Rukh O'Rorke
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Post by Rukh O'Rorke on Aug 21, 2022 17:25:09 GMT -5
conversation on another thread leading to this one.
How do you plan to approach using the 401k money in terms of anticipated taxes? This looks tricky to me as the percent of the account you must withdraw when you get to RMD increases each year.
Wondering what you all are doing/planning to minimize lifetime taxes?
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billisonboard
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Post by billisonboard on Aug 21, 2022 18:47:04 GMT -5
Don't usually bother to comment on such here on the Your Money page but I am bored and you did say "you all". I plan, as usual, to do nothing to minimize my tax burden, aka my contribution to cover my nation's expenses.
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CCL
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Post by CCL on Aug 21, 2022 19:28:25 GMT -5
I'm doing yearly Roth conversions. I'm hoping to get most of it converted before they raise taxes again.
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giramomma
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Post by giramomma on Aug 21, 2022 19:37:31 GMT -5
Honestly, I'm not worrying about it until I get closer to drawing SS. I've got 13 years until I hit 60. It looks like we don't have to start taking RMDs until 72, anyway.
We also have some of everything. Which makes it easier to deal with in more in terms of "we will deal with when we get there."
However, with my pension, I suspect we'll be converting some of our traditional IRAs to Roth right before we collect SS. With our pensions (DH gets half of a pension, but I never really include it in our planning), I think most of SS is going to get taxed. We'll have to see my how my health is too. What DH and I might do as a married couple would be a lot different than as a single person. My mom is going to be shocked when she sees her tax bill next year. Minimally, she''s going from the 12% to the 22% bracket, maybe even the 24% bracket.
There's other ways we could minimize taxes, but honestly, I'm not interested. One of my good friends was 50 when she adopted internationally. That path would not work for me.
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teen persuasion
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Post by teen persuasion on Aug 21, 2022 20:11:55 GMT -5
No pensions for us, and want to wait on SS until 70 for DH. So in the meantime, we have lots of years to Roth convert as part of a Roth ladder - to get around the pre-59.5 withdrawal penalty rules. So, Roth convert a chunk, withdraw previous Roth contributions for spending, rinse and repeat. I can choose how much to convert to dial in the tax we pay, and withdraw an unrelated amount for spending - ideally convert more than spending, but leaving more in Roth to grow tax free, and the conversions at the minimum offset annual growth in the trad accounts (keeping balances from growing) or possibly shrink the trad accounts over time. The Roth never shrinks unless we spent more than conversions, which I really don't foresee. We will withdraw more now before SS, but when SS kicks in we need less additional money to cover expenses, so we won't have a steady withdrawal rate. More now, less later. We are already at about 35% Roth, 65% trad. I've figured out that the % really isn't the important factor, it's the actual $ figure in trad, which drives RMD, which affects SS taxation. As long as trad balances are in the $400-$600k range, RMDs won't get out of hand, probably will be what we'd want to withdraw for spending anyways, and keep SS taxation low. But, if we can't keep trad accounts in that range, and they grow larger, well, that's a good problem to have - more money - and we will pay the tax on it gladly. We don't need to get everything converted to Roth, that would be overkill with no pensions or LTCG. I'm not concerned about leaving trad IRAs to the kids after we die, because it will be divided 5 ways minimum (more if we include grandkids in the future) - no one portion should create a tax bomb over the ten years they have to withdraw funds if they are sensible. YMMV
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jerseygirl
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Post by jerseygirl on Aug 21, 2022 20:25:57 GMT -5
We’re planning to leave to our grands as well. So reduce the tax bombs
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Rukh O'Rorke
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Post by Rukh O'Rorke on Aug 22, 2022 9:11:35 GMT -5
No pensions for us, and want to wait on SS until 70 for DH. So in the meantime, we have lots of years to Roth convert as part of a Roth ladder - to get around the pre-59.5 withdrawal penalty rules. So, Roth convert a chunk, withdraw previous Roth contributions for spending, rinse and repeat. I can choose how much to convert to dial in the tax we pay, and withdraw an unrelated amount for spending - ideally convert more than spending, but leaving more in Roth to grow tax free, and the conversions at the minimum offset annual growth in the trad accounts (keeping balances from growing) or possibly shrink the trad accounts over time. Q1: The Roth never shrinks unless we spent more than conversions, which I really don't foresee.We will withdraw more now before SS, but when SS kicks in we need less additional money to cover expenses, Q2: so we won't have a steady withdrawal rate. More now, less later. We are already at about 35% Roth, 65% trad. I've figured out that the % really isn't the important factor, it's the actual $ figure in trad, which drives RMD, which affects SS taxation. As long as trad balances are in the $400-$600k range, RMDs won't get out of hand, probably will be what we'd want to withdraw for spending anyways, and keep SS taxation low. But, if we can't keep trad accounts in that range, and they grow larger, well, that's a good problem to have - more money - and we will pay the tax on it gladly. We don't need to get everything converted to Roth, that would be overkill with no pensions or LTCG. I'm not concerned about leaving trad IRAs to the kids after we die, because it will be divided 5 ways minimum (more if we include grandkids in the future) - no one portion should create a tax bomb over the ten years they have to withdraw funds if they are sensible. YMMV how are you accounting for market fluctuations? So if you convert 40k, will you keep it in safe money until you use it? Or how will that work? If you convert 45k and plan to spend 40k in 5 years, do you keep the 40 in safe and invest the 5? you mention ss changing this, but with the RMD percent going up each year, once you hit the age threashold seems like we won't have a lot of control unless we already want to withdraw more than RMD, which once you get into mid 80's is 6%.
