Reducing balances of tax deferred accounts before RMDs

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
Mike Scott
Posts: 3579
Joined: Fri Jul 19, 2013 2:45 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by Mike Scott »

Don't exceed your targeted marginal tax bracket range.
User avatar
David Jay
Posts: 14586
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Reducing balances of tax deferred accounts before RMDs

Post by David Jay »

Mike Scott wrote: Sun Aug 07, 2022 11:35 amDon't exceed your targeted marginal tax bracket range.
This is true if your heirs are also in the same (or higher) tax bracket. If they are likely to be in a lower tax bracket then it may make sense to convert less.

You should also evaluate your IRMMA threshold, that is a "one dollar over" penalty.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by delamer »

Have you figured out if you did nothing (to reduce tax-deferred balances), what portion of your Social Security would be taxed when RMDs start and over time? Look at both married and single scenarios, since paying at single rates is almost inevitable for one spouse eventually.

If you have pensions or taxable accounts that throw off income, you may not be able to avoid SS taxation. The thresholds are pretty low.

No point in twisting yourself in knots for something that you can’t do much about.

(IRMAA premiums are a related issue.)
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

David Jay wrote: Sun Aug 07, 2022 11:39 am
Mike Scott wrote: Sun Aug 07, 2022 11:35 amDon't exceed your targeted marginal tax bracket range.
This is true if your heirs are also in the same (or higher) tax bracket.

If they are likely to be in a lower tax bracket then it may make sense to convert less.
I am assuming by the time my heirs get the money I would be old enough that they would be required to take RMDs for the tax deferred accounts they inherit so that might push them into a different tax bracket. I also consider not being required to take RMDs or being able to take a tax free lump sum to say help with buying a house to be a big advantage. But maybe I am overthinking something. I am more concentrated on surviving souse than heirs.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by delamer »

TheTimeLord wrote: Sun Aug 07, 2022 11:47 am
David Jay wrote: Sun Aug 07, 2022 11:39 am
Mike Scott wrote: Sun Aug 07, 2022 11:35 amDon't exceed your targeted marginal tax bracket range.
This is true if your heirs are also in the same (or higher) tax bracket.

If they are likely to be in a lower tax bracket then it may make sense to convert less.
I am assuming by the time my heirs get the money I would be old enough that they would be required to take RMDs for the tax deferred accounts they inherit so that might push them into a different tax bracket. I also consider not being required to take RMDs or being able to take a tax free lump sum to say help with buying a house to be a big advantage. But maybe I am overthinking something. I am more concentrated on surviving souse than heirs.
Your initial post said your concern was about the taxation of your Social Security benefits.

Now you are worried about your heirs’ tax situations.

Those are two different issues with potentially two different solutions.

What is/are your true concern(s)?
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

delamer wrote: Sun Aug 07, 2022 11:46 am Have you figured out if you did nothing (to reduce tax-deferred balances), what portion of your Social Security would be taxed when RMDs start and over time? Look at both married and single scenarios, since paying at single rates is almost inevitable for one spouse eventually.

If you have pensions or taxable accounts that throw off income, you may not be able to avoid SS taxation. The thresholds are pretty low.

No point in twisting yourself in knots for something that you can’t do much about.

(IRMAA premiums are a related issue.)
The thresholds are definitely pretty low which is why I am trying to get started as quickly as possible. I am aware of the iRMAA issues but that seems unavoidable to me, especially since the DW shows no interest in retiring. In fairness she would likely be even worse at it than me.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

delamer wrote: Sun Aug 07, 2022 11:50 am
TheTimeLord wrote: Sun Aug 07, 2022 11:47 am
David Jay wrote: Sun Aug 07, 2022 11:39 am
Mike Scott wrote: Sun Aug 07, 2022 11:35 amDon't exceed your targeted marginal tax bracket range.
This is true if your heirs are also in the same (or higher) tax bracket.

If they are likely to be in a lower tax bracket then it may make sense to convert less.
I am assuming by the time my heirs get the money I would be old enough that they would be required to take RMDs for the tax deferred accounts they inherit so that might push them into a different tax bracket. I also consider not being required to take RMDs or being able to take a tax free lump sum to say help with buying a house to be a big advantage. But maybe I am overthinking something. I am more concentrated on surviving souse than heirs.
Your initial post said your concern was about the taxation of your Social Security benefits.

Now you are worried about your heirs’ tax situations.

Those are two different issues with potentially two different solutions.

What is/are your true concern(s)?
Primary concern is SS taxation for us as a couple and a surviving spouse. The heirs comment in the original post was just a bolstering of the case, the post you included is just a response to David Jay's post. Somewhere in my head is the idea it would be much simpler dealing only with taxable and Roth accounts in retirement.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by delamer »

TheTimeLord wrote: Sun Aug 07, 2022 11:51 am
delamer wrote: Sun Aug 07, 2022 11:46 am Have you figured out if you did nothing (to reduce tax-deferred balances), what portion of your Social Security would be taxed when RMDs start and over time? Look at both married and single scenarios, since paying at single rates is almost inevitable for one spouse eventually.

If you have pensions or taxable accounts that throw off income, you may not be able to avoid SS taxation. The thresholds are pretty low.

No point in twisting yourself in knots for something that you can’t do much about.

(IRMAA premiums are a related issue.)
The thresholds are definitely pretty low which is why I am trying to get started as quickly as possible. I am aware of the iRMAA issues but that seems unavoidable to me, especially since the DW shows no interest in retiring. In fairness she would likely be even worse at it than me.
If IRMAA premiums are unavoidable, then it’s hard to see a scenario where SS taxation also wouldn’t be.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

delamer wrote: Sun Aug 07, 2022 11:57 am
TheTimeLord wrote: Sun Aug 07, 2022 11:51 am
delamer wrote: Sun Aug 07, 2022 11:46 am Have you figured out if you did nothing (to reduce tax-deferred balances), what portion of your Social Security would be taxed when RMDs start and over time? Look at both married and single scenarios, since paying at single rates is almost inevitable for one spouse eventually.

