Open Social Security strategy results question

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markcoop
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Re: Open Social Security strategy results question

Post by markcoop » Fri May 22, 2020 8:17 am

vtMaps wrote:
Fri May 22, 2020 4:17 am
No. With SS = $58k, if you are past the hump, you are past the 12% tax bracket.
Thanks for pointing that out. My exact amount of SS in my calculations is $58,459. I computed that I am past the hump at other income greater than $66,171. So, taxable income = .85 * 58459 + 66171 = $115861 which is greater than the 12% tax bracket. Depending upon my RMD alone, however, I am not out of the 12% bracket and therefore still in the hump portion.
vtMaps wrote:
Fri May 22, 2020 4:17 am
With SS = $58k, the worst of the hump (40.7%) is so narrow that it is not much of a consideration. Your non SS income above about $20k will be taxed at about 22%. Non SS income up to about $20k is untaxed. If you can do enough Roth conversion to get your RMD down to $20k, you may never pay taxes on any income again.
Got a little lost here. Looking at the charts in the wiki, I thought the worst case of a 40.7% hump is only in the single case (not the MFJ case). I have some of the calculations from those charts in my spreadsheet, but not all of them. So, wasn't sure. Probably need to play around with the total taxation part to understand it better. I have just been focusing on the SS part.
vtMaps wrote:
Fri May 22, 2020 4:17 am
I think you should convert up to the top of the 22% bracket. That means converting now at 22% to avoid paying 22% later. The reason to do this is because you are married. Look what happens to the tax hump after one of you dies, and the single survivor, with just a survivor SS benefit, has a RMD of $50k. There's a lot of unavoidable 40.7% marginal bracket!
I am still trying to figure this all out. I think these options could make sense. Note that I am currently contributing to my 401K (not Roth 401K) because I have a state tax and don't think I will when I retire) :
1) Take spouse SS at 62 and convert to the top of the 12% bracket for 10 years (age 60-70).
2) Don't take spouse SS at 62 and convert to the top of the 12% bracket for 10 years (age 60-70).
3) Don't take spouse SS at 62 and convert to the top of the 22% bracket for 10 years (age 60-70). This makes sense to me if not taking spouse SS at this time because would avoid any hump on her SS and could get the RMD down to zero.

I really appreciate all the help here.
Mark

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FiveK
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Re: Open Social Security strategy results question

Post by FiveK » Fri May 22, 2020 1:09 pm

markcoop wrote:
Fri May 22, 2020 8:17 am
Got a little lost here. Looking at the charts in the wiki, I thought the worst case of a 40.7% hump is only in the single case (not the MFJ case). I have some of the calculations from those charts in my spreadsheet, but not all of them. So, wasn't sure. Probably need to play around with the total taxation part to understand it better. I have just been focusing on the SS part.
The wiki Y vs. X charts show only one example. It is possible to have the higher rates when MFJ - see the "heat map" charts in that article.

There can be even higher marginal rates when dividends and capital gains are present.

Given the "...in my spreadsheet" comment, you might find the personal finance toolbox Excel spreadsheet useful for comparing your results to its, or taking some of its formulas for use in yours, etc.

As noted a few days ago in this post, "There is no tool - either free or commercially available - that will solve the non-linear optimization problem of "maximum spendable" using all degrees of freedom available to most retirees...In other words, "some assembly required"...."

vtMaps
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Re: Open Social Security strategy results question

Post by vtMaps » Fri May 22, 2020 1:13 pm

markcoop wrote:
Fri May 22, 2020 8:17 am
Got a little lost here. Looking at the charts in the wiki, I thought the worst case of a 40.7% hump is only in the single case (not the MFJ case).
Check out the "heat maps" in the wiki:
https://www.bogleheads.org/wiki/Taxatio ... y_benefits

There is a separate heat map for single and married. Look at how much red there is for a single person with one SS benefit and $50k of RMD.

--vtMaps
Historical Fact: Justin Smith Morrill represented Vermont in congress, had a dog named 'Trump', and wrote legislation establishing the Land Grant Colleges.