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Post by minnesotapaintlady on Aug 22, 2022 9:15:33 GMT -5
I just don't see RMD's as a huge issue for me with no pension and one small SS check that I may hold off until 70 to draw. I will be spending down the pre-tax from 59 to 72 and would be drawing close to these amounts the first decade of RMDs just to live off of. If in my upper 80's, early 90's I find I'm way wealthier than I thought I'd be, I'll call that a win and pay the maximum $581/month IRMAA. Age RMD % of Acct. Balance 72 3.65% 73 3.78% 74 3.93% 75 4.07% 76 4.22% 77 4.37% 78 4.55% 79 4.74% 80 4.96% 81 5.16% 82 5.41% 83 5.65% 84 5.96% 85 6.25% 86 6.58% 87 6.95% 88 7.30% 89 7.76% 90 8.20% 91 8.70% 92 9.26% 93 9.91% 94 10.53% 95 11.24% 96 11.91% 97 12.83% 98 13.70% 99 14.71% 100 15.63% Conversions won't make sense for me until the kids drop off my taxes and I could be 64 by the time that happens! Still, that leaves me 8 years to convert. More if Secure Act 2.0 passes and they raise the RMD age.
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Post by The Walk of the Penguin Mich on Aug 22, 2022 9:51:14 GMT -5
conversation on another thread leading to this one. How do you plan to approach using the 401k money in terms of anticipated taxes? This looks tricky to me as the percent of the account you must withdraw when you get to RMD increases each year. Wondering what you all are doing/planning to minimize lifetime taxes? We are pulling from non taxed retirement accounts up to a certain point, and looking to long term capital gains investments to fill in. It was either this, or back door Roth’s and figured (lotta spread sheets) that is was the way to go. Also, you need to consider IRMAA on Medicare as well.
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Tiny
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Post by Tiny on Aug 22, 2022 9:53:10 GMT -5
Wondering what you all are doing/planning to minimize lifetime taxes? I'm not that worried about lifetime taxes. Also I'm single so I don't have to think about how taxes will effect a surviving spouse. Back in the day I assumed I wouldn't be touching my tax advantaged accounts, SS, and a pension until I was 65 when I would "retire". But, I kind of started contemplating some sort of FIre back (if one thinks of retirement between 58 and 60 as "early retirement") in my 40's. It looks like I will be using a combination of after tax savings and pre tax 401K money from 59.5 until 65. I'm thinking I will be converting some of the 401K money to Roth money every year as I will most likely be in a lower tax bracket. At 65 I have to start my no Cola pension and then using less 401K money. after 65 it's likely I will be converting to a Roth in a higher tax bracket than before I took the pension (or converting less each year). And I'm thinking I will put off SS as long as possible. Once the pension and SS are going together (at 70?) I'm anticipating NOT needing as much 401K money. But I should have drawn the 401K down over the 10 or 11 years prior to age 70. I'll suck up whatever income taxes I have to pay on the combination of pension, SS and 401K withdrawals. I'm anticipating using/needing some 401K money every year of my retirement. With the bulk of the withdrawals early in retirement (and the replaced by pension and SS). I'm anticipating my eventual RMDs NOT being bigger than the amount I actually need (and was most likely already withdrawing every year.) I'm imaging having to tetris my yearly income streams to maintain a taxable income of some level - especially in the years leading up to 65 (medicare) and the pension.
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Post by The Walk of the Penguin Mich on Aug 22, 2022 9:54:00 GMT -5
Honestly, I'm not worrying about it until I get closer to drawing SS. I've got 13 years until I hit 60. It looks like we don't have to start taking RMDs until 72, anyway.
