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Post by Deleted on Mar 22, 2011 0:28:14 GMT -5
Some responses about the thread I started: saving too much for retirement had me thinking.
This couple had most of their retirement savings in tax deferred accounts, 1.1M compared to only 300K in taxable accounts and some posters suggested they would have rather have it the other way.
Care to explain? Is it better to have more in taxable accounts than tax deferred accounts? If so why?
I get the easy access in case of emergencies, need of cash, downpayment for a house, car purchases, etc. But they do have a considerable amount (300K is not chump change) in a taxable accounts and I am sure that would cover most if not all emergencies that might come up; also they had another 80K in ROTH IRA's.
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cronewitch
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Post by cronewitch on Mar 22, 2011 1:30:23 GMT -5
I need 401K to be my taxable income in retirement, without it I would miss out on the bottom tax brackets but not too much because I will be paying taxes on the account including earning at full tax rates. ROTH can be used in large chunks if needed where if you cash out 401K you can be in a high bracket that year. Taxable accounts can be used then put back so if I need a short term amount I don't need to cash out ROTH that can't be put back.
When I die my heirs will be paying full tax on the 401K and get no extra benefit over what I would get on the ROTH but would get a stepped up basis on my taxable accounts.
So my plan is to spend my 401K evenly over my life taking out the RMD at least and running out entirely at the end leaving nothing. The ROTH will be kept for major items like a new house, roof, car or other large spending. Taxable accounts will be used as needed but much will be left when I die if I don't need it.
I don't have kids or grand kids so I really don't care about leaving an estate but I rather have some left than run out. My nieces and nephews should be over 70 when I die so if they need the money shame on them.
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Post by Deleted on Mar 22, 2011 2:20:32 GMT -5
Carl,
I posted much the same information in the other thread.
Taxable accounts are a good bridge in the event you want/need to retire before age 55. Otherwise if you separate from service at age 55 or later you can access the 401k/IRA accounts.
We've got a pretty sizable taxable accounts partly through inheritance and partly due to savings outside the 401k/457 plans. DH has been considered a highly compensated employee for most of his career so he couldn't contribute the max to his 401k. Now that he's eligible for the "catch up" period he can't get any tax benefit because Germany taxes his salary, not the US, so no tax benefit to contributing extra to the US 401k. Additionally, because his contract end date is 5 months before the year he turns 55 he won't be able to access his 401k until he's 59.5.
In your earlier example, the couple has enough in taxable accounts ($300,000) to bridge an early retirement from today. I think he's 54. The shortfall from their current spending minus the wife's pension is $49k/yr. So unless there's some pretty serious inflation or medical expenses I think they have the right amount in taxable accounts.
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giramomma
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Post by giramomma on Mar 22, 2011 7:01:42 GMT -5
. Taxable accounts are a good bridge in the event you want/need to retire before age 55. Otherwise if you separate from service at age 55 or later you can access the 401k/IRA accounts. I'm wondering if you have a link for this? I was just on the IRS web site, where it talks about IRA distributions, and I don't see where it says you can access your individual IRAs before 59 and a half, even if you retire at 55.
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Post by Deleted on Mar 22, 2011 7:22:37 GMT -5
Thanks everyone . Taxable accounts are a good bridge in the event you want/need to retire before age 55. Otherwise if you separate from service at age 55 or later you can access the 401k/IRA accounts. I'm wondering if you have a link for this? I was just on the IRS web site, where it talks about IRA distributions, and I don't see where it says you can access your individual IRAs before 59 and a half, even if you retire at 55. I believe she meant you can't which is why it's good to have a taxable account. Since you cannot access the 401K or other tax deferred accounts before 59 1/2 it is good to have a taxable accounts if you want to retire before than like 55.
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Post by Deleted on Mar 22, 2011 7:25:39 GMT -5
I need 401K to be my taxable income in retirement, without it I would miss out on the bottom tax brackets but not too much because I will be paying taxes on the account including earning at full tax rates. ROTH can be used in large chunks if needed where if you cash out 401K you can be in a high bracket that year. Taxable accounts can be used then put back so if I need a short term amount I don't need to cash out ROTH that can't be put back. When I die my heirs will be paying full tax on the 401K and get no extra benefit over what I would get on the ROTH but would get a stepped up basis on my taxable accounts. So my plan is to spend my 401K evenly over my life taking out the RMD at least and running out entirely at the end leaving nothing. The ROTH will be kept for major items like a new house, roof, car or other large spending. Taxable accounts will be used as needed but much will be left when I die if I don't need it. I don't have kids or grand kids so I really don't care about leaving an estate but I rather have some left than run out. My nieces and nephews should be over 70 when I die so if they need the money shame on them. crone, are you saying you would rather take the money out of your 401K first before the other accounts? or did I get it wrong? You would take enough to keep your tax liability low and supplement with the ROTH? I am confuse sorry
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resolution
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Post by resolution on Mar 22, 2011 7:27:27 GMT -5
My parents ended up in a higher tax bracket in retirement than they were during working years, so now that they are taking mandatory distributions they are paying at a higher rate than they would have paid at the time. It is a good problem to have, but they really wish that ROTHs had been available or that some of their savings was in taxable accounts.
