~1 year from FIRE - Tax diversification strategy?

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AlwaysWannaLearn
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~1 year from FIRE - Tax diversification strategy?

Post by AlwaysWannaLearn » Sun Jun 10, 2018 10:06 pm

I can't tell you all how much I've learned from you on this forum over the months and years as I've been doing my best to get educated - Thank you!!

Here's my situation and my question: My current plan is to retire about a year from now or at the next significant market downturn (whichever comes first). I'm interested in hearing what the wise folks here think might be a good goal for someone in my position to pursue for allocation among taxable/tax-deferred/Roth AFTER I (1) hang up my spikes and move to one of the no income tax states (Las Vegas is the frontrunner) from my current HCOL/high income tax state, and (2) implement an aggressive Roth conversion path and also do some re-allocations so that tax-efficient holdings are in the taxable accounts and less tax-efficient holdings are in the tax-deferred and Roth accounts.

Things might turn out differently, but I expect that after ~6-10 years there, personal circumstances will require me to move to a state with a relatively high income tax but LCOL (long story). So basically, I'll have 6-10 years to get this tax house in order, based on whatever we know at the time. Tax laws change; I get that. I'm not holding anyone here to anything on that front.

Originally, I was thinking that after the move I'd convert the vast majority of the tax-deferred assets to Roth in those years, having read all the regrets in the comments to the "Woulda/Coulda/Shoulda" Vanguard blog post from the 70+ crowd about how the RMDs are making them look wealthier than they are, increased their taxes and Medicare premiums, etc. I've since learned from others here (thank you!) that there may be benefits to keeping *some* assets in tax-deferred accounts (e.g., medical expense deductions later, tax law changes in the future that can't be predicted now but might subject some Roth assets to tax, etc.).

Obviously at the time I "flip the switch" to zero earned income, I'll be 6 years from penalty-free withdrawals from tax-deferred and Roth accounts, 12 years away from Medicare, and (if all goes according to plan) 17 years from SS and forced into taking RMDs. Thus, I'll need to keep a good chunk on the taxable side to cover health care (the biggest wild card) and living expenses. I'll also need to keep a careful eye on tax law changes/developments.

Me:
-52yo, single, no dependents
-No debt, no real estate
-$5MM in financial assets: 73% in taxable accounts/23% tax-deferred (combo of 401k/403b/tIRA/very small amt. in a 529)/4% Roth
-Tax bracket: 33% in 2017 (but hit w/both AMT and NIIT, because I was stupid); my bracket will be either 32% or 35% in 2018 dep. how the year goes. I've never been eligible for deductible Roth contributions since Roth came into being, and "back door" during my working years wasn't an option due to the tax hit. The 4% Roth I currently have was from the one year I was between jobs: I knew it'd likely be a low-income year and the govt. was offering an incentive to split the tax hit over 2 years; I decided to convert my entire tIRA - i.e., all of my annual non-deductible contributions - that year.
-Current expenses: Roughly $65K/year. I'm conservatively projecting $72K/year after the move due to the healthcare wild card, despite lower CoL. It will take a while for me to do the asset re-allocation that in theory might make me eligible for ACA subsidy (if it's still around - I know: NOT within forum rules to discuss) and to work my unearned income down to the 22% bracket.
-FWIW, I'm in excellent health; my only HC expenses currently are for vision/dental and the premiums for a HD plan that I never use, i.e., I insure for catastrophe. Knock on wood....

Again, my question is: My current "tax allocation" is 73/23/4 - taxable/tax-deferred/tax-free. What is a good 6 to 10 year goal for someone in my position to pursue after I: (1) retire and move to one of the no income tax states from my HCOL/high income tax state, (2) reduce earned income from a healthy six figures to zero, and (3) implement an aggressive Roth conversion path and also do some re-allocations so that tax-efficient holdings are in the taxable accounts and less tax-efficient holdings are in the tax-deferred and Roth accounts?

