Ideal income bracket target?

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gasdoc
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Ideal income bracket target?

Post by gasdoc » Sat Sep 28, 2019 6:37 am

This is a hypothetical question. If a higher net worth person in the decumulation stage has equal money in tax deferred, taxable and Roth, and therefore could literally pick any income level as a target by pulling from the appropriate accounts, what would that target income be? Would it be the income level to qualify for ACA subsidies? $78,950 to stay in the 12% tax bracket and the 0% capital gains bracket? $165,400 to stay in the 22% tax bracket, sacrificing the subsidies and lower current taxes in order to have lower RMD's and taxes later (when rates may be higher)? If one ends up in the 22% bracket, would one want to do Roth Conversions up to the 24% tax bracket? Thanks in advance.

Gasdoc

abner kravitz
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Re: Ideal income bracket target?

Post by abner kravitz » Sat Sep 28, 2019 7:02 am

Good question. I personally go to the top of the 12% bracket. This is more than I spend, the balance goes to Roth. I am not sure this is optimal. I worry a little about taxes down the line with RMDs/SS payments, but also don't want to get into projecting future tax rates. I am interested in what other folks do.

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Re: Ideal income bracket target?

Post by Kagord » Sat Sep 28, 2019 7:12 am

I'm similar, but planning to keep equal amounts in Roth and Traditional. You have to keep in mind your traditional is earning exponential income on what would be taxed if moved, that's a lot of growth over 10-40 potential more years. I figure, by having a choice on what to withdrawal, being taxable, roth IRA, or traditional IRA, I can have some flexibility later. My plan would be to not tap the traditional until RMDs force me to. Estate planning, as much as possible becomes Inherited IRAs to my beneficiaries, and the tax deferral continues.

I'm also considering a strategy to have regular taxable accounts in tax free investments to minimize the tax rate later when the RMDs come. Also, IMHO, RMDs don't really become painful until 88-90+, at which point income earned in the IRA seems to not keep pace with mandatory distributions (balance on the account begins to drop now), and, besides, by that point, does it really matter?

Interested to hear what others say.
Last edited by Kagord on Sat Sep 28, 2019 8:12 am, edited 4 times in total.

Admiral
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Re: Ideal income bracket target?

Post by Admiral » Sat Sep 28, 2019 7:14 am

Seems difficult if not impossible to answer as it's dependent on need, right? Also you need to factor in pension and social security which might fill much of lower brackets anyway. Certainly it makes sense to convert to Roth up to the top of the bracket where you already are anyway. Personally I'm not that worried about RMDs. You deferred the tax, at some point it will need to be paid. Anyone who's complaining about tax on RMDs likely has plenty of money to begin with!

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Watty
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Re: Ideal income bracket target?

Post by Watty » Sat Sep 28, 2019 7:20 am

More factors that you did not list.

1) The rates you listed seem for be for a couple, but you also need to look at the single rates since one half of the couple will likely survive the other and then file in the single tax brackets. Likewise if you are looking at single rates is it possible that you might get married later.

2) The likely tax brackets of your heirs may be more important than yours so a lot of what to do is really an estate planning question.

3) Possible Medicare surcharges later in life.

4) If there are no tax law changes the rates will go revert to the old higher rates in 2016.

5) They may be able to take long term capital gains in the 0% long term capital gains tax bracket.

6) Currently capital gains go to your estate at a stepped up cost basis but there is no guarantee that will be the same if you die several decades from now.

7) When to start Social Security is also an important factor.


I don't think that a general answer to your question is really possible.
Last edited by Watty on Sat Sep 28, 2019 7:24 am, edited 1 time in total.

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Re: Ideal income bracket target?

Post by Watty » Sat Sep 28, 2019 7:22 am

RickBoglehead wrote:
Sat Sep 28, 2019 7:17 am
Off topic comment removed by Moderator Misenplace
If you have a high net worth is likely that keeping your income low enough to qualify for an ACA is impossible because of the interest and dividends in your taxable account.

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Re: Ideal income bracket target?

Post by rkhusky » Sat Sep 28, 2019 7:28 am

Depends on what your marginal tax rate will be before and after RMD's and SS kick in. If future tax rates don't matter, then best to pull enough from tax-deferred to cover 0% income tax rate and then from taxable to top of 0% LTCG rate.

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Re: Ideal income bracket target?

Post by AlohaJoe » Sat Sep 28, 2019 7:28 am

Surely the ideal bracket is 35% because that means you have lots and lots of money. Having less money in order to pay less tax is not "ideal", it is crazy.

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Re: Ideal income bracket target?

Post by abner kravitz » Sat Sep 28, 2019 7:32 am

AlohaJoe wrote:
Sat Sep 28, 2019 7:28 am
Surely the ideal bracket is 35% because that means you have lots and lots of money. Having less money in order to pay less tax is not "ideal", it is crazy.
Not in the decumulation phase.

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Re: Ideal income bracket target?

Post by Bacchus01 » Sat Sep 28, 2019 7:37 am

AlohaJoe wrote:
Sat Sep 28, 2019 7:28 am
Surely the ideal bracket is 35% because that means you have lots and lots of money. Having less money in order to pay less tax is not "ideal", it is crazy.
In the earning phase, sure, but that’s not what the OP is referencing.