We also have some of everything. Which makes it easier to deal with in more in terms of "we will deal with when we get there."
However, with my pension, I suspect we'll be converting some of our traditional IRAs to Roth right before we collect SS. With our pensions (DH gets half of a pension, but I never really include it in our planning), I think most of SS is going to get taxed. We'll have to see my how my health is too. What DH and I might do as a married couple would be a lot different than as a single person. My mom is going to be shocked when she sees her tax bill next year. Minimally, she''s going from the 12% to the 22% bracket, maybe even the 24% bracket.
There's other ways we could minimize taxes, but honestly, I'm not interested. One of my good friends was 50 when she adopted internationally. That path would not work for me.
You might want to consider doing this now, while you have a lot of dependents.
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MN-Investor
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Post by MN-Investor on Aug 22, 2022 13:20:14 GMT -5
My husband used to say he wasn't allowed to die... it would put me in single taxpayer rates and I would never forgive him for that. Unfortunately, he died less than two years after retiring. I'm now taxed at single taxpayer rates. Moreover, there was no monetary benefit to wait until 70 to take Social Security, so I started taking SS in 2018 at age 65. So my tax rate is higher than we had planned, and my income is higher than we had planned. Last year I was in the 22% tax bracket. But, as my sweetie used to say - First World Problems. A year before my sweetie retired, we made a couple of changes to our will. At that time, our lawyer said that the best advice he could give us would be to move to a lower tax state. Minnesota is not a low tax state! My DH and I discussed that as we left the lawyer's office and once again agreed that one reason we had saved and invested for so long was so that we could continue to afford to live here in Minnesota. So I will continue to contribute to charities I support and pay the high taxes I'll be hit with when RMDs kick in, but, fortunately, that won't impact my quality of life. It just impacts what I have to leave to my nephews and nieces, and none of them are expecting anything anyway, so they won't complain.
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Tiny
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Post by Tiny on Aug 22, 2022 14:11:31 GMT -5
Just a general FYI: how retirement income is taxed varies by State. Moving to a new "lower income tax" State might not make much overall difference - if the ONLY reason you are moving is to pay less in State Income Taxes. You will need to know how your income will be taxed in whatever State you want to live in. And then you also need to look at what other State taxes will effect what you will be spending on in whatever State you want to live in. You could wind up with a "wash" of sorts - pay less in State Income Taxes but then spend that "savings" on your day to day stuff via other State Taxes.
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Rukh O'Rorke
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Post by Rukh O'Rorke on Aug 22, 2022 14:18:26 GMT -5
conversation on another thread leading to this one. How do you plan to approach using the 401k money in terms of anticipated taxes? This looks tricky to me as the percent of the account you must withdraw when you get to RMD increases each year. Wondering what you all are doing/planning to minimize lifetime taxes? We are pulling from non taxed retirement accounts up to a certain point, and looking to long term capital gains investments to fill in. It was either this, or back door Roth’s and figured (lotta spread sheets) that is was the way to go. Also, you need to consider IRMAA on Medicare as well. discussed IRMAA on the other thread, I don't see it as being impactful enough cost-wise to influence my plan, and I consider the benefits to other seniors if I pay a larger share as a win.
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Rukh O'Rorke
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Post by Rukh O'Rorke on Aug 22, 2022 14:23:18 GMT -5
My husband used to say he wasn't allowed to die... it would put me in single taxpayer rates and I would never forgive him for that. Unfortunately, he died less than two years after retiring. I'm now taxed at single taxpayer rates. Moreover, there was no monetary benefit to wait until 70 to take Social Security, so I started taking SS in 2018 at age 65. So my tax rate is higher than we had planned, and my income is higher than we had planned. Last year I was in the 22% tax bracket. But, as my sweetie used to say - First World Problems. A year before my sweetie retired, we made a couple of changes to our will. At that time, our lawyer said that the best advice he could give us would be to move to a lower tax state. Minnesota is not a low tax state! My DH and I discussed that as we left the lawyer's office and once again agreed that one reason we had saved and invested for so long was so that we could continue to afford to live here in Minnesota. So I will continue to contribute to charities I support and pay the high taxes I'll be hit with when RMDs kick in, but, fortunately, that won't impact my quality of life. It just impacts what I have to leave to my nephews and nieces, and none of them are expecting anything anyway, so they won't complain.
I know how much you still miss him. Glad he left you in such good financial shape, and hope you have made your unexpectedly single life rewarding for yourself.