I welcome and thank you in advance for your wisdom. :happy
Last edited by AlwaysWannaLearn on Mon Jun 11, 2018 8:24 am, edited 1 time in total.

aristotelian
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by aristotelian » Mon Jun 11, 2018 1:37 am

You are at 70x expenses and you are worried about tax diversification? I would convert every year up to the top of the 22% bracket while living off the dividends from the taxable account.

SGM
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by SGM » Mon Jun 11, 2018 4:04 am

I would consider converting up to the 24% tax bracket. Higher state taxes in 6 years will likely more than make up for the 2% difference in marginal rates of the 22% bracket and allow for a lot more conversions each year over your 6 year time frame.

State and local income taxes can be significant. It is good you are considering the effect of moving eventually to a high income tax state.

michaeljc70
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by michaeljc70 » Mon Jun 11, 2018 9:24 am

Note that some states don't have income tax on Roth conversations (mine being one of them).

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FiveK
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by FiveK » Mon Jun 11, 2018 2:05 pm

First, see How to withdraw funds from your IRA and 401k without penalty before age 59.5. You can have penalty-free withdrawals of large fractions of your tIRA and Roth accounts at any age. Not tax-free from the tIRA, though, which leads to the main question.

The percentages are much less important than the absolute amount you have in the traditional account. One rough (but not unreasonable) estimate procedure:
a) Estimate base income from dividends, interest, capital gains, etc. now. Set up to calculate your marginal rate on tIRA distributions above that base.
b) Estimate base income from SS, dividends, interest, capital gains, etc. at age 70. Set up to calculate your marginal rate on tIRA distributions above that base.

With things set up as above, try different annual tIRA distributions and calculate the rates you get for "a" and "b".

E.g., if you convert very small amounts in the coming years, you will likely pay lower tax rates in those years but get hit with high rates when RMDs start. If you convert large amounts in the coming years, you will likely pay high tax rates in those years but have low rates when RMDs start.

The "Goldilocks amount" of conversions (i.e., whatever amount leads to ~flat marginal rates in all years) is likely best for you. It's also likely that a range, rather than a single value, of conversion amounts will provide roughly the same results.

Or see something like Optimal Retirement Planner - Extended Parameter Form that will do an analysis similar to that described above.

terran
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by terran » Mon Jun 11, 2018 2:44 pm

michaeljc70 wrote:
Mon Jun 11, 2018 9:24 am
Note that some states don't have income tax on Roth conversations (mine being one of them).
Interesting! Based on https://www.forbes.com/sites/ashleaebel ... cc7159a462 it looks like Hawaii (401k or rollover IRA from 401k only), Illinois, Kentucky, and Pennsylvania are the ones that would apply to someone who is not yet "retirement age."

So I assume the disadvantage to these states as compared to no income tax states is that they still tax dividends and capital gains?

heyyou
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by heyyou » Mon Jun 11, 2018 2:45 pm

You have the right strategy. Consider just feeling grateful for whatever you do get converted into the Roth IRA (RIRA), instead of hoping for 100% conversion then feeling like you failed at age 70 if you are not finished. RMDs do start out low, and you can just save any income that you don't need to spend from the RMD.

One retirement spending method uses the RMD percentage for each year as the withdrawal percentage across the whole portfolio. That is intended to use up the portfolio at a very advanced age, not having so much leftover like the methods that are tailored to fit the worst retirement periods. If yours is going to be one of the worst retirement periods, it will be obvious in the first decade of a 30 year retirement. Also, there are RMD withdrawal % for younger people who have inherited traditional IRAs, not just starting at age 70.5.

For your size of portfolio, would it be worth paying a CPA tax specialist for long term plans showing how much to convert each year? With big conversions, you might be in the same, or an even higher tax bracket in retirement, as now.

per Google
Substantially equal periodic payments (SEPP) are one of the exceptions in the United States Internal Revenue Code §72(t)(1) that allows receiving payments without the 10% early distribution penalty from a retirement plan or deferred annuity before the usual 59​1⁄2 age restriction under certain circumstances.
Substantially equal periodic payments - Wikipedia
https://en.wikipedia.org/wiki/Substanti ... c_payments

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David Jay
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by David Jay » Mon Jun 11, 2018 2:51 pm

SGM wrote:
Mon Jun 11, 2018 4:04 am
I would consider converting up to the 24% tax bracket. Higher state taxes in 6 years will likely more than make up for the 2% difference in marginal rates of the 22% bracket and allow for a lot more conversions each year over your 6 year time frame.

