Can I minimize the Tax Torpedo and future Medicare costs?

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Zag
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Can I minimize the Tax Torpedo and future Medicare costs?

Postby Zag » Fri Mar 17, 2017 3:44 pm

Greetings.

I'm new here, first time posting so please bear with me.

I've heard great things about this forum and am hoping to tap into the knowledge base here regarding reducing the impact of what looks to be a Tax Torpedo up ahead along with increased Medicare premiums. :confused

Details:

Age = 66 (Single, no exes, no kids. Healthy, so far.)
Own my house outright (no mortgage), current value = ~$400k
Retired, collecting non-COLA pension of $30k/yr...(supplemented with withdrawals from investments, as needed, to cover my living expenses)
On Medicare, with a supplemental Plan G
Currently in 25% fed. tax bracket
SS estimate at 70 = ~$36k/yr (Planning on deferring SS until 70. Family longevity has me using 103 for a lifetime estimate.)
Bulk of my investments are in IRAs. Trad. IRA = ~$1 million and Roth IRA = ~$150k
No future windfalls anticipated (such as inheritances, etc.)

I live beneath my means (LBYM), and am trying to stretch my means to allow for some fun and travel now while planning for the possibility of a long life and needing care in my later years.

Looking down the road, I am seeing the possibility of even higher taxes and Medicare premiums:

  • RMDs beginning at age 70.5 (using today's Trad. IRA value, my first RMD = ~$36,500)
  • Plus my Social Security payments will likely be taxed as well
  • These RMD and SS increases in income will put me into higher-cost Medicare premium brackets, etc.

Are there any suggestions on steps I can take now, or in the next few years, to reduce taxes and Medicare premiums while maximizing my net worth and income for longevity? I've recently seen some calculators/articles on The Hump and possible taxation rates in the high 40-something percents, but rather than gaining clarity they only confused me.

Zag

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Dale_G
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Dale_G » Fri Mar 17, 2017 7:37 pm

To minimize the RMDs, hold bonds to the extent possible in the traditional IRA - and hold equities to the extent possible in the Roth IRA and taxable accounts.

The "hump" only occurs over the income range where SS goes from being taxed at zero until 85% of it is fully taxed, then the tax rate drops back. The Medicare and and part D premiums (not really taxes) are a step function however - and an extra dollar of income can be "taxed" a thousand percent or so for a couple. It is best to avoid that last dollar of income.

Dale

Edited in red to correct SS taxation goof
Last edited by Dale_G on Sat Mar 18, 2017 12:03 am, edited 1 time in total.
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DSInvestor
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby DSInvestor » Fri Mar 17, 2017 7:49 pm

I like Dale's suggestion to place bonds in Traditional IRA.

30K pension and some investment income may put you in a low tax bracket now. Run some numbers for how much it would cost to do some Roth conversions now before you have social security income and RMD. Compare the cost of Roth conversion now against the cost to take the RMD of 36K on top of 30K pension and 36K social security.

retiredjg
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby retiredjg » Fri Mar 17, 2017 8:14 pm

The maximum of 85% of your SS is probably going to be taxed because of the other income. You will be past the donut hole and out the other end (unless things change). There is nothing to be done about this other than be joyful that you get 15% of your SS tax free. :happy

Consider converting tIRA to Roth IRA up to the point where your medicare premiums would go up. This is NOT as high as the top of the 25% bracket for a single person. I think it is $80k or $88k or something in that neighborhood. Leave a buffer because this limit is a hard line. If you go $10 over, your medicare premiums will go up for a full year and that could amount to several hundred dollars. Little surprises like forgetting to include your state tax refund in your income could push you over the edge.

Your IRA is so large you won't get a lot converted in the next 2 or 4 years. Not much you can do about it unless you just want to convert up to the next Medicare premium limit for a few years. I have no idea what that is or if it would alleviate your issue when you hit 70.5.

GerryL
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby GerryL » Fri Mar 17, 2017 9:25 pm

I'm pretty much in the same situation as you, although with a much smaller (minimal) non-COLA pension.
I was using my 15% bracket years to do Roth conversions even though it was not going to take a significant slice out of eventual RMDs, but stopped doing that since I figure the Roth is most likely to go to charity anyway. Now that Qualified Charitable Distributions (QCDs) are a "permanent" option for RMDs, I plan to use charitable giving to keep my AGI below the current $85k threshold for higher Medicare premiums. With your pension, that will be harder, but it is an option for the future once you do as much as you can with Roth conversions and strategically holding bonds and equities as others have recommended.

spencer99
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby spencer99 » Fri Mar 17, 2017 11:23 pm

Hi Zag,

Welcome to the forum.

