Secure Act 2.0

[tallguy]

Apr 17, 2022 10:25:48 GMT -5 The Walk of the Penguin Mich said:

Apr 16, 2022 23:18:21 GMT -5 Rukh O'Rorke said:

I think we need an elaboration on "everyone", because no one here seems to have encountered that advice at all. Seems it might be very dependent on balances and AA.

I have heard this too on a lot of retirement boards.  The thought is to let these investments grow even larger.  However, it makes some assumptions that may or may not be true, so this really is not a ‘one size fits all’ strategy.  I don’t think there is one.

No, there isn't.  I have mentioned that I am actively and intentionally limiting my income for tax purposes.  Keeping my income below a certain level will save me a small fortune in property taxes.  I have absolutely no intention of selling anything in my taxable account at this point.  Far better to take from my IRA since I can do a certain amount tax-free anyway.  Let the taxable sit forever.  If it gets inherited with a stepped-up basis, fine.  I'm happy to escape taxes entirely on as much money as possible.

[Happy prose]

Can someone help me understand IRMAA? I've been reading about it all morning, but don't understand 100%.

It says MAGI for Medicare is your AGI, plus tax exempt interest. What is tax exempt interest? I am not withdrawing anything from my 457 or Roth. (I will be 63 in Sept, still working. DH is 65, retired) I plan to retire end of year, so when they determine IRMAA in 2024, it will be based on this years return.
** I believe on one site it said money that is currently being contributed to my 457 counts as income. Is that correct? 

Also, in this income calculation they use, you still get credit for standard deductions?

I think I read that when determining IRMAA for MEDICAID, it counts you as household income, regardless of filing status. For MEDICARE, is it better for us to file separately, so maybe I only get the bump up?

Thanks in advance for any info you can give me!

[seriousthistime]

Start with Line 11 on your Form 1040 federal tax return.  That is your AGI.  Tax exempt interest usually comes from municipal bonds and is not taxed by the feds.  If you have any municipal bonds that is not included in Line 11, add it to your AGI. 

Check your W-2.  Line 1 on your W-2 is the amount of your income after certain pre-tax deductions.  That is, if your income is $100,000 and you put $10,000 into your 457 plan through payroll deduction, Line 1 will be $90,000.  That number is what goes on Line 1 of your Form 1040 and is included in the MAGI. 

The standard deductions are reported on Line 12a.  The standard deductions reduce your taxable income but they do not reduce your AGI or MAGI. 

Medicaid is a state program so I'm not sure what your state looks at to determine eligibility.  It seems for Medicaid, most states do look at household income.

The IRMAA income brackets are double for married filing jointly compared to individual filers.  This year's IRMAA starts at $91,000 for individuals or $182,000 for married filing jointly.  Stay under those numbers and you will only be charged the standard Medicare premium.  So if your own MAGI is $95,000 and your DH's taxable retirement income is $40,000, you would be hit with an IRMAA surcharge based on your $95,000 income, but if you file jointly, neither of you would be hit with an IRMAA surcharge based on $135,000 of MAGI. 

There is a separate bracket for married filing separately for people who lived together at least part of the year, and it is much more punitive. Check out Form SSA-44.

www.ssa.gov/forms/ssa-44-ext.pdf

Your IRMAA for 2024 would normally be based on 2022 MAGI.  When you sign up for Medicare, they will send out an initial determination stating what your IRMAA will be, based on your 2022 tax return.  A reduction or stoppage of work (as usually happens when people quit their jobs and retire) is a life-changing event that you can use to appeal the initial IRMAA determination. The life-changing event allows you to have your IRMAA based on your estimated new (lower) income level, rather than your MAGI of 2 years prior when you were working. The feds do check to ensure that your actual income for that year that you report on your Form 1040 is similar to what you estimated, and if it's higher enough to push you into a higher IRMAA bracket, they will bill you for the difference for that year.  

I retired at the end of 2020.  In 2021 I signed up for Part B and got hit with a large IRMAA determination based on my income two years prior when I was working full time. I filled out the form for an IRMAA appeal based on my expected retirement income in 2021, and it was approved.  I did the same earlier this year for 2022, which was also approved.  In 2023, my IRMAA will be based on 2021 MAGI (first year of retirement) so I shouldn't have to file an IRMAA appeal.  

Hope this helps. 

[Happy prose]

seriousthistime Thank you for all that information! I have to check my tax return when I get home.

[Happy prose]

seriousthistime I checked my tax return, and I'm fine.   Amazing that you explained it so well, and every website had my head spinning. Thanks again!

