Long term capital gains vs 401k taxed at regular income

[tallguy]

I am fortunate to be in a situation where my Roth balances are higher than my T-IRA balances already.  Maxing them out for decades, doing some smaller conversions and a couple larger ones has worked out well.  But yes, the math is not good for singles.  Things would have been very different if I had not had the option of survivor's benefits, but I couldn't in any way turn down that much free money.  I have to now balance the tax cost of larger conversions making my SS taxable against wanting my future RMDs more manageable.  My guess is that it won't really be worth it to try and do too much now, and that dealing with the future RMDs won't be too bad, but it's hard to really know.  There are some tools that can help, which is nice, but not knowing where the legislation will end up is a killer. 

[Rukh O'Rorke]

Feb 17, 2024 20:43:14 GMT -5 minnesotapaintlady said:

Feb 17, 2024 19:27:54 GMT -5 Rukh O'Rorke said:

Those rmds keep growing! need to be careful in the begining years.

Yes, but assuming you're giving yourself a COL raise every year you should be withdrawing more every year anyhow.  I worked it out figuring drawing 45K year one with a 3% COL increase every year and the portfolio making an annualized 6% and it doesn't ever really seem to be an issue.  Now SS getting tossed in there at 70 will be over and above and if I have a lot larger return than expected maybe, but everything will be indexed up for inflation so that 132K income at 95 is the same as 45K at 59. 

There's always the option to use the extra RMD money for QCDs if they start causing problems as you don't need to itemize to take advantage of that. Of course, tax laws could (and probably will) be completely different in 40 years. I can only plan off what I know to be true right now.

Thanks for posting this. It's kind of non-intuitive that a small number growing at 3% that is less than the gains on a much larger number growing at 6% is eventually going toexceed the growth on the big number when you take withdrawals.

That aside! I'm unsure of your model rules. Is the 6% just a conservative estimate on market growth going forward? Usually when I see people using 6% they take that as an inflation adjusted growth number. My own inclination would be to use about 10% as a long term market growth number, assuming you don't go all 60/40 or less stock exposure. I had thought you mentioned being stock heavy for the duration, but maybe you changed your mind or I missed a nuance there?

Back to the first point, Assuming .06 growth is the turning point between eventually using up the kitty vs an ever expanding kitty as .07 would not have the withdrawals overtake the growth. So, if the market is doing really well especially the first few years that might set you up to not have the greatest control over your tax situation down the line.

Of course - as you mention direct charity contributions or just paying those taxes with a huge smile on your on your face are possibilities.  But I do want to make moves into roth if I can at all in those earlier years and let the money compound in the roth rather than the pretax.

[Rukh O'Rorke]

Feb 18, 2024 12:13:59 GMT -5 teen persuasion said:

Feb 18, 2024 10:20:09 GMT -5 minnesotapaintlady said:

I'm 55 now, and until age 65 it will be way too costly to convert anything.  There might be some room from 65 to 75.  We'll see what the tax situation is like come then.

But, that reminds me.  I never pulled the Roth money out of my spreadsheet when I added the RMDs column.  About 20% of that starting balance is Roth money, so the RMDs aren't as high as I posted. 

Ugh, the math is so crappy for singles!

Our state exchange says we could have $50k AGI and pay ~$100/ month, MFJ. But switch to a single, and it's $34k AGI to get near half that (because one person, right?). My expenses wouldn't drop much if I was widowed, just food, really. Some stuff would likely increase, w/o DH around to DIY things. So I don't budget less for when one of us passes away.

That's why I'm planning to convert as much as I can every year, even if its just $15k now. Every bit shifted to Roth and out of tIRA is a win. Hopefully I have many years to do conversions as MFJ, but maybe I won't (or DH won't). Pre-SS  is my prime time to do them, because no pension income to get in the way. Once SS and RMDs kick in, there's much less room.

the other unknown is if future tax rates increase - that would really be nontriumphant! at least for this highly taxed singleton!!

[minnesotapaintlady]

Feb 18, 2024 13:04:46 GMT -5 Rukh O'Rorke said:

Thanks for posting this. It's kind of non-intuitive that a small number growing at 3% that is less than the gains on a much larger number growing at 6% is eventually going toexceed the growth on the big number when you take withdrawals.

