Anyone spending less in retirement to delay taxes?

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michaeljc70
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Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

I retired early. I find myself spending less because I want to avoid/delay paying taxes. 90% of my investments are in retirement/HSA accounts. 35% of my NW is in my house. I am not living like a miser by any means, but feel I keep postponing paying taxes (less IRA withdrawals/selling taxable) and spending less than I could. I always contributed to deductible retirement/HSA accounts when I could (medium tax bracket). I figured a bird in the hand. How can I know what tax bracket I will be in in 20, 30 or 40 years? I do have 10% of investments in an HSA and 10% in a Roth.

I do get an ACA subsidy, so any dollar of income (taxable or tax-exempt long term capital gains) results in around a 10% tax there. Then there is federal and state taxes (5% in my state, not applicable to IRA withdrawals, but capital gains are taxable even if not federally). I am married and my spouse still works (not making a lot, but around $50k) so that doesn't leave me much room for the ACA subsidy.

Anyone else find themselves doing the same? I guess I am thinking that between age 65-69 I will do Roth conversions when the ACA subsidy isn't applicable. Maybe with possible inheritances of IRAs I am just being cheap now and should pay up and spread it out more?
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David Jay
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Re: Anyone spending less in retirement to delay taxes?

Post by David Jay »

We are being very careful about taxable withdrawals while we are in the ACA period (age 63).

We will be tackling Roth conversions after age 65, but then we have to watch IRMAA limits.
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tibbitts
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Re: Anyone spending less in retirement to delay taxes?

Post by tibbitts »

I'm spending less on travel and other anticipated expenses in retirement because of the pandemic. But I'm spending much more on taxes this year, and probably next (realistically, another pandemic year), because I'm doing far more aggressive Roth conversions than I'd planned on. I don't even think about taxes in terms of deciding whether to spend money on a purchase or not - well except maybe sales taxes.
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michaeljc70
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Re: Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

tibbitts wrote: Fri Nov 20, 2020 7:40 pm I'm spending less on travel and other anticipated expenses in retirement because of the pandemic. But I'm spending much more on taxes this year, and probably next (realistically, another pandemic year), because I'm doing far more aggressive Roth conversions than I'd planned on. I don't even think about taxes in terms of deciding whether to spend money on a purchase or not - well except maybe sales taxes.
I don't think of taxes on every purchase. To be clear, I am spending at similar levels to when I was working. However, I can probably spend more. I am spending currently at around a 2% SWR, ignoring SS which is far away. And I am not conservative by any means. I just don't want to lose too much to taxes. However, I am wondering if that is inevitable and I am just delaying it.
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Re: Anyone spending less in retirement to delay taxes?

Post by tibbitts »

michaeljc70 wrote: Fri Nov 20, 2020 7:44 pm
tibbitts wrote: Fri Nov 20, 2020 7:40 pm I'm spending less on travel and other anticipated expenses in retirement because of the pandemic. But I'm spending much more on taxes this year, and probably next (realistically, another pandemic year), because I'm doing far more aggressive Roth conversions than I'd planned on. I don't even think about taxes in terms of deciding whether to spend money on a purchase or not - well except maybe sales taxes.
I don't think of taxes on every purchase. To be clear, I am spending at similar levels to when I was working. However, I can probably spend more. I am spending currently at around a 2% SWR, ignoring SS which is far away. And I am not conservative by any means. I just don't want to lose too much to taxes. However, I am wondering if that is inevitable and I am just delaying it.
Well, partly it depends if you have already paid taxes, or if you have large deferred balances. At some accumulation level, your deferred balances will grow faster (at historically typical return levels) than you can convert them at less than a 30-something percent marginal rate. Of course if you allow the balances to grow, when RMDs hit you won't have the luxury of 2% withdrawal rates. Well, you'll pay taxes on more than 2% of your deferred accumulations; whether you spend that money of course is up to you.
Last edited by tibbitts on Fri Nov 20, 2020 7:57 pm, edited 1 time in total.
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Re: Anyone spending less in retirement to delay taxes?

Post by Golf maniac »

Taxes are something I wished I had spent more time thinking about before I retired. It is a bit of a minefield with Medicare Part B and the tax brackets if doing Roth conversions. I wish I had put more in Roth to give me more flexibility in spending. But I have what I have now and have to make the best of it. Like OP we are doing fine but need to be careful on when we spend and the tax implications. One solution is to leverage your home equity position. With the extremely low interest rates it is a good time to look at that, but even that has tax implications.
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Re: Anyone spending less in retirement to delay taxes?

Post by tibbitts »

Golf maniac wrote: Fri Nov 20, 2020 7:57 pm Taxes are something I wished I had spent more time thinking about before I retired. It is a bit of a minefield with Medicare Part B and the tax brackets if doing Roth conversions. I wish I had put more in Roth to give me more flexibility in spending. But I have what I have now and have to make the best of it. Like OP we are doing fine but need to be careful on when we spend and the tax implications. One solution is to leverage your home equity position. With the extremely low interest rates it is a good time to look at that, but even that has tax implications.
No kidding, I don't honestly know how the deferred account accumulations somehow flew under my planning radar. I just kept adding to them far longer than I should have. I had become accustomed to deferring taxes whenever possible, without fully analyzing the repercussion for later on.
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Re: Anyone spending less in retirement to delay taxes?

Post by dknightd »

I figure taxes are inevitable. Money we were going to spend on travel is now going toward paying off the mortgage. I'm converting to Roth up to the top of our current tax bracket. I'd almost rather pay taxes now while we can afford it.
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Re: Anyone spending less in retirement to delay taxes?

Post by Olemiss540 »

Taxes are an issue thanks to an incredible bull market. Maybe a nice bear will make you feel better about your outstanding tax burden.