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Post by Deleted on Mar 22, 2011 7:48:49 GMT -5
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Wisconsin Beth
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Post by Wisconsin Beth on Mar 22, 2011 8:18:54 GMT -5
My extremely limited understanding of WHY we should have money in the assorted various pots mentioned in other posts is to this - It provides us with options.
We don't know what our lives are going to bring us. Will DH and/or I be laid off in our 50s and have a problem finding a job? Will the kids go to college? Will the kids get pregnant at 16 and need more of our help in both time and moeny? Will we decide that we can't take Wisconsin winters anymore and move somewhere warmer? Will I go back to school and finally get my completely useless degree in archeology? Will we be able to afford to let me change jobs and take a crappy paying job in archeology? Taxable accounts will give us the chance to explore options in our late 50s/early 60s.
And then there's the tax implications. Crone touched on this. It may be prudent to use money from certain accounts at certain times in retirement to either pay the least amount of taxes or to leave the largest inheritance for your kids. I am NOT the person to ask about tax implications and it's definitely NOT my forte.
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qofcc
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Post by qofcc on Mar 22, 2011 8:47:02 GMT -5
Taxable accounts are a good bridge in the event you want/need to retire before age 55. Otherwise if you separate from service at age 55 or later you can access the 401k/IRA accounts.
I'm wondering if you have a link for this? I was just on the IRS web site, where it talks about IRA distributions, and I don't see where it says you can access your individual IRAs before 59 and a half, even if you retire at 55.
You can take IRA contributions early without penalty using the "series of substantially equal payments" rule, but you can take 401K contributions at 55 without limitations if you have a "separation in service" whether voluntary or involuntary. This is one reason why someone might choose to keep money in a 401K rather than rolling it into an IRA.
IRS Publication 575
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Gardening Grandma
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Post by Gardening Grandma on Mar 22, 2011 10:14:38 GMT -5
My parents ended up in a higher tax bracket in retirement than they were during working years, so now that they are taking mandatory distributions they are paying at a higher rate than they would have paid at the time. It is a good problem to have, but they really wish that ROTHs had been available or that some of their savings was in taxable accounts. Our income, in retirement, is higher than it was in our working years, yet we are in a lower tax bracket because of the tax cuts. In the 80's I was making $30K/yr and was in the 42% bracket. So I don't know how folks that are currently retired could possibly be in a higher tax bracket.
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MN-Investor
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Post by MN-Investor on Mar 22, 2011 10:30:41 GMT -5
Right now I am struggling with this very issue. DH is 56 and working, I am 58; I quit working in 1999.
About 2/3 of our investments are in tax deferred accounts, 1/3 in taxable. Most of the tax deferred accounts are traditional 401(k)s which come into income as ordinary income.
DH got the option this year to put his new contributions into a Roth 401(k), so we are doing that to give us more flexibility with future distributions.
I left my 401(k) with my employer when I left in 1999. I know, a no-no. But, while the mutual funds in that account haven't done a lot over the past 12 years (up 25%), my company stock is worth 7 times what it was 12 years ago! Next year, when I turn 59-1/2, I'll probably roll the mutual funds into an IRA and put the company stock into a taxable account and use the net unrealized appreciation rules re it.
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cronewitch
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Post by cronewitch on Mar 22, 2011 10:44:42 GMT -5
I won't have a pension of any kind so without income from my 401K I wouldn't have to file a tax return at all. So if I saved my 401K until 70.5 it would be a higher RMD than if I spent it down earlier. Taking say 20K a year from retirement until the RMD time that income would be in a 0, 10 and 15% brackets. If I did that for 4 years it is 80K less than if I didn't do that to have RMD based on.
If I got 20K in SS income and added half to my AGI I would be taxed on 5K of my SS check so I might just take 15K from the 401K to make it not taxable. Then I would have 35K income and my budget is about 35K. If I wanted to buy something not in my budget like a furnace or roof, I could take a bunch from my ROTH or harvest some losses and gains from my taxable accounts to increase my cash without increasing my taxes.