[Happy prose]

Can someone now please explain the Roth conversion for me? Basically when and how it is done. I don't understand where the savings/benefit comes in. The majority of my money is in my 457. I plan to retire 1/1/23, and will be about 63.5 yrs old. How I understand what I've been reading, if I take money out once retired, put in an IRA, and convert to Roth. Wouldn't I still have to pay taxes on the 457 withdrawls? And is it the same Roth limit? I'd be afraid I'd screw this up.

ETA: Am I allowed to put/convert money to Roth once I'm no longer working, or earning income?

[minnesotapaintlady]

Apr 19, 2022 10:38:39 GMT -5 Happy prose said:

Can someone now please explain the Roth conversion for me? Basically when and how it is done. I don't understand where the savings/benefit comes in. The majority of my money is in my 457. I plan to retire 1/1/23, and will be about 63.5 yrs old. How I understand what I've been reading, if I take money out once retired, put in an IRA, and convert to Roth. Wouldn't I still have to pay taxes on the 457 withdrawls? And is it the same Roth limit? I'd be afraid I'd screw this up.

You have to pay taxes on the amount of the 457 that you convert to a Roth, but then that money is never subject to taxes again, or RMDs.  There is no limit on how much you can convert in a year, but you have to be careful that you don't screw yourself tax-wise for the year doing too much at once.  Lots of people like to convert just enough to keep themselves in the 12% tax bracket every year.

This is another one of those have to run all the numbers and see where you stand personally.  I don't think I will ever do any conversions...at least not a large amount.

[minnesotapaintlady]

Apr 19, 2022 10:38:39 GMT -5 Happy prose said:

ETA: Am I allowed to put/convert money to Roth once I'm no longer working, or earning income?

You can convert pre-tax money to Roth, but you cannot make regular contributions to your Roth without earned income.

[Happy prose]

minnesotapaintlady Thank you. My Roth is with Vanguard, so I would just open an IRA, and is this 'convert to Roth' easy? I thought once I'm retired I'm done.

[minnesotapaintlady]

Apr 19, 2022 10:52:19 GMT -5 Happy prose said:

minnesotapaintlady Thank you. My Roth is with Vanguard, so I would just open an IRA, and is this 'convert to Roth' easy? I thought once I'm retired I'm done.

In your Vanguard account if you're looking at the "Balances and Holdings" page.  Under the Roth IRA by all the buttons for like "buy and sell" and "order status" and "transaction history", there is another one that says "Convert to Roth".  You won't see it now if you don't have a traditional IRA with them. 

Click that and it walks you right through it.

I'm more fuzzy on the 457 side of things.  I'm pretty certain you need to keep all your money in the 457 and not roll it all over into an IRA if you want to do conversions because the entire IRA has to be converted.  So you just make a withdrawal of say 10K, stick it in your IRA (you have 60 days to do this) and then convert that 10K.  Sometimes people roll their entire workplace plan over to an IRA when they quit/retire and then I think you're stuck not being able to do conversions.

[Happy prose]

Got it, thank you. I probably won't be able to do too much, because I'll have pension income also.

[teen persuasion]

No, you don't have to convert your whole IRA at once; you can convert a bit each year.

And withdrawing from one account to put back in another before converting sounds like an easy way to trip yourself up. There's limits on how often you can do rollovers (vs transfers), I believe it's one per year (as in, 365+ days apart, not anytime in 2022 then anytime in 2023, etc).

IRS rollover rules

[minnesotapaintlady]

Apr 19, 2022 20:27:58 GMT -5 teen persuasion said:

No, you don't have to convert your whole IRA at once; you can convert a bit each year.

And withdrawing from one account to put back in another before converting sounds like an easy way to trip yourself up. There's limits on how often you can do rollovers (vs transfers), I believe it's one per year (as in, 365+ days apart, not anytime in 2022 then anytime in 2023, etc).

IRS rollover rules

Told you I was fuzzy on that part!  

I was thinking of the backdoor Roth conversion rules where post tax is mixed with pre-tax and having to convert the entire account. 

[Happy prose]

teen persuasion  minnesotapaintlady This opens up a new set of questions! I read your link; tell me if I'm understanding it right. If I have Nationwide (my 457 plan) issue a check to Vanguard (where I have my Roth and will open IRA), no tax is withheld by Nationwide? I can then convert to Roth? Meaning the money will never be taxed? And this is probably a crazy question- why does the money have to go to an IRA first, and not straight to a Roth? I'm clearly missing something. I do understand the year apart rule. Thanks!

