Messages

1

Taxes / Re: Distributing an Inherited IRA as an early retiree

« on: November 03, 2022, 04:05:27 PM »

Hi Jeremy,

One new factor that just came to mind that I didn't think of earlier (maybe you did, but I missed your mention of it):

If we take all $250k from the inherited IRA into our taxable account year 1, and invest it in vanguard funds paying about 2% in dividends, we'll have another $5,000 in income each year. So it's not like I can just go back to my usual income and ACA/tax planning as it was before in my years 2-10. We'll have a taxable income of ~$50,000 a year instead of ~$45,000 a year. Luckily we have some earned income, so if we want to shoot for those sweet CSRs, we can contribute to an IRA each year to get ourselves down near that 250% FPL number**. But any Roth conversions and capital gains harvesting would become near impossible.

This CSR part doesn't apply to everyone, we just happen to be at that threshold, but paying a little more in ACA tax years 2-10 would be universal by taking the $250k in year 1. Perhaps taking it in year 10 makes more sense? Then again, it's probably just a fraction of a percent difference in overall tax rates.

Am I thinking about this right?

** Since the FPL numbers are derived from the CPI, with current inflation levels, maybe the FPL levels will increase a good chunk over the next couple years and soon a $50k income for a family of 2 will be eligible for CSRs.

2

Taxes / Re: Distributing an Inherited IRA as an early retiree

« on: October 29, 2022, 01:04:09 PM »

Ah yes, you're right, I was just thinking of a big "taxed owed" number come April and was assuming there'd be a commensurate penalty. I didn't think it through. We will have had more taxes withheld from our "fun jobs" than the tax we owed last year (that's line 24 on form 1040, right? If so, that's $155 for us.)

In researching Illinois underpayment penalty rules, I was reminded that Illinois is generous to retirees in that they don't tax withdrawals from retirement accounts, so no worries there!

As for your spreadsheet, yes, your numbers make sense. With withdrawing the funds this year, the repayment of PTCs would also be a factor (for those scenarios over 400% FPL, we have to pay it all back, but paybacks are limited at lower FPLs), but wouldn't be big enough factor to change my mind.

I'll keep thinking about "other factors" but unless I come up with them, I think I'll pull the trigger on a 2022 full distribution. Thanks for helping us flush out the scenarios! It was a surprising result for me! I would have guessed that a scenario like withdrawing up until the 400% FPL or 12% tax bracket each year would have come out on top.

3

Taxes / Re: Distributing an Inherited IRA as an early retiree

« on: October 29, 2022, 11:12:09 AM »

Sorry for the delay, life got in the way with me being able to put my focus on this the past few weeks.

Gosh, it sure seems like taking the lump sum in a single year is the way to go.

- it wins for simplicity and not having to remember to recalculate things every year
- it's net tax rate meets my judgement of "close enough!" to the other options
- we have the free cash to pay the tax due
- in a down market, it's not a bad time to take a distribution from an IRA

If we did it during the 2022 tax year, wouldn't we owe an underpayment penalty of 3% Federal and "up to 10%" state (Illinois)? So we would have to do it for the 2023 tax year and pay estimated taxes along the way next year? (Or likely Vanguard can withhold taxes for us).

It would have been nice to do it during the 2022 tax year because we *are* eligible and have been enjoying CSRs, and we wouldn't have to pay them back come tax time (in my understanding). But I can't think of away around the harsh underpayment penalties.

I also have a nagging feeling there's another factor or two we should be considering in our decision, but I haven't come up with it yet. I'll keep thinking.

(As I typed that I thought that while we rent, we might want to buy a home, and with mortgage rates around 7%, maybe having a nice pile of cash laying around to put toward - or pay for a home outright - might be a blessing. Another in the "pro" column for taking a big distribution up front.)

4

Taxes / Re: Distributing an Inherited IRA as an early retiree

« on: October 01, 2022, 06:47:46 PM »

Holy cow, thanks for much for putting all that time into that reply!

I need to read it a few more times to fully absorb everything, but since you wrote "at most you are paying ~$2k/yr for an ACA silver plan" and also "If my ACA premium assumptions are off, the numbers shift. Perhaps substantially", I want to interject and say I'm paying $9,600/yr for an ACA silver plan.

(Yes, it's the most expensive Silver plan in our area, but it's the only one that has a specialist in their network that my wife wanted, and it's the only national plan and we wanted reassurance when snowbirding in the winter.)

So before I dive in, does this fact substantially alter your analysis?

5

Taxes / Distributing an Inherited IRA as an early retiree

« on: September 26, 2022, 11:24:24 AM »

Hi,

This year my spouse received an Inherited IRA from a parent of $250k. We are a family of two and use ACA and get health insurance subsidies based on our roughly $45k in total income in early retirement. With the Inherited IRA 10-Year Rule, we will need to take distributions of the full $250k by 2032. (We're dollar cost averaging it into broad market funds so would expect it to grow over those 10 years, too.) We still won't be on Medicare by that time so expect to still be using the ACA for healthcare.

Can you give us pointers on what factors to think about when deciding to take distributions? I have a feeling that neither adding $25k of income each year for 10 years nor taking the full tax hit of $250k in a single year are ideal. (But there's value in simplicity!)

What should we consider? What would you recommend?

Mike

6

Taxes / Re: Spiked or smoooooth income for ACA?

« on: May 07, 2022, 02:33:49 PM »

Thanks!

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Taxes / Spiked or smoooooth income for ACA?

« on: May 04, 2022, 01:26:28 PM »

https://www.gocurrycracker.com/go-curry-cracker-2021-taxes/

Brilliant stuff as usual. I admire your creativity!

One of your moves got me thinking: your tax gain harvesting of $150k to ease the next few years of income for ACA (and other benefits). Assuming tax and ACA laws are unchanged, do you think you'll repeat something like that every few years - where you have one low/no ACA subsidy year followed by two or three generous subsidy years - or do you think that once you've run out of that full basis $150k, you will sell/convert a little each year going forward?

If not for your household situation, can you think of an early retiree household type where a spiked income pattern makes a lot of sense?

8

Taxes / Re: ACA/Taxes in early retirement

« on: November 27, 2020, 09:49:32 AM »

  Of course, thank you GCC.

With about two decades until we're hit with RMDs and about $1M (today's dollars) in IRAs I'm going to continue to stick to an income in the range that offers those sweet sweet cost-sharing subsidies. As much as anything, because it seems the ACA and its form of tax credits and subsidies don't seem long for this world. If the Dems get their way, a public option or Medicare for All will be available. If the GOP gets its way, the ACA will be repealed and we'll likely be back to to the subsidy-less days before the ACA. In years under either of those scenarios, plus the 5 years that we'll be on Medicare but before RMDs have begun, I'm betting we can do the bulk of our Roth Conversions while staying within the 12% tax bracket. As we get closer to that time and it's looking like my prediction is wrong, we can crank out the Roth conversions, subsidies be damned.

Knowing the way I think, once a subsidy-based system is gone, I'll kick myself for not taking advantage of them while I had the chance.

Please poke holes in my thinking if warranted.

9

Taxes / Re: ACA/Taxes in early retirement

« on: November 24, 2020, 10:35:48 AM »

Has this math perhaps changed since the Tax Cuts and Jobs Act? We file jointly and the article says we'd pay 25%+ tax rate when we earn $35,000-$50,000 in combined income, qualified dividends, Roth Conversions, and capital gains - which has been the range of our earnings the past few years - yet TurboTax tells us we're paying a <5% effective rate when we file our federal taxes.