarding, and we can still be conservative re: sequence of returns risk to ensure that we didn't overspend. Arguably, the model isn't telling us much different than what the 4% rule does. At $1.75 million, 4% is an annual spend of 70k per year.
Two errors, and a couple of things you could consider changing.
1. The RMD divisors you are using are the old ones. New ones were published by the IRS in the last few months that will apply to you by the time you're 72. The new ones are higher, meaning that the percentage withdrawals are lower. Probably won't affect your model and solution too much if at all.
I've found articles presenting proposed new divisors but the info on the IRS' website still shows the old ones. I probably just haven't found the right thing yet. I'll keep digging.
2. The standard deduction increases when you hit age 65, and also when your spouse hits age 65.
I believe I took that into consideration, a $1,300 increase per person. I'm guessing you noticed the state standard deduction, which doesn't change in North Carolina.
You're ignoring IRMAA, although with your goals and solution it probably won't affect you, so probably not a real issue.
The model doesn't track increased Medicare premiums based on income since the goal was to not have an income over 85k by that point. And I don't have a good way of illustrating how the cost of medicare supplemental plans increase in cost with age (the model includes thosse), though I suppose one has little control over that so maybe it's not worth thinking about.
In general, I prefer to work in nominal dollars, so if I have a number for my SS in 2041 or whatever, I keep the number in 2041 dollars. Doing so reasonably accurately requires me to inflate everything according to the various inflation rates.
You've increased your portfolios by 5%, but it looks like you haven't adjusted anything else in your spreadsheet. The things that I adjust in my model are my SS amounts, the tax bracket amounts, the standard deduction amounts, the IRMAA brackets and amounts (again, possibly N/A for you), and the FPL amounts.
Some people argue that all of this stuff cancels out. Maybe so, but it makes me feel better to model it all out in case it doesn't. It can add a lot to complexity though, and more complexity can increase the chances of an error in the model.
I always work in nominal dollars (today's dollars) because I hate having to think about inflation across all the number values. The 5% growth rate I assume is based on the historical growth rate of 6.7% before inflation. If we include inflation that rate is more like 10% I believe.
I think the SS values should be somewhat self-adjusting via the increase in average wages until we're 60. So the 27k SS projects we'll receive at 67 will no doubt increase as wages do, though if they change things to address the coming trust exhaustion that will need to be accounted for.
I didn't dig into it for this, but in general since it sounds like you have a child, you might want to model the tax changes as that child gets older - your ACA family size will drop by one at some point, and your child tax credit changes (at age 6 and age 17 or so, IIRC). Things of that nature.
I did account for $2,000 in CTC until the child is 17, then dropping to $500 at 18 and 19, then $0 after. Not assuming college in the name of being conservative with any benefits. I didn't bother with the increased CTC this year, as I believe it's only this year so we'll miss that.
Another thing you might take a look at is i-orp (www.i-orp.com). You can't probably bend it to model what you are trying to accomplish (more spendable when young) as I think the tool tries to maximize lifetime spending instead. But it may be informative to play with. Use the advanced version - there should be a checkbox at the top somewhere.
I will take a look at that!
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I read through the strategies outlined here with considerable interest as I have also been thinking about Roth conversions. Let me start by admitting that my situation is very much in the nature of an extreme first world problem.
My wife and I have over $3M in pre-tax accounts ($1.7M in my tIRA and $1.5M in my wife’s 401k). I am in my late 50s and retired last year but my wife is still working and earning a fabulous salary. Since we get our health insurance through her company, we don’t have any ACA issues to deal with as of now.
We are already in a high tax bracket solely based on my wife's income. Consequently, it appears that I can’t even start my Roth conversions until she decides to retire - which is a few years away. It appears that we have a window of opportunity for Roth conversions between when she decides to retire and RMDs kick in. Looking at the rules, one way or another, we are probably going to be paying hefty income taxes well into old age
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New RMD tables. Age 72 factor should be 27.3 if my spreadsheet is right:
https://www.taxwarriors.com/blog/updated-irs-life-expectancy-tables-mean-smaller-rmds-in-2022
As far as the standard deduction goes, I was looking at column AG on the first worksheet, but I just didn't look down far enough.
You didn't specifically reply about adjusting the standard deduction and tax brackets - they are increased by inflation every year, so you not adjusting them results in more aggressive taxation than will actually be the case, and apparently by quite a bit. I'm 14 years older than you, so I have 14 years less of inflation adjustments before RMD age, and although the standard deduction for a single over 65 is $14,250 (I think that's the right 2021 number), by the time I start RMDs at age 72 it'll be $21,175. (I assume 2% inflation.)
As mentioned before, to adjust your spreadsheet for that would add complexity though. My spreadsheet just has the tax brackets in rows by year and does the basic tax calculations for each year in each row. You could accomplish something similar by adding something like "...*1.02^(row()-3)" in cells like first worksheet cells AM4:AM66 whenever referring to thresholds from the 2021 taxes sheet.
(Of course, with the way things go these days, trying to predict taxes beyond the current year might be viewed as a fool's errand, so you could wave it away with that. You might also just prefer to have the bias in there. It also might not be that bad if you're going to update the worksheet yearly with the new constants on the "2021 taxes" sheet, as I think your situation will tend towards a reasonable optimum if you iterate each year.)
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I read through the strategies outlined here with considerable interest as I have also been thinking about Roth conversions. Let me start by admitting that my situation is very much in the nature of an extreme first world problem.
My wife and I have over $3M in pre-tax accounts ($1.7M in my tIRA and $1.5M in my wife’s 401k). I am in my late 50s and retired last year but my wife is still working and earning a fabulous salary. Since we get our health insurance through her company, we don’t have any ACA issues to deal with as of now.
We are already in a high tax bracket solely based on my wife's income. Consequently, it appears that I can’t even start my Roth conversions until she decides to retire - which is a few years away. It appears that we have a window of opportunity for Roth conversions between when she decides to retire and RMDs kick in. Looking at the rules, one way or another, we are probably going to be paying hefty income taxes well into old age
Probably so. One minor optimization is if your wife retires early in a given calendar year, a Roth conversion that year (and every year between then and RMD age) might make sense.
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We have LTCG in these early years and at that spending level, I can't get our income under 150% of the federal poverty level for a family of 3 ($32,580).
Why not? Just make the higher-income year be first instead of second. At the end of December in Year 1, realize a bunch of extra capital gains to fund your spending in Year 2. The only income that's really unavoidable is the dividends from your taxable account. VTSAX tends to pay about 2% (less this year though as dividends haven't kept pace with share prices), meaning you need to have in the ballpark of $1.5 million in taxable VTSAX for the dividends to approach your $32k number....which if that's the case, and taxable is only 35% of your portfolio, you can afford to spend a lot more than $85k annually.
I think the variable that is making my examples look so much worse than yours is the use of a bronze plan.
I don't think your choice of bronze vs. silver changes the math here very much. The subsidy is always calculated based on the price of the second-cheapest silver plan. The rate it phases out is the same regardless of what plan you pick, except at the lower end of the income range where your income is so low that the bronze plan is free, which means you're wasting some of the subsidy you could have had if you bought a better health plan. Even with some wasted subsidy in your low-income year it just impacts the bottom line up to the amount of wasted subsidy, which likely doesn't explain much of the discrepancy between your smooth vs. fluctuating income scenarios.
A bigger factor is just the way the marginal rates work out given the second-cheapest silver plan that results from your combination of age/location/family size. The fluctuating income scenario requires your high-income year to have enough income taxed at the lower post-ACA rates to make up for all of the income taxed at the higher ACA phase-out rates. That's not happening for you with the numbers you were using. Of note is that you're still getting some subsidy (and therefore paying a marginal rate of 22% + 8.5% = 30.5%) at $140k AGI, while the childless couple in Seattle phases out of subsidies at around $105k and pays just 22% from then on. Based on the unsubsidized insurance cost you cite in your $215k income scenario, I calculate that your subsidies won't phase out completely until about $210k. That means even if you did a three-year cycle with two low income years and one high-income year you would still probably pay more than if you kept your income even.
I'm tempted to make a blog post with some different graphs to illustrate this concept.
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One consideration you aren't thinking here is once you start "losing" the refundable portions of credits, you are still paying a marginal tax rate even if your federal tax owed is still $0 or negative.
Going from $0 owed/$5k refund to $0/$0 still means you had a marginal tax rate.
That doesn't change the conclusion you came to necessarily but it does change how you are thinking about the "tax-free" aspect.
While true, the refundable portion of the child tax credit requires earned income, doesn't it? We have none, so we would forfeit that portion of the CTC regardless.
Not this year! The child tax credit is fully refundable in 2021. Current law would have us revert back to the previous rules next year, though the Democrats in Congress have stated a desire to extend this year's rules into the future. I wouldn't be at all surprised to see them stick that provision into a future reconciliation bill, especially if the monthly checks prove popular.
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New RMD tables. Age 72 factor should be 27.3 if my spreadsheet is right:
https://www.taxwarriors.com/blog/updated-irs-life-expectancy-tables-mean-smaller-rmds-in-2022
As far as the standard deduction goes, I was looking at column AG on the first worksheet, but I just didn't look down far enough.
You didn't specifically reply about adjusting the standard deduction and tax brackets - they are increased by inflation every year, so you not adjusting them results in more aggressive taxation than will actually be the case, and apparently by quite a bit. I'm 14 years older than you, so I have 14 years less of inflation adjustments before RMD age, and although the standard deduction for a single over 65 is $14,250 (I think that's the right 2021 number), by the time I start RMDs at age 72 it'll be $21,175. (I assume 2% inflation.)
As mentioned before, to adjust your spreadsheet for that would add complexity though. My spreadsheet just has the tax brackets in rows by year and does the basic tax calculations for each year in each row. You could accomplish something similar by adding something like "...*1.02^(row()-3)" in cells like first worksheet cells AM4:AM66 whenever referring to thresholds from the 2021 taxes sheet.
(Of course, with the way things go these days, trying to predict taxes beyond the current year might be viewed as a fool's errand, so you could wave it away with that. You might also just prefer to have the bias in there. It also might not be that bad if you're going to update the worksheet yearly with the new constants on the "2021 taxes" sheet, as I think your situation will tend towards a reasonable optimum if you iterate each year.)
I don't update any of the tax thresholds. I'm kinda operating under the assumption that the tax brackets will increase similarly to the standard deduction and that both of those will track general inflation. I know that could get out of whack a little, but I don't know how I could effectively add those subtle differences in.
I have the model set up in general for no inflation because I didn't want to be looking at values 50 years from now and have a hard time putting that in perspective because we think in today's dollars and relationship to material costs
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We have LTCG in these early years and at that spending level, I can't get our income under 150% of the federal poverty level for a family of 3 ($32,580).
Why not? Just make the higher-income year be first instead of second. At the end of December in Year 1, realize a bunch of extra capital gains to fund your spending in Year 2. The only income that's really unavoidable is the dividends from your taxable account. VTSAX tends to pay about 2% (less this year though as dividends haven't kept pace with share prices), meaning you need to have in the ballpark of $1.5 million in taxable VTSAX for the dividends to approach your $32k number....which if that's the case, and taxable is only 35% of your portfolio, you can afford to spend a lot more than $85k annually.
Fair point! Though our income in the second year is over $172,750 so our capital gains are no longer free. So moving those capital gains from the lower-income year would generate additional tax. I think this is only an issue with a substantially higher income. In the example you provided, shifting capital gains would likely still keep the big income year under $172,750 AGI so you could double up with no effect.
Though I could also see the possibility that you'd still be getting some ACA premium subsidies and those shifted LTCG would cost you that as well. Our SLCSP for three people is $1,496 per month, $17,952 per year, which at an upper limit of 8.5% of AGI, means premium subsidies don't fully phase out until 211,200.
I don't think your choice of bronze vs. silver changes the math here very much. The subsidy is always calculated based on the price of the second-cheapest silver plan. The rate it phases out is the same regardless of what plan you pick, except at the lower end of the income range where your income is so low that the bronze plan is free, which means you're wasting some of the subsidy you could have had if you bought a better health plan. Even with some wasted subsidy in your low-income year it just impacts the bottom line up to the amount of wasted subsidy, which likely doesn't explain much of the discrepancy between your smooth vs. fluctuating income scenarios.
Ah, you're right. I don't know what I was thinking there.
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One consideration you aren't thinking here is once you start "losing" the refundable portions of credits, you are still paying a marginal tax rate even if your federal tax owed is still $0 or negative.
Going from $0 owed/$5k refund to $0/$0 still means you had a marginal tax rate.
That doesn't change the conclusion you came to necessarily but it does change how you are thinking about the "tax-free" aspect.
While true, the refundable portion of the child tax credit requires earned income, doesn't it? We have none, so we would forfeit that portion of the CTC regardless.
Not this year! The child tax credit is fully refundable in 2021. Current law would have us revert back to the previous rules next year, though the Democrats in Congress have stated a desire to extend this year's rules into the future. I wouldn't be at all surprised to see them stick that provision into a future reconciliation bill, especially if the monthly checks prove popular.
I'm highly confident most of the last stimulus will be put into law for the future including child tax credit and dependent care credits. In addition to the ACA subsidy changes and elimination of the cliff. If I'm wrong well I'll just go on Sedera
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This is the dance we have been dancing. We have found alternating years helpful for reasons not mentioned on this thread. We have a trickle of regular w-2 income. We also have two offspring. One on high school and the other in a two year technical program. Low years are good for FAFSA and EITC. High years have involved selling appreciated stocks in taxable so that we have enough money to finance our lifestyle.
Last year was not a FAFSA year as we will not have anyone in higher education during the 2022-2023 school year. This year counts for younger offspring’s first year of college.
Lots of moving parts and tax changes to digest too. In the end there is probably no optimal just directional better or worse.
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While I understand that the government can do anything they damn well please, I have a hard time believing they would tax straight Roth withdrawals. That would be double taxation since we've already paid tax once on conversions. Also, if they decided to start taxing Roth gains, it's basically the same thing as a tIRA at that point so why not just eliminate the Roth account entirely. Are there other factors here I'm not thinking of?
A fairly reasonable situation I can think of is withdrawals of Roth gains being included in calculating things such as ACA subsidies, tax credits, and SS taxation.
There are of course more alarmist perspectives you could take such as wealth taxes factoring in your Roth accounts or straight up different taxation on Roth withdrawals (similar to how capital gains are taxed differently).
Personally, I think the likelihood of actual direct taxation is low. But I do think the chances Roth is indirectly taxed to be reasonably high in the timelines we talk about for FIRE.
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While I understand that the government can do anything they damn well please, I have a hard time believing they would tax straight Roth withdrawals. That would be double taxation since we've already paid tax once on conversions. Also, if they decided to start taxing Roth gains, it's basically the same thing as a tIRA at that point so why not just eliminate the Roth account entirely. Are there other factors here I'm not thinking of?
A fairly reasonable situation I can think of is withdrawals of Roth gains being included in calculating things such as ACA subsidies, tax credits, and SS taxation.
There are of course more alarmist perspectives you could take such as wealth taxes factoring in your Roth accounts or straight up different taxation on Roth withdrawals (similar to how capital gains are taxed differently).
Personally, I think the likelihood of actual direct taxation is low. But I do think the chances Roth is indirectly taxed to be reasonably high in the timelines we talk about for FIRE.
If Roth gains are the most likely point of attack then we'd get a reprieve until 60, which is most of our early retirement. Given how minimal the withdrawal of Roth gains are before 60, it seems like it wouldn't be very effective for influencing ACA subsidies or tax credits. Almost everyone is done with kids, careers are mostly over, and ACA participation is mostly over by that point. I mean, they could still do this if they want to target the likes of Peter Theil's $5 billion Roth IRA but that's not going to affect me one bit.
Do you imagine this would happen as an attempt to end the Roth IRA without actually killing it? Taxing gains would make a Roth IRA no different than a taxable account. Why would people bother contributing to one at that point? Any taxation of withdrawals would make it the worst investment vehicle available because of the double taxation, also immediately eliminating contributions/conversions. I guess I'm struggling to understand the political motivation. Just because?
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Do you imagine this would happen as an attempt to end the Roth IRA without actually killing it? Taxing gains would make a Roth IRA no different than a taxable account. Why would people bother contributing to one at that point? Any taxation of withdrawals would make it the worst investment vehicle available because of the double taxation, also immediately eliminating contributions/conversions. I guess I'm struggling to understand the political motivation. Just because?
This is assuming that Roth IRA taxation would be exactly what capital gains taxation. Surely you can imagine ways it might be different (maybe it's a 10% tax with graduation similar to capital gains, etc, lots of possibilities).
Anyways, my point here is assumptions go into many things in this equation. Your assumption here (which you obviously believe quite strongly) is that Roth gains will never have a negative tax impact and always remain 100% tax consequence free.
That's fine. Just make sure you recognize it as an assumption and analyze risk accordingly.
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Do you imagine this would happen as an attempt to end the Roth IRA without actually killing it? Taxing gains would make a Roth IRA no different than a taxable account. Why would people bother contributing to one at that point? Any taxation of withdrawals would make it the worst investment vehicle available because of the double taxation, also immediately eliminating contributions/conversions. I guess I'm struggling to understand the political motivation. Just because?
This is assuming that Roth IRA taxation would be exactly what capital gains taxation. Surely you can imagine ways it might be different (maybe it's a 10% tax with graduation similar to capital gains, etc, lots of possibilities).
Anyways, my point here is assumptions go into many things in this equation. Your assumption here (which you obviously believe quite strongly) is that Roth gains will never have a negative tax impact and always remain 100% tax consequence free.
That's fine. Just make sure you recognize it as an assumption and analyze risk accordingly.
The thought of Roth funds becoming taxed in new ways has never crossed my mind before now, hence the questioning. Why is it that you feel so strongly that this will inevitably happen, because of the Peter Theil/Mitt Romney type examples?
I'm definitely going to take a fresh look at things with future taxation in mind but my options are somewhat limited since two thirds of our money is tied up in IRAs. It might end up being a case of "well that sucks that I didn't see that coming but since I've exhausted all our taxable funds I don't have much choice but to press forward."
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The thought of Roth funds becoming taxed in new ways has never crossed my mind before now, hence the questioning. Why is it that you feel so strongly that this will inevitably happen, because of the Peter Theil/Mitt Romney type examples?
Huh?
I've never been saying anything along these lines.
This is what I initially said, which kicked off this back/forth:
I do not think it's likely Roth withdrawals will be directly taxed but I would not be surprised if they change to for example impact your ACA subsidies or SS taxation. There is an assumption in a lot of FIRE calculations that Roth growth never will negatively impact your financial situation or have any tax impact.
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Personally, I think the likelihood of actual direct taxation is low. But I do think the chances Roth is indirectly taxed to be reasonably high in the timelines we talk about for FIRE.
I'm not trying to get into an argument about it. I was just wondering what info has you forming that opinion. I'm considering the idea of future Roth taxation for the first time here so any input is input worth looking at, as I currently have none.
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A fairly reasonable situation I can think of is withdrawals of Roth gains being included in calculating things such as ACA subsidies, tax credits, and SS taxation.
...
Personally, I think the likelihood of actual direct taxation is low. But I do think the chances Roth is indirectly taxed to be reasonably high in the timelines we talk about for FIRE.
I hadn't thought of this, but it does seem plausible. It wouldn't invalidate the promise of tax free withdrawals or modify the Roth statute at all. It would just modify other benefits so that people with multiple resources (specifically Roth holders) don't get quite as much "dole" from ACA subsidies, SS tax breaks and so on as people lacking those same resources.
Re motivations, I can certainly imagine a continued trend toward viewing Roths as the province of fat cats like Thiel, rather than a tool of the everyday person. At that point, a populist party or a social justice party could each have reason to "stop fat cats from profiting at the trough of benefits for the needy" or some such.
Not saying it will happen, just agreeing that over 30-40 years, it easily could happen.
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^ is about what I'd say as well. We're talking timelines for most of us that are 30-50+ years if we FIRE.
That is a long time for taxes to materially stay the same.
For reference, Roth has only been around since 1997 (24 years).
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I spent yesterday thinking about @ender's comment about Roth taxation changing, pondering how I might modify my FIRE spending strategy to mitigate that risk, or perhaps even just diversify a bit. In my model we spend down taxable accounts until they're exhausted while doing Roth conversions. Once that bucket is empty we transition to spending Roth IRA principal until age 60. After 60 we spend Roth principal and gains, with RMDs from our tIRAs at age 72 and beyond.