Come on and live life. Who gives a crap what your marginal rate is when you are talking about 2% WD rates. Your heirs may appreciate the thought when you are gone but having regret (in hindsight) seems absurd due to an amazing amount of good luck on your investment returns.

Here is to hoping the next 30 years are exactly like the last and I can complain of my tax burden as well.
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Re: Anyone spending less in retirement to delay taxes?

Post by goaties »

I learned something when managing my parents' money during their sick-and-dying years: at some point your medical expense deduction becomes so huge, you can spend large sums from your traditional IRA tax-free. One hopes, of course, never to get that sick, but it does seem to be what happens to many people. So now I spend a few hundred in taxes each year converting a small amount from Trad to Roth and call it a day.

As for day-to-day spending, no, I am not spending less. But unlike the OP, I have sufficient non-IRA savings to do so. Perhaps that's an argument for not placing all your savings inside tax-advantaged vehicles during your earning years.
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Re: Anyone spending less in retirement to delay taxes?

Post by Olemiss540 »

tibbitts wrote: Fri Nov 20, 2020 8:02 pm
Golf maniac wrote: Fri Nov 20, 2020 7:57 pm Taxes are something I wished I had spent more time thinking about before I retired. It is a bit of a minefield with Medicare Part B and the tax brackets if doing Roth conversions. I wish I had put more in Roth to give me more flexibility in spending. But I have what I have now and have to make the best of it. Like OP we are doing fine but need to be careful on when we spend and the tax implications. One solution is to leverage your home equity position. With the extremely low interest rates it is a good time to look at that, but even that has tax implications.
No kidding, I don't honestly know how the deferred account accumulations somehow flew under my planning radar. I just kept adding to them far longer than I should have. I had become accustomed to deferring taxes whenever possible, without fully analyzing the repercussion for later on.
What was your marginal rate while deferring versus now?
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Globalviewer58
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Re: Anyone spending less in retirement to delay taxes?

Post by Globalviewer58 »

Have you tried scenarios in I-orp.com, Optimal Retirement Planner, to see what tax levels you can expect based on 1) no Roth conversions 2) convert 25% of accounts to Roth 3) convert 50% of accounts to Roth, etc.

These scenarios on the Advanced version of I-orp can be instructive to forecast future taxes. The tool is free to use.
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Re: Anyone spending less in retirement to delay taxes?

Post by tj »

goaties wrote: Fri Nov 20, 2020 8:23 pm I learned something when managing my parents' money during their sick-and-dying years: at some point your medical expense deduction becomes so huge, you can spend large sums from your traditional IRA tax-free. One hopes, of course, never to get that sick, but it does seem to be what happens to many people. So now I spend a few hundred in taxes each year converting a small amount from Trad to Roth and call it a day.

As for day-to-day spending, no, I am not spending less. But unlike the OP, I have sufficient non-IRA savings to do so. Perhaps that's an argument for not placing all your savings inside tax-advantaged vehicles during your earning years.
Traditional withdrawals are tax free for medical expenses?
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Re: Anyone spending less in retirement to delay taxes?

Post by Watty »

michaeljc70 wrote: Fri Nov 20, 2020 7:25 pm I do get an ACA subsidy, so any dollar of income (taxable or tax-exempt long term capital gains) results in around a 10% tax there........

Anyone else find themselves doing the same?
I carefully manage my income to make sure that I get the ACA subsidy.

One thing I did was to set up a HELOC on my paid off house so I can draw on that to keep my income low. That obviously has to be paid back and and interest is charged but getting that extra 9.8% ACA subsidy for every dollar that I am below the subsidy cliff can make that worthwhile.

I have to juggle and plan ahead but I only had about four years between COBRA and Medicare so for me that is doable. For example in January I will make most of my IRA withdrawals for 2021 to pay down the HELOC then I will draw on the HELOC when I need more spending money. After I get on Medicare I will pay it off with IRA withdrawals.

If you don't already have a HELOC set up you might consider doing that while your wife is still working so it will be easier to qualify for. Even if you don't plan on using it the HELOC could still come in handy if you have some unexpected large expense.
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Re: Anyone spending less in retirement to delay taxes?

Post by goaties »

tj wrote: Fri Nov 20, 2020 8:36 pm
goaties wrote: Fri Nov 20, 2020 8:23 pm I learned something when managing my parents' money during their sick-and-dying years: at some point your medical expense deduction becomes so huge, you can spend large sums from your traditional IRA tax-free. One hopes, of course, never to get that sick, but it does seem to be what happens to many people. So now I spend a few hundred in taxes each year converting a small amount from Trad to Roth and call it a day.

As for day-to-day spending, no, I am not spending less. But unlike the OP, I have sufficient non-IRA savings to do so. Perhaps that's an argument for not placing all your savings inside tax-advantaged vehicles during your earning years.
Traditional withdrawals are tax free for medical expenses?
No, not directly of course. I meant that when your medical expenses are tens of thousands of dollars, your income (such as IRA withdrawals) is offset.
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Re: Anyone spending less in retirement to delay taxes?

Post by Gnirk »

No. We retired 13 years ago at 68/63 and the majority of our income comes from taxable investments and Social Security rather than tax-advantaged accounts. Our spending isn't less than before we retired, it is just different. We spend more on health care, more on travel, more on dining out. Less on commuting, less on clothing. Everything else is about the same.
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Re: Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

To respond to a few things:

-I am only 50. My tax bracket when working was middle-upper. I made 6 figures 25 years ago. Unfortunately in my field, I made similar 23 years later (not adjusting for inflation...so much less).

