Question/Clarification on how to minimize retirement taxes

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Topic Author
honigvod
Posts: 26
Joined: Thu Apr 29, 2021 9:08 pm

Question/Clarification on how to minimize retirement taxes

Post by honigvod »

Greetings all!

I have been reading blogs, wikis, forum posts, and more over the past few years and been getting further into the details about what to do in the near future (<10 years) when I retire early.

I will be 42 in a few months and I am doing everything I can so far:
Contribute to 401k to employer match (last decade) >
Max roth (ramped up to same over last decade, had it for longer at a lower contribution rate) >
Max 401k (started when I paid off my house 2 years back) >
Created an i/ee bond ladder (emergency fund to replace savings, will become an effective $10k/year annuity baseline from 52-70, started buying this year) >
Taxable account (starting initial buy-in on my birthday this year, likely VTSAX and forget it for simplicity but still learning, putting $1k/month and raising if I can after the first year budget review)

Now that everything is (almost) set, I plan on keeping the next 5-10 years simple and boring while I continue my daily life and work. However, I do want to plan a bit about what could happen after that. But! It isn't easy to find out how the rules work for *lean*FIRE for a single person in their 50s, at least not fully explained in a way that makes sense to me.

If I was there right now (Early 50s, ready to pull the leanfire trigger), and lets say...

I redeem $13k (purchase price $10k) of ibonds, *and*
I pull roughly $20k+ (purchase price of $10k+) from my taxable, long term capital gains.

What is counted as 'income', both for purpose of base taxes, and for ACA income subsidies?

$3k from ibond gains for sure, but from what I read, long term capital gains aren't taxed (for the above scenario) if my income is under $40k. But does it still count for 'income' when trying to get marketplace health insurance subsidies?

Assuming the bond returns are my only income, and long term capital gains wouldn't be taxed as income because of above...

Standard deduction is $12,550, 0% taxes effectively on anything below that.
If I did a traditional ira > roth conversion of $9,550 (12,550-3,000 from bond returns), I would pay effectively 0% in taxes for it?
If I did a traditional ira > roth conversion of $19,500 (above +$9,950 for first tax bracket), I would pay 10% ($995) on the amount over the previous line and that's it?
And so on if I want to go above that? These are for a Roth conversion ladder to cover the gap after taxable runs out/as a companion to it before I hit 60.

If ACA stays the same by then, and the above is true, I will likely convert up to the top of the 10% bracket (~23k, ~10k of which taxed at 10% after deduction, no long term capital gains taxes, living off taxable and bonds, then off taxable/conversions and bonds).

I am very willing to go above that as I have a lot of room in the 12% bracket and it isn't that much of a pinch beyond what I already mentioned, but trying to establish a baseline and make sure I understand how it all works before planning much further.

I'm not counting state taxes right now as I am unsure where I will be living. House is paid off. Car is paid off. HSA doesn't really work with my job enough to be worth it (trust me, I checked). I plan on not touching my current roth until much later in life/have it as a backup. I do plan on social security and will have 35 years worked/hit the second bend point 'wall' at 50 so my (non-roth) retirement accounts only really need to last until 70. As such, I am willing to take out/convert more as needed, even to the point of taking a penalty (instead of convert and wait) if I only need a little in my later 50s.

I know $30k is quite 'lean' to some, but I actually live on $20k right now so don't see it as much of a chore or unreasonable. I will likely go above that (but under $50k total in today's dollars), hence the 'room' in the 12% bracket, but again trying to get a good starting point to build off of and make sure I am not missing anything first.

Thanks for reading! Sorry If I rambled a bit. The heat is getting to me in the midwest and my brain is fried, but this has been on my mind the past few weeks and had to ask someone, and at least work it out 'on paper' for myself.
Cheers!
exodusNH
Posts: 10344
Joined: Wed Jan 06, 2021 7:21 pm

Re: Question/Clarification on how to minimize retirement taxes

Post by exodusNH »

honigvod wrote: Thu Jun 17, 2021 9:23 pm What is counted as 'income', both for purpose of base taxes, and for ACA income subsidies?

$3k from ibond gains for sure, but from what I read, long term capital gains aren't taxed (for the above scenario) if my income is under $40k. But does it still count for 'income' when trying to get marketplace health insurance subsidies?

Assuming the bond returns are my only income, and long term capital gains wouldn't be taxed as income because of above...
That all counts as income.

You might consider taking a part-time job, at something like Home Depot. This would allow you to continue earning income and putting money into a Roth IRA. If you work just enough to earn $6K or $7K, you can stash that all away. At $15/hr, that's like 11-13 weeks of work a year.
nalor511
Posts: 5058
Joined: Mon Jul 27, 2015 1:00 am

Re: Question/Clarification on how to minimize retirement taxes

Post by nalor511 »

Just buy download tax software and do your next year's taxes as a mock up, and you can see exactly what counts as income, where, in which form, etc. It's really enlightening. I do it before recognizing any income (Roth conversion, stock sale, etc) just to be sure.
Topic Author
honigvod
Posts: 26
Joined: Thu Apr 29, 2021 9:08 pm

Re: Question/Clarification on how to minimize retirement taxes

Post by honigvod »

exodusNH wrote: Thu Jun 17, 2021 10:44 pm
honigvod wrote: Thu Jun 17, 2021 9:23 pm What is counted as 'income', both for purpose of base taxes, and for ACA income subsidies?