If you have pensions or taxable accounts that throw off income, you may not be able to avoid SS taxation. The thresholds are pretty low.

No point in twisting yourself in knots for something that you can’t do much about.

(IRMAA premiums are a related issue.)
The thresholds are definitely pretty low which is why I am trying to get started as quickly as possible. I am aware of the iRMAA issues but that seems unavoidable to me, especially since the DW shows no interest in retiring. In fairness she would likely be even worse at it than me.
If IRMAA premiums are unavoidable, then it’s hard to see a scenario where SS taxation also wouldn’t be.
Could be a misunderstanding on my part but once I reach a point where this effects IRMAA (age 63 as I understand), my understanding is the effect is for 1 year at a time. Where as I see SS taxation as likely permanent given the RMD schedule.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
jebmke
Posts: 25475
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: Reducing balances of tax deferred accounts before RMDs

Post by jebmke »

delamer wrote: Sun Aug 07, 2022 11:57 am If IRMAA premiums are unavoidable, then it’s hard to see a scenario where SS taxation also wouldn’t be.
yes, red lines pretty fast and baseline isn't indexed so as time marches on, the pretty safe assumption is 85% taxable.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
User avatar
TomatoTomahto
Posts: 17158
Joined: Mon Apr 11, 2011 1:48 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TomatoTomahto »

TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
IMHO, give the thinking a rest. If memory serves, you have a boatload of money. You and your heirs will do fine.

In any case, you asked for our strategies. I used to have a strategy of doing conversions and having my wife make Roth contributions rather than traditional, but it’s swimming against the tide. As it happens, she continues to work for a paycheck, so I will be taking RMDs soon at the highest marginal rate. We make gifts to the kids at the max annual amount in order to reduce our estate, but don’t otherwise do much other than deposit our checks and pay our taxes.

My thinking lately is that our sensible financial ways and luck in her career give us the luxury of not worrying about the last nickel we can squeeze. I know others have to worry about that nickel, and I’m not being dismissive, but I believe that you and I should worry about something else.
I get the FI part but not the RE part of FIRE.
marcopolo
Posts: 8445
Joined: Sat Dec 03, 2016 9:22 am

Re: Reducing balances of tax deferred accounts before RMDs

Post by marcopolo »

TheTimeLord wrote: Sun Aug 07, 2022 11:54 am
delamer wrote: Sun Aug 07, 2022 11:50 am
TheTimeLord wrote: Sun Aug 07, 2022 11:47 am
David Jay wrote: Sun Aug 07, 2022 11:39 am
Mike Scott wrote: Sun Aug 07, 2022 11:35 amDon't exceed your targeted marginal tax bracket range.
This is true if your heirs are also in the same (or higher) tax bracket.

If they are likely to be in a lower tax bracket then it may make sense to convert less.
I am assuming by the time my heirs get the money I would be old enough that they would be required to take RMDs for the tax deferred accounts they inherit so that might push them into a different tax bracket. I also consider not being required to take RMDs or being able to take a tax free lump sum to say help with buying a house to be a big advantage. But maybe I am overthinking something. I am more concentrated on surviving souse than heirs.
Your initial post said your concern was about the taxation of your Social Security benefits.

Now you are worried about your heirs’ tax situations.

Those are two different issues with potentially two different solutions.

What is/are your true concern(s)?
Primary concern is SS taxation for us as a couple and a surviving spouse. The heirs comment in the original post was just a bolstering of the case, the post you included is just a response to David Jay's post. Somewhere in my head is the idea it would be much simpler dealing only with taxable and Roth accounts in retirement.
The SS taxation thresholds are pretty low, and not indexed to inflation. You appear to have significant assets and still income for a while, likely making the pile bigger. I would suspect it will be difficult to avoid the 85% SS taxation without doing massive conversion at really high marginal rates, which is likely to be counter productive.

What we do is keep the low-growth portion of our assets in tax-deferred accounts, and attempt to configure our withdrawals and small Roth conversions such that our marginal tax rates stay essentially flat for the duration of our planning horizon. This theoretically maximizes after-tax spendable dollars. Of course you have to make assumptions about future tax policy, portfolio growth rates, joint life spans, etc. So, it all a noisy guess.
Once in a while you get shown the light, in the strangest of places if you look at it right.
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by JBTX »

TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
This can be a guide (for MFJ)

https://www.bogleheads.org/w/images/3/3 ... ed2022.png
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

JBTX wrote: Sun Aug 07, 2022 3:21 pm
TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
This can be a guide (for MFJ)

https://www.bogleheads.org/w/images/3/3 ... ed2022.png
I did not realize half of your SS benefit was included in the calculation of combined income.

https://faq.ssa.gov/en-us/Topic/article/KA-02471
Some people who get Social Security must pay federal income taxes on their benefits. However, no one pays taxes on more than 85% percent of their Social Security benefits.

You must pay taxes on your benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000. If you file a joint return, you must pay taxes if you and your spouse have “combined income” of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits.

Retirement Benefits: Income Taxes and Your Social Security Benefits for more information.

NOTE: “Combined income” includes your adjusted gross income, tax-exempt interest income and half of your Social Security benefits.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by delamer »

TheTimeLord wrote: Sun Aug 07, 2022 12:03 pm
delamer wrote: Sun Aug 07, 2022 11:57 am
TheTimeLord wrote: Sun Aug 07, 2022 11:51 am
delamer wrote: Sun Aug 07, 2022 11:46 am Have you figured out if you did nothing (to reduce tax-deferred balances), what portion of your Social Security would be taxed when RMDs start and over time? Look at both married and single scenarios, since paying at single rates is almost inevitable for one spouse eventually.

If you have pensions or taxable accounts that throw off income, you may not be able to avoid SS taxation. The thresholds are pretty low.

No point in twisting yourself in knots for something that you can’t do much about.