Hypothetically speaking, accessing anything but Roth principal generates taxable income. Taking tIRA withdrawals early, Roth conversions, taxable withdrawals (assuming the account is equities w/ capital gains). Assuming one's taxable equities aren't approaching 100% capital gains, taxable funds represent the most access to your money for the same taxable income. tIRA withdrawals and Roth conversions are 1:1 with how much income they create. Roth principal is free but the total amount available in our case is low because we were high earners so our Roth account balances are small. The spread on our taxable dollars diminishes as capital gains go up but right now it's close to a 2:1 ratio of accessible money to income generated.
The value of that broader access was very apparent in the Spring of last year when we thought we'd have to buy a house with cash because a bank wouldn't lend to us (no "legit" incomes). We would not have been able to access a couple hundred thousand dollars without paying significantly higher taxes for the year if every dollar was taxable income.
So I thought perhaps I was approaching the model the wrong way. If I'm trying to give us access to as much of our money at any given time as possible without triggering penalties, etc. wouldn't it make more sense to leave as much of our taxable funds intact as possible? So I made a second model that uses taxable funds only until our Roth principal is large enough to cover spending and then we convert to Roth funds until age 60. However, we stop conversions at age 55 and the 5-year rule carries us those last 5 years. During those 5 years, we generate our income from long-term capital gains since our taxable accounts are highly appreciated now that we haven't used those funds in almost 20 years.
It shouldn't have come as a surprise but the newer model gave us much greater access to our money leading up to age 60. In the first model, since we had exhausted our taxable accounts, our only access was to any Roth principal we hadn't already spent. In the second model, we'd been spending Roth principal as fast as we were building it so that bucket was still very small but our taxable accounts had been left to grow. We have access to both principal and gains there so the difference was twice the available money, 800k vs. 400k.
Once we get past 60, tIRA funds and Roth IRA gains are available penalty-free so our whole portfolio opens up.
In the process of creating the second model, I made several improvements to the data set. Previously, I had capital gains as a static percentage of our taxable accounts. I knew this became inaccurate as years of gains accumulated so I addressed that by adding a couple columns to update the basis in our taxable accounts as money is spent (or not) each year. I also added a flag so that I could harvest capital gains (incurring the taxable event without actually spending down the taxable account). In the process of doing all this, I also had to change some formula inaccuracies for different calculations. I hadn't designed the model to withstand a higher income; I assumed our spending would stay low in the name of yearly tax efficiency. Now that I've changed what I'm asking the model to show me some faults were exposed, like not properly calculating long-term capital gains when total income after the standard deduction pushes into the third tax bracket.
Another interesting effect of the second model is that we end up with a much more even distribution of funds across taxable, tIRA, and Roth IRA buckets in the run-up to 60. I mentioned in an earlier post that right now our allocation is 60% tIRA/35% taxable/5% Roth. In the first model, at 60 our allocation is 20% tIRA/0% taxable/80% Roth. In the second model, our allocation at 60 is 22% tIRA/42% taxable/36% Roth. Both models basically have the same total portfolio balance at age 60. They're within 1% of each other.
I'm still digesting but I think the second model is the better path. The better distribution of funds across account types would provide more flexibility toward future legislative changes. Maybe Roth IRAs do get taxed in a way that affects us. Maybe long-term capital gains start getting taxed in the lowest two tax brackets. Perhaps the biggest concern with the first model is that as soon as we exhaust our taxable accounts, the only penalty-free way we have to generate income is Roth conversions. If future legislation eliminated the Roth conversion process we'd have no choice but to pay penalties on IRA withdrawals to support our spending until age 60. The model exhausts our taxable accounts at age 49. That's a long time until 60. Yikes!
Edit: typo
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Another interesting effect of the second model is that we end up with a much more even distribution of funds across taxable, tIRA, and Roth IRA buckets in the run-up to 60.
That does seem more robust. You can vary details as conditions become apparent. Maybe the best thing now is the action path that preserves the biggest variety of options.
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Another interesting effect of the second model is that we end up with a much more even distribution of funds across taxable, tIRA, and Roth IRA buckets in the run-up to 60.
That does seem more robust. You can vary details as conditions become apparent. Maybe the best thing now is the action path that preserves the biggest variety of options.
Now that I've marinated on it a little bit, even more options are bubbling to the surface. I don't plan to borrow money on margin but if we had to for some reason, it's an option with a healthy taxable balance. Also, if we ever needed to do something with banking, we've already experienced how they poo-poo funds in retirement accounts with young people. Not that I'd expect 800k in taxable account to win the war alone there, but maybe as we get older there's some blend or whatever that might be the difference between being able to do something and not.
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It amazing how little time I have to spend on this now that I don't sit at a desk all day trying to fill the hours. I'll hopefully have time in a couple weeks to dig in here.
I like keeping a large taxable account for emergency margin and other reasons. But maybe I'll drain it.
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I spent yesterday thinking about @ender's comment about Roth taxation changing, pondering how I might modify my FIRE spending strategy to mitigate that risk, or perhaps even just diversify a bit. In my model we spend down taxable accounts until they're exhausted while doing Roth conversions. Once that bucket is empty we transition to spending Roth IRA principal until age 60. After 60 we spend Roth principal and gains, with RMDs from our tIRAs at age 72 and beyond.
Mr. Green, thanks for the detailed commentary, it offered a helpful perspective on maintaining a "balanced" portfolio in terms of tax status and one that is both flexible and accessible.
We were not ultra high earners and therefore are fortunate to not be as lopsided at the onset of early retirement in terms of tIRA/taxable/Roth. It's still in our plan to do as much Roth Converting as we can.
Our models are more rudimentary I'm sure, but my back of the napkin approach, along with an increasing willingness to sacrifice more than a sliver of efficiency for my desired flexibility, has led me to a similar conclusion about not letting taxable account balance fall to zero.
Our rough plan basically always calls for maintaining some minimum amount of "trigger money" in a taxable account. Something that can be accessed at the drop of a hat if we get a wild hair (or get in a tight spot). In the past it has funded buying new (to us) vehicles and buying an investment home for cash at auction. We aren't in the market for a new home or a small recreational farm or investment property, but we regularly discuss what the max amount is that we would drop on something of that sort if the right deal came along. We plan to try to keep at least 30% of that amount as a floor in our taxable account.
What was the result of your encounter last spring when you thought you'd have to pay cash? Did you wind up doing that? Or did the lender come thru?
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I think Max every year is what we'll do while we have kids on our aca plan. To me it leads to future flexibility. And we'll also just margin borrow the first 5 years vs selling taxable shares. We can always tap our Roth contributions if we get a margin call.
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I've been trying to work through our own Roth conversion strategy recently and I had settled on a plan that looked similar to Mr. Green's original proposal (spend from taxable while doing Roth conversions, then switch to spending seasoned Roth money after exhausting the taxable). But the points about flexibility and access in the last post make a lot of sense, so I'm now re-thinking the plan.
Mr. Green, could you share your updated spreadsheet if you're willing?
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@Watchmaker give me a few days. We're camping out of the car in the mountains of Colorado right now. I can do this whenever we hit up a local library for wifi.
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@Watchmaker give me a few days. We're camping out of the car in the mountains of Colorado right now. I can do this whenever we hit up a local library for wifi.
No rush-- much appreciated!
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Fascinating discussion. It hits home how de-accumulation is harder then accumulation and how each person circumstances is different and unique. I am pondering the same questions. In my case, I'm nearly 56 and due to the rule-of-55 I have penalty free access to the bulk of my tIRA accounts (I can do partial distributions), but I do not need the money (yet). As with many here, the largest accounts are tIRA and I (think) I would like to increase the value Roth accounts. Also, in my case the ACA is irrelevant since I will be getting subsidized health-care through my former mega-org employer (same premium as employees). I also continue to work part time and make enough for all my spending needs so I do not need to access my funds. Question I have for myself:
- How aggressively do I roll tIRA funds into Roth while I have part-time income? If at all? Rolling over sufficient amounts to alleviate the RMD problems means I will have to pay marginal taxes @ 22% for roll-overs from tIRA to Roth. Yet, if I do not roll over, my tIRA will grow forcing quite large RMD when the time comes. So are roll-overs @ 22% marginal tax rates worth doing?
- How aggressively do I roll tIRA funds into Roth if I no longer have part time income? I could certainly roll-over and not having part-time income means I can take advantage of a marginal tax rate of 12% for the roll-over, but I also need to live either from 1) distributing tIRA funds or 2) brokerage account funds. If I do #1 I can roll-over less without hitting my higher marginal tax rates while #2 second means I deplete brokerage funds which reduces (in my mind) flexibility.
First world problems, still I do not (yet) see a clear path forward.
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- How aggressively do I roll tIRA funds into Roth while I have part-time income? If at all? Rolling over sufficient amounts to alleviate the RMD problems means I will have to pay marginal taxes @ 22% for roll-overs from tIRA to Roth. Yet, if I do not roll over, my tIRA will grow forcing quite large RMD when the time comes. So are roll-overs @ 22% marginal tax rates worth doing?
If I were in your shoes, I'd figure out what my marginal bracket will be when I'm 72 or so and I have RMDs and SS. If it's equal to or higher than 22%, most would say to convert. You can rerun the analysis each year between now and then.
- How aggressively do I roll tIRA funds into Roth if I no longer have part time income? I could certainly roll-over and not-having part-time income means I can take advantage of a marginal tax rate of 12% for the roll-over, but I also need to live either from 1) distributing tIRA funds or 2) brokerage account funds. If I do #1 I can roll-over less without hitting my higher marginal tax rates while #2 second means I deplete brokerage funds which reduces (in my mind) flexibility.
First world problems, still I do not (yet) see a clear path forward.
You could Roth convert whatever makes sense tax-wise, spend brokerage until it is low or gone, then spend from Roth. Spending from Roth in this case, if it's lower than your Roth conversion amounts, is essentially the same as distributing from the traditional IRA whatever you're spending, with the excess automatically being parked in the tax-free Roth until needed later.[/list]
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- How aggressively do I roll tIRA funds into Roth while I have part-time income? If at all? Rolling over sufficient amounts to alleviate the RMD problems means I will have to pay marginal taxes @ 22% for roll-overs from tIRA to Roth. Yet, if I do not roll over, my tIRA will grow forcing quite large RMD when the time comes. So are roll-overs @ 22% marginal tax rates worth doing?
If I were in your shoes, I'd figure out what my marginal bracket will be when I'm 72 or so and I have RMDs and SS. If it's equal to or higher than 22%, most would say to convert. You can rerun the analysis each year between now and then.
Well, back of the envelope calculations suggest converting at 22% might make sense for me which is the reason I am pondering the question in the first place. Still, a lot of assumptions about the future and projection into the future. I will have to a do a more rigorous analysis when the time comes.
- How aggressively do I roll tIRA funds into Roth if I no longer have part time income? I could certainly roll-over and not-having part-time income means I can take advantage of a marginal tax rate of 12% for the roll-over, but I also need to live either from 1) distributing tIRA funds or 2) brokerage account funds. If I do #1 I can roll-over less without hitting my higher marginal tax rates while #2 second means I deplete brokerage funds which reduces (in my mind) flexibility.
First world problems, still I do not (yet) see a clear path forward.
You could Roth convert whatever makes sense tax-wise, spend brokerage until it is low or gone, then spend from Roth. Spending from Roth in this case, if it's lower than your Roth conversion amounts, is essentially the same as distributing from the traditional IRA whatever you're spending, with the excess automatically being parked in the tax-free Roth until needed later.[/list]
Yes, converting up to the max (whatever make sense tax-wise) and then living on brokerage and/or Roth distribution as need be will probably be what I do.
It is somewhat crazy that not having part-time income would in some ways help me. What a tangled web our politicians weave.
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@Watchmaker here's the updated model.
Changes from the previous version (which I'll remove upthread because it's inferior in every way):
- Eliminated the column for traveling abroad. The original purpose was to max Roth conversions in a year when there'd be no ACA insurance. This was no longer valuable as Roth conversions are manually entered at larger amounts.
- Added a column to dictate what bucket each year's expenses should be pulled from (tIRA, Roth, Taxable). Allows for finer control.
- Added columns to identify exact capital gain percentages of the Taxable account with growth so that this figure is always accurate, rather than an estimate based on averages.
- Added a column to harvest capital gains.
- Updated RMDs to the new 2021 values.
The model is still a bit crude in some ways. It will not do capital gain harvesting and spending taxable money in the same year since I have no plans to do that. I am 97% sure the model handles all the buckets of money (tIRA, Roth, Taxable) correctly depending on what type of withdrawal is done each year. However, I cannot be sure that it will handle edge cases someone else might introduce through their own personal financial situation.
And of course, the carryover caveats:
- State tax and ACA premium values are based on North Carolina, the county of my residence, and the expected family size for my personal situation. The ACA spreadsheets I made are very easily updated to your local insurance premiums though.
- The ACA premium reflected in the model can be updated fairly easily. Just needs to point to different cells in the ACA silver/bronze plan spreadsheets.
- I have notes in place to help delineate where formulas may change with age, like when Social Security, Medicare, and RMDs start, in case someone would want to modify those (i.e. taking social security at a different age than I have specified).
That's all I can think of at the moment. I'll edit the post if I've forgotten something.
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@Watchmaker here's the updated model.
Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on how much I should spend from Taxable vs Roth.
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@Watchmaker here's the updated model.
Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on home much I should spend from Taxable vs Roth.
That ended up being the case for our circumstances as well. If we keep our income low enough to receive considerable ACA subsidies it leads to an obscene portfolio value later in life at the expense of reduced access to our money while young. We don't think we'll need more access while young but the future is unknown and if the default option leads to obscene balances we'll never dream of spending, why not pay a little more tax to increase access in case something unforeseen would require additional funds earlier in life. That's my current thought process anyway.
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@Watchmaker here's the updated model.
Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on home much I should spend from Taxable vs Roth.
That ended up being the case for our circumstances as well. If we keep our income low enough to receive considerable ACA subsidies it leads to an obscene portfolio value later in life at the expense of reduced access to our money while young. We don't think we'll need more access while young but the future is unknown and if the default option leads to obscene balances we'll never dream of spending, why not pay a little more tax to increase access in case something unforeseen would require additional funds earlier in life. That's my current thought process anyway.
I'm glad I started this thread and that we're all coming to the same conclusions. Thank you guys for all the mental gymnastics and banter. I'm sure this may all change again in 3 months when we know more about whatever the Dems pass with respect to making ACA changes permanent.
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@Watchmaker here's the updated model.
Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on home much I should spend from Taxable vs Roth.
That ended up being the case for our circumstances as well. If we keep our income low enough to receive considerable ACA subsidies it leads to an obscene portfolio value later in life at the expense of reduced access to our money while young. We don't think we'll need more access while young but the future is unknown and if the default option leads to obscene balances we'll never dream of spending, why not pay a little more tax to increase access in case something unforeseen would require additional funds earlier in life. That's my current thought process anyway.
I'm glad I started this thread and that we're all coming to the same conclusions. Thank you guys for all the mental gymnastics and banter. I'm sure this may all change again in 3 months when we know more about whatever the Dems pass with respect to making ACA changes permanent.
If anything, making the ACA changes permanent supports the ability to declare higher incomes because the subsidy cliff stays gone.
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@Watchmaker here's the updated model.
Thanks for sharing, I'm just adjusting it for my circumstances now. On first blush, it looks like I'm better off with more Roth conversions early in FIRE (100% converting Trad to Roth over 10 years), even though I lose most of the healthcare subsidies. I'm still working on home much I should spend from Taxable vs Roth.
That ended up being the case for our circumstances as well. If we keep our income low enough to receive considerable ACA subsidies it leads to an obscene portfolio value later in life at the expense of reduced access to our money while young. We don't think we'll need more access while young but the future is unknown and if the default option leads to obscene balances we'll never dream of spending, why not pay a little more tax to increase access in case something unforeseen would require additional funds earlier in life. That's my current thought process anyway.
I'm glad I started this thread and that we're all coming to the same conclusions. Thank you guys for all the mental gymnastics and banter. I'm sure this may all change again in 3 months when we know more about whatever the Dems pass with respect to making ACA changes permanent.
If anything, making the ACA changes permanent supports the ability to declare higher incomes because the subsidy cliff stays gone.
Correct. That's all we really need then you really just worry about your tax bracket and add your ACA cost on as a percent tax.
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I've nothing to add, except for a big THANK YOU to all the participants in this thread--I'm wrestling with many of the same questions, and you all have brought up a lot of good things to bear in mind as I plan.
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I've nothing to add, except for a big THANK YOU to all the participants in this thread--I'm wrestling with many of the same questions, and you all have brought up a lot of good things to bear in mind as I plan.
+1
I *hope* I'm close to that time when I need to think about a Roth conversion pipeline (or not), so...thanks for the resources!
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Following so that I can dig into some of the more detailed posts later.
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We are trying to figure this out now. Ages 63 and 62, no kids, living off of retirement accounts (tIRA) no need to take ACA into consideration. So do we pull out way more than we need and put the extra into our Roths? Should we even worry whether about our marginal tax rate is 12% or 22%?
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We are trying to figure this out now. Ages 63 and 62, no kids, living off of retirement accounts (tIRA) no need to take ACA into consideration. So do we pull out way more than we need and put the extra into our Roths? Should we even worry whether about our marginal tax rate is 12% or 22%?
Depends on a lot of things. How much of your stash are you spending each year? Will you get Social Security in a few years? Would you prefer to see your extra money used later in life, even if it's gifting/charitable donations or do you want It dispersed after death?
If I could afford everything I planned to do and still had extra, but had no intention of gifting money while alive, I'd just pay as little tax as possible so the pile is as large as possible upon my death. If I only had just enough, I also might be fairly choosy about paying any more tax than I had to. However, if I had extra and wanted access to it while alive, whether it was to spend more or gift it, I would probably elect to pay more tax to get at that money. Likewise, I would also elect to pay more tax now if my tIRAs were so large, that come RMDs my tax rate would jump into a higher bracket, causing me to pay a much larger amount of taxes in old age.
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We are spending about 3%, and that is while being frugal but not skimping on anything. But it would be good to have access to more in case we want or need to spend on something big.
I get the general principle but not sure how to work out the details of the various moving parts.
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We are spending about 3%, and that is while being frugal but not skimping on anything. But it would be good to have access to more in case we want or need to spend on something big.
I get the general principle but not sure how to work out the details of the various moving parts.
If you're only spending 3% you're likely leaving a lot of money to heirs. Which means you really need to learn understand and optimize your money for future generations. Unless you're giving it all away.
It's all just a function of future tax implications your spending rate doesn't really matter in the trad to roth conversation it's more about account balances and marginal tax rates now vs when rmds hit. Also expected growth of traditional accounts as well
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We don’t have any heirs that we’re hell-bent on leaving money to. So it’s spend it over the next 20-30 years and/or charity.
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I guess my question is how to compare the costs of leaving the money in the tIRAs and possibly taking out lump sums occasionally vs. siphoning a chunk of it every year into the Roths. Whenever I run one of those Roth conversion calculators they say it's a wash, but I may not be entering the right numbers.
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I guess my question is how to compare the costs of leaving the money in the tIRAs and possibly taking out lump sums occasionally vs. siphoning a chunk of it every year into the Roths. Whenever I run one of those Roth conversion calculators they say it's a wash, but I may not be entering the right numbers.
For this specific question I would be looking at my tax rates. What tax bracket will you be in with all sources of money except Roth conversions? Then look at RMDs and you can project out some gains to your tIRA until 72 but it won't be perfect. This would still give you an idea of what your income will be once you hit RMDs. (There is some proposed legislation for raising the minimum age to 75. No idea if that will happen though.)
If your income now and over the years leading up to RMDs is significantly different than once you start drawing RMDs then you are quite possible being tax inefficient and it would behoove you to withdraw some of that tIRA money consistently leading up to RMDs. Do you use Excel at all? You could probably whip up a fairly simple illustration with some basic Excel skills.
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I used i-orp.com which seems to be a super powerful modeler of optimal withdrawal strategies. An interesting finding is that for a "typical" retired couple, Roth conversions make virtually no difference in the end. But for me, it showed that if I'm super aggressive with conversions early, like to the top of the 24% tax bracket even though my retirement marginal rate would otherwise be probably 12%, then my yearly disposible income can go up by well over 10% per year in perpetuity. What makes me different than the typical situation? I have a TON of money in my tIRA, a lot in my brokerage, and almost nothing right now in my Roth, for similar reasons as Mr. Greene.