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Re: Ideal income bracket target?

Post by happymob » Sat Sep 28, 2019 8:05 am

gasdoc wrote:
Sat Sep 28, 2019 6:37 am
This is a hypothetical question. If a higher net worth person in the decumulation stage has equal money in tax deferred, taxable and Roth, and therefore could literally pick any income level as a target by pulling from the appropriate accounts, what would that target income be? Would it be the income level to qualify for ACA subsidies? $78,950 to stay in the 12% tax bracket and the 0% capital gains bracket? $165,400 to stay in the 22% tax bracket, sacrificing the subsidies and lower current taxes in order to have lower RMD's and taxes later (when rates may be higher)? If one ends up in the 22% bracket, would one want to do Roth Conversions up to the 24% tax bracket? Thanks in advance.

Gasdoc
ACA subsidies potentially are a huge chunk of money. If that is in play, I would keep under the ACA cliff.

Otherwise, I would model (and personally do) what is going going to happen later in life. When are you collecting SS? How much? Are there any pensions? When and how much? Assume some value for portfolio growth that isn't super aggressive nor super conservative (I do 3% real for my modeling) and see what RMDs will look like at age 70.5. If married, think about what happens when one partner dies and the other is filing as a single filer.

We're still accumulating, but modeled out where we'd be at 57 (possible early retirement date), 65 (start drawing pensions), and 70/70.5 (start drawing SS and RMDs kick in) and was pretty shocked at the bad tax things that happen at age 70.5 even if we are both alive and filing jointly. I went from "Stay in the 12% bracket" to "Even 24% is probably ok" pretty fast. Tax credits, particularly the ACA premium tax credit is a huge variable in this (and it will be for us at age 57 if we actually do retire and the law doesn't change).

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Re: Ideal income bracket target?

Post by LadyGeek » Sat Sep 28, 2019 8:28 am

gasdoc - To keep this actionable, I would assume you are asking this question because it could apply to yourself, a family member, or friend.
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Re: Ideal income bracket target?

Post by gasdoc » Sat Sep 28, 2019 8:31 am

This is the OP. Thanks for the thoughtful comments so far. Assume also retirement at 62, Medicare at 65, Soc Security at 70, and no pension. I guess the answer would be different for different ages? Maybe burn through the taxable account from age 62-65, until Medicare kicks in to stay below the ACA, 12% tax, and 0% cap gains brackets? Then from age 65 to 70, what bracket would you target? Thanks.

gas doc

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Re: Ideal income bracket target?

Post by Sandtrap » Sat Sep 28, 2019 8:32 am

gasdoc wrote:
Sat Sep 28, 2019 6:37 am
This is a hypothetical question. If a higher net worth person in the decumulation stage has equal money in tax deferred, taxable and Roth, and therefore could literally pick any income level as a target by pulling from the appropriate accounts, what would that target income be? Would it be the income level to qualify for ACA subsidies? $78,950 to stay in the 12% tax bracket and the 0% capital gains bracket? $165,400 to stay in the 22% tax bracket, sacrificing the subsidies and lower current taxes in order to have lower RMD's and taxes later (when rates may be higher)? If one ends up in the 22% bracket, would one want to do Roth Conversions up to the 24% tax bracket? Thanks in advance.

Gasdoc
A thought:

Where there are somewhat unlimited assets . . .
. . . income should be whatever it takes to maintain secure and pleasant retirement years.
IE: if one is frugal by nature, then that will be the case, and vs vs.
j :happy
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Re: Ideal income bracket target?

Post by gasdoc » Sat Sep 28, 2019 8:35 am

LadyGeek wrote:
Sat Sep 28, 2019 8:28 am
gasdoc - To keep this actionable, I would assume you are asking this question because it could apply to yourself, a family member, or friend.
Thanks, Lady Geek, for giving me the chance to explain. Yes, this applies to myself. I am a few years from turning 62 and am trying to get and keep my Roth, taxable and tax deferred buckets at appropriate levels for planning purposes.

gasdoc

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Re: Ideal income bracket target?

Post by gasdoc » Sat Sep 28, 2019 8:36 am

Sandtrap wrote:
Sat Sep 28, 2019 8:32 am
gasdoc wrote:
Sat Sep 28, 2019 6:37 am
This is a hypothetical question. If a higher net worth person in the decumulation stage has equal money in tax deferred, taxable and Roth, and therefore could literally pick any income level as a target by pulling from the appropriate accounts, what would that target income be? Would it be the income level to qualify for ACA subsidies? $78,950 to stay in the 12% tax bracket and the 0% capital gains bracket? $165,400 to stay in the 22% tax bracket, sacrificing the subsidies and lower current taxes in order to have lower RMD's and taxes later (when rates may be higher)? If one ends up in the 22% bracket, would one want to do Roth Conversions up to the 24% tax bracket? Thanks in advance.

Gasdoc
A thought:

Where there are somewhat unlimited assets . . .
. . . income should be whatever it takes to maintain secure and pleasant retirement years.
IE: if one is frugal by nature, then that will be the case, and vs vs.
j :happy
Thanks, Sandtrap, you are a philosophical one! Unfortunately, assets are nowhere near unlimited! Have a great day!

gasdoc

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Re: Ideal income bracket target?

