Bogleheads® 2022 Conference – Mike Piper- Social Security, Tax Planning Before and During Retirement
00:00:00.000 | [ Applause ]
00:00:04.800 | Mike is a CPA, and he's the author of many finance and tax-related books.
00:00:10.020 | In fact, more than he can even count, but he's got these wonderful small books
00:00:15.580 | that are written in a really straightforward way.
00:00:18.320 | He does such a great job of communicating just what you need to get something figured out.
00:00:24.540 | He has also developed the website Open Social Security, and I think in a lot of ways
00:00:29.160 | that website epitomizes Mike's approach to what he does
00:00:33.840 | where he is creating this open source program, and it's just there to be helpful.
00:00:42.100 | It's a free tool.
00:00:43.320 | He's not selling it, and it's a wonderful, wonderful resource.
00:00:46.800 | So if you're trying to figure out Social Security, trying to get a second opinion
00:00:51.360 | on Social Security, definitely check out Open Social Security.
00:00:56.280 | He's here to discuss Social Security and tax planning matters before and during retirement.
00:01:04.100 | So please join me in welcoming Mike.
00:01:06.140 | [ Applause ]
00:01:08.140 | >> Thanks, Christine.
00:01:09.240 | Sorry. I don't know who this is.
00:01:13.300 | I'm just worried about, you know, tripping on it, making a mess.
00:01:17.280 | All right.
00:01:19.300 | So when clients come to me, and they're in this window of years, either shortly before retiring
00:01:25.940 | or shortly after retiring, they come to me with a list of questions on which they want my input,
00:01:32.120 | and there are three questions that show up on that list almost every single time.
00:01:37.180 | There we go.
00:01:39.320 | The first question is, when should I file for Social Security, as you might imagine.
00:01:43.360 | Second question is, should I be doing Roth conversions?
00:01:46.660 | They've heard that Roth conversions might be advantageous during retirement,
00:01:50.200 | but they don't know whether that applies to them specifically.
00:01:53.520 | And the third question is, which accounts should I spend from every year?
00:01:58.000 | All right.
00:01:58.780 | Let's say you want to spend $90,000 this year.
00:02:01.100 | Should it come out of your traditional IRA, Roth IRA, taxable brokerage accounts?
00:02:06.060 | How do you figure it out?
00:02:07.540 | So we're just going to go through these one by one today.
00:02:09.980 | When should I file for Social Security?
00:02:12.680 | There are three big factors that you should make sure to include in this decision.
00:02:17.420 | The first factor is actuarial math.
00:02:21.520 | So this is just math based on life expectancies.
00:02:23.660 | Then we have longevity risk.
00:02:25.860 | That's the risk of outliving your money, right?
00:02:28.800 | If you live for a very long retirement, you're more likely
00:02:31.560 | to deplete your portfolio during your lifetime.
00:02:33.540 | And then we have tax planning.
00:02:35.760 | So starting with actuarial math, this is exactly what Open Social Security does,
00:02:41.060 | and the idea here is we're just asking which filing age, or if you're married,
00:02:47.120 | which combination of filing ages, would be expected to provide the greatest total amount
00:02:52.780 | of benefits over your lifetime, or actually slightly more precisely what we're asking is
00:02:57.480 | which filing age is expected to provide the greatest present value of total benefits.
00:03:02.480 | So we're accounting for the fact that the dollar that you receive sooner is more valuable
00:03:07.620 | than the dollar that you receive later due to A, inflation, and B,
00:03:11.780 | the fact that the sooner you have a dollar in your hands, the sooner you can invest it.
00:03:16.140 | And this is exactly what Open Social Security does.
00:03:18.540 | It just takes the inputs that you give it, takes the mortality assumptions that you give it,
00:03:22.540 | and it figures out which filing age or combination of filing ages is expected
00:03:26.820 | to maximize your spending power over your lifetime.
00:03:29.500 | And when we do that math, what we typically see for an unmarried person, and we're starting
00:03:36.640 | with that analysis because that's the simpler one, and then we'll move
00:03:39.580 | on to the analysis for a married couple, we typically see that it makes sense to wait
00:03:44.200 | until age 70, or in some cases, file a little bit before age 70.
00:03:48.780 | And the reason that this is how the math works out, to understand it,
00:03:54.260 | it can help to back up a step and to talk about when the current version
00:03:58.660 | of the rules were first created.
00:04:00.280 | So the rules that say that as you wait however many months,
00:04:03.100 | your benefit goes up by this much percent every month.
00:04:05.080 | The idea was that the system would be actuarially neutral,
00:04:11.300 | meaning that any one filing age was supposed to be about as good as any other filing age,
00:04:15.860 | because as you wait, your benefit goes up, but that would be offset by the fact
00:04:20.280 | that you're receiving that benefit for a smaller number of months.
00:04:23.320 | So that's the idea.
00:04:24.400 | It was supposed to be actuarially neutral.
00:04:26.180 | But the reality is that today, it no longer is, and that's because the rules didn't change,
00:04:33.500 | but the world did change.
00:04:35.280 | Specifically, life expectancies have gone up, and that pushes the math in favor of waiting.
00:04:41.640 | Because the longer you live, the better it works out to have waited to file for your benefit.
00:04:46.000 | Right? Because your benefit lasts your whole life, so if you live for a very long life,
00:04:49.600 | it would be good to have a larger social security benefit.
00:04:52.860 | So this shifts the math in that direction.
00:04:55.640 | But there are exceptions, right?
00:04:58.060 | There are cases in which an unmarried person should go ahead and file early.
00:05:01.100 | The obvious one is somebody in poor health, right?
00:05:04.580 | If you're 62 and you're trying to figure out whether to make this decision,
00:05:07.940 | if you already have a diagnosis that says you're only supposed to live to age 65,
00:05:11.840 | you shouldn't wait until age 70 to file for your benefit.
00:05:16.600 | Then we have, if you have a minor child or an adult disabled child,
00:05:21.840 | your child can receive benefits on your work record, but not until you have filed
00:05:27.360 | for your retirement benefit, so that can be a point in favor of filing earlier
00:05:31.160 | so that your child can get those benefits starting at an earlier time.
00:05:35.920 | And whenever real interest rates are high, so real interest rates meaning inflation adjusted
00:05:40.600 | interest rates like we see on TIPS, whenever those are high,
00:05:43.540 | that makes filing early relatively more advantageous, right?
00:05:47.620 | Because the idea is that the take the money and invest it strategy, it becomes more attractive
00:05:52.960 | when you know you can get a better return.
00:05:54.340 | Now when we move on to the decision for a married couple, what we typically see,
00:06:02.900 | the life expectancy math showing us, is that the higher earner should wait until age 70,
00:06:08.000 | and the lower earner should file somewhat earlier, not necessarily ASAP at age 62,
00:06:14.660 | but somewhat before 70, and the reason for that has to do with the way that survivor benefits work.
00:06:20.640 | Basically as soon as either person dies,
00:06:23.040 | the surviving spouse continues receiving the larger of the two benefit amounts.
00:06:28.640 | That's the smaller of the two benefit amounts that goes away.