But even with this prediction, I think i-orp understates the advantages of very aggressive Roth conversions early in (early) retirement:
1. State tax arbitrage. You can move to a state with no state income tax and do all your conversions. Then you are free to move wherever you like and not have to worry about state income tax on your tIRA (and similar) distributions, because now most of your withdrawals will be from Roths.
2. If you are married, one of you is going to die before the other--possibly many years before. And suddenly, the surviving spouse will be paying at the much higher single tax payer rate. But if you've crammed as much of your tIRA as possible into your Roth (and probably shrunk your brokerage account down while doing it), then you don't have to worry about that tax bomb.
Anyway, I had considered only doing Roth conversions in a way that would not trigger capital gains taxes, nor a higher income tax bracket. But after plugging numbers into i-orp, I'm convinced I should do very aggressive early conversions, even to the tune of tens of thousands of dollars "extra" in taxes paid right away.
I'm still playing with i-orp, but it, and this thread which caused me to plug my info into it, has been *incredibly* eye opening.
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I used i-orp.com which seems to be a super powerful modeler of optimal withdrawal strategies. An interesting finding is that for a "typical" retired couple, Roth conversions make virtually no difference in the end. But for me, it showed that if I'm super aggressive with conversions early, like to the top of the 24% tax bracket even though my retirement marginal rate would otherwise be probably 12%, then my yearly disposible income can go up by well over 10% per year in perpetuity. What makes me different than the typical situation? I have a TON of money in my tIRA, a lot in my brokerage, and almost nothing right now in my Roth, for similar reasons as Mr. Greene.
But even with this prediction, I think i-orp understates the advantages of very aggressive Roth conversions early in (early) retirement:
1. State tax arbitrage. You can move to a state with no state income tax and do all your conversions. Then you are free to move wherever you like and not have to worry about state income tax on your tIRA (and similar) distributions, because now most of your withdrawals will be from Roths.
2. If you are married, one of you is going to die before the other--possibly many years before. And suddenly, the surviving spouse will be paying at the much higher single tax payer rate. But if you've crammed as much of your tIRA as possible into your Roth (and probably shrunk your brokerage account down while doing it), then you don't have to worry about that tax bomb.
Anyway, I had considered only doing Roth conversions in a way that would not trigger capital gains taxes, nor a higher income tax bracket. But after plugging numbers into i-orp, I'm convinced I should do very aggressive early conversions, even to the tune of tens of thousands of dollars "extra" in taxes paid right away.
I'm still playing with i-orp, but it, and this thread which caused me to plug my info into it, has been *incredibly* eye opening.
It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.
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It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.
So.... I agree it's unorthodox. Do you think it's wrong? By calling it a "game" it makes me think you think this is risky.
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It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.
So.... I agree it's unorthodox. Do you think it's wrong? By calling it a "game" it makes me think you think this is risky.
No he's saying it's almost impossible to find real data and past experiences with what we're all trying to do here. Honestly this is the largest reason I came back to the forums was the mental gymnastics around all of this.
My current plan is to leverage low cost margin available today while converting to the top of the 12% tax bracket. Currently I live in a 6% income tax state. But even converting that much money I likely will have the traditional funds I have maintain or grow. But since I'm leveraging margin I want to have a large slush fund of tapable Roth conversions at my disposal in the even of a margin call. This allows a few things for me.
1. My money stays invested longer both the Roth contributions and my taxable funds.
2. It allows me the flexibility in the event of a margin call to pay it off . Or if the rates become incredibly unattractive on the margin.
I'd say this falls into a mildly riskier strategy bc it may magnify an early downturn in RE. But at the end of the day it's likely extremely better long term. At current account balances I have over 2 years of spending available on margin and I have Roth contributions to back it all up til the 5 year bridge kicks in the really slushy funds
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It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.
So.... I agree it's unorthodox. Do you think it's wrong? By calling it a "game" it makes me think you think this is risky.
Sorry if that was misleading. I consider whole whole financial system a game. Everyone is trying to pay as little tax as possible, or work as little as possible, or something else that is game-y. By unorthodox, I meant who else out there has saved up seven figures by their 30s, stopped working, expects to live off of an income source that most only start thinking about in their 50s, while trying to optimize income and taxes over the remaining 40-60 years of one's life? Pretty much no one. So when you think you have something figured out or are questioning a strategy, there are very few people to use as a sounding board. I think the exercise is a lot of fun but when only a handful of people are doing it, the "validation of seeing others do it too" is harder to come by. As a novice, that's one of the most common ways that we learn so it's uncomfortable to find yourself in a bit of a vacuum. It is for me, anyway. I'm glad there are smarter people on here than me!
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Mr. Green, now that I'm digging in to this, I feel like there are more people doing this than you'd think. And I'm now contemplating doing a big (like $100K) Roth conversion this year, while I'm still working. Have you spent much time with i-orp? I know your situtation is different because you have real estate, but I think it might be powerful enough to handle it. And there are paid options, too, though consensus seems to be they aren't really better, and in some cases are worse, than i-orp. The main problem with i-orp is that the brilliant, kind soul who runs it is in his/her 80s, and unless someone steps up with a succession plan and agrees to take it over, well...
I found several interesting threads by searching for "i-orp" in bogleneads. A real rabbit hole!
ETA: the Bogleheads have already helped me a LOT. One reason i-orp is so aggressive with conversions is because you tell it what your current asset allocation is in each account--and if you are already doing the tax efficient thing, your Roths have all equities and all your bonds are in your tax deferreds. So to optimize, the program wants to get you out of the lower performing account (the tax deferred) and into the high growth one (Roth). But that, obviously, completely screws up your asset allocation (unless you are 100% stocks or 100% bonds, but most of us aren't). To "fix" the problem, you lie to i-orp and tell it that every account (Roth, tax deferred, and after tax) all have the same asset allocation. Once I did that, it no longer recommended I do conversions up to the 24% bracket and do them fast, but just recommended up to the 12% and do them slow.
So this "solution" isn't perfect--your Roths *should* be more aggressive, and will continue to be your whole life. So i-orp's output will assume a (slightly?) worse outcome for you than you'd actually experience, following its advice. But anyway, it's still an incredibly powerful tool.
Note, too, that the wisdom of aggressive conversions is a function of predicted returns of both equities and bonds. It's *really* sensitive to even a percentage difference in prediction. So I don't know what to make of this. Possibly that I should just go somewhere between "super aggressive conversions" and "no conversions." But man, this stuff is hard.
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Mr. Green, now that I'm digging in to this, I feel like there are more people doing this than you'd think. And I'm now contemplating doing a big (like $100K) Roth conversion this year, while I'm still working. Have you spent much time with i-orp? I know your situtation is different because you have real estate, but I think it might be powerful enough to handle it. And there are paid options, too, though consensus seems to be they aren't really better, and in some cases are worse, than i-orp. The main problem with i-orp is that the brilliant, kind soul who runs it is in his/her 80s, and unless someone steps up with a succession plan and agrees to take it over, well...
I found several interesting threads by searching for "i-orp" in bogleneads. A real rabbit hole!
Maybe there are more than I realize. That would be great!
I've been messing around with i-orp for about 10 minutes now and interestingly, it will not allow for a retirement age under 39. That's a challenge for us since we're already retired but I'm playing with it anyway.
It's nice to see i-orp essentially reaching a similar conclusion as I have, which is that aggressive Roth conversion and transitioning to spending Roth funds as quickly as possible is the best way to go, though there are some differences. Though I'm struggling to understand some of the specific calculations it is reaching. It does not appear to be calculating taxable gains correctly, even though I've input our cost basis. Trying to figure out why that is.
This is a great generic calculator, though I like the idea of my expanded model a little better because I can fine-tune for ACA inputs (choosing a bronze plan vs. silver plan) and I can fine-tune the income a little bit better. One thing that's nice about building your own model, even if it's just a recreation of something like i-orp, is that it gives you a much better understanding of the underlying data and why the numbers are what they are.
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Mr. Green, now that I'm digging in to this, I feel like there are more people doing this than you'd think. And I'm now contemplating doing a big (like $100K) Roth conversion this year, while I'm still working. Have you spent much time with i-orp? I know your situtation is different because you have real estate, but I think it might be powerful enough to handle it. And there are paid options, too, though consensus seems to be they aren't really better, and in some cases are worse, than i-orp. The main problem with i-orp is that the brilliant, kind soul who runs it is in his/her 80s, and unless someone steps up with a succession plan and agrees to take it over, well...
I found several interesting threads by searching for "i-orp" in bogleneads. A real rabbit hole!
Maybe there are more than I realize. That would be great!
I've been messing around with i-orp for about 10 minutes now and interestingly, it will not allow for a retirement age under 39. That's a challenge for us since we're already retired but I'm playing with it anyway.
It's nice to see i-orp essentially reaching a similar conclusion as I have, which is that aggressive Roth conversion and transitioning to spending Roth funds as quickly as possible is the best way to go, though there are some differences. Though I'm struggling to understand some of the specific calculations it is reaching. It does not appear to be calculating taxable gains correctly, even though I've input our cost basis. Trying to figure out why that is.
This is a great generic calculator, though I like the idea of my expanded model a little better because I can fine-tune for ACA inputs (choosing a bronze plan vs. silver plan) and I can fine-tune the income a little bit better. One thing that's nice about building your own model, even if it's just a recreation of something like i-orp, is that it gives you a much better understanding of the underlying data and why the numbers are what they are.
Yep it's fun but slightly limited.
I still can't understand why someone would choose a silver plan over a bronze plan.
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Excellent discussion. I've been spreadsheeting this stuff myself lately. I'll have to read through all of this thread and make adjustments. Thanks so much for the input and insights!
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I still can't understand why someone would choose a silver plan over a bronze plan.
If your income is over 200% of the poverty level, you'll probably find silver to be a worse deal than bronze or gold. This is due to the practice of "silver loading," where the cost of providing cost-sharing subsidies for low-income silver plan subscribers has been baked into the premium for silver plans ever since Republicans in Congress decided they didn't want to reimburse insurance companies for these subsidies anymore. If you're under 200% of the poverty level, silver is probably the way to go.
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I still can't understand why someone would choose a silver plan over a bronze plan.
If your income is over 200% of the poverty level, you'll probably find silver to be a worse deal than bronze or gold. This is due to the practice of "silver loading," where the cost of providing cost-sharing subsidies for low-income silver plan subscribers has been baked into the premium for silver plans ever since Republicans in Congress decided they didn't want to reimburse insurance companies for these subsidies anymore. If you're under 200% of the poverty level, silver is probably the way to go.
Gotcha. I think this was in bidens agenda to fix but as long as they keep the current plans moving as they are today per the last stimulus I'll be happy. I think he wanted to move that up to the gold level plans and base subsidies on them
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There was a little discussion in 2birds1stone's journal about the book "Die With Zero." I've been thinking about that a little bit and after playing around with i-orp, which also exhausts your funds by default, I wanted to make my model do the same. I was just curious to see what it would say. Well, that basically turned into a major modification project that took most of today. My last version allowed me to change each year's income source (after-tax, tIRA, Roth) but I couldn't combine multiple sources in the same year. So rather than use flags, I updated the model to allow for amounts from each bucket. There's a little bit more manual entry, but it also makes the formulas easier because there aren't all these if statements in the cells. While I was at it I added conditional formatting to some of the manual entry columns so it "alerts" if one of my values is a problem.
I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
It took a lot of massaging to get our accounts under $1 million by 80+ years of age because of all the different failures involved. Exhausting Roth principal before 60 is a failure. Leaving too much in tIRAs where the RMDs run away in old age is a failure. Having choppy tax rates from one period to the next is a failure. And so on and so forth.
From a starting point of $1.75 million, spending after taxes and healthcare premiums looks like this:
Now through age 44: 80k
45-49: 100k
50-65: 120k
66-70: 100k
71-75: 80k
76+: 60k
I've really been digging the idea of that kind of spending arc through life because I think it more accurately reflects how people really spend money. A traditional 4% SWR on $1.75 million would be 70k across the board but that's just not going to happen once travel is curtailed.
The hilarious thing is this is already low, assuming the market doesn't crash before the end of the year because we're way beyond a 5% gain this year. So I guess we'll be donating a lot of money as we get older!
My numbers are in line with what i-orp tells me so that helps me feel good that I don't have any glaring problems with my model. I may try to sanitize this newest version and toss it up here. I think I cut out almost as many columns as I added so it's not really any more complex. It just allows the data to be controlled a bit differently.
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There was a little discussion in 2birds1stone's journal about the book "Die With Zero." I've been thinking about that a little bit and after playing around with i-orp, which also exhausts your funds by default, I wanted to make my model do the same. I was just curious to see what it would say. Well, that basically turned into a major modification project that took most of today. My last version allowed me to change each year's income source (after-tax, tIRA, Roth) but I couldn't combine multiple sources in the same year. So rather than use flags, I updated the model to allow for amounts from each bucket. There's a little bit more manual entry, but it also makes the formulas easier because there aren't all these if statements in the cells. While I was at it I added conditional formatting to some of the manual entry columns so it "alerts" if one of my values is a problem.
I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
It took a lot of massaging to get our accounts under $1 million by 80+ years of age because of all the different failures involved. Exhausting Roth principal before 60 is a failure. Leaving too much in tIRAs where the RMDs run away in old age is a failure. Having choppy tax rates from one period to the next is a failure. And so on and so forth.
From a starting point of $1.75 million, spending after taxes and healthcare premiums looks like this:
Now through age 44: 80k
45-49: 100k
50-65: 120k
66-70: 100k
71-75: 80k
76+: 60k
I've really been digging the idea of that kind of spending arc through life because I think it more accurately reflects how people really spend money. A traditional 4% SWR on $1.75 million would be 70k across the board but that's just not going to happen once travel is curtailed.
The hilarious thing is this is already low, assuming the market doesn't crash before the end of the year because we're way beyond a 5% gain this year. So I guess we'll be donating a lot of money as we get older!
My numbers are in line with what i-orp tells me so that helps me feel good that I don't have any glaring problems with my model. I may try to sanitize this newest version and toss it up here. I think I cut out almost as many columns as I added so it's not really any more complex. It just allows the data to be controlled a bit differently.
I mean that's the most likely thing 4% is worst case. We likely all die with lots of money. Like there is a 50% chance my wife and I die billionaires. Can't wait
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It's any incredibly unorthodox position. You're playing a game that literally almost no one plays, so the education gets a lot harder to come by. I wish it was easier because I'm still a novice.
So.... I agree it's unorthodox. Do you think it's wrong? By calling it a "game" it makes me think you think this is risky.
No he's saying it's almost impossible to find real data and past experiences with what we're all trying to do here. Honestly this is the largest reason I came back to the forums was the mental gymnastics around all of this.
My current plan is to leverage low cost margin available today while converting to the top of the 12% tax bracket. Currently I live in a 6% income tax state. But even converting that much money I likely will have the traditional funds I have maintain or grow. But since I'm leveraging margin I want to have a large slush fund of tapable Roth conversions at my disposal in the even of a margin call. This allows a few things for me.
1. My money stays invested longer both the Roth contributions and my taxable funds.
2. It allows me the flexibility in the event of a margin call to pay it off . Or if the rates become incredibly unattractive on the margin.
I'd say this falls into a mildly riskier strategy bc it may magnify an early downturn in RE. But at the end of the day it's likely extremely better long term. At current account balances I have over 2 years of spending available on margin and I have Roth contributions to back it all up til the 5 year bridge kicks in the really slushy funds
Something else I've thought about is whether or not it makes sense to convert more in Roth conversions so you can end up with more taxable, letting you do more loans against your investments, similar to what you are saying.
The more Roth principal you have as a result of conversions means you have a ton more flexibility for these types of things because you can at any time after the 5 year holding period convert those to taxable and thus have more options for these pretty quickly.
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This is a complicated problem. I have spent lots of energy considering it and what could be the best path forward, as we are now in the beginning stages of this process.
If you are simply looking to pay as little tax as possible now, a blend of income from taxable accounts (long-term capital gains) and Roth IRA conversions is best. In 2021, married folks can convert $25,100 from tIRA to Roth tax-free. If you have children, that really juices the amount you can convert by allowing you to offset your federal taxes with the child tax credit. If planned for correctly, in 2021 a married couple could have an income of $106,150 consisting solely of Roth conversions and long-term capital gains and pay zero federal tax. If you have enough kids I suppose it could be even more, especially with the newly expanded child tax credit.
However, there's a long-term angle to consider as well. If your tIRA balances are high enough (ours are), solely focusing on minimizing tax burden now may lead to tIRA balances that are so large by the time you hit Required Minimum Distributions that you're paying significantly higher taxes on an income in old age that is so large you likely can't spend it all because your mobility and health are declining. This aspect is especially worth considering if you knew balancing current and future taxes would result in a larger income now that you could enjoy while younger and healthier. The obvious caveat here is that we don't know exactly what future taxes will be so this optimization won't be perfect.
The ACA "tax" will happen no matter what. The only way you can limit that is by either choosing a cheaper bronze plan so that the loss of premium tax credits is less or relocating to another place where health insurance premiums are lower overall. There are potential drawbacks to both of these though. You may not want to move, or someone in your family may have health problems that make a bronze plan more expensive than a silver plan after considering the cost of care in addition to insurance premiums.
As to @boarder42's comment about leaving money untaxed to lessen the impact of SORR, this really depends on whether you need all those dollars, which is what @seattlecyclone was getting at. If you need to spend 80k per year it doesn't matter whether your portfolio is 1 million or 500k. However, if you can spend less than 80k (belt-tightening), or if you were simply creating an 80k income in the name of tax efficiency and aren't actually spending all that money each year, then having a larger portfolio balance is going to be better for SORR.
However, if your portfolio balance is high enough that you're not concerned about running out of money, and your long-term plan is to create a certain level of income yearly no matter what because that brings down your tIRA balance over time to make RMDs more equitable to current taxation, then performing a Roth conversion in the midst of a crash is a nice little bonus since you get to convert more shares for the same dollar amount.
Even after FIRE, I propose that someone with a huge tIRA balance should consider being more aggressive with Roth conversions, rather than conservative. Over time your portfolio will grow faster than the income tax bracket thresholds are increased. That means the current tax year allows you to convert the largest percentage of your portfolio for the same tax cost. There are caveats with this as well since tax rates can change and markets can crash, but considering the overall long-term trend of markets going up, delaying will only lead to converting smaller and smaller percentages of your portfolio if your intention is to convert up to a certain tax bracket threshold for tax efficiency.
I have gone so far as to create an Excel spreadsheet that calculates our overall tax rate (federal + state + ACA premiums) each year so that I can model tax efficiency over our lifetimes. At a 40-45k annual spend, being the most tax-efficient now (paying $0 federal tax) leads to ridiculous RMDs later in life, assuming average historical returns continue into the future. Like 200k in RMDs ridiculous (in today's dollars). So it would actually behoove us to perform larger Roth conversions now to make that tax rate more even across our lifetimes.
Hi Mr. Green- Just a quick question as I am not as up to speed as most people on here but trying to educate myself.
In your post it is stated that In 2021, married folks can convert $25,100 from tIRA to Roth tax-free
I tried to google this but could not find any info on this. Is there somewhere I could get more info on this as it would be perfect in my situation.
Thank you all very much for such great discussions- much appreciated for someone just learning!
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https://arstechnica.com/cars/2021/08/senate-votes-to-restrict-ev-tax-credits-despite-climate-crisis/?amp=1
Well this could dictate some choices in a given year. If the 100k cap stays in place and you buy a new ev. So many variables at play in this game. Really wish they'd simplify the tax code. Info find the game fun but the avg person has no chance understanding all this
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@woody51285 that's the non itemized standard deduction level 25100 the first 25100 any couple earns isn't taxed federally and increases annually.
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Ah- OK. Now i get it. Thanks for helping out someone just learning!
I appreciate it!
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Ah- OK. Now i get it. Thanks for helping out someone just learning!
I appreciate it!
That's why we're all here.
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https://arstechnica.com/cars/2021/08/senate-votes-to-restrict-ev-tax-credits-despite-climate-crisis/?amp=1
Well this could dictate some choices in a given year. If the 100k cap stays in place and you buy a new ev. So many variables at play in this game. Really wish they'd simplify the tax code. Info find the game fun but the avg person has no chance understanding all this
Wow, this seems super stupid.
I wonder what percentage of electric vehicle purchases are going to qualify. Hopefully it's $100k single/$200k household at least.