-I have a margin account that I can borrow against at 1.6%. However, borrowing while retired has been a fools gambit IMO. You have no real income per se to pay it back. So, borrowing just delays taking money out of that will be taxable. My dividends/interest are not substantial.

-I have used i-Orp. It is not well suited for my situation (spouse works part time, I pay almost all the bills).

-At age 50, I have few medical expenses (beyond premiums) that I can pull from the HSA. I am saving receipts, but not much there.
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Re: Anyone spending less in retirement to delay taxes?

Post by JDCarpenter »

tibbitts wrote: Fri Nov 20, 2020 7:40 pm I'm spending less on travel and other anticipated expenses in retirement because of the pandemic. But I'm spending much more on taxes this year, and probably next (realistically, another pandemic year), because I'm doing far more aggressive Roth conversions than I'd planned on. I don't even think about taxes in terms of deciding whether to spend money on a purchase or not - well except maybe sales taxes.
+1

We've managed to travel a lot even this year (but will end up spending 7 months at home, so a significant decrease). BUT, like tibbitts, we have big Roth conversions. Even in years that we could have had $0 taxes, we've maxed the 24% bracket. Still much better than our marginal rate when working, and likely better than widow[er] filling as single taxpayer... And we'll be hit by IRMA regardless when the time comes.

FWIW, 60/59, retired three years, grossly disproportionate amounts in deferred accounts at retirement....
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Re: Anyone spending less in retirement to delay taxes?

Post by Normchad »

Watty wrote: Fri Nov 20, 2020 8:36 pm
michaeljc70 wrote: Fri Nov 20, 2020 7:25 pm I do get an ACA subsidy, so any dollar of income (taxable or tax-exempt long term capital gains) results in around a 10% tax there........

Anyone else find themselves doing the same?
I carefully manage my income to make sure that I get the ACA subsidy.

One thing I did was to set up a HELOC on my paid off house so I can draw on that to keep my income low. That obviously has to be paid back and and interest is charged but getting that extra 9.8% ACA subsidy for every dollar that I am below the subsidy cliff can make that worthwhile.

I have to juggle and plan ahead but I only had about four years between COBRA and Medicare so for me that is doable. For example in January I will make most of my IRA withdrawals for 2021 to pay down the HELOC then I will draw on the HELOC when I need more spending money. After I get on Medicare I will pay it off with IRA withdrawals.

If you don't already have a HELOC set up you might consider doing that while your wife is still working so it will be easier to qualify for. Even if you don't plan on using it the HELOC could still come in handy if you have some unexpected large expense.
+1. I love it. What a great idea!
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Re: Anyone spending less in retirement to delay taxes?

Post by TravelforFun »

michaeljc70 wrote: Fri Nov 20, 2020 7:25 pm I retired early. I find myself spending less because I want to avoid/delay paying taxes. 90% of my investments are in retirement/HSA accounts. 35% of my NW is in my house. I am not living like a miser by any means, but feel I keep postponing paying taxes (less IRA withdrawals/selling taxable) and spending less than I could. I always contributed to deductible retirement/HSA accounts when I could (medium tax bracket). I figured a bird in the hand. How can I know what tax bracket I will be in in 20, 30 or 40 years? I do have 10% of investments in an HSA and 10% in a Roth.

I do get an ACA subsidy, so any dollar of income (taxable or tax-exempt long term capital gains) results in around a 10% tax there. Then there is federal and state taxes (5% in my state, not applicable to IRA withdrawals, but capital gains are taxable even if not federally). I am married and my spouse still works (not making a lot, but around $50k) so that doesn't leave me much room for the ACA subsidy.

Anyone else find themselves doing the same? I guess I am thinking that between age 65-69 I will do Roth conversions when the ACA subsidy isn't applicable. Maybe with possible inheritances of IRAs I am just being cheap now and should pay up and spread it out more?
Like you, most of our investable asset is in tax deferred accounts and because we're retired, we use it to pay for most of our living expenses as I'm waiting until 70 to draw SS benefits. I'm paying a little more taxes (32% bracket) now than when I was working because we're spending more and every dollar we withdraw from our IRAs is earned income. If I could go back in time, I would have put more money in taxable accounts and less in IRAs. Long term capital rate in taxable accounts is only 15%.

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Re: Anyone spending less in retirement to delay taxes?

Post by RetiredAL »

tibbitts wrote: Fri Nov 20, 2020 8:02 pm
Golf maniac wrote: Fri Nov 20, 2020 7:57 pm Taxes are something I wished I had spent more time thinking about before I retired. It is a bit of a minefield with Medicare Part B and the tax brackets if doing Roth conversions. I wish I had put more in Roth to give me more flexibility in spending. But I have what I have now and have to make the best of it. Like OP we are doing fine but need to be careful on when we spend and the tax implications. One solution is to leverage your home equity position. With the extremely low interest rates it is a good time to look at that, but even that has tax implications.
No kidding, I don't honestly know how the deferred account accumulations somehow flew under my planning radar. I just kept adding to them far longer than I should have. I had become accustomed to deferring taxes whenever possible, without fully analyzing the repercussion for later on.
I started retirement with a substantial amount of ROTH $, between DW and I. From time when ROTHs started, I maxed out our ROTHs and put a similar amount into my 401K. Today, including several years of modest conversions, about 37% of our ROTH/401K savings are in ROTHs, almost all else is in IRAs, with very little in taxable. When I factor in the LUMP SUM IRA $, the ROTHs are 27% of the total. The 401K was also Rolled Over into an IRA. DW was a SAHM, so no significant Work Plan for her.