00:06:31.000 | And so what this means is that when the higher earner waits to file,
00:06:36.660 | it increases the household income as long as either person is still living
00:06:40.940 | or until both people have died.
00:06:42.840 | So for example, if you consider myself and my spouse, if you imagine that when we reach age 62,
00:06:48.600 | if at that point in time I'm the one with the higher earnings record, if I wait to file,
00:06:54.000 | that increases my retirement benefit, and that's relevant for as long as I'm alive.
00:06:59.980 | But if I die first, and she outlives me, her benefit as my survivor will be increased due
00:07:05.940 | to the fact that I waited, so when the higher earner waits,
00:07:09.080 | it increases the household income while either person is still living.
00:07:12.020 | Now when the lower earner waits, it's kind of the opposite situation.
00:07:17.460 | It only increases the household income for as long as both people are still living.
00:07:21.120 | So again, in this example, if you take my spouse, if she waits to file for her retirement benefit,
00:07:26.340 | if she's the lower earner at that time, then that will increase her retirement benefit.
00:07:30.840 | But then if she dies first, that increased benefit is no longer relevant.
00:07:35.140 | And if I die first, she would start receiving a benefit as my survivor.
00:07:39.400 | So again, the fact that she waited is no longer relevant.
00:07:41.940 | And the key point here is that while either person is still alive is a longer length of time
00:07:49.860 | than while both people are still alive.
00:07:52.720 | So when the higher earner waits, it increases the household income for a longer length of time.
00:07:57.340 | Sorry, just a very thirsty speaker.
00:08:06.820 | All right, now what we can do, this is an illustrative concept, we can think about all
00:08:14.000 | of the possible mortality outcomes and group them into four categories.
00:08:21.500 | We have the first corner, where both people live beyond their life expectancy.
00:08:26.060 | And in the opposite corner, we've got the opposite case,
00:08:28.880 | where both people died before reaching their life expectancy.
00:08:31.280 | And then we have the case where spouse A dies before reaching their life expectancy
00:08:35.400 | and spouse B lives past their life expectancy, and the opposite case.
00:08:39.200 | So for the higher earner's filing decision, what we want to know is how long will it be
00:08:46.520 | until both people have died?
00:08:49.360 | Or another way that we can ask that question is how likely is it
00:08:53.920 | that at least one person lives past their life expectancy?
00:08:58.040 | Because if at least one person lives past their life expectancy,
00:09:01.580 | then it will have been a good thing for that higher earner to have waited.
00:09:05.140 | So in which of these four cases does at least one person live past their life expectancy?
00:09:10.800 | We've got this one where they both do, this one where spouse B does.
00:09:17.040 | Sorry, a bit of a delay with the clicker here.
00:09:21.180 | And this one where spouse A does.
00:09:22.800 | So in other words, there's about a three out of four chance
00:09:25.200 | that at least one person lives past their life expectancy.
00:09:28.240 | And that's why it's generally a good idea for that higher earner to wait to file.
00:09:33.000 | But then when we look at the decision for the lower earner,
00:09:36.600 | now we have to ask the opposite question.
00:09:38.860 | How likely is it that at least one person dies early before reaching their life expectancy?
00:09:44.800 | Because if that happens, at least one person dies early, then it will have been advantageous
00:09:49.500 | for that lower earner to file early.
00:09:51.840 | So in which of these four cases does at least one person die early?
00:09:56.280 | Well, these three.
00:09:58.440 | Every case other than the one in which they both live past their life expectancy, right?
00:10:02.340 | So there's about a three out of four chance that at least one person dies before reaching their life
00:10:07.680 | expectancy, and that's why it's generally advantageous for that lower earner to file earlier.
00:10:12.240 | And that's why we get this rough draft plan, where the higher earner waits until age 70,
00:10:17.860 | and the lower earner files somewhat earlier.
00:10:20.020 | But again, there are exceptions.
00:10:23.200 | There's the case in which you have a minor child or adult disabled child, same idea as before.
00:10:28.440 | That can be a point in favor of the higher earner filing earlier so that
00:10:32.660 | that child can receive child benefits on that person's work record,
00:10:35.380 | starting at an earlier point in time.
00:10:36.720 | There's the case where the lower earner is younger than full retirement age
00:10:41.720 | and still working, then we have to concern ourselves with the social security earnings test,
00:10:46.120 | which we're not going to get into all of the rules, but it's a compelling point in favor
00:10:51.220 | of that lower earner waiting at least until the year they reach full retirement age
00:10:55.600 | or the year in which they stop working.
00:10:56.940 | And then we have the case in which either person has a government pension from work
00:11:02.560 | that wasn't covered by social security tax, so a job where they didn't have to pay FICA taxes,
00:11:06.660 | because then two additional sets of rules kick in, windfall elimination provision
00:11:10.880 | and government pension offset, and we're not going to dig into the details of those either.
00:11:14.420 | But that can be a compelling point in either direction,
00:11:19.340 | filing earlier or later for either person.
00:11:21.480 | So it can push the math either way for either person.
00:11:24.440 | So it's especially complicated, so in those cases it is helpful to use a calculator.
00:11:29.260 | Again, open social security does account for that.
00:11:31.580 | The other good calculators do to maximize my social security, social security solutions.
00:11:35.440 | They both account for that, but it's important to use something
00:11:38.700 | that will actually do the math that's specific to your household.
00:11:41.060 | Another possible exception is if both people are in very poor health, then it makes sense
00:11:47.840 | for the higher earner to take their filing date and move it somewhat earlier.
00:11:51.620 | Or the opposite case, if both people are in really good health or you're just concerned
00:11:56.040 | about longevity, you can take the lower earner's filing date and push it later.
00:11:59.620 | And then we have tax planning.
00:12:03.480 | Tax planning is usually a point in favor of delaying, but it can go in either direction.
00:12:08.060 | And so that brings us back to our three major factors.
00:12:10.280 | We've spent a lot of time talking about actuarial math.
00:12:12.260 | We're going to talk more briefly about longevity risk and tax planning.
00:12:15.320 | So longevity risk, again, it's just the chance of outliving your money, right?
00:12:19.640 | The idea that the longer you live, the more likely you are to deplete your portfolio.
00:12:22.880 | And it's usually a point in favor of waiting to file for your benefit, right?
00:12:26.980 | Because the longer you live, the more helpful it will be to have
00:12:30.140 | that larger social security benefit that's going to last a whole lifetime.
00:12:34.340 | However, something I see with a fair number of bugle head households, frankly,
00:12:38.860 | is that there's already no longevity risk, almost.
00:12:42.000 | Because the amount that they want to spend per year relative to the level
00:12:49.020 | of assets they've already accumulated, they're just not going to spend
00:12:52.660 | down their portfolio during their lifetime.
00:12:54.120 | It's just extremely likely that a good chunk of it is going to go to their heirs.
00:12:57.740 | And so in those cases, longevity risk, it's just not a big factor in the decision.
00:13:03.020 | It's not something we really need to think about.
00:13:04.440 | And then we have tax planning, which usually is a point in favor of delaying.
00:13:09.600 | And that's for two reasons.