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@woody51285 that's the non itemized standard deduction level 25100 the first 25100 any couple earns isn't taxed federally and increases annually.
Of course you still may owe state or local income taxes. And there are other impacts as well - reduced ACA subsidies and potentially effects on financial aid (FAFSA or CSS profile).
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@woody51285 that's the non itemized standard deduction level 25100 the first 25100 any couple earns isn't taxed federally and increases annually.
Of course you still may owe state or local income taxes. And there are other impacts as well - reduced ACA subsidies and potentially effects on financial aid (FAFSA or CSS profile).
+1. Sometimes when we get to talking about taxes we tend to ignore state level taxes because it's different for everyone. I think there's an implied "plus whatever your state will hit you with."
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So I made a second model that uses taxable funds only until our Roth principal is large enough to cover spending and then we convert to Roth funds until age 60. However, we stop conversions at age 55 and the 5-year rule carries us those last 5 years. During those 5 years, we generate our income from long-term capital gains since our taxable accounts are highly appreciated now that we haven't used those funds in almost 20 years.
Please explain the implementation of this. I'm getting confused about the wording.
Years 1-5: Spend from taxable and do Roth conversions large enough to cover future spending.
Year 6-age 55: Spend from the conversions as they mature; continue converting. Taxable continues growth and tax-advantaged accounts decrease.
55-59.5: Use the last of the Roth conversions. Or use taxable?
59.5+: Spend from tax-advantaged.
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Wait you can use the 5 year rule even if you don't retire at 55? I thought you had to end your employment associated with a 401k to start tapping it at 55
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This thread is more or less on topic with something I was about to post over in the Taxes area. If it's too hijack-y just LMK and I'll remove it.
I've been putting my ducks in a row to start MBR, and I'm pretty excited about that. But my wife also has around $400k in old employer plans (403b and TSP) and traditional deductible IRAs. We're on track for ye 'ole RMD tax bomb with about $2.1M in tax-deferred accounts and close to 30 years to go before RMDs start...while we continue to pump $50-$60k tax-deferred into our 401/3 and 457 plans every year, and we'll likely work until 50+.
We only have about $100k in taxable brokerage and $100k in Roth IRAs. As you can see, we've prioritized the pre-tax accounts, hence the pending RMD tax bomb.
The mitigating strategies I've considered so far are: 1) converting the $400k in old employer accounts to Roth over the next N years while we're still working, or 2) quitting work way earlier than planned and starting to draw down pre-tax accounts via some combination of SEPP and Roth conversion laddering, or 3) both.
I'd be happy to convert some of that $400k to the top of the 22% bracket or into 24% ASAP before FAFSA/CSS come into play in a few years (oldest starts HS in a year). Except this year, because I'm trying to capture $3,000 extra from the 2021 expanded child tax credit by going nuts with pre-tax contributions to get AGI below $150k.
In order to give a bunch more AGI breathing room for conversions (and possibly qualify for more need-based aid for college), I could also cut my hours at work substantially. I'd probably have to cut back on pre-tax contributions as well in that case, but my marginal rate for conversions is going to be 22% regardless.
There is no silver bullet, and as tax laws and rates continue to change it all amounts to a game of whack-a-tax-mole anyway.
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It definitely makes sense to keep a decent amount in traditional in case of late-life medical expenses, as distributions will be tax free above the floor, also, if charitably inclined, the later-in-iife QCD's will be tax free distributions, thus one would needlessly pay taxes if they fully converted and could have avoided taxes on certain types of expenses.
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So I made a second model that uses taxable funds only until our Roth principal is large enough to cover spending and then we convert to Roth funds until age 60. However, we stop conversions at age 55 and the 5-year rule carries us those last 5 years. During those 5 years, we generate our income from long-term capital gains since our taxable accounts are highly appreciated now that we haven't used those funds in almost 20 years.
Please explain the implementation of this. I'm getting confused about the wording.
Years 1-5: Spend from taxable and do Roth conversions large enough to cover future spending.
Year 6-age 55: Spend from the conversions as they mature; continue converting. Taxable continues growth and tax-advantaged accounts decrease.
55-59.5: Use the last of the Roth conversions. Or use taxable?
59.5+: Spend from tax-advantaged.
You got is right. 55-59.5 we'd use the last of the Roth conversions. However, during those 5 years we now have no taxable income. This would be a problem for ACA unless you wanted to be on Medicaid so we can harvest long-term capital gains to generate that income. There would be quite a bit of gains to harvest since we'd been drawing on Roth funds for the last 15 or so years so those taxable shares would likely be highly appreciated.
Wait you can use the 5 year rule even if you don't retire at 55? I thought you had to end your employment associated with a 401k to start tapping it at 55
I'm not sure what the rules are around tapping a 401k before age 60. We've already quit working and have rolled our 401ks into IRAs so we wouldn't encounter any limitations there.
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This thread is more or less on topic with something I was about to post over in the Taxes area. If it's too hijack-y just LMK and I'll remove it.
I've been putting my ducks in a row to start MBR, and I'm pretty excited about that. But my wife also has around $400k in old employer plans (403b and TSP) and traditional deductible IRAs. We're on track for ye 'ole RMD tax bomb with about $2.1M in tax-deferred accounts and close to 30 years to go before RMDs start...while we continue to pump $50-$60k tax-deferred into our 401/3 and 457 plans every year, and we'll likely work until 50+.
We only have about $100k in taxable brokerage and $100k in Roth IRAs. As you can see, we've prioritized the pre-tax accounts, hence the pending RMD tax bomb.
The mitigating strategies I've considered so far are: 1) converting the $400k in old employer accounts to Roth over the next N years while we're still working, or 2) quitting work way earlier than planned and starting to draw down pre-tax accounts via some combination of SEPP and Roth conversion laddering, or 3) both.
I'd be happy to convert some of that $400k to the top of the 22% bracket or into 24% ASAP before FAFSA/CSS come into play in a few years (oldest starts HS in a year). Except this year, because I'm trying to capture $3,000 extra from the 2021 expanded child tax credit by going nuts with pre-tax contributions to get AGI below $150k.
In order to give a bunch more AGI breathing room for conversions (and possibly qualify for more need-based aid for college), I could also cut my hours at work substantially. I'd probably have to cut back on pre-tax contributions as well in that case, but my marginal rate for conversions is going to be 22% regardless.
There is no silver bullet, and as tax laws and rates continue to change it all amounts to a game of whack-a-tax-mole anyway.
You could just stop contributing to pre-tax accounts right now if that wouldn't put you in a significantly higher tax bracket. There is only so much tax smoothing you can do if you are in high tax brackets now, don't plan to stop working until later in life, and are also socking away a lot of money. You've basically created a self-imposed floor because your tax rates are naturally high for most years of your life. You need gaps (low/no income years to pull some of those higher tax years into to bring taxes down across multiple years.
If you need all that income and retirement saving then there's not much you can do with that. It is what it is and the tax man is going to get his bite. But if you don't need the extra money and are just having a hard time pulling the trigger, well that's certainly tick in the column for leaving work sooner. But if you like what you do then maybe you don't care. In that case you just optimize what you can and don't worry about the rest.
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I am having a hard time following these posts. I am retired now and my wife is retiring soon. We were planning on converting about 50K per year from TIRA to ROTH. But what I think I picked up, is that at that income level our child would have to go on Medicaid. Is that right? Is there a hard line where children can go onto ACA and not Medicaid or is it different from state to state? And if you reach that line then you probably price out of subsidies???
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I am having a hard time following these posts. I am retired now and my wife is retiring soon. We were planning on converting about 50K per year from TIRA to ROTH. But what I think I picked up, is that at that income level our child would have to go on Medicaid. Is that right? Is there a hard line where children can go onto ACA and not Medicaid or is it different from state to state? And if you reach that line then you probably price out of subsidies???
I'm not sure if it's a required component of Medicaid in all states but the ones I'm familiar with have programs that will insure children at higher income limits than traditional medicaid. The idea is to make sure kids get healthcare. The programs change with age too. I think one program supports kids from birth through age 6 and another will cover them through to adulthood. Each of those programs has a different income threshold.
In the event you have a child that qualifies for those programs based on your income, that child will not be eligible for ACA insurance subsidies. The expectation is that the child would enroll in the state insurance program. Adults will still qualify for subsidies and your insurance premiums will be priced based on the number of household members who only have ACA insurance as an option, not the total number of household members.
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I am having a hard time following these posts. I am retired now and my wife is retiring soon. We were planning on converting about 50K per year from TIRA to ROTH. But what I think I picked up, is that at that income level our child would have to go on Medicaid. Is that right? Is there a hard line where children can go onto ACA and not Medicaid or is it different from state to state? And if you reach that line then you probably price out of subsidies???
I'm not sure if it's a required component of Medicaid in all states but the ones I'm familiar with have programs that will insure children at higher income limits than traditional medicaid. The idea is to make sure kids get healthcare. The programs change with age too. I think one program supports kids from birth through age 6 and another will cover them through to adulthood. Each of those programs has a different income threshold.
In the event you have a child that qualifies for those programs based on your income, that child will not be eligible for ACA insurance subsidies. The expectation is that the child would enroll in the state insurance program. Adults will still qualify for subsidies and your insurance premiums will be priced based on the number of household members who only have ACA insurance as an option, not the total number of household members.
Supporting Mr. Green with additional details: @MattyP, fear not, it's going to work.
1. It's state to state where the line is between ACA and Medicaid, but within each state, it's a hard line in the sense that the "line" is a set of qualification rules related to income, family status, etc. If the child qualifies, the child qualifies.
2. Something to know is that there are 2 kinds of states: states with "Medicaid expansion" (most states; roughly, the liberal states and some of the others), and states without Medicaid expansion (some of the conservative states, like Texas, where I live). This will come into play below if you follow the links.
3. The result is summarized from a Medicaid viewpoint in this link (one of many consumer explanations, though not a complete one). https://www.verywellhealth.com/your-assets-magi-and-medicaid-eligibility-4144975
4. Above a certain income, you have to buy your own insurance instead of using ACA, but that income is more than 50k. Under the max parental income (this year $86,600 for a family of 3), each person in the family will individually either qualify for ACA or Medicaid, one or the other. I guess there are cases where parent has ACA and kid has Medicaid, but it still works. Medicaid will be subsidized for sure. ACA will have subsidies from the lowest eligible income up to the highest eligible income. The lower limit depends on Medicare expansion in your state but the upper limit is federal. See the table and calculators in the following links to verify that a household of 3 people qualifies for premium subsidy up to $86,600 income.
https://obamacarefacts.com/2021-obamacare-eligibility-chart-and-subsidy-calculator/
https://www.healthinsurance.org/obamacare/subsidy-calculator/
5. The details are particularly beneficial this year and next year because of the American Rescue Plan (ARP), the Biden stimulus bill that became law in March. Basically the underlying ACA had relatively few holes of the type you're worried about, so it's already much better than you'd think, but the ARP temporarily fills in the few gaps. Here is an article with detailed explanations of the regular long term ACA, and what the extra benefits of the ARP are. https://www.healthinsurance.org/obamacare/beware-obamacares-subsidy-cliff/
PS. Fwiw, I've been on ACA for over five years, using "income" from tIRA->Roth transfers while spending down other assets. Also I have repeatedly helped my ex-GF do her ACA paperwork for her and her child. The state always does a Medicaid determination for the child. So far they've always concluded child is ineligible for Medicaid, at which point instantly the child qualifies for ACA. Once the paperwork is finished, the policy activates on the first of the following month.
For me, next year might be when I finally start drawing from Roths instead of just transferring, but the ACA piece works great. My premiums net of subsidy are usually between $0/month and $54/month, depending on details that year.
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I'll give an example from my home state of North Carolina, which is not a Medicaid expansion state. For a family of 3, the income limit for a child age 0-5 to be on Medicaid is $46,116/year. Adults would still be on private ACA insurance plans unless income was drastically lower. For children age 6-18 the income limit drops to $29,208/year for Medicaid. However, there is a secondary program for kids over 5 called NC Health Choice, basically Medicaid-lite. Incomes ranging from $29,208-46,344 per year qualify for that. So income would need to get above $46,000 for a child to qualify for private ACA-subsidized insurance instead of a state-based plan.
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And in Washington (https://www.hca.wa.gov/health-care-services-supports/apple-health-medicaid-coverage/children), kids up to age 19 qualify for free Medicaid coverage in a family of three up to $47k annual income. Between $47k-$69k, the kids would be charged $20-30/month premiums for the same coverage. Above that level they'd be on Marketplace coverage.
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Kids really help high spenders on the exchange is what I've gathered so far from this in my state with 4 kids I have to be at 81k to keep them off medicaid.
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Oh man, if we had four kids in Washington they'd be on Medicaid as long as our income was less than $112,800.
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It definitely makes sense to keep a decent amount in traditional in case of late-life medical expenses, as distributions will be tax free above the floor, also, if charitably inclined, the later-in-iife QCD's will be tax free distributions, thus one would needlessly pay taxes if they fully converted and could have avoided taxes on certain types of expenses.
That's true! My parents are doing QCD for about half their RMD's, and it's working well for them.
In our case, even if we manage to convert $400k to Roth at 22% or 24%, we'll still have another $1.7M (and growing) in tax deferred. That could be around $3M by the time we might reasonably finish converting the $400k, hopefully by 2026 when the tax rates are scheduled to go up.
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Wait you can use the 5 year rule even if you don't retire at 55? I thought you had to end your employment associated with a 401k to start tapping it at 55
I've thought about this before - wondering how long you have to be employed to do this.
Could you find a company where you're eligible for the 401k day 1, start at 55, initiate a rollover of a large IRA balance, then immediately retire after a day working and then start taking withdrawals?
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You could just stop contributing to pre-tax accounts right now if that wouldn't put you in a significantly higher tax bracket.
It's funny -- the 'problem' I'm trying to solve is too much future taxes due to too much in pre-tax accounts. Yet maxing out pre-tax accounts has been so much a part of my journey to FI for so long (>2 decades) that the thought of cutting back on those contributions gives me intense feelings of FOMO. I think I need to spend some time resolving that conflict one way or the other.
If you need all that income and retirement saving then there's not much you can do with that. It is what it is and the tax man is going to get his bite. But if you don't need the extra money and are just having a hard time pulling the trigger, well that's certainly tick in the column for leaving work sooner. But if you like what you do then maybe you don't care. In that case you just optimize what you can and don't worry about the rest.
Well summarized! This would be much easier if I didn't like my job. Ah well, fingers crossed that my next boss is an intolerable nitwit...my troubles would be over! :D
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Wait you can use the 5 year rule even if you don't retire at 55? I thought you had to end your employment associated with a 401k to start tapping it at 55
I've thought about this before - wondering how long you have to be employed to do this.
Could you find a company where you're eligible for the 401k day 1, start at 55, initiate a rollover of a large IRA balance, then immediately retire after a day working and then start taking withdrawals?
Yes, but I think the company might not like you much.
And @boarder42, the rule in this case is separating from service in the year in which you turn 55 (or after that date). So if your 55th birthday will be on December 29th this year, you could retire/quit/be fired this past January 1st and qualify. Or you could retire two years from now and still use the rule.
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This is a great discussion. It's a lot to take in.
I am wondering how a pension might affect everything. I'll use our case as an example. I am retired but my wife continues to work. We are thinking maybe about 5 more years for her, which puts us both at 50. The bulk of our retirement now is in tIRA and 403b. We even have a good chunk of money in an HSA. We have maybe only 2 years worth of living expenses split between taxable and Roth accounts. We obviously won't start collecting the pension until age 65, but it's a decent amount of money.
Being likely 5 years away from full FIRE for both of us has me thinking more about where our income is going to come from the first 9.5 years or so. I am certain we'll need more money sooner than later as we have plans for some extensive travel.
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This is a great discussion. It's a lot to take in.
I am wondering how a pension might affect everything. I'll use our case as an example. I am retired but my wife continues to work. We are thinking maybe about 5 more years for her, which puts us both at 50. The bulk of our retirement now is in tIRA and 403b. We even have a good chunk of money in an HSA. We have maybe only 2 years worth of living expenses split between taxable and Roth accounts. We obviously won't start collecting the pension until age 65, but it's a decent amount of money.
Being likely 5 years away from full FIRE for both of us has me thinking more about where our income is going to come from the first 9.5 years or so. I am certain we'll need more money sooner than later as we have plans for some extensive travel.
Gotta figure out your "effective" rate on the IRA withdrawals after 65 with the pension (and SS) and see if it makes more sense to do Roth conversions before 59.5, basically.
Potentially do a cash out refinance if you have a lot of home equity right before retiring too.
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This is a great discussion. It's a lot to take in.
I am wondering how a pension might affect everything. I'll use our case as an example. I am retired but my wife continues to work. We are thinking maybe about 5 more years for her, which puts us both at 50. The bulk of our retirement now is in tIRA and 403b. We even have a good chunk of money in an HSA. We have maybe only 2 years worth of living expenses split between taxable and Roth accounts. We obviously won't start collecting the pension until age 65, but it's a decent amount of money.
Being likely 5 years away from full FIRE for both of us has me thinking more about where our income is going to come from the first 9.5 years or so. I am certain we'll need more money sooner than later as we have plans for some extensive travel.
Gotta figure out your "effective" rate on the IRA withdrawals after 65 with the pension (and SS) and see if it makes more sense to do Roth conversions before 59.5, basically.
Potentially do a cash out refinance if you have a lot of home equity right before retiring too.
Hmm, didn't think about the home equity. We do have a decent amount of equity. SS won't be much for me. I only worked for 10 years in an actual high paying job. My spouse, on the other hand, will be collecting a lot more than me. The pension will be north of 200K. If we let the tax deferred sit for another 15+ years it will be way more than we need to live on. The pension really is just an added bonus for our old people money.
FWIW my spouse is still funding her 403b quite extensively. I'm wondering if putting that on hold and throwing more in the taxable account is another option. It would still keep us in the 12% bracket.
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You could just stop contributing to pre-tax accounts right now if that wouldn't put you in a significantly higher tax bracket. There is only so much tax smoothing you can do if you are in high tax brackets now, don't plan to stop working until later in life, and are also socking away a lot of money. You've basically created a self-imposed floor because your tax rates are naturally high for most years of your life. You need gaps (low/no income years to pull some of those higher tax years into to bring taxes down across multiple years.
I've done exactly this in response to this thread. I am 53, soon to be 54. We've been stuffing money into my t401k and tIRA for a decade and have about 750k in those accounts with about 200k in Roth and 100k in taxable accounts. I'm planning to retire in three years, just before my 57th bday. One thing I realize is that I simply have more money to pay taxes with now than I will in retirement.
We'll have several years to spend out of the trad accounts before RMDs kick in but if I continue putting all my money in there, I'm going to wind up with a flood of money coming at me in my 70s. I'd rather spread that out and try to get my trad balance down prior to 72 for all the reasons described in this thread.
One conundrum I have relates to health insurance choices and Roth conversions. When I stop working, I will be eligible for retiree medical insurance from my employer but I have to pay full freight which will be $1000 per month. In addition, I have to start it immediately and once I stop it, I can't ever go back on it. I thought it might be a good idea to do massive trad conversions for the first couple of years while doing retiree medical, then flip to ACA once my traditional balances are much lower.
I think it would be better for me to just start out on ACA at the beginning of retirement and take out whatever we need from out traditional 401k accounts to control our income at an optimal level. Spend what we need to live on and convert the rest to Roth at that time.
Anyway, I wanted to thank all the posters on this thread for sharing your wisdom and hard work on this and so many topics.
Best,
AM
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This thread is really pushing me to put more into ROTH IRA/401k while we are in the 12% bracket. We don't have the assets or timeline others do in this thread, but I think by the time we get to contemplating pulling the plug the traditional balances will be much higher than our ROTH balances. Somebody has mentioned already that it's just been brainless trad contributions since the start. Now, I'm revisiting.
As many others have mentioned, thanks to all those who put a ton of deep think into this thread.
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This thread is really pushing me to put more into ROTH IRA/401k while we are in the 12% bracket. We don't have the assets or timeline others do in this thread, but I think by the time we get to contemplating pulling the plug the traditional balances will be much higher than our ROTH balances. Somebody has mentioned already that it's just been brainless trad contributions since the start. Now, I'm revisiting.
As many others have mentioned, thanks to all those who put a ton of deep think into this thread.
If you're in the 12% bracket, you should definitely take advantage of that to pump up the Roth.
