Managing lifetime taxes

[mistymoney]

Need to get some check on my thoughts here. I've been working in my spreadsheets trying to estimate my retirement tax rate year to year.

I have started some expensive (24% tax bracket) roth conversions fro 2024 and 2025. For 2025, I want to do up to the 24% limit. I will likely be quiting the day job, keep a small side gig, and be mostly retired sometime this year. Given uncertainties in the economy I am trying to hold out in a tough job situation for a few more months. Could be a small bonus, use up some sick time and other PTO that is not paid out at separation, etc. Nothing big, but a little bit more into the pot gives me a little bit more assurance.

I have most of my money in pretax, roth is getting plumper after the conversions, but was  avery bitter pill on the 2024 conversions losing a lot of value I had already paid taxes on. But can't control or predict the market, but still stings a bit.

@Sandi_k reminded me today that I also need to take irmaa into consideration.

I will also be in the hallowed 59.5 years of age before I retire.

Here is my relatively simple plan:

Convert up the 24% bracket during the pre-irmaa years.
Depending on what the market and projections are looking like, might also do this for irmaa year 1 as it will only affect 3 months of medicare payments before resetting.
Roth convert up to the irmaa limit each year, with a bit of a cushion in to avoid going above it on any interest/dividends, and then live out of the roth account during the year.

I think at that point I can live easily and well at the irmaa free level, but if I have a big ticket item in any year, just dig into other roth funds as needed.

If the market does well, will need to rethink as RMDs could get out of control, but if markets are lackadaisical the next decade or so, RMDs won't be a lot more than I need for expenses for a while. I would assume a lost decade would at some point hit another bull market and then need to reassess the tax strategy.

Alternate strategy - bite the bullet early on with irmaa charges and keep roth converting more significant amounts for more years until pretax gets down to a level where RMD won't realistic exceed what I need to living. To convert withint he 24% bracket, would cost about 3.5k in extra medicare fees. Maybe more, that is just on the standard monthly charge, I think there are other parts to medicare that also have irmaa charges? not sure.

Am concerned is I pay a lot more taxes in the early years (income and irmaa), and stock growth is not there, then it would be a waste of money that is never recouped will leave me limping along the rest of retirement.

I am looking to start with a 5.75% withdrawal rate that will decrease as some loans are paid off in 2028, 2031, 2032. Hopefully earlier. I am focusing on roth conversions right now rather than debt payoff, but have been paying a little extra on the loans. The 2032 loans have the highest interest rate so focusing on those right now.

Loan balance amounts plus basic living expenses and expected taxes through to 70 and social security are in fixed income in pretax. If social security comes through at around the expected amount WR will be about 3% at that point with targetted AA at 80/20.

Acknowledging this is not the best scenario, and the economic landscape has me hesitant. But - I think I am truly done with my career right now. I am done with this boss from hell for sure! Maybe I just need a sabatical? but will be female in 60's with a job gap looking for a job as AI is changing my profession nearly daily, so not putting anything in that basket right now. File under unlikely to pan out. I'll keep the side gig going for as long as I can. Side gig can pay about 8% or so of annual income needs. Can try to increase that - but trying to plan for if it fizzles completely at any moment. Adding in side gig money at 2024 level would ttake my initial WR to 5.35%.

Anyhoo - I think minimizing lifetime taxes is my best bet to success from here.

would appreciate thoughts or advice on accomplishing this.

[MDM]

Aiming to keep your marginal tax rate about the same from year to year is a good guess.  If you can pay conversion tax from cash on hand you can justify paying a somewhat higher tax rate in earlier years.

[Omy]

If Trump gets rid of income tax, Roth conversions will have been a suboptimal plan.

[secondcor521]

I agree with MDM and you on the strategy of leveling marginal rate.

A few thoughts:

1.  It's a seesaw.  You can pay more taxes up front - heavy Roth conversions now, for example - which means lower taxes later.  Or you can pay fewer taxes up front - skip the conversions - which will mean higher taxes later.

2.  To keep the seesaw balanced, figure your marginal rate now vs. your marginal rate at 75 or so.  Your marginal rate now you can figure out from your most recent tax return.  Your marginal rate at 75 is going to generally be based on your interest, dividends, pensions, 85% of SS, and RMDs and is ordinary income tax plus IRMAA (and maybe NIIT).

Aside:  IRMAA has multiple brackets, not just one.  And it applies to both Part B and Part D premiums.

3.  Figure out your age 75 marginal rate, but I personally don't worry about balancing things perfectly.  If you do it approximately right, you're going to have plenty of money.

4.  I think you alluded to this idea, but there is the notion of asymmetry here - if you tip the seesaw too aggressively by paying a lot of taxes up front and things don't turn out well, then you might not have the money you need because you paid it all in taxes.  On the flip side, if you don't pay enough taxes early on and things go better than expected, then your biggest problem will be writing big checks to the IRS.  As a result of this principle, I personally tend to Roth convert up to a few percentage points below my age 75 marginal rate.  I'd rather err on the safer side of asymmetry.

You might consider whether it might be better to just pay off the loans - compare your interest rate on the fixed income against the interest rate on the loans, adjust for tax impacts, and see if you're really gaining anything.

Your 5.35% WR is a little high, but you're not taking into account SS, which is accessible in a few years.  Just pointing out that you do have a tiny bit of SORR risk to consider.  But it does sound like you're done with your job, so... :shrug:

[mistymoney]

If Trump gets rid of income tax, Roth conversions will have been a suboptimal plan.

is this seriously under consideration??