(IRMAA premiums are a related issue.)
The thresholds are definitely pretty low which is why I am trying to get started as quickly as possible. I am aware of the iRMAA issues but that seems unavoidable to me, especially since the DW shows no interest in retiring. In fairness she would likely be even worse at it than me.
If IRMAA premiums are unavoidable, then it’s hard to see a scenario where SS taxation also wouldn’t be.
Could be a misunderstanding on my part but once I reach a point where this effects IRMAA (age 63 as I understand), my understanding is the effect is for 1 year at a time. Where as I see SS taxation as likely permanent given the RMD schedule.
If you are paying IRMAA in a given year, then you will have paid taxes on 85% of Social Security in the year that your IRMAA is based on (assuming, of course, that you were collecting SS).

But, obviously, a one-off unavoidable IRMAA year is different than an ongoing IRMAA scenario. And so would call for a different strategy.

I agree with marcopolo’s analysis, approach and his “noisy guess” description.

I ended up with an undesirable,inheritance-related tax situation because my parents did not predict the huge increase in the federal estate tax threshold when they made their estate plans.

Hindsight is 20/20; foresight can’t even come close to that. So take your best shot amd move on. I’m still a lot better having to pay those taxes than not inheriting the assets at all. That’s the only way to look at it.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
Flobes
Posts: 1771
Joined: Mon Feb 15, 2010 11:40 pm
Location: Home

Re: Reducing balances of tax deferred accounts before RMDs

Post by Flobes »

TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally, I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs
RMDs start at 72.

IRAs are eligible for QCDs starting the day after you turn 70.5.

Limited to $100,000 a year, QCDs lower you IRA balance and thus you future RMDs while remaining out of your AGI and making the world a better place.

Depending on when in year your birthdate falls, you can get one or two years of QCDs before you reach RMD age.
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by JBTX »

TheTimeLord wrote: Sun Aug 07, 2022 4:29 pm
JBTX wrote: Sun Aug 07, 2022 3:21 pm
TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
This can be a guide (for MFJ)

https://www.bogleheads.org/w/images/3/3 ... ed2022.png
I did not realize half of your SS benefit was included in the calculation of combined income.

https://faq.ssa.gov/en-us/Topic/article/KA-02471
Some people who get Social Security must pay federal income taxes on their benefits. However, no one pays taxes on more than 85% percent of their Social Security benefits.

You must pay taxes on your benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000. If you file a joint return, you must pay taxes if you and your spouse have “combined income” of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits.

Retirement Benefits: Income Taxes and Your Social Security Benefits for more information.

NOTE: “Combined income” includes your adjusted gross income, tax-exempt interest income and half of your Social Security benefits.
A conclusion you could come to in that graph, for MFJ, is that if you have above average SS and a material amount of other income, such as RMD’s, if you hit the “hump” 40.5% range at all, it is for a fairly narrow range, such that the dollar impact may not be prohibitive. At $70k of SS at most you’d pay about an $1800 tax “penalty”. Not chump change, but survivable.

Note those caps, such as the $32k for combined income are not inflation adjusted. With high inflation it is going down rapidly in real terms.
curmudgeon
Posts: 2630
Joined: Thu Jun 20, 2013 11:00 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by curmudgeon »

Managing to avoid taxation of SS benefits for relatively high earners may be a valuable strategy, but it's pretty difficult to achieve in practice. I was aiming toward that goal, but the effects of the current inflation, especially if sustained for a few years, may close the window. In my case I took the "bird in hand" (ACA subsidies) rather than push big Roth conversions the last few years, which may well have been less optimal in the long term. This gives a limited number of years for larger conversions after age 65 and before SS/RMD. I keep in mind that just like the current inflation, future tax law changes may significantly tilt the playing field outside of my control.

For the next few years I'm willing to take the risk of "over-converting" to some degree, but I keep an eye on the IRMAA, NIT, etc impacts.

When we hit SS + RMDs, I expect to project marginal tax rates for the year ahead and try to adjust taxable income via QCDs or additional Roth conversions if we would be in the "SS tax hump". Either lower income below the hump by using QCD in place of some of the RMD, or push well beyond the hump to the top of the tax/IRMAA bracket with additional Roth conversions to improve the situation in the future.
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

JBTX wrote: Sun Aug 07, 2022 5:25 pm
TheTimeLord wrote: Sun Aug 07, 2022 4:29 pm
JBTX wrote: Sun Aug 07, 2022 3:21 pm
TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
This can be a guide (for MFJ)

https://www.bogleheads.org/w/images/3/3 ... ed2022.png
I did not realize half of your SS benefit was included in the calculation of combined income.

https://faq.ssa.gov/en-us/Topic/article/KA-02471
Some people who get Social Security must pay federal income taxes on their benefits. However, no one pays taxes on more than 85% percent of their Social Security benefits.

You must pay taxes on your benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000. If you file a joint return, you must pay taxes if you and your spouse have “combined income” of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits.

Retirement Benefits: Income Taxes and Your Social Security Benefits for more information.

NOTE: “Combined income” includes your adjusted gross income, tax-exempt interest income and half of your Social Security benefits.
A conclusion you could come to in that graph, for MFJ, is that if you have above average SS and a material amount of other income, such as RMD’s, if you hit the “hump” 40.5% range at all, it is for a fairly narrow range, such that the dollar impact may not be prohibitive. At $70k of SS at most you’d pay about an $1800 tax “penalty”. Not chump change, but survivable.

Note those caps, such as the $32k for combined income are not inflation adjusted. With high inflation it is going down rapidly in real terms.
I guess if I had a clue what the percentages represent or had realized MFJ was "Married Filing Jointly".
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by JBTX »

TheTimeLord wrote: Sun Aug 07, 2022 6:38 pm
JBTX wrote: Sun Aug 07, 2022 5:25 pm
TheTimeLord wrote: Sun Aug 07, 2022 4:29 pm
JBTX wrote: Sun Aug 07, 2022 3:21 pm
TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
This can be a guide (for MFJ)

https://www.bogleheads.org/w/images/3/3 ... ed2022.png
I did not realize half of your SS benefit was included in the calculation of combined income.

https://faq.ssa.gov/en-us/Topic/article/KA-02471
Some people who get Social Security must pay federal income taxes on their benefits. However, no one pays taxes on more than 85% percent of their Social Security benefits.

You must pay taxes on your benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000. If you file a joint return, you must pay taxes if you and your spouse have “combined income” of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits.

