How I used the 4% rule over the past 29 years

I’m one who delayed till 70, and will be hit with RMD in 2025. I made no attempt at doing the sort of planning you describe, so I’ll be hit certainly.

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I’ve been doing it, but of course, my #1 investment objective is to minimize fees, commissions, trading costs and taxes. And I’ve managed my investment portfolio to minimize dividend and interest income to focus on taking spending money withdrawals in capital gains or tax-fee returns of capital for over 25 years. The idea is to pay taxes on Roth conversions to level your lifetime taxation when it makes sense, and then still have the flexibility to throttle your taxable income to capture freebies like “free Obamacare” when it offers a $100,000 in savings over 5 or 6 years, or the $14,000 max annual benefit for energy efficiency refunds available to those who can keep their income under 80% of the median for their zip code. Who wouldn’t like the Gov’t to give them a free HVAC upgrade for their home? The present value of that exceeds the tax arbitrage available to me by a wide margin.

On delaying SS to age 70, that’s an asset allocation decision. I’d rather have a larger SS check if I can buy if for half the cost an insurance company would charge for the same monthly benefit than hold something like an i-bond. Similarly, a mortgage-free home, if bought at a favorable price, is a wonderful retirement asset. Could I have taken out a mortgage and put more money in stocks? Sure, but I already have over 90% of my net worth in the stock market. Do I really need a higher allocation to stocks? And when I bought the home I had enough money sitting in a money market fund to cover the purchase price earning 2% at the time, why take out a mortgage at 3%?.

Lots of moving parts in the strategy. People thought I was nuts at age 40 when I started a SEPP to whittle down the size of my IRA while keeping my taxable account intact. The IRA is still “too large” today at about 30% of my net worth, but I hope to do another series of 6 figure Roth conversions in the 5 years between now and age 73 to make it even smaller. That is, unless I mine some other freebie in the tax code with a larger present value.

intercst

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You may have doing it since your requirement to continue your SEPP withdrawals expired after you reached 59 1/2, but as you admit yourself, you took required SEPP withdrawals that generated ordinary income for nearly 20 years before moving to the ‘only capital gains and qualified dividends’ strategy:

So far, your capital gains and dividends strategy been in place for what, maybe half of the time that your SEPP strategy lasted? That means that you did the long-term tax planning that I said needed to be done. Given that you said that people thought you were nuts, I’m not sure why you think that there might be a lot of people out there who have done the same tax planning that you did. And yet, even with all that planning…

Yeah, good luck with avoiding IRMAA when doing this.

AJ

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Is IRMAA so bad? Isn’t it only something like a couple of hundred a month max?

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Not true. I’ve been managing my taxable account to limit interest and dividend income all along. I was just just fortunate to recoginize early on that the IRA would generate tax problems when DELL and Pfizer caused the IRA to grow by 10X over 3 or 4 years in the late 1990’s.

I’m resigned to paying IRMAA, but I don’t want to bust an IRMAA bracket by a few dollars and trigger an extra thousand or more of penalties.

intercst

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Between Part B and Part D, it can be up to an additional $500/month Benefits Planner: Retirement | Medicare Premiums | SSA

Considering that @intercst had been paying very little for his ACA coverage, even the increase to the regular Medicare premiums ($174.70/month for part B this year) was a large increase. The 2nd step, where the part B premium doubles (to $349.40), is pretty low in the ‘6 figure range’ at only $129k. Since IRMAA only looks at MAGI, without considering deductions, there’s not going to be much way to avoid it when doing 6 figure conversions.

AJ

The top IRMAA bracket adds $6,000 or $7,000 year when you include the IRMAA penalty on Part D drug plans. But you’re right, at that level of income, it’s lost in the round off compared to all the other taxes you’re paying.

intercst

Managing your taxable account is different than “only capital gains and qualified dividends”. Your SEPP withdrawals created ordinary income, which meant you more than $0 in taxes, which is what you were advocating for:

AJ

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You don’t take SEPP withdrawals after age 59.5, so you’re free to implement the delay SS from age 62 to age 70 to reduce taxes at that point.