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teen persuasion
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Post by teen persuasion on Aug 22, 2022 19:10:31 GMT -5
No pensions for us, and want to wait on SS until 70 for DH. So in the meantime, we have lots of years to Roth convert as part of a Roth ladder - to get around the pre-59.5 withdrawal penalty rules. So, Roth convert a chunk, withdraw previous Roth contributions for spending, rinse and repeat. I can choose how much to convert to dial in the tax we pay, and withdraw an unrelated amount for spending - ideally convert more than spending, but leaving more in Roth to grow tax free, and the conversions at the minimum offset annual growth in the trad accounts (keeping balances from growing) or possibly shrink the trad accounts over time. Q1: The Roth never shrinks unless we spent more than conversions, which I really don't foresee.We will withdraw more now before SS, but when SS kicks in we need less additional money to cover expenses, Q2: so we won't have a steady withdrawal rate. More now, less later. We are already at about 35% Roth, 65% trad. I've figured out that the % really isn't the important factor, it's the actual $ figure in trad, which drives RMD, which affects SS taxation. As long as trad balances are in the $400-$600k range, RMDs won't get out of hand, probably will be what we'd want to withdraw for spending anyways, and keep SS taxation low. But, if we can't keep trad accounts in that range, and they grow larger, well, that's a good problem to have - more money - and we will pay the tax on it gladly. We don't need to get everything converted to Roth, that would be overkill with no pensions or LTCG. I'm not concerned about leaving trad IRAs to the kids after we die, because it will be divided 5 ways minimum (more if we include grandkids in the future) - no one portion should create a tax bomb over the ten years they have to withdraw funds if they are sensible. YMMV how are you accounting for market fluctuations? So if you convert 40k, will you keep it in safe money until you use it? Or how will that work? If you convert 45k and plan to spend 40k in 5 years, do you keep the 40 in safe and invest the 5? you mention ss changing this, but with the RMD percent going up each year, once you hit the age threashold seems like we won't have a lot of control unless we already want to withdraw more than RMD, which once you get into mid 80's is 6%. This is a simplified example to demonstrate my thinking. Say we have $1m in retirement accounts, $400k in Roth and $600 in trad. I want a 70/30 AA, with all stocks in Roth (tax free growth) and stocks + bonds in trad (because I want less growth in the part getting taxed eventually). That means $400k Roth in stocks, $300 trad in stocks, $300 trad in bonds. Let's guess that our stocks increase in value by 10%, and bonds probably throw off 1% in dividends. Then the Roth grows $40k, and the trad grows $30k + $3k = $33k. So even though the Roth is smaller, it grows more than the half-bond trad account. The 4% rule would suggest we could withdraw $40k a year from the total of $1m. DH just turned 56, so 3.5 years until we can withdraw from the trad w/o penalty, but I can instead convert $40k from trad stocks to Roth stocks (same tax effect) and withdraw from previous Roth contributions for spending (no tax cost). So if the trad account grew by $33k and I convert $40k, I shrink the trad by $7k and the Roth growth is untouched (I'm essentially spending the $s converted - convert and then withdraw other $$, but same end result). So the Roth grows, trad shrinks a bit, my total proportion shifts more Roth, and the trad is more bond than stocks, so it will grow a little bit slower next year. But if we are taking 4% of the total, effectively all from trad, that is more like 6% of the trad account. Ok, what's the tax cost? We've got the standard MFJ deduction ~$26k, and the next $14k is at 10%, so total federal tax cost of $1400 to convert $40k. Hmm, could convert up to $46k and stay in the 10% bracket - $2k tax for $46k conversion. Now, if I spend less than I convert, and leave the difference in the Roth, the Roth will grow faster still. As the trad account proportion shrinks, it becomes more bond heavy, until it's all bonds, and grows less, so the conversions shrink it faster. The stock market would need to grow heavily to outpace my moderate yearly conversions to get too big and lead to large RMDs. When DH reaches 70, SS will kick in, knocking our money need down by $34k. If the trad account has shrunk, I can convert less now, maybe low enough to keep SS taxation low. Let's see - maybe $20k conversion - if inflation increases SS in 14 years to $50k, half of SS is $25k + $20k other income = $45k. The first $32k is not SS taxable, next $12k is 50% (so $6k taxable), rest above $44k is 85% (so $850). That's $6850 taxable SS + $20k other income; well, that's below where the standard deduction will likely be after 14 years of inflation! No tax, or perhaps convert a bit more to get up to the standard deduction amount. When RMDs finally kick in, we will likely just be at about the same $$ amount, roughly The excess Roth amounts will be for after one of us passes away, reducing SS, if needed. Or for our heirs.