00:13:11.180 | Reason number one is that social security benefits are always at least partially tax-free.
00:13:17.480 | At least 15% of your social security income is tax-free.
00:13:21.000 | And if your income is below certain thresholds, more than 15% will be tax-free.
00:13:26.620 | So, for example, if you spend down a traditional IRA in order
00:13:33.440 | to fund your living expenses while you wait to file for social security,
00:13:36.560 | what you're doing is giving up future growth in that traditional IRA, right?
00:13:40.380 | So you're giving up income that would be fully taxable.
00:13:43.360 | And you're getting more social security income that is at least partially tax-free.
00:13:48.280 | And usually that's a good tradeoff.
00:13:50.120 | And the other reason that tax planning points in favor of delaying in most cases is
00:13:55.120 | that it gives you more time to take advantage of Roth conversions.
00:13:58.360 | And we'll talk about Roth conversions next.
00:14:00.420 | But they're most often advantageous in the years after you have retired,
00:14:05.940 | but before social security has started.
00:14:08.440 | So when you push that social security start date back further into the future,
00:14:12.540 | that expands that window of time.
00:14:14.700 | It gives you more years to do Roth conversions.
00:14:16.680 | And the way I actually do this for clients when they come to me and ask this question is,
00:14:21.920 | step number one, put it into the calculator.
00:14:24.560 | It's, you know, easy.
00:14:26.220 | It only takes a few minutes.
00:14:27.100 | And it will tell you the actuarially best strategy.
00:14:29.800 | But then we have to remember those other two factors.
00:14:32.540 | We have to ask, okay, well, what about tax planning?
00:14:35.220 | What about longevity risk?
00:14:36.480 | And is there a compelling reason from either of those two points of view to do something different?
00:14:41.680 | And usually that something different would be for the lower earner to wait longer
00:14:46.620 | or if it's a single person to wait longer.
00:14:48.460 | And so the next step is to go back to open social security
00:14:53.080 | and see what happens when we do that.
00:14:55.100 | So what happens when we take the lower earner's filing date and push it somewhat later?
00:14:59.340 | Does the expected present value change?
00:15:01.840 | It will. But sometimes it goes down by a tiny amount, 1%, 2%.
00:15:07.460 | And when that's what happens, what the calculator's telling you is basically
00:15:11.160 | from a life expectancy math point of view, this lower earner's filing date,
00:15:15.680 | it's just not that important.
00:15:16.660 | And so it frees you up to make the decision from a tax planning point of view
00:15:20.560 | or a longevity risk point of view.
00:15:21.760 | It frees you up to go ahead and have that person wait.
00:15:23.840 | But other times what you'll see is that when you take that lower earner's filing date
00:15:27.460 | and push it later, the expected present value just nosedives, right?
00:15:31.520 | It goes off a cliff.
00:15:32.320 | And that's most often the case when there's a big age gap between the two people or if one
00:15:38.820 | of the two people is in particularly poor health.
00:15:40.640 | And what it's telling you then in that case is, yes, it really does make sense
00:15:46.680 | to have this lower earner file earlier.
00:15:49.120 | So that's it for social security.
00:15:52.840 | Next up, we're going to talk about Roth conversions.
00:15:54.800 | Just one second.
00:15:55.420 | All right.
00:16:02.600 | So should you be doing Roth conversions during retirement?
00:16:04.620 | Just to make sure that we're on the same page about terminology, you know,
00:16:08.040 | what's a Roth conversion, a Roth conversion is when you take money from a tax-deferred account
00:16:13.120 | and you move it over to a Roth account.
00:16:14.740 | So for example, you're moving money from a traditional IRA over to a Roth IRA.
00:16:19.280 | And when you do that, the money that you convert, the money that you move over,
00:16:23.080 | it's generally taxable as income in the year that you do the conversion.
00:16:26.940 | So why would you do that?
00:16:29.180 | When would you do that?
00:16:30.440 | The idea is basically whenever you have a temporarily low tax rate,
00:16:34.880 | it makes sense to do a conversion.
00:16:36.980 | Pay some tax now, right?
00:16:39.400 | Move some money from traditional to Roth now.
00:16:41.700 | Pay tax at your temporarily low tax rate so that you won't have
00:16:46.380 | to pay tax later at a higher tax rate.
00:16:48.760 | Because from now on, this money is going to be in Roth.
00:16:50.780 | So whenever it comes out later, it's going to be tax-free.
00:16:52.960 | So very succinctly, if your current marginal tax rate is less
00:16:56.940 | than the future marginal tax rate, well, hang on.
00:17:00.940 | There we go.
00:17:01.560 | Do a Roth conversion.
00:17:02.520 | But there are a whole bunch of caveats, a lot of other things to consider in this analysis,
00:17:07.700 | things that make it more complicated than people often expect.
00:17:10.060 | Sorry, I think we got a battery issue here.
00:17:14.540 | Maybe I'll just stand here.
00:17:15.600 | All right, the first thing is that this isn't a binary decision.
00:17:20.860 | It's not a decision where we're choosing between convert none of the IRA
00:17:25.720 | or convert the whole IRA this year.
00:17:27.900 | That's not what we're choosing between.
00:17:29.660 | Most of the time, what it makes sense to do is convert a portion of the IRA this year
00:17:34.680 | and another portion next year and another portion next year.
00:17:37.880 | And in many cases, we still don't convert the whole IRA.
00:17:40.740 | You're only doing a chunk of it over several years.
00:17:44.880 | So in theory, this is a dollar-by-dollar analysis that you're repeating every single year.
00:17:48.200 | And often, the answer is that it makes sense to do conversions
00:17:52.120 | up to a particular income threshold each year.
00:17:54.420 | So for example, right, because there's all these things in our tax code
00:17:57.820 | where as your income goes up, your tax rate goes up, too.
00:18:00.520 | And so often, we pick a particular threshold and say, all right, up to this threshold,
00:18:05.180 | I would be paying these low tax rates on conversions.
00:18:08.180 | And that seems like it's probably advantageous.
00:18:11.000 | But above this income threshold, I would be paying a higher tax rate,
00:18:14.340 | and that seems less advantageous.
00:18:15.880 | So we're going to do conversions to bring my income up to this level.
00:18:18.280 | Another important thing to keep in mind is
00:18:21.620 | that your marginal tax rate is not necessarily the same thing as your tax bracket.
00:18:26.680 | A lot of people make this very understandable assumption.
00:18:30.420 | You know, for example, if you're in the 22% bracket, people often think, well,
00:18:34.000 | I must have a 22% marginal tax rate.
00:18:36.460 | But that's not how it works because there's a whole ton of things in our tax code
00:18:41.900 | where as your income goes up, for example, if you are in that 22% bracket,
00:18:47.740 | as your income goes up, you've got your 22% tax increase from your tax bracket.
00:18:52.200 | But then you've also got something else happening, right?
00:18:54.760 | Like you're becoming ineligible for a particular deduction or a particular credit
00:18:58.020 | because your income has crossed whatever threshold applies here.
00:19:00.780 | And so when you account for this factor and this factor,
00:19:04.040 | your total marginal tax rate is more than just that 22%.