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cronewitch
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Post by cronewitch on Mar 22, 2011 11:00:07 GMT -5
I told my boss if we had the ROTH 401K I would use it. He said it would be more paperwork. At least he knows I would use it so we will see if he is willing to deal with more paperwork to keep me happy.
He knows I like money.
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phil5185
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Post by phil5185 on Mar 22, 2011 11:23:12 GMT -5
Care to explain? Is it better to have more in taxable accounts than tax deferred accounts? If so why? To an extent, a taxable account can be used as a Roth (allowing you to bypass the $5000/yr limit). In both cases, you invest posttax dollars. And if you place your 'excess' money in the taxable account for you heirs, the tax will never be due (similar to a Roth). And if you need some of the account, you pay only capital gains tax on profit.
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schildi
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Post by schildi on Mar 22, 2011 11:35:36 GMT -5
And if you place your 'excess' money in the taxable account for you heirs, the tax will never be due (similar to a Roth). Phil, can you pls. explain this? I had asked the same in a different thread, but you probably never saw the question ... :-( There is no inheritance tax for gains in that case?
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Post by Savoir Faire-Demogague in NJ on Mar 22, 2011 11:36:59 GMT -5
Phil, can you pls. explain this? I had asked the same in a different thread, but you probably never saw the question ... There is no inheritance tax for gains in that case?
Assets received through inheritance get a stepped up tax basis.
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schildi
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Post by schildi on Mar 22, 2011 11:49:38 GMT -5
Phil, can you pls. explain this? I had asked the same in a different thread, but you probably never saw the question ... There is no inheritance tax for gains in that case? Assets received through inheritance get a stepped up tax basis. Hmmm, I just googled this. From what I found, this "step-up basis only existed until 2009, and even then was only valid for real property? Looks like Phil is talking about the exemption from Estate Tax, right Phil? SF, where do you get your information from? :-)
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Post by Deleted on Mar 22, 2011 11:52:42 GMT -5
Phil, can you pls. explain this? I had asked the same in a different thread, but you probably never saw the question ... There is no inheritance tax for gains in that case? Assets received through inheritance get a stepped up tax basis. Hmmm, I just googled this. From what I found, this "step-up basis only existed until 2009, and even then was only valid for real property? Looks like Phil is talking about the exemption from Estate Tax, right Phil? SF, where do you get your information from? :-) stepped up basis was in place through 2009, went away for 2010, but cam e back at the end of the year and the estate had a choice whether they wanted stepped up basis or not, and then came back in full in 2011. step up applies to all applicable assets such as real property and stock and investments held in a taxable account.
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schildi
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Post by schildi on Mar 22, 2011 11:57:56 GMT -5
Hmmm, I just googled this. From what I found, this "step-up basis only existed until 2009, and even then was only valid for real property? Looks like Phil is talking about the exemption from Estate Tax, right Phil? SF, where do you get your information from? :-) stepped up basis was in place through 2009, went away for 2010, but cam e back at the end of the year and the estate had a choice whether they wanted stepped up basis or not, and then came back in full in 2011. step up applies to all applicable assets such as real property and stock and investments held in a taxable account. Oh! Thanks, Archie! My bad then, and bad bad google. :-) Sorry, SF, I guess you info was correct!
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Post by Savoir Faire-Demogague in NJ on Mar 22, 2011 12:04:22 GMT -5
Sorry, SF, I guess you info was correct!
No sweat Shildi....
That is one reason why assets should not be titled or gifted to descendants. In any event, big financial transactions such as these should not be executed without running it by a financial planner. Estate law and the tax code are both nightmares for the average person to even think they can comprehend. You may be thinking you are doing your heirs a favor, but doing nothing but creating a legal quagmire for them to untangle.
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dancinmama
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Post by dancinmama on Mar 22, 2011 12:25:37 GMT -5
Some responses about the thread I started: saving too much for retirement had me thinking. This couple had most of their retirement savings in tax deferred accounts, 1.1M compared to only 300K in taxable accounts and some posters suggested they would have rather have it the other way. Care to explain? Is it better to have more in taxable accounts than tax deferred accounts? If so why? I get the easy access in case of emergencies, need of cash, downpayment for a house, car purchases, etc. But they do have a considerable amount (300K is not chump change) in a taxable accounts and I am sure that would cover most if not all emergencies that might come up; also they had another 80K in ROTH IRA's. Balances being higher in tax deferred accounts is the nature of the beast. It is no wonder that they would be higher than most taxable accounts cuz the money that went in was not taxed and neither were all the earnings - that adds up to a lot of money. In 2007 I earned over $150K in DH's 401K. Our balance would be at least $22,500 less for just that one year if I had had to pay capital gains taxes on that - and that's for just one year (but my best I must admit ).
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