Post by LadyGeek » Sat Sep 28, 2019 9:33 am

gasdoc - Would this spreadsheet help? Retiree Portfolio Model

(If you don't have Excel, it runs fine on LibreOffice Calc.)
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Re: Ideal income bracket target?

Post by adam1712 » Sat Sep 28, 2019 9:40 am

If the tax rates are progressive with more income being taxed at a higher marginal rate, the correct answer is you want to be in the same tax bracket each year. This is true for most US income taxes but there are a few exceptions with phase outs and subsidies.

My observation is a large majority of this board is either in the 12% or 22% bracket in retirement. I'd recommend to anybody to do Roth/Roth conversions and withdrawals up to the 12% bracket. Then try to determine if you are likely to be in the 22% bracket and if there's any risk with future RMDs/pensions or future single filer if you might go out of the 22% bracket.

The main other big complications are social security taxation, ACA subsidies, and Medicare IRMAA. Which I plan to fiddle around with on a year to year basis.

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Re: Ideal income bracket target?

Post by MrDrinkingWater » Sat Sep 28, 2019 9:50 am

LadyGeek wrote:
Sat Sep 28, 2019 9:33 am
gasdoc - Would this spreadsheet help? Retiree Portfolio Model

(If you don't have Excel, it runs fine on LibreOffice Calc.)
I was thinking that using RPM might help the OP, too. Maybe the OP should shoot for having the same effective tax rate each year for, say, a 25-year to 30-yr retirement. Maybe use a variable Roth Conversion amount every year to model hitting, for example, a 17% effective federal income tax rate each year.

Thus, his ideal marginal rate income tax bracket might be to land somewhere in the 22% bracket, maybe shoot for the top of the 22% bracket. Consider selling assets from his taxable portfolio to have perhaps a fifth of his taxes be from a 15% capital gains tax rate each year.

The key is to legally pay the least amount of income tax and capital gains tax each year, and maximizing spendable dollars each year. Good luck!

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Re: Ideal income bracket target?

Post by randomguy » Sat Sep 28, 2019 10:27 am

abner kravitz wrote:
Sat Sep 28, 2019 7:32 am
AlohaJoe wrote:
Sat Sep 28, 2019 7:28 am
Surely the ideal bracket is 35% because that means you have lots and lots of money. Having less money in order to pay less tax is not "ideal", it is crazy.
Not in the decumulation phase.
I can't imagine any reasonable case where not being in the 35% bracket isn't ideal. If you aren't in the 35% bracket in the ideal case, you don't have enough money. Seriously think about how to stay out of the 3% bracket when you have say 100 million dollars split evenly between accounts:) Obviously this isn't what the OP is asking for. I am pretty sure what they are looking for is for a given level of spending (spending != income) and asset split, what is the ideal way to spend down their money to maximize spending (not minimize taxes)

That is a very, very hard question. It is easy to make a local optimization and say keep income low to get 6k of ACA subsidy now. But you have to make a ton of assumptions to figure out what the costs of taking 6k now is in future taxes. If I spend 20k of roth now to save 6k, and that ends up costing me 30k of taxes in 20 years (taxes on SS, medicare cost sharing, just having to pay income taxes) did I make the right move. Would I have been better off with say a 3k ACA subsidy and paying 3k of taxes now and only having to pay say 15k in the future? You can run the calculators to try and answer these questions but they are very dependent on your assumptions of returns, lifespans, and tax rates.

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Re: Ideal income bracket target?

Post by Misenplace » Sat Sep 28, 2019 11:43 am

Please keep the discussion on topic, which is how to best structure distributions from one's retirement and taxable accounts during the de-accumulation phase. Several contentious comments regarding the ACA subsidy had to be removed because they were derailing this thread.

Moderator Misenplace

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Re: Ideal income bracket target?

Post by EddyB » Sat Sep 28, 2019 12:09 pm

Watty wrote:
Sat Sep 28, 2019 7:22 am
RickBoglehead wrote:
Sat Sep 28, 2019 7:17 am
Off topic comment removed by Moderator Misenplace
If you have a high net worth is likely that keeping your income low enough to qualify for an ACA is impossible because of the interest and dividends in your taxable account.
Perhaps likely (clearly depends on how high is “high” and what the composition of the taxable account is, and other aspects of the income picture), but certainly not universal, and the fact that an ACA subsidiary is available and dependent on income is very relevant in figuring out the “ideal.”

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Re: Ideal income bracket target?

Post by BanquetBeer » Sat Sep 28, 2019 12:23 pm

Kagord wrote:
Sat Sep 28, 2019 7:12 am
You have to keep in mind your traditional is earning exponential income on what would be taxed if moved, that's a lot of growth over 10-40 potential more years.
I thought that there is no effective difference in value between a pre-tax and converted (Roth) account - provided you are in the same tax bracket for both.

Tax differs gains are greater dollar value but you will have to pay taxes on that vs the Roth gains will always be tax free. Is this right?

I know it gets more complex if you change tax brackets

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Re: Ideal income bracket target?