Of course, you recognize that the tax code changes all the time. You look at what’s available to you at the moment, and make the decision with the best present value over the long term.

intercst

Yeah, already talked about that:

and

The point is - paying $0 in taxes while having more than $100k in taxable income for a few years may be an option, but really needs to be looked at in terms of what the long-term impacts will be, because there will be trade-offs that may not be as tax-efficient just to claim that you have $100k in taxable income while paying $0 in income taxes.

AJ

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No. The capital gains strategy was in place all along in the taxable account. The rapidly growing IRA caused a separate, potentially explosive tax problem that I addressed with a SEPP at age 40. Like I said, you look at the tools available at the time and make the decision with the best present value. Note that my taxes would have been even higher during the period I was taking the SEPP, if I wasn’t limiting interest and dividend income from my taxable account.

intercst

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You keep leaving out the bolded part of that strategy:

Only capital gains and qualified dividends

Sorry, but if you’re taking SEPP withdrawals, you are, by definition, not living on “only capital gains and qualified dividends”.

AJ

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If our MAGI after taking RMDs beginning at age 73 comes to $750k+ repeatedly over the years then … I’ll pay the $500.30 extra every month, that’s only $6003.60 a year. If my MAGI one year hits that amount, due to taking some capital gains, then I assume I only have to pay the high IRMAA for one year and then it drops back down, correct?

The premiums are adjusted each year based on inflation, so while it might be $6k each (so $12k for a couple MFJ) for 2024, it could be significantly more by the time you reach RMD age.

IRMAA is recalculated for each year’s premium. The income used is from the tax return for the year that is 2 years prior to the year that premiums will be paid. For instance, 2024 premiums are calculated based on the 2022 tax return AG plus any 2022 tax-free dividends/interest (like from muni bonds).

I will point out that, at least for now, qualified Roth distributions are not included in your AGI, and are not added back in as a part of the of the IRMAA MAGI calculation. That said, I would not be surprised if a future fix to ‘save’ Medicare added qualified Roth distributions in, along with the already added tax-free interest/dividends, when calculating the MAGI for IRMAA.

AJ

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I wouldn’t be surprised if they put some limit on the maximum value of a Roth IRA account, say at something like $5 million. And then force you the remove the excess at year end and either spend it, or place it in a taxable investment account.

IRA stands for Individual Retirement Arrangement, not a multi-generational tax avoidance scheme. An account balance of $5 million is plenty to fund a well-upholstered retirement.

intercst

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Yes, that’s already been proposed, as a part of the Build Back Better plan, although the limit was $10MM. Along with that, there were proposals to close backdoor Roth contributions.

That said, my suggestion was specific to Medicare IRMAA premium calculations, not overall retirement plan changes.

Yes, and the SECURE and SECURE 2.0 changes to require non-spouse inherited retirement accounts (including Roth accounts) be fully distributed within 10 years**, along with requiring RMDs from those inherited accounts during the distribution timeframe if the decedent had reached RMD age significantly limited the ability for retirement accounts to be used for multi-generational tax avoidance (previously known as ‘stretch IRAs’).

** If the non-spouse beneficiary is a qualified minor child, the distribution timeframe will be 10 years after the minor reaches the age of majority.

AJ

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They could call it “Trickle down economics!” Oh the irony

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It can take several years to filter into the system. But if its a one time event, there is an appeal system to ask for an earlier reduction. Its been a while, but when I did this it took a visit to your local Social Security office bringing your last tax return.

You get a statement from Social Security each year usually in mid-December telling you what your IRMAA costs will be for the coming year. The appeal procedures are described in the fine print on that letter.

If both spouses that file their taxes as MFJ are covered by Medicare, the IRMAA premium is applied to each spouse’s Medicare coverage. The maximum $6003.60 annual IRMAA premium for 2024 becomes $12007.20 for that year.

Social Security will automatically reduce or eliminate the IRMAA premium based on your income in the following year.

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Absolutely! That’s why I’m a big fan of minimizing my interest and dividend income and taking as much as possible of my annual withdrawal in capital gains. Then you won’t be forced to sell dividend paying stocks at an inopportune time. Holding BRK is a godsend for those pursing this strategy.

intercst

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