Retirement Benefits: Income Taxes and Your Social Security Benefits for more information.

NOTE: “Combined income” includes your adjusted gross income, tax-exempt interest income and half of your Social Security benefits.
A conclusion you could come to in that graph, for MFJ, is that if you have above average SS and a material amount of other income, such as RMD’s, if you hit the “hump” 40.5% range at all, it is for a fairly narrow range, such that the dollar impact may not be prohibitive. At $70k of SS at most you’d pay about an $1800 tax “penalty”. Not chump change, but survivable.

Note those caps, such as the $32k for combined income are not inflation adjusted. With high inflation it is going down rapidly in real terms.
I guess if I had a clue what the percentages represent or had realized MFJ was "Married Filing Jointly".
The percentages are the marginal tax rates at those income ranges, including the impact of SS tax.
RetiredCSProf
Posts: 1228
Joined: Tue Feb 28, 2017 3:59 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by RetiredCSProf »

There is no rule that Roth conversion of tax deferred accounts must stop when RMDs start. As long as tax deferred accounts are growing an average of 5-6% per year, the balances will continue to grow until the account owners reach their mid- to late- 80's; at which time, the RMD will increasingly erode the balance of the tax deferred accounts.

My initial strategy, after retiring, was to convert up to the top of my current marginal tax rate each year, pay attention to IRMAA brackets, with a goal of converting half the tax-deferred balance into Roth. My current goal is to continue converting until the balance in my tax-deferred accounts is reduced to a designated dollar value, regardless of the portions split between pre-tax and post-tax accounts.

My current strategy is to perform Roth conversions each year, up to the top of the 24% tax bracket (single filer), ignore IRMAA brackets, and apply the following limits: No conversions after age 85; No conversions if the total balance of my tax-deferred accounts is less than $400K at the beginning of the calendar year.

Of course, future changes in tax laws may cause me to reconsider. For example, I thought I was done with Roth conversions a few years ago, before the SECURE Act was signed, which totally changed my thinking about legacy.
an_asker
Posts: 4903
Joined: Thu Jun 27, 2013 2:15 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by an_asker »

TomatoTomahto wrote: Sun Aug 07, 2022 12:20 pm [...]
IMHO, give the thinking a rest. If memory serves, you have a boatload of money. You and your heirs will do fine.

In any case, you asked for our strategies. I used to have a strategy of doing conversions and having my wife make Roth contributions rather than traditional, but it’s swimming against the tide. As it happens, she continues to work for a paycheck, so I will be taking RMDs soon at the highest marginal rate. We make gifts to the kids at the max annual amount in order to reduce our estate, but don’t otherwise do much other than deposit our checks and pay our taxes.

My thinking lately is that our sensible financial ways and luck in her career give us the luxury of not worrying about the last nickel we can squeeze. I know others have to worry about that nickel, and I’m not being dismissive, but I believe that you and I should worry about something else.
I agree with this response. It is similar to the response I got from my tennis buddy. He is into his 60s and is going strong at work (and, to be honest, in his tennis as well); shows no sign of retiring.

Early this year (before the market did an about turn), one day at tennis, I put to him a similar question because I was starting to get worried about IRMAA etc after reading threads here. I had started considering Roth conversions and was getting worried that we would get pushed out of the medical insurance subsidy range ourselves.

His response (and I doubt he is in the league of TheTimelord in savings based on my memory] was pretty straightforward:

- I love my work, and
- if I lose the subsidies, so be it. I am sure the money I earn will more than make up for it
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

an_asker wrote: Tue Aug 09, 2022 8:21 pm
TomatoTomahto wrote: Sun Aug 07, 2022 12:20 pm [...]
IMHO, give the thinking a rest. If memory serves, you have a boatload of money. You and your heirs will do fine.

In any case, you asked for our strategies. I used to have a strategy of doing conversions and having my wife make Roth contributions rather than traditional, but it’s swimming against the tide. As it happens, she continues to work for a paycheck, so I will be taking RMDs soon at the highest marginal rate. We make gifts to the kids at the max annual amount in order to reduce our estate, but don’t otherwise do much other than deposit our checks and pay our taxes.

My thinking lately is that our sensible financial ways and luck in her career give us the luxury of not worrying about the last nickel we can squeeze. I know others have to worry about that nickel, and I’m not being dismissive, but I believe that you and I should worry about something else.
I agree with this response. It is similar to the response I got from my tennis buddy. He is into his 60s and is going strong at work (and, to be honest, in his tennis as well); shows no sign of retiring.

Early this year (before the market did an about turn), one day at tennis, I put to him a similar question because I was starting to get worried about IRMAA etc after reading threads here. I had started considering Roth conversions and was getting worried that we would get pushed out of the medical insurance subsidy range ourselves.

His response (and I doubt he is in the league of TheTimelord in savings based on my memory] was pretty straightforward:

- I love my work, and
- if I lose the subsidies, so be it. I am sure the money I earn will more than make up for it
My understanding is IRMAA is based on MAGI from 2 years prior so wouldn't a conversion on effect 1 year?
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
dharrythomas
Posts: 1223
Joined: Tue Jun 19, 2007 4:46 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by dharrythomas »

You are correct that inherited taxable and Roth accounts are simpler for a heir to deal with than traditional tax deferred accounts.

We’re converting some to Roth at the 22% rate and when eligible will make our charitable contributions using QCDs since we should still be taking the standard deduction. Also contributing to Roth IRAs opened in the 1990s and using the Roth TSP.

I’m not going to zero out the Traditional, since we make contributions anyway, QCDs will allow us to give more money at less cost. The value of that depends on your charitable inclination.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Reducing balances of tax deferred accounts before RMDs

Post by celia »

Mike Scott wrote: Sun Aug 07, 2022 11:35 am Don't exceed your targeted marginal tax bracket range.
This “advice” doesn’t make sense to me. I could always set an unrealistic goal (like staying in a low 10% tax bracket), but that doesn’t mean I would ever meet the goal. And if I did, I might have to abandon doing any Roth conversions, only to find out at age 72, that it was a mistake, because my tax bracket could increase much higher after age 72 unless I gave all my RMDs to charity.
:oops:

My strategy is to first calculate my expected tax-deferred balance at 72 and RMDs after that to at least 75 without doing any Roth conversions. Then I would estimate my Taxable Income and tax bracket for age 72 and later.

