How much less in taxes will you pay in 2024?
Posted on November 22, 2024
I finalized my tax plan for 2024. I altered the templates I provided in August for our situation. Patti and I know we have “more than enough” (Chapter 10, Nest Egg Care [NEC]); our Safe Spending Amount (SSA, Chapter 2, NEC) is more than we want to spend. I start with the amount I want after taxes for spending in 2025. My objective is to get to a tax bite and MAGI that I can tolerate before I take our RMD. (I withhold all taxes for the year when I take our RMDs.) My revised plan lowered taxes by 20% and MAGI by 12% from my initiale plan. I include the templates for single filer and married, joint filers.
== How I used the template ==
I start with the total that I want for spending after taxes. My initial entries assume our spending from our portfolio comes from two sources: RMD and sale of taxable securities. The template finds federal taxes and MAGI. I always tweak this.
1) The biggest lever to lower taxes and MAGI is to use QCD as a part of RMD; Patti and I normally use QCD. (We’re older than 70½.) We are happy that we can donate. We did not use QCD in 2022 when our portfolio declined steeply: our calculated “more than enough” did not look that rosy. My use of QCD means I net less for spending from RMD; I need to make that up with greater sales of taxable securities + Roth.
2) I can lower MAGI and taxes by selling less from taxable securities and more from Roth. Selling more Roth is a bigger lever on MAGI than taxes because the effective tax rate on the proceeds of sale of taxable securities is low. I am careful in my use of Roth. I want to make sure I have enough to always be able to sneak under a nearby IRMAA tripwire. My plan this year includes selling from Roth: I gain more breathing room so I don’t mistakenly cross the next IRMAA tripwire.
My final plan lowered taxes by 20% and lowered MAGI by 12% relative to my first cut of no QCD and no Roth.
== SHIFT traditional to Roth ==
It ALWAYS makes sense to SHIFT after-tax value from traditional to Roth if can convert at the 22% marginal rate – you have room to the top of 22% marginal tax bracket and a conversion won’t cross an IRMAA tripwire. You would not worry about the effects of ever-increasing RMD: crossing into to the next marginal tax bracket; and the potential pain of crossing an IRMAA tripwire.
The correct way to SHIFT after-tax value to Roth is to pay taxes due on the pre-tax conversion amount from your “Roth Conversion account.” (I assume you are older than 59½.) See here. The template shows your capacity to convert traditional to Roth to the top of the 22% marginal bracket.
Example: If I could convert 3% of my traditional to Roth this year, I have forever lowered my RMD by 3% from what it would be without the conversion. If I convert 3% every year for a number of years, I’m making a significant dent.
Just double-check to make sure you don’t cross an IRMAA tripwire. This simple example shows you could be paying an effective 29% tax rate, not 22%, if that happens.
== Greater QCD? ==
Added QCD – distributing more than RMD – is the other option to knock down our traditional IRA and future RMD. This is obviously for those who judge they have “more than enough.” If I donate 2% of my traditional IRA as added QCD, I have forever lowered by RMD by 2% from what it would be without the added QCD.
Conclusion: I completed my tax plan for 2024. I know I have kept taxes to an “acceptable” amount and I will be under the nearest IRMAA tripwire. I know how much to withhold in taxes when I take RMD at the end of next week. My revised plan lowered taxes by 20% and IRMAA by 12% from my initial plan.
The template that I provide in this post is different from the one I provided in August: that one starts with the total amount you want to withdraw from your portfolio (your SSA), calculates taxes and MAGI. You get to the after-tax amount you have to spend. You can adjust where you will sell (e.g., less from taxable securities and more from Roth) to “control” taxes and MAGI and increase the after-tax amount you have for spending.
My template in this post starts with the total I want to spend after taxes. (We know we have “more than enough.”) It calculates how much I have to sell and calculates taxes and MAGI. I can adjust the sources of cash for spending (e.g., less table from RMD when I use QCD, more from sales of taxable securities or Roth) to “control” my taxes and MAGI.