00:19:08.240 | Now, there's some things that can cause this to happen that are pretty common for retirees.
00:19:12.020 | Number one is the premium tax credit.
00:19:13.740 | That's anybody -- for anyone buying insurance on the Affordable Care Act exchange.
00:19:16.920 | So it's especially relevant for anybody retiring before 65.
00:19:20.440 | So before you get access to Medicare.
00:19:21.940 | And the way that credit works is that as your income goes up, the credit goes down.
00:19:25.880 | So if you're buying insurance on the exchange, and this applies to you,
00:19:29.400 | your marginal tax rate is more than your tax bracket because every additional chunk
00:19:33.240 | of income is causing that credit to shrink.
00:19:36.380 | The way that Social Security benefits are taxed also causes this sort of effect.
00:19:39.660 | Medicare IRMA, that's income-related monthly adjustment amount.
00:19:43.460 | Those are just the rules for determining your Medicare premiums.
00:19:45.580 | The way it works is when your income crosses certain thresholds,
00:19:48.340 | your Medicare premiums jump upwards.
00:19:51.240 | So at those particular thresholds, your marginal tax rate is way higher
00:19:56.240 | than just your tax bracket.
00:19:57.920 | The 3.8% net investment income tax causes an effect like this.
00:20:02.880 | And essentially anything in our tax code that phases in or phases out based on your income,
00:20:07.540 | it's going to cause an effect like this
00:20:09.600 | where your actual marginal tax rate is something different than just your tax bracket.
00:20:14.260 | And the reason I am spending so much time on this, the reason I'm harping on it is that a lot
00:20:19.520 | of people -- what I see a whole lot is people taking a DIY approach to this analysis,
00:20:25.260 | which is cool because we're bogleheads, we're do-it-yourselfers.
00:20:27.620 | But they also take a DIY approach to the actual tax calculations.
00:20:33.340 | They try to do it in a spreadsheet, something like that.
00:20:35.260 | And I'm a CPA, so I love spreadsheets.
00:20:38.480 | I mean, I use Excel every day, and that truly includes weekends.
00:20:42.480 | But -- I'm not joking.
00:20:45.320 | And it's just not the right tool for this job.
00:20:49.140 | Because when people do the math in a spreadsheet, they almost always leave out one
00:20:54.780 | of those other factors or more than one of those other factors.
00:20:59.000 | And so you see this situation where you've got a person who spent all
00:21:01.460 | of this time doing this analysis, and they expected to pay tax at this rate on the conversion,
00:21:07.220 | and they paid tax at this rate on the conversion.
00:21:09.400 | And so they sunk all of this time and effort into it and did as much harm as it did good.
00:21:14.040 | And that's just insane.
00:21:16.280 | So don't take a DIY approach to the tax calculations, please.
00:21:20.400 | But the good news is that there's tax software that does this.
00:21:23.560 | It's good software out there.
00:21:25.300 | Income strategy is one.
00:21:27.780 | It's not free, but it's not super expensive either.
00:21:30.820 | It's by two very well-respected experts in the field, or even, frankly,
00:21:34.660 | just TurboTax or something like that.
00:21:37.360 | There's a good chance you're already paying for it, right?
00:21:38.940 | And even if you aren't, it's not very expensive.
00:21:41.300 | And it has an extremely sophisticated tax calculation built into it.
00:21:46.740 | That's largely what the software does.
00:21:48.760 | And so you can basically just prepare a hypothetical return, right?
00:21:52.560 | Say we expect this much of this type of income and this much of this other type.
00:21:55.940 | And then what if we did a $10,000 Roth conversion?
00:21:59.360 | And you see, this is how much my tax has changed.
00:22:01.460 | So you can see what your actual marginal tax rate is for that amount of income.
00:22:04.240 | And then you bump it from a $10,000 conversion to a $20,000 conversion
00:22:08.060 | and see what your tax rate would be on that next chunk of income.
00:22:10.220 | And it'll actually do this math for you in a reliable and accurate way.
00:22:13.960 | Another important thing to keep in mind is that for a married couple, the marginal tax rate
00:22:21.120 | for the household often goes up after either of the two people has died.
00:22:26.480 | And the reason for this is that the standard deduction for one person, for a single filer,
00:22:32.280 | is half of what it is for a married couple filing jointly.
00:22:35.760 | And the tax brackets have half as much space in them for a single filer
00:22:40.100 | as for a married couple filing jointly.
00:22:41.820 | But when one person dies, the household's income falls by less than half
00:22:45.660 | because it's the smaller of the two Social Security benefits that goes away.
00:22:49.500 | And the income from the portfolio really doesn't change.
00:22:53.600 | You've still got the same interest and dividends and RMDs coming in.
00:22:56.540 | So you've got a situation where you've got half the standard deduction and half the space
00:23:01.160 | in the tax brackets, but more than half as much income.
00:23:03.720 | And so you often, not always, but often have a case
00:23:07.760 | where that surviving spouse now has a higher marginal tax rate.
00:23:10.340 | And so the implication here is that it often makes sense for a married couple
00:23:15.820 | to prioritize doing Roth conversions while both people are still living.
00:23:19.500 | And our last caveat here on the topic of Roth conversions is that the future tax rate
00:23:26.000 | that we're talking about might not be your future tax rate, right,
00:23:30.100 | because we're always asking what is the current marginal tax rate that you would pay
00:23:33.880 | on a conversion and how does that compare to the future tax rate, which is the tax rate
00:23:39.000 | that will be paid on these dollars later whenever they come out of the account later
00:23:43.860 | if you don't convert them right now.
00:23:46.600 | And when you're doing that comparison, that future tax rate could be somebody else's.
00:23:50.300 | It could be the tax rate that your heirs would pay on distributions
00:23:54.100 | from an inherited traditional IRA.
00:23:55.760 | Because for a lot of people in this room, it's pretty likely that you aren't going
00:24:01.060 | to completely spend down your traditional IRA and 401(k)
00:24:05.180 | and other tax-deferred accounts during your lifetime.
00:24:06.940 | And so the Roth conversion decisions that can make sense
00:24:11.300 | for one household might make no sense for another household just purely based
00:24:14.580 | on the difference in the beneficiaries of their accounts, right.
00:24:17.640 | So if you imagine Household A and Household B who have identical finances,
00:24:22.580 | but Household A has one child and she is an anesthesiologist,
00:24:28.080 | very successful, really high income, she's probably going to pay a really high tax rate
00:24:33.080 | on distributions from that inherited traditional IRA.
00:24:36.140 | And then if we imagine Household B over here and they've got four kids,
00:24:42.240 | so the tax-deferred accounts are going to be split up among four people,
00:24:45.920 | which means the distributions themselves will be smaller and therefore less likely
00:24:49.840 | to push the beneficiaries into higher tax brackets.
00:24:52.040 | And if we imagine that the four kids are in careers with more modest levels of earnings,
00:24:56.320 | they're probably going to pay a considerably lower tax rate on those distributions
00:25:01.000 | from the inherited traditional IRAs.