Post by randomguy » Sat Sep 28, 2019 12:41 pm

BanquetBeer wrote:
Sat Sep 28, 2019 12:23 pm
Kagord wrote:
Sat Sep 28, 2019 7:12 am
You have to keep in mind your traditional is earning exponential income on what would be taxed if moved, that's a lot of growth over 10-40 potential more years.
I thought that there is no effective difference in value between a pre-tax and converted (Roth) account - provided you are in the same tax bracket for both.

Tax differs gains are greater dollar value but you will have to pay taxes on that vs the Roth gains will always be tax free. Is this right?

I know it gets more complex if you change tax brackets
Tax brackets don't matter. What you actually pay does. Sometimes the tax bracket is the same as your marginal rate but a lot of times it differs. But yes at a high level paying 25% now is the same as paying 25% later. Now figuring out what your later figure will be requires a lot of guess work. You can be in that 12% bracket and have that next dollar be taxed at like 28%+ (see Social security taxes or pushing 1 dollar of LTGC from 0 to 15%).

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Re: Ideal income bracket target?

Post by curmudgeon » Sun Sep 29, 2019 12:00 am

gasdoc wrote:
Sat Sep 28, 2019 6:37 am
This is a hypothetical question. If a higher net worth person in the decumulation stage has equal money in tax deferred, taxable and Roth, and therefore could literally pick any income level as a target by pulling from the appropriate accounts, what would that target income be? Would it be the income level to qualify for ACA subsidies? $78,950 to stay in the 12% tax bracket and the 0% capital gains bracket? $165,400 to stay in the 22% tax bracket, sacrificing the subsidies and lower current taxes in order to have lower RMD's and taxes later (when rates may be higher)? If one ends up in the 22% bracket, would one want to do Roth Conversions up to the 24% tax bracket? Thanks in advance.
I'm not sure that there is a truly "knowable" best answer to this situation. Some cases (substantial pensions, or really large tax-deferred), may have limited flexibility. In other situations, the desired spending level may force certain choices. The composition of taxable accounts (dividend/interest income, proportion of cap gains) may also impact choices. My general target would be relatively level taxable income across the decumulation stage, but I modify that when specific circumstances come into play. I retired in late 50's, with substantial taxable and tax-deferred balances, but pretty small Roth. With our spending levels and resources, I'm choosing to stay under the ACA cliff until age 65, then will push Roth conversions of the tax-deferred with the goal of converting around half before RMDs start. This may trigger IRMAA and such, but I'll live with that.

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Re: Ideal income bracket target?

Post by SGM » Sun Sep 29, 2019 12:29 am

A major move we made to lower our income taxes in retirement was to do serial Roth conversions over a 5 or 6 year period before taking delayed SS. We now only have a taxable and Roth account. We also delayed our own SS benefits until 70 although we took advantage of file and suspend and a spousal benefit at full retirement age. Both moves meant spending from our taxable account for taxes and other expenses. Our income keeps going up in retirement. Our IRMMA is high, but would be higher yet with RMDs. My Roth account is the same value as our traditional accounts would have been. All taxes on conversions were paid out of a taxable account. We also considered the effect one of us outliving the other on future taxes for the survivor. We never would have qualified for low cost insurance due to the ACA.

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Re: Ideal income bracket target?

Post by TomatoTomahto » Sun Sep 29, 2019 8:12 am

BanquetBeer wrote:
Sat Sep 28, 2019 12:23 pm
I thought that there is no effective difference in value between a pre-tax and converted (Roth) account - provided you are in the same tax bracket for both.
Mostly yes, unless you reside in a state with low estate exclusion (eg, MA’s $1M) or your estate exceeds the Federal exclusion (generous today, don’t count tomorrow).
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Ideal income bracket target?

Post by gasdoc » Sun Sep 29, 2019 8:14 am

LadyGeek wrote:
Sat Sep 28, 2019 9:33 am
gasdoc - Would this spreadsheet help? Retiree Portfolio Model

(If you don't have Excel, it runs fine on LibreOffice Calc.)
Thanks, LadyGeek!

gasdoc

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Re: Ideal income bracket target?

Post by gasdoc » Sun Sep 29, 2019 8:25 am

This is the OP. Thanks for all the great responses. They are all very helpful. Does it make a difference if there is an age difference of four years between spouses? For example, when I reach Medicare age of 65, DW will be just 61. When I reach delayed Soc Sec age of 70, DW will be 66. Ect. Thanks.

gasdoc

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Re: Ideal income bracket target?

Post by mjb » Sun Sep 29, 2019 10:05 am

I am dealing with this for my parents.

Mu suggestion is to Max out the bracket you are in. For most here they will be in the 12% bracket once they retire but before SS and RMDs. With my parents, we are Roth converting each year from the older parent up to the max of the bracket and will continue this until they get pushed into the next bracket and then will stop. There isn't much value converting once you get to the 22% bracket as it and the 24%% bracket are very close.

Our plan is to draw down the traditional. They will need managed care in a few years and their retirement income is split between taxable accounts, SS, some partial pensions, and tax deferred and Roth accounts. Both are likely to live into their late 80s or early 90s but will likely need care. Drawing down the traditional once they hit the 22% bracket has the advantage that once it runs out, they may drop back into the 12% bracket with it's advantageous treatment of dividends. Combine this with Roth withdrawals and it should be the best long term tax result.