Wish I could say I understood and planned it that way, but in actuality I got to this point mainly because it felt good having a mindset I was pulling a fast one on the taxman as the ROTHs grew. I know that's not true as I've paid the tax club dues every year. The bulk of the ROTH $ were contributed via the 15% bracket, so in a small sense it was a good choice. Although I'm solidly in the whats considered the 12% bracket, the damn SS Hump means every additional $ taken out of the IRAs is at the 22% increment as that hump works at catching me up to the same tax bill that I always had while working with my taxable earnings near the top of the 15% bracket. I am quite pleased that today's Fed tax bill in $ is running only at 40% of what it was while I was working, yet my $ into my checking now equals working $ into checking minus the ROTH contributions.

This HUMP rate thing does ding my head hard as I convert modest amount of IRA $ to ROTH each year. So for now, I've chosen to yearly withdraw for spending a little more than 2% of my IRAs and convert another 2%, as that 4% total is what the RMD would be if I had started them this year at 70. When my RMD's start in 2022, I'm leaning towards 2% spending withdrawal, 2% withdrawal to taxable, and 2-3% to convert. That will get me approaching the top of the std 12% bracket. When one of us becomes the survivor, that person will be substantially into the std 22% bracket, so in the big picture it hardly matters if I pay 22% now or later.
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celia
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Re: Anyone spending less in retirement to delay taxes?

Post by celia »

We retired as soon as:
The mortgage was paid off
Education for the kids was paid
We had “enough” in retirement

Once that was all covered, our living expenses dropped significantly so we retired. So we answer “YES” to the question “Anyone Spending Less in Retirement” but it is not because of taxes. In fact our taxes rose in retirement since we switched to doing Roth Conversions. In another year we will have emptied our tIRAs and have most of our assets in Roth IRAs. Then we will no longer have to think about RMDs.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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Re: Anyone spending less in retirement to delay taxes?

Post by curmudgeon »

I watch and plan our taxable income fairly carefully in retirement, but I try to not have that drive our spending. For us, this is relatively easy due to the nature and placement of our retirement assets (more on this later). If I was stuck with most assets in IRA/401K (or tied up with large cap gains), I would consider foregoing the ACA subsidy every 2nd or 3rd year and bunch up IRA withdrawals/ cap gains that would support our spending across multiple years. Maybe even pass on the ACA subsidy altogether, depending on the size of the tax-deferred accounts.

When I retired, in my late 50's, we had a substantial taxable account as well as substantial real estate equity. We downsized, which freed up a large pile of cash (sale fit under the homeowner exclusion, so no tax on the gains). I'm not a big believer in the traditional asset allocation and FI placement often advocated here on bogleheads. The cash pile from downsizing sits as FI investment in our taxable account; it generates some taxable interest income, but the principal is available for spending without triggering any taxes (or pushing us over the ACA cliff).

If I held all our bonds/FI in the IRA, and only had equities with large embedded cap gains in our taxable account, we wouldn't have near the spending flexibility. As it is, I add a chunk of Roth conversion on top of our taxable interest/dividends to get us close, but not over, the ACA cliff, but we can spend much more than our "taxable income". When we hit medicare age, I expect to crank up the Roth conversions and/or draw more from the IRAs for spending. Our taxes will go up quite a bit then, but the idea is to get the t-IRA balances down quite a bit before RMDs start. I plan to defer SS until age 70.
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michaeljc70
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Re: Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

curmudgeon wrote: Sat Nov 21, 2020 2:28 am I watch and plan our taxable income fairly carefully in retirement, but I try to not have that drive our spending. For us, this is relatively easy due to the nature and placement of our retirement assets (more on this later). If I was stuck with most assets in IRA/401K (or tied up with large cap gains), I would consider foregoing the ACA subsidy every 2nd or 3rd year and bunch up IRA withdrawals/ cap gains that would support our spending across multiple years. Maybe even pass on the ACA subsidy altogether, depending on the size of the tax-deferred accounts.

When I retired, in my late 50's, we had a substantial taxable account as well as substantial real estate equity. We downsized, which freed up a large pile of cash (sale fit under the homeowner exclusion, so no tax on the gains). I'm not a big believer in the traditional asset allocation and FI placement often advocated here on bogleheads. The cash pile from downsizing sits as FI investment in our taxable account; it generates some taxable interest income, but the principal is available for spending without triggering any taxes (or pushing us over the ACA cliff).

If I held all our bonds/FI in the IRA, and only had equities with large embedded cap gains in our taxable account, we wouldn't have near the spending flexibility. As it is, I add a chunk of Roth conversion on top of our taxable interest/dividends to get us close, but not over, the ACA cliff, but we can spend much more than our "taxable income". When we hit medicare age, I expect to crank up the Roth conversions and/or draw more from the IRAs for spending. Our taxes will go up quite a bit then, but the idea is to get the t-IRA balances down quite a bit before RMDs start. I plan to defer SS until age 70.
I was playing with that in my tax software yesterday. If I give up the subsidy for a year, at ~$79k the tax rate goes from 12% to 22%. I can go all the way up to $168k before leaving the 22% bracket. None of this takes into account the standard deduction (which of course doesn't apply to the ACA subsidy). The problem is, due to not being 59.5, I cannot take out a big chunk from my IRA without paying a penalty. There is the CARES Act and 72t. I took $90k out using the CARES act and am debating how much of that to pay back (and where to take the $$$ from).
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Re: Anyone spending less in retirement to delay taxes?

Post by carolinaman »

I think it is wise to consider tax implications for spending discretionary dollars, but I would not sacrifice the satisfaction of that spending (within reason) to avoid taxes. Taxes should not be the driver in spending decisions.
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Watty
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Re: Anyone spending less in retirement to delay taxes?