[mistymoney]

I agree with MDM and you on the strategy of leveling marginal rate.

A few thoughts:

1.  It's a seesaw.  You can pay more taxes up front - heavy Roth conversions now, for example - which means lower taxes later.  Or you can pay fewer taxes up front - skip the conversions - which will mean higher taxes later.

2.  To keep the seesaw balanced, figure your marginal rate now vs. your marginal rate at 75 or so.  Your marginal rate now you can figure out from your most recent tax return.  Your marginal rate at 75 is going to generally be based on your interest, dividends, pensions, 85% of SS, and RMDs and is ordinary income tax plus IRMAA (and maybe NIIT).

Aside:  IRMAA has multiple brackets, not just one.  And it applies to both Part B and Part D premiums.

3.  Figure out your age 75 marginal rate, but I personally don't worry about balancing things perfectly.  If you do it approximately right, you're going to have plenty of money.

4.  I think you alluded to this idea, but there is the notion of asymmetry here - if you tip the seesaw too aggressively by paying a lot of taxes up front and things don't turn out well, then you might not have the money you need because you paid it all in taxes.  On the flip side, if you don't pay enough taxes early on and things go better than expected, then your biggest problem will be writing big checks to the IRS.  As a result of this principle, I personally tend to Roth convert up to a few percentage points below my age 75 marginal rate.  I'd rather err on the safer side of asymmetry.

You might consider whether it might be better to just pay off the loans - compare your interest rate on the fixed income against the interest rate on the loans, adjust for tax impacts, and see if you're really gaining anything.

Your 5.35% WR is a little high, but you're not taking into account SS, which is accessible in a few years.  Just pointing out that you do have a tiny bit of SORR risk to consider.  But it does sound like you're done with your job, so... :shrug:

good points to consider.

In terms of the loans, I do keep putting extra to them here and there. And am considering just pulling the money out of pretax my first calendar year of retirement just to be done with it. So if I retire this year as I am thinking, would just pay minimums till Jan 2026 and then take out the money from pretax and pay everything off. But will see how far I get with pay down while still working and maxing my 401k contributions.

that would take me to around 5% wr in 2026, 4.6% if side gig continues.

Oh! Also, I have some small bits of moneys I don't usually include. HSA, ibonds, my small taxable savings. If I include them after the debt payoff and with side gig money still coming in, down to 4.45% wr.

which is in the benegan approved range!!

[Sandi_k]

Remember that making $20k per year is the equivalent of a $500k stash, in 4% SWR-land.

If work is that sucky, yes, get out.

[lhamo]

What is your situation re:cash flow/living expenses?

Personally, I am not choosing to pay high taxes on Roth conversions.  My retirement accounts are split about 50/50 between Trad and Roth, with around 550k in each. 

I'm keeping conversion amounts low up to Medicare age, since losing ACA benefits would be a huge blow to my budget.  I still have a college age daughter as a dependent (she is on full scholarship, though) and am living mostly off LTCG at the moment, so I can convert 10-20k/year for the next three years.  Will probably mostly live off of the Trad IRA money from age 59.5-65, maybe doing some small conversions depending on ACA situation -- might tap into some of the Roth money during that phase just to keep tax and ACA situation reasonable.  Then I'll plan for larger conversions from age 65-72 or whatever the RMD start age is these days.  But hopefully won't be in the 24% bracket.  If the Trad accounts grow tremendously I'd rather donate all or part of RMDs rather than pay ridiculous taxes.

I like the Bogleheads spreadsheet for Roth planning

https://www.bogleheads.org/forum/viewtopic.php?t=97352

[MDM]

I'm keeping conversion amounts low up to Medicare age, since losing ACA benefits would be a huge blow to my budget.

That probably makes sense.  This annotated chart is one example of the high marginal rates for conversions that having ACA insurance can cause.

[mistymoney]

What is your situation re:cash flow/living expenses?

Personally, I am not choosing to pay high taxes on Roth conversions.  My retirement accounts are split about 50/50 between Trad and Roth, with around 550k in each. 

I'm keeping conversion amounts low up to Medicare age, since losing ACA benefits would be a huge blow to my budget.  I still have a college age daughter as a dependent (she is on full scholarship, though) and am living mostly off LTCG at the moment, so I can convert 10-20k/year for the next three years.  Will probably mostly live off of the Trad IRA money from age 59.5-65, maybe doing some small conversions depending on ACA situation -- might tap into some of the Roth money during that phase just to keep tax and ACA situation reasonable.  Then I'll plan for larger conversions from age 65-72 or whatever the RMD start age is these days.  But hopefully won't be in the 24% bracket.  If the Trad accounts grow tremendously I'd rather donate all or part of RMDs rather than pay ridiculous taxes.

I like the Bogleheads spreadsheet for Roth planning

https://www.bogleheads.org/forum/viewtopic.php?t=97352

Thanks, my 401k to roth is 91% to 9%, so just a very modest roth percentage, and even more modest taxable. But - I will be 59.5 so the only hiccup is the taxes with the large pretax.

I think you are living off taxable income (with the LTCG). and with 50/50 pretax/roth seems a really good mix for controlling taxes.

Good thought on the option for charitable giving if RMDs look too ugly and finances are secure. if it seems the larger rmd might threaten overall security by jacking up taxes and irmaa for a few years while funds dwindle, I'll also consider a qlac to help even things out.

I guess there is no way to have a precise plan because things will be changing all the time!

[mistymoney]

What is your situation re:cash flow/living expenses?

non-discretionary expenses are pretty high. This should reduce over the next few years.

so high wr is temporary.