Don't overdo efforts on tax strategies

The Baltimore Sun

I am 63, my wife is 61, and we both still work. Our goal is simple: We want to maximize our net retirement income. If we have too much income, our Social Security will be taxed, and our Medicare payment increased. After 70 1/2 , there are mandatory withdrawal rules for our IRAs. The IRS, Social Security and Medicare all provide calculators, but none includes all these rules. Can you recommend a calculator that includes all these rules so I can determine my actual retirement income?

- B.L.

Your goal may be simple, but calculating a comprehensive strategy that minimizes taxes during retirement isn't.

One calculator designed to incorporate all those factors (and more) is an Excel-based program called ESPlanner, which was developed by a pair of economists from Boston University and the Cato Institute.

The program, available in its basic version for about $150 at, will calculate a sustainable-retirement-living standard, factoring in your age, earnings, Social Security and Medicare taxes and a host of other factors. It may take some time to get comfortable with the program, so you might shop for a planner who has adopted the adviser version or some other modeling tool.

In an interview, you said you have $3.6 million in a taxable account and $2.2 million in traditional individual retirement accounts. You also wondered if it made sense to opt out of Medicare Part B because of the new means testing for determining premiums and explore private coverage or self-insurance.

ESPlanner showed you could boost your annual living standard by about $6,000 by waiting until age 70 to collect Social Security and start drawing down the individual retirement accounts, said Laurence Kotlikoff, a developer of the model and a Boston University economist. That would give you $238,771 to spend each year in today's dollars, in addition to providing enough for withdrawals for annual income and property taxes.

What about converting the IRAs to Roth IRAs in 2010, when the income limitations on conversions are lifted? Kotlikoff said a single conversion of the IRAs wouldn't produce a higher living standard because of the tax bill it would generate. Smaller conversions over time might work, however, and those also can be modeled with the software.

Partial Roth conversions could help keep you from large required minimum distributions from your traditional IRA that can throw you into a higher tax bracket, said Michael Kitces, financial planning director for Pinnacle Advisory Group in Columbia.

Other ways to model your retirement finances include giving money to your children or charities over time to reduce your taxable estate, said Kotlikoff, co-author of a new book on draw-down strategies, Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard - Today and When You Retire.

This could be especially important to you because you indicated you already have given away a large sum, and that you will spend far less than what your portfolio will be generating in income each year.

As for Medicare, you're probably best off signing up for Part B as soon as you are eligible and paying any higher rates adjusted for your income, rather than trying to self-insure, said Mary Lacey Gibson, a financial planner in San Juan Bautista, Calif., who counsels other planners about Medicare issues.

Even though your portfolio is large, Gibson thinks it would be a mistake to risk a major portion of it by forgoing Medicare Part B, which pays for physician and outpatient services. And few carriers offer basic medical plans to people over 65 because of Medicare, Gibson said.

Even with increasing Medicare costs and taxes on Social Security benefits, Gibson doubts your Medicare premiums will exceed your Social Security check, and your other assets are substantial enough to cover your other living costs.

Remember not to get carried away with tax strategies, Kitces said. You indicated you have a large position in municipal bonds, which is good from a tax standpoint today, but he said that income is included in calculating your Medicare premium. So keep the bonds only if they represent a good investment to balance the rest of your portfolio, he said.

"Don't work so hard to avoid having Social Security income taxed or to minimize the Medicare Part B payment thresholds that you make bad financial decisions," Kitces said.

Janet Kidd Stewart writes for Tribune Media Services.

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