Although my $$ are much less than yours, with pension + delayed SS + RMDs, I've given some thought to how the questions you pose play out at age 70. A few thoughts:

I'm reconciled to 85% of SS being taxed. Pensions do that and I can't see a way around it.

IRMAA (Income-Related Medicare Adjustment Amount) first level threshold is $85,000 MAGI and applies to both Part B and Part D as I understand it. I estimate an additional yearly cost of about $1,000. LINK: https://secure.ssa.gov/poms.nsf/lnx/0601101020 IRMAA is not inflation indexed at this point but indexing begins in a couple years as I understand it.

As GerryL mentions, if you're close to the 85k threshold a QCD is a great option, but I don't see that helping you with > $100,000 projected income post 70.

As others' mentioned equities in your Roth helps but not much given the relative sizes of your tIRA and Roth IRA.

Conversion of tIRA to Roth IRA is probably the most effective approach to reducing RMDs but you don't have that much time and in order to convert more than a small amount you'd be well into the 25% tax bracket. Granted you're in at least the 25% tax bracket at age 70 anyway, but I don't understand this well enough to know if a conversion at 25% significantly helps you in the future.

Something I wonder about is: although delayed claiming of Social Security until 70 (your plan and mine) is often advised, is there ever a rationale to claim at FRA when delay-increased SS payments will push one into either a higher tax bracket or additional fees (such as IRMAA)?

S

kaneohe
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby kaneohe » Sat Mar 18, 2017 8:35 am

For comparison, you might want to look at your situation > 70 when your SS and RMDs start. Your tax rates might be even higher
that your rates now even w/ IRMAA, perhaps even having AMT so by avoiding the IRMAA frying pan now, you might be in the fire then.
Overall tho, a nice problem to have.

Lynette
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Lynette » Sat Mar 18, 2017 9:11 am

I recommend becoming really familiar with the tax code and running what if scenarios. I retired a few months ago at the age of 73 and it seems I pay tax and additional premiums on everything as I have pensions, full SS and RMDs.

What to do? I solution suggest that you become really familiar with the tax code and possibly do your taxes manually and run what if scenarios on Roth conversions. As I retired later I did not have this opportunity and my accountant advised me not to do Roth conversions as it would be a wash.

I am trying to minimize taxes in my taxable account by placement of funds in my portfolio. I have the bond portion of my Asset Allocation in my 401K, stock mutual funds in my Roth and stock mutual funds that don't give out too many distributions in my taxable account.

Welcome to retirement and taxes!

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samsoes
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby samsoes » Sat Mar 18, 2017 9:44 am

Zag, being single with no kids (like me), have you considered moving to a non-income tax state? I plan to do so post-haste when I retire. Immediate 5.5% state tax savings (CT), depending on how your state taxes SS payments.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

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sometimesinvestor
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby sometimesinvestor » Sat Mar 18, 2017 9:46 am

I agree with the comments suggesting Roth Conversions even think it will be worthwhile to do then to the extent that you are close to the top of the 25% bracket as it is clear you will be there after 70 .You are in the classic you can pay me now or pay me later trap.If your Roth investments do well enough you may be able to donate some of the RMDs and keep below the 25% bracket in the future.

Zag
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Zag » Sat Mar 18, 2017 9:52 am

Thanks for the warm welcomes and well-informed responses.

I'm relieved to hear that at least the donut hole is not a worry. :o And I can celebrate the 15% tax-free SS at 70+. :sharebeer

I'll check my bond and equity holdings -- get bonds in Trad. IRA and equities in Roth.

It looks like I need to run some calculations as to Roth conversions which may/may not be a wash.

I'll be keeping QCDs for RMDs in mind. (Although my family longevity has me concerned about donating too much to charity in my younger years.)

Staying under the Medicare premium increases sounds like another math problem to solve....along with running various IRS tax scenarios.

My state doesn't tax SS (yet). Moving somewhere else (Florida?) for a change of pace is not out of the question, though.


Zag

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Watty
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Watty » Sat Mar 18, 2017 10:14 am

Lynette wrote:I recommend becoming really familiar with the tax code and running what if scenarios.


+1

Even if you don't normally do your own taxes buying tax software, including for your state, and doing dummy tax returns would be well worth the cost.