[tallguy]

Apr 20, 2022 12:19:07 GMT -5 Happy prose said:

teen persuasion  minnesotapaintlady  This opens up a new set of questions! I read your link; tell me if I'm understanding it right. If I have Nationwide (my 457 plan) issue a check to Vanguard (where I have my Roth and will open IRA), no tax is withheld by Nationwide? I can then convert to Roth? Meaning the money will never be taxed? And this is probably a crazy question- why does the money have to go to an IRA first, and not straight to a Roth? I'm clearly missing something. I do understand the year apart rule. Thanks!

A trustee-to-trustee transfer from one institution to another means that a check is never distributed to you.  There is no withholding on such a transfer, and you have no responsibility other than to tell them where to send the money.  A direct rollover is similar in that the check is sent to you in the name of the receiving institution so no tax is withheld.  It is, however, your responsibility to take the check to your new IRA institution within 60 days.  If a check is distributed to you in your name, then 20% taxes will be withheld.  This makes it a really bad idea to have the check in your name, because you must roll over the entire distribution including the withheld 20% within 60 days to qualify as an indirect rollover.  Any amount not rolled over into the new IRA is then considered a taxable distribution.  And no, it is not true that, "the money will never be taxed".  It will be taxed when it is either distributed to you or converted.  After the money is in the Roth it will escape taxes, but converting it is a taxable event.

The reason that direct conversions are not generally done is because some plans do not allow partial distributions and few people want to convert their entire balance at one time.  Rolling it into an IRA first enables you to convert as much as you want when you want and spread out the tax hit to something manageable.   

[Happy prose]

tallguy So if I told Nationwide to transfer $10k to Vanguard IRA, Then I'd convert To Roth, I'd bectaxed on the $10k, but no money initially withheld?

[tallguy]

If Nationwide allows partial distributions where they will do a specified amount instead of the entire balance, then theoretically yes.  You would roll over the $10,000 to an IRA and then convert it to Roth.  If the transfer is directly from Nationwide to Vanguard then no money is withheld.  The $10,000 becomes taxable when it is converted to Roth, but is not taxable while it is still in the IRA.  That does raise the question of why bothering if Nationwide allows partial distributions?  I would think they should be able to handle a direct conversion in that case, but you would have to verify that.  

[Happy prose]

tallguy Got it, thanks. They do allow partial distributions, which is why I asked why the middle step to IRA. Thanks for your help!

[teen persuasion]

Just make sure you somehow plan for the extra $10k (or whatever #) in taxable income that will be reported on your tax return - you should receive a 1099 form to report the conversion to Roth. You will need to withhold or pay quarterly tax payments to compensate for the extra $10k in taxable income. Withholding is easier, because it's assumed to be done evenly thruout the year (even if it's not). You can increase withholding in some other area, if you have it: employer if you are still working even part time, or SS if you are receiving it, or tIRA withdrawals.

Make sure you hit a safe harbor amount, so you don't get hit with an underpayment penalty.

[seriousthistime]

After mulling over all this information, I'm trying to decide if I'm overlooking something between withdrawals from retirement accounts, conversions, and MAGI/IRMAA.

My tax filing status is single. 

I just sketched out my anticipated 2022 taxable income from all sources, which is from two different pensions, plus SS taxable at 85%, plus the interest earned, minus itemized deductions.  I fall squarely in the middle of a marginal tax bracket and am not remotely close to either the next lowest or next highest bracket.  This gives me some wiggle room.

I am not required to take RMDs yet.  I don't expect to have any earned income this year so I can't contribute to an IRA, and can't "backdoor" any of my existing IRAs into a Roth unless I have earned income.  But it seems that even without earned income I can convert some of my tIRA to a Roth IRA and pay the taxes on it this year, and there is no limit to the amount I can convert.  (Is all this correct?)

MAGI is also a concern, because I don't want to increase my income to a point where my IRMAA will increase. 

I've calculated my MAGI for 2022 will be about $8,500 less than the next highest IRMAA threshold.  That gives me some wiggle room to convert from tIRA to a Roth IRA this year, if the above is correct.  And hopefully reduce the RMDs I will have to start taking in 2024.  As it stands right now, the RMDs will push me over into the next highest IRMAA bracket.   And $8,500 converted this year and a similar amount next year will not make enough of a difference to get the income including the RMDs below the IRMAA threshold, but it would convert some money into tax free status now.  And that's a good thing. 