State and local income taxes can be significant. It is good you are considering the effect of moving eventually to a high income tax state.
I think that either the top of the 22% bracket or the top of the 24% bracket makes sense, whichever you choose. Filing Single, the 22% tax bracket may limit the amount too much.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

AlwaysWannaLearn
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by AlwaysWannaLearn » Mon Jun 11, 2018 7:32 pm

Many thanks to you all for the thoughtful and helpful replies! You all are wonderful - Thank you!

Based on this, I think the plan will be to convert at least to the top of the 22% bracket (as aristotelian suggested), and (to SGM's and David Jay's point) probably to the top of the 24% bracket given the timeframe I have to work with. That also seems consistent with the calculations that FiveK kindly suggested in how to figure out the "Goldilocks" range - at least if all my guesstimates about future income from various sources in running the calculations turns out to be anything close to right. ; ) A few responses to specific comments:
aristotelian wrote:
Mon Jun 11, 2018 1:37 am
You are at 70x expenses and you are worried about tax diversification?
Is that bad? :confused
heyyou wrote:
Mon Jun 11, 2018 2:45 pm
You have the right strategy. Consider just feeling grateful for whatever you do get converted into the Roth IRA (RIRA), instead of hoping for 100% conversion then feeling like you failed at age 70 if you are not finished.
Thank you, hey you. You are right: As they say, "perfect" is the enemy of "good." This is a helpful and needed reminder to me not to let some hypothetical perfect solution be the enemy of a good solution.
heyyou wrote:
Mon Jun 11, 2018 2:45 pm
RMDs do start out low, and you can just save any income that you don't need to spend from the RMD...Also, there are RMD withdrawal % for younger people who have inherited traditional IRAs, not just starting at age 70.5.
Thanks again, heyyou. I've actually been receiving small RMD checks annually since I was 37 when my Dad passed away and I (along with each of my 3 siblings) inherited 1/4 of his modest 401(k), tIRA and Roth accounts. It's been an eye-opening and great learning experience about how these retirement accounts actually work that I'd never have known otherwise. As you said, RMDs start out small but they DO grow over time as life expectancy shortens.

The next great eye-opener was learning how income (including RMDs) can affect Medicare premiums. (Dang, who knew?) THAT's when I realized that holy crap! I've been socking away the max in 401k/tIRA for years and now have over a $1mm in tax-deferred accounts. Those RMDs are going to kill me when I hit 70.5 if I don't convert! :o

As all of you know, the game the govt. plays with us all is pay now or pay later. All that said, this would of course all be easier to map out and plan for if I knew when and how I was going to die, lol. Meh, that's ok. If it turns out that I keel over before 70, hopefully my heirs will be happy I paid the tax bill while I was alive, and they get untaxed RMDs vs. taxed RMDs. ; )
heyyou wrote:
Mon Jun 11, 2018 2:45 pm
One retirement spending method uses the RMD percentage for each year as the withdrawal percentage across the whole portfolio. That is intended to use up the portfolio at a very advanced age, not having so much leftover like the methods that are tailored to fit the worst retirement periods. If yours is going to be one of the worst retirement periods, it will be obvious in the first decade of a 30 year retirement.
Interesting! I'm not familiar with this method. Can you say more or provide links? As for that last sentence, thank you again heyyou - That's wisdom. And I wouldn't have thought of it unless you had said it. But as soon as I read it, I had no doubt it's correct. Oh and once I was done kicking myself for not realizing it earlier (hahaha), I was simply grateful for the comfort you kindly provided. :happy
heyyou wrote:
Mon Jun 11, 2018 2:45 pm