Be sure to look at the cost over a number of years. It could be that doing a couple of years of very large Roth conversions would save you a lot of taxes and surcharges later.

Unless you get married I don't see that it would be likely that you would ever get below the 25% tax bracket. I don't know how the numbers would work out but if you have low or no state income taxes it could be that doing Roth conversions up to the top of the 28% tax would be worthwhile in order to get lower taxes and medicare surcharges later on. It would be painful to pay that and the medicare surcharge but that is only 3% higher than the 25% tax bracket. If that can reduce the taxes you will be paying on the Social Security later on that could be worth a lot over the long term.

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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby cherijoh » Sat Mar 18, 2017 12:29 pm

Zag wrote:Thanks for the warm welcomes and well-informed responses.

I'm relieved to hear that at least the donut hole is not a worry. :o And I can celebrate the 15% tax-free SS at 70+. :sharebeer

I'll check my bond and equity holdings -- get bonds in Trad. IRA and equities in Roth.

It looks like I need to run some calculations as to Roth conversions which may/may not be a wash.

I'll be keeping QCDs for RMDs in mind. (Although my family longevity has me concerned about donating too much to charity in my younger years.)

Staying under the Medicare premium increases sounds like another math problem to solve....along with running various IRS tax scenarios.

My state doesn't tax SS (yet). Moving somewhere else (Florida?) for a change of pace is not out of the question, though.


Zag


A couple of things to keep in mind regarding Roth conversions:
  • A Roth conversion makes the most sense when you have money for the taxes in a taxable account rather than having to pull more money out of the IRA to pay taxes on the conversion.
  • Recharacterizing a Roth conversion gives a unique "do-over" opportunity, but to take full advantage it makes sense to open new traditional and Roth IRAs.
  • If you follow the mantra of "Buy Low/ Sell High" make sure you are buying low into your Roth - in other words, a stock market correction can be an ideal time to do a Roth conversion especially if you don't have to sell equities to pay the taxes.

Zag
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Zag » Sun Mar 19, 2017 12:34 am

cherijoh wrote:A couple of things to keep in mind regarding Roth conversions:
  • A Roth conversion makes the most sense when you have money for the taxes in a taxable account rather than having to pull more money out of the IRA to pay taxes on the conversion.
  • Recharacterizing a Roth conversion gives a unique "do-over" opportunity, but to take full advantage it makes sense to open new traditional and Roth IRAs.
  • If you follow the mantra of "Buy Low/ Sell High" make sure you are buying low into your Roth - in other words, a stock market correction can be an ideal time to do a Roth conversion especially if you don't have to sell equities to pay the taxes.


cherijoh,

Good to know.

Sadly, I've used-up most of my taxable funds for expenses and whatever taxes would be due on any conversions would have to come out of the IRA.

It sounds as though I need to run various scenarios (such as converting to the top of the 28% bracket). If it does make sense to convert, I need to decide how much to convert and be poised to take action on a stock market downturn.

I've been such a scrimp-and-save LBYM kind of person, it might give me a heart attack to pay the taxes on any really large conversions, though. :shock:

Thanks.

Zag

retiredjg
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby retiredjg » Sun Mar 19, 2017 6:10 am

If you decide to convert to the top of the 28% bracket, I think that will push you up 3 tiers in medicare premiums. If it were not for that, it makes sense to convert to the top of the 28% bracket. You might find it better to only convert into, but not to the top of, the 28% bracket.

This all makes me wonder about converting the whole thing in one year or two years. I might take a look at that myself.

Zag
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Zag » Sun Mar 19, 2017 9:57 am

spencer99 wrote:Something I wonder about is: although delayed claiming of Social Security until 70 (your plan and mine) is often advised, is there ever a rationale to claim at FRA when delay-increased SS payments will push one into either a higher tax bracket or additional fees (such as IRMAA)?

S


spencer99,

I've been trying to wrap my head around this, wondering if I should possibly start collecting SS now...part of me hates leaving money on the table (especially with the family longevity and being responsible for my own care in old age), but I wonder if I'm not possibly shooting myself in the foot, by pushing myself into higher tax & medicare premium brackets, at the same time?

Does anyone have further insights on this?

Zag

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samsoes
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby samsoes » Sun Mar 19, 2017 10:11 am

Zag wrote:
spencer99 wrote:Something I wonder about is: although delayed claiming of Social Security until 70 (your plan and mine) is often advised, is there ever a rationale to claim at FRA when delay-increased SS payments will push one into either a higher tax bracket or additional fees (such as IRMAA)?

