CONSTRAINT CHECKLIST
There are a variety of constraints (brackets, thresholds, etc.) that may interact with strategies you hope to take advantage of. Take a moment to review this list as you create your plan. Click the links for detailed information on each constraint.
What Constraints Affect My Plan?
Cashflow Constraint
Will this strategy prevent you from having enough income to cover your expenses?
A common example of a strategy that might create a cash constraint is delaying Social Security or receipt of a pension.
Age 59.5 penalty on early withdrawal
Are you able to withdraw from this account at any time?
Are there any constraints on your withdrawals?
Are you able to make withdrawals at the intervals you desire from the account?
Income tax bracket
Will this strategy increase your income beyond your desired income tax bracket?
If so, does the strategy still result in a net benefit?
Capital Gains tax bracket
Will this strategy increase your income beyond your desired capital gains tax bracket?
If so, does the strategy still result in a net benefit?
Social Security income subject to income tax
Will this strategy increase the percent of your Social Security benefit that is taxed?
If so, does the strategy still result in a net benefit?
IRMAA Income Related Monthly Adjustment Amount
Will this strategy increase your income beyond your desired IRMAA bracket?
If so, does the strategy still result in a net benefit when the increased Medicare Premiums are taken into consideration?
Not everyone knows this, but Medicare premiums are assessed on a year to year basis, based upon your Modified AGI from 2 years prior. And, there are 5 tiers of Medicare surcharges based on income thresholds. If you have a high income, you may be subject to this surcharge which is officially called the Income Related Monthly Adjustment Amount, or IRMAA. The AGI threshold changes annually with inflation and the threshold is actually a cliff, meaning one dollar over the limit can incur the entire surcharge.
You may not know that there are also a couple of Modified AGI calculations which are used in particular instances such as the determination of thresholds and credits. We refer to these as MAGIs and there’s a specific MAGI that’s used in the calculation of your Medicare Premium.
To calculate the MAGI for IRMAA add back the following items:
Tax-exempt interest income received or accrued (usually from state and local municipal bonds).
Interest earned from U.S. savings bonds used to pay higher education tuition and fees.
The taxable portion of your social security is already in your AGI. Don’t include the non-taxable portion of social security for IRMAA.
Earned income earned of U.S. citizens living abroad that was excluded from gross income.
Income from sources within Guam, the Northern Mariana Islands, or Puerto Rico not otherwise included in AGI.
NIIT Net Investment Income Tax
Will this strategy subject you to NIIT?
If so, does the result of the strategy still result in a net benefit when the NIIT tax is taken into consideration?
The Net Investment Tax is a 3.8% tax on investment income if your income exceeds the thresholds below.
Investment income includes things like interest, dividends, capital gains from the sale of stocks, bonds and mutual funds, capital gain distributions from mutual funds and rental and royalty income to name a few.
Common types of income that are NOT Net Investment Income include wages, unemployment compensation, Social Security benefits, alimony, tax-exempt interest and self-employment income.
This tax is not included in NewRetirement Calculations
AMT
Will this strategy subject you to the AMT?
If so, does the result of the strategy still result in a net benefit when the AMT tax is taken into consideration?
Incomes above the annual Alternative Minimum Tax (AMT) exemption trigger the alternative minimum tax which is designed to ensure that certain taxpayers pay at least a minimum amount of income tax. In essence, AMT calculations limit certain tax breaks for some taxpayers to ensure that they are not avoiding income tax by using deductions.
The Alternative Minimum Tax (AMT) is figured separately from your regular tax liability. You compare that AMT to what you would owe under the normal income tax system and pay the higher of the two.
Accelerating tax deductions can trigger the AMT.
This tax is not included in NewRetirement Calculations
Premium Tax Credits for the American Health Care Act
Will this strategy increase your income beyond your desired AGI for the ACA?
If so, does the result of the strategy still result in a net benefit when the increased Health Care Premiums are taken into consideration?
If you purchase your ACA plan on the marketplace, and your income is low enough, you may be eligible for premium tax credits, or subsidies. They’re often referred to as Advanced Tax Credits because the IRS pays them to your insurer every month and you reconcile them on your tax return.
Affordable Care Act Calculation
Estimate your income
Determine where your income falls in relation to the federal poverty level
Determine your expected contribution (measured as a percentage of your income) using the table below
Determine the cost of the second-lowest-cost silver plan (benchmark) in your area
Subtract your required contribution from the cost of the benchmark plan
Estimate your premium tax credits
Asset allocation
Will this strategy increase your exposure to risk or decrease your desired return?
If so, does the result of the strategy still result in a net benefit?
After tax money to pay tax on Roth Conversions
Do you have after tax to pay the tax on Roth Conversions?
If not, and you decide to convert and pay the conversion tax from the IRA, does the strategy result in a net benefit?