For your size of portfolio, would it be worth paying a CPA tax specialist for long term plans showing how much to convert each year? With big conversions, you might be in the same, or an even higher tax bracket in retirement, as now.
I hear you, heyyou. To answer your question, in a word: Yes. I have a decent tax CPA, but as someone mentioned on one of the other forum posts, many good tax CPAs aren't particularly well-versed in IRAs generally, or Roth conversion strategy specifically. It's really a sub-specialty in itself. One of my first orders of business when I get to Las Vegas or Austin or Naples (or wherever I land) is to find a really good CPA who knows his or her way around this stuff. Thanks to the education I've received from folks like you, I'm fairly confident I'll be able to discern whether the individual is posing or really DOES know this stuff. I'm thankful to everyone on this forum for sharpening my "bs detector" on that front.
terran wrote:
Mon Jun 11, 2018 2:44 pm
michaeljc70 wrote:
Mon Jun 11, 2018 9:24 am
Note that some states don't have income tax on Roth conversations (mine being one of them).
Interesting! Based on https://www.forbes.com/sites/ashleaebel ... cc7159a462 it looks like Hawaii (401k or rollover IRA from 401k only), Illinois, Kentucky, and Pennsylvania are the ones that would apply to someone who is not yet "retirement age."

So I assume the disadvantage to these states as compared to no income tax states is that they still tax dividends and capital gains?
Thanks, michaeljc70 and terran! I wasn't aware of this, either. I'm guessing terran's right as to the disadvantage. Given the size of my taxable account - which has to stay fairly large to pay the taxes on the conversions and pay living expenses until 59.5 - it'd be a deal-breaker for me but might help others here.

The one question I guess I still have is: Even if the stars align and I have the opportunity to convert everything in my 6-10 year timeframe - Is there some percentage of assets I should deliberately leave in tIRA/401k? If so, what would it be? For example, if I have some serious and costly health issue at 65, where I'd want to draw from the tIRA/401k to pay the medical bills and then take a med. expense deduction. Or if tax laws change in a way that makes drawing from tIRA more favorable than drawing from Roth?

P.S. Thanks to FiveK and heyyou for reminding me that there actually ARE penalty-free ways to draw from tax-deferred in the pre-59.5 period if needed. My bad. I remember reading about that in other forum posts but had forgotten all about it. Hopefully I won't need to take advantage of that option. (If I do, candidly something has gone HORRIBLY wrong in my planning for which I will take full responsibility.) In any event, good to know!!

Again, thanks to all who responded. You rock! :sharebeer

michaeljc70
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by michaeljc70 » Mon Jun 11, 2018 8:04 pm

terran wrote:
Mon Jun 11, 2018 2:44 pm
michaeljc70 wrote:
Mon Jun 11, 2018 9:24 am
Note that some states don't have income tax on Roth conversations (mine being one of them).
Interesting! Based on https://www.forbes.com/sites/ashleaebel ... cc7159a462 it looks like Hawaii (401k or rollover IRA from 401k only), Illinois, Kentucky, and Pennsylvania are the ones that would apply to someone who is not yet "retirement age."

So I assume the disadvantage to these states as compared to no income tax states is that they still tax dividends and capital gains?
I believe so. But there are a few states with no state income tax, so those would be ideal. But as implied in other posts, most people aren't going to move to a state they don't want to to save a few percent. However, Florida and Texas are two of the biggest states.

Living in IL, there not being taxes on Roth conversions is the first personally beneficially tax "deal" I feel I've gotten. :shock:
Last edited by michaeljc70 on Tue Jun 12, 2018 9:33 am, edited 1 time in total.

terran
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by terran » Mon Jun 11, 2018 8:14 pm