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Re: Ideal income bracket target?

Post by curmudgeon » Sun Sep 29, 2019 10:21 am

gasdoc wrote:
Sun Sep 29, 2019 8:25 am
This is the OP. Thanks for all the great responses. They are all very helpful. Does it make a difference if there is an age difference of four years between spouses? For example, when I reach Medicare age of 65, DW will be just 61. When I reach delayed Soc Sec age of 70, DW will be 66. Ect.
It can make a significant difference in the choice to stay under the ACA subsidy cliff with that age spread. When only one person of a couple is using ACA, the subsidy is quite a bit less when the MAGI is close to the cliff. In that scenario, I'd at least consider giving up the ACA subsidy for some of those years to do more Roth conversion.

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Re: Ideal income bracket target?

Post by Cyclesafe » Sun Sep 29, 2019 10:44 am

Wish I saw this thread earlier. All I seem to think about lately is this issue: how to maximize the present value of lifetime spendable funds while in decumulation.

Pinch a balloon and it expands somewhere else. Tweak your spreadsheet and there are far-reaching unanticipated effects down the line. My modeling looks like TV hurricane path predictions. Then reality intervenes and find that I am wrong, wrong, wrong.

Early on, it is sorely tempting to manage income for zero federal tax on QDI/LTCG's, for ACA subsidies, to avoid IRMAA tiers, to avoid social security taxation, etc. etc. These savings accrue now, they are tangible. They do not depend on speculations of market performance, inflation, tax policy, IRA rules, marital status, and cash flow needs. If things go South for a very long time, one would be very happy with a decision to manage income at "optimum" low levels

OTOH, if one is optimistic, has substantial tax deferred assets, and, again, is trying to maximize spendable funds (not considering legacy/charity interests), tax liability is greatly aggravated by this strategy. Passing up on the 22%, 24%, 27.8% (3.8% NIIT) federal (MFJ) bracket in the early years will be sorely regretted when after 2026 income now charged 27.8% is once again scheduled to be charged 36.8%. Or worse could happen.

One doesn't have to be too optimistic for this to be an issue. Only a 4% and 2% nominal expectation for equity and fixed growth, respectively, has me Roth converting to the top of the 27.8% bracket. RMD's in 5.5 years nevertheless push me well into the new (old) 36.8% bracket.

TL;DR. Even an earnest attempt at modeling exposes more questions than answers. Truly a crap shoot.
"Plans are useless; planning is indispensable.” - Dwight Eisenhower

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Re: Ideal income bracket target?

Post by Cyclesafe » Sun Sep 29, 2019 10:53 am

mjb wrote:
Sun Sep 29, 2019 10:05 am
I am dealing with this for my parents.

Mu suggestion is to Max out the bracket you are in. For most here they will be in the 12% bracket once they retire but before SS and RMDs. With my parents, we are Roth converting each year from the older parent up to the max of the bracket and will continue this until they get pushed into the next bracket and then will stop. There isn't much value converting once you get to the 22% bracket as it and the 24%% bracket are very close.

Our plan is to draw down the traditional. They will need managed care in a few years and their retirement income is split between taxable accounts, SS, some partial pensions, and tax deferred and Roth accounts. Both are likely to live into their late 80s or early 90s but will likely need care. Drawing down the traditional once they hit the 22% bracket has the advantage that once it runs out, they may drop back into the 12% bracket with it's advantageous treatment of dividends. Combine this with Roth withdrawals and it should be the best long term tax result.
Don't forget to reserve sufficient traditional to apply to deductible ADL expenses. https://www.kiplinger.com/article/retir ... eturn.html
"Plans are useless; planning is indispensable.” - Dwight Eisenhower

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Re: Ideal income bracket target?

Post by gasdoc » Sun Sep 29, 2019 11:14 am

This is the OP. If one is Roth converting up to the 22% bracket, doesn't it make sense to continue to Roth convert all the way to the 24% bracket since it is not much of an increased marginal rate? Thanks.

gasdoc

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Re: Ideal income bracket target?

Post by MrDrinkingWater » Sun Sep 29, 2019 1:48 pm

gasdoc wrote:
Sun Sep 29, 2019 11:14 am
This is the OP. If one is Roth converting up to the 22% bracket, doesn't it make sense to continue to Roth convert all the way to the 24% bracket since it is not much of an increased marginal rate? Thanks.

gasdoc
To answer your question, it would likely help to determine what approach lets you end up with the most spendable money, rather than which approach results in the lowest amount of tax paid. Maybe use a tool like Retiree Portfolio Model. Maybe using i-orp could give you some insight as well. My earlier comment touched on this point.

Are you in a state with a state income tax? You might check to see where the marginal state income tax rates jump for you from a lower rate to a higher rate. What is the percentage chance that you might move from a state with an income tax to a state that does not have an income tax? If you already live in a state without an income tax, are you going to move in later retirement to a state that has an income tax? In that situation, it might be far better to do Roth conversions to the top of the 24% bracket sooner.