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Rukh O'Rorke
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Post by Rukh O'Rorke on Aug 28, 2022 9:24:59 GMT -5
We’re planning to leave to our grands as well. So reduce the tax bombs inheritance is certainly something to consider. My understanding is that if heir inherit roth or 401k rollovers, they need to exhaust the account in 10 years of annual withdrawls. No taxes on roth, but income taxes on the 401k. That could well hit mine in their peak earnings decade. How do these account figure in with the estate tax laws? So looks like illinois excemption is 4 million - which I likely won't ever hit ( ) - so I'm assuming if everything was switched to taxable/Roth - heirs would inherit free and clear - but if 1 millions in taxable/roth and 1 million in 401k rollover - they would need to take 100k/year and pay income taxes on it. Is this the way it goes?
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Rukh O'Rorke
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Post by Rukh O'Rorke on Aug 28, 2022 9:38:25 GMT -5
how are you accounting for market fluctuations? So if you convert 40k, will you keep it in safe money until you use it? Or how will that work? If you convert 45k and plan to spend 40k in 5 years, do you keep the 40 in safe and invest the 5? you mention ss changing this, but with the RMD percent going up each year, once you hit the age threashold seems like we won't have a lot of control unless we already want to withdraw more than RMD, which once you get into mid 80's is 6%. This is a simplified example to demonstrate my thinking. Say we have $1m in retirement accounts, $400k in Roth and $600 in trad. I want a 70/30 AA, with all stocks in Roth (tax free growth) and stocks + bonds in trad (because I want less growth in the part getting taxed eventually). That means $400k Roth in stocks, $300 trad in stocks, $300 trad in bonds. Let's guess that our stocks increase in value by 10%, and bonds probably throw off 1% in dividends. Then the Roth grows $40k, and the trad grows $30k + $3k = $33k. So even though the Roth is smaller, it grows more than the half-bond trad account. The 4% rule would suggest we could withdraw $40k a year from the total of $1m. DH just turned 56, so 3.5 years until we can withdraw from the trad w/o penalty, but I can instead convert $40k from trad stocks to Roth stocks (same tax effect) and withdraw from previous Roth contributions for spending (no tax cost). So if the trad account grew by $33k and I convert $40k, I shrink the trad by $7k and the Roth growth is untouched (I'm essentially spending the $s converted - convert and then withdraw other $$, but same end result). So the Roth grows, trad shrinks a bit, my total proportion shifts more Roth, and the trad is more bond than stocks, so it will grow a little bit slower next year. But if we are taking 4% of the total, effectively all from trad, that is more like 6% of the trad account. Ok, what's the tax cost? We've got the standard MFJ deduction ~$26k, and the next $14k is at 10%, so total federal tax cost of $1400 to convert $40k. Hmm, could convert up to $46k and stay in the 10% bracket - $2k tax for $46k conversion. Now, if I spend less than I convert, and leave the difference in the Roth, the Roth will grow faster still. As the trad account proportion shrinks, it becomes more bond heavy, until it's all bonds, and grows less, so the conversions shrink it faster. The stock market would need to grow heavily to outpace my moderate yearly conversions to get too big and lead to large RMDs. When DH reaches 70, SS will kick in, knocking our money need down by $34k. If the trad account has shrunk, I can convert less now, maybe low enough to keep SS taxation low. Let's see - maybe $20k conversion - if inflation increases SS in 14 years to $50k, half of SS is $25k + $20k other income = $45k. The first $32k is not SS taxable, next $12k is 50% (so $6k taxable), rest above $44k is 85% (so $850). That's $6850 taxable SS + $20k other income; well, that's below where the standard deduction will likely be after 14 years of inflation! No tax, or perhaps convert a bit more to get up to the standard deduction amount. When RMDs finally kick in, we will likely just be at about the same $$ amount, roughly The excess Roth amounts will be for after one of us passes away, reducing SS, if needed. Or for our heirs. thank you, this is helpful. once your DH is 59.5, and can withdraw without penalty, does roth conversion still help if you aren't withdrawing more than is needed to live on? So if you needed to fill the 12% tax bracket just to live on and didn't want to venture into the 22% bracket, would you just withdraw from 401k?