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This thread is really pushing me to put more into ROTH IRA/401k while we are in the 12% bracket. We don't have the assets or timeline others do in this thread, but I think by the time we get to contemplating pulling the plug the traditional balances will be much higher than our ROTH balances. Somebody has mentioned already that it's just been brainless trad contributions since the start. Now, I'm revisiting.
As many others have mentioned, thanks to all those who put a ton of deep think into this thread.
If you're in the 12% bracket, you should definitely take advantage of that to pump up the Roth.
It's new this year for us. Thanks for the advice. Seeing discussions like this really put into perspective the ramifications of large traditional balances.
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Well this news stinks. Hopefully it doesn't make it in as part of this plan.
The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans like 401(k) plans.
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Well this news stinks. Hopefully it doesn't make it in as part of this plan.
The legislation would end the backdoor Roth IRA strategy by eliminating Roth conversions for both IRAs and workplace plans like 401(k) plans.
What legislation?
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Sounds like it would only apply to those with income over $400,000.
https://www.cnbc.com/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html
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Sounds like it would only apply to those with income over $400,000.
https://www.cnbc.com/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html
^ I don't have any issues with anything in that proposal. Not sure who much revenue it will actually generate though.
There were a number of years after the Roth IRA was created where Backdoor was not possible. I guess the law that created them had "unintended consequences", and now they are correcting that.
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Sounds like it would only apply to those with income over $400,000.
https://www.cnbc.com/2021/09/13/house-democrats-propose-new-retirement-plan-rules-for-the-wealthy.html
But it would completely end after-tax conversions to Roth (MBR) regardless of income level. From the article:
Democrats’ legislation would end the mega-backdoor Roth by prohibiting all after-tax contributions in workplace plans and prohibiting after-tax IRA contributions from being converted to a Roth account.
This policy would apply for everyone, regardless of income level.
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I think some things are being confused. According to the article, Roth conversions would only be disallowed at income levels above $400,000.
The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.
The Mega-backdoor Roth would go away for everyone but that doesn't seem like a big deal for the FIRE crowd. As long as Roth conversions can still be done then we're still good. I doubt many FIREees have income levels above 400k per year.
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I think some things are being confused. According to the article, Roth conversions would only be disallowed at income levels above $400,000.
The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.
The Mega-backdoor Roth would go away for everyone but that doesn't seem like a big deal for the FIRE crowd. As long as Roth conversions can still be done then we're still good. I doubt many FIREees have income levels above 400k per year.
I agree. My quote was from the day it came out before the full text came out in a CNBC article
There's no doubt that converting I'll to the top on the 12% def makes sense over other measures though simply bc they can kill our loophole anytime
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I think some things are being confused. According to the article, Roth conversions would only be disallowed at income levels above $400,000.
The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.
The Mega-backdoor Roth would go away for everyone but that doesn't seem like a big deal for the FIRE crowd. As long as Roth conversions can still be done then we're still good. I doubt many FIREees have income levels above 400k per year.
I agree. My quote was from the day it came out before the full text came out in a CNBC article
There's no doubt that converting I'll to the top on the 12% def makes sense over other measures though simply bc they can kill our loophole anytime
I don't feel like it's much of a loophole because conversions do get taxed. If they don't like the idea of gains not getting taxed then why did they create Roth's at all? As someone whose portfolio is 2/3s tIRA at the moment I hear you on wanting to convert some of that as quickly as possible. We'll be doing the same, though we're so far beyond our original FIRE number that at this point we could pay the 10% tIRA penalty without running short onmoney. It would still suck to give away 10% just because the rules change in the middle of the game.
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I think some things are being confused. According to the article, Roth conversions would only be disallowed at income levels above $400,000.
The bill would also repeal so-called Roth conversions in individual retirement accounts and 401(k)-type plans for those making more than $400,000 a year.
The Mega-backdoor Roth would go away for everyone but that doesn't seem like a big deal for the FIRE crowd. As long as Roth conversions can still be done then we're still good. I doubt many FIREees have income levels above 400k per year.
I agree. My quote was from the day it came out before the full text came out in a CNBC article
There's no doubt that converting I'll to the top on the 12% def makes sense over other measures though simply bc they can kill our loophole anytime
I don't feel like it's much of a loophole because conversions do get taxed. If they don't like the idea of gains not getting taxed then why did they create Roth's at all? As someone whose portfolio is 2/3s tIRA at the moment I hear you on wanting to convert some of that as quickly as possible. We'll be doing the same, though we're so far beyond our original FIRE number that at this point we could pay the 10% tIRA penalty without running short onmoney. It would still suck to give away 10% just because the rules change in the middle of the game.
Yeah I could see them changing the 5 year waiting to 3 years being more likely before it's closed simply bc they'd want to encourage conversions in the short term. But there probably aren't enough people doing this for it to matter.
We're still at the edge of our FI number hopefully that changes the next few years and we get to where 10% doesn't matter.
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@Watchmaker here's the updated model.
Changes from the previous version (which I'll remove upthread because it's inferior in every way):
- Eliminated the column for traveling abroad. The original purpose was to max Roth conversions in a year when there'd be no ACA insurance. This was no longer valuable as Roth conversions are manually entered at larger amounts.
- Added a column to dictate what bucket each year's expenses should be pulled from (tIRA, Roth, Taxable). Allows for finer control.
- Added columns to identify exact capital gain percentages of the Taxable account with growth so that this figure is always accurate, rather than an estimate based on averages.
- Added a column to harvest capital gains.
- Updated RMDs to the new 2021 values.
The model is still a bit crude in some ways. It will not do capital gain harvesting and spending taxable money in the same year since I have no plans to do that. I am 97% sure the model handles all the buckets of money (tIRA, Roth, Taxable) correctly depending on what type of withdrawal is done each year. However, I cannot be sure that it will handle edge cases someone else might introduce through their own personal financial situation.
And of course, the carryover caveats:
- State tax and ACA premium values are based on North Carolina, the county of my residence, and the expected family size for my personal situation. The ACA spreadsheets I made are very easily updated to your local insurance premiums though.
- The ACA premium reflected in the model can be updated fairly easily. Just needs to point to different cells in the ACA silver/bronze plan spreadsheets.
- I have notes in place to help delineate where formulas may change with age, like when Social Security, Medicare, and RMDs start, in case someone would want to modify those (i.e. taking social security at a different age than I have specified).
That's all I can think of at the moment. I'll edit the post if I've forgotten something.
@Mr. Green Thank you for posting this. I had not spent any time actually looking at what my detailed spending with ACA and taxes would be when I retire because it is still projecting at 10 years away, but when I started reviewing your spreadsheet and reading about a Roth ladder and some other posts I might be reach FI in 5 years. I am in the middle of converting the spreadsheet into the way my brain thinks(years left to right), but it sure does make FI potentially 5 years sooner than I expected and maybe RE.
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@soulpatchmike glad it spurred some new thought processes for you! I think anyone that knows a bit of excel should make a model like this for themselves because it really gives you understanding and command of all the variables. Knowing all that stuff now makes it so much easier for me to analyze how a change might impact us, vs. spending significant time thinking about it because it's new. I think that folks would find it also gives them a lot of confidence in their plan.
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I'm going to revisit this again as iIve been thinking about it - there are 3 major components I see at play here.
1. Current tax out lay - or SORR risk - spend more today to convert more - locks in cost today
2. Cost to convert later in life due to RMDs - could increase total lifetime tax outlay
3. Flexibility in retirement due to more Roth contributions available
Number 1 carries the most weight in my mind and its not close if look at my personal situation with 4% SWR on 2MM at 80k per year option to convert 106k vs 81k increases that withdrawal rate by a full 1% and we all know that greatly decreases safety in RE. Now my AA should support that but what if we were more strategic with higher conversion years like choosing down markets. Could this maximize the returns better?
2 I don't think carries much weight to me at all b/c if this is really an issue you've won the game and you can gift alot of money to charity to offset
3. this sits on the same side of the fence as number 2 meaning converting more is better. But I guess we have to weight the reason one would need more than what was converted. For me planning to use margin to optimize max cash invested its important to have more flexibility, but whats the cost if i havent converted enough and need to withdraw. It goes from 12% cost in taxes to 22% cost in taxes. is this really that bad? we're talking a cost on an additional need that would have otherwise been available of 10% on 26k - or 2600 dollars. i'm saving 8k today in tax and aca by converting the 81.5k vs the 106k.
Just some random thoughts here on SORR vs RMD risk
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@boarder42 if you're retiring younger and want to maximize the availability of money in the younger years of retirement, waiting for market downturns to make bigger Roth conversions would likely work against you since you only have access to the basis until 59.5.
This is really only a consideration for those whose portfolios have vastly outgrown their planned spending, though statistically that will become most of us at some point as gains outgrow our spending. For some this will happen closer to 59.5 and maybe it's not an issue then. Our original goal was living on 40k. Our portfolio has grown to where a 4% WR is 80k. I could just let all that extra sit in tax deferred accounts but I don't like that idea because the future is unknown. So I want more access to that money before 59.5. I have no idea if I'll use it but I want it available with no restrictions or caveats to work around. At least that's my current thought process.
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@boarder42 if you're retiring younger and want to maximize the availability of money in the younger years of retirement, waiting for market downturns to make bigger Roth conversions would likely work against you since you only have access to the basis until 59.5.
This is really only a consideration for those whose portfolios have vastly outgrown their planned spending, though statistically that will become most of us at some point as gains outgrow our spending. For some this will happen closer to 59.5 and maybe it's not an issue then. Our original goal was living on 40k. Our portfolio has grown to where a 4% WR is 80k. I could just let all that extra sit in tax deferred accounts but I don't like that idea because the future is unknown. So I want more access to that money before 59.5. I have no idea if I'll use it but I want it available with no restrictions or caveats to work around. At least that's my current thought process.
I have thought of the issue with conversion in down years affecting the fact that gains can only be withdrawn at 59.5. In your case with having an effective 2% SWR it makes perfect sense to go to the max always. You've basically won the SORR issue. As someone just starting out who hasnt seen what the first few years may bring I have to think the locked in spend early on is a larger negative than either of the other two issues.
Even picking a terrible starting year like 1973 when my asset allocation lost 50% the first 2 years I still recovered to my starting balance in 5 years converting more during down years. assuming I just oscillate between CHIP cliff on ACA and top of the 12% bracket for MFJ. I think long term most people will end up at max convert to top of 12% bracket. And possibly even going into the 22% bracket on really bad years later in the portfolio life.
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Threads like this are the reason why the MMM forums exist. This is all of my favorite smart people in one place, solving relevant problems with solid mathematical analyses, and then sharing it freely for constructive criticism. You folks make my day.
For the record, running the numbers of my family's personal financial situation has suggested that we only convert about $25k from trad to Roth each year (while subsidizing the rest of our spending out of taxable accounts or other income). Yes, that is likely to result in higher RMD tax liability many years down the line, but it also comes with immediate monetary benefits beyond a lower current tax rate, such as free healthcare and college tuition. I have paid exorbitant tax rates in the past, and I am happy to pay them again in the future, in exchange for guaranteeing the success of my financial plan during the uncertainties of an early retirement.
And honestly, what's the gripe about getting dinged for big RMDs? "Oh noes I'm too rich, whatever will I do with all this money?!" is not exactly a position that garners much sympathy with me. You got the benefit of avoiding all of that early SORR, and your only downside is the off chance that you'll end up with too much money when you're old? Yea, that sounds like a win-win to me.
If you're really worried about paying higher taxes from your dragon-hoard-style mountain of money when you're old, consider the utility of large charitable donations to people or causes you believe in. Build a homeless shelter, or donate it to a medical research fund. Even the most selfish of rich bastards is probably okay with giving every person in their immediate family the gift-tax maximum of $15k, from you and your spouse, every year, for the last 10 years of your lives just to "spend down" their wealth while keeping it all in the family.
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there is a 50% chance my wife and I die billionaires.
This part, though, is icky. Please don't do that. In a world where we embraced any vague semblance of morality, billionaires should not exist. At least not anytime before a LOT more inflation.
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there is a 50% chance my wife and I die billionaires.
This part, though, is icky. Please don't do that. In a world where we embraced any vague semblance of morality, billionaires should not exist. At least not anytime before a LOT more inflation.
FYI, in case anyone is wondering what the difference is between a millionaire, a billionaire and Musk or Bezos(~$180B or so) is:
SWR on $1M with zero investment return = $1000/week = 1000 weeks = 19.23 years. I could spend $1000 per week for 19.23 years without making any return on my money before I run out.
SWR on $1B with zero investment return = $1M/week = 1000 weeks = 19.23 years. I could spend $1M per week for 19.23 years without making any return on my money before I run out.
SWR on $180B(Musk, Bezos) with zero investment return = $180M per week = 1000 weeks = 19.23 years. Elon Musk and Jeff Bezos each could spend $180M per week for 19.23 years without making any return on their money before running out.
Hopefully, this gives a reality check to anyone who thinks there is a point when everyone is so rich that the numbers don't matter. A billionaire is crazy rich, but Bezos and Musk can each spend $1M a week for nearly 500 years before running out of money.
Now regarding the possibility of becoming a billionaire by savings rate and investing alone:
~10% of American Households(~12M households out of 125M total households) are at Millionaire status or higher.
~10% of millionaire households(~1.4M) are decamillionaires $10M or higher
~10% of decamillionaire households(~100k) are centimillionaires $100M or higher.
~1% of centamillionaire households(~1000) are Billionaires
Now if we extrapolate to 30 years ago data for the next 30 years, there were roughly 60 American billionaires in 1991, which could mean there was roughly 6000 centiM, 60kdecaM and 600k millionaire households.
Today we have about ~20x > $M households than in 1991 so it bears a reasonable assumption that we will also have ~20x > $M households in 30 more years. With that said, statistically it is unlikely that a millionaire today will end up being one of the estimated 20,000 billionaire households in 30 years by savings and investment returns alone, but it is certainly reasonable to believe that ~10% or more of American households will be decamillionaires in 30 years and the median household NW should be > $1M.
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there is a 50% chance my wife and I die billionaires.
This part, though, is icky. Please don't do that. In a world where we embraced any vague semblance of morality, billionaires should not exist. At least not anytime before a LOT more inflation.
Glad we got you out of retirement from the forums! It will be given away for the must part of it gets that big. We haven't over saved much. It's just a possible outcome.
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Threads like this are the reason why the MMM forums exist. This is all of my favorite smart people in one place, solving relevant problems with solid mathematical analyses, and then sharing it freely for constructive criticism. You folks make my day.
For the record, running the numbers of my family's personal financial situation has suggested that we only convert about $25k from trad to Roth each year (while subsidizing the rest of our spending out of taxable accounts or other income). Yes, that is likely to result in higher RMD tax liability many years down the line, but it also comes with immediate monetary benefits beyond a lower current tax rate, such as free healthcare and college tuition. I have paid exorbitant tax rates in the past, and I am happy to pay them again in the future, in exchange for guaranteeing the success of my financial plan during the uncertainties of an early retirement.
And honestly, what's the gripe about getting dinged for big RMDs? "Oh noes I'm too rich, whatever will I do with all this money?!" is not exactly a position that garners much sympathy with me. You got the benefit of avoiding all of that early SORR, and your only downside is the off chance that you'll end up with too much money when you're old? Yea, that sounds like a win-win to me.
If you're really worried about paying higher taxes from your dragon-hoard-style mountain of money when you're old, consider the utility of large charitable donations to people or causes you believe in. Build a homeless shelter, or donate it to a medical research fund. Even the most selfish of rich bastards is probably okay with giving every person in their immediate family the gift-tax maximum of $15k, from you and your spouse, every year, for the last 10 years of your lives just to "spend down" their wealth while keeping it all in the family.
Yeah this is the conclusion I've come to. It's too early to plan for RMD risk when sorr risk is far greater and more immediate. If we have high RMDs lots of money can be given away. No reason to give more money to the give today to solve a risk 40 years in the future. Holy shit that's longer than I've lived to date. Also we live in a state with 5.4% income tax and we might relocate to a no income tax state at some point who knows.
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Glad we got you out of retirement from the forums!
I came looking for tax planning advice, and I found some. Thank you, to you and everyone else who has contributed here.
As much as I enjoy hardly thinking about money at all anymore now that I'm retired, at least once a year I have to sit up and pay attention just to make sure I'm still sort of on top of things. Most of my financial life is on autopilot as I coast through my 40s as an early retiree, but even autopilots need occasional supervision. And I'm glad to see you guys are still an invaluable resource.
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Threads like this are the reason why the MMM forums exist. This is all of my favorite smart people in one place, solving relevant problems with solid mathematical analyses, and then sharing it freely for constructive criticism. You folks make my day.
For the record, running the numbers of my family's personal financial situation has suggested that we only convert about $25k from trad to Roth each year (while subsidizing the rest of our spending out of taxable accounts or other income). Yes, that is likely to result in higher RMD tax liability many years down the line, but it also comes with immediate monetary benefits beyond a lower current tax rate, such as free healthcare and college tuition. I have paid exorbitant tax rates in the past, and I am happy to pay them again in the future, in exchange for guaranteeing the success of my financial plan during the uncertainties of an early retirement.
And honestly, what's the gripe about getting dinged for big RMDs? "Oh noes I'm too rich, whatever will I do with all this money?!" is not exactly a position that garners much sympathy with me. You got the benefit of avoiding all of that early SORR, and your only downside is the off chance that you'll end up with too much money when you're old? Yea, that sounds like a win-win to me.
If you're really worried about paying higher taxes from your dragon-hoard-style mountain of money when you're old, consider the utility of large charitable donations to people or causes you believe in. Build a homeless shelter, or donate it to a medical research fund. Even the most selfish of rich bastards is probably okay with giving every person in their immediate family the gift-tax maximum of $15k, from you and your spouse, every year, for the last 10 years of your lives just to "spend down" their wealth while keeping it all in the family.
Thank you for further confirming my new pivot in this space. It's insane to plan for a future so far away and unknown, but the current state of things is pretty well known barring some tax changes that may go into effect in 2022(most of which should help me anyway). Protection today and less money to the govt today will keep us more secure short term. And longer term we can open up our pockets to help more people should we decide to continue.
If you're spending taxable - why not spend margin today if your pockets are that deep? It keeps more money invested therefore leaving more money available later to do more good?
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@boarder42 I think there are a couple of things you're missing in your analysis.
1) If you convert the extra $25k, you're not actually increasing your withdrawal rate. Your assets have not decreased by another $25k. You've simply shifted some of those assets from one bucket to another.
2) Taxes need to be considered as part of your spending. If you're converting some assets now, it means that you'll pay less in taxes later, which in turn means that you'll need to withdraw less money. In other words, compare withdrawing $80k from your traditional IRA and pay $10k in taxes, versus withdrawing $35k from a Roth and $40k from a traditional IRA, and paying $5k in taxes. Your overall withdrawal would only be $75k, not $80k, buying back some of that safety margin
Threads like this are the reason why the MMM forums exist. This is all of my favorite smart people in one place, solving relevant problems with solid mathematical analyses, and then sharing it freely for constructive criticism. You folks make my day.
For the record, running the numbers of my family's personal financial situation has suggested that we only convert about $25k from trad to Roth each year (while subsidizing the rest of our spending out of taxable accounts or other income). Yes, that is likely to result in higher RMD tax liability many years down the line, but it also comes with immediate monetary benefits beyond a lower current tax rate, such as free healthcare and college tuition. I have paid exorbitant tax rates in the past, and I am happy to pay them again in the future, in exchange for guaranteeing the success of my financial plan during the uncertainties of an early retirement.
And honestly, what's the gripe about getting dinged for big RMDs? "Oh noes I'm too rich, whatever will I do with all this money?!" is not exactly a position that garners much sympathy with me. You got the benefit of avoiding all of that early SORR, and your only downside is the off chance that you'll end up with too much money when you're old? Yea, that sounds like a win-win to me.
If you're really worried about paying higher taxes from your dragon-hoard-style mountain of money when you're old, consider the utility of large charitable donations to people or causes you believe in. Build a homeless shelter, or donate it to a medical research fund. Even the most selfish of rich bastards is probably okay with giving every person in their immediate family the gift-tax maximum of $15k, from you and your spouse, every year, for the last 10 years of your lives just to "spend down" their wealth while keeping it all in the family.