00:25:02.760 | So even though the parent households have identical finances, you know,
00:25:07.900 | the Roth conversion decision that makes so much sense over here and is a clear
00:25:11.400 | and obvious win might make no sense at all for this household over here.
00:25:15.080 | And to the extent that you're going to be leaving your tax-deferred dollars to charity,
00:25:20.840 | the future tax rate is zero, right, because tax-exempt organizations are tax-exempt.
00:25:26.440 | So if they inherit a tax-deferred account, they don't have to pay tax on it.
00:25:31.740 | And so quick tangent, if you are considering leaving money to charity,
00:25:36.400 | these are the dollars to leave to charity because if you leave a traditional IRA
00:25:40.520 | to your kids or your grandkids, they only get to spend however much is left after taxes,
00:25:44.880 | whereas if you leave it to a charity, they get to spend the whole amount.
00:25:48.620 | So if you're doing that, then however much ends up going to that charity,
00:25:53.240 | that future tax rate is zero, which therefore means
00:25:56.240 | that Roth conversions probably don't make very much sense, right, because the whole point
00:26:00.240 | of a Roth conversion is pay tax now so we can avoid the future tax rate.
00:26:03.540 | But why would you pay any tax now to avoid a 0% future tax rate?
00:26:08.320 | It makes no sense at all.
00:26:09.440 | So that brings us to key decision number three,
00:26:13.400 | which is which accounts should I spend from every year?
00:26:15.920 | And in this discussion, we're going to be assuming that there's three accounts, really.
00:26:27.880 | There's tax-deferred accounts or three types of accounts,
00:26:30.240 | tax-deferred, Roth, and taxable accounts.
00:26:33.060 | And I know we were talking about HSAs just in the last session, but at least for most people,
00:26:38.560 | the overwhelming majority of the assets are in these three accounts.
00:26:41.160 | So we're just going to limit it to these.
00:26:42.880 | And let's start with an example where you're trying to figure out which dollars to use
00:26:48.740 | for your next $1,000 of spending this year.
00:26:51.320 | And let's imagine in this example that you have not yet used up the standard deduction this year.
00:26:58.500 | So your income so far this year is less than the standard deduction amount,
00:27:02.340 | which means that if you took the money out of a traditional IRA, it would be tax-free.
00:27:07.220 | And that sounds like a pretty good time to take the money out of your traditional IRA to spend it.
00:27:12.200 | So we're basically rigging the example, admittedly, to make tax-deferred spending look good.
00:27:17.200 | So that is option A. Spend $1,000 from your tax-deferred account.
00:27:22.340 | Option B is to spend $1,000 from a taxable account.
00:27:28.040 | Just imagine it's coming out of your regular checking account.
00:27:30.720 | And at the same time, do a $1,000 Roth conversion.
00:27:36.680 | Now, there's a lot of things that are similar between option A and option B. Firstly,
00:27:41.980 | in both cases, you wanted to spend $1,000, and you did, so thumbs up.
00:27:46.760 | They both win in that regard.
00:27:48.080 | And in both cases, you created $1,000 of income that's going to show up on your tax return,
00:27:54.060 | your Form 1040, but $0 of actual tax because that income just got offset by the standard deduction.
00:27:59.940 | And in both cases, you've got $1,000 less in your tax-deferred account
00:28:06.180 | than you did a minute ago, right?
00:28:07.380 | Because with option A, we spent $1,000 for that account.
00:28:10.140 | And with option B, we moved $1,000 from tax-deferred to Roth as the Roth conversion.
00:28:15.840 | So that is the same between option A and option B. They have a lot in common.
00:28:20.380 | So what's different?
00:28:22.140 | What's different is that with option A, you're left with $1,000 in your taxable account.
00:28:27.760 | You didn't spend anything from your taxable account.
00:28:30.560 | So you have $1,000 more in that checking account.
00:28:33.300 | With option B, you have $1,000 more in your Roth account because you did spend that money
00:28:38.560 | from checking, but you also moved $1,000 from tax-deferred to Roth.
00:28:42.560 | And it turns out, that's the only difference between option A and option B.
00:28:47.780 | In the one case, you have more money left in a checking account.
00:28:51.280 | And in the other case, you've got more money left in a Roth IRA.
00:28:54.220 | It's better to have more money in a Roth IRA.
00:28:58.580 | That's just how this works.
00:28:59.760 | Roth IRAs, if you invest that money, it's going to get to grow tax-free.
00:29:03.460 | Whereas, if you took that money that's left in the checking account and invest it,
00:29:06.640 | you're going to be paying tax on it.
00:29:07.960 | So option B strictly beats option A. And in this example, we're just talking about $1,000
00:29:15.960 | of spending, and we're talking about this very low 0% tax rate.
00:29:19.640 | But the same exact thing applies when we increase the dollar amount,
00:29:23.600 | so we increase the tax rates.
00:29:24.940 | So for example, now we're talking about taking $100,000
00:29:29.100 | out of your tax-deferred account to spend.
00:29:32.740 | And in this example, let's imagine that you have a 25% tax rate between federal
00:29:37.640 | and state across that $100,000 of income.
00:29:40.060 | So that means you actually get to spend $75,000 because $25,000 went to taxes.
00:29:46.940 | So that's option A. Option B, spend the same amount, but it just comes
00:29:53.960 | out of a regular checking account, taxable account, and do a $100,000 Roth conversion,
00:30:00.160 | which again, because we're assuming this 25% tax rate, it's going to result in $25,000 of taxes,
00:30:05.160 | and we're going to have that money come out of the checking account also.
00:30:08.520 | So in both cases, you actually spent $75,000.
00:30:14.360 | So they're the same in that regard.
00:30:15.960 | And in both cases, you've created $100,000 of income that's going to show
00:30:20.720 | up on your tax return, and you paid $25,000 of taxes.
00:30:24.320 | And in both cases, you now have $100,000 less than your tax-deferred account,
00:30:29.880 | than you did beforehand, because with option A, you took that money out to spend it,
00:30:33.460 | and with option B, you did the Roth conversion.
00:30:35.920 | So what's different?
00:30:38.200 | It's the same thing.
00:30:39.600 | What's different is that with option A, you have a whole bunch of money left
00:30:42.280 | in your taxable account, the checking account, because you didn't spend it.
00:30:44.780 | And with option B, you've got a bunch of money in a Roth IRA.
00:30:48.300 | And again, option B wins in the exact same way and for the exact same reason.
00:30:52.840 | And over a few years of spending, this makes a really big difference.
00:30:58.640 | You can have a bunch of money in a regular checking account or a bunch of money
00:31:02.820 | in a Roth IRA, and the Roth IRA is better.
00:31:05.380 | Now, I know a lot of people are probably thinking, okay, cool, but I don't keep like years worth
00:31:13.440 | of spending in a checking account, and that's normal.
00:31:16.660 | But what we're talking about here is not only spending the money that's
00:31:20.380 | in your checking account right now, we're also talking about spending any money that's
00:31:24.460 | in a savings account, as well as anything that automatically shows up in your checking account.