Post by Watty »

michaeljc70 wrote: Fri Nov 20, 2020 7:25 pm I am married and my spouse still works (not making a lot, but around $50k) so that doesn't leave me much room for the ACA subsidy.
One more thought.

Could your spouse get a job that provides health insurance so you would not need to worry about the ACA subsidy?
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Re: Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

carolinaman wrote: Sat Nov 21, 2020 8:56 am I think it is wise to consider tax implications for spending discretionary dollars, but I would not sacrifice the satisfaction of that spending (within reason) to avoid taxes. Taxes should not be the driver in spending decisions.
I see your point, but since I am living just like I did while I was working, it doesn't really feel like sacrifice. My parents have lived in the same house for 40+ years. They can afford a much better house now than when they bought it. They don't view it as sacrificing though. It is what they are used to. I feel after age 65 when I go on Medicare and don't have to deal with the ACA subsidy taxes will be much less of a concern. I worry though that at that age I won't want to take as many trips and things. I certainly am not looking to leave a big estate as I have no kids.
Last edited by michaeljc70 on Sat Nov 21, 2020 9:18 am, edited 1 time in total.
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Re: Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

Watty wrote: Sat Nov 21, 2020 9:07 am
michaeljc70 wrote: Fri Nov 20, 2020 7:25 pm I am married and my spouse still works (not making a lot, but around $50k) so that doesn't leave me much room for the ACA subsidy.
One more thought.

Could your spouse get a job that provides health insurance so you would not need to worry about the ACA subsidy?
That would be great but it is unlikely to happen. They have a part time "fun" job bartendering.
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samsoes
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Re: Anyone spending less in retirement to delay taxes?

Post by samsoes »

Olemiss540 wrote: Fri Nov 20, 2020 8:22 pm Taxes are an issue thanks to an incredible bull market. Maybe a nice bear will make you feel better about your outstanding tax burden.

Come on and live life. Who gives a crap what your marginal rate is when you are talking about 2% WD rates. Your heirs may appreciate the thought when you are gone but having regret (in hindsight) seems absurd due to an amazing amount of good luck on your investment returns.

Here is to hoping the next 30 years are exactly like the last and I can complain of my tax burden as well.
Yikes! :shock:
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Re: Anyone spending less in retirement to delay taxes?

Post by flyingaway »

The more delay, the more taxes you pay if you want to withdraw the money. Better to enjoy the life if you can.
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Re: Anyone spending less in retirement to delay taxes?

Post by Olemiss540 »

samsoes wrote: Sat Nov 21, 2020 9:25 am
Olemiss540 wrote: Fri Nov 20, 2020 8:22 pm Taxes are an issue thanks to an incredible bull market. Maybe a nice bear will make you feel better about your outstanding tax burden.

Come on and live life. Who gives a crap what your marginal rate is when you are talking about 2% WD rates. Your heirs may appreciate the thought when you are gone but having regret (in hindsight) seems absurd due to an amazing amount of good luck on your investment returns.

Here is to hoping the next 30 years are exactly like the last and I can complain of my tax burden as well.
Yikes! :shock:
Seems an awful lot like asking if anyone is working part time to reduce their taxes.
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
ad2007
Posts: 162
Joined: Wed Nov 29, 2017 5:59 am

Re: Anyone spending less in retirement to delay taxes?

Post by ad2007 »

Not sure that I'm spending less just to delay taxes. Spending less this year because of Covid.

But I have abandoned my roth conversion plan. Decided to not pay taxes upfront. I could be wrong, but I figured IRA RMD can go to donation if we don't need it, and can serve as long term care if needed. My kids are young so there's no way of knowing their tax bracket. IRA can go to them if they're not high income. And taxable will get a step up. But if they are successful, IRA can ultimately go to charity.

After paying high taxes for years, I'm looking forward to the low tax bracket in retirement.
ad2007
Posts: 162
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Re: Anyone spending less in retirement to delay taxes?

Post by ad2007 »

tibbitts wrote: Fri Nov 20, 2020 7:55 pm At some accumulation level, your deferred balances will grow faster (at historically typical return levels) than you can convert them at less than a 30-something percent marginal rate.
Can you elaborate re some accumulation level?

All our IRA (20% of NW) all in bonds, we're late 40s and early 50 y.o. and will delay until RMD. I have a tough time imagining our RMD will bounce us back up to our working tax rates.
tj
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Re: Anyone spending less in retirement to delay taxes?

Post by tj »

michaeljc70 wrote: Sat Nov 21, 2020 8:50 am
curmudgeon wrote: Sat Nov 21, 2020 2:28 am I watch and plan our taxable income fairly carefully in retirement, but I try to not have that drive our spending. For us, this is relatively easy due to the nature and placement of our retirement assets (more on this later). If I was stuck with most assets in IRA/401K (or tied up with large cap gains), I would consider foregoing the ACA subsidy every 2nd or 3rd year and bunch up IRA withdrawals/ cap gains that would support our spending across multiple years. Maybe even pass on the ACA subsidy altogether, depending on the size of the tax-deferred accounts.

When I retired, in my late 50's, we had a substantial taxable account as well as substantial real estate equity. We downsized, which freed up a large pile of cash (sale fit under the homeowner exclusion, so no tax on the gains). I'm not a big believer in the traditional asset allocation and FI placement often advocated here on bogleheads. The cash pile from downsizing sits as FI investment in our taxable account; it generates some taxable interest income, but the principal is available for spending without triggering any taxes (or pushing us over the ACA cliff).