Then I would do the same estimate with doing an aggressive Roth conversion each year. Note that the amount converted would need to be more than the yearly growth or I would just be “treading water”, although I would likely be doing better than the case where I hadn’t converted at all.

After comparing both scenarios and what would happen after age 72, if I found the Roth conversions beneficial, I would tweak the scenario to try to have larger Roth conversions up front to bring down the tax-deferred value faster. I might be able to avoid all IRMAA surcharges if I did this early enough and had a suitable set of income streams. I might also test a scenario if I was retiring about age 60 where I used ACA every other year and paid full price for medical insurance while doing large Roth conversions in the opposite years. If I was married, I’d probably look at what would happen for either spouse dying suddenly at age 70 where the survivor would then have to file as Single in the following years. (The space in each tax bracket is half as much for Singles as for MFJ, so the survivor’s tax bracket could increase just from the change in filing status.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
heyyou
Posts: 4461
Joined: Tue Feb 20, 2007 3:58 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by heyyou »

Having steadily done the annual Roth conversions in early retirement, my RMDs are now only 4 digit amounts, which does help on taxes, especially since my spouse has died.
I only store bond funds in my tIRA so that helps to lower any growth there.
sc9182
Posts: 2178
Joined: Wed Aug 17, 2016 7:43 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by sc9182 »

I think some folks often have "conflicting" objectives while the realities largely "differ"

How can one person who has large "Traditional IRA" amounts -- could try to fly under SS-Taxation? (Unless they want to incur top-tax rates during contributions and/or Roth-conversion phases, apriori)

How come one-spouse just suddenly die at age-70'ish -- to crush your future tax-brackets? (even unfortunately thus so, how can you "generalize" as if it's an oft-occurrence for everyone !?); May be stepped-up basis helped you some, may be "higher-of-the-two" SS helped you some more, may be some limited amounts of tax-free Life-Insurance proceeds helped you even more -- make some lemonade out of such albeit tragic situation?

How can you contribute to Roth a lot - if Roth has been available -- only last 2 decades+ ?

How could you "convert" large sums into Roth -- if Roth-conversions have been blessed by IRS only in the last Dozen some years (especially for folks who project/show-off 2+ million in IRA monies)

Someone slowly forget/slips a fact about having double-maxed out pensions (and survivor pension), and Topped-up higher-of-the-two SS benefits ? I guess some parties also have "annuities" income on top of such Pensions to make the income-stream mix rather un-favorable/un-avoidable. Then -- they come here to explain/preach Roth-conversion strategy of Traditional IRA (yes, try to convert your SS, or double maxed pensions, or annuities to Roth first - if you can :oops: )

Yes - ideally, we would want to be in lower-tax brackets while contributing/converting to Roth -- but how/what are you going to eat to survive during such low-income years - if you are saving/converting most of it to Roth?

Most of it is wishful thinking - to me it seems anyway.

For folks with larger traditional amounts - not only consider QCDs, possibly self-fund long-term care costs deductible following some rules, also consider giving to 2nd or 3rd generation heirs as beneficiaries (doesn't have to give IRA-inheritance only to direct descendants) - ie., spread the wealth, and spread to lower-tax-tier kith-and-kin.

Yes - tax-diversification is good thing and having large-enough buckets in different buckets is a good thing !

But, somehow having it all stashed-in/converting-to Roth (are we talking $2+ millions) ? How is it even possible (unless paid/converted at some of the highest tax-brackets -- if so, how could such pay-lesser-taxes strategy be working) ?

Taxes (or higher taxes) is a consequence of "you've done a great job of saving and investing" -- its a good thing; Go to Club-house and humble-brag about your Tax-bill, then have a Friday sip. We would rather be in this scenario than - trying to fly-under SS-income taxation category (and likely living in poor-house) ..
Last edited by sc9182 on Fri Aug 12, 2022 1:13 pm, edited 9 times in total.
ThankYouJack
Posts: 5704
Joined: Wed Oct 08, 2014 7:27 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by ThankYouJack »

I love trying to save on taxes myself but if you're obsessively thinking, anxious about the future and worried about RMDs, I'd work on trying to pinpoint the root cause of the worry and then work on ways to reduce the worry. Or try to shift the thinking to feeling blessed that you have excess wealth and fortunately are able to easily pay $X in taxes.
Rose
Posts: 196
Joined: Fri Nov 13, 2015 10:16 am

Re: Reducing balances of tax deferred accounts before RMDs

Post by Rose »

celia wrote: Fri Aug 12, 2022 12:57 am
Mike Scott wrote: Sun Aug 07, 2022 11:35 am Don't exceed your targeted marginal tax bracket range.
This “advice” doesn’t make sense to me. I could always set an unrealistic goal (like staying in a low 10% tax bracket), but that doesn’t mean I would ever meet the goal. And if I did, I might have to abandon doing any Roth conversions, only to find out at age 72, that it was a mistake, because my tax bracket could increase much higher after age 72 unless I gave all my RMDs to charity.
:oops:

My strategy is to first calculate my expected tax-deferred balance at 72 and RMDs after that to at least 75 without doing any Roth conversions. Then I would estimate my Taxable Income and tax bracket for age 72 and later.
Celia, what's the magic of age of 72?
RetiredCSProf
Posts: 1228
Joined: Tue Feb 28, 2017 3:59 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by RetiredCSProf »

The OP asked for a strategy to reduce tax-deferred accounts (through withdrawals and/or Roth conversions) before starting RMDs -- in particular, to reduce the portion of SS income that would be taxed during RMD-years. The question is specific to investors who expect to start RMDs at age 72. (Personally, I had RMDs at age 70, 71, and 73, but none at age 72, due to Covid-inspired waiver.)