S


spencer99,

I've been trying to wrap my head around this, wondering if I should possibly start collecting SS now...part of me hates leaving money on the table (especially with the family longevity and being responsible for my own care in old age), but I wonder if I'm not possibly shooting myself in the foot, by pushing myself into higher tax & medicare premium brackets, at the same time?

Does anyone have further insights on this?

Zag


Take it now, Zag, or at least at FRA. Although you have a family history of longevity on your side, us single folk statistically tend to croak earlier than our married friends. In addition, you'll never know when you'll encounter the strung-out wrong-way driver on the freeway or meet your premature demise by any other sudden accidental situation. Finally, you'll enjoy the $$ more when you're younger.
"Happiness Is Not My Companion" - Gen. Gouverneur K. Warren. (Avatar is the statue of Gen. Warren at Little Round Top @ Gettysburg National Military Park.)

retiredjg
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby retiredjg » Sun Mar 19, 2017 10:45 am

Zag wrote:Does anyone have further insights on this?

I don't know if this is further insight, but I took SS at 62 after having been retired a few years.

I believe that much of the benefit of delaying SS goes to couples, not singles. That is because a couple has 2 opportunities to live past the "break even" age. I think a single person only has a break even chance of living past the break even age. At the time I had to decide, I had no reason to believe I'd live past the break even age (that continues to be true) so I decided to start SS early and leave more IRA to heirs.

When people ask, I don't discourage delaying SS for couples because there seems to be evidence that it is helpful to delay. But in the same light, I don't encourage delaying SS for singles because I'm not sure there is a benefit. I'm not sure there isn't either. So I usually don't express an opinion on that. However, since you are wondering about it, I think you should throw that into the mix of things to look at as well.

The trouble with taking it early is that you will end up with a higher RMD because you are using less of your IRA. But you could have the same or more or less overall taxable income because your SS will be lower at RMD time than if you wait. I don't know which it might be because I never looked at it.

Throw into all this the fact that some states do not have taxes and even many states that have taxes don't tax SS. And there are probably a couple of more moving pieces (like changes in tax law) to fit in here.... It seems to me one of those "pay your money and take your chances" choices. There is absolutely no way to predict what is best.

So my decision was to pick something and be happy with it and not put any effort into figuring out if it was the "right" decision or not. And obviously in your case, you should have plenty of money anyway so this is not a human food vs dog food scenario.

In fact, I believe it will rarely be that type of question. Most people have either saved enough or they haven't saved enough. Even though we spend enormous amounts of time discussing it, some of the rest of this is just detail.

Zag
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Zag » Sun Mar 19, 2017 8:11 pm

Thanks, samsoes and retired jg for your insights.

Hadn't really thought of SS from a singles vs couples perspective and had always simply assumed waiting until 70 was the way to go for anyone who could afford it, unless they had a an inkling that they might not reach the breakeven age.

Will need to revisit this.

Zag

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Epsilon Delta
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Epsilon Delta » Sun Mar 19, 2017 8:41 pm

I plan to delay taking SS until age 70 as longevity insurance, not to maximize my expected return.

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Puck
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Puck » Sun Mar 19, 2017 9:26 pm

Zag,

You might want to check out BigFoot48's Retiree Portfolio Model. I've found it to be very helpful in Roth conversion planning.

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

Puck

LeeMKE
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby LeeMKE » Sun Mar 19, 2017 11:13 pm

I would suggest the I-ORP.com modeling to see how much sense conversions now will make for you. That model works on the taxation of Social Security (the hump - google on this site for it) and it is set up to evaluate all your moving parts. I don't think it solves for the Medicare issue.

Good luck!
The mightiest Oak is just a nut who stayed the course.

Zag
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Zag » Tue Mar 21, 2017 9:08 am

Thanks, guys.

I'd used i-orp calculator some years ago. Looks like they've updated it with a few nice features which will make running a few "what if" scenarios a bit easier and clearcut.

I'll have to revisit BigFoot48's Retiree Portfolio Model. A while back, I got mired somewhere in the middle of it and couldn't figure out what I'd done wrong. Will take another run at it.

Zag

The Wizard
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby The Wizard » Tue Mar 21, 2017 9:48 am

I'm in similar situation, age 67, and in an elevated Medicare tier.
While Bigfoot's spreadsheet may be useful, I made my own single-page spreadsheet covering my first ten Retirement years, age 63 to 72.
The main rows in my sheet are income streams that start and stop at different times. For instance, my withdrawals in lieu of SS go from age 63 to 69. Another row for my SS starts at age 70. Similar for RMDs.