00:31:28.920 | So if you're still working or if your spouse is still working, presumably that money shows
00:31:34.080 | up in your checking account, and that's some of the most tax-efficient money
00:31:37.580 | to spend every month and every year.
00:31:39.820 | Same thing with Social Security benefits.
00:31:42.320 | It's getting paid into your checking account, and that's some of the best money
00:31:45.420 | to spend every month and every year.
00:31:46.840 | If you have a pension or an annuity, it's showing up in your checking account,
00:31:51.360 | and that's some of the first most tax-efficient money to spend.
00:31:55.000 | Interest and dividends from holdings in a taxable brokerage account,
00:31:57.860 | it often makes sense during retirement to turn off automatic dividend reinvestment,
00:32:03.560 | have that money sent to your checking account, because it's some of the best money
00:32:06.940 | to spend from a tax point of view.
00:32:08.440 | RMDs, it's money coming out of tax deferred, shows up in a taxable account,
00:32:13.680 | that's some of the best money to spend.
00:32:15.460 | And in fact, it also makes sense to spend any assets in a taxable brokerage account
00:32:22.700 | where there's unrealized losses or only very modest unrealized gains.
00:32:27.320 | So basically, anything where if you sold it, you wouldn't have to pay tax
00:32:30.540 | or you'd only have to pay a tiny amount of tax.
00:32:34.680 | And so, just to reiterate, the whole idea here is that before spending anything at all
00:32:39.520 | from a retirement account, you want to spend any assets from taxable accounts
00:32:43.720 | where you wouldn't have to pay any additional tax to spend those dollars.
00:32:49.440 | And then if you still have low tax rate space that isn't being used
00:32:52.960 | up because you aren't taking money out of a tax deferred account to spend it,
00:32:56.520 | fill up that low tax rate space by doing Roth conversions.
00:33:00.480 | Now, of course, in a lot of years, you're going to spend all
00:33:06.060 | of those checking account dollars and still need to spend more.
00:33:08.500 | So it will have to come out of a tax deferred account or a Roth IRA.
00:33:12.620 | And so, in those years, the general analysis is to ask how does your current marginal tax rate,
00:33:20.000 | so the tax rate you would pay taking the money out of a tax deferred account,
00:33:22.720 | how does that compare to the future marginal tax rate?
00:33:25.660 | If your current marginal tax rate is less, you take advantage of that low tax rate
00:33:30.320 | by spending from tax deferred.
00:33:31.480 | And if your current marginal tax rate is higher, you spend from Roth,
00:33:35.120 | the idea being my tax rate right now is high, so I'm going to try
00:33:38.600 | to keep my income low by spending from Roth.
00:33:42.400 | Now, what you might notice is that this math comparison we're doing,
00:33:45.860 | current marginal tax rate compared to future marginal tax rate,
00:33:49.380 | it's the exact same comparison we were doing for Roth conversions.
00:33:54.120 | The math is exactly the same, and so all of the same caveats
00:33:58.520 | and extra considerations, they apply in just the same way.
00:34:01.480 | Number one, it's not a binary decision.
00:34:03.920 | You're not usually choosing spend only tax deferred this year or spend only Roth.
00:34:08.600 | It often makes sense, spend from tax deferred up to a particular income limit
00:34:12.420 | and then spend from Roth, so in many years, that's what you're going to be doing.
00:34:15.600 | And we have to remember that your marginal tax rate is something different
00:34:20.040 | than just your tax bracket in many cases.
00:34:22.560 | So please, please, please don't DIY your way into the tax calculations, use tax software,
00:34:29.080 | which is very affordable and available, and we have to remember that for a married couple,
00:34:34.500 | the marginal tax rate often goes up when either of the two people dies.
00:34:38.540 | And so that can be a point in favor of spending
00:34:40.320 | from tax deferred while both people are still living.
00:34:42.820 | Take advantage of the relatively lower tax rate at that time.
00:34:45.660 | And finally, we need to remember that the future tax rate
00:34:49.780 | in this comparison could be somebody else's.
00:34:52.600 | To the extent you're leaving these dollars to somebody else at your death,
00:34:56.660 | the future tax rate is not your own, but it's the tax rate that will be paid
00:35:00.660 | by whoever you're naming as the beneficiary of these accounts.
00:35:04.520 | So just to reiterate the whole plan here,
00:35:07.140 | because I know it's not the most intuitive thing in the world.
00:35:09.700 | Taxable assets are the first priority for spending every year.
00:35:15.000 | And that includes anything in your checking account, everything that automatically gets paid
00:35:21.020 | into your checking account, anything in a savings account, and any taxable brokerage assets
00:35:26.100 | where you wouldn't have to pay very much tax to sell them to use them for spending.
00:35:30.380 | So in other words, it's everything in that taxable category.
00:35:34.140 | Other than holdings that are already highly appreciated.
00:35:37.300 | So things that have already gone way up in value since you bought them.
00:35:40.820 | Those ones you generally want to try to hold on to.
00:35:43.940 | And ideally, never sell them at all, if that's plausible for your circumstances.
00:35:49.860 | Because then if you leave them to your kids or grandkids or whoever it is,
00:35:53.100 | could be a charity, really anyone, they get a step up in cost basis and then all
00:35:56.700 | of that appreciation ultimately goes untaxed.
00:35:58.580 | So step one, spend everything from taxable other than those things
00:36:03.500 | that are already highly appreciated.
00:36:04.980 | And then if you still need to spend more than that in a given year,
00:36:09.380 | then when your current tax rate is high, spend from Roth.
00:36:13.440 | And when your current tax rate is low, spend from tax deferred.
00:36:16.540 | And then when you're following this strategy, if in any given year you have low tax rate space
00:36:22.400 | that you haven't yet used up, because you're not spending from tax deferred accounts,
00:36:25.620 | use up that low tax rate space with Roth conversions.
00:36:29.060 | Because then you're going to be left with more money in Roth.
00:36:31.880 | And that's really it.
00:36:33.980 | Those are the three questions I wanted to talk about.
00:36:35.980 | So we've still got some time for questions.
00:36:37.460 | [ Applause ]
00:36:42.620 | >> Okay, I'm Lady Geek.
00:36:44.280 | Okay. My, sorry, my perspective, when I talk, post things in a forum,
00:36:52.980 | I always take the perspective of a new ambassador.
00:36:55.900 | One thing that's screaming to me is that we have a lot of people,
00:37:00.340 | new people here who probably do not understand what a Roth conversion is.
00:37:03.680 | And what my big fear is that doing the wrong thing can be worse than doing nothing.
00:37:10.960 | Don't mess with the IRS is a thing we always follow.
00:37:15.500 | So if you don't understand what these two words together mean, first of all, okay,
00:37:22.220 | push the boatheads wiki, there's a Roth IRA conversion.
00:37:24.720 | But if you don't do this correctly, we receive a lot of people posting in the forum,
00:37:29.280 | not a lot, but significant numbers saying, I messed up my Roth conversion.
00:37:33.240 | So please be careful.
00:37:36.360 | And this is not something, I would call this more like an advanced type of investment.
00:37:41.000 | People just starting out, I think you can ignore Roth conversions.