That aside! I'm unsure of your model rules. Is the 6% just a conservative estimate on market growth going forward? Usually when I see people using 6% they take that as an inflation adjusted growth number. My own inclination would be to use about 10% as a long term market growth number, assuming you don't go all 60/40 or less stock exposure. I had thought you mentioned being stock heavy for the duration, but maybe you changed your mind or I missed a nuance there?

Back to the first point, Assuming .06 growth is the turning point between eventually using up the kitty vs an ever expanding kitty as .07 would not have the withdrawals overtake the growth. So, if the market is doing really well especially the first few years that might set you up to not have the greatest control over your tax situation down the line.

Of course - as you mention direct charity contributions or just paying those taxes with a huge smile on your on your face are possibilities.  But I do want to make moves into roth if I can at all in those earlier years and let the money compound in the roth rather than the pretax.

I'm just being conservative as I plan on being more like 70/30 in retirement and I was through the lost decade, so know it could be flat (or down) for a long time too.  It won't run out at 6% unless I live to 105, so not really worried about it. 

There's not much I can do to to change how things are.  Roth (outside of the IRA) was never a good choice for my tax situation. I would not have anywhere near the savings I do now if I'd gone Roth in my 401K and I'm not paying a 30-40% marginal rate to convert either.  With being HOH and a dependent until potentially 63 and ACA subsidies to worry about until 65.

So, if come 75 I am flush with money.  Oh. Well.  I am so ready for that day.  I've been keeping myself "poor" for almost 20 years now and still have a decade to go. 

[Rukh O'Rorke]

Feb 18, 2024 14:58:06 GMT -5 minnesotapaintlady said:

Feb 18, 2024 13:04:46 GMT -5 Rukh O'Rorke said:

Thanks for posting this. It's kind of non-intuitive that a small number growing at 3% that is less than the gains on a much larger number growing at 6% is eventually going toexceed the growth on the big number when you take withdrawals.

That aside! I'm unsure of your model rules. Is the 6% just a conservative estimate on market growth going forward? Usually when I see people using 6% they take that as an inflation adjusted growth number. My own inclination would be to use about 10% as a long term market growth number, assuming you don't go all 60/40 or less stock exposure. I had thought you mentioned being stock heavy for the duration, but maybe you changed your mind or I missed a nuance there?

Back to the first point, Assuming .06 growth is the turning point between eventually using up the kitty vs an ever expanding kitty as .07 would not have the withdrawals overtake the growth. So, if the market is doing really well especially the first few years that might set you up to not have the greatest control over your tax situation down the line.

Of course - as you mention direct charity contributions or just paying those taxes with a huge smile on your on your face are possibilities.  But I do want to make moves into roth if I can at all in those earlier years and let the money compound in the roth rather than the pretax.

I'm just being conservative as I plan on being more like 70/30 in retirement and I was through the lost decade, so know it could be flat (or down) for a long time too.  It won't run out at 6% unless I live to 105, so not really worried about it. 

There's not much I can do to to change how things are.  Roth (outside of the IRA) was never a good choice for my tax situation. I would not have anywhere near the savings I do now if I'd gone Roth in my 401K and I'm not paying a 30-40% marginal rate to convert either.  With being HOH and a dependent until potentially 63 and ACA subsidies to worry about until 65.

So, if come 75 I am flush with money.  Oh. Well.  I am so ready for that day.  I've been keeping myself "poor" for almost 20 years now and still have a decade to go. 

You're doing great! I hope you can loosen up the purse strings for yourself a little bit in the very near future

I suspect that the most likely scenario is that we both end up pretty flush in a 'normal' market situation in the next few decades. Of course, we need to be prudent "just in case" we're going to party like it's 1929.....

[resolution]

Another factor with the ACA for people who live in states that rejected the Medicaid expansion - there is a minimum amount of taxable income that you have to maintain in order to qualify for subsidies on the exchange. The original intent was that anyone under that amount would be covered by Medicaid, but for the states that didn't expand Medicaid there is a gap where your income can be to low to qualify for subsidized insurance but you also aren't eligible for Medicaid. So for people in those states, it may be beneficial to keep some money in traditional IRA/401K to generate that taxable income.