Income from SS benefits is taxed by the IRS, regardless of age, based on a progressive scale, up to 85%. If the retiree has a pension or income from non-SS sources, it does not take much to be pushed into paying taxes on 85% of SS benefits. The IRS offers a calculator https://www.irs.gov/help/ita/are-my-soc ... ts-taxable to help figure this out.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Reducing balances of tax deferred accounts before RMDs

Post by celia »

Rose wrote: Fri Aug 12, 2022 11:44 am Celia, what's the magic of age of 72?
That’s when RMDs (Required Minimum Distributuons) are required to be taken and every dollar withdrawn will be taxed on your income taxes, unless you donate all or some of it to a qualified charity.

And then you also can’t convert until after you’ve finished your RMD for the year.


When you were contributing to tax-deferred, you were also agreeing to pay the taxes later. Congress let’s you delay them until you are 72 (and are probably retired), but you can always pay them earlier by taking withdrawals or converting to Roth.
Last edited by celia on Fri Aug 12, 2022 9:28 pm, edited 1 time in total.
kd2008
Posts: 1274
Joined: Sun Feb 15, 2009 5:19 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by kd2008 »

One mental mistake many make is that they count all of RMD as being taxed at highest rate. The concern should be only for the amount that puts you in higher tax bracket, not the entire RMD amount.
User avatar
celia
Posts: 16774
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Reducing balances of tax deferred accounts before RMDs

Post by celia »

kd2008 wrote: Fri Aug 12, 2022 9:21 pm One mental mistake many make is that they count all of RMD as being taxed at highest rate. The concern should be only for the amount that puts you in higher tax bracket, not the entire RMD amount.
That’s not correct. If you have a REQUIRED Minimum Distribution, you must take it, even if you don’t need to spend it. And you will have to pay taxes on ALL of it, regardless of what tax bracket the dollars fall in (other than those given to charity, of course).


And the bigger the withdrawal or conversion is, sometimes that makes more of your SS also be taxed (until 85% of your SS is taxed).

That can be part of why people delay SS until 70. Another reason is that you can use the space in your tax brackets for more Roth conversions instead of collecting SS earlier, and because you also get a larger SS benefit the longer you wait to collect (until age 70).
kd2008
Posts: 1274
Joined: Sun Feb 15, 2009 5:19 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by kd2008 »

celia wrote: Fri Aug 12, 2022 9:34 pm
kd2008 wrote: Fri Aug 12, 2022 9:21 pm One mental mistake many make is that they count all of RMD as being taxed at highest rate. The concern should be only for the amount that puts you in higher tax bracket, not the entire RMD amount.
That’s not correct. If you have a REQUIRED Minimum Distribution, you must take it, even if you don’t need to spend it. And you will have to pay taxes on ALL of it, regardless of what tax bracket the dollars fall in (other than those given to charity, of course).


And the bigger the withdrawal or conversion is, sometimes that makes more of your SS also be taxed (until 85% of your SS is taxed).

That can be part of why people delay SS until 70. Another reason is that you can use the space in your tax brackets for more Roth conversions instead of collecting SS earlier, and because you also get a larger SS benefit the longer you wait to collect (until age 70).
You misunderstood my point. You are welcome to your opinion.
Nahtanoj
Posts: 131
Joined: Tue Apr 04, 2017 7:01 am

Re: Reducing balances of tax deferred accounts before RMDs

Post by Nahtanoj »

celia wrote: Fri Aug 12, 2022 12:57 am
Mike Scott wrote: Sun Aug 07, 2022 11:35 am Don't exceed your targeted marginal tax bracket range.
This “advice” doesn’t make sense to me. I could always set an unrealistic goal (like staying in a low 10% tax bracket), but that doesn’t mean I would ever meet the goal. And if I did, I might have to abandon doing any Roth conversions, only to find out at age 72, that it was a mistake, because my tax bracket could increase much higher after age 72 unless I gave all my RMDs to charity.
:oops:
I think this advice is based on the idea that you will end up paying more in taxes per dollar of spending over a period of years if some of the years are in a very low tax bracket and some are in high tax brackets - while if you manage to stay in the same tax bracket for the whole period (in a bracket somewhere in the middle between low and high), you will end up paying less in taxes per dollar of spending over the full period.

For example, someone who was following the aproach of just spending from taxable accounts first and then from tax deferred after the taxable is depleted might find themselves paying more in total taxes over the period than if they tried to stay in the same bracket the whole time.

This might affect someone’s Roth conversion strategy if they decided to limit the conversion in any year to the amount that would not cause them to go into a higher bracket than their targeted bracket in that year.
User avatar
Lee_WSP
Posts: 10401
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Reducing balances of tax deferred accounts before RMDs

Post by Lee_WSP »

I don’t think there’s much to be gained by someone with a very large tax deferred account trying to avoid the highest SS taxation. I’m not sure it’s even possible and if it is I’m pretty sure it’s almost never worth the effort. And if it does work, it kind of calls into question how large the beginning balance was to begin with and whether you even needed that much money and what you’re going to do with it. But I digress.

But the question really is an extension of the Roth v Trad debate. I always approach it working backwards. Figure out what the RMD’s are going to look like, figure out whether it’s possible to reduce them, figure out the target tax bracket, then convert up to that tax bracket staying clear of any cliffs.
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by delamer »

Lee_WSP wrote: Fri Aug 12, 2022 10:32 pm I don’t think there’s much to be gained by someone with a very large tax deferred account trying to avoid the highest SS taxation. I’m not sure it’s even possible and if it is I’m pretty sure it’s almost never worth the effort. And if it does work, it kind of calls into question how large the beginning balance was to begin with and whether you even needed that much money and what you’re going to do with it. But I digress.

But the question really is an extension of the Roth v Trad debate. I always approach it working backwards. Figure out what the RMD’s are going to look like, figure out whether it’s possible to reduce them, figure out the target tax bracket, then convert up to that tax bracket staying clear of any cliffs.
Agree with all of the above.

Let’s say you have $500,000 in a taxable account. In order to pay for a long-awaited vacation, you’d have to withdraw $10,000 from your taxable account with $3,000 in capital gains on the withdrawal. In addition to the capital gains tax (about $450 federal) now 85% of your SS benefits are taxed instead of 50%.