00:37:44.740 | Because if you don't understand them, maybe later you can understand them.
00:37:48.140 | But be safe and stick with what you know first.
00:37:51.360 | Under, never invest in anything you don't understand.
00:37:55.160 | So I'm just putting a big caution flag here that this is something that, all right,
00:37:59.620 | do I have to understand Roth conversions?
00:38:01.440 | No. It might not save you that much anyway.
00:38:03.460 | In theory, yes.
00:38:04.180 | In practice, maybe not.
00:38:05.320 | You don't know what you'll be paying in the future.
00:38:06.760 | Okay, so that being said, also in the boatheads wiki is a tax estimation tools page for this.
00:38:14.120 | You want to know, I personally use H&R Block.
00:38:16.600 | I just throw everything in my tax software.
00:38:18.520 | I can do spreadsheets, the retiree portfolio model to do Roth conversions.
00:38:21.860 | No. Put it in your tax software and give it your best shot, run a few sneers.
00:38:26.820 | It's just going to sense and just watch how much your refund or balance due changes.
00:38:31.360 | That's all you need to know is what's your bottom line.
00:38:33.560 | And the third thing is, which account to spend from is
00:38:39.320 | that you have to be careful on your own situation.
00:38:42.100 | Say I post in a form for my mom for managing my mom's account in the personal investments.
00:38:46.100 | I create an investment policy statement.
00:38:48.260 | But in her situation, she has a very large medical expense,
00:38:54.100 | qualified medical expense under memory care.
00:38:57.920 | That is huge.
00:38:59.580 | I am taking that as a tax strategy to put it as a medical deduction.
00:39:04.800 | That will allow me to draw down from her traditional IRA with minimal tax impact.
00:39:09.420 | And I want to draw it down for errors.
00:39:12.120 | So be careful, use your tax planning software as your guide.
00:39:16.520 | So I'm playing games because I'm modeling this in tax software.
00:39:19.220 | So her number one priority for draw down is the traditional IRA, not the taxable account.
00:39:24.700 | And I will be doing a Roth conversion so I can take it, you know, play games like that.
00:39:29.280 | >> Yeah, just going to highlight, but that's the exact situation.
00:39:32.020 | >> Yes, yeah.
00:39:32.620 | And it's the exact.
00:39:33.780 | >> Spend, use that deduction.
00:39:36.000 | >> Yes.
00:39:36.520 | >> To offset the Roth conversion income.
00:39:38.980 | >> Yes.
00:39:39.420 | >> Spend from that taxable account.
00:39:40.700 | >> Yes, yes.
00:39:41.200 | >> Yeah.
00:39:41.680 | >> So I just say just, and Bogleheads Wiki is a great place.
00:39:45.040 | Getting started.
00:39:45.880 | >> Absolutely, yes.
00:39:47.580 | Good shout out to the Bogleheads Wiki.
00:39:49.520 | And it's a, sorry, yes, absolutely, worth applauding.
00:39:53.240 | And Lady Geek is absolutely right that Roth conversions,
00:39:58.700 | make sure you understand the concept, you know, what this is, how to do it,
00:40:03.460 | what the implications are going to be.
00:40:04.620 | Take your time with it.
00:40:06.520 | Don't rush that decision, absolutely.
00:40:09.400 | >> My question is also about Roth conversions.
00:40:11.700 | I've been doing them, trying to fill up a low tax bracket, and we are in a situation
00:40:17.420 | where we won't necessarily have heirs, we don't have children.
00:40:20.000 | So unless it goes to our lucky nieces and nephews, most of it,
00:40:23.420 | assuming we don't spend it all on travel, we'll probably go to charity.
00:40:27.620 | But I have been doing the Roth conversions more with the,
00:40:33.020 | knowing that charity doesn't have to pay anything.
00:40:37.160 | The only other reason I could find was that if we do the Roth conversions now,
00:40:42.620 | we would possibly lower our future RMDs.
00:40:45.760 | Is that good, good thinking?
00:40:48.800 | >> Yes, it's absolutely true.
00:40:51.560 | Roth IRAs don't have RMDs while you're still alive.
00:40:53.960 | They have RMDs for beneficiaries of the account.
00:40:56.980 | And so that is a point in favor of Roth conversions,
00:41:00.380 | that you're reducing your tax deferred accounts.
00:41:03.140 | However, an important thing to keep in mind here is that, depending on the household,
00:41:09.820 | the RMDs might not be a bad thing, because again, that's the, it's a several-way tie
00:41:15.260 | for the most tax-efficient money to spend every year.
00:41:18.680 | So if your desired level of spending exceeds the amount that you're considering
00:41:25.080 | as RMDs, plus the other things in that category that we talked about,
00:41:29.040 | then the RMDs aren't a bad thing at all.
00:41:30.820 | There's absolutely no point in reducing them.
00:41:33.300 | But if that's not the case, so your desired level of spending is here,
00:41:37.580 | and your RMDs plus Social Security is going to be here,
00:41:39.740 | then there is an advantage to reducing them.
00:41:41.800 | However, I would say that it's worth modeling, well, two things here.
00:41:49.440 | It's worth modeling how much is going to go to charity eventually, you know,
00:41:53.960 | upon your death or your spouse's death.
00:41:55.660 | And of course, that's got a million unknown factors, right?
00:41:58.760 | We don't know how long we're going to live.
00:41:59.840 | We don't know what investment returns we're going to get, but it's worth modeling that.
00:42:02.780 | And then the second thing, though, is we haven't talked
00:42:05.420 | about qualified charitable distributions yet, but that is once you reach age 70-and-a-half,
00:42:11.920 | and it is age 70-and-a-half, rather than 72, you can have money sent from a traditional IRA,
00:42:19.820 | another caveat here, specifically has to be a traditional IRA, it cannot be a 401(k),
00:42:25.260 | money sent directly from a traditional IRA to a qualified charity.
00:42:29.900 | And that money comes out tax-free.
00:42:32.660 | You don't have to pay tax on it.
00:42:33.880 | The charity doesn't have to pay tax on it.
00:42:35.920 | And once you're 72, it counts towards your RMDs.
00:42:39.040 | So if you're in this situation where you're expecting, oh, my RMDs are so high,
00:42:45.080 | and I'm not going to need that money for spending, but you don't plan to leave the money
00:42:50.600 | to anyone other than charity anyway, it probably makes sense to just use that money
00:42:54.800 | for QCDs, Qualified Charitable Distributions, and not worry about the fact that there's RMDs,
00:42:59.800 | because you're planning to leave the money to charity at some point,
00:43:03.480 | so you can just give it to them now, and I wouldn't really --
00:43:06.920 | it's hard to say without knowing all of the analysis, but it's pretty likely that if you're okay
00:43:13.380 | with doing Qualified Charitable Distributions, and you're leaving the money to charity upon your
00:43:16.980 | death, Roth conversions are likely not a great idea going forward.
00:43:21.060 | >> Hi, Jason Lynch from Detroit.
00:43:26.280 | Shout out to Detroit Chapter.
