Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

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Jon Luskin
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Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by Jon Luskin »

As announced on the last episode of Bogleheads® Live, our guests on Wednesday, May 25th are Cody Garrett & Sean Mullaney. We'll be going live at 4:00 PM Eastern/1:00 PM Pacific.

Both Cody & Sean provide a wealth of information for do-it-yourself (DIY) investors.

From Cody: https://measuretwicemoney.com/
From Sean: https://www.youtube.com/channel/UC3KawD ... Pvtq89AESQ

Also, Sean was previously on the Bogleheads® speaker series. You can watch that below:
https://www.youtube.com/watch?v=ZIjPP-0I3UY

We'll be discussing tax planning for early retirees, or members of the financial independence / retire early community (FIRE).
You can submit your questions below for Cody and/or Sean. (I may include your question in the episode. No guarantees.) Or, you can ask your questions live by joining us on Twitter Spaces.

At the appointed time, use this link to join:

https://twitter.com/i/spaces/1MYGNndZMawGw?s=20


While anyone can listen to a live Twitter Space event on desktop, you'll need to be using the Twitter app from a mobile device to ask questions (if you’d like to participate in the Q&A).

If you're not already signed up for Twitter, you can do so here: https://twitter.com/. You can sign up with your Google or Apple account, or via phone, or by email.

Also, if you missed previous episodes of Bogleheads® Live, the first three episodes are now available as a podcast. You can check that out below:

https://www.buzzsprout.com/1973223


Looking forward to seeing you on Wednesday, May 25th, where Sean & Cody will answer your questions on tax planning for early retirement.

Thank you,
Jon Luskin
Host
Bogleheads® Live
Last edited by Jon Luskin on Fri May 20, 2022 10:30 pm, edited 2 times in total.
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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spencydub
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Re: Bogleheads® Live: Submit ?s for Sean Mullaney & Cody Garrett on Tax Planning for Early Retirees

Post by spencydub »

Will all of these "Live" sessions be available in the podcast eventually?
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Re: Bogleheads® Live: Submit ?s for Sean Mullaney & Cody Garrett on Tax Planning for Early Retirees

Post by Normchad »

I’m looking forward to this one.

Not sure this is a question, but it’s in there somewhere. In early retirement, there is a desire to do Roth IRA conversions. And that can be at odds with a desire to minimize MAGI for the purposes of maximizing ACA premium tax credits.

What’s their take on this? And backing up, say 5-10 years before retiring, what are some smart planning steps keeping those two things in mind.
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Re: Bogleheads® Live: Submit ?s for Sean Mullaney & Cody Garrett on Tax Planning for Early Retirees

Post by Jon Luskin »

spencydub wrote: Sun May 15, 2022 12:30 pm Will all of these "Live" sessions be available in the podcast eventually?
Hello spencydub,

Absolutely.

The first three episodes are now available for download. You can use the link below to check them out:

https://www.buzzsprout.com/1973223

More episodes coming soon!

:happy
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Re: Bogleheads® Live: Submit ?s for Sean Mullaney & Cody Garrett on Tax Planning for Early Retirees

Post by Jon Luskin »

This is a great question, Normchad!

I'm very much looking forward to hearing both Cody & Sean's take on this.

:happy
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by Normchad »

So far, it looks like I’ve asked the best question. I hope nobody asks an even more better question. :)

Maybe this would be a good time to ask whether TLH is worth it for retirees? Near retirees?
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Re: Bogleheads® Live: Submit ?s for Sean Mullaney & Cody Garrett on Tax Planning for Early Retirees

Post by FiveK »

Normchad wrote: Sun May 15, 2022 2:09 pm I’m looking forward to this one.

Not sure this is a question, but it’s in there somewhere. In early retirement, there is a desire to do Roth IRA conversions. And that can be at odds with a desire to minimize MAGI for the purposes of maximizing ACA premium tax credits.

What’s their take on this? And backing up, say 5-10 years before retiring, what are some smart planning steps keeping those two things in mind.
The answer should be something like "whether Roth conversions now are a good idea depends on the marginal tax rate for a conversion now vs. what you expect it to be later." ACA premium tax credits can indeed affect that calculation.

And along these lines, if they have experience with and would comment on tools such as i-ORP, Retiree Portfolio Model, Personal finance toolbox, and/or various commercial ones that people might use, that could also be interesting.
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by ginrummy »

And to take the Roth conversation one step further, I’ve found that where you actually decide to live and spend those tax free dollars can have yes or no impact on whether a Roth conversion is worth it. With some early retirees it’s hard to tell where they’ll end up after 60.
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by sailaway »

I feel pretty confident about the long range stuff, but am stressing about the transitional periods. Make the most of the MBR even if you have to withdraw from taxable? Use after tax dollars to top up the HSA after income ends? Does it make sense to use HSA for COBRA? Does being a CA or NJ resident change that? Any special considerations for Roth vs traditional in the 401k in that last year if you expect income to straddle your anticipated future tax bracket?
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by FiveK »

sailaway wrote: Sat May 21, 2022 12:23 am Any special considerations for Roth vs traditional in the 401k in that last year if you expect income to straddle your anticipated future tax bracket?
Are you asking what to do if some of your traditional 401k contribution could save 22% and the rest would save 12% and you expect to pay 15% on withdrawals?

