Help with No Tax Withdrawal Plan

[mrjondoe]

Hey all - I'm about 50% towards reaching my FI number, so I've been spending more of my time focusing on the withdrawal phase. I have a question about the actual implementation of the Roth IRA Conversion Ladder and specifically paying no / low taxes.  I've heard the limit being around ~$100k / year during the conversion phase several times on this blog, other blogs, and podcasts.

However, as I actually look at the tax tables and run the numbers, I can't get $0 taxes at any income over $24k for MFJ no kids (standard deduction). I understand the no tax on 401k contributions, and withdrawal of Roth IRA conversions at 0% (same as Roth Contributions).

Assumptions / Math:
1) Convert $70k per year from 401k to Roth IRA
2) MFJ with 2 kids
3) 70k income - standard deduction of 24k = 46k of income
4) 46k income = $5,139 in taxes
5) 2 kids = 4k in child tax credits
6) total tax = $1,139 (Conversion amount only)
7) +15% of qualified dividends and capital gains on selling brokerage (for first 5 years, and I haven't done the math here to guess what % div, capital gains, vs contributions)

Am I missing something here?

I know that's not a huge amount of tax (and much better than my last plan), but it will slightly affect the FI number and drawdown rate.

[gocurrycracker]

You have to reign in your conversions.

Try converting $60,500 and arrive at a $3,999 tax bill, completely offset by the CTC. $0.

Now you can have ~$40k of qualified dividends and long term capital gain income. Tax on this, also $0.


This is at the Federal level. Your State may tax these conversions, and it will also impact your ACA subsidies, if applicable.

However, as I actually look at the tax tables and run the numbers, I can't get $0 taxes at any income over $24k for MFJ no kids (standard deduction).

Right, this is how it works.
See here: https://www.gocurrycracker.com/gcc-vs-rmd/

You can then have ~$76k of dividends & gains at 0%

[mrjondoe]

Thanks - this leads to the following questions / comments:

1) I'm reading the 2018 tax table showing 0% taxes on qualified dividends with incomes up to $101,400, for MFJ ($77,400 + $24,000 standard deduction); just want to confirm I'm doing it right
1A) also to confirm that once I lose the kids, I go back to only $24,000 in withdrawals completely tax free, then about $43k with an effective rate of $2k / 5%, then up to my $70k I'd owe the $5k / 8% I referenced before (conversion income only, dividends should be good all the way to $101k still)
 
this leads naturally to 2) should I be saving such that by my FI age, my 401k balance doesn't have a balance larger than 25x ~$60,500 / year and investing so that my taxable account kicks off $10k in qualified dividends?
2.5) I guess really the comparison math is tax rate today (what I avoid with pre-tax contributions), vs withdrawal tax rate. Since I'm in the 22%, probably always worth it?

I'm just trying to get the gist of how I should think about my withdrawal plan. I'm been contributing about 1/3 pre-tax, roth, taxable, but think I'm going to switch to max pre-tax, rest taxable, based on the tax implications

[gocurrycracker]

1) You're doing it right.
1a) more or less. Everything is the same with/without kids except the CTC.
2) probably smaller than this assuming you are expecting growth faster than inflation.
2.5) that is the correct comparison math, but... you could have 10% federal rate and 15% ACA subsidy reduction. 25% future > 22% today. Plus State.
https://www.gocurrycracker.com/obamacare-optimization-early-retirement/

This is where kids / no kids can be significant, as 400% FPL is vastly different for family of 2 vs 4.

[mrjondoe]

Great thanks - this helps alot! I'm going to check all the tables, run some options, and then see how I should split the rest between pre-tax / taxable account.