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jerseygirl
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Post by jerseygirl on Aug 28, 2022 9:42:44 GMT -5
Yes and expect that IRA inheritance will increase their taxes and put them in higher tax brackets for those 10 years. Including grands in the distribution will lower amounts and associated taxes. Their parents likely would give their kids portion anyway We only have a relatively small Roth in comparison to tIRAs. Never did backdoor Roths because it would increase our taxes by putting us in higher bracket. Couldn’t do regular Roths. Only did the Roth in 2020 when didn’t need to take RMDs so put that amount into a Roth. it’s done well . So house proceeds, insurance and Roths won’t cause taxes. And stocks in brokerage account will get step up basis. One financial advisor I spoke to suggested leaving non taxable accounts to kids who are in highest tax brackets with adjustments for value. Thinking that would be a logistical nightmare
At least federal if exemptions stay the same. I don’t know NJ death tax . Probably want to tax us when we die cause nj sure taxes us now
Have been thinking of moving IRAs ourselves to decrease our RMDs and associated taxes .
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teen persuasion
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Post by teen persuasion on Aug 28, 2022 10:57:43 GMT -5
This is a simplified example to demonstrate my thinking. Say we have $1m in retirement accounts, $400k in Roth and $600 in trad. I want a 70/30 AA, with all stocks in Roth (tax free growth) and stocks + bonds in trad (because I want less growth in the part getting taxed eventually). That means $400k Roth in stocks, $300 trad in stocks, $300 trad in bonds. Let's guess that our stocks increase in value by 10%, and bonds probably throw off 1% in dividends. Then the Roth grows $40k, and the trad grows $30k + $3k = $33k. So even though the Roth is smaller, it grows more than the half-bond trad account. The 4% rule would suggest we could withdraw $40k a year from the total of $1m. DH just turned 56, so 3.5 years until we can withdraw from the trad w/o penalty, but I can instead convert $40k from trad stocks to Roth stocks (same tax effect) and withdraw from previous Roth contributions for spending (no tax cost). So if the trad account grew by $33k and I convert $40k, I shrink the trad by $7k and the Roth growth is untouched (I'm essentially spending the $s converted - convert and then withdraw other $$, but same end result). So the Roth grows, trad shrinks a bit, my total proportion shifts more Roth, and the trad is more bond than stocks, so it will grow a little bit slower next year. But if we are taking 4% of the total, effectively all from trad, that is more like 6% of the trad account. Ok, what's the tax cost? We've got the standard MFJ deduction ~$26k, and the next $14k is at 10%, so total federal tax cost of $1400 to convert $40k. Hmm, could convert up to $46k and stay in the 10% bracket - $2k tax for $46k conversion. Now, if I spend less than I convert, and leave the difference in the Roth, the Roth will grow faster still. As the trad account proportion shrinks, it becomes more bond heavy, until it's all bonds, and grows less, so the conversions shrink it faster. The stock market would need to grow heavily to outpace my moderate yearly conversions to get too big and lead to large RMDs. When DH reaches 70, SS will kick in, knocking our money need down by $34k. If the trad account has shrunk, I can convert less now, maybe low enough to keep SS taxation low. Let's see - maybe $20k conversion - if inflation increases SS in 14 years to $50k, half of SS is $25k + $20k other income = $45k. The first $32k is not SS taxable, next $12k is 50% (so $6k taxable), rest above $44k is 85% (so $850). That's $6850 taxable SS + $20k other income; well, that's below where the standard deduction will likely be after 14 years of inflation! No tax, or perhaps convert a bit more to get up to the standard deduction amount. When RMDs finally kick in, we will likely just be at about the same $$ amount, roughly The excess Roth amounts will be for after one of us passes away, reducing SS, if needed. Or for our heirs. thank you, this is helpful. once your DH is 59.5, and can withdraw without penalty, does roth conversion still help if you aren't withdrawing more than is needed to live on? So if you needed to fill the 12% tax bracket just to live on and didn't want to venture into the 22% bracket, would you just withdraw from 401k? Once DH gets to 59.5, we *could* just withdraw directly from tIRA (I expect to roll all 401, 403, SIMPLE accounts to tIRA for simplicity) for spending, and in a separate step convert up to whatever tax threshold we choose. I think it will be easier for record keeping and planning purposes to just keep converting a whole chunk to Roth annually, and do all withdrawal from Roth for spending. It just makes sense to my mental model - convert opportunistically with an eye to tax cost, smoothing it out over time, and spend from past Roth contributions/conversions as needed. It's cleaner, to me, to separate the taxable transaction from the spending part, and keeping it to one taxable transaction (the Roth conversion) instead of two or more (tIRA withdrawal(s) plus Roth conversion to self-imposed limit), especially if I have to figure out just how much I want/need to withdraw for the year. With Roth withdrawals, I can tweak it as needed w/o worrying about cost - monthly draws, or annual + top-up if needed, etc. I'm mentally separating the conversion schedule from the withdrawal schedule. I'd like to convert opportunistically each year, and convert as much as possible at low cost as rapidly as possible because I don't know what tax code changes might happen in the future. If I could convert all or almost all before RMDs, I definitely would. I don't think I need to, because (based on current tax rules) we will still likely have room in the zero (standard deduction) and lowest brackets for desired income, or SS + RMDs. Converting too much at tax cost is dumb, just to waste tax free space later! At the same time, we are starting with a MFJ scenario, which will eventually become a Single scenario, but I have no idea when. As single brackets and standard deductions are half of MFJ, the shift can be jarring, so I'm trying to look at how it might play out. Obviously, more time at MFJ to do bigger conversions is better, so again the desire to frontload more conversions before one of us runs out of time. Lots of trade-offs to consider. I'm not as worried about our heirs inheriting too much tIRA - there's 5 kids to divide it between, and possible grandkids (one so far, and one on the way). Divided 5 or more ways, and then spread over 10 years it's just not enough to be a big deal, unless the market goes crazy!