00:43:27.980 | One comment is, buy your tax software around Black Friday,
00:43:33.720 | so you can do your hypothetical tax preparation before end of year, and then maybe make
00:43:39.460 | that additional Roth contribution a DAF -- or Roth conversion, DAF contribution.
00:43:45.880 | I have a question, though, for Mike on Social Security.
00:43:50.600 | It's hypothetical.
00:43:52.360 | Imagine there are triplets.
00:43:54.720 | Everything is identical.
00:43:56.240 | Earnings, lifestyle, everything.
00:43:59.400 | If one claims at 62, one about full retirement age, and one about age 70,
00:44:07.280 | if Washington changes the rules, do you think they'll generally be treated the same,
00:44:15.480 | or would maybe the early claimer get a benefit because they claimed early,
00:44:19.760 | or are they close enough that it probably -- any changes won't affect them differently?
00:44:26.840 | >> I would be very surprised if any changes are not based on birth year.
00:44:32.280 | If they're based on, oh, you've already filed, so we're not going to change yours,
00:44:35.720 | and you have filed -- or, I mean, you have not filed, so we are going to change yours.
00:44:41.120 | But legislation is hard to predict.
00:44:43.680 | I mean, when I talk to other tax professionals, all of us,
00:44:48.240 | every person I've ever asked this question was shocked
00:44:52.040 | by all the various changes included in the Tax Cuts and Jobs Act.
00:44:55.040 | I don't know anybody who had it on their list of things that they were expecting,
00:44:58.000 | that the standard deduction was going to be doubled and exemptions would go away.
00:45:01.200 | No one, no one I know was, like, including that in their,
00:45:04.640 | yeah, this will probably happen analysis.
00:45:07.320 | Similar thing here.
00:45:08.280 | It's really -- I can't -- I don't know what Congress is going to do.
00:45:12.200 | My guess would be that it would be based on birth year.
00:45:15.120 | If nothing else, that's pretty darn easy to implement.
00:45:17.040 | It's pretty easy to explain.
00:45:18.920 | So those are both points in favor of the legislation that way, but I don't know.
00:45:24.800 | >> Hi, my name's Dave Hamilton.
00:45:26.080 | I'm from Brookfield, Wisconsin.
00:45:28.400 | You know, you touched on IRMA, and I thought I would elaborate on some things
00:45:32.760 | that I've learned, mainly the hard way.
00:45:35.440 | And with IRMA, as you said, it's surcharges for your Medicare premiums.
00:45:40.880 | And there are several tiers to that, four or five tiers.
00:45:45.000 | And if you go over that income tier, you're going to be paying a premium.
00:45:49.040 | And one of the key things to remember is if you go even $1 over,
00:45:52.920 | you're going to be paying the full premium for that bracket.
00:45:56.760 | And so one of the things that I found important while I'm deferring pension and Social Security
00:46:02.280 | and all that stuff is to very carefully track my income,
00:46:06.680 | and it has to be your modified adjusted gross income.
00:46:09.280 | So your adjusted gross income plus municipal bond income, basically.
00:46:14.640 | And then doing my Roth conversion up to that IRMA level.
00:46:20.600 | And if I go -- if I'm forced to go over that IRMA bracket, I might as well go up to the top
00:46:25.720 | of that bracket and take advantage of it.
00:46:28.600 | So these are -- and this IRMA modeling usually doesn't come out in things like TurboTax.
00:46:34.480 | >> Right.
00:46:34.840 | >> And so you have to model this by hand.
00:46:36.920 | Keep very careful track of your income if you're going to do these Roth conversions and things
00:46:41.600 | to be able to take full advantage of it.
00:46:43.320 | So I just wanted to comment on that.
00:46:44.640 | >> Yeah, that's an excellent point.
00:46:46.160 | Thank you.
00:46:47.680 | TurboTax, when we're talking about what's my marginal tax rate on a conversion
00:46:50.880 | or on distributions that I'm anticipating, it's only looking at taxes.
00:46:54.880 | Medicare IRMA, I can consider it essentially just, you know,
00:46:59.200 | a piece of that marginal tax rate, but it isn't going to be modeled by TurboTax.
00:47:03.000 | You're absolutely right.
00:47:03.920 | So you'll have to include that on your own manually.
00:47:06.520 | If you're using tax preparation software as opposed to retirement planning software.
00:47:11.360 | >> Hello.
00:47:11.600 | [ Inaudible ]
00:47:19.600 | >> Could you repeat that?
00:47:21.080 | [ Inaudible ]
00:47:22.440 | >> Okay.
00:47:23.000 | [ Inaudible ]
00:47:33.000 | >> Retirement portfolio model spreadsheet?
00:47:38.320 | >> Yeah.
00:47:39.080 | >> Okay. Look it up.
00:47:42.560 | Excellent.
00:47:44.240 | >> Okay. Yes.
00:47:47.000 | My name is Brian Polges from San Diego, California.
00:47:50.720 | And I'm the one that prematurely asked the Social Security question yesterday of you.
00:47:55.800 | But now it's not premature.
00:47:57.880 | And you did -- and the part of your presentation I was interested in was
00:48:04.120 | where you were talking about if your partner or spouse is younger.
00:48:10.200 | So mine is seven and a half years younger.
00:48:13.320 | And also when there's a large income disparity,
00:48:17.840 | mine is the higher income by quite a bit.
00:48:21.160 | And I was really interested in that four box thing that you put up.
00:48:25.240 | Could you speak more about that please?
00:48:28.200 | >> Sure. For the higher earners filing decision,
00:48:32.040 | the life expectancy we're concerned with is the second to die joint life expectancy.
00:48:38.560 | So how long will it be until both people have died?
00:48:41.920 | And so the younger that your spouse is relative to you, the longer that life expectancy.
00:48:50.840 | And so that's a part of -- it makes it more advantageous for you to wait
00:48:54.800 | to file the younger your spouse is relative to you essentially.
00:48:58.400 | Is that --
00:48:59.640 | >> Yeah. The part -- I understood that.
00:49:01.560 | But for the younger spouse, could you speak to that?
00:49:03.840 | >> Okay. Great.
00:49:04.480 | So for the younger spouse now we're concerned with the first to die joint life expectancy.
00:49:08.160 | However, it's -- and by definition that is a shorter life expectancy
00:49:13.200 | than the second to die joint life expectancy.
00:49:15.200 | However, the -- that takeaway that the younger your spouse is relative to you,
00:49:22.200 | the more advantageous it is to delay, that's still true.
00:49:25.440 | So you're both older and the higher earning spouse.
00:49:30.000 | Okay. So for the younger earning spouse or for the lower earning spouse,
00:49:32.840 | it's generally advantageous to file early.
00:49:35.440 | The fact that you're older relative to her or him makes it even more advantageous
00:49:41.160 | for your spouse to file early.
00:49:43.200 | >> Oh, to file early.
00:49:44.920 | >> Correct.
00:49:45.360 | >> Okay. Thank you.
00:49:46.560 | >> Yep.
00:49:47.280 | >> Thank you so much, Mike.
00:49:50.880 | That was absolutely fabulous.
00:49:52.600 | [ Applause ]
00:49:55.600 | [BLANK_AUDIO]