So once I'm required to take RMDs and am pushed into a higher IRMAA threshold because of that, it would seem the thing to do would be to not just take the RMDs but also take out more from the tIRAs to convert to the Roth to stay just under the next highest income tax bracket, because the IRMAA limit will have been exceeded anyway. 

Just as an example, the first IRMAA threshold is $91,000, and the next one is $114,000. Assume retirement and interest income of $85,500, and RMD of $6,000, so income would be $91,500, past the first IRMAA threshold.  The marginal tax bracket for that income (24%) goes up to $170,500 (32%).  Wouldn't it be best to take the RMD of $6,000 plus an additional $22,500 from the tIRA, to keep my income under $114,000?  It would still be well under the 32% income tax bracket.  Or if I wanted to completely blow a whole year (or two) of IRMAA thresholds, I could take the RMD of $6,000 plus $79,000 to reach $170,500 in income, all taxed at the marginal 24% rate, and the IRMAA would increase but not for two years, and only for that year (or two). That would keep subsequent years' RMDs low enough to not be bumped past an IRMAA threshold. 

It would have to be done with a keen eye to the exact amounts.  The IRMAA thresholds are cliffs, whereas income tax is a marginal rate.  

Thoughts/advice?

   

[tallguy]

Yes, you can convert from T-IRA to Roth at any time even without earned income.  The entire converted amount is taxable when converted assuming there were no non-deductible contributions at any point.  I also think you are on the right track with converting up to the next IRMAA tier.  With regard to "blowing" a year and jumping a few IRMAA tiers, that is something you would really have to analyze to see if it is actually best for you.  One factor would be your IRA balances.  If your initial RMD would really be only $6000, then your balance is somewhere under $200,000, correct?  If that is the case then you should probably be able to lower it through smaller annual conversions rather than one large one.  Normally, one would want to have some remaining in T-IRAs rather than paying taxes to convert everything because everybody has a certain "zero-bracket" amount where part of their IRA distribution could be tax-free anyway, but you are already beyond that with the two pensions.    

[seriousthistime]

The $6,000 figure was an example.  I've been avoiding looking at the actual balances because the market is so sluggish.  So you made me look.  Not pretty.  But still higher than what I used for an example. 

Another part of the moving target is that one of the pensions could disappear at a moment's notice as it is tied to XH's longevity.  If he kicks the bucket, my portion ends, and his portion and mine all go to his new wife, even if they divorce.*  If that happens, my income would go down quite a bit, and it's likely I wouldn't hit IRMAA territory even with RMDs as they look today.  It would hurt if, after "blowing" a year or two of IRMAA to max out the conversions, I got hit with the higher IRMAA at the same time I lost that pension income. 

* After spending a significant sum on attorney fees when we divorced, XH decided he could draft his own prenup. It turned out to be a bad idea.

[seriousthistime]

Here's an update on Secure Act 2.0.

www.cnn.com/2022/04/26/economy/401k-senate-congress-retirement-changes/index.html

Some of the changes proposed in the Senate include raising the age for RMDs to 75, without a phase-in. 

[susana1954]

Apr 27, 2022 12:02:47 GMT -5 seriousthistime said:

Here's an update on Secure Act 2.0.

www.cnn.com/2022/04/26/economy/401k-senate-congress-retirement-changes/index.html

Some of the changes proposed in the Senate include raising the age for RMDs to 75, without a phase-in. 

Right . . . in 2032.  So it would only affect those 65 and younger.

[seriousthistime]

Oops.  I read that wrong. 

Wishful thinking, I guess. 

[teen persuasion]

Apr 27, 2022 12:02:47 GMT -5 seriousthistime said:

Here's an update on Secure Act 2.0.

www.cnn.com/2022/04/26/economy/401k-senate-congress-retirement-changes/index.html

Some of the changes proposed in the Senate include raising the age for RMDs to 75, without a phase-in. 

I don't understand how the House And Senate get anything done in this fashion - House creates something, votes on it, then Senate creates its own version instead of just using the House one as a starting point and making revisions.

Each of the three different Senate bills seems to want something that sounds stupid to me (vs what the article said the House plans):
The Cardin-Portman bill has no automatic enrollment, and the wait for RMD age increases instead of stepped increases. 

The Murray-Burr bill also has no auto enrollment, and encourages annuities in plans.  .