AlwaysWannaLearn wrote:
Mon Jun 11, 2018 7:32 pm
aristotelian wrote:
Mon Jun 11, 2018 1:37 am
You are at 70x expenses and you are worried about tax diversification?
Is that bad? :confused
Not bad, as such, it's just that even 35x is considered pretty conservative, so at 70x you're pretty well bullet proof. You could have retired a lot sooner, or you could spend a lot more. If not, you should probably give some thought to what you'd like to happen with all the money that you won't spend in your lifetime.
AlwaysWannaLearn wrote:
Mon Jun 11, 2018 7:32 pm
Given the size of my taxable account - which has to stay fairly large to pay the taxes on the conversions and pay living expenses until 59.5...
In addition to the SEPP method Heyyou linked above, also note that the amount you convert to Roth each year (but not the gains on that amount) can be withdrawn tax and penalty free five years later, so you actually only need enough in taxable to pay for 5 years of taxes and living expenses. After that you can just keep the so called "roth conversion ladder" going using the money you withdraw. You can also withdraw roth contributions (but again, not gains) at any time.
AlwaysWannaLearn wrote:
Mon Jun 11, 2018 7:32 pm
The one question I guess I still have is: Even if the stars align and I have the opportunity to convert everything in my 6-10 year timeframe - Is there some percentage of assets I should deliberately leave in tIRA/401k? If so, what would it be? For example, if I have some serious and costly health issue at 65, where I'd want to draw from the tIRA/401k to pay the medical bills and then take a med. expense deduction. Or if tax laws change in a way that makes drawing from tIRA more favorable than drawing from Roth?
Ideally you want to equalize your tax bracket throughout your life, so you wouldn't want to convert everything in the next 6-10 years as you would then have many years of a very low tax bracket. What exactly the amount you want left in traditional is hard to pinpoint though since you don't know what tax rates will be or what the rate of return will be on your remaining traditional assets.

heyyou
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by heyyou » Tue Jun 12, 2018 12:57 am

Edited to add: It is RMD % plus annual dividends and interest, but not cap gains.

Per the OP's request, below is the link to the brief that suggests using the RMD % as the retirement withdrawal rate on the entire portfolio. Be aware that the table showing the percentages is on page 7, in the Appendix, and that is not mentioned in the brief.

Careful readers will ask, since the authors compared all methods to an optimal one, why can't we just use it? In academia, the optimal method is often the one if you had known every future return at the start of your investing period. The brief does not say if that is what they used as the comparison tool.

http://crr.bc.edu/wp-content/uploads/20 ... 19-508.pdf

Searching for the two authors will bring up other papers by them since the 2012 publication of the one above. On some, the lead author position is reversed from the paper above. Maybe including their first names would capture all their papers in one search.

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kramer
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by kramer » Tue Jun 12, 2018 4:21 am

SGM wrote:
Mon Jun 11, 2018 4:04 am
I would consider converting up to the 24% tax bracket. Higher state taxes in 6 years will likely more than make up for the 2% difference in marginal rates of the 22% bracket and allow for a lot more conversions each year over your 6 year time frame.

State and local income taxes can be significant. It is good you are considering the effect of moving eventually to a high income tax state.
Here is another reason to do that. By converting to the top of the 22% bracket, you are moving all of your qualified dividends from 0% to 15% taxation. This does not happen again when going from 22 to 24. So when moving into the 22% bracket, your marginal rate temporarily moves to 27% then back down to 22% once all of your qualified dividends (and cap gains) have been moved to 15%. This won't be a factor if your qualified dividends plus dividends already reach the 15% bracket (around 50K dividends for a single person) before any conversions.

AlwaysWannaLearn
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by AlwaysWannaLearn » Tue Jun 12, 2018 4:47 pm

michaeljc70 wrote:
Mon Jun 11, 2018 8:04 pm
terran wrote:
Mon Jun 11, 2018 2:44 pm
michaeljc70 wrote:
Mon Jun 11, 2018 9:24 am
Note that some states don't have income tax on Roth conversations (mine being one of them).
Interesting! Based on https://www.forbes.com/sites/ashleaebel ... cc7159a462 it looks like Hawaii (401k or rollover IRA from 401k only), Illinois, Kentucky, and Pennsylvania are the ones that would apply to someone who is not yet "retirement age."