Welcome back! And you're 100% on point here. In the context of the MMM forums and ER, performing Roth conversions is only partly about optimizing taxes paid. The bigger issue for many mustachians is making sure that sufficient funds are available to cover living expenses before age 59.5. If you can do both (optimize taxes *and* access your money), *and* find yourself staring down the barrel of an RMD, then congrats, you've won the game. You're rich. Go start a DAF.
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@zolotiyeruki maybe you misunderstood my post. There is an increased cost of taxes and the ACA cost today. When I change my conversion to 106k from 81k that additional cost in ACA and taxes today out of my pocket is 8k. Long term we don't know what the ACA will cost or not cost or what taxes or RMDs will be or what market returns will be. So it's prudent with my 4-5% wr today to be conservative with cash outflows. The down side of this strategy is it is likely to be tax inefficient long term due to RMDs and the size of my traditional accounts. But it's shortsighted to look 40 years into the future today when the bigger risk today is the additional 8k in withdrawals to pay taxes and the ACA today. Worst case short term is I didn't convert enough for some large spending changes and I've exhausted our Roth conversions at which point we'd have to start paying a 10% penalty to tap our traditional funds. Then there are possible future state income tax savings if we were to relocate later in life. Not much reason to lock up more tax on top of more federal and aca taxes today when that too could change.
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@zolotiyeruki maybe you misunderstood my post. There is an increased cost of taxes and the ACA cost today. When I change my conversion to 106k from 81k that additional cost in ACA and taxes today out of my pocket is 8k. Long term we don't know what the ACA will cost or not cost or what taxes or RMDs will be or what market returns will be. So it's prudent with my 4-5% wr today to be conservative with cash outflows. The down side of this strategy is it is likely to be tax inefficient long term due to RMDs and the size of my traditional accounts. But it's shortsighted to look 40 years into the future today when the bigger risk today is the additional 8k in withdrawals to pay taxes and the ACA today. Worst case short term is I didn't convert enough for some large spending changes and I've exhausted our Roth conversions at which point we'd have to start paying a 10% penalty to tap our traditional funds. Then there are possible future state income tax savings if we were to relocate later in life. Not much reason to lock up more tax on top of more federal and aca taxes today when that too could change.
Ah, I see now what you meant. Thanks for the clarification!
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@zolotiyeruki maybe you misunderstood my post. There is an increased cost of taxes and the ACA cost today. When I change my conversion to 106k from 81k that additional cost in ACA and taxes today out of my pocket is 8k. Long term we don't know what the ACA will cost or not cost or what taxes or RMDs will be or what market returns will be. So it's prudent with my 4-5% wr today to be conservative with cash outflows. The down side of this strategy is it is likely to be tax inefficient long term due to RMDs and the size of my traditional accounts. But it's shortsighted to look 40 years into the future today when the bigger risk today is the additional 8k in withdrawals to pay taxes and the ACA today. Worst case short term is I didn't convert enough for some large spending changes and I've exhausted our Roth conversions at which point we'd have to start paying a 10% penalty to tap our traditional funds. Then there are possible future state income tax savings if we were to relocate later in life. Not much reason to lock up more tax on top of more federal and aca taxes today when that too could change.
Ah, I see now what you meant. Thanks for the clarification!
Yeah gotta take care of the big barking dog standing outside the door the first 5-10 years of RE starting at 35(SORR) before i start to look at the long term risk of possibly paying more tax due to over saving 40 years in the future - which is likely the case for everyone on these forums b/c 4% is by design incredibly conservative.
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Yeah gotta take care of the big barking dog standing outside the door the first 5-10 years of RE starting at 35(SORR) before i start to look at the long term risk of possibly paying more tax due to over saving 40 years in the future - which is likely the case for everyone on these forums b/c 4% is by design incredibly conservative.
Fortunately, charitable donations can completely alleviate the problem of having to pay higher taxes in your old age. I'd like to believe that a higher-than-average percentage of people on this website, being smarter than the average bear, will want to use their future wealth to make the world a better place instead of a worse one.
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holy crap - sol's back too?
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From my position, the choice to raise Roth conversions higher than needed now to reduce RMDs later is only about the unknown. Most people probably aren't starting families as they're pushing 40. So for us, maximizing the unpenalized dollars available to us through 60 is mostly about edge cases. A kid with special needs. An accident that requires permanently elevated levels of spending. Those kinds of things. I suppose the nice thing about already having "won the game" is that I get to consider these things, which people aren't going to focus on as much if they've just hit their number. At that point, SORR is still the predominant variable one is planning for.
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Yeah gotta take care of the big barking dog standing outside the door the first 5-10 years of RE starting at 35(SORR) before i start to look at the long term risk of possibly paying more tax due to over saving 40 years in the future - which is likely the case for everyone on these forums b/c 4% is by design incredibly conservative.
Fortunately, charitable donations can completely alleviate the problem of having to pay higher taxes in your old age. I'd like to believe that a higher-than-average percentage of people on this website, being smarter than the average bear, will want to use their future wealth to make the world a better place instead of a worse one.
Agreed. This fire following may generate one of the most giving futures for our fellow humans and planet.
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Threads like this are the reason why the MMM forums exist. This is all of my favorite smart people in one place, solving relevant problems with solid mathematical analyses, and then sharing it freely for constructive criticism. You folks make my day.
For the record, running the numbers of my family's personal financial situation has suggested that we only convert about $25k from trad to Roth each year (while subsidizing the rest of our spending out of taxable accounts or other income). Yes, that is likely to result in higher RMD tax liability many years down the line, but it also comes with immediate monetary benefits beyond a lower current tax rate, such as free healthcare and college tuition. I have paid exorbitant tax rates in the past, and I am happy to pay them again in the future, in exchange for guaranteeing the success of my financial plan during the uncertainties of an early retirement.
And honestly, what's the gripe about getting dinged for big RMDs? "Oh noes I'm too rich, whatever will I do with all this money?!" is not exactly a position that garners much sympathy with me. You got the benefit of avoiding all of that early SORR, and your only downside is the off chance that you'll end up with too much money when you're old? Yea, that sounds like a win-win to me.
If you're really worried about paying higher taxes from your dragon-hoard-style mountain of money when you're old, consider the utility of large charitable donations to people or causes you believe in. Build a homeless shelter, or donate it to a medical research fund. Even the most selfish of rich bastards is probably okay with giving every person in their immediate family the gift-tax maximum of $15k, from you and your spouse, every year, for the last 10 years of your lives just to "spend down" their wealth while keeping it all in the family.
Sol! Nice to see you back!
My strategy and philosophy is pretty much identical to this. For the next 4-5 years I will probably be limiting Roth conversions + harvested capital gains to around 20-25k/year in order to minimize taxes, health care, and college costs. Once I am past needing to worry about FAFSA rules I may bump that up quite a bit -- or at least alternate years where I try to minimize income/health costs and do bigger conversions + DAF contributions. I'll probably do a hefty bit of my converting between ages 65-72 when I don't need to worry about the ACA anymore. Once I'm taking SS at age 70 a bunch will be gifted, both to family and charities.
Since i don't think it has been linked in this thread I'll mention that the Bogleheads spreadsheet has a robust Roth conversion planning section -- it is kind of a pain to figure out at first but once you have worked through it once it gets easier to update:
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
With the strategy outlined above I have managed to come up with a model that minimizes RMDs and keeps me mostly in the 12% bracket from now to age 92, which is as long as it will allow me to plan for. The 40 year limit is one of the annoying things about the tool for early retirees....
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holy crap - sol's back too?
Nah, not back, just reading up on tax advice for my own edification, as the calendar year draws to a close and I need to make some moves.
A quick perusal of the rest of the forum confirms for me my decision to stop participating so much here. We don't deserve each other.
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holy crap - sol's back too?
Nah, not back, just reading up on tax advice for my own edification, as the calendar year draws to a close and I need to make some moves.
A quick perusal of the rest of the forum confirms for me my decision to stop participating so much here. We don't deserve each other.
That's why I generally avoid the "Off-topic" subforum. :)
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In a world where we embraced any vague semblance of morality, billionaires should not exist. At least not anytime before a LOT more inflation.
I was delighted to see you pop up on the board; this is why. I really appreciate your willingness to speak for the possibility of a better culture. The board lost a lot when you made for the door (I know you have reasons, but I'd be willing to follow some other spaces if they were reflective of your combination of prudence, conservation, & moral fiber, just sayin'. Someone's got to fix things. If not us, who?)
Hope you're well!
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Fortunately, charitable donations can completely alleviate the problem of having to pay higher taxes in your old age. I'd like to believe that a higher-than-average percentage of people on this website, being smarter than the average bear, will want to use their future wealth to make the world a better place instead of a worse one.
Hmm, I never considered using donations to make the world a worse place... a "Dr Evil DAF"? Reminds me of a line from Reservoir Dogs: "Torture you? That's a good idea. I like that."
The lowest earning years are a good time to do Roth Conversions. Highest earning years are a good time to setup a Donor Advised Fund.
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Fortunately, charitable donations can completely alleviate the problem of having to pay higher taxes in your old age. I'd like to believe that a higher-than-average percentage of people on this website, being smarter than the average bear, will want to use their future wealth to make the world a better place instead of a worse one.
Hmm, I never considered using donations to make the world a worse place... a "Dr Evil DAF"? Reminds me of a line from Reservoir Dogs: "Torture you? That's a good idea. I like that."
The lowest earning years are a good time to do Roth Conversions. Highest earning years are a good time to setup a Donor Advised Fund.
How much money would Dr. Evil have in his DAF?
One MILLion dollars!!!!
And I didn't go to evil medical school for six frickin' years to spend my 'stache making the world a better place!!! bwahaha
Back on topic, I'd like to add my thanks to everyone else's, the value in this thread definitely provides great ROI on the cost of several years' MMM forum membership...
@Mr. Green, thanks for the great spreadsheet. I've needed to start modeling our income & tax projections, RMDs, Roth conversion options, etc. for a while now, and your heavy lift will make that easier. Our situation differs, so I'm adapting it to our needs.
As a US Foreign Service employee hanging on for MRA, like @MasterStache I'll receive a pension. Since I'll retire before age 62 and therefore won't have reached SS eligibility, Uncle Sugar adds an annuity supplement for the period between my retirement and age 62 (aside: some FS folks opine that continuing to work after reaching retirement eligibility makes little sense because you never have another chance at that annuity supplement). Uncle also contributes to FEHB in retirement at the same rate as for current employees, and my contribution share also remains the same, albeit with post-tax dollars upon retirement (while working, it's pre-tax). My DW will also receive a small pension.
Thus I can discard with calculations of ACA eligibility, and perhaps post-retirement Medicare part B calculations (I'm not sure whether it makes sense to opt in to Medicare part B - another topic to model and analyze).
OTOH, the income from the pensions (and the annuity supplement in the first few years) will make it difficult to squeeze some tax-free or low-tax-rate Roth conversions into the pipeline. We've both contributed heavily to taxable TSP and other retirement accounts, and are continuing to contribute to taxable through 2022, our last year to qualify for the AOTC, and we need to keep reducing AGI to maintain eligibility.
I'm using the model to decide whether to shift our TSP contributions to Roth in 2023 and beyond, because that would likely vault us into the 24% marginal tax bracket, keeping in mind that we're among those high-saving folks who will face high RMDs on our traditional funds and the accompanying federal taxes, with little room to convert at lower rates due to our pensions (boo-hoo, I know).
Also, assuming we maintain our health, we'll have so much income that taking SS before age 70 will simply increase our taxes further for little benefit (more tears fall into my beer...).
For ill or good we started contributing to Roth IRAs when they first became available in 1998 - our incomes were much lower then - and have simply continued to make IRA contributions only to Roth since then. We may have missed out on some tax breaks in the past, and nevertheless have built up large Roth balances rather than adding to our RMD/tax problem.
Upon retirement, we plan to transfer our Roth TSP funds to Roth IRAs, because according to the document Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions (https://www.tsp.gov/publications/tsp-775.pdf),
The Internal Revenue Code (IRC) requires that you begin receiving distributions from your account in the calendar year you become age 72 and are separated from federal service. Your entire TSP account—both traditional and Roth—is subject to these required minimum distributions (RMDs).
I'm definitely down with @ender 's idea of doing a cash-out refi just before bailing out - get the mortgage while we're still receiving paychecks.
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Upon retirement, we plan to transfer our Roth TSP funds to Roth IRAs, because according to the document Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions (https://www.tsp.gov/publications/tsp-775.pdf),
The Internal Revenue Code (IRC) requires that you begin receiving distributions from your account in the calendar year you become age 72 and are separated from federal service. Your entire TSP account—both traditional and Roth—is subject to these required minimum distributions (RMDs).
Not to derail the thread, but I will put out there that when you separate from service you are eligible to pull half of your assets out of TSP. I'll caveat that with I'm not sure if retirement counts but my guess it does.
You may want to consider leaving some funds in there depending on balances (maybe not) due to the availability of the G fund and how it pays long/intermediate term rates on a loss protected* short term like asset. That is, if your post retirement AA includes a bond component
Google G fund free lunch to find more.
*Inflation risk is the only downside to this fund
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Not to derail the thread, but I will put out there that when you separate from service you are eligible to pull half of your assets out of TSP. I'll caveat that with I'm not sure if retirement counts but my guess it does.
Can you point to TSP documents to this effect? Their Withdrawing from Your TSP Account for Separated and Beneficiary Participants (https://www.tsp.gov/publications/tspbk02.pdf) doesn't mention anything about such a provision.
In my own case, I'll have attained 55+ and can withdraw upon separation in any case. However, given the rock-bottom management fees, which make Vanguard look downright pricey, I'd prefer to keep much of my traditional funds in TSP as long as possible.
You may want to consider leaving some funds in there depending on balances (maybe not) due to the availability of the G fund and how it pays long/intermediate term rates on a loss protected* short term like asset. That is, if your post retirement AA includes a bond component
Google G fund free lunch to find more.
*Inflation risk is the only downside to this fund
Thanks for the tip. We're not G fund investors so found this information enlightening. That said, we feel that our pensions provide a partially inflation-protected annuity and thus aren't considering adding bonds to our portfolios. Furthermore, since we carry both a mortgage and a HELOC on our property, we don't think adding bonds makes sense for us at this juncture.
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Can you point to TSP documents to this effect? Their Withdrawing from Your TSP Account for Separated and Beneficiary Participants (https://www.tsp.gov/publications/tspbk02.pdf) doesn't mention anything about such a provision.
In my own case, I'll have attained 55+ and can withdraw upon separation in any case. However, given the rock-bottom management fees, which make Vanguard look downright pricey, I'd prefer to keep much of my traditional funds in TSP as long as possible.
Looks like regs have changed slightly since the TSP modernization act with more withdrawal options so I'll need to review changes. However, partial withdrawals are still discussed and allowed here (https://www.tsp.gov/bulletins/19-6/) and here (https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.doi.gov/sites/doi.gov/files/migrated/flert/training/upload/Withdrawing-Your-TSP-Account-After-Leaving-Federal-Service.pdf&ved=2ahUKEwjGhJGGkZ30AhVulWoFHZtjBpUQFnoECAQQAQ&usg=AOvVaw0GRJFnXSw_BhV8wwmAJwCG)
Old regs i believe had you limited to two withdrawals and if you did a partial withdrawal it had to be half the value actually i think the partial could be any amount but the second had to empty the account completely. It looks like things have changed a bit and you're not stuck with exactly half for a partial so I'll need to read up on it.
Thanks for the tip. We're not G fund investors so found this information enlightening. That said, we feel that our pensions provide a partially inflation-protected annuity and thus aren't considering adding bonds to our portfolios. Furthermore, since we carry both a mortgage and a HELOC on our property, we don't think adding bonds makes sense for us at this juncture.
I've said my piece on this elsewhere on managing invested assets separate from fixed income/expenses. Send me a PM if you're curious and I'll point you to the posts. However, looks like you're going to have a pretty low withdrawal rate from your portfolio so you may not need them.
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As many of the previous posts have surmised, one can preform 1,000's of calculations and come up with a precise answer based on today's conditions, BUT all these conditions will change between today and any point in the future. My simple heuristic in these impossible calculations, is to do 50/50. Shoot for a 50/50 balance between regular and ROTH as any law change can make a perfect decision today a disaster in the future (see 2017 stretch IRA change).
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
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As many of the previous posts have surmised, one can preform 1,000's of calculations and come up with a precise answer based on today's conditions, BUT all these conditions will change between today and any point in the future. My simple heuristic in these impossible calculations, is to do 50/50. Shoot for a 50/50 balance between regular and ROTH as any law change can make a perfect decision today a disaster in the future (see 2017 stretch IRA change).
not sure how this is relevant to a withdrawal thread in post fire.
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
i'm 80/20 SCV/LTTs and plan for about 8% returns blended
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
i'm 80/20 SCV/LTTs and plan for about 8% returns blended
Tough times to be an LTT investor. I'm actually short the LTT using TTT. Longer term I think it's a solid approach if you can stomach the swings, but right now I would NOT want to be long LTT. I am anti-market timing on the equity side but I am more of a market timer and opportunist on the fixed income side. I am maxing out I-Bonds and have the rest in intermediate TIPs (VIPIX) and ST Bonds. Cash in HYSA including HM Bradley $100k yielding 3.5%.
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
i'm 80/20 SCV/LTTs and plan for about 8% returns blended
Tough times to be an LTT investor. I'm actually short the LTT using TTT. Longer term I think it's a solid approach if you can stomach the swings, but right now I would NOT want to be long LTT. I am anti-market timing on the equity side but I am more of a market timer and opportunist on the fixed income side. I am maxing out I-Bonds and have the rest in intermediate TIPs (VIPIX) and ST Bonds. Cash in HYSA including HM Bradley $100k yielding 3.5%.
not too worried about it i have almost 2 years before any money is there and i'd have said similar things this time in 2019 and it would have helped a ton in 2020 in march
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
i'm 80/20 SCV/LTTs and plan for about 8% returns blended
Tough times to be an LTT investor. I'm actually short the LTT using TTT. Longer term I think it's a solid approach if you can stomach the swings, but right now I would NOT want to be long LTT. I am anti-market timing on the equity side but I am more of a market timer and opportunist on the fixed income side. I am maxing out I-Bonds and have the rest in intermediate TIPs (VIPIX) and ST Bonds. Cash in HYSA including HM Bradley $100k yielding 3.5%.
not too worried about it i have almost 2 years before any money is there and i'd have said similar things this time in 2019 and it would have helped a ton in 2020 in march
I suspect you will be fine then. Just don't be surprised if your LTT drops 30% in a given year and don't panic sell and lock in that loss.
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
i'm 80/20 SCV/LTTs and plan for about 8% returns blended
Tough times to be an LTT investor. I'm actually short the LTT using TTT. Longer term I think it's a solid approach if you can stomach the swings, but right now I would NOT want to be long LTT. I am anti-market timing on the equity side but I am more of a market timer and opportunist on the fixed income side. I am maxing out I-Bonds and have the rest in intermediate TIPs (VIPIX) and ST Bonds. Cash in HYSA including HM Bradley $100k yielding 3.5%.
not too worried about it i have almost 2 years before any money is there and i'd have said similar things this time in 2019 and it would have helped a ton in 2020 in march
I suspect you will be fine then. Just don't be surprised if your LTT drops 30% in a given year and don't panic sell and lock in that loss.
my plan is to have a rising equity glide path to eliminate SORR and don't plan to rebalance in these events i'm very well aware of the volatility of my 2 chosen asset classes.
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
i'm 80/20 SCV/LTTs and plan for about 8% returns blended
Tough times to be an LTT investor. I'm actually short the LTT using TTT. Longer term I think it's a solid approach if you can stomach the swings, but right now I would NOT want to be long LTT. I am anti-market timing on the equity side but I am more of a market timer and opportunist on the fixed income side. I am maxing out I-Bonds and have the rest in intermediate TIPs (VIPIX) and ST Bonds. Cash in HYSA including HM Bradley $100k yielding 3.5%.
not too worried about it i have almost 2 years before any money is there and i'd have said similar things this time in 2019 and it would have helped a ton in 2020 in march
I suspect you will be fine then. Just don't be surprised if your LTT drops 30% in a given year and don't panic sell and lock in that loss.
my plan is to have a rising equity glide path to eliminate SORR and don't plan to rebalance in these events i'm very well aware of the volatility of my 2 chosen asset classes.
Is the 80/20 the goal of the rising equity glidepath or the starting point? Where are you now in terms of allocation?