In that case, putting the amount that would save 22% into traditional and the rest into Roth would be reasonable.
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by Jon Luskin »

Normchad wrote: Fri May 20, 2022 6:26 pm So far, it looks like I’ve asked the best question. I hope nobody asks an even more better question. :)

Maybe this would be a good time to ask whether TLH is worth it for retirees? Near retirees?
Another great question. Thank you, Normchad. I'll add it to the list.

:)
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Bogleheads® Live: Submit ?s for Sean Mullaney & Cody Garrett on Tax Planning for Early Retirees

Post by Jon Luskin »

FiveK wrote: Fri May 20, 2022 8:31 pm
The answer should be something like "whether Roth conversions now are a good idea depends on the marginal tax rate for a conversion now vs. what you expect it to be later."
Well said. Kitces wrote about this recently:

https://www.kitces.com/blog/tax-diversi ... tax-alpha/
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by sailaway »

FiveK wrote: Sat May 21, 2022 1:10 am
sailaway wrote: Sat May 21, 2022 12:23 am Any special considerations for Roth vs traditional in the 401k in that last year if you expect income to straddle your anticipated future tax bracket?
Are you asking what to do if some of your traditional 401k contribution could save 22% and the rest would save 12% and you expect to pay 15% on withdrawals?

In that case, putting the amount that would save 22% into traditional and the rest into Roth would be reasonable.

Unfortunately, due to RSUs, we don't know our actual income until after most decisions have been made and executed. It will just be somewhere around X.

Anyway, my point was to address if any of the rules of thumb should be reconsidered for early retirees right as they are retiring. My instinct is that for tax planning, like long term investing in general, it is the consistency that counts and a single year doesn't make much difference unless you do something very spontaneous like cashing out your 401k.
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

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ginrummy wrote: Fri May 20, 2022 9:59 pm And to take the Roth conversation one step further, I’ve found that where you actually decide to live and spend those tax free dollars can have yes or no impact on whether a Roth conversion is worth it. With some early retirees it’s hard to tell where they’ll end up after 60.
I love this point.

Much of Roth conversion planning relies on a whole bunch of assumptions.

Andy Pank wrote about this recently, below:

https://rethinking65.com/2022/04/07/why ... is-futile/
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

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sailaway wrote: Sat May 21, 2022 8:18 pm Anyway, my point was to address if any of the rules of thumb should be reconsidered for early retirees right as they are retiring. My instinct is that for tax planning, like long term investing in general, it is the consistency that counts and a single year doesn't make much difference unless you do something very spontaneous like cashing out your 401k.
Due to multiple "it depends on..." things, most rules of thumb regarding traditional vs. Roth should be ignored in favor of a back-of-the-envelope (i.e., some approximate) comparison of current vs. expected marginal tax rates.

It's plausible that those near retirement could have a more accurate estimate than, say, those 20+ years away, but the market, tax policy, and one's own situation can always change.
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by FiveK »

JonL wrote: Sun May 22, 2022 1:35 pm Much of Roth conversion planning relies on a whole bunch of assumptions.

Andy Pank wrote about this recently, below:

https://rethinking65.com/2022/04/07/why ... is-futile/
Indeed, assumptions abound. ;)

That is a decent article, although it unfortunately starts off suggesting the use of "effective" tax rates for comparison. It's possible he means the same calculation shown in Marginal rates explained, but most often "effective" means (total tax)/(total income). E.g., see Marginal Vs Effective Tax Rates And When To Use Each.

His point that "relatively small tweaks in assumptions will have fairly large impacts on the resultant “value” of doing Roth conversions" is excellent. In other words, don't agonize over precise calculations because they aren't likely to be accurate. Doing some projecting, however, does seem worthwhile, if only to identify when it is "highly likely" that one particular course of action will be best.
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by Jon Luskin »

sailaway wrote: Sat May 21, 2022 12:23 am I feel pretty confident about the long range stuff, but am stressing about the transitional periods. Make the most of the MBR even if you have to withdraw from taxable? Use after tax dollars to top up the HSA after income ends? Does it make sense to use HSA for COBRA? Does being a CA or NJ resident change that? Any special considerations for Roth vs traditional in the 401k in that last year if you expect income to straddle your anticipated future tax bracket?
Lots of great stuff here, sailaway. Thank you for submitting your questions. I'll add your questions to the list. :happy
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

Post by sailaway »

FiveK wrote: Sun May 22, 2022 2:22 pm
JonL wrote: Sun May 22, 2022 1:35 pm Much of Roth conversion planning relies on a whole bunch of assumptions.

