@SeattleCPA agree with your recent posts 100%.
Yeah, the big picture message is you probably want to avoid needlessly pushing your income in any given year into the 22% and higher brackets as long as you are sure you can avoid them in your lifetime. If you might be in the 22% and higher brackets in your 70s when SS and RMDs hit, then that's a different story.
can you explain your meaning here a little?
since I'm single, I'll hit the 22% tax rate at relatively low amounts of income (to my eye!), and I have very low taxable and roth balances to try to get crafty with it! All or nearly all living expenses will be taxed coming out of the 401ks.
I still thought it was good to try to minimize money in the 22% tax bracket on an annual basis, but wonder if you had other thoughts on this. Like get the money out earlier in the 22% bracket and direct into taxable or roth accounts before social security comes along?
Sure.
To the extent you can, you usually want to either defer or accelerate income from years in which it would have been taxed at a "high" tax rate into years in which it will be taxed at a "low" tax rate. For every dollar you do this with, you save ("high" - "low") tax rate in cents. For example, getting a dollar taxed at 12% instead of 22% saves you ten cents. Not much on an individual dollar basis, but it adds up over dollars and years.
I like to imagine each year as it's own tax column, and the higher the column of income, the higher that top marginal rate is going to be. It's helpful to think a little bit about the future brackets, which ordinarily increase with inflation each year, and which may be compressed again (but who really knows) in 2026. It's also helpful to think about future income that you may be "forced" to receive, such as SS, a pension, and RMDs - they can be the "required dollars" that you have to work your discretionary plans around.
What I think is a good goal is to, again, to the extent you can, is to shift income from high marginal rate columns / years to lower marginal rate columns / years until it's as even as it can possibly be.
As an example, suppose you inherit a reasonably large traditional IRA from someone. If you just take the minimum amount required in the first nine years, that 10th year the big slug of income from being forced to take the remaining balance (SECURE Act rules) might push you into the 32% bracket. But you could pull some or possibly a lot of those 32% dollars into the first nine years and maybe pay 22% or 24% on them instead.
As another example, the OP in this thread was considering essentially $100K Roth conversions for five years on top of their income and paying 22%. If they spread that out via a combination of part time work, SEPPs, and smaller Roth conversions, they could get the same result in the 12% bracket. Maybe not all the dollars fit into 12%, but more of them would.
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A couple of points:
1. To do this sort of thing, you need to be making educated guesses about the future landscape: tax law, your spending needs, your investment growth, and more. I think this is pretty much impossible to do perfectly. But you can make some estimates and do some sensitivity analysis and make some educated guesses.
2. There are big wins and small wins. The big wins are between the 12% bracket and 22% bracket, and the 24% and 32% brackets. The small wins are between the 10% and 12% bracket, and the 22% and 24% bracket. The big wins are worthwhile IMHO, the small wins are nice but in the end probably won't be critical for people on this board.
3. What is a "high" bracket and what is a "low" bracket depends on your lifetime level of wealth. If you think about "evening out" your income, it's going to be "evened out" at some level. If you can do the projections (see point #1), you can sort of figure out where that level is. Then the simple rule becomes: each year, voluntarily generate taxable income (via Roth conversions for example) up to that level, or try to defer income to a later year if above that level.
4. The two previous points can result in people expressing different viewpoints. A person solidly in the 22% bracket with small SS and no pension may think Roth conversions are no big deal. Another person in their 40s with low expenses who can fill up the 10% and 12% brackets with Roth conversions and minimize the runaway growth on their large 100% stock IRA in their 70s who might be facing the 32% bracket then may say Roth conversions are a huge deal.
5. I wrote "to the extent you can" a couple of times. Probably most people when they start to look at multi-year tax optimization already have constraints: they already have a SS benefit of a certain size, they have a lifestyle of a certain dollar cost they want to maintain, their investments are already a certain way, their taxable is invested a certain way that probably has tax consequences to change, etc. There also may be that year that is your 25th anniversary and you want to spend that blowout dollar amount to go on that African safari or 15 day European river cruise, which is probably more important than levelizing your marginal income.
6. Most people are taught to try to defer defer defer taxes. And usually it's a good idea. But taken to the extreme, it can work against you. Let's say you manage to defer a bunch of your salary into a 401(k) while you're working and stay out of the 22% bracket during your working career. Then you retire and don't spend much, and your 401(k) continues to grow. If you saved enough and invested well, then by the time you're 75, that RMD might force you through the 24% into the 32% bracket. You would have saved some money to only defer enough to stay out of the 24% bracket while working and then Roth convert to the 24% bracket in early retirement, both of which could reduce the size of your 401(k) RMD to keep you out of the 32% bracket.
OTOH, you might die before you get to that 32% bracket, and then it becomes your beneficiary's problem.
Hope that helps.