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Re: Ideal income bracket target?

Post by gasdoc » Sun Sep 29, 2019 6:17 pm

MrDrinkingWater wrote:
Sun Sep 29, 2019 1:48 pm
gasdoc wrote:
Sun Sep 29, 2019 11:14 am
This is the OP. If one is Roth converting up to the 22% bracket, doesn't it make sense to continue to Roth convert all the way to the 24% bracket since it is not much of an increased marginal rate? Thanks.

gasdoc
To answer your question, it would likely help to determine what approach lets you end up with the most spendable money, rather than which approach results in the lowest amount of tax paid. Maybe use a tool like Retiree Portfolio Model. Maybe using i-orp could give you some insight as well. My earlier comment touched on this point.

Are you in a state with a state income tax? You might check to see where the marginal state income tax rates jump for you from a lower rate to a higher rate. What is the percentage chance that you might move from a state with an income tax to a state that does not have an income tax? If you already live in a state without an income tax, are you going to move in later retirement to a state that has an income tax? In that situation, it might be far better to do Roth conversions to the top of the 24% bracket sooner.
I am currently in a state with state income taxes, but I don't know where I will be during the period in question. We are currently visiting 55+ communities.

gasdoc

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Re: Ideal income bracket target?

Post by adam1712 » Sun Sep 29, 2019 11:36 pm

gasdoc wrote:
Sun Sep 29, 2019 11:14 am
This is the OP. If one is Roth converting up to the 22% bracket, doesn't it make sense to continue to Roth convert all the way to the 24% bracket since it is not much of an increased marginal rate? Thanks.

gasdoc
If you're confident you'll be in the 22% bracket for life, then sure it won't cost much to do some at 24%. The only real mistake would be to convert a bunch at 24% and then find out later in life you have a lot of 12% bracket that doesn't get filled. It also would take a ton of pre-tax accounts with RMDs to go past the 24% bracket (current top income amount is $321,450 for MFJ) in retirement. I'd say it's likely if you're squarely in the 22 or 24% bracket it could make sense to do some Roth conversions but there's likely no rush or reason to really overdo it and regret it later.

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Re: Ideal income bracket target?

Post by randomguy » Sun Sep 29, 2019 11:58 pm

adam1712 wrote:
Sun Sep 29, 2019 11:36 pm
gasdoc wrote:
Sun Sep 29, 2019 11:14 am
This is the OP. If one is Roth converting up to the 22% bracket, doesn't it make sense to continue to Roth convert all the way to the 24% bracket since it is not much of an increased marginal rate? Thanks.

gasdoc
If you're confident you'll be in the 22% bracket for life, then sure it won't cost much to do some at 24%. The only real mistake would be to convert a bunch at 24% and then find out later in life you have a lot of 12% bracket that doesn't get filled. It also would take a ton of pre-tax accounts with RMDs to go past the 24% bracket (current top income amount is $321,450 for MFJ) in retirement. I'd say it's likely if you're squarely in the 22 or 24% bracket it could make sense to do some Roth conversions but there's likely no rush or reason to really overdo it and regret it later.
If you convert up to 24%, you end up with the money in a ROTH. If you wait for RMDs to take it out at 22%, the money ends up in taxable. If you are leaving your money to heirs, tax drag over 30+ years will definitely cost you more than 2%.

If you end up in the 12% range, it could be interesting. Depending on your situation you could end up saving a lot SS taxation (i.e. your in the 12% bracket but your marginal rate is like 25%) and probably IRMAA which will get you back a bunch of your money.

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Re: Ideal income bracket target?

Post by adam1712 » Mon Sep 30, 2019 12:58 am

randomguy wrote:
Sun Sep 29, 2019 11:58 pm

If you convert up to 24%, you end up with the money in a ROTH. If you wait for RMDs to take it out at 22%, the money ends up in taxable. If you are leaving your money to heirs, tax drag over 30+ years will definitely cost you more than 2%.

If you end up in the 12% range, it could be interesting. Depending on your situation you could end up saving a lot SS taxation (i.e. your in the 12% bracket but your marginal rate is like 25%) and probably IRMAA which will get you back a bunch of your money.
Really good first point. You don't want RMDs you aren't going to spend.

For your second point, I haven't run or seen somebody do the numbers but I'd be surprised if you could make it work to save on taxes Roth conversions at 22/24% and end up in 12% + SS tax + IRMAA. But likely makes things closer to a wash. The real place to make this work is making sure you do all the 12% conversions possible in the years before SS and IRMAA.

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Re: Ideal income bracket target?

Post by FiveK » Mon Sep 30, 2019 1:48 am

gasdoc wrote:
Sun Sep 29, 2019 11:14 am
This is the OP. If one is Roth converting up to the 22% bracket, doesn't it make sense to continue to Roth convert all the way to the 24% bracket since it is not much of an increased marginal rate? Thanks.
Note that "bracket" is not necessarily the same as marginal tax rate. You might find it instructive to look at your expected marginal rates for traditional withdrawals at different ages.

You can use the personal finance toolbox Excel spreadsheet to see graphs of those marginal rates as you move through the various stages of ACA, IRMAA, SS, etc. (or do a bunch of trials with tax software and hand calculations and hand plotting).