If I held all our bonds/FI in the IRA, and only had equities with large embedded cap gains in our taxable account, we wouldn't have near the spending flexibility. As it is, I add a chunk of Roth conversion on top of our taxable interest/dividends to get us close, but not over, the ACA cliff, but we can spend much more than our "taxable income". When we hit medicare age, I expect to crank up the Roth conversions and/or draw more from the IRAs for spending. Our taxes will go up quite a bit then, but the idea is to get the t-IRA balances down quite a bit before RMDs start. I plan to defer SS until age 70.
I was playing with that in my tax software yesterday. If I give up the subsidy for a year, at ~$79k the tax rate goes from 12% to 22%. I can go all the way up to $168k before leaving the 22% bracket. None of this takes into account the standard deduction (which of course doesn't apply to the ACA subsidy). The problem is, due to not being 59.5, I cannot take out a big chunk from my IRA without paying a penalty. There is the CARES Act and 72t. I took $90k out using the CARES act and am debating how much of that to pay back (and where to take the $$$ from).
Why don't you convert to Roth? No penalty for that.
Outer Marker
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Re: Anyone spending less in retirement to delay taxes?

Post by Outer Marker »

I think keeping income low enough to qualify for ACA subsidy is a smart move. That said, I think there's a good possibility capital gains taxes will go up in the next Administration, so you might want to realize some of those gains at today's low rates.
curmudgeon
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Re: Anyone spending less in retirement to delay taxes?

Post by curmudgeon »

michaeljc70 wrote: Sat Nov 21, 2020 8:50 am
curmudgeon wrote: Sat Nov 21, 2020 2:28 am I watch and plan our taxable income fairly carefully in retirement, but I try to not have that drive our spending. For us, this is relatively easy due to the nature and placement of our retirement assets (more on this later). If I was stuck with most assets in IRA/401K (or tied up with large cap gains), I would consider foregoing the ACA subsidy every 2nd or 3rd year and bunch up IRA withdrawals/ cap gains that would support our spending across multiple years. Maybe even pass on the ACA subsidy altogether, depending on the size of the tax-deferred accounts.
I was playing with that in my tax software yesterday. If I give up the subsidy for a year, at ~$79k the tax rate goes from 12% to 22%. I can go all the way up to $168k before leaving the 22% bracket. None of this takes into account the standard deduction (which of course doesn't apply to the ACA subsidy). The problem is, due to not being 59.5, I cannot take out a big chunk from my IRA without paying a penalty. There is the CARES Act and 72t. I took $90k out using the CARES act and am debating how much of that to pay back (and where to take the $$$ from).
The typical models for this are a Roth conversion "ladder" (five-year cycle of Roth conversions so that the oldest age out of the penalty withdrawal zone), or 72t. But neither of those work all that well with managing income under ACA. You can split up IRAs to do 72t on only a portion of your tax-deferred, but it's still fairly inflexible. This is best figured out before retiring if possible, but life doesn't always run that smoothly. I will admit that psychologically I'd have a hard time paying the 10% early withdrawal penalty. I can justify doing Roth conversions and running up into higher tax brackets as a "now vs later" choice, but paying a "penalty" is harder to swallow. Comparing your marginal rate while you were earning (what you were avoiding by doing tax-deferred investing) with your marginal rate including the 10% now might help make it easier to swallow (or not).
Topic Author
michaeljc70
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Re: Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

tj wrote: Sat Nov 21, 2020 10:41 am
michaeljc70 wrote: Sat Nov 21, 2020 8:50 am
curmudgeon wrote: Sat Nov 21, 2020 2:28 am I watch and plan our taxable income fairly carefully in retirement, but I try to not have that drive our spending. For us, this is relatively easy due to the nature and placement of our retirement assets (more on this later). If I was stuck with most assets in IRA/401K (or tied up with large cap gains), I would consider foregoing the ACA subsidy every 2nd or 3rd year and bunch up IRA withdrawals/ cap gains that would support our spending across multiple years. Maybe even pass on the ACA subsidy altogether, depending on the size of the tax-deferred accounts.

When I retired, in my late 50's, we had a substantial taxable account as well as substantial real estate equity. We downsized, which freed up a large pile of cash (sale fit under the homeowner exclusion, so no tax on the gains). I'm not a big believer in the traditional asset allocation and FI placement often advocated here on bogleheads. The cash pile from downsizing sits as FI investment in our taxable account; it generates some taxable interest income, but the principal is available for spending without triggering any taxes (or pushing us over the ACA cliff).

If I held all our bonds/FI in the IRA, and only had equities with large embedded cap gains in our taxable account, we wouldn't have near the spending flexibility. As it is, I add a chunk of Roth conversion on top of our taxable interest/dividends to get us close, but not over, the ACA cliff, but we can spend much more than our "taxable income". When we hit medicare age, I expect to crank up the Roth conversions and/or draw more from the IRAs for spending. Our taxes will go up quite a bit then, but the idea is to get the t-IRA balances down quite a bit before RMDs start. I plan to defer SS until age 70.
I was playing with that in my tax software yesterday. If I give up the subsidy for a year, at ~$79k the tax rate goes from 12% to 22%. I can go all the way up to $168k before leaving the 22% bracket. None of this takes into account the standard deduction (which of course doesn't apply to the ACA subsidy). The problem is, due to not being 59.5, I cannot take out a big chunk from my IRA without paying a penalty. There is the CARES Act and 72t. I took $90k out using the CARES act and am debating how much of that to pay back (and where to take the $$$ from).
Why don't you convert to Roth? No penalty for that.
The 5 year rule.
lomarica01
Posts: 184
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Re: Anyone spending less in retirement to delay taxes?