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Rukh O'Rorke
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Post by Rukh O'Rorke on Aug 28, 2022 11:39:59 GMT -5
thank you, this is helpful. once your DH is 59.5, and can withdraw without penalty, does roth conversion still help if you aren't withdrawing more than is needed to live on? So if you needed to fill the 12% tax bracket just to live on and didn't want to venture into the 22% bracket, would you just withdraw from 401k? Once DH gets to 59.5, we *could* just withdraw directly from tIRA (I expect to roll all 401, 403, SIMPLE accounts to tIRA for simplicity) for spending, and in a separate step convert up to whatever tax threshold we choose. I think it will be easier for record keeping and planning purposes to just keep converting a whole chunk to Roth annually, and do all withdrawal from Roth for spending. It just makes sense to my mental model - convert opportunistically with an eye to tax cost, smoothing it out over time, and spend from past Roth contributions/conversions as needed. It's cleaner, to me, to separate the taxable transaction from the spending part, and keeping it to one taxable transaction (the Roth conversion) instead of two or more (tIRA withdrawal(s) plus Roth conversion to self-imposed limit), especially if I have to figure out just how much I want/need to withdraw for the year. With Roth withdrawals, I can tweak it as needed w/o worrying about cost - monthly draws, or annual + top-up if needed, etc. I'm mentally separating the conversion schedule from the withdrawal schedule. I'd like to convert opportunistically each year, and convert as much as possible at low cost as rapidly as possible because I don't know what tax code changes might happen in the future. If I could convert all or almost all before RMDs, I definitely would. I don't think I need to, because (based on current tax rules) we will still likely have room in the zero (standard deduction) and lowest brackets for desired income, or SS + RMDs. Converting too much at tax cost is dumb, just to waste tax free space later! At the same time, we are starting with a MFJ scenario, which will eventually become a Single scenario, but I have no idea when. As single brackets and standard deductions are half of MFJ, the shift can be jarring, so I'm trying to look at how it might play out. Obviously, more time at MFJ to do bigger conversions is better, so again the desire to frontload more conversions before one of us runs out of time. Lots of trade-offs to consider. I'm not as worried about our heirs inheriting too much tIRA - there's 5 kids to divide it between, and possible grandkids (one so far, and one on the way). Divided 5 or more ways, and then spread over 10 years it's just not enough to be a big deal, unless the market goes crazy! thanks! this makes so much sense. And congrats on the grandkids!
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Rukh O'Rorke
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Post by Rukh O'Rorke on Aug 28, 2022 11:44:50 GMT -5
Yes and expect that IRA inheritance will increase their taxes and put them in higher tax brackets for those 10 years. Including grands in the distribution will lower amounts and associated taxes. Their parents likely would give their kids portion anyway We only have a relatively small Roth in comparison to tIRAs. Never did backdoor Roths because it would increase our taxes by putting us in higher bracket. Couldn’t do regular Roths. Only did the Roth in 2020 when didn’t need to take RMDs so put that amount into a Roth. it’s done well . So house proceeds, insurance and Roths won’t cause taxes. And stocks in brokerage account will get step up basis. One financial advisor I spoke to suggested leaving non taxable accounts to kids who are in highest tax brackets with adjustments for value. Thinking that would be a logistical nightmare At least federal if exemptions stay the same. I don’t know NJ death tax . Probably want to tax us when we die cause nj sure taxes us now Have been thinking of moving IRAs ourselves to decrease our RMDs and associated taxes . Thanks! I tried to find the NJ estate tax exemption but a lot of different results popped up, so I file it under "who knows?". found only 25,000 exempt, 2 million exempt, or unlimited exempt.