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
i'm 80/20 SCV/LTTs and plan for about 8% returns blended
Tough times to be an LTT investor. I'm actually short the LTT using TTT. Longer term I think it's a solid approach if you can stomach the swings, but right now I would NOT want to be long LTT. I am anti-market timing on the equity side but I am more of a market timer and opportunist on the fixed income side. I am maxing out I-Bonds and have the rest in intermediate TIPs (VIPIX) and ST Bonds. Cash in HYSA including HM Bradley $100k yielding 3.5%.
not too worried about it i have almost 2 years before any money is there and i'd have said similar things this time in 2019 and it would have helped a ton in 2020 in march
I suspect you will be fine then. Just don't be surprised if your LTT drops 30% in a given year and don't panic sell and lock in that loss.
my plan is to have a rising equity glide path to eliminate SORR and don't plan to rebalance in these events i'm very well aware of the volatility of my 2 chosen asset classes.
Is the 80/20 the goal of the rising equity glidepath or the starting point? Where are you now in terms of allocation?
80.20 start - my current AA is far too complicated to explain b/c of all my company stock and 401k options. but if i control the dollar 100% its in SCV currently. there is next to nothing for the avg forum user to learn from my plans because they are incredibly A - Typical of people around here.
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
We are retired now and keep an 80/20. No plans to change it for the foreseeable future.
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
We are retired now and keep an 80/20. No plans to change it for the foreseeable future.
I would consider dropping your modeled return at 80/20 to 4% real. Bonds are yielding negative real returns so that 20% needs to be factored in.
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
We are retired now and keep an 80/20. No plans to change it for the foreseeable future.
I would consider dropping your modeled return at 80/20 to 4% real. Bonds are yielding negative real returns so that 20% needs to be factored in.
are you a bogglehead or something? these are insanely conservative numbers and even going with your suggested AA of a 50/50 or 60/40 has longterm negative affects on longevity of your stash. I mean your 54 and are probably getting SSA in a few years so this may not matter much to you but these are incredibly TOO conservative projections and asset allocations in general IMO.
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
We are retired now and keep an 80/20. No plans to change it for the foreseeable future.
I would consider dropping your modeled return at 80/20 to 4% real. Bonds are yielding negative real returns so that 20% needs to be factored in.
are you a bogglehead or something? these are insanely conservative numbers and even going with your suggested AA of a 50/50 or 60/40 has longterm negative affects on longevity of your stash. I mean your 54 and are probably getting SSA in a few years so this may not matter much to you but these are incredibly TOO conservative projections and asset allocations in general IMO.
I do hang out on Bogleheads but do not consider my self to be a "Bogglehead" lol. I probably spend as much time here as there. More to the point, I did not recommend 50/50 or 60/40 for a young retiree. I just referenced those allocations as examples of where most retirees eventually gravitate towards. I'm retiring in a couple months and plan to get to 60/40 within a few years by spending down on the cash side (currently closer to 50/50). I think what a lot of folks are overlooking is that bonds are likely to yield negative returns on an inflation adjusted basis for a long time to come until the Fed figures out how to normalize monetary policy. If you're going to have a significant bond allocation, you need to factor that in. One way I am mitigating this is to max out I-Bond purchases ($20k per year for a married couple) which are guaranteed to yield at least the same as inflation.
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I needed that extra control to be able to really squeeze the juice out of the portfolio in order to "die with zero" or something close to it. I really like that it pulls the whole portfolio down close to 500k by our early 70's and then it's just a slow burn through the money because by that point our spending will drop with less mobility and poorer health to where Social Security and dividends will make up the majority of our spending needs.
The more I fine-tune this thing, the more it blows my mind how high the incomes get. I've stated before that I use a fairly conservative 5% ROI after inflation. The historical average is closer to 7%.
Just curious, what is your current and planned asset allocation in retirement? If you are 100% stock then I think your 5% real return is achievable, but for most retirees, a 60/40 or 50/50 allocation is more common. I am planning to be around 60/40 and my assumption is that stocks will yield 5% real while bonds will yield negative 0.5% real. This results in a blended real return of around 3%.
We are retired now and keep an 80/20. No plans to change it for the foreseeable future.
I would consider dropping your modeled return at 80/20 to 4% real. Bonds are yielding negative real returns so that 20% needs to be factored in.
are you a bogglehead or something? these are insanely conservative numbers and even going with your suggested AA of a 50/50 or 60/40 has longterm negative affects on longevity of your stash. I mean your 54 and are probably getting SSA in a few years so this may not matter much to you but these are incredibly TOO conservative projections and asset allocations in general IMO.
I do hang out on Bogleheads but do not consider my self to be a "Bogglehead" lol. I probably spend as much time here as there. More to the point, I did not recommend 50/50 or 60/40 for a young retiree. I just referenced those allocations as examples of where most retirees eventually gravitate towards. I'm retiring in a couple months and plan to get to 60/40 within a few years by spending down on the cash side (currently closer to 50/50). I think what a lot of folks are overlooking is that bonds are likely to yield negative returns on an inflation adjusted basis for a long time to come until the Fed figures out how to normalize monetary policy. If you're going to have a significant bond allocation, you need to factor that in. One way I am mitigating this is to max out I-Bond purchases ($20k per year for a married couple) which are guaranteed to yield at least the same as inflation.
this thread is about roth to trad conversion if you want to start a thread about negative bond returns you could do that. we're muddying up a very very useful thread with opinions of returns on asset allocations.
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Guilty as charged Boarder42!
To get this back on track, I would like to bring to your attention an excellent model that I found on my beloved Boglehead forum lol.
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Seriously though, this is a really great and free tool that does help a lot with Roth conversion strategies and scenarios. I like to model the rates of return in real terms (i.e., ignoring inflation) so that you are looking at everything in today's dollars. This is actually what made me think about the negative returns on bonds that I referenced earlier. I'd be happy to help anyone who is interested in using it but maybe finds it a bit overwhelming.
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Guilty as charged Boarder42!
To get this back on track, I would like to bring to your attention an excellent model that I found on my beloved Boglehead forum lol.
https://www.bogleheads.org/wiki/Retiree_Portfolio_Model
Seriously though, this is a really great and free tool that does help a lot with Roth conversion strategies and scenarios. I like to model the rates of return in real terms (i.e., ignoring inflation) so that you are looking at everything in today's dollars. This is actually what made me think about the negative returns on bonds that I referenced earlier. I'd be happy to help anyone who is interested in using it but maybe finds it a bit overwhelming.
now this looks fun to lay with.
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well playing around with that for 15 mins just further solidified how safe our plans are even if i use 6% avg annual returns really this all comes down to SORR. I'll have to dig in more to how this handles conversions. Basically it appear my only mechanism to control annual conversions is to increase my minimum taxable account balance
also it appears to draw down IRAs without penalties unless i'm missing something.
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well playing around with that for 15 mins just further solidified how safe our plans are even if i use 6% avg annual returns really this all comes down to SORR. I'll have to dig in more to how this handles conversions. Basically it appear my only mechanism to control annual conversions is to increase my minimum taxable account balance
also it appears to draw down IRAs without penalties unless i'm missing something.
I believe it draws down your taxable account completely before using any funds from IRA in conversions. You tell the model how much you want to withdraw per year from IRAs. I will look into the penalty logic.
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well playing around with that for 15 mins just further solidified how safe our plans are even if i use 6% avg annual returns really this all comes down to SORR. I'll have to dig in more to how this handles conversions. Basically it appear my only mechanism to control annual conversions is to increase my minimum taxable account balance
also it appears to draw down IRAs without penalties unless i'm missing something.
I believe it draws down your taxable account completely before using any funds from IRA in conversions. You tell the model how much you want to withdraw per year from IRAs. I will look into the penalty logic.
if you know how to modify this logic it could be modified to work better here but i'm not sure how much better it would be than the case study spreadsheet
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well playing around with that for 15 mins just further solidified how safe our plans are even if i use 6% avg annual returns really this all comes down to SORR. I'll have to dig in more to how this handles conversions. Basically it appear my only mechanism to control annual conversions is to increase my minimum taxable account balance
also it appears to draw down IRAs without penalties unless i'm missing something.
I believe it draws down your taxable account completely before using any funds from IRA in conversions. You tell the model how much you want to withdraw per year from IRAs. I will look into the penalty logic.
if you know how to modify this logic it could be modified to work better here but i'm not sure how much better it would be than the case study spreadsheet
I reread my last post and realized I wrote someting incorrect and stupid. It definitely uses your IRA as the funding source for the Roth conversion. Your expenses are deducted from your taxable account as a running balance. Regarding IRA withdrawals other than conversions, you need to tell the model those annual amounts which you can set up in a time series.
Also, the readme tab explains the answer to your penalty question
"Limitations
1. Non-deductible (after-tax) contributions to your traditional IRAs are not considered in calculating taxes on withdrawals. All traditional IRAs are assumed to have been ""tax-deductible"" when funded.
2. The model does not calculate pre-59 1/2 traditional IRA or Roth withdrawal penalties, or the penalty on withdrawing Roth earnings within five years of opening the Roth if over age 59 1/2."
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well playing around with that for 15 mins just further solidified how safe our plans are even if i use 6% avg annual returns really this all comes down to SORR. I'll have to dig in more to how this handles conversions. Basically it appear my only mechanism to control annual conversions is to increase my minimum taxable account balance
also it appears to draw down IRAs without penalties unless i'm missing something.
I believe it draws down your taxable account completely before using any funds from IRA in conversions. You tell the model how much you want to withdraw per year from IRAs. I will look into the penalty logic.
if you know how to modify this logic it could be modified to work better here but i'm not sure how much better it would be than the case study spreadsheet
I reread my last post and realized I wrote someting incorrect and stupid. It definitely uses your IRA as the funding source for the Roth conversion. Your expenses are deducted from your taxable account as a running balance. Regarding IRA withdrawals other than conversions, you need to tell the model those annual amounts which you can set up in a time series.
Also, the readme tab explains the answer to your penalty question
"Limitations
1. Non-deductible (after-tax) contributions to your traditional IRAs are not considered in calculating taxes on withdrawals. All traditional IRAs are assumed to have been ""tax-deductible"" when funded.
2. The model does not calculate pre-59 1/2 traditional IRA or Roth withdrawal penalties, or the penalty on withdrawing Roth earnings within five years of opening the Roth if over age 59 1/2."
no idea how to do what you're saying here. i have withdrawals from IRAs starting later - in general its pretty common for bogglehead stuff to need reasonable modifcations to work here.
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As many of the previous posts have surmised, one can preform 1,000's of calculations and come up with a precise answer based on today's conditions, BUT all these conditions will change between today and any point in the future. My simple heuristic in these impossible calculations, is to do 50/50. Shoot for a 50/50 balance between regular and ROTH as any law change can make a perfect decision today a disaster in the future (see 2017 stretch IRA change).
not sure how this is relevant to a withdrawal thread in post fire.
If Traditional/ROTH ratio is high, withdraw more from Traditional, until balanced 50/50 with ROTH. The uncertainty of policy changes over the next 50 years makes any precise calculation meaningless.
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As many of the previous posts have surmised, one can preform 1,000's of calculations and come up with a precise answer based on today's conditions, BUT all these conditions will change between today and any point in the future. My simple heuristic in these impossible calculations, is to do 50/50. Shoot for a 50/50 balance between regular and ROTH as any law change can make a perfect decision today a disaster in the future (see 2017 stretch IRA change).
not sure how this is relevant to a withdrawal thread in post fire.
If Traditional/ROTH ratio is high, withdraw more from Traditional, until balanced 50/50 with ROTH. The uncertainty of policy changes over the next 50 years makes any precise calculation meaningless.
I can't say I agree with this sentiment. Of course your calculations will become less precise when you're modeling farther into the future where more unknowns apply. That doesn't mean we should throw our hands up in the air and say it's impossible to know what will happen so we should just go 50/50. Suppose under current law, Roth looks better for you than pre-tax. Current law would therefore point you to bias your contributions toward Roth. By going 50/50 you're betting on a law change in a particular direction: namely that Congress will make Roth look like a worse idea than it does today. You're neglecting that they could just as easily go the other way! Of course it's prudent to run through some modeling where Congress does make Roth accounts look worse and make sure you'll fare okay in that scenario, but that's a different thing entirely from betting on that law change to happen.
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If taxes go down or income limits go up or market tanks, Traditional balance is better. If taxes go up or limits go down or market rips ROTH is better. 50/50 is not throwing up one's hands but providing an accurate estimate as opposed to a precise estimate. When dealing with uncertainty, accuracy is more valuable than precision. Of the two scenarios, which is more valuable estimate if you were traveling to LA on December 1st? 1. The high temperature at LAX on December 1st 2022 is estimated to be 72.56812 or 2. There is a 95% chance the high temperature at LAX on December 1st 2022 will be between 70.2 and 75.6.
As it is quite easy to find a "#", many retirees focus on the exact temperature when the far more valuable estimate is establishing a 95% confidence interval.
All of these estimates should also be conditioned by current and expect tax bracket for each individual and the estimated duration in each bracket. If income limits/tax rates are rise/fall, I would raise the Trad/ROTH to maybe 55/45 or if income limits/tax rates fall/rise, I would adjust to 45/55 Trad/ROTH.
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Okay, but why suggest a 50/50 ratio for everyone right now? The current incentive structure heavily favors one over the other for quite a lot of people. 50/50 is saying "ignore the current rules and assume they're as likely as not to completely flip it in the opposite direction by the time you withdraw."
Going along with your weather analogy, it might or might not rain in LA next week. It probably won't, but it might. Do I go 50/50 and make sure half my suitcase is full of waterproof clothes, or do I take a look at the existing pattern and pack mostly for dry days? I think it makes more sense to do the latter. Pack a small umbrella just in case, but leave the waterproof pants at home.
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Average for all should be 50/50, but not one person could be 50/50. Any point estimate for an individual is useless, all the provider of this stat is communicating is their lack of statistical knowledge. The 95% confidence interval for optimal Trade/ROTH ratio is between 60/40 to 40/60. Anyone providing more precision than this does not understand the underlying assumptions of their point estimate and should be asked to explain why they haven't shared their Nobel prize winning new statistical procedures or ignored.
Policy uncertainty overwhelms all point estimates for anyone over any time period where tax policy can change (Once a year, See tax act 2017). Point estimates are also a pet-peeve for anyone who understands statistic as they are useless, regardless of how many spreadsheets are used.
For packing, one would do more of a Bayesian/Random Walk estimate and wait until the day before travel before making any climate estimates. Random Walk is basically the best predictor of tomorrow is today and Bayes would use today's estimate as the primary variable in tomorrow's climate.
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The 95% confidence interval for optimal Trade/ROTH ratio is between 60/40 to 40/60.
From where do you derive this confidence interval, and to whom does it apply?
The traditional vs. Roth decision comes down chiefly to current marginal tax rate compared against your expected marginal tax rate when you withdraw. It's impossible to be perfectly accurate when estimating your tax rate decades in advance. We agree on this. Someone who expects a similar income during retirement to what they have today could do well with a 50/50 ratio because policy changes could easily make either choice look best in hindsight. Hedging your bets with a 50/50 ratio seems quite reasonable in this case. For someone making $300k today and planning to spend $50k in retirement it's a completely different story. Congress would need to triple the tax rate for the $50k bracket during this person's retirement in order for Roth to have been a better decision. I'll happily bet against that happening. An allocation heavily biased against Roth would make sense in this case.
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I maintain my position that each person's portfolio makeup, goals, and age can have an effect that requires a far more specific plan than "just be 50/50." My goal is to maximize the access to our money over our lifetimes. That can be accomplished a couple different ways, as my extensive posts in this thread have laid out, but all of them require a steady movement of money from tIRA to Roth. I'm sure we'd be 50/50 at some moment in time but we're not going to stop there because that would be inefficient and not allow us to accomplish our objective.
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The 95% confidence interval for optimal Trade/ROTH ratio is between 60/40 to 40/60.
From where do you derive this confidence interval, and to whom does it apply?
Take samples from investors and estimate the ex-post optimal Trad/Roth ratio for a standard desired duration. One would have the average optimal Trad/ROTH ratio, the standards deviation of the optimal estimates, population size and follow below formula. One could define the population by age, current tax rate or any variable of interest. It would be laborious to collect the data and only provide limited useful information for a specific time period, specific current tax rate, age, retirement date. But demonstrates the challenge of providing useful Trad/ROTH ratio and why the point estimates, although easy to calculate, are statistically useless for someone who understands the limitations of the estimate.
For example, one could look back 20 years and estimate that the optional Trad/Roth ratio the investor should have maintained for the past 20 years should have been 35/65, another person could have been 55/45, another, another, a few hundred, estimate mean and standard deviation and follow formula for optimal estimate with CI. The calculation is simple, but the data collection is costly and complex.
https://www.itl.nist.gov/div898/handbook/prc/section1/prc14.htm
For example, a 100(1−α) % confidence interval for the mean of a normal population is
Y¯±z1−α/2σN−−√,
where Y¯ is the sample mean, z1−α/2 is the 1−α/2 critical value of the standard normal distribution which is found in the table of the standard normal distribution, σ is the known population standard deviation, and N is the sample size.
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This is a great discussion and I'm just now discovering how complicated this all gets. I'm planning to FIRE in a few months. At this point, I've way over-saved unless I seriously inflate my lifestyle. This is in part due to trying to prepare for healthcare if the ACA does not survive (even though I think it will at this point). Also, I was fortunate to inherit an IRA from my grandparents (my parents passed it on to me and my siblings) a few years ago but I've been basically ignoring it since I wanted to make it on my own. Plus with COVID the last couple years, I wasn't as eager to FIRE anyway. I'm 32 so will still be retiring from my career very young.
So I've budgeted more for healthcare than would be necessary if I can keep my income low and get a subsidy. My state has separate healthcare programs for under 200% FPG. If I can keep my income as a single person at around $25,759, I can get health insurance for ~$20 a month (it was $70 a month before the Rescue plan so maybe will change back) with low OOP costs. On the other end of the spectrum, I can get health insurance on the open market. I've found what looks like a good PPO plan, HSA eligible for ~$250 with $7k deductible/OOP max so $10k worst case. I'm young and healthy so don't expect high OOP costs but anything can happen. Obviously premiums will go up as I age. Subsidies may start making more sense as I get older, but for now I think either be <200% FPG or get no subsidies and focus on conversions. I've budgeted $7k per year for healthcare. Dental and vision are included in the state plan but would be OOP for the open market route.
If I go the state plan route and keep income under $25.7k, taxes would be under $1200 total (fed + state) and I'd get a bigger property tax refund as well which would probably pay for about half my property tax. Based on my current lifestyle and planned retirement lifestyle, I could easily live off this, taking an additional $7.2k out of Roth per year to pay my mortgage (PI only). This would allow me a decent travel/entertainment budget and still cover all essentials, plus a decent chunk for house maintenance and car replacement funds. I have enough Roth principal now to pay off my mortgage or make regular payments until it's paid off. So basically, I'd be happy to live at $25.7k (adjusted for inflation) indefinitely. BUT, this puts me at like a 1.9% WR. So I'm pretty sure my assets are gonna grow quite a bit at that rate. It's also very likely that I'll inherit a big chunk of change from my parents at some point (hopefully in a long, long time) since they over-saved even more than me. I haven't even considered social security either. With only 11 years or so of earnings, it won't be a ton but won't be nothing either.
I do have a decent chunk in taxable and Roth thanks to the mega backdoor (wish I'd started earlier and put less in taxable!). My breakdown is approximately 25% taxable, 21% Roth, 4% HSA, 26% Traditional 401k, 24% inherited IRA. Doing some modeling assuming 6% returns, my 401k alone could grow to around $4M by the time RMDs start if I do no conversions before then. The inherited IRA RMDs start to get quite large too if I don't take out enough early on. Then if I let the taxable account grow, the dividends will start to become significant and the basis will be low compared to gains. It's all a giant balancing act with too many moving parts and unknowns to really plan for.
For 2022, I'll have employer healthcare for part of the year. I'll do one last dental and vision checkup before I retire. Then I plan to do the $250/mo open market plan for the rest of the year. I'll convert enough to keep my income at the top of the 0% dividend/LTCG bracket ($41,675). I still have some carryover capital losses from the 2020 crash. $3k for this year and $2700 next year. So next year I'll stay on the open market plan and do another conversion year to make use of the last of the capital losses.
