Retirees: Tax Planning Opportunities Using Roth IRA And HSA Accounts
In which I summarize several prior articles and put all the pieces together.
In October, 2021, I wrote an article featuring the benefits of Health Savings Accounts (HSA). In the article, I explained why these accounts are a tax-advantaged triple threat.
Just last month, I wrote a two-part series of articles on the topic of asset location. In the first, I shared a theoretical framework for thinking about this. In the second, I offered the greatest level of detail I have ever revealed with respect to how I am attempting to apply these principles in my personal portfolio. Here, for convenience, are handy links to all 3 articles.
In the earlier articles, I promised that I would return with further details as to how these concepts can be used, in combination, to take steps to plan for, and minimize, one’s marginal tax rate. In this article, I will do so.
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Putting It All Together - ETF Monkey’s 2022 Tax Planning
As featured in Part II of my prior series, I retired late in 2021. While I encourage you to go back and read that article, here is a brief snippet in which I described the situation in which I find myself this year.
Now that I am retired, I find myself in the decumulation phase referred to in part 1 of this article series. Happily, in addition to my retirement accounts, I was fortunate enough to be able to accumulate funds along the way in taxable investment accounts.
In short, here is my current retirement strategy. The current plan is to defer starting Social Security until full retirement age, which in my case is 67. So, for approximately the next 7 years, I will need to live off my investments. As featured in the previous article, the preferred sequence is to start by tapping taxable accounts.
As featured in Part I, the theoretical framework, this leaves me in a situation whereby I am able to “manage” my income to attempt to take the greatest advantage of tax planning opportunities.
For 2022, this involves making planned conversions from regular IRA accounts to Roth IRA accounts. It also involves taking advantage of the deductibility of HSA contributions to lower my income.
Here is how it plays out.
With respect to Roth IRA conversions, the goal is to voluntarily absorb a managed tax bill now, in return for greater flexibility later on, when I will not only be receiving social security income, but dealing with required minimum distributions.
Since I am married, and file a joint tax return, $83,550 is a key number I am planning around. This is the upper threshold of the 12% federal tax bracket. Any taxable income in excess of that would be taxed at 22%, greatly lessening the benefits of tax planning.
In the mockup above, then, I have listed the amount ($90,000) that I have actually converted to Roth IRA accounts so far this year. The remaining two values are estimates, but I believe both are reasonably solid. The first is for estimated commissions from my work as ETF Monkey on the Seeking Alpha website, the second for interest and dividends I project to receive on my taxable investments.
From this income, I will be entitled to the standard deduction. I show this next.
In addition to this, however, is a second benefit I can take advantage of. You see, just as the HSA contributions my employer withheld from my paycheck during my working career were deductible, so are contributions I voluntarily make from my assets as a retired individual. So, I am contributing right up to the legal limit, for me, of $8,300.
In combination, my “managed” adjusted gross income is currently forecast to come in at $75,800, leaving me just a little wiggle room for error while not exceeding $83,550 and throwing me into a higher marginal bracket.
As a resident of California, I also need to consider state taxes when planning. As it happens, California has several additional tax brackets to work through. In my case, any income above roughly $70,000 is being taxed at a marginal rate of 6.0%. But, as shown in the graphic above, my overall CA tax rate at the forecast income level is 2.74%, bringing my total federal and state liability to 14.74%. Due to the greater impact of the 6.0% marginal tax rate for California, this increases very slightly if my income gets closer to $83,300, but remains right around 15%.
Teaser - Another Opportunity Available Within The 12% Tax Bracket
To close the article, and perhaps to stimulate a little conversation in the comments section below, there is another opportunity for tax planning available to me, as long as I stay below that $83,550 threshold. As it happens, I am working now on how best to use that in the fairly near future, before the tax code gets changed.
Anyone care to guess what that is?
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Thank you for honoring me with your time by reading my work. I hope the article has been of some use to you. I look forward to chatting again soon!