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jerseygirl
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Post by jerseygirl on Aug 28, 2022 14:56:51 GMT -5
Thanks Rukh! You got me looking up NJ taxes Fantastic ! as of 2019 NJ has NO estate taxes! NJ has inheritance taxes but not for spouse or direct descendants
So they’ll only have federal taxes Makes me think that moving our IRAs to Roths even less favorable since we would need to pay the IRS as well as the 7% NJ taxes
Frankly I am astounded that NJ has given up an opportunity to tax!!
As long as federal estate tax is $11 million each spouse not even close But I have heard grumbling about decreasing
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Rukh O'Rorke
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Post by Rukh O'Rorke on Aug 28, 2022 15:18:12 GMT -5
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CCL
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Post by CCL on Aug 28, 2022 20:27:40 GMT -5
Thanks Rukh! You got me looking up NJ taxes Fantastic ! as of 2019 NJ has NO estate taxes! NJ has inheritance taxes but not for spouse or direct descendants So they’ll only have federal taxes Makes me think that moving our IRAs to Roths even less favorable since we would need to pay the IRS as well as the 7% NJ taxes Frankly I am astounded that NJ has given up an opportunity to tax!! As long as federal estate tax is $11 million each spouse not even close But I have heard grumbling about decreasing Wait. If they inherit a taxable IRA or 401k won't they still have to pay federal and state income taxes on it? Aren't estate/inheritance taxes in addition to income tax? I know, in Indiana, when I inherited a portion of a very small taxable IRA, I had to pay federal and state income taxes on it. Now I'm gonna have to go look all of this up.
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jerseygirl
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Post by jerseygirl on Aug 28, 2022 21:37:07 GMT -5
Yes they’ll need to pay IRS and state taxes after they inherit the IRAs, must empty the IRAs over 10 years and taxed as ordinary income taxes in addition to whatever they earn. But estate taxes and inheritance taxes are in addition and payable on the entire estate before ‘parceling out’ to the heirs Most states only have estate taxes but around 10 including NJ also have inheritance taxes. Since 2019 no estate or inheritance tax for spouse or direct descendants, But, eg, siblings niece nephews friends etc would need to pay estate and inheritance taxes
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laterbloomer
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Post by laterbloomer on Aug 28, 2022 22:20:00 GMT -5
Just a reminder, I'm Canadian so dealing with a different system. Not sure how much overlaps. Most of my retirement investments are in after tax accts because that money will not count as income and will allow me to qualify for an additional $12,000/yr in GIS between 65 and 72. At 72 I will covert all my pre tax investments in one shot so I am only disqualified from the GIS money for one year and can collect it again at 74. The tax hit will not be much different than if I spread it over a number of years and be more than compensated for by the eXtra $12,000/yr in GIS.
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resolution
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Post by resolution on Aug 29, 2022 14:32:33 GMT -5
I don't have a plan to minimize taxes in retirement. Right now about 1/3 of our investments are in pre-tax accounts, 1/3 in roth, and 1/3 in a regular taxable brokerage account. I will have enough pension and rental income to make my social security taxable regardless of whether I withdraw anything from the pre-tax accounts, so I will just be dealing with normal tax brackets and not anything that would have an outsized impact on my social security.
I am considering retiring in the next year or two, but my husband plans to work at least another 10 years, which would keep our income at an all time high. My pre-tax account is a 457 plan with no age restrictions on withdrawal, so in theory I might draw on that before I am old enough to access the other accounts, but I would probably just use the taxable brokerage account and just have to pay long term capital gains. If we are fortunate, our income will stay high enough that I won't ever want to withdraw from the pre-tax accounts, and then just end up doing the mandatory distribution thing when we are older.
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swamp
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Post by swamp on Aug 29, 2022 14:37:50 GMT -5
I really don't have a plan.
Tax laws can change so quickly that I don't feel like it matters what I do. And if there is plenty of money left when DH and I are dead, the taxes are the kids' problem. I told them I plan on spending the last penny then dying, so if they get anything i consider it a win.
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Deleted
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Post by Deleted on Aug 29, 2022 17:07:56 GMT -5
I really don't have a plan. Tax laws can change so quickly that I don't feel like it matters what I do. And if there is plenty of money left when DH and I are dead, the taxes are the kids' problem. I told them I plan on spending the last penny then dying, so if they get anything i consider it a win. We did the recommended thing during our working years, maxing out contributions to tax-sheltered accounts because, theoretically we would be in a lower tax bracket when retired. I'm not complaining but it didn't work out that way so we just pay what we pay and I'm not complaining. The only thing that would really impact our taxes at this point would be if RMD's were suspended or taxed differently and I don't see that happening
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