$3k from ibond gains for sure, but from what I read, long term capital gains aren't taxed (for the above scenario) if my income is under $40k. But does it still count for 'income' when trying to get marketplace health insurance subsidies?

Assuming the bond returns are my only income, and long term capital gains wouldn't be taxed as income because of above...
That all counts as income.

You might consider taking a part-time job, at something like Home Depot. This would allow you to continue earning income and putting money into a Roth IRA. If you work just enough to earn $6K or $7K, you can stash that all away. At $15/hr, that's like 11-13 weeks of work a year.
I have been side-eyeing part time or seasonal jobs, but mostly plan on taking those if I pull the retirement trigger early. I don't have that many expenses and I like the idea of something with just enough return for a roth/a little bit of mad money to supplement everything. CoolWorks, something school support related (with summers off and part time during the year), or 'Barista'-ish jobs/something like you mentioned.

5 years from now, a part time job like that combined with my bonds/taxable would see me at a comfortable but frugal life until I decide I want to stop. 10 years from now I wouldn't need any supplement at all but might still do it just to feel productive.
Topic Author
honigvod
Posts: 26
Joined: Thu Apr 29, 2021 9:08 pm

Re: Question/Clarification on how to minimize retirement taxes

Post by honigvod »

nalor511 wrote: Fri Jun 18, 2021 2:23 am Just buy download tax software and do your next year's taxes as a mock up, and you can see exactly what counts as income, where, in which form, etc. It's really enlightening. I do it before recognizing any income (Roth conversion, stock sale, etc) just to be sure.
Ah, the simple, sensible, and easy approach that could be done quickly... No wonder I never thought of it. =) I will definitely check it out, or grab a free version if I can for last year's taxes because I just want to see how the numbers work. I'm not ready to actually make the jump and know it will likely change around a bit as laws and regulations evolve in the near future. But a great place to start, thanks!
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retired@50
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Re: Question/Clarification on how to minimize retirement taxes

Post by retired@50 »

honigvod wrote: Thu Jun 17, 2021 9:23 pm What is counted as 'income', both for purpose of base taxes, and for ACA income subsidies?
See link from healthcare.gov

https://www.healthcare.gov/income-and-h ... come/#magi

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
honigvod
Posts: 26
Joined: Thu Apr 29, 2021 9:08 pm

Re: Question/Clarification on how to minimize retirement taxes

Post by honigvod »

retired@50 wrote: Fri Jun 18, 2021 10:11 am
honigvod wrote: Thu Jun 17, 2021 9:23 pm What is counted as 'income', both for purpose of base taxes, and for ACA income subsidies?
See link from healthcare.gov

https://www.healthcare.gov/income-and-h ... come/#magi

Regards,
I've dug through that website before and following the links therein (and a few others). In several places it says long term capital gains won't affect *income* tax since they are taxed separately at a different rate. BUT, they will affect AGI. However, in early retirement, AGI runs a bit different and most articles online don't seem geared towards helping out those in that situation so was hoping for clarity to make sure I was getting it right.

It does seem that capital gains affect agi which is what counts for ACA subsidy calculations. Technically it is MAGI but should be the same. So it is good to know and plan for. With the new rules it will be less of a worry than before but I will have to adjust a tiny bit to either stay low or take out a bit more to cover reduced plan costs.
nalor511
Posts: 5058
Joined: Mon Jul 27, 2015 1:00 am

Re: Question/Clarification on how to minimize retirement taxes

Post by nalor511 »

honigvod wrote: Fri Jun 18, 2021 11:22 am
retired@50 wrote: Fri Jun 18, 2021 10:11 am
honigvod wrote: Thu Jun 17, 2021 9:23 pm What is counted as 'income', both for purpose of base taxes, and for ACA income subsidies?
See link from healthcare.gov

https://www.healthcare.gov/income-and-h ... come/#magi

Regards,
I've dug through that website before and following the links therein (and a few others). In several places it says long term capital gains won't affect *income* tax since they are taxed separately at a different rate. BUT, they will affect AGI. However, in early retirement, AGI runs a bit different and most articles online don't seem geared towards helping out those in that situation so was hoping for clarity to make sure I was getting it right.

It does seem that capital gains affect agi which is what counts for ACA subsidy calculations. Technically it is MAGI but should be the same. So it is good to know and plan for. With the new rules it will be less of a worry than before but I will have to adjust a tiny bit to either stay low or take out a bit more to cover reduced plan costs.
AGI and MAGI are not the same, and there are even different versions of MAGI. Here's the ACA version of MAGI explained:

https://laborcenter.berkeley.edu/pdf/2019/magi.pdf (updated Apr 2020)
Topic Author
honigvod
Posts: 26
Joined: Thu Apr 29, 2021 9:08 pm

Re: Question/Clarification on how to minimize retirement taxes

Post by honigvod »

nalor511 wrote: Fri Jun 18, 2021 3:19 pm
AGI and MAGI are not the same, and there are even different versions of MAGI. Here's the ACA version of MAGI explained:

https://laborcenter.berkeley.edu/pdf/2019/magi.pdf (updated Apr 2020)
Oh, I know that they are different. However, nothing on the MAGI side will apply to me in early retirement (later with social security and roth that would likely change). So they will be effectively the same number for quite a while.
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