Topic Author
markcoop
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Joined: Fri Mar 02, 2007 8:36 am

Re: Open Social Security strategy results question

Post by markcoop » Sat May 23, 2020 10:07 am

FiveK wrote:
Fri May 22, 2020 1:09 pm
Given the "...in my spreadsheet" comment, you might find the personal finance toolbox Excel spreadsheet useful for comparing your results to its, or taking some of its formulas for use in yours, etc.
Thanks you guys for all the help and the tip on this calculator. I love to do everything in a spreadsheet. Setting up the formulas are a great way to understand how things work. I downloaded the Retire Portfolio Model spreadsheet and took a quick look at this as well. These spreadsheet are amazing and so much better than so many simple calculators online that make so many assumptions they become useless.
Mark

Topic Author
markcoop
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Re: Open Social Security strategy results question

Post by markcoop » Mon May 25, 2020 9:34 am

vtMaps wrote:
Fri May 22, 2020 4:17 am
I think you should convert up to the top of the 22% bracket. That means converting now at 22% to avoid paying 22% later. The reason to do this is because you are married. Look what happens to the tax hump after one of you dies, and the single survivor, with just a survivor SS benefit, has a RMD of $50k. There's a lot of unavoidable 40.7% marginal bracket!
I was re-reading this conversation and had a couple follow-up questions. I am currently in the 22% bracket and also live in NY and pay state taxes. I do believe there is a good chance I will not live in NY in retirement. So, I didn't think it was a good idea to convert now, or contribute to a Roth 401K, since I am currently paying state taxes. However, I am sensitive to the fact that taxes may go up in the future. As for when I retire and have some years to convert, I still am not sure converting to the top of the 22% bracket makes sense. If I were to that, I would be able to convert my whole 401K. I do own an inherited IRA that cannot be converted ($150K). If I were to convert as much as possible, going into the 22% bracket, I would think it would be possible that I have too little income to take advantage of the lowest tax brackets or even use the 401K for some other tax-free plans (ie., given to charity).

The questions:
1) Does it make sense for me not to convert/contribute to a Roth 401K now because of state taxes?

2) Does it make sense in retirement not to convert all of my 401K assuming I will convert at least to the top of the 12% bracket? If yes, what would be a reasonable amount not to convert?
Mark

vtMaps
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Re: Open Social Security strategy results question

Post by vtMaps » Mon May 25, 2020 10:13 am

markcoop wrote:
Mon May 25, 2020 9:34 am
As for when I retire and have some years to convert, I still am not sure converting to the top of the 22% bracket makes sense. If I were to that, I would be able to convert my whole 401K. I do own an inherited IRA that cannot be converted ($150K). If I were to convert as much as possible, going into the 22% bracket, I would think it would be possible that I have too little income to take advantage of the lowest tax brackets or even use the 401K for some other tax-free plans (ie., given to charity).
As I mentioned above, while married with $58k SS income, you can have about $20k of other income (including RMD) without paying any income tax. Any income above that puts you in the SS tax hump. If your RMD and other income is higher than $20k, you can reduce your RMD tax liability with a charitable distribution (once you are 70.5 years old).

So, I do not recommend that you Roth convert your entire IRA. Just get your RMD down to an acceptable level of taxation. Don't forget to consider what happens when one of you dies... lower SS income and likely a higher tax bracket.

--vtMaps
Historical Fact: Justin Smith Morrill represented Vermont in congress, had a dog named 'Trump', and wrote legislation establishing the Land Grant Colleges.

Topic Author
markcoop
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Re: Open Social Security strategy results question

Post by markcoop » Thu May 28, 2020 8:27 am

I constructed a few tables similar to the wiki and also played around with my wife delaying SS till 70 so I can convert more (which I now believe will be optimal). Our SS benefit will be $68,894. The heat map is probably sufficient for planning purposes, but I prefer the exercise of computing the values. The 22.2% marginal rate will begin at $26,634 and the 40.7% marginal rate will begin at $59,337. I would have no taxes at $15,957. I didn't compute the rates for the single filer, but expect SS to be around $45K which would put the 40.7% rate beginning around $32K. I also calculated out some ranges of RMDs at given conversions. My goal, if I understand the posts above, should be to get the range of RMDs below the 40.7% range for all cases. I would therefore think that my goal should be to get my RMDs between $26K and $32K, maybe even a bit lower but not below $16K. That would mean I would convert well into the 22% bracket. I think I finally got that all right (please let me know if I don't).