The Starter-K plan seems to be reinventing the wheel - vague plans to create a new type of retirement account that's easier for small business owners; it sounds like a SIMPLE IRA, but has a $6k limit.  No, no, no - stick with the SIMPLE IRA concept, it works, but INCREASE the limit to match 401k/403b/457 account limits instead of being unfairly lower.

[tskeeter]

Apr 27, 2022 20:44:02 GMT -5 teen persuasion said:

Apr 27, 2022 12:02:47 GMT -5 seriousthistime said:

Here's an update on Secure Act 2.0.

www.cnn.com/2022/04/26/economy/401k-senate-congress-retirement-changes/index.html

Some of the changes proposed in the Senate include raising the age for RMDs to 75, without a phase-in. 

I don't understand how the House And Senate get anything done in this fashion - House creates something, votes on it, then Senate creates its own version instead of just using the House one as a starting point and making revisions.

Each of the three different Senate bills seems to want something that sounds stupid to me (vs what the article said the House plans):
The Cardin-Portman bill has no automatic enrollment, and the wait for RMD age increases instead of stepped increases. 

The Murray-Burr bill also has no auto enrollment, and encourages annuities in plans.  .

The Starter-K plan seems to be reinventing the wheel - vague plans to create a new type of retirement account that's easier for small business owners; it sounds like a SIMPLE IRA, but has a $6k limit.  No, no, no - stick with the SIMPLE IRA concept, it works, but INCREASE the limit to match 401k/403b/457 account limits instead of being unfairly lower.

What you are seeing is the founding fathers strategy for preventing sudden, ill advised changes to our laws in action.  By creating what is an admittedly slow and cumbersome process, our founding fathers force legislators to engage in significant discussions before legislation gets enacted.  This reduces the risk that poor legislation will be approved in a fit of emotion and passion.  Keeping the process slower allows legislators and the public time to learn about, understand, and consider the implications of proposals and to make adjustments before proposed laws are finalized.  I think the founding fathers were a bunch of pretty smart people to identify the risks in the legislative process and to implement safeguards that help to ensure that our laws are carefully thought out and in the interest of the voters.  (Yes, I understand that you can debate whether or not specific legislation is “in the interest of the voters”.  Unfortunately, intent and execution are not always the same thing.  But the intent is a step in the right direction.)

[minnesotapaintlady]

Apr 28, 2022 13:31:09 GMT -5 tskeeter said:

What you are seeing is the founding fathers strategy for preventing sudden, ill advised changes to our laws in action.  By creating what is an admittedly slow and cumbersome process, our founding fathers force legislators to engage in significant discussions before legislation gets enacted.  T

Slow and cumbersome is right.  This is supposedly "flying" through having passed the Senate in July.  The two versions are so close to the same that you think it would be simple to find middle ground and draft a final for both to vote on again, but they're saying it could take until Christmas.   

[seriousthistime]

Jul 22, 2022 12:58:15 GMT -5 minnesotapaintlady said:

Apr 28, 2022 13:31:09 GMT -5 tskeeter said:

What you are seeing is the founding fathers strategy for preventing sudden, ill advised changes to our laws in action.  By creating what is an admittedly slow and cumbersome process, our founding fathers force legislators to engage in significant discussions before legislation gets enacted.  T

Slow and cumbersome is right.  This is supposedly "flying" through having passed the Senate in July.  The two versions are so close to the same that you think it would be simple to find middle ground and draft a final for both to vote on again, but they're saying it could take until Christmas.   

[Rukh O'Rorke]

Apr 19, 2022 11:04:17 GMT -5 minnesotapaintlady said:

Apr 19, 2022 10:52:19 GMT -5 Happy prose said:

minnesotapaintlady Thank you. My Roth is with Vanguard, so I would just open an IRA, and is this 'convert to Roth' easy? I thought once I'm retired I'm done.

In your Vanguard account if you're looking at the "Balances and Holdings" page.  Under the Roth IRA by all the buttons for like "buy and sell" and "order status" and "transaction history", there is another one that says "Convert to Roth".  You won't see it now if you don't have a traditional IRA with them. 

Click that and it walks you right through it.

I'm more fuzzy on the 457 side of things.  I'm pretty certain you need to keep all your money in the 457 and not roll it all over into an IRA if you want to do conversions because the entire IRA has to be converted.  So you just make a withdrawal of say 10K, stick it in your IRA (you have 60 days to do this) and then convert that 10K.  Sometimes people roll their entire workplace plan over to an IRA when they quit/retire and then I think you're stuck not being able to do conversions.

so say you convert 5k to roth out of an ira.....then what happens? Do you need to pay income tax on it?