To answer an earlier question, if you really will pay a 22% marginal rate on RMDs, converting some years earlier at 24% might (or might not) be mathematically advantageous if you can use taxable funds to pay the tax on a conversion.

Due to ACA, IRMAA, SS, QD/LTCG, etc., it is very likely that your actual marginal rates will often differ from the nominal brackets.

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Re: Ideal income bracket target?

Post by Cyclesafe » Mon Sep 30, 2019 7:07 am

The "top of the 24% bracket is actually 27.8%, just saying.

Since the $250k (MFJ) "exclusion" from the 3.8% NIIT is purposely not adjusted for inflation, this, like the AMT of yore, will affect more and more people as the years go by. Still another reason to convert now when taxes are comparatively low.
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Re: Ideal income bracket target?

Post by MikeG62 » Mon Sep 30, 2019 8:09 am

OP,

I think the best outcome is the one where your effective tax rate would be roughly similar over your retirement horizon (assuming current tax rates going forward). I think you'd likely be worse off minimizing your income now to qualify for the ACA subsidy if that means your tax rate will be a lot higher later.

This also depends on how much money you have in all three places (taxable, tax deferred and tax free) and the relative amount in each.
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Re: Ideal income bracket target?

Post by randomguy » Mon Sep 30, 2019 8:51 am

Cyclesafe wrote:
Mon Sep 30, 2019 7:07 am
The "top of the 24% bracket is actually 27.8%, just saying.

Since the $250k (MFJ) "exclusion" from the 3.8% NIIT is purposely not adjusted for inflation, this, like the AMT of yore, will affect more and more people as the years go by. Still another reason to convert now when taxes are comparatively low.
NIIT doesn't apply to roth rollovers so if the rate is 24% or 27.8% will depend on if you have investment income that is subject to it or not.

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Re: Ideal income bracket target?

Post by randomguy » Mon Sep 30, 2019 9:35 am

adam1712 wrote:
Mon Sep 30, 2019 12:58 am

Really good first point. You don't want RMDs you aren't going to spend.

For your second point, I haven't run or seen somebody do the numbers but I'd be surprised if you could make it work to save on taxes Roth conversions at 22/24% and end up in 12% + SS tax + IRMAA. But likely makes things closer to a wash. The real place to make this work is making sure you do all the 12% conversions possible in the years before SS and IRMAA.
Given that the marginal tax rates on SS can be over 20%, is pretty close. For example lets compare a couple with
70k of SS and either 20k of distributions or 60k of distributions.

a) 20k -> 878 in taxes
b) 60k-> 10090 in taxes

so you are basically paying 23% on that extra 40k. That is pretty darn close to break even. Obviously this is all very situation specific with the interaction of SS and other income.

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Re: Ideal income bracket target?

Post by Cyclesafe » Mon Sep 30, 2019 10:09 am

randomguy wrote:
Mon Sep 30, 2019 8:51 am
Cyclesafe wrote:
Mon Sep 30, 2019 7:07 am
The "top of the 24% bracket is actually 27.8%, just saying.

Since the $250k (MFJ) "exclusion" from the 3.8% NIIT is purposely not adjusted for inflation, this, like the AMT of yore, will affect more and more people as the years go by. Still another reason to convert now when taxes are comparatively low.
NIIT doesn't apply to roth rollovers so if the rate is 24% or 27.8% will depend on if you have investment income that is subject to it or not.
There are two branches for the NIIT calculation illustrated by Form 8960. You are correct for the first branch. Modified adjust gross income, which includes rollovers, is not a component of line 8.

However, unfortunately, MAGI is indeed a component of the second branch - the one with the $250k exclusion. It appears at Form 8960 line 13. My comments above relate to this.

So you're right, it's more complicated than I thought. Another example of how it is potentially misleading to broadly generalize one's unique situation.
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Re: Ideal income bracket target?

Post by randomguy » Mon Sep 30, 2019 11:45 am

Cyclesafe wrote:
Mon Sep 30, 2019 10:09 am
randomguy wrote:
Mon Sep 30, 2019 8:51 am
Cyclesafe wrote:
Mon Sep 30, 2019 7:07 am
The "top of the 24% bracket is actually 27.8%, just saying.

Since the $250k (MFJ) "exclusion" from the 3.8% NIIT is purposely not adjusted for inflation, this, like the AMT of yore, will affect more and more people as the years go by. Still another reason to convert now when taxes are comparatively low.
NIIT doesn't apply to roth rollovers so if the rate is 24% or 27.8% will depend on if you have investment income that is subject to it or not.
There are two branches for the NIIT calculation illustrated by Form 8960. You are correct for the first branch. Modified adjust gross income, which includes rollovers, is not a component of line 8.

However, unfortunately, MAGI is indeed a component of the second branch - the one with the $250k exclusion. It appears at Form 8960 line 13. My comments above relate to this.

So you're right, it's more complicated than I thought. Another example of how it is potentially misleading to broadly generalize one's unique situation.
Of course that is how LTGC taxes are calculated as they stack on top of other income. So you end up paying 18.8% LTGC instead of 15%. And obviously you can move around that 3.8% to where ever you want.