Thanks to all for the help in this planning exercise. I do understand that many of these numbers will change (especially SS), but I now have a spreadsheet that I understand where I can substitute new values.
Mark

vtMaps
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Re: Open Social Security strategy results question

Post by vtMaps » Thu May 28, 2020 10:42 am

markcoop wrote:
Thu May 28, 2020 8:27 am
My goal, if I understand the posts above, should be to get the range of RMDs below the 40.7% range for all cases.
Not all cases. I gave an example earlier in this thread about having a high income year (passing through the hump) in order to have low income years that largely avoid the hump.

Did you mention that both of you might defer SS until 70 so that you can convert more before SS? That may not be optimal. Usually the lower SS benefit should start before age 70.

If one of you is collecting SS benefits before the other, and if the 40.7% marginal bracket is narrow enough, it doesn't matter much and you can pass through it and get more 22% bracket. That might help to get the conversions done in the few years before both of you are collecting SS.

--vtMaps
Historical Fact: Justin Smith Morrill represented Vermont in congress, had a dog named 'Trump', and wrote legislation establishing the Land Grant Colleges.

Topic Author
markcoop
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Re: Open Social Security strategy results question

Post by markcoop » Thu May 28, 2020 11:32 am

vtMaps wrote:
Thu May 28, 2020 10:42 am
markcoop wrote:
Thu May 28, 2020 8:27 am
My goal, if I understand the posts above, should be to get the range of RMDs below the 40.7% range for all cases.
Not all cases. I gave an example earlier in this thread about having a high income year (passing through the hump) in order to have low income years that largely avoid the hump.

Did you mention that both of you might defer SS until 70 so that you can convert more before SS? That may not be optimal. Usually the lower SS benefit should start before age 70.

If one of you is collecting SS benefits before the other, and if the 40.7% marginal bracket is narrow enough, it doesn't matter much and you can pass through it and get more 22% bracket. That might help to get the conversions done in the few years before both of you are collecting SS.
I understand the points. As I am still a few years from retirement, I will hash out the details later on. I have found this exercise extremely valuable for future planning and to understand the options much better. One point I would add is about when my wife (the lower earner) will take SS. I do understand that it could be more valuable for her to take it early, but that does depend on the assumptions made. Playing around with opensocialsecurity.com, how this thread started, I can change some assumptions, such as the mortality table used and the discount rate, to come to the opposite conclusion. I will certainly investigate the options closer to the date. I guess the biggest lesson I have learned by far is to plan to convert a very large amount of my tax-deferred money. I originally had planned to convert to the top of the 12% bracket. I now understand that converting well into the 22% bracket may (and can probably add the stronger will) be advantageous.

Thanks again for all the help
Mark

Topic Author
markcoop
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Re: Open Social Security strategy results question

Post by markcoop » Thu Jun 04, 2020 3:00 pm

vtMaps wrote:
Thu May 28, 2020 10:42 am
Did you mention that both of you might defer SS until 70 so that you can convert more before SS? That may not be optimal. Usually the lower SS benefit should start before age 70.

If one of you is collecting SS benefits before the other, and if the 40.7% marginal bracket is narrow enough, it doesn't matter much and you can pass through it and get more 22% bracket. That might help to get the conversions done in the few years before both of you are collecting SS.
I gave this rest for a while but had some new thoughts. If my wife takes SS at age 62 and we planned to do conversions into the 22% bracket at the same time, 85% of that SS will be taxed. Since the SS will only be about $14K, there is no 40.7% hump, but the max 85% is all still taxed on that amount because of the large other income doing conversions. In this scenario, at age 70 I think the smaller hump is a bit on an illusion, because of that earlier SS that was already taxed.

Here are my two current options I'm playing with:

1) Option 1: Wife takes SS at 62. We pay taxes on 85% of the $14K for 8 years. Converting into the 22% at this time. At age 70, SS is $59K. Hump is small (about $4k). Tax-deferred pot about $100K bigger.

2) Option 2: Wife takes SS at 70. Converting into the 22% from age 62-70. At age 70, SS is $69K. Hump is a little bigger (about $12K). Tax-deferred pot about $100K smaller.

I think the smaller hump in option 1 only looks smaller because 85% of the $14k was taxed for 8 years. If I never reach the 40.7% hump in option 2, I am leaning toward that option. Another advantage for option 2 is it leaves us in a better situation when one of us dies because RMDs will be a bit smaller. OpenSocialSecurity calculates about $13K difference in present value dollars between the options (but given that I think we're in good health, it maybe less than that).
Mark

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