Andy Pank wrote about this recently, below:

https://rethinking65.com/2022/04/07/why ... is-futile/
Indeed, assumptions abound. ;)

That is a decent article, although it unfortunately starts off suggesting the use of "effective" tax rates for comparison. It's possible he means the same calculation shown in Marginal rates explained, but most often "effective" means (total tax)/(total income). E.g., see Marginal Vs Effective Tax Rates And When To Use Each.

His point that "relatively small tweaks in assumptions will have fairly large impacts on the resultant “value” of doing Roth conversions" is excellent. In other words, don't agonize over precise calculations because they aren't likely to be accurate. Doing some projecting, however, does seem worthwhile, if only to identify when it is "highly likely" that one particular course of action will be best.
I am also leaning towards the idea that for 2023 we can do traditional, get the full match quicker ('cause front loading worked out soooo great in 2022), and if we end up with lower income, we can always do our first Roth conversion in November/December. Sometimes I forget there are more levers to pull!
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

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FiveK wrote: Sun May 22, 2022 2:22 pm
His point that "relatively small tweaks in assumptions will have fairly large impacts on the resultant “value” of doing Roth conversions" is excellent. In other words, don't agonize over precise calculations because they aren't likely to be accurate. Doing some projecting, however, does seem worthwhile, if only to identify when it is "highly likely" that one particular course of action will be best.
Well said.

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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

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sailaway wrote: Sun May 22, 2022 5:24 pm
I am also leaning towards the idea that for 2023 we can do traditional, get the full match quicker ('cause front loading worked out soooo great in 2022), and if we end up with lower income, we can always do our first Roth conversion in November/December. Sometimes I forget there are more levers to pull!
Yep. Any Roth conversion/tax gain harvesting is preliminary earlier in the year. I often tell folks it usually makes sense to do such moves in December, once you'll have a better estimate for your income for the year.

:happy
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

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sailaway wrote: Sun May 22, 2022 5:24 pm
I am also leaning towards the idea that for 2023 we can do traditional, get the full match quicker ('cause front loading worked out soooo great in 2022), and if we end up with lower income, we can always do our first Roth conversion in November/December. Sometimes I forget there are more levers to pull!
One catch is that - on average - the market goes up. That could mean paying more taxes than if making a Roth contribution initially.

As with much in life, it's a trade-off. There is no perfect answer.
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

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We're just one day away, folks!

Wednesday, May 25th at 4:00 PM Eastern/1:00 PM Pacific.

Use this link to join:

https://twitter.com/i/spaces/1MYGNndZMawGw?s=20
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Bogleheads® Live: Submit ?s on Tax Planning for Early Retirees

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We're just hours from you getting your ❓s about #taxes in early #retirement answered.

Tax pros Sean Mullaney (@SeanMoneyandTax) & Cody Garrett (@MeasureTwiceMNY) are our guests for today's "Bogleheads® Live."

Today @ 4:00 PM Easterm (1:00 PM Pacific)

https://twitter.com/i/spaces/1MYGNndZMawGw?s=20
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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Re: Bogleheads® Live: Submit ?s for Sean Mullaney & Cody Garrett on Tax Planning for Early Retirees

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Normchad wrote: Sun May 15, 2022 2:09 pm I’m looking forward to this one.

Not sure this is a question, but it’s in there somewhere. In early retirement, there is a desire to do Roth IRA conversions. And that can be at odds with a desire to minimize MAGI for the purposes of maximizing ACA premium tax credits.

What’s their take on this? And backing up, say 5-10 years before retiring, what are some smart planning steps keeping those two things in mind.
+1
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Re: Bogleheads® Live: Submit ?s for Sean Mullaney & Cody Garrett on Tax Planning for Early Retirees

Post by Jon Luskin »

Wannaretireearly wrote: Wed May 25, 2022 9:21 am
Normchad wrote: Sun May 15, 2022 2:09 pm I’m looking forward to this one.

Not sure this is a question, but it’s in there somewhere. In early retirement, there is a desire to do Roth IRA conversions. And that can be at odds with a desire to minimize MAGI for the purposes of maximizing ACA premium tax credits.

What’s their take on this? And backing up, say 5-10 years before retiring, what are some smart planning steps keeping those two things in mind.
+1
Fantastic. This question is high up on the list.

Also, we're going live in just a few minutes.

Here's the link:

https://twitter.com/i/spaces/1MYGNndZMawGw?s=20
When there are multiple solutions to a problem, choose the simplest one. ~Jack Bogle
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