Do you not take the trip? Assume you have no other way of paying for it, absent the taxable sale.

I sure do. I’m not at a point in my life where deferring this type of gratification is something I’m willing to do. Some of this tax avoidance gets pretty silly, when you look at it in terms of quality-of-life.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
User avatar
chickadee
Posts: 458
Joined: Thu Jul 10, 2014 2:13 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by chickadee »

@JBTX could you post the above tax rate graphic for singles?
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

delamer wrote: Sat Aug 13, 2022 1:13 pm
Lee_WSP wrote: Fri Aug 12, 2022 10:32 pm I don’t think there’s much to be gained by someone with a very large tax deferred account trying to avoid the highest SS taxation. I’m not sure it’s even possible and if it is I’m pretty sure it’s almost never worth the effort. And if it does work, it kind of calls into question how large the beginning balance was to begin with and whether you even needed that much money and what you’re going to do with it. But I digress.

But the question really is an extension of the Roth v Trad debate. I always approach it working backwards. Figure out what the RMD’s are going to look like, figure out whether it’s possible to reduce them, figure out the target tax bracket, then convert up to that tax bracket staying clear of any cliffs.
Agree with all of the above.

Let’s say you have $500,000 in a taxable account. In order to pay for a long-awaited vacation, you’d have to withdraw $10,000 from your taxable account with $3,000 in capital gains on the withdrawal. In addition to the capital gains tax (about $450 federal) now 85% of your SS benefits are taxed instead of 50%.

Do you not take the trip? Assume you have no other way of paying for it, absent the taxable sale.

I sure do. I’m not at a point in my life where deferring this type of gratification is something I’m willing to do. Some of this tax avoidance gets pretty silly, when you look at it in terms of quality-of-life.
Honestly not seeing the correlation with Roth conversions made pre-SS benefits beyond you could take the money out of the Roth instead of a Taxable account.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
smitcat
Posts: 13300
Joined: Mon Nov 07, 2016 9:51 am

Re: Reducing balances of tax deferred accounts before RMDs

Post by smitcat »

TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
"What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?"
RPM and/or Pralana Gold.
delamer
Posts: 17453
Joined: Tue Feb 08, 2011 5:13 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by delamer »

TheTimeLord wrote: Sat Aug 13, 2022 8:04 pm
delamer wrote: Sat Aug 13, 2022 1:13 pm
Lee_WSP wrote: Fri Aug 12, 2022 10:32 pm I don’t think there’s much to be gained by someone with a very large tax deferred account trying to avoid the highest SS taxation. I’m not sure it’s even possible and if it is I’m pretty sure it’s almost never worth the effort. And if it does work, it kind of calls into question how large the beginning balance was to begin with and whether you even needed that much money and what you’re going to do with it. But I digress.

But the question really is an extension of the Roth v Trad debate. I always approach it working backwards. Figure out what the RMD’s are going to look like, figure out whether it’s possible to reduce them, figure out the target tax bracket, then convert up to that tax bracket staying clear of any cliffs.
Agree with all of the above.

Let’s say you have $500,000 in a taxable account. In order to pay for a long-awaited vacation, you’d have to withdraw $10,000 from your taxable account with $3,000 in capital gains on the withdrawal. In addition to the capital gains tax (about $450 federal) now 85% of your SS benefits are taxed instead of 50%.

Do you not take the trip? Assume you have no other way of paying for it, absent the taxable sale.

I sure do. I’m not at a point in my life where deferring this type of gratification is something I’m willing to do. Some of this tax avoidance gets pretty silly, when you look at it in terms of quality-of-life.
Honestly not seeing the correlation with Roth conversions made pre-SS benefits beyond you could take the money out of the Roth instead of a Taxable account.
There isn’t one . . .

I was addressing the issue of of limiting taxation of SS benefits, which Is tangential to your original question.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
mkc
Moderator
Posts: 3291
Joined: Wed Apr 17, 2013 2:59 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by mkc »

smitcat wrote: Sun Aug 14, 2022 9:07 am
TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
"What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?"
RPM and/or Pralana Gold.
Is there a good "compare and contrast" discussion of the two? I use RPM and have been curious about Pralana Gold.
smitcat
Posts: 13300
Joined: Mon Nov 07, 2016 9:51 am

Re: Reducing balances of tax deferred accounts before RMDs

Post by smitcat »

mkc wrote: Sun Aug 14, 2022 11:23 am
smitcat wrote: Sun Aug 14, 2022 9:07 am
TheTimeLord wrote: Sun Aug 07, 2022 11:30 am Mentally I have started to obsess on reducing the balances of our tax deferred accounts through withdrawals and Roth conversions before we would start taking RMDs because of the effect on taxing SS. This also seems like a good idea for heirs and surviving spouses. Tax wise I expect we will remain in the same bracket we are today throughout retirement. Because this is becoming a bit of an obsession I am a little worried about over doing it. What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?
"What strategies are people who want to reduce their tax deferred balances using to determine how much to withdraw or convert?"
RPM and/or Pralana Gold.
Is there a good "compare and contrast" discussion of the two? I use RPM and have been curious about Pralana Gold.
It's our second year using Pralana, we have used RPM much longer than that as well as IORP. In our case we think that Pralana is easier to set up and use then RPM, a slight bit easier to vary inputs and understand the results. We do run many versions for comparing future possibilities of each. We have not used the updated version of Pralana for this year which reportedly has some valuable additions.
User avatar
jh
Posts: 1998
Joined: Mon May 14, 2007 11:36 am
Location: USA

Re: Reducing balances of tax deferred accounts before RMDs

Post by jh »

I have a pension. So, I never put that much money into my 401k as over all you can keep your taxes lower using a taxable account instead.

I retired this year (June) at 46 off of roughly $1M in taxable, $100k in 401k and 21.5 years in a pension I can tap at age 60+.

You can make up to around $40k as a single person in qualified dividends and pay $0 in taxes. Double if married. This income is also useful for meeting the ACA minimum income threshold. Starting next year my tax rate and health insurance will drop to near $0 and I'll have $36k+ to live off of which is what I was spending while working.