I don't model any portfolio growth in my sheet, but I do update it each January with actuals. My sheet's focus is taxable income so I ignore my Roth IRA and my presently modest taxable account.

My goal with this sheet is to be able to adjust my taxable income with Roth conversions to have my taxable income increase a small amount most years without too big a jump at age 70. Converting to the top of the XX% bracket plays no role here. The goal is to manage the growth of AGI.

Having said all that, my projected RMD could certainly drop between now and 2020 depending on market forces. So I don't over-convert to Roth to try eliminate the age 70 AGI increase entirely...
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Zag
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby Zag » Tue Mar 21, 2017 11:54 am

The Wizard wrote:I'm in similar situation, age 67, and in an elevated Medicare tier.
While Bigfoot's spreadsheet may be useful, I made my own single-page spreadsheet covering my first ten Retirement years, age 63 to 72.
The main rows in my sheet are income streams that start and stop at different times. For instance, my withdrawals in lieu of SS go from age 63 to 69. Another row for my SS starts at age 70. Similar for RMDs.

I don't model any portfolio growth in my sheet, but I do update it each January with actuals. My sheet's focus is taxable income so I ignore my Roth IRA and my presently modest taxable account.

My goal with this sheet is to be able to adjust my taxable income with Roth conversions to have my taxable income increase a small amount most years without too big a jump at age 70. Converting to the top of the XX% bracket plays no role here. The goal is to manage the growth of AGI.

Having said all that, my projected RMD could certainly drop between now and 2020 depending on market forces. So I don't over-convert to Roth to try eliminate the age 70 AGI increase entirely...


Great idea. I like this. I need to create a similar spreadsheet.

Q: Are you converting significant IRAs pre-70.5 to reduce lifetime RMDs (or eliminate them altogether at a later age)?
Q: Are you managing AGI to stay within a given elevated MEdicare tier?

Zag

LeeMKE
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby LeeMKE » Tue Mar 21, 2017 1:15 pm

Be aware that "The Hump" occurs much later, than age 72. I'm not sure this spreadsheet will help you with that. In my case, it generated taxes at 35% for 5 years on $351k of w/d from IRA. That is what I'm using I-ORP to solve for.
The mightiest Oak is just a nut who stayed the course.

The Wizard
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby The Wizard » Tue Mar 21, 2017 1:55 pm

Zag wrote:...Great idea. I like this. I need to create a similar spreadsheet.

Q: Are you converting significant IRAs pre-70.5 to reduce lifetime RMDs (or eliminate them altogether at a later age)?
Q: Are you managing AGI to stay within a given elevated MEdicare tier?

Zag

My tax deferred sum is a 403(b) not an IRA, but the same RMD rules apply. I'm doing modest conversions from 403(b) to Roth IRA on a monthly basis.
My current projection for 2020 (my age 70.5 year) shows an AGI jump of $14,000 which isn't too bad. So I could do an additional $10,000 Roth conversion toward the end of the year, I suppose.

Regardless, these Roth conversions are a bit less than 5% annualized of my 403(b) balance​ so I'm not going to reduce that balance significantly by 2020. And that's fine.
I'm taking out an additional amount from that 403(b) in lieu of SS, so in 2020 that cashflow transitions to being a good part of my RMD.

As for Medicare IRMAA brackets, I have the latest brackets printed out and I keep an eye on them. Biggest uncertainty is if I take a part-time work gig again, since that tends to bump things up...
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The Wizard
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Re: Can I minimize the Tax Torpedo and future Medicare costs?

Postby The Wizard » Tue Mar 21, 2017 2:04 pm

LeeMKE wrote:Be aware that "The Hump" occurs much later, than age 72. I'm not sure this spreadsheet will help you with that. In my case, it generated taxes at 35% for 5 years on $351k of w/d from IRA. That is what I'm using I-ORP to solve for.

Good point, I suppose I could extend mine out to age 80 or so.
But what will an IRA with $1M at age 70 be worth at age 75 or 80, assuming just RMDs taken from it?
We have no idea since we can't predict market returns accurately in advance...
:(

This is why I project zero growth in my portfolio from year to year, to be conservative. If the markets have a 10% or 15% increase one year, I can just pour an adult beverage and celebrate...
:sharebeer
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