Then I'm thinking of alternating between staying under 200% FPG and doing conversions. Taxes will be almost $7k more in conversion years so that hurts a bit. In market downturns, I can convert more. In normal good market years, I can donate to my DAF to offset some of the income. I'll also do QCDs when I get to RMD age, so I'm ok having a bit of a higher balance. I'm not sure if I'll do every other year while I'm younger, or do a conversion every several years. Probably just see what my balances look like each year and re-evaluate. I was originally planning to just keep my income under 200% FPG as long as I could. And if I end up with a ton, then I'll have more than I need and would be fine paying higher taxes and donating more. But it probably makes sense to try and convert more while I'm younger and healthcare costs are lower. I'd rather have the low OOP costs in my 50s rather than 30s. Then again, maybe some day we'll have more affordable healthcare for everyone. One can dream.
Sorry for the novel. This thread really got me thinking about this and running the numbers. I'm really grateful for this place and all the smart people here. With the ACA considerations, how much to convert can be a really complicated question. It's great to hear everyone's perspective on it.
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Maybe a helpful note for anyone making annual Roth IRA pipeline rollovers: it turns out you have to actually invest your money after the coversion. Once your finances are on FIRE autopilot, it's easy to overlook these things.
We made our first rollover at the end of 2020, and our second at the end of 2021. But after the rollover was complete the money was deposited into my settlement fund, and it sat there for all of 2021 while the market spiked 20%. Not that a little extra cash buffer is necessarily a bad thing in my asset allocation, and one year of rollover funds is a drop in the bucket in the grand financial plan, but I'm still a little peeved that I left thousands of dollars of gains on the table by not logging back in to ensure that my rollover was properly assigned to the individual funds I wanted it to be in.
Oops.
Hopefully all of you are smarter than I was. But just in case you're not, here's a tip: after you complete your conversion, make sure to assign the balance to the correct fund(s) you have chosen in your AA.
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Maybe a helpful note for anyone making annual Roth IRA pipeline rollovers: it turns out you have to actually invest your money after the coversion. Once your finances are on FIRE autopilot, it's easy to overlook these things.
We made our first rollover at the end of 2020, and our second at the end of 2021. But after the rollover was complete the money was deposited into my settlement fund, and it sat there for all of 2021 while the market spiked 20%. Not that a little extra cash buffer is necessarily a bad thing in my asset allocation, and one year of rollover funds is a drop in the bucket in the grand financial plan, but I'm still a little peeved that I left thousands of dollars of gains on the table by not logging back in to ensure that my rollover was properly assigned to the individual funds I wanted it to be in.
Oops.
Hopefully all of you are smarter than I was. But just in case you're not, here's a tip: after you complete your conversion, make sure to assign the balance to the correct fund(s) you have chosen in your AA.
Definitely a worthy reminder. I made a similar mistake when I helped my kids open their Roth IRAs last year--the money sat in their accounts for a few weeks, and missed several percentage points of gains. I haven't made that kind of mistake a second time!
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Maybe a helpful note for anyone making annual Roth IRA pipeline rollovers: it turns out you have to actually invest your money after the coversion. Once your finances are on FIRE autopilot, it's easy to overlook these things.
We made our first rollover at the end of 2020, and our second at the end of 2021. But after the rollover was complete the money was deposited into my settlement fund, and it sat there for all of 2021 while the market spiked 20%. Not that a little extra cash buffer is necessarily a bad thing in my asset allocation, and one year of rollover funds is a drop in the bucket in the grand financial plan, but I'm still a little peeved that I left thousands of dollars of gains on the table by not logging back in to ensure that my rollover was properly assigned to the individual funds I wanted it to be in.
Oops.
Hopefully all of you are smarter than I was. But just in case you're not, here's a tip: after you complete your conversion, make sure to assign the balance to the correct fund(s) you have chosen in your AA.
This isn't necessarily the case. I've converted mutual fund holdings from Traditional IRA to Roth IRA at Vanguard. The invested funds stayed in tact. It seems odd that your broker would have sold to cash when doing the conversion...
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Maybe a helpful note for anyone making annual Roth IRA pipeline rollovers: it turns out you have to actually invest your money after the coversion. Once your finances are on FIRE autopilot, it's easy to overlook these things.
We made our first rollover at the end of 2020, and our second at the end of 2021. But after the rollover was complete the money was deposited into my settlement fund, and it sat there for all of 2021 while the market spiked 20%. Not that a little extra cash buffer is necessarily a bad thing in my asset allocation, and one year of rollover funds is a drop in the bucket in the grand financial plan, but I'm still a little peeved that I left thousands of dollars of gains on the table by not logging back in to ensure that my rollover was properly assigned to the individual funds I wanted it to be in.
Oops.
Hopefully all of you are smarter than I was. But just in case you're not, here's a tip: after you complete your conversion, make sure to assign the balance to the correct fund(s) you have chosen in your AA.
This isn't necessarily the case. I've converted mutual fund holdings from Traditional IRA to Roth IRA at Vanguard. The invested funds stayed in tact. It seems odd that your broker would have sold to cash when doing the conversion...
same here. My rollover at etrade rolled over the shares of the stock i wanted rolled. and they stayed invested.
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Maybe a helpful note for anyone making annual Roth IRA pipeline rollovers: it turns out you have to actually invest your money after the coversion. Once your finances are on FIRE autopilot, it's easy to overlook these things. ...
This isn't necessarily the case. I've converted mutual fund holdings from Traditional IRA to Roth IRA at Vanguard. The invested funds stayed in tact. It seems odd that your broker would have sold to cash when doing the conversion...
My guess is that sol was rolling from a 401k or other qualified plan account (not an IRA) at the retirement plan provider to a separate financial institution (one he chose himself.) Most plan providers only want to distribute cash (unless it's internal at the same firm - which can be an easy way around that limitation, & afterward you can transfer the shares wherever.)
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At Vanguard, I transferred from a rollover ira to a roth ira. There was no selling. They just moved shares between the two accounts. I remember it being effortless. Not so at Fidelity.
At Fidelity, they had to sell the tIRA shares and buy the RIRA shares, and I can't see how much it actually is until they put out a statement (or call). I was over my target by $235 for 2021. This is the 2nd year that I did this at Fidelity, and it was annoying. MPP, I know.
This year, I can't go over, because of the ACA subsidies. I'm considering moving all my holdings to Vanguard.
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Maybe a helpful note for anyone making annual Roth IRA pipeline rollovers: it turns out you have to actually invest your money after the coversion. Once your finances are on FIRE autopilot, it's easy to overlook these things. ...
This isn't necessarily the case. I've converted mutual fund holdings from Traditional IRA to Roth IRA at Vanguard. The invested funds stayed in tact. It seems odd that your broker would have sold to cash when doing the conversion...
My guess is that sol was rolling from a 401k or other qualified plan account (not an IRA) at the retirement plan provider to a separate financial institution (one he chose himself.) Most plan providers only want to distribute cash (unless it's internal at the same firm - which can be an easy way around that limitation, & afterward you can transfer the shares wherever.)
It seems like it would be a real pain to do annual rollovers from an Employer Plan versus sending it all to an IRA at once.
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80.20 start - my current AA is far too complicated to explain b/c of all my company stock and 401k options. but if i control the dollar 100% its in SCV currently. there is next to nothing for the avg forum user to learn from my plans because they are incredibly A - Typical of people around here.
A few considerations for 100% SCV (small cap/value). First, Larry Swedroe would be impressed, and I'd suggest his books for staying the course with SCV. Second, SCV can underperform for many years before it catches up, which is why I stopped tilting SCV myself. Third, SCV invests against big tech (large cap/growth) since they're opposites, and those big tech companies have huge advantages.
Those caveats aside, international small/value can be difficult, but it's important. U.S. and international trade off performing better, with international having better value characteristics (P/E, p/b) right now. I'd suggest using etdb's list, and then search for each on Morningstar's websites to get the 9-box weights.
https://etfdb.com/etfdb-category/foreign-small-mid-cap-equities/
Or you could say I was picking small/value ETFs incorrectly and ignore that advice - and since I did give up on SCV, I'd have to say it's a fair point.
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At Fidelity, they had to sell the tIRA shares and buy the RIRA shares, and I can't see how much it actually is until they put out a statement (or call). I was over my target by $235 for 2021. This is the 2nd year that I did this at Fidelity, and it was annoying. MPP, I know.
Strange, I did a traditional to Roth conversion at Fidelity at the end of 2021 and they transferred shares just fine. I used the online "Transfer" workflow. It's best to do soon after market close to make sure it's completed that day once you know the closing value, but not at the next days closing value. I've gotten/seen different answers about the timing, but the earliest I've seen is to submit the transfer before 6pm EST.
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Yeah, the difference is if it's within the same institution vs going between companies. Internal movements at one company (or those between companies but where the account title isn't changing) usually can be done in-kind.
Some people don't want to pull more out of their 401ks than needed because their state leaves IRAs open to creditors.
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I had a bit of an epiphany this morning and I'm paging @boarder42 for his thoughts since he has also spent quite a bit of time thinking about this process.
With the market poised for a considerable drop I have been doing some thinking about whether it would be advantageous to max out Roth conversions when the market is down since it may well be the last year that has no income cap for ACA subsidies. For me personally that still limits the maximum theoretical conversion to about $100,000 because I would never want to push into the 22% ordinary income tax bracket under voluntary circumstances.
My initial thinking was that I would set some type of threshold for a market drop (say 30%) after which I would automatically make the maximum conversion that I was considering for the year. The thinking being that the same number of absolute dollars would represent a larger percentage of my portfolio, thus getting as much of our stash as possible into accounts that will no longer be taxed.
However I ultimately realized there is a fairly large flaw in this thinking under certain scenarios, and this flaw extends so far as to influencing whether or not I would contribute lots of money to a Roth IRA early in my career if I had the choice or not. My focus with my FIRE spreadsheet projections has been about how one can maximize their yearly spending over their lifetime in a bell-shaped curve while also minimizing taxes through long-term tax smoothing. In the posts I've made upthread I have commented on how for the very early retiree (think < age 40-45) the biggest hurdle to increasing spending actually becomes available Roth IRA principal prior to age 60.
The critical flaw here is that increased Roth conversions over decades require a large traditional IRA balance and depleting that balance more quickly reduces the amount of funds available to convert (duh). At a certain point, taking advantage of the ACA subsidy cap removal and converting a larger amount now could actually reduce our maximum annual spending via a Roth conversion pipeline. I suppose if we got close enough to traditional retirement age the conversation could then turn to a 72t SEPP to bridge that gap but I am still not a fan of that particular method.
As this dawned on me, I realized that it is actually quite a good thing that the majority of our money is in traditional IRAs right now because that high balance will fuel large Roth conversions for us for the next two decades. Had we instead made significant Roth IRA contributions in place of tIRA contributions when we were younger and hadn't yet passed income thresholds that allowed that, we would have significantly less Roth principle to spend over the next 20 or so years. The majority of our money would be Roth gains and not subject to withdrawal without penalty prior to age 60.
It is possible that this is merely a self-reinforcing situation in the sense that those that have typically been able to retire before age 40 have had exceptionally high incomes which would disallow Roth contributions anyway. However I know it was the case for us that my income (and our stash) only grew astronomically in the last 5 years or so before we FIREd. Had I known, we could have been making Roth IRA contributions (instead of tIRA) during most of my twenties. Looking at it now, if trying to maximize our long-term annual spending, I suspect that having made Roth contributions all those years would have actually left us with less flexibility than we have now.
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"ACA subsidy cap removal" - did they actually make that permanent? Last I knew, that was 2021 and 2022 only, but making it permanent was included in the Build Back Better bill that failed. Really hope I missed something related to that though.
I think the strategy to maximize Roth conversions during big downswings might work well on the "minimizing taxes" goal. In terms of maximizing available to spend across lifetime it is less clear to me. Overall I think you're right about conversions (if you can weather the 5 year holding period after conversions) allow for much more Roth available to withdraw than sum of contributions. So chalk another up to "Roth sucks", at least during accumulation years.
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@dandarc the cap removal expires after this year which is why I was initially thinking about maximizing a conversion if we see a big market crash.
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There are three separate things here.
First, yes, it is generally advantageous to do a Roth conversion when the market is "low" during the year because you get more shares converted for the same tax cost. Or alternatively, you get the same amount of shares converted for a lower tax cost. I saw a YouTube video once that claimed that converting half of the total on 1/1, then the other half when the market was down 20% during the year, else the other half at the end of the year was historically a good approach. Personally I just wait to see if I'm getting scared or people are grumbling or afraid and then do maybe half of what I think I'll do for the year. Then I fine tune in December to hit my AGI target. It may not be totally optimal but I place a fairly high value on the certainty of hitting my AGI target (and thus the tax structure I want for the year).
Second, how much to convert is always an interesting and tricky question, and one must consider all of the factors. Of which there are quite a few, and certainly the ACA PTC currently-temporary cap removal is one that would apply to people considering Roth conversions around that 400% FPL mark. Overall, though, the best metric I've been able to come up with after a lot of study is comparison of marginal rates now to probable marginal rates when I'm 75 or so. And being 52-almost-53, I don't think it's feasible to construct an accurate enough model to get things to within closer than a 5% point range. So in the end one might feel comfortable paying taxes at 20% but not at 25% or something like that.
Third, as far as Roth contributions vs. traditional, I agree with the assessment that for early retirees, traditional contributions then Roth conversion ladder is probably the better way to go in terms of spending availability in one's 50s. My three 20-something offspring are all doing Roth contributions now because they're in low brackets. I don't think any of my three kids will FIRE anyway for various reasons, so perhaps it's not a problem.
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I have been marinating on this for the last few days based on @secondcor521's comment and I think I'm overcomplicating the issue based on the assumed complexity of the situation.
Choosing not to take advantage of converting while the market is down leaves gains from the next market recovery in our tIRA accounts. We can reasonably expect to pay at least ~20% tax on that money. 10% is the lowest Federal tax bracket plus 5% North Carolina state taxes. It's more likely that money would end up in the 12% Federal tax bracket, which I expect to revert to 15% after the next few years. Plus health insurance "taxes" via reduced subsidies on higher income. Regardless, I can't really think of a scenario where the combined taxes are less than 10% which is the only "tax" we'd pay for taking Roth gains before age 59.5 via penalty. It's probably really as simple as that.
Now that I think about it, I suspect if I were to retool my model to plan for taking Roth gains prior to age 59.5 we could both increase our maximum annual lifetime spending and lower total overall taxes. I think a version 3.0 is needed.
This would also change my opinion re: Roth contributions early in my career, where once again we should have been contributing the max any time we were able.
Do I have that right?
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Regardless, I can't really think of a scenario where the combined taxes are less than 10% which is the only "tax" we'd pay for taking Roth gains before age 59.5 via penalty.
Roth gains removed prior to 59½ count as regular income toward your AGI and are taxed accordingly, plus the 10% early withdrawal tax.
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Regardless, I can't really think of a scenario where the combined taxes are less than 10% which is the only "tax" we'd pay for taking Roth gains before age 59.5 via penalty.
Roth gains removed prior to 59½ count as regular income toward your AGI and are taxed accordingly, plus the 10% early withdrawal tax.
Bah, I thought that was kicking around in the back of my brain somewhere but a quick Google search came up empty so I figured I was confusing it with something else. The marination shall continue!
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Back on topic, I'd like to add my thanks to everyone else's, the value in this thread definitely provides great ROI on the cost of several years' MMM forum membership...
@Mr. Green, thanks for the great spreadsheet. I've needed to start modeling our income & tax projections, RMDs, Roth conversion options, etc. for a while now, and your heavy lift will make that easier. Our situation differs, so I'm adapting it to our needs.
As a US Foreign Service employee hanging on for MRA, like @MasterStache I'll receive a pension. Since I'll retire before age 62 and therefore won't have reached SS eligibility, Uncle Sugar adds an annuity supplement for the period between my retirement and age 62 (aside: some FS folks opine that continuing to work after reaching retirement eligibility makes little sense because you never have another chance at that annuity supplement). Uncle also contributes to FEHB in retirement at the same rate as for current employees, and my contribution share also remains the same, albeit with post-tax dollars upon retirement (while working, it's pre-tax). My DW will also receive a small pension.
Thus I can discard with calculations of ACA eligibility, and perhaps post-retirement Medicare part B calculations (I'm not sure whether it makes sense to opt in to Medicare part B - another topic to model and analyze).
OTOH, the income from the pensions (and the annuity supplement in the first few years) will make it difficult to squeeze some tax-free or low-tax-rate Roth conversions into the pipeline. We've both contributed heavily to taxable TSP and other retirement accounts, and are continuing to contribute to taxable through 2022, our last year to qualify for the AOTC, and we need to keep reducing AGI to maintain eligibility.
I'm using the model to decide whether to shift our TSP contributions to Roth in 2023 and beyond, because that would likely vault us into the 24% marginal tax bracket, keeping in mind that we're among those high-saving folks who will face high RMDs on our traditional funds and the accompanying federal taxes, with little room to convert at lower rates due to our pensions (boo-hoo, I know).
Also, assuming we maintain our health, we'll have so much income that taking SS before age 70 will simply increase our taxes further for little benefit (more tears fall into my beer...).
For ill or good we started contributing to Roth IRAs when they first became available in 1998 - our incomes were much lower then - and have simply continued to make IRA contributions only to Roth since then. We may have missed out on some tax breaks in the past, and nevertheless have built up large Roth balances rather than adding to our RMD/tax problem.
Upon retirement, we plan to transfer our Roth TSP funds to Roth IRAs, because according to the document Important Tax Information About Your TSP Withdrawal and Required Minimum Distributions (https://www.tsp.gov/publications/tsp-775.pdf),
The Internal Revenue Code (IRC) requires that you begin receiving distributions from your account in the calendar year you become age 72 and are separated from federal service. Your entire TSP account—both traditional and Roth—is subject to these required minimum distributions (RMDs).
I'm definitely down with @ender 's idea of doing a cash-out refi just before bailing out - get the mortgage while we're still receiving paychecks.
I'm following up on this thread in case someone reads this without knowing about the changes resulting from the SECURE Act 2.0. Kitces has a long read on it here: https://www.kitces.com/blog/secure-act-2-omnibus-2022-hr-2954-rmd-75-529-roth-rollover-increase-qcd-student-loan-match/
The short version:
The age for RMDs was raised - in our cases to 75 - giving us a few more years to try to squeeze in Roth conversions.
Roth TSP funds are no longer subject to RMDs in retirement, so we'll probably leave Roth funds in the TSP after retirement.
Employers can consider the option of having matching funds go to a Roth 401(k), though I haven't heard whether TSP will do so.
On a personal note, we realized that contributing to Roth TSP didn't make sense because it would vault us into the 24% Federal tax bracket, and we also pay State income tax on top. So we've kept with Traditional despite our high balances in Traditional TSPs & IRAs. We probably wouldn't consider putting our matching funds into Roth TSP.
We're still not investing in the G Fund, and we probably cannot access it currently anyway due to the Department of the Treasury's "extraordinary measures" to keep from breaching the debt limit. We continue to eschew bonds in our investment allocation.
However, SECURE 2.0 also requires high wage earners to place their catch-up contributions in Roth starting in 2024. Since we're taxed whether we place those funds into Roth TSP or into a taxable account, it makes sense to consider whether to continue making catch-up contributions in 2024 and beyond.
We wouldn't lose any matching on catch-up contributions, so that's not a consideration.
TSP funds have extremely low costs, so if we'd invest those contributions anyway, that's an advantage for continuing catch-up contributions. Also, there really isn't an access problem, since we'll both be over 55 when we separate from service and can therefore access our TSP accounts at any time without penalty.
If we decide to deleverage by paying down our HELOC, I suppose we might then eschew catch-up contributions to divert more funds to loan repayment. We'll see what happens with interest rates; our HELOC currently costs us 7.25%, is only fractionally tax-deductible, and that rate is close to the long-term stock market return.
So it would seem that the trade-off is use-or-lose access to the low-cost TSP funds vs. using those taxed funds for HELOC repayment.
We'll see where things stand in 2024, I suppose. And we'll continue to consider a cash-out refi just before bailing.
Edited to fix quoting.
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I had someone pop into my Dying With Zero journal (https://forum.mrmoneymustache.com/journals/dying-with-zero/)asking for my modeling spreadsheet. It made me think I should post a link to that journal here because in our case saying with zero is heavily reliant on the Roth conversion pipeline and there is some interesting commentary there both about the effect of buying and selling real estate and the market drop over the last year. Since I'll continue updating that journal with interesting data points I find it may be useful in providing additional thinking points to others in their own Roth conversion journeys.