Post by lomarica01 »

no just the opposite. my goal it to withdraw from tax deferred now even though I do not need the $$$ in order to reduce large future rmd's, to avoid the risk of having to pay income tax as a single filer if a spouse dies sooner than expected and to enjoy the $$ while still relatively young.

everyone has to pay the tax at some point whether it was deferred or paid up front with a roth or with a roth conversion. On thought that helps my a little bit is the value of the dollars I a paying now in taxes is worth much less than the value of the dollars at the time of the tax deferral over the last 30 years due to inflation.
tj
Posts: 3754
Joined: Thu Dec 24, 2009 12:10 am

Re: Anyone spending less in retirement to delay taxes?

Post by tj »

lomarica01 wrote: Sat Nov 21, 2020 12:09 pm no just the opposite. my goal it to withdraw from tax deferred now even though I do not need the $$$ in order to reduce large future rmd's, to avoid the risk of having to pay income tax as a single filer if a spouse dies sooner than expected and to enjoy the $$ while still relatively young.

everyone has to pay the tax at some point whether it was deferred or paid up front with a roth or with a roth conversion. On thought that helps my a little bit is the value of the dollars I a paying now in taxes is worth much less than the value of the dollars at the time of the tax deferral over the last 30 years due to inflation.
I thought inflation decreases the value of a dollar?
Broken Man 1999
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Re: Anyone spending less in retirement to delay taxes?

Post by Broken Man 1999 »

flyingaway wrote: Sat Nov 21, 2020 9:48 am The more delay, the more taxes you pay if you want to withdraw the money. Better to enjoy the life if you can.
Agree!

We are retired and there is no way we are interested spending less to delay taxes.

We have been able to have remodeling projects paid in two different calendar years to avoid a large increase in taxes if paid in one calendar year. That was easy to do, we were spending the same amount of money no matter when the expenses fell.

What is the point of being responsible in planning for a comfortable retirement, but letting taxes affect the enjoyment of your retirement?

No thanks!

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
carolinaman
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Location: North Carolina

Re: Anyone spending less in retirement to delay taxes?

Post by carolinaman »

michaeljc70 wrote: Sat Nov 21, 2020 9:14 am
carolinaman wrote: Sat Nov 21, 2020 8:56 am I think it is wise to consider tax implications for spending discretionary dollars, but I would not sacrifice the satisfaction of that spending (within reason) to avoid taxes. Taxes should not be the driver in spending decisions.
I see your point, but since I am living just like I did while I was working, it doesn't really feel like sacrifice. My parents have lived in the same house for 40+ years. They can afford a much better house now than when they bought it. They don't view it as sacrificing though. It is what they are used to. I feel after age 65 when I go on Medicare and don't have to deal with the ACA subsidy taxes will be much less of a concern. I worry though that at that age I won't want to take as many trips and things. I certainly am not looking to leave a big estate as I have no kids.
It is very possible that you will not want to or be able to travel and do other things at age 65. I am still able to do most things at age 76 (thank you Lord) but DW cannot. Thus we miss out on traveling which we enjoyed immensely when we were both able. Therefore, you should consider doing some of those things now while you can best enjoy them. Best wishes.
bsteiner
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Re: Anyone spending less in retirement to delay taxes?

Post by bsteiner »

TravelforFun wrote: Fri Nov 20, 2020 11:13 pm ... If I could go back in time, I would have put more money in taxable accounts and less in IRAs. Long term capital rate in taxable accounts is only 15%.
The tax rate on the income and gains on "your share" of your traditional IRA is zero.

Assume a constant 30% combined Federal and state income tax rate.

You contribute $1,000 to your traditional IRA. It grows to $10,000. You withdraw the $10,000, pay $3,000 tax, and keep $7,000.

If you didn't make the IRA contribution, you would have paid $300 of tax initially, and invested the remaining $700 in your taxable account. If the tax rate on your investment income and gains were zero, it would grow to the same $7,000. However, if you have any interest, dividends, or capital gains, even if they're taxed at capital gains rates, your taxable account will grow to something less than $7,000.

The analysis is similar with regard to Roth contributions and conversions, except that many people are able to convert or withdraw at lower rates after they retire.
J295
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Re: Anyone spending less in retirement to delay taxes?

Post by J295 »

Really interesting thread. It’s helpful for me to see which posters have similar situations.

We are quite top-heavy in retirement accounts (70% liquid assets there) and have been on the ACA since it’s inception. The annual premium for 2021 for the two of us at age 61 would be $30,000, but we manage modified adjusted gross income and the premium is $0.

I haven’t done any detailed analysis. I really just considered that $30,000 is a nice annual savings, and we aren’t strapped for current cash needs so planning just to deal with retirement withdrawals, taxes, and the like as needed. That’s basically how we approached early retirement and will continue to monitor. Probably sometime will do a deep dive and appreciate the references to the computer program that could be helpful Flexibility and creativity and adapting seem to be good qualities for this phase of our life
J295
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Joined: Sun Jan 01, 2012 11:40 pm

Re: Anyone spending less in retirement to delay taxes?

Post by J295 »

michaeljc70 wrote: Fri Nov 20, 2020 9:02 pm .....

-I have a margin account that I can borrow against at 1.6%. However, borrowing while retired has been a fools gambit IMO. You have no real income per se to pay it back. So, borrowing just delays taking money out of that will be taxable. My dividends/interest are not substantial.
Where/how are you able to borrow at 1.6% margin? While I’ve never used it, the rate at Fido is substantially higher (7% for $100k loan). Thanks
Topic Author
michaeljc70
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Re: Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

J295 wrote: Sun Nov 22, 2020 9:16 am
michaeljc70 wrote: Fri Nov 20, 2020 9:02 pm .....