We have a half dozen nonInflation adjusted items in the tax code. In 30 years, things like NIIT, social security and the home exclusion (500k seems like a lot to some people. Do the math on what happens if you house appreciates 3% for 30 years) will move to hitting a lot more people. That might be an incentive to convert a lot more stuff now versus later.

You do have to think about who you are. If you expect to be making 80k for the rest of your life, going up to the 24% bracket doesn't make a ton of sense. If you expect to be doing about 200k, you are likely paying 22-24% no matter what and the question is do you pay it now or latter and you can save a few percent based on the choice you make if things work out.

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gasdoc
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Re: Ideal income bracket target?

Post by gasdoc » Mon Sep 30, 2019 3:10 pm

From the OP: Phew! I never thought this was so complex. Thanks, everyone, for the responses. Lots to think about.

gasdoc

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Re: Ideal income bracket target?

Post by MathWizard » Mon Sep 30, 2019 3:59 pm

gasdoc wrote:
Sat Sep 28, 2019 6:37 am
This is a hypothetical question. If a higher net worth person in the decumulation stage has equal money in tax deferred, taxable and Roth, and therefore could literally pick any income level as a target by pulling from the appropriate accounts, what would that target income be? Would it be the income level to qualify for ACA subsidies? $78,950 to stay in the 12% tax bracket and the 0% capital gains bracket? $165,400 to stay in the 22% tax bracket, sacrificing the subsidies and lower current taxes in order to have lower RMD's and taxes later (when rates may be higher)? If one ends up in the 22% bracket, would one want to do Roth Conversions up to the 24% tax bracket? Thanks in advance.

Gasdoc
I suggest running some scenarios through i-orp.com to see if there is a pattern.

I think that it may in fact be even more complicated, because you may not want a constant withdrawal rate, you may want to
bunch income so that in some years 85% of SS benefits are taxable, while the next perhaps only 50% (or less) are.

Bunching may also help with itemizing charitable deductions, or you may want to use QCDs to lessen RMDs (and not count toward income
while not having to itemize).

Are you married, so that when you or your spouse dies, the survivor is now filing single, and hence has higher taxes.
What state are you in, and how does it tax distributions and SS benefits?

Do you want to leave money to heirs?

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Re: Ideal income bracket target?

Post by gasdoc » Mon Sep 30, 2019 4:48 pm

MathWizard wrote:
Mon Sep 30, 2019 3:59 pm
gasdoc wrote:
Sat Sep 28, 2019 6:37 am
This is a hypothetical question. If a higher net worth person in the decumulation stage has equal money in tax deferred, taxable and Roth, and therefore could literally pick any income level as a target by pulling from the appropriate accounts, what would that target income be? Would it be the income level to qualify for ACA subsidies? $78,950 to stay in the 12% tax bracket and the 0% capital gains bracket? $165,400 to stay in the 22% tax bracket, sacrificing the subsidies and lower current taxes in order to have lower RMD's and taxes later (when rates may be higher)? If one ends up in the 22% bracket, would one want to do Roth Conversions up to the 24% tax bracket? Thanks in advance.

Gasdoc
I suggest running some scenarios through i-orp.com to see if there is a pattern.

I think that it may in fact be even more complicated, because you may not want a constant withdrawal rate, you may want to
bunch income so that in some years 85% of SS benefits are taxable, while the next perhaps only 50% (or less) are.

Bunching may also help with itemizing charitable deductions, or you may want to use QCDs to lessen RMDs (and not count toward income
while not having to itemize).

Are you married, so that when you or your spouse dies, the survivor is now filing single, and hence has higher taxes.
What state are you in, and how does it tax distributions and SS benefits?

Do you want to leave money to heirs?
1. Married
2. Unsure what state this period of my life will be in.
3. Leaving money to heirs in inconsequential at this point.

gasdoc

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Re: Ideal income bracket target?

Post by randomguy » Mon Sep 30, 2019 5:49 pm

gasdoc wrote:
Mon Sep 30, 2019 3:10 pm
From the OP: Phew! I never thought this was so complex. Thanks, everyone, for the responses. Lots to think about.

gasdoc
If you make a more specific post (say you have 500k in ROTH, 500k taxable with 200k cost basis, 1 million in tax deferred, 40k/year SS at age 70, currently 60/55, want 80k/year want 80k/year spending after taxes), we can walk through the different cases but yeah it is an incredibly difficult problem.

To make it some what tractable, you have to think about a couple of things
a) Are ACA subsidies something you need to worry about. Maybe there is no way you can keep your income low enough to qualify. Or maybe you have some nice health care deal from an employer.

b) What is your likely income when SS kicks in. Again you might learn that avoiding having most of your Social security check being taxed is also pretty much unavoidable.

c) what level of spending are we talking about. A lot of people are right on that 12%/22% line (call it about 100k of income after deductions/SS taxation) where you can get a somewhat noticeable change depending on how you play it. Other people are firmly in the 22% bracket pretty much no matter what they do (think someone with 60k of SS and a 60k pension)

d) how do you feel about writing big checks. It is easy to say that filling up the 24% bracket is the right move. Writing a 24k check to the government earlier than you need to though might be mentally very hard.

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