I plan to keep my 401k around as a source of emergency cash.

With ACA this year I choose a HSA eligible plan and that allowed me to put $3,650 into it and it acts very similar to a Traditional IRA with no income cap. So, I get to deduct that off of my taxable income for this year.
Retired in 2022 at the age of 46. Living off of dividends.
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

ThankYouJack wrote: Fri Aug 12, 2022 8:54 am I love trying to save on taxes myself but if you're obsessively thinking, anxious about the future and worried about RMDs, I'd work on trying to pinpoint the root cause of the worry and then work on ways to reduce the worry. Or try to shift the thinking to feeling blessed that you have excess wealth and fortunately are able to easily pay $X in taxes.
Everyone is different, but just because I obsess or over focus on something doesn't in my case mean it is making me anxious or worried. Probably a byproduct of my career where spent much of my time leading efforts to fix thing or figure out issues. I will always be obsessing on something, I would just rather it be something like scuba diving or fitness trackers instead of taxes.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
randomguy
Posts: 11295
Joined: Wed Sep 17, 2014 9:00 am

Re: Reducing balances of tax deferred accounts before RMDs

Post by randomguy »

jh wrote: Sun Aug 14, 2022 1:35 pm I have a pension. So, I never put that much money into my 401k as over all you can keep your taxes lower using a taxable account instead.

I retired this year (June) at 46 off of roughly $1M in taxable, $100k in 401k and 21.5 years in a pension I can tap at age 60+.

You can make up to around $40k as a single person in qualified dividends and pay $0 in taxes. Double if married. This income is also useful for meeting the ACA minimum income threshold. Starting next year my tax rate and health insurance will drop to near $0 and I'll have $36k+ to live off of which is what I was spending while working.
Now think where you would be if you had invested more in the 401(k) and were able to convert 13k/26k/year tax free into a Roth. Do you really think you came out ahead by paying taxes instead of not paying taxes? Seems very unlikely...

It is easy to reduce your tax deferred balances. It can be hard to do it in an efficient manner that leaves you better off. There are a few simple things like moving expected high return assets to taxable/roth (assuming they are tax efficient) can reduce the tax deferred growth and spending earlier versus later can even out the spending but if you are a highish income person it can be hard to avoid the tax burdens. You end up either paying say 24% now to do large Roth conversion or you end up paying like 24% latter (the blend of 0-22%+ SS taxation). You can run the math to see if you number for later is likely to be 22% or 26%.

For a lot of people in that 22% range (MFJ in the like 120-150k income range), I expect the math says they should be converting up to 24% before SS and medicare. But voluntarily writing those large checks early in retirement is going to be mentally hard AND could expose you to some SORR if you retire into a down decade or so...
User avatar
jh
Posts: 1998
Joined: Mon May 14, 2007 11:36 am
Location: USA

Re: Reducing balances of tax deferred accounts before RMDs

Post by jh »

I absolutely think I came out ahead. I used etfs like VTI and QQQ before retiring and I paid essentially $0 taxes on those every year.

Doing a conversion isn't tax free. You are using up valuable space in the lower tax bracket. It just means the money you will need to withdraw to live on will get taxed at a higher rate that year as your conversion will push your AGI up.
Retired in 2022 at the age of 46. Living off of dividends.
ThankYouJack
Posts: 5704
Joined: Wed Oct 08, 2014 7:27 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by ThankYouJack »

TheTimeLord wrote: Sun Aug 14, 2022 2:00 pm
ThankYouJack wrote: Fri Aug 12, 2022 8:54 am I love trying to save on taxes myself but if you're obsessively thinking, anxious about the future and worried about RMDs, I'd work on trying to pinpoint the root cause of the worry and then work on ways to reduce the worry. Or try to shift the thinking to feeling blessed that you have excess wealth and fortunately are able to easily pay $X in taxes.
Everyone is different, but just because I obsess or over focus on something doesn't in my case mean it is making me anxious or worried.
In the original post you said "Because this is becoming a bit of an obsession I am a little worried about over doing it"

I guess that worry is about over doing the Roth conversions but not the RMDs? Maybe you'll pay a little more in taxes one way or the other, but what difference will it make in the long run?

I think excess wealth from RMDs is a good "problem" to have.
User avatar
Topic Author
TheTimeLord
Posts: 12130
Joined: Fri Jul 26, 2013 2:05 pm

Re: Reducing balances of tax deferred accounts before RMDs

Post by TheTimeLord »

ThankYouJack wrote: Sun Aug 14, 2022 4:02 pm
TheTimeLord wrote: Sun Aug 14, 2022 2:00 pm
ThankYouJack wrote: Fri Aug 12, 2022 8:54 am I love trying to save on taxes myself but if you're obsessively thinking, anxious about the future and worried about RMDs, I'd work on trying to pinpoint the root cause of the worry and then work on ways to reduce the worry. Or try to shift the thinking to feeling blessed that you have excess wealth and fortunately are able to easily pay $X in taxes.
Everyone is different, but just because I obsess or over focus on something doesn't in my case mean it is making me anxious or worried.
In the original post you said "Because this is becoming a bit of an obsession I am a little worried about over doing it"

I guess that worry is about over doing the Roth conversions but not the RMDs? Maybe you'll pay a little more in taxes one way or the other, but what difference will it make in the long run?

I think excess wealth from RMDs is a good "problem" to have.
It seems fairly common here for people to be in the situation where their RMDs are larger than the gap between other income sources and expenses. I realize I don't have to spend the whole RMD but there will be another one next year and so on and so on. Anyway, I tend to be more on the controlling side planning wise so it is difficult for me to go with allowing another entity to dictate when I withdraw money, especially when it effects my taxes. So I get a little worried I will overdo conversions just for the sake of taking back that control over my funds. So it isn't worry, worry more it is I know myself and I can get carried and don't want to do something boneheaded worry.
IMHO, Investing should be about living the life you want, not avoiding the life you fear. | Run, You Clever Boy! [9085]
Post Reply