-I have a margin account that I can borrow against at 1.6%. However, borrowing while retired has been a fools gambit IMO. You have no real income per se to pay it back. So, borrowing just delays taking money out of that will be taxable. My dividends/interest are not substantial.
Where/how are you able to borrow at 1.6% margin? While I’ve never used it, the rate at Fido is substantially higher (7% for $100k loan). Thanks
Interactive Brokers. And 1.6% is on small amounts. If you borrow big bucks it is even lower. All the other major brokers are a ripoff when it comes to margin rates. At TDA (where I had my taxable account) the rate on small amounts is 9.5%. IB is not perfect but you cannot beat the margin rates.
Topic Author
michaeljc70
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Re: Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

Thanks for all the comments. One thing that some people have missed (or ignored) is that all these taxes are not just being deferred. You have income taxes on IRA withdrawals that will have to be paid at some point. You have capital gains that may or may not be taxable (LT not taxable with income <80k). However, the ACA tax credit is something that will not have to be repaid in the future. Going forward I'm going to try and have a little more balance and take more out. This is a good year to start that because my spouse will certainly make less due to Covid.
KlangFool
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Re: Anyone spending less in retirement to delay taxes?

Post by KlangFool »

OP,

My annual expense is about 60K per year.

1) I am in COBRA this year and next. I do not need to worry about the ACA subsidy this year and next.


2) I am using this period to build up my CASH to 3 years of expense.


3) I can do a bit of Capital Gain Harvesting next year.


4) I have 200K of Roth IRA contribution and 70K of Roth IRA's gain.


5) My taxable account portfolio is about 400K.


6) My tax-deferred account is about 800K.


Essentially, I can spend my annual expense for many years while doing Roth conversion to generate whatever amount of taxable income for the ACA subsidy. I do not think I have any problem.


KlangFool
TravelforFun
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Re: Anyone spending less in retirement to delay taxes?

Post by TravelforFun »

bsteiner wrote: Sun Nov 22, 2020 8:27 am
TravelforFun wrote: Fri Nov 20, 2020 11:13 pm ... If I could go back in time, I would have put more money in taxable accounts and less in IRAs. Long term capital rate in taxable accounts is only 15%.
The tax rate on the income and gains on "your share" of your traditional IRA is zero.

Assume a constant 30% combined Federal and state income tax rate.

You contribute $1,000 to your traditional IRA. It grows to $10,000. You withdraw the $10,000, pay $3,000 tax, and keep $7,000.

If you didn't make the IRA contribution, you would have paid $300 of tax initially, and invested the remaining $700 in your taxable account. If the tax rate on your investment income and gains were zero, it would grow to the same $7,000. However, if you have any interest, dividends, or capital gains, even if they're taxed at capital gains rates, your taxable account will grow to something less than $7,000.

The analysis is similar with regard to Roth contributions and conversions, except that many people are able to convert or withdraw at lower rates after they retire.
What you said is true if your tax rate stays the same. For some people (including me), our tax rate in retirement is higher than when we were working because of social security benefits, pension, dividends, rental income, RMD, etc. Also, heirs would receive step-up benefits and not have to deal with the 10-year RMD upon inheritance if the money is in taxable account and not IRA.

TravelforFun
Topic Author
michaeljc70
Posts: 7277
Joined: Thu Oct 15, 2015 3:53 pm

Re: Anyone spending less in retirement to delay taxes?

Post by michaeljc70 »

KlangFool wrote: Sun Nov 22, 2020 10:27 am OP,

My annual expense is about 60K per year.

1) I am in COBRA this year and next. I do not need to worry about the ACA subsidy this year and next.


2) I am using this period to build up my CASH to 3 years of expense.


3) I can do a bit of Capital Gain Harvesting next year.


4) I have 200K of Roth IRA contribution and 70K of Roth IRA's gain.


5) My taxable account portfolio is about 400K.


6) My tax-deferred account is about 800K.


Essentially, I can spend my annual expense for many years while doing Roth conversion to generate whatever amount of taxable income for the ACA subsidy. I do not think I have any problem.


KlangFool
Is the COBRA better than your ACA options with subsidy?
bsteiner
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Location: NYC/NJ/FL

Re: Anyone spending less in retirement to delay taxes?

Post by bsteiner »

TravelforFun wrote: Sun Nov 22, 2020 2:34 pm
bsteiner wrote: Sun Nov 22, 2020 8:27 am
TravelforFun wrote: Fri Nov 20, 2020 11:13 pm ... If I could go back in time, I would have put more money in taxable accounts and less in IRAs. Long term capital rate in taxable accounts is only 15%.
The tax rate on the income and gains on "your share" of your traditional IRA is zero.

Assume a constant 30% combined Federal and state income tax rate.

You contribute $1,000 to your traditional IRA. It grows to $10,000. You withdraw the $10,000, pay $3,000 tax, and keep $7,000.

If you didn't make the IRA contribution, you would have paid $300 of tax initially, and invested the remaining $700 in your taxable account. If the tax rate on your investment income and gains were zero, it would grow to the same $7,000. However, if you have any interest, dividends, or capital gains, even if they're taxed at capital gains rates, your taxable account will grow to something less than $7,000.

The analysis is similar with regard to Roth contributions and conversions, except that many people are able to convert or withdraw at lower rates after they retire.
What you said is true if your tax rate stays the same. For some people (including me), our tax rate in retirement is higher than when we were working because of social security benefits, pension, dividends, rental income, RMD, etc. Also, heirs would receive step-up benefits and not have to deal with the 10-year RMD upon inheritance if the money is in taxable account and not IRA.
Your first sentence suggests you might do more Roth conversions before your tax rate increases.

I don't agree with your second sentence for the reasons set forth in my previous post. You can minimize the taxes on the income and gains in your taxable account by investing for growth. However, you'll probably have at least some income and gains in your taxable account, and the tax rate on them won't be less than zero.
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