So I assume the disadvantage to these states as compared to no income tax states is that they still tax dividends and capital gains?
I believe so. But there are a few states with no state income tax, so those would be ideal. But as implied in other posts, most people aren't going to move to a state they don't want to to save a few percent. However, Florida and Texas are two of the biggest states.
Agreed. In case anyone's curious - because I checked them all out as potential future domiciles as part of my process of pulling together a pre-59.5/pre-70.5 FIRE plan - There are currently 7 states with no income tax: In addition to Florida and Texas, the other five are Alaska, Washington state, Nevada, Wyoming and South Dakota. With no disrespect to the home state of any gentle readers of this forum, to michaeljc70's point, some of those just weren't going to work for me. Once those were culled, I did a deeper dive on the remaining states w/r/t COL, availability of things I like to do/want to do in retirement, health insurance options, etc.
michaeljc70 wrote:
Mon Jun 11, 2018 8:04 pm
Living in IL, there not being taxes on Roth conversions is the first personally beneficially tax "deal" I feel I've gotten.
Yeah, IL state taxes are tough. Take advantage of every bennie they give you!

AlwaysWannaLearn
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by AlwaysWannaLearn » Tue Jun 12, 2018 5:47 pm

terran wrote:
Mon Jun 11, 2018 8:14 pm
Not bad, as such, it's just that even 35x is considered pretty conservative, so at 70x you're pretty well bullet proof. You could have retired a lot sooner, or you could spend a lot more. If not, you should probably give some thought to what you'd like to happen with all the money that you won't spend in your lifetime.
Thank you, Terran. I know you're right. I've no regrets about not retiring earlier; I've pretty consistently had a high degree of career satisfaction. I've also never ever deprived myself of anything I wanted/needed. (You can see one story/example from my past in the thread about splurging on NBA playoff tickets.) Bottom line: Maybe I'm just wired as someone who has few wants/needs in order to be happy and fulfilled? (No 'mos toward anyone wired differently.) I don't see that changing in retirement. (As an example, I LOVE hanging out in libraries - and they're free! :D )

Back to your point, I've given some thought to what will happen with my estate - esp. since I'm single w/no kids, although I have plenty of nieces/nephews/other potential worthy individual/charitable beneficiaries - but you're right that I need to give it more thought. The good news is that once my plan is implemented and my full-time occupation in my new LCOL/no tax area will be "converting", I'll have roughly 364.5 days/yr. to allocate to other pursuits. Some portion of that time will be allocated to estate planning. ; ) Bottom line: My crystal ball is no better than anyone else's but if it turns out that I "leave too much", I'm ok with it. The security of having had it there during my pre-DOD years means it will have served its purpose.
terran wrote:
Mon Jun 11, 2018 8:14 pm
In addition to the SEPP method Heyyou linked above, also note that the amount you convert to Roth each year (but not the gains on that amount) can be withdrawn tax and penalty free five years later, so you actually only need enough in taxable to pay for 5 years of taxes and living expenses. After that you can just keep the so called "roth conversion ladder" going using the money you withdraw. You can also withdraw roth contributions (but again, not gains) at any time.
Excellent point, Terran. That's helpful and does provide additional flexibility - Thank you! Also, your comment reminded me that the one conversion I mentioned in my OP was in 2012, so I've passed both of the Roth "5-year rules" with that conversion. BTW, when I did that conversion I didn't know about either of the 5-year rules. Hey, sometimes it's better to be lucky than good, hahaha... ; )
terran wrote:
Mon Jun 11, 2018 8:14 pm
Ideally you want to equalize your tax bracket throughout your life, so you wouldn't want to convert everything in the next 6-10 years as you would then have many years of a very low tax bracket. What exactly the amount you want left in traditional is hard to pinpoint though since you don't know what tax rates will be or what the rate of return will be on your remaining traditional assets.
Thanks again, Terran. This is wisdom, and I will keep it in mind as I forge onward!

AlwaysWannaLearn
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by AlwaysWannaLearn » Tue Jun 12, 2018 5:54 pm

heyyou wrote:
Tue Jun 12, 2018 12:57 am
Edited to add: It is RMD % plus annual dividends and interest, but not cap gains.

Per the OP's request, below is the link to the brief that suggests using the RMD % as the retirement withdrawal rate on the entire portfolio. Be aware that the table showing the percentages is on page 7, in the Appendix, and that is not mentioned in the brief.

Careful readers will ask, since the authors compared all methods to an optimal one, why can't we just use it? In academia, the optimal method is often the one if you had known every future return at the start of your investing period. The brief does not say if that is what they used as the comparison tool.

http://crr.bc.edu/wp-content/uploads/20 ... 19-508.pdf

Searching for the two authors will bring up other papers by them since the 2012 publication of the one above. On some, the lead author position is reversed from the paper above. Maybe including their first names would capture all their papers in one search.
Thanks, heyyou! This is interesting. Knowing myself, I'd have a hard time "forcing" myself to pull out and spend just because I can, but this could be VERY helpful to others reading.

AlwaysWannaLearn
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by AlwaysWannaLearn » Tue Jun 12, 2018 5:59 pm

kramer wrote:
Tue Jun 12, 2018 4:21 am
SGM wrote:
Mon Jun 11, 2018 4:04 am
I would consider converting up to the 24% tax bracket. Higher state taxes in 6 years will likely more than make up for the 2% difference in marginal rates of the 22% bracket and allow for a lot more conversions each year over your 6 year time frame.

State and local income taxes can be significant. It is good you are considering the effect of moving eventually to a high income tax state.
Here is another reason to do that. By converting to the top of the 22% bracket, you are moving all of your qualified dividends from 0% to 15% taxation. This does not happen again when going from 22 to 24. So when moving into the 22% bracket, your marginal rate temporarily moves to 27% then back down to 22% once all of your qualified dividends (and cap gains) have been moved to 15%. This won't be a factor if your qualified dividends plus dividends already reach the 15% bracket (around 50K dividends for a single person) before any conversions.
Thank you, Kramer! Another excellent point I hadn't considered. Given that I'll be doing a bunch of re-allocations, it's tough to say whether my divs and CGs would already put me over the threshhold or not, but I appreciate the guidance. It's something I should keep an eye on. Thank you!

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Re: ~1 year from FIRE - Tax diversification strategy?

Post by LucyB » Wed Jun 13, 2018 9:05 am

Hello, I find this thread very helpful. I am confused about the comments by Kramer and SGM. Are you saying that since the result is that dividends and capital gains from the taxable accounts will be put into a higher tax situation, it would be better to convert to a higher level (meaning convert more for the same tax cost for that year of capital gain and dividend income), so as to reduce the number of years that happens? Also, would you suggest keeping conversions under the NITT threshold or do you think that is still worth it to the top of the 24% bracket?
The above comments are merely an expression of personal opinion and should not be considered advice in any form—tax, legal, financial or otherwise.

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Re: ~1 year from FIRE - Tax diversification strategy?

Post by kramer » Thu Jun 14, 2018 4:24 pm

LucyB wrote:
Wed Jun 13, 2018 9:05 am
Hello, I find this thread very helpful. I am confused about the comments by Kramer and SGM. Are you saying that since the result is that dividends and capital gains from the taxable accounts will be put into a higher tax situation, it would be better to convert to a higher level (meaning convert more for the same tax cost for that year of capital gain and dividend income), so as to reduce the number of years that happens? Also, would you suggest keeping conversions under the NITT threshold or do you think that is still worth it to the top of the 24% bracket?
There is a temporary 27% tax bracket as you push any qualified dividends and capital gains from the 0% to 15% bracket. Qualified dividends and capital gains are stacked on top of your ordinary income, so as you convert more Roth as ordinary income, the qualified divs and cap gains can be pushed from the 0% to 15% bracket (plus you are paying 12% for the actual conversion).

The OP is single, so he doesn't reach the higher capital gains tax threshold (200K, I think) even if he goes to the top of the 24% bracket. This is not true for couples (250K, I think), so that will be another factor to consider.

I know I didn't explain this thoroughly, maybe someone can point you to the appropriate place in the Wiki...

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FiveK
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by FiveK » Thu Jun 14, 2018 5:01 pm

kramer wrote:
Thu Jun 14, 2018 4:24 pm
I know I didn't explain this thoroughly, maybe someone can point you to the appropriate place in the Wiki...
There is the Marginal tax rate wiki that addresses the general concept of marginal rates and how they can differ from nominal bracket rates.

Tax law isn't the most straightforward thing (yes, I know everyone is shocked at that...) and can lead to some strange situations. E.g., see the chart in this post and #cruncher's explanation in the following post.

LucyB
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by LucyB » Thu Jun 14, 2018 10:02 pm

Thank you for the added explanation. I am still trying to get my arms around all of this and will eventually post my own questions. It is all a bit overwhelming. Thank you to the OP for letting me learn from the OP’s post. I really appreciate it!!
The above comments are merely an expression of personal opinion and should not be considered advice in any form—tax, legal, financial or otherwise.

AlwaysWannaLearn
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by AlwaysWannaLearn » Thu Jun 14, 2018 10:23 pm

LucyB wrote:
Wed Jun 13, 2018 9:05 am
Hello, I find this thread very helpful. I am confused about the comments by Kramer and SGM. Are you saying that since the result is that dividends and capital gains from the taxable accounts will be put into a higher tax situation, it would be better to convert to a higher level (meaning convert more for the same tax cost for that year of capital gain and dividend income), so as to reduce the number of years that happens?
Rightly or wrongly, I took the posts more as the combination of (a) SGM's comment that I'd be able to do a lot more conversions for probably a better overall tax picture given that I likely have a limited number of years before moving to a high-tax state, and (b) Kramer's comment that, in addition, I'm better off getting all the LTCG into the 15% bracket so as to avoid that "temporary" increase in the marginal rate that happens when moving from 22% to 24% due to the "stacking" of LTCG on top of ordinary income (assuming my LTCG wasn't already putting me there), and converting more (to the top of 24%) helps me do that. BTW in 2017 LTCG brackets were tied to ordinary income, but I believe for 2018 they're not.
LucyB wrote:
Wed Jun 13, 2018 9:05 am
Also, would you suggest keeping conversions under the NITT threshold or do you think that is still worth it to the top of the 24% bracket?
Since I'm single, the top of the 24% bracket ($157,500) is lower than the NIIT threshhold ($200,000 MAGI). MFJ is a different story ($315K and $250K). My plan is to do what I can to keep MAGI below the NIIT, but I'll have a lot of moving parts esp. in the first years that I'm doing this.

Edit: I found this post - and esp. the linked article - really helpful in wrapping my brain around how the LTCG tax brackets work: viewtopic.php?f=2&t=251561#p3969970

AlwaysWannaLearn
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by AlwaysWannaLearn » Thu Jun 14, 2018 10:39 pm

LucyB wrote:
Thu Jun 14, 2018 10:02 pm
Thank you to the OP for letting me learn from the OP’s post. I really appreciate it!!
My pleasure, LucyB! We're all learning... :happy

LucyB
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by LucyB » Thu Jun 14, 2018 10:45 pm

Thank you all!
The above comments are merely an expression of personal opinion and should not be considered advice in any form—tax, legal, financial or otherwise.

hawkfan55
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by hawkfan55 » Fri Jun 15, 2018 12:55 am

I would recommend the Optimal Retirement Planner, i-orp.com. Use the Extended Version for best results.
Forum Library of Investing Advice: https://www.bogleheads.org/wiki/Main_Page

AlwaysWannaLearn
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Re: ~1 year from FIRE - Tax diversification strategy?

Post by AlwaysWannaLearn » Thu Jun 21, 2018 8:24 pm

hawkfan55 wrote:
Fri Jun 15, 2018 12:55 am
I would recommend the Optimal Retirement Planner, i-orp.com. Use the Extended Version for best results.
Thanks, hawkfan55. Based on others' posts, I had tried out i-orp but found it way too simplistic to give any useful guidance for my situation. I probably dismissed it too early because I hadn't noticed the